Why Is ServiceNow (NOW) Down 9.8% Since Last Earnings Report?
A month has gone by since the last earnings report for ServiceNow (NOW). Shares have lost about 9.8% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is ServiceNow due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
ServiceNow Q1 Earnings & Revenues Surpass Estimates
ServiceNow reported first-quarter 2022 adjusted earnings of $1.73 per share, which beat the Zacks Consensus Estimate by 2.37% and improved 13.8% year over year.
Revenues of $1.72 billion surpassed the consensus mark by 1.71% and increased 26.6% year over year. After adjusting for forex, revenues of $1.76 billion surged 29% year over year.
Subscription revenues improved 26% year over year to $1.63 billion. After adjusting for forex, subscription revenues increased 29% year over year to $1.67 billion.
Professional services and other revenues increased 36% year over year to $91 million. After adjusting for forex, professional services and other revenues jumped 39% on a year-over-year basis to $93 million.
ServiceNow has been benefiting from the rising adoption of its workflows by enterprises undergoing digital transformation. The company now has 1,401 total customers with more than $1 million in annual contract value, representing 24% year-over-year growth in customers.
Renewal rate was 98% in the reported quarter compared with 97% reported in the year-ago quarter.
During the reported quarter, ServiceNow closed 52 transactions with more than $1 million in net new annual contract value, representing 41% year-over-year growth.
As of Mar 31, 2022, current remaining performance obligations (“RPO”) of $5.69 billion up 29% year-over-year. On a constant currency basis, current RPO increased 30.5%.
RPO, on a constant currency basis, rose 31.5% year over year to $11.6 billion.
Operating Details
In the first quarter, non-GAAP gross margin was 82.6%, which expanded 70 basis points (bps) on a year-over-year basis.
Subscription gross margin of 86.5% expanded 90 bps year over year. Professional services and other gross margin were 14.3% compared with the year-ago quarter’s figure of 13.4%.
Total operating expenses, on a non-GAAP basis, were $986 million in the reported quarter, up 32.7% year over year. As a percentage of revenues, operating expenses increased 260 bps on a year-over-year basis.
ServiceNow’s non-GAAP operating margin contracted 200 bps on a year-over-year basis to 25.4%.
Balance Sheet & Cash Flow
As of Mar 31, 2022, ServiceNow had cash and cash equivalents, and short-term investments of $4.01 billion compared with $3.30 billion as of Dec 31, 2021.
During the reported quarter, cash from operations was $863 million compared with $844 million in the previous quarter.
ServiceNow generated free cash flow of $770 million in the quarter, up from $744 million reported in the prior quarter.
Guidance
For second-quarter 2022, non-GAAP subscription revenues are projected between $1.715 billion and $1.720 billion, which suggests an improvement of 29% year over year.
ServiceNow expects non-GAAP operating margin to be 22%.
For 2022, ServiceNow expects non-GAAP subscription revenues to be $7.155-$7.170 billion, which suggests a rise of 28.5% from the year-ago reported figure.
ServiceNow expects non-GAAP subscription gross margin to be 86% and non-GAAP operating margin to be 25%. Moreover, non-GAAP free cash flow margin is expected to be 31%.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended downward during the past month.
The consensus estimate has shifted -39.27% due to these changes.
VGM Scores
At this time, ServiceNow has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, ServiceNow has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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