ServiceNow, Inc. (NOW) on Q2 2021 Results - Earnings Call Transcript
Operator: Good day, and thank you for standing by. Welcome to the Q2 2021 ServiceNow Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now turn the call over to your first speaker today Lisa Banks, Senior Vice President of Finance. You may begin your conference. Lisa Banks: Bill McDermott: Thank you, Lisa, and good afternoon, everyone. Welcome to our Q2 earnings call. Our team delivered an outstanding quarter, significantly exceeding the high end of our guidance across all metrics. Subscription revenues were up 31%. Subscription billings were up 30%. Operating margin was 25% and the number of deals greater than $1 million was 51 up 28% year-over-year. Free cash flow for the first half of the year was up 34% year-over-year, an incredible performance by our team and exceptional first half. And we have unstoppable momentum and we’ve reflected this in our strong full year guidance raise across the board. Gina Mastantuono: Thank you, Bill. Q2 was a tremendous quarter with strong beats across our top line and profitability guidance metric. The team demonstrated exceptional execution and we saw strong demand across all regions and workflows. Q2 subscription revenues was $1.33 billion, $35 million above the high end of our guidance range and growing 31% year-over-year inclusive of a 450 basis points tailwind from FX. Remaining performance obligation or RPO ended the quarter at approximately $9.5 billion, representing 35% year-over-year growth. Current RPO was approximately $4.7 billion, representing 34% year-over-year growth and a $4.3 billion versus our guidance. Currency was a 300 basis point tailwind year-over-year. Operator: And your first question comes from the line of Raimo Lenschow from Barclays. Your line is open. Raimo Lenschow: Hey, congrats on a very strong second quarter. Bill, can you talk a little bit to the growing pipeline that you kind of mentioned here on the call? Just talk a little bit about sales cycles, I would assume that helping you this year, but also kind of sets the foundation for next year. Just any color there would be nice. Thank you. Bill McDermott: Sure. Thank you very much, Raimo, for the question. First, I’d like to recognize our outstanding IT leadership, as well as our incredible focus on analytics in the company, because we really run the company on the ServiceNow platform. And whatever all the systems even exist in the company, I couldn’t pick out of a lineup, because only thing we look at as Now, ServiceNow. And I have real-time data on every single account and every single deal that’s moving in the global economy. And I can tell you that the pipeline is incredibly robust. And it has substantially grown and the lights are all green. Our sales leader is extremely positive on the second half of the year as is our engineering leader and the unity in the company around performing right now is really strong. So you can take Gina’s value and the raise that she just put in front of the capital markets to heart, because we looked at every detail and everywhere we could with our own information. It’s very, very strong. In terms of the sales cycles, I think the sales cycles are moving quicker. The notoriety of the brand is resonating as the digital transformation control tower, as I said. IT is the stronghold on so many things now, because if you want to give the employees a great experience that you want to provide the customers an unmatched service or you want to unify IT business around creating these new workflows, which is necessary, because there’s not enough developers to develop all the applications that are required. Everybody can agree on the Now platform and that seems to be unifying organizations between IT and business and accelerating our sales cycles and enlarging our deal sizes. Raimo Lenschow: Perfect. Thank you. And then any early feedback from the customers around Lightstep, because that’s obviously like expanding your TAM quite a bit, what has been the early feedback from the customer base. Thank you. Bill McDermott: Yes, I really like to thank Ben and his team for their trust in ServiceNow, and Pablo and CJ and our great engineering team for the work that they’re doing together. What we think is that ServiceNow has proven capabilities combined with Lightstep’s observability technology will really help organizations seamlessly connect, because that’s the big deal, seamlessly connect the insights in that data form the necessary patterns in that data. And then action them into the workflow which enables people process and technology to truly deliver great experiences for the customers and the employees and I think what differentiates us uniquely is this is one pane of glass. It’s one user experience, and it is not just the developer operations, you’ll also see business executives align on this as well. And to us that’s going to really help organization seamlessly connect their digital experiences across the enterprise. Again, the platform I can’t stress this enough, the digital platform, the Now platform is the glue that’s tying it all together. Raimo Lenschow: Thank you. Well done. Bill McDermott: Thank you. Operator: And your next question comes from Matt Hedberg from RBC Capital Markets. Your line is open. Matt Hedberg: Hey guys. Great. Thanks for taking my questions and congrats from me as well. Bill, you talked about the power of the platform with really a consumer grade interface, but also I think the simplifying buying process new ELAs is really powerful and