Service Today (NOW – The Free Report) reported third-quarter 2022 adjusted earnings of $1.96 per share, beating the Zacks Consensus Estimate by 5.95% and improving 26.5% year over year.
Our earnings estimate is pegged at $1.86 per share.
Revenues of $1.83 billion lagged the consensus mark by 1.2% but rose 21.1% year over year. After adjusting for forex, revenues of $1.93 billion jumped 27.5% year over year.
Subscription revenues improved 22.1% year over year to $1.74 billion. After adjusting for forex, subscription revenues rose 28.5% year over year to $1.83 billion, exceeding management’s guidance range of $1.750-$1.755 billion.
Professional services and other revenue increased 4.7% year over year to $89 million. After adjusting for forex, professional services and other revenue increased 12% on a year-over-year basis to $95 million.
ServiceNow benefits from the increasing use of its workflows by businesses undergoing digital transformation. The company now has 1,530 total customers with more than $1 million in annual contract value, representing 22% year-over-year customer growth.
Customers with a contract value of $10 million grew 60% year-over-year in the reported quarter. The renewal rate was 98% in the reported quarter, flat year over year.
During the reported quarter, ServiceNow closed 69 transactions with more than $1 million in new annual contract value.
As of Sept 30, 2022, current outstanding performance obligations (cRPO) were $5.87 billion, up 18% year over year. On a constant currency basis, cRPO increased by 25%.
Outstanding performance obligations, on a constant currency basis, increased 24.5% year over year to $12.1 billion after adjusting for forex.
In the third quarter, non-GAAP gross margin was 82.4%, which grew 130 basis points (bps) on a year-over-year basis.
Gross subscription margin of 86.2% expanded 120 bps year-on-year. Professional services and other gross margin was 7% compared to last quarter’s figure of 16.5%.
Total operating expenses, on a non-GAAP basis, were $1.03 billion in the reported quarter, up 23.1% year over year. As a percentage of revenues, operating expenses rose 90 bps on a year-over-year basis.
ServiceNow’s non-GAAP operating margin expanded 40 bps on a year-over-year basis to 26.2%.
Balance Sheet and Cash Flow
As of Sept 30, 2022, ServiceNow had cash and cash equivalents and short-term investments of $3.96 billion compared to $3.83 billion as of June 30, 2022.
In the reported quarter, cash from operations was $265 million compared to $433 million in the previous quarter.
ServiceNow generated free cash flow of $103 million in the reported quarter, down from $287 million reported in the previous quarter.
For the fourth quarter of 2022, subscription revenues are expected to be between $1.834 billion and $1.839 billion, suggesting an improvement in the range of 20-21% year over year on a GAAP basis. In constant currency, subscription revenues are expected to grow in the range of 26-27%.
cRPO is expected to grow 26% year over year on a non-GAAP basis and 20% on a GAAP basis. Unfavorable forex is expected to hurt subscription revenues by $330 million.
ServiceNow expects its non-GAAP operating margin to be 26%.
For 2022, ServiceNow expects subscription revenues to be $6.865-$6.870 billion, suggesting an increase of 23% over 2021 on a GAAP basis. In constant currency, subscription revenues are expected to grow 28.5% in 2021.
Unfavorable forex is expected to erode subscription revenues by $290 million by 2022.
ServiceNow expects non-GAAP subscription gross margin to be 86% and non-GAAP operating margin to be 25%. Additionally, the non-GAAP free cash flow margin is expected to be 29%.
Zacks Rank and Stocks to Consider
Currently, ServiceNow has a Zacks Rank #3 (Hold).
Shares of ServiceNow have underperformed the Zacks Computer & Technology sector year to date. While NOW shares lost 43.5%, the Computer & Technology sector fell 34.3%.
Airbnb (ABNB – Free Report), Super Micro Computer (SMCI – Free Report) and Blackbaud (BLKB – Free Report) are some better-ranked stocks that investors in the broader sector can consider. All three stocks have a Zacks Rank #1 (Strong Buy) and are scheduled to report their quarterly results on Nov 1. You can see the complete list of Zacks #1 Rank stocks today here.
Shares of Airbnb and Blackbaud are down 30.7% and 33.5% year to date, respectively. Super Micro rose 49.4% in the same timeframe.