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ServiceNow Slips After Cutting Sales Forecast on Dollar, Demand

·3-min read

(Bloomberg) -- ServiceNow Inc., a maker of business workflow software, declined in extended trading after reducing its full-year revenue forecast on the strength of the dollar and a potential pull back in demand.

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Annual subscription revenue, which makes up the overwhelming majority of company sales, will increase 24% to a midpoint of $6.92 billion, the Santa Clara, California-based company said Wednesday in a statement. In April, ServiceNow projected full-year sales growth of 26%, with a midrange of $7.03 billion. The company said currency fluctuations would cost $220 million in 2022 revenue.

While the revision of the outlook is mainly due to the strength of the US dollar, it also factors in a potential reduction in demand, which hasn’t materialized, said Chief Executive Officer Bill McDermott in an interview. “We’re going to see some longer sales cycles” given the uncertainty of the economy, he said.

Current remaining performance obligations, which are contract sales that will be recognized as revenue in the next 12 months, will be reduced by about 2 percentage points in the current quarter because of seasonality in customer renewals, the company said. “We always do much more CRPO in Q4 because that’s where the lion’s share of our renewals are,” McDermott said.

The performance obligations will “pop back up in Q4,” Chief Financial Officer Gina Mastantuono said during a conference call after the results. The software maker’s 99% customer renewal rate gives her confidence that pending deals will be completed as the year continues, she added.

ServiceNow sells applications that help companies organize and automate their personnel, customer service and information technology operations. McDermott is targeting $16 billion annual revenue by 2026.

The shares fell about 6% in extended trading after closing at $448.60 in New York. The stock has declined 31% this year, and earlier this month saw its largest one-day plunge in six years after McDermott outlined concerns about the economic environment in a TV interview.

The comments on the TV interview weren’t “ServiceNow specific -- that was really about the global macro,” McDermott said when asked about the market response. “There’s kind of a tendency to overreact on the negative.”

In the second quarter, subscription revenue increased 25% to $1.66 billion, a slowdown from 26% annual growth in the first quarter and just below the average analyst estimate of $1.67 billion. Current remaining performance obligations gained 21% to $5.75 billion, missing an average estimate of $5.9 billion.

Profit, excluding some items, was $1.62 a share in the period ended June 30, compared with an average estimate of $1.55 a share. ServiceNow said it had 1,463 customers with more than $1 million in annual contract value when the period ended, a 22% increase from a year earlier.

“ServiceNow remains a core component of our customers’ digital transformation strategy and we continue to see a very strong pipeline,” Mastantuono said in the statement.

Tech firms that have significant overseas exposure, including Oracle Corp., Salesforce Inc. and Microsoft Corp., have seen growth curtailed by a surging US dollar. ServiceNow said currency weighed on second-quarter growth by 4.5 percentage points.

Even with the forecast reduction, ServiceNow’s cloud growth story remains intact, said Bloomberg Intelligence’s Anurag Rana. The company controls about 35% of the fast-growing market for information technology service management, and continued corporate migration to the cloud could fuel years of double-digit growth, according to a Bloomberg Intelligence report.

McDermott was known as a dealmaker during his tenure as CEO of German software giant SAP SE. However, he said he’s not looking for acquisitions for ServiceNow even though the recent market downturn has left more companies with “realistic” valuations.

“Even if I could get them at the perfect price, its not necessary based upon the trajectory we’re on,” he said.

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