you called out Deloitte, I guess I wanted to double-click on that a bit and really the importance of this simplifying buying process and how you see that benefiting really new account acquisition as well as expansion. Bill McDermott: Yes, absolutely Matt. The main thing is speed, right. We’re in a market that is very robust. Digital transformation is really hot and we are that signature brand. So the more quickly we can evolve the upgrade process and the net new deals to get customers live, that’s really what it’s all about. And I want you to rest assured that from finance to legal, to the way we execute the sales motions in the field and also enable our ecosystem, that whole value chain is right now pedal to the metal. So when you think about the Now buying program, we’re looking at larger rapidly expanding customers and making it easier for them to grow with us. So that includes simplifying the buying process as you rightly point out, using flexibility so they can easily upgrade to higher tiers of product innovation, our innovators, they’re just so amazing here. Every time you turn around and the next release is a new breakthrough, I just can’t thank them enough. ITSM Pro and enterprise are doing terrific, and this is enabling customers to try things as well. And exchange or adopt products at their will, and it’s giving them a forward look at where we’re going with our roadmaps. And when they see the innovation powered ServiceNow that actually buys them in very quickly. And finally, I would just like to say, we’ve done a really good job on the industry domain expertise in the company, but also on aligning all the value that we have to the platform and making sure that the customer understands the value they realized. So as they step in to bigger relationships with us, we can predict those expansions and those pricing tiers and the integrated customer success support and value, and they can carry that into the boardroom with great confidence and say, this is what ServiceNow is doing to deliver for you; I was really excited when I saw the Telia article that went out today, where they were talking about retiring 75 legacy systems that they standardized on the Now platform. So it’s just really good for the customer and it’s good for our folks too to get the customer to value fast. Matt Hedberg: Makes sense. Maybe just a quick one for Gina. Last quarter, you talked about net new ACV acceleration, and I guess maybe I can assume based on your increased guidance, what the answer is, be curious if you have any thoughts on net new ACV. Gina Mastantuono: Yes. So I talked about net new ACV accelerating in 2021 versus 2020. And we have definitely seen that happening across the board and with our strong beat in Q2 and our raise in the back-half the acceleration that we’re seeing is actually greater than initially anticipated. Matt Hedberg: Great to hear. Thanks a lot, guys. Bill McDermott: Thank you, Matt. Operator: And your next question comes from the line of Kash Rangan from Goldman Sachs. Your line is open. Kash Rangan: Thank you very much and hearty congratulations on another spectacular quarter. I couldn’t help, but notice that the net new ACV contribution from your core IT business – workflow business was up very sharply, curious to get your thoughts on what’s happening in that segment of the market. And Bill, I also noticed that the headcount in sales and marketing also went up pretty significantly. Can you just talk about, what the implications are for number one, the increase in net new business coming from your core business, coupled with what seems to be a pretty gigantic increase in sales and marketing, which I guess is a positive. But I just want you to give me the implications of these two observations. Thank you so much and congrats. Bill McDermott: Well, thank you very much Kash. And thank you for all the things that you saw in the Now platform and our leadership in the market, I really appreciate it. In terms of the core business, the core is becoming more and more relevant as these enterprises try to separate away from the old world of islands of automation and point solution buying and dealing with fragmented systems, processes and silos. So the core of the core, of course, is our ITX portfolio, and that is really resonating with our customers. Because they can do all the things they want to do on one platform. And to the extent, they want to leverage other technologies that they’ve already invested in, of course, we’re so accommodating to that, because our great engineers have built all out of the box integrations to the biggest systems in the world. So it’s kind of started with the core and now it’s moving across the enterprise with great speed and all the businesses have done great. And in fact, all the geos are ahead of their operating plans and they’re all doing really, really well in every geography and every industry is amazing. So I would just like to give you a feel for this Kash by just saying, like, we have seen the immediate impact of our innovation core as we expand the perimeter to employee and customer service management and now creator our great sales leadership sees the opportunity and they see the hockey stick building in the pipeline. And we’re trying to get out in front of that with the coverage model. And what I think you made a great sage comment on is that’s a high class situation, because most companies are complaining about the (ph) talent and they’re actually suffering because they don’t have enough talented people to do the job. We’re