ServiceNow (NOW) Up 5.9% Since Last Earnings Report: Can This Continue?

It’s been about a month since ServiceNow’s (NOW) last earnings report. Shares have risen about 5.9% in that time, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is ServiceNow headed for a recession? Before we dive into the recent reaction from investors and analysts, let’s take a quick look at the company’s most recent earnings report in order to get a better handle on the important factors influencing the situation.

ServiceNow’s first-quarter earnings beat estimates, revenues grow YoY

ServiceNow reported first-quarter 2024 adjusted earnings of $3.41 per share, up 8.25% in line with the Zacks Consensus Estimate and up 44% year-over-year.

Revenues of $2.60 billion beat the consensus estimate by 0.62% and increased 24.2% year-over-year. On a constant currency (cc) basis, revenue increased 24% year over year to $2.597 billion.

Subscription revenue increased 24.7% year-over-year to $2.52 billion. For cc, subscription revenue grew 24.5% year-over-year, 50 basis points (bps) above the company’s high-end guidance.

Professional services and other revenues increased 11% year-over-year on both a reported and correspondence basis to $80 million.

At the end of the first quarter, current outstanding performance obligations (cRPO) were $8.45 billion, up 21% year-over-year on both reported and traditional basis and 100 basis points above guidance board of directors. Other performance obligations, on a constant currency basis, increased 27% year over year to $17.7 billion.

ServiceNow had 1,933 total customers and an annualized contract value (ACV) of more than $1 million at the end of the reporting quarter, representing a 15.5% year-over-year customer growth.

During the reported quarter, ServiceNow closed eight transactions with a net new ACV exceeding $5 million and four transactions with a net new ACV exceeding $10 million. Closed 59 transactions valued at more than $1 million in net new ACV. The number of customers depositing more than $20 million or more increased by 50% year over year.

In terms of key businesses, ITSM and ITOM were in 16 of the top 20 deals. Overall, security and risk were in 11 of the top 20 deals, while customer and employee creator workflows were in 10 of the top 20 deals.

Generative AI transactions continued to gain traction with record new net ACV for Pro Plus, making it the fastest-selling product in ServiceNow history. Gen AI products were among seven of ServiceNow’s top 10 deals, and during the reported quarter, the company completed seven deals valued at more than $1 million ACV.

In terms of industry, technology, media and telecommunications network, new ACV increased by more than 100% year-on-year. Education grew by almost 50% year-on-year, while transportation and logistics, business and consumer services, and retail and hospitality also recorded strong growth.

The story continues

Operational details

In the first quarter, non-GAAP gross margin was 83.5%, up 70 basis points year-over-year.

Gross margin on subscription was 85.7% and did not change year-on-year. Professional services and other gross margins were 16.3% compared to 2.8% recorded in the same quarter last year.

Total operating expenses were $1.75 billion in the reported quarter, up 15.7% year-over-year. Operating expenses as a percentage of revenue decreased 500 basis points year-over-year.

ServiceNow’s non-GAAP operating margin increased 410 basis points year-over-year to 30.4%, or 150 basis points above management’s expectations, driven by strong revenue growth and disciplined expenses.

Balance sheet and cash flow

As of March 31, 2024, the company had cash and cash equivalents and short-term investments of $5.11 billion, compared to $4.88 billion as of December 31, 2023.

During the reported quarter, operating cash flow was $1.34 billion compared to $1.61 billion in the prior-year quarter.

ServiceNow generated free cash flow of $1.23 billion in the reported quarter, up from $1.34 billion in the prior-year quarter.

The company repurchased 225,000 shares for $175 million and has a remaining authorization of approximately $787 million.

Conductivity

In Q2 2024, subscription revenue is forecast to range from $2.525 billion to $2.53 billion, suggesting improvement in the range of 21.5%-22% year-over-year on a GAAP basis. For cc, subscription revenues are expected to grow in the range of 22%.

cRPO is expected to grow 20.5% year-over-year on both a non-GAAP and GAAP basis.

ServiceNow expects non-GAAP operating margin to be 25% for the current quarter.

The company currently expects 2024 subscription revenue to be $10.56 billion to $10.575 billion, which represents GAAP growth of 21.5% to 22% from 2023. For cc, subscription revenue is expected to grow in 2023 by 21.5%.

ServiceNow expects non-GAAP subscription gross margin to be 84.5% and non-GAAP operating margin to be 29%. Additionally, free cash flow margin is expected to be 31%.

How have estimates changed since then?

It turns out that estimate revisions have been on a downward trend over the past month.

Due to these changes, the consensus estimate moved -5.63%.

VGM results

ServiceNow currently has a Strong Growth Score of A, although it lags well behind its Momentum Score of C. However, the stock is rated F on the value side, putting it in the bottom quintile of this investing strategy.

Overall, the stock has a Total VGM Score of C. If you’re not focused on one strategy, this score should interest you.

Perspectives

Estimates for this company are generally on a downward trend, and the magnitude of these revisions indicates a downward shift. Notably, ServiceNow carries a Zacks Rank #3 (Hold). We expect a linear rate of return on the stock over the next few months.

Industry player performance

ServiceNow is part of the Zacks Computers – IT Services industry. Over the past month, Infosys (INFY), a stock in the same industry, has gained 2.3%. More than a month ago, the company published its results for the quarter ended March 2024.

In the most recent quarter, Infosys reported revenues of $4.56 billion, representing a year-over-year change of +0.2%. EPS of $0.23 for the same period compared to $0.18 a year ago.

For the current quarter, Infosys is expected to report earnings per share of $0.18, representing a year-over-year change of +5.9%. Over the past 30 days, the Zacks Consensus Estimate has moved -0.2%.

Infosys carries a Zacks Rank #3 (Hold) based on the overall direction and magnitude of estimate revisions. Additionally, the stock has a VGM Rating of D.

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