wow It’s hard to believe how far ServiceNow (NOW) has come overnight. Up to 15%. This former Sarge name (it’s hard to tell the former when you see an old fave soar) is down 43% year to date entering the report, and down 48% from November 2021.
It has changed significantly since the closing bell on Wednesday.
In profits? Maybe. In generating income? That was missed. In the guide? The guide is not a home run.
Perhaps it’s the fact that CEO Bill McDermott has been named Chairman of the Board, effective immediately, while founder Fred Lundy has stepped down from that role, but remains a member of the Board. maybe. McDermott is thought of, by myself and others, as one of the best CEOs on Wall Street. Today, he is more than just “a CEO” at ServiceNow. Huzzah.
The numbers
For the three-month period ended September 30, ServiceNow posted adjusted EPS of $1.96 (GAAP EPS: $0.39), which was a beat… on revenue of $1.831B. That was a small miss. These numbers equate to revenue growth on an adjusted basis of 26% versus revenue growth of 21.2%. Subscription revenue of $1.742B is good for growth of 22% or 28.5% in constant currency. While impressive, it still falls short of the consensus view for $1.75B.
Current outstanding performance obligations (cRPO) printed at $5.87B (up 18% or 25% in cc). Again, this is impressive, but short of the $5.96B Wall Street had in mind. Outstanding performance obligations (RPO) totaled $11.4B (up 17% or 24.5% in cc).
A gross profit margin of 78% produced gross profit of $1.413B, and ultimately net income of $80M or in adjusted terms… $398M. The company generated $103M in free cash flow, which is good for growth of 6%.
Guidance
For the current quarter, ServiceNow forecasts subscription revenue of $1.834B to $1.839B. This would come to a growth of 20% to 21% or a growth of 26% to 27% in constant currency. Wall Street is looking for between $1.87B and $1.875B. As for cRPO, the company sees a growth of 20% of 26% in cc. The company also sees a 26% operating margin.
For the full year, SerrviceNow expects subscription revenue growth of 23% (28.5% in cc), and subscription gross profit margin of 86%, operating margin of 25% and free cash flow margin of 29%.
Balance sheet
As the quarter closed, ServiceNow ran with a net cash position of $3.956B and current assets of $5.476. These two lines have grown since the beginning of the year. Current liabilities stand at $4.432B, bringing the firm’s current ratio to a solid 1.24.
Total assets add up to $11.106B. This includes only $1.028B in “goodwill” and other intangibles. That’s only 9.3% of total assets, which we’d like to see. Total liabilities less total equity of $6.583B. This includes $1.485B in long-term debt, which the company can pay out of pocket nearly three times over. It’s a very fine balance.
Wall Street
So far, I’ve found nine sell-side analysts rated at a minimum of four stars (out of five) on TipRanks who opined on NOW as of last night. All nine rate the stock at either a “buy” or something we consider a “buy equivalent.”
The average price target among all nine of these analysts is $514.44 with a high of $600 (Philip Winslow of Credit Suisse) and a low of $475 (Keith Bachman of BMO Capital). When the high and low are removed as outliers, the average target price among the other seven comes to $507.86.
My thoughts
Although performance was good and business was growing, the firm missed consensus on some metrics and even took guidance (while still good) below Wall Street’s expectations.
Is this really a case of Wall Street believing Bill McDermott? Believe me, he is a one man catalyst. Perhaps some of this morning’s run for shares was simply because the worse was feared with so many tech stocks falling out of bed. 50 times forward looking earnings is a tough train to ride in these markets.
On the one hand, NOW withdrew both the 21-day exponential average (EMA) and 50-day simple moving average (SMA) this Thursday morning. On the other hand, the stock has not created a huge unfilled gap that would require a price of $382 to fill. Then again, the Fibonacci retracement of 38.2% (of the November 2021 to October 2022 selloff) will play out at the 200-day SMA ($480).
I’m not going to get into the momentum trade today. I will tell you this, though. If after the Fed makes their statement next week, this stock holds the 50-day line at $410, I think I’ll have to reconsider buying the equity. Until then, I’d rather sell the $400 that expires Friday for a $2 premium and eat the shares if I have to. A trader could buy the $390 that expires on Friday for around $1 if not comfortable without some risk management in place.
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