only hiring 1% of the applicants that are highly qualified to come into ServiceNow and the hardest part our recruiting team’s doing right now is just keeping up with the inflow of all the resumes. So I think it’s great that we’re actually hiring ahead. We see a great hockey stick in the pipeline and I have tremendous confidence in our sales leadership all over the world. Kash Rangan: Thank you, brilliant. Thank you so much. Bill McDermott: Thank you, Kash. Operator: And your next question comes from the line of Alex Zukin. Your line is open. Alex Zukin: Hey guys, thanks for taking the question. So I want to ask a similar question in that, around the ELA cycle and the deals that you talked about. Can you comment on how common that is for your pipeline right now versus maybe in previous years and give us a sense for the kind of magnitude of upsell that is possible when customers move at an accelerated pace to these enterprise buying activities. Bill McDermott: Thank you very much, Alex. I mean, the good news is, it’s early – it’s a very, very small part of our results and a very, very small part of our pipeline. So the upside for this initiative and this way of thinking is quite dramatic. Because if you think about enterprise solution selling and you do that in all the geos and all the industries, and you really establish a relationship plan with the customers at the C level, that’s quite convincing, you could do a lot. And what we could also do is get customers resonating with this and really lock them into the idea of a future roadmap. So they become a design partner. And that’s really what we want. We don’t want sales, we want partnerships. So if we have design partnerships to go three to five years, we’re buying into the roadmap and we’re doing that giving the customer all the benefits of scale and innovation that they deserve from ServiceNow. And at the same time, we’re investing less calories in selling things and more calories on building relationships that last a lifetime. Gina Mastantuono: And I would just add Alex that on that while it’s still small, the current expansion that we’re having with our customers, who are going through this buying, we’re going to pretty significant. So we’re really happy with it. Alex Zukin: Perfect. And then just maybe one follow-up for you, Gina, if you look at the guidance on a constant currency basis, can you give us a sense, just, I mean, clearly Q3 is a big federal quarter and everything we’ve heard to gesture federal pipeline is quite robust. Can you give us some puts and takes around the guardrails or the conservatism and the guidance that takes that strong federal pipeline into account? Gina Mastantuono: Yes. Great question. We absolutely are expecting another strong federal quarters this year. But if you remember on a quarterly basis, there’s a lot of seasonality built into billing. And so as we shared in the past, there’s a couple of drivers impacting the growth rate, which is really a function of renewal invoice timing, and not a function of business performance. So one particular item this quarter of Q3 is at some of our customers are becoming larger. They’ve requested a change in annual semi bill – the semiannual billing and this is much more pronounced in Q3 of this year. As we had two large customers that were previously invoiced annually in Q3 2020, that are now being invoiced sending an annual. So that’s actually resulting in two point headwind to the year-over-year growth. It’s one of the reasons why I talked about the four quarter rolling number and if you look at four quarter rolling for Q3 with this guide, it implies 31% year-over-year growth. So we absolutely expect the strong federal quarter, we absolutely expect continued acceleration in net new and we are feeling really good about Q3 as well as the full year increase in billings guidance. Bill McDermott: And Alex, if I could build on Gina’s outstanding commentary, I would just say there’s many big opportunities in the back end of the year, in federal, in particular. And the attending to be large programs, as opposed to smaller point solutions. And again, this is more or less the theme now as we’ve become an enterprise solutions company and you’re seeing business in the area of resiliency, there’s a lot of focused on business continuity now outages of course, and dealing with the COVID scenario, cyber security is on the top of many lists and programs that we’re involved in and vaccine management. Vaccine management is one of the greatest workflow challenges the government faces. And as you can tell, they’ll likely need to be readministering things regularly and managing that process, where our front and center on that. And of course, I’m really proud actually of the way the government is looking at digital transformation. They really are looking at this as a way to help government run like business. And there’s a lot of really smart operators on the technology side that I’ve met in many of the large programs and our team is very humble to have an opportunity to help not only the United States, but many of the governments around the world is really exciting. Alex Zukin: Makes total sense. And Gina, this is why we’re all very thankful that you’re now guiding to current RPO, where these issues probably don’t – are less impactful. Gina Mastantuono: Exactly. Exactly. Thank you. Operator: And your next question comes from Gregg Moskowitz from Mizuho. Your line is open. Gregg Moskowitz: Okay. Thanks very much for taking the question. Bill, should we construe the strong Q2 results in your bullish pipeline commentary to mean that you’ve clearly begun to benefit more from the economy reopening. And then also, how do you see that playing out over the back half of the year? Bill McDermott: Thank you very much, Gregg. Certainly, I think it’s beginning to show in the results and I have to say, part of my belief is that as the economy opens up even more. That can only benefit ServiceNow even more. We have done a great job and I really do take my hat off to our team and all functions of the company to stay focused on the customer and digital only world is not an easy thing to do. And ServiceNow employees that stood up to the challenge. But now as the economies open up and people are back in the office and there is a hybrid world that we’re all accommodating, I do believe getting our sales professionals and executives in front of other executives is only going to help the story resonate even more. So the important thing I believe is that we all learn something from COVID and we recognize what’s essential in terms of travel and accommodating personal meetings versus what is more adequately handled using tools that are digital and can be scaled even faster. And it’s the combination of those two forces that I think will really lift ServiceNow actually to new heights, Gregg. Gregg Moskowitz: That’s great. Thanks, Bill. And then just one for Gina, I think your subscription gross margins are a bit lower than they’ve been in awhile. Is there anything that you would call that here? Gina Mastantuono: Yes, the margins we talked about there, we were keeping them flat to our guys that they are impacted versus the prior year a bit. And we talked about this earlier in the year when making increased investment in our data centers and customer support to serve customers impacted by the new data residency regulations, as well as serving our customers who require additional security measures such as IL-5 for our fed customers. So those are the big ticket items that are impacting our margin that was included in our original dive for the year. And we are achieving exactly what we set out to do on both those funds. Gregg Moskowitz: Perfect. Thank you. Operator: And your next question comes from Arjun Bhatia. Your line is open. Arjun Bhatia: Perfect. Thank you very much for taking my question and congrats on the quarter. I want to start off maybe with the new customers, is it clearly seems like there’s strong traction there and your platform is broader than it used to be many years ago. I’m wondering how many of your new customers are coming in off of that outside of your core IT workflows in HR, in customer service management. Are you seeing traction there from new customers or was that mostly a point of expansion from existing customers? Bill McDermott: That’s a really good question, Arjun. What we’re seeing is, ServiceNow has hired some of the best people in the world and creative workflows and customer service management and employee experience. And we are built big businesses within our company in these categories. So it’s not at all unusual to see a customer begin with us on the employee experience side. There are many customers out there today that have systems of record that frankly can accommodate a one-stop shop for all the hybrid work needs of a workforce that’s going to be everywhere. And we uniquely serve that need with that consumer grade UX on the mobile. And now you see us with amazing partnerships with Microsoft and others. And I think that really is creating a lot of interest in the marketplace and yes, new deals beginning with employee experience. The same thing on customer service management. We’re now in a direct-to-consumer digital first world and the Now Platform is uniquely advantaged for customer service. And that is our focus and there’s many companies, especially in telecommunications and banking, not limited to that, that have come to us and started with us data. And I really want to stress this create a workflow situation. If you think about the 500 million apps that are going to have to be developed and the shortage of developers to do it, what you’re going to see is a groundswell of new business opportunities with ServiceNow starting there, because what’s happening is they have to start with the low-code, but they also want the resiliency and the security of tying in to a unified platform like ServiceNow, and ServiceNow is friendly to everybody in the market. And that’s what customers want. They want somebody that breaks them out of the islands of automation. So we’ve seen new deals and creator and customer and employee, not just starting with IT. And yes, that is kind of a new frontier. And it’s one of the reasons why we’re very bullish on the company. Gina Mastantuono: And I would just add on that really pleased with our new customer growth. We talked about it in the script about five new customers, just this quarter, over $1 million, and that’s across several different industries. And all of those five customers actually purchased five or more products. So cross-platform, it’s quite amazing. And so I still talks about IT certainly continues to be a high percentage of our new logos, but we’re seeing more and more, a high percentage of land with TSM, app engine and HR. So really, really pleased with the progress there. Bill McDermott: Absolutely. Arjun Bhatia: Perfect. That’s great to hear. And one more, if I can follow-up on Gregg’s question about reopening, I’m curious if the delta variant or any impact from that is coming up in your