Current service NOW reported that the adjusted earnings per share for the third quarter of 2020 was $1.21, which was 17.48% higher than the Zacks consensus estimate and a year-on-year increase of 22.2%.
Revenue was US$1.15 billion, exceeding market expectations by 3.75%, an increase of 30% year-on-year. After adjusting the exchange rate, revenue was US$1.137 billion, a year-on-year increase of 28%.
Subscription revenue increased by 31% year-on-year to US$1.091 billion. After adjusting the exchange rate, subscription revenue increased by 29% year-on-year to US$1.077 billion.
Professional services and other income increased 19% year-on-year to US$61 million. After adjusting the exchange rate, professional services and other income increased by 17% to $60 million.
ServiceNow benefits from the increasing adoption of its workflow by companies undergoing digital transformation.
Following the impressive third-quarter results and continued adoption of its solutions and stable channels, ServiceNow has raised its guidance for subscription revenue, billing, operating margins, and free cash flow margins in 2020.
ServiceNow, Inc. prices, consensus and EPS surprises
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Settlement details
The total bill calculated on a non-GAAP basis increased by 25% year-on-year to US$1.139 billion. After adjusting the exchange rate, the total bill increased by 23% year-on-year to US$1.126 billion.
The subscription fee was US$1.081 billion, a year-on-year increase of 25%. After adjusting the exchange rate, the subscription fee was US$1.069 billion, an increase of 24%.
Professional services and other bills increased by 13% to $58 million. After adjusting the exchange rate, professional services and other bills were $57 million, an increase of 12%.
Expanding customer base is still worthy of attention
ServiceNow’s safe workplace application suites and dashboards have been downloaded by more than 800 organizations worldwide, including Raymond James, Standard & Poor’s and Rutgers University. It is worth noting that Rutgers University is using the Safe Workplace app for health checks, room reservations and contact tracking to “ensure the safety of all students, faculty and staff.”
In addition, ServiceNow announced a new integration with Uber for Business to help employees feel safe when commuting to and from get off work as soon as possible after being safely on duty.
During the quarter, ServiceNow completed 41 transactions, with a new annual contract value (ACV) exceeding $1 million.
Currently, this Zacks ranked second (buying) company has a total of 1,012 customers, and its ACV exceeds $1 million, a year-on-year increase of 25%.you can see The full list of today’s Zacks #1 ranking (strong buy) is here.
Since the Now platform is still a mission-critical part of its customer operations, ServiceNow’s consistent 98% renewal rate reflects the flexibility of the business.
The company completed the largest transaction in its history, with a transaction value of more than $40 million. Following the strong momentum of the Now platform, the company has increased its guidance throughout the year.
It is worth noting that the company’s top 20 deals include three or more products. ITSM (or IT Service Management) Professional Edition ranks 16 of the 17 ITSM transactions among the top 20 transactions. In addition, 18 of the top 20 deals also include ITOM (or IT operations management).
ServiceNow marks its largest federal quarter, with 9 federal customers with ACV revenue exceeding $10 million.
Winners include Mount Sinai, the Federal Defense Information Systems Agency, the U.S. Air Force, the U.S. Army and the U.S. Department of Veterans Affairs, the U.S. Senate and the Federal Court of Claims, and the Department of Veterans Affairs.
In fact, ServiceNow has been appointed as a leader in the 2020 Gartner Magic Quadrant for IT Risk Management. The company’s governance, risk and compliance (“GRC”) platform has been evaluated.
In addition, among the top 20 transactions, 13 have won customer service management (CSM) orders, which reflects the growth momentum of its business, of which 8 transactions amounted to more than $1 million.
It is worth noting that the ServiceNow CSM solution is already helping video conferencing giants, Zoom movie ZM updates its customer service operations. Zoom Video also uses ServiceNow’s AIOps capabilities to enable its new hardware as a service (HaaS) business model.
During the reporting quarter, ServiceNow and Microsoft MSFT provides employees with an enhanced digital experience. At Microsoft Ignite 2020, the company introduced a new workflow built into the Microsoft team to improve employee productivity with faster case resolution and seamless self-service.
The company also works with CiscoCSCO DNA Spaces has improved its Contact Tracing app to create a safer return to the workplace environment during the coronavirus pandemic.
In addition, ServiceNow announced the expansion of its partnership with Deloitte to help customers enhance their HR Service Delivery (HRSD) workload and provide employees with an enhanced digital experience.
Operational details
In the third quarter, the non-GAAP gross profit margin was 82%, an increase of 100 basis points (bps) year-on-year. The subscription gross profit margin remained flat year-on-year at 86%. Professional services and other gross profit margin was 19%, compared with 1% in the same period last year.
Total operating expenses calculated on a non-GAAP basis were US$648.8 million, an increase of 31.7% over the same period last year.
ServiceNow’s non-GAAP operating profit margin was 26%, the same as the same period last year. It is worth noting that management expects a non-GAAP operating profit margin of 22%. The strong growth in subscription revenue and the reduction in costs related to the coronavirus drove better than expected performance.
Balance sheet and cash flow
As of September 30, 2020, ServiceNow’s cash and cash equivalents and short-term investments were US$2.95 billion, compared with US$2.34 billion as of June 30, 2020.
In the reported quarter, operating cash was US$241.5 million, compared with US$368.1 million in the previous quarter.
ServiceNow generated $216.3 million in free cash flow, an increase of 78.3% year-on-year. In addition, the free cash flow margin was 19%, an increase of 500 basis points year-on-year.
As of the end of the third quarter, the remaining performance obligations were US$7.3 billion, a year-on-year increase of 31% and an increase of 28% after exchange rate adjustments.
Q4 guidance
For the fourth quarter of 2020, non-GAAP adjusted subscription revenue is expected to be between US$1.141 billion and US$1.146 billion (adjusted for fixed exchange rates), a year-on-year increase of 27%.
Non-GAAP adjusted subscription fees are expected to be between US$1.612 billion and US$1.632 billion, an increase of 24-26% over the same period last year.
In addition, ServiceNow expects a non-GAAP operating margin of 21%.
It is worth noting that ServiceNow expects to shift marketing spending from the third quarter to the fourth quarter, and increase investment in pipeline production activities to limit profit growth.
2020 guidance
For 2020, ServiceNow revised the guidelines. The company now expects non-GAAP-adjusted subscription revenue to be between US$4.251 billion and US$4.256 billion, an increase of 31% from 2019. The previous guidance ranged from US$4.210 billion to US$4.225 billion.
Non-GAAP adjusted subscription fees are expected to be $4.78-$4.80 billion, an increase of 26-27% from the reported value of $4.660-$4.700 billion in the same period last year. After adjusting for fluctuations in foreign exchange and billing periods, subscription accounts are expected to be between US$4.779 billion and US$4.799 billion, a year-on-year increase of 26-27%.
In addition, ServiceNow expects a non-GAAP subscriber margin of 86% and a non-GAAP operating margin of 24.5% (higher than the previous guidance of 24%).
In addition, the non-GAAP free cash flow margin is expected to be 31.5% (higher than the previous guidance of 29.5%).
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