ServiceNow (NOW) – Earnings Review – January 27, 2024

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ServiceNow (NOW) – Earnings Review – January 27, 2024

ServiceNow is one of the largest enterprise software firms in the world. It automates workflows, tech stacks and projects to augment efficiency and service of customers. For this reason, it calls itself the “leading digital workflow company.” Buckets of workflow automation include: service management, operations, asset management, security, customer management, employee management and creator management. These are further grouped into workflow buckets like “customer workflows” and “creative workflows.”

All products and services are neatly tied into its “ServiceNow Platform.” To bolster automation capabilities, ServiceNow recently debuted its GenAI “Vancouver Platform.” This consolidates all of the model and app work it’s been doing in the space directly into its existing products. A key example is “Now Assist.” It’s monetizing this new GenAI-infused platform directly just like Microsoft with its copilot suite.

Demand

  • Beat revenue estimate by 1.7%.
    • Its 25% 3-yr revenue CAGR compares to 25.8% as of last quarter & 26.2% 2 quarters ago.
  • Beat foreign exchange neutral (FXN) subscription revenue growth guide by about 200 bps. Beat subscription revenue estimates by 2.2%.
  • Beat 21% Y/Y current remaining performance obligations (cRPO) growth guide by about 300 bps.
  • Closed 168 $1 million+ net new transactions vs. 83 Q/Q and 126 Y/Y.

Source: Brad Freeman – SEC Filings, Company Presentations, and Company Press Releases

Source: Brad Freeman – SEC Filings, Company Presentations, and Company Press Releases

Margins

  • Beat EBIT estimates by 8.1%.
  • Beat free cash flow (FCF) estimates by 2.3%.
  • Beat $2.78 earnings per share (EPS) estimates by $0.36.

Source: Brad Freeman – SEC Filings, Company Presentations, and Company Press Releases

Source: Brad Freeman – SEC Filings, Company Presentations, and Company Press Releases

Balance Sheet

  • $8.1 billion in cash, equivalents & investments.
  • $1.5 billion in debt.
  • Share count rose by 2% Y/Y as buybacks offset some of its dilution.

Guidance

First Quarter:

  • 24.25% Y/Y subscription revenue growth.
  • 20% Y/Y cRPO growth.
  • 29% EBIT margin vs. expectations of 26.8%.

Full Year:

  • 21.75% Y/Y subscription revenue growth. This is roughly in line with expectations and led to a modest upward revision in annual overall revenue estimates from analysts.
  • 29% EBIT margin vs. expectations of 28.2%.
  • 31% FCF margin, which met expectations.

The upbeat full year guide “reflects the early success ServiceNow has seen with its GenAI products.”

“The accelerating pace of investments in workflow automation and GenAI positions us well for another strong year.” – CEO Bill McDermott As of today, NOW trades for 49x NTM EBIT, 59x NTM net income and 47x NTM FCF. EBIT is expected to grow by 27% Y/Y in 2024; net income is expected to grow by 24% Y/Y in 2024; FCF is expected to grow by 24% Y/Y in 2024.

Call & Release Highlights

The Platform Play:

Platform plays are thriving in this environment. This was a key theme last earnings season and is looking like a key theme this time around too. Within enterprise software and workflow automation, ServiceNow is the end-to-end platform. It allows for broad maintenance, optimization and expansion of a client’s asset base to ensure that asset base is best-positioned for success. It also offers seamless processes for 3rd party developers to build custom apps on top of its platform to better cater to local needs. What does this all mean? Better workflow automation efficacy and value harvesting paired with lower cost. That’s always a popular combination; it is especially popular when money isn’t free and macro isn’t as historically easy – like today. All of this offers clear evidence as to why “new logo growth is accelerating” and clients are lining up to work with ServiceNow. New logo growth has now accelerated for 4 straight quarters.

  • ServiceNow closed 168 $1 million+ transactions this quarter for 33% Y/Y growth.
  • It also enjoyed 15% Y/Y growth in $1 million+ customers to reach 1,897.
  • Customers aren’t just landing… they’re staying. ServiceNow’s renewal rate remains at a sky-high 99%.

One quarter after its creative workflows product bucket crossed $1 billion in contract value, its customer workflows bucket became its 3rd product category to do just that. It now has 11 different individual product lines with over $250 million in annual contract value (ACV); virtually all of the product groups closed more than 10 $1 million+ deals for the quarter. Again, the platform play.

“The core business is rock solid and growing. Our perimeter is growing. Platform adoption is growing.” – CEO Bill McDermott

GenerativeAI News:

Now Assist, one of its GenAI add-ons, enjoyed more business in a first quarter vs. any other product release in its history. This is one of ServiceNow’s products in its “Plus SKUs” subscription bundle. This includes software add-ons (like its newer GenAI tools) to bolster value for clients with deeper needs. Plus SKU describes the type of subscription bundle while Now Assist describes the product category. Further, Now Assist is the GenAI product suite to automate and bolster work under the broader Vancouver Platform umbrella.

The company expanded the use cases for its Now Assist GenAI suite. New tools include a virtual agent or assistant for conversational querying and faster issue resolution and workflow generation. It takes a client 15 minutes to onboard this set of new tools. 

McDermott shared some interesting Gartner research to frame the software and GenAI opportunity through 2027. Gartner expects tech spending to rise from $5 trillion in 2024 to north of $6 trillion in 2026. The two years it will take to add another trillion in “tech spending” compare to the ten years it took that spend to move from $4 trillion to $5 trillion. AI is a big piece of this, with $3 trillion in spend expected to take place from 2023 to 2027. ServiceNow is taking the direct monetization approach to GenAI just like Microsoft. Any traction here, which is clearly already coming, should bear material, near-term fruit.

“What we have here is a strong, durable market being supercharged by a once-in-a-generation secular trend.” – CEO Bill McDermott

ServiceNow is also using its GenAI work internally to drive outcomes like a 52% boost to innovation speed for its developers via text to code tools.

Partnerships & M&A:

  • Added a new partnership with DXC. ServiceNow will integrate its data analytics and GenAI tools into DXC’s own platform.
  • New 5 year collaboration with Amazon Web Services (AWS) to provide its products on Amazon’s marketplace and to work together on or “co-develop” new AI applications.
  • Deepened its EY partnership to “empower responsible AI usage and to bring AI experiences to EY’s employees and clients with Now Assist. 
  • New 5 year strategic alliance with Visa to “transform payment service experiences” starting with dispute management.
  • Joined the AI Alliance (started by Meta and IBM among others) to “advance open, safe and responsible AI usage.”

Take

This was yet another rock-solid quarter. The margin trends are great while it posted its fastest Y/Y revenue growth rate in over a year as well. New product launches are clearly working alongside its value proposition as a whole. There’s really nothing to pick at here… at all… so I won’t pick.

Disclaimer: Third party content is provided for informational purposes only and should not be construed as an offer to sell or a solicitation of an offer to buy or sell any security. Third party content is not intended to serve as a recommendation to buy or sell any security and is not intended to serve as investment advice. Third party content creators are not affiliated with BBAE Holdings LLC, (“BBAE”) Redbridge Securities LLC (“Redbridge Securities”) or BBAE Advisors LLC (“BBAE Advisors”). All investments involve risk, including the possibility of total loss of principal. For additional important information, please click here.

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