conversations with customers and whether this is something that you’re factoring, if you’re factoring that into guidance at all at this point or if it’s still too early to bake in any impact from impact of verticals on that front? Gina Mastantuono: Yes. Yes. It’s a great question. And certainly first and foremost, our greatest concern is always for the health and wellbeing of our people and our hearts go out to all those affected. And we definitely having conversations with customers, but with that said our business model is extremely resilient and predictable. We have a very robust backlog RPO exiting Q2 at $9.5 billion. And we talked about pipeline, right our pipeline continues to look really strong and our coverage ratio is better than the same time last year. So that’s definitely off getting any potential conversion rates that might come under pressure. So I feel extremely confident in our guide right now. And we’re certainly seeing the acceleration of digital transformation as hybrid environment, continuing to accelerate itself feels very strong about the guide. Arjun Bhatia: Great. Congrats again. Bill McDermott: Thank you. Operator: And your next question comes from Keith Weiss from Morgan Stanley. Your line is open. Keith Weiss: Excellent. Thank you guys for taking the question and congratulations on a really nice quarter as well. I want to ask a kind of a higher level question. What are the – investor debates going on right now is relative strength in the market of back office applications versus front office with most investors thinking that that most of the focal point is on the front office. You guys see both sides of the equation. So Bill, can you give us some indication on sort of whether there’s a relative more strength in the front office and back office or how you’re seeing that market environment right now. Bill McDermott: That’s a really important question. One of the things that’s really, really interesting Keith is, it’s neither a back nor front office world anymore. It actually is both and that’s the big change in the enterprise. And that’s why the Now Platform is uniquely competitive advantage for us and for our customers on our ecosystem, because it actually ties the front and the back together. And that’s the big aha, so many enterprise participants and I’ve been in the enterprise for awhile made their success at a being good in functional domains with shrink wrapped software and then pushing it out globally and getting standards built on it and then eco systems evolve on top of that. But what happened, especially in this hybrid work from anywhere world and with the digital transformation era, these are do or die moments now. And the executives in these companies need to have that resilient IT for that’s absolutely Fort Knox in terms of its security, its resilience and its performance. And it has to serve the business and then the business is pulling at IT to serve it. But even as the business wants to get innovative and do its own thing, in this world, the silos are an impediment to progress. So I think having a great front office employee experience and having a great front office customer service management and a great career workflow is tied to that resilient core. It’s really resonating so big time. And the other thing is, it’s really nice to speak well of all the market participants, because we just want to make them all better and we want to make all the customers successful. So that Now Platform is really thinking in as the platform for digital business and that’s really what we dreamed of and it’s happening. Keith Weiss: Got it. And if I think one last one, I think it kind of dovetails what you are talking about in terms of working well with the other market participants. And it’s kind of more of a question on the other side, I’ve always thought of your ITSM solution is kind of the backbone within the IT department, which everybody integrates into. And one of those major integrations has been the observability vendors in the states. I’ve always heard them talk about sort of as not being one of the most requested integrations on their platform, but now you’re going to start competing with these guys. So how do you balance being that good partner as the backbone within IT, but also starting to emerge as more of a competitor and observability? Bill McDermott: I think it’s very important to acknowledge that it’s not about competing with the other participants in the market. It’s about innovating on the Now Platform and giving the customer as much innovation as we possibly can. So they can conduct their business processes and their workflows on the Now Platform. To the extent, there are functionalities or investments that have been made in other participants in the market. We’re very happy to integrate with them and accentuate that functionality into our Now Workflow. So the customer gets the best of all worlds. I will tell you that there are many customers that absolutely tell us that we want Keith Weiss: …to particular functional areas who intervene it means and that’s it. Thank you. Bill McDermott: Thank you very much for the question, Keith. Hey look, the reality is we’re the only born in the cloud so for a company to have eclipsed $5 billion in revenue without large M&A. We’re highly aware of that. But we also aware that this is a very unique culture and this sales – for engineers is really in a league of its own and we continue to run the playbook again innovation. And that is what I represented and Gina represented at our Capital Markets