Yahoo Finance Why Is ServiceNow (NOW) Up 17.1% Since Last Earnings Report?
It has been about a month since the last earnings report for ServiceNow (NOW). Shares have added about 17.1% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is ServiceNow due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
ServiceNow Q1 Earnings Top Estimates, Revenues Rise Y/Y
ServiceNow reported first-quarter 2023 adjusted earnings of $2.37 per share, which beat the Zacks Consensus Estimate by 16.18% and jumped 37% year over year.
Revenues of $2.10 billion beat the consensus mark by 0.34% and increased 21.7% year over year. At constant currency (cc) revenues increased 24.5%.
Subscription revenues improved 24.1% year over year to $2.02 billion. Professional services and other revenues decreased 20.9% year over year to $72 million.
ServiceNow has been benefiting from the rising adoption of its workflows by enterprises undergoing digital transformation. The company had 1,682 total customers with more than $1 million in annual contract value at the end of the first quarter.
The renewal rate was 98% in the reported quarter, unchanged year over year.
At the end of the first quarter, the current remaining performance obligations (cRPO) were $7.01 billion, up 23% year over year. On a constant currency basis, cRPO increased 25%.
Remaining performance obligations, on a constant currency basis, rose 24% year over year to $14 billion after adjusting for forex.
Operating Details
In the first quarter, the non-GAAP gross