Day, when we said we’d be a $15 billion plus revenue company. Having said that, RPA, and some of the other items that you mentioned, you shouldn’t expect us to make acquisitions in that space, but you should expect us to build our functionality and our capabilities, but also be an open and willing partner for the customers because it’s really about solving their problems. And the biggest thing I hear from them is, they’ve got lots of good points solutions all over the place. And that in effect is the root cause of a lot of the mess that’s been created in these enterprises. And more and more when I talk to leaders of companies and spent quite a bit of time during that this year, they tell me that they’re looking for that control tower, that, that clear pane of glass that can move their workloads, enable that workflows, tighten up their systems, their siloed operations, and enable their people to serve their customers. And really that’s what we’re doing. So I’ll always keep bringing it back to, we can get where we said, we’d go organically. We’re always on our tippy toes, looking at what’s best for our customers and our shareholders. And we always look at that. But right now, the plan is ever steady and there are no plans to acquire in the space that you mentioned. Keith Weiss: All right. Many things, Bill. Bill McDermott: Thank you very much for the question too. Thank you, Keith. Operator: And your next question comes from Tyler Radke from Citi. Your line is open. Tyler Radke: Yes. Thanks for the question. Bill, last quarter you talked about the EMEA business, I think you said it was on fire and clearly it’s nice to see the uptick in EMEA as a percentage of revenue. Curious how that’s evolved this quarter, obviously there’s kind of some mixed trends over there as it relates to reopening. But just wanted to see what if you’re seeing that momentum carry into Q2 and your thoughts there for the back half of the year. Bill McDermott: Yes. EMEA is doing fabulous. And one of the big changes that we’ve made in EMEA was obviously the proper leadership, not just that the immediate ahead level, which is now obviously working extremely well and very proud of that, but also in significant countries within EMEA, because as you know, every country in Europe has its own unique culture, its own unique business motions, and you have to be strong with leadership and all of the geographies. And we’re able to attract and retain the very best people in the enterprise software industry. I think that’s one of the root causes of our success. The second would be our C-level relationships. We have upped our game and instead of dealing with only the CIO, which is an incredibly important executive to us. We have also created relationship plans across the C-suite and really enabled the platform strategy for our customers. And I think that’s the big evolution of ServiceNow in EMEA. We’ve become a platform company there as well. So it’s kind of exciting when you consider how talk to Europe has had it with COVID and the travel restriction to do as well as we are. And can you imagine when things do loosen up and open up a little bit, just how big this is going to get in Europe for us. So we’re very excited. The business is going great. And in EMEA, just so, if the head of the first half operating plan, the internal operating plan and that’s a really good sign. Gina Mastantuono: And I would just add to there that only did EMEA do well. We had really strong performance across all regions, Americas and APJ as well. So we’re really feeling good from a geography perspective that, that we’re hitting on all cylinders. Tyler Radke: Great. And just as making a quick follow-up. So I think you talked about Creator workflows, being an 18 in the top 20 deals, which was more than both ITSM and ITOM, but it did a down tick from 20% of net new ACV to 14% this quarter. I was curious if there’s anything to call out there, whether it was just smaller creator deal sizes, or it was just the IPPs was so strong this quarter. Thanks. Gina Mastantuono: Yes. Yes. I’ll take that. So platform had a very strong quarter and you’re right in 17 of our top 20 deals, including one deal over $1 million. Q1, we closed some seven figure, multiple seven figure Creator workflow deals, which were unusually large and more than we typically see in one particular quarter. And so that’s why you’re seeing a little bit of a shift queue. In Q2, we really basically went back to a more normalized run rate of the 14%, which is consistent with what we’ve been seeing. I know that back in financial Analyst Day in May, we talked about the fact that we expect creative workflows becomes 20% of net new ACV by 2024. And we’re well on our way and are doing extremely well in that trajectory. So we feel really good about the performance. And then Bill, I don’t know if you want to add anything on the actual strategy behind. Bill McDermott: No. I think you did a great Gina. And I think you also acknowledged all of our regional leaders and I like to acknowledge all of our regional leaders along with you, it’s a great thing, and also our leadership executive team here and all the folks in engineering that have worked tirelessly to build the most innovative platform in the world is truly an honor to be associated with these folks. And I’m so bullish on creative workflow. And I truly believe that the new motion in the enterprise, it’s not going to be in a separate endeavors of innovation. It’s going to be the unification of innovation. And the big organizations are going to insist on enterprise coherence and security and business process alignment, and the CEOs of very involved in digital transformation, the CEOs that are out there, some of the greatest leaders I’ve ever seen, and they’re very focused on digital first and they’re not going to let these enterprises do whatever they want to do. So the companies that have true platforms that are acknowledged in the strategy room of the Board of Directors of given companies are going to do very well now. And the ones that are trying to get there, you better have a really great story on how you’re going to take care of all the needs of the enterprise and not just a few needs of a specific silo. Operator: And we will be taking one more question from the line of Sterling Auty from JPMorgan. Your line is open. Sterling Auty: Yes. Thanks. Hi guys. Just one question from my side, you mentioned the improvement in the hardest hit industries from the pandemic. I’m curious, what are these industries prioritizing in terms of their spend with ServiceNow and how durable do you expect that spending to be moving forward? Gina Mastantuono: Yes, great question. We’re really pleased with the trajectory there and that they are returning to more normalized spending habits. The areas that I can call out most are really around business resilience and how do they make sure that they are extremely well positioned, as we come out of this pandemic to help their employees be more productive in a hybrid world to really help ensure that their operations are as resilient as possible. So that’s throughout our IT, whether it’s ITOM and ITAM together or ITBM as well as risk and security. So really across the board feeling really good about the fact that, that, that’s opening up again. Bill McDermott: And I would build on Gina’s comments Sterling by also saying that the speed of digital business right now is faster than I think any of us could have even imagined. And they’re all talking seamless customer experience. And when you have to have a seamless customer experience to win, you have to align the value chain across the entire enterprise to earn that customer loyalty. And what you see in a lot of these companies is the middle office operations and just how manual these processes are and just how fractured the data is. So we’re really good in getting the data organized and focused and put into a workflow so you can align the business process and you can be more resilient, but at the same time, you can enable this direct-to-consumer relationship. I mean, when was the last time anyone on this call went into a bank, everything is done on the mobile. Everything is direct-to-consumer. Everything has to happen with a gorgeous, simplified UI. And I think that is really driving so much of the conversations we’re in right now. Sterling Auty: Understood. Thank you. Bill McDermott: Thank you. Operator: And due to time constraints, that will be our last question. And this concludes today’s conference call. Thank you for participating. You may now disconnect your lines. Goodbye.NOW Ratings Summary
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ServiceNow Shares Drop 4% on Weak Subscription Revenue Guidance
ServiceNow (NYSE:NOW) announced first-quarter earnings with a significant increase in adjusted earnings per share (EPS) to $3.41, up from $2.37 a year earlier, beating the consensus of $3.16. Revenue also outpaced expectations, amounting to $2.60 billion compared to an anticipated $2.58 billion.
The company's subscription revenue aligned with expectations at $2.52 billion. However, ServiceNow provided a softer forecast for the second quarter, expecting subscription revenue between $2.525 billion and $2.53 billion, slightly below the forecast of $2.54 billion. This guidance adjustment led to a 4% drop in ServiceNow’s stock in pre-market today.
For the full year, ServiceNow tightened its subscription revenue outlook to between $10.56 billion and $10.58 billion, marginally under the consensus estimate of $10.59 billion.
Notably, the company reported an adjusted gross margin of 83%, surpassing the expected 82.6%. The subscription gross margin was particularly strong at 86%, well above the forecasted 84.7%.
ServiceNow also highlighted a significant rise in free cash flow, which reached $1.23 billion, surpassing estimates of $961.1 million.
ServiceNow’s Price Target Raised Ahead of Earnings Announcement
Needham analysts increased their price target for ServiceNow (NYSE:NOW) to $900 from $660, while reiterating their Buy rating.
The analysts maintained a positive outlook on ServiceNow shares leading up to the company's earnings announcement on Wednesday. They believe that the management's conservative approach to the 2024 Subscription Revenue target of $10.4 billion, set during the May 2023 Financial Analyst Day, leaves room for outperformance.
At the time of this forecast, ServiceNow had not yet launched its Pro+ SKUs, finalized SKU pricing, or fully gauged customer interest and pipeline development. Moreover, the company had not incorporated its GenAI offerings into the product roadmap.
Given ServiceNow’s subscription revenue model and its consistent outperformance throughout 2023, the analysts expect the company to surpass its initial $10.4 billion target (with a consensus estimate of $10.5 billion). They emphasized ServiceNow's potential as a sustainable growth company, with over 20% annual growth driven by its subscription-based revenue model, comprehensive platform offerings, and the emerging monetization of its GenAI technology.
ServiceNow’s Price Target Raised Ahead of Earnings Announcement
Needham analysts increased their price target for ServiceNow (NYSE:NOW) to $900 from $660, while reiterating their Buy rating.
The analysts maintained a positive outlook on ServiceNow shares leading up to the company's earnings announcement on Wednesday. They believe that the management's conservative approach to the 2024 Subscription Revenue target of $10.4 billion, set during the May 2023 Financial Analyst Day, leaves room for outperformance.
At the time of this forecast, ServiceNow had not yet launched its Pro+ SKUs, finalized SKU pricing, or fully gauged customer interest and pipeline development. Moreover, the company had not incorporated its GenAI offerings into the product roadmap.
Given ServiceNow’s subscription revenue model and its consistent outperformance throughout 2023, the analysts expect the company to surpass its initial $10.4 billion target (with a consensus estimate of $10.5 billion). They emphasized ServiceNow's potential as a sustainable growth company, with over 20% annual growth driven by its subscription-based revenue model, comprehensive platform offerings, and the emerging monetization of its GenAI technology.
ServiceNow’s Price Target Raised at Evercore
Evercore ISI analysts increased their price target for ServiceNow (NYSE:NOW) from $725.00 to $800.00, while continuing to recommend an Outperform rating. This adjustment follows the results of a positive partner survey.
The analysts noted that although ServiceNow shares have seen a significant rise since the third fiscal quarter results, investors might need to exercise some patience in the near term. The partner survey, which gathered insights from 15 major ServiceNow partners, suggests that estimates for 2024 should lean towards an upward adjustment. It also underscores the potential benefits from the Pro+ SKU.
Regarding the fourth fiscal quarter results, the analysts anticipate ServiceNow to achieve modestly better performance than the current outlook and Street estimates, which are both at $2.4 billion in revenue. The expected Compound Recurring Profit Order (CRPO) growth is around 20.5% (21% in constant currency).
ServiceNow Stock Gains 3% Following Q3 Beat
Shares of ServiceNow (NYSE:NOW) rose more than 3% during Thursday's pre-market trading in response to their recently announced Q3 results and an upward revision in guidance.
For Q3, the company reported an EPS of $2.92, surpassing the Street expectation of $2.56. The revenue surged 25% year-on-year to $2.29 billion, higher than the anticipated $2.27 billion. Within this, subscription revenues reached $2.216 billion, marking a 27% growth. The company's current remaining performance obligations also exhibited growth, increasing by 27% from the previous year to stand at $7.43 billion.
Looking ahead, ServiceNow projects its Q4/23 subscription revenues to fall between $2.320 billion and $2.325 billion, indicating a growth of roughly 24.5%-25% from the previous year. For the entire year, they anticipate subscription revenues to range between $8.635 billion and $8.640 billion, which would mean an approximate 25.5% year-on-year increase.
What to Expect From ServiceNow’s Upcoming Analyst Day?
RBC Capital analysts provided their views on ServiceNow, Inc. (NYSE:NOW) ahead of the company’s Analyst Day this week.
The analysts believe the focus remains on the long-term product roadmap with a heavy dose of generative AI, workflow, and platform spend consolidation.
At the 2022 analyst day, subscription revenue guidance moved higher to $11 billion or more in 2024 and $16 billion or more in 2026. Additionally, operating margin guidance moved higher to 27% in 2024 vs. 26.5% at the 2021 analyst day while free cash flow margin was maintained at 33%.
Given incremental macro pressure as well as FX headwinds over the past year, the analysts believe most investors think the 2024 revenue guide will move back down to $10 billion for 2024 with free cash flow margins likely in the 31-32% range.
ServiceNow Reports Better Than Expected Q1 Results
ServiceNow (NYSE:NOW) reported strong Q1 results yesterday, beating expectations as demand trends remained durable, including growth in the financial services vertical, despite broader volatility.
Q1 EPS came in at $2.37, beating the Street estimate of $2.04. Revenue was $2.14 billion, better than the Street estimate of $2.08 billion.
According to the analysts at RBC Capital, the sales pipeline remains strong as they believe management remains prudent in the near term. That said, due to FX and ongoing macro pressures, the analysts believe long-term targets likely move lower at the upcoming investor day, which is something investors expected.
For the full year, the company expects subscription revenues to be in the range of $8.47-$8.52 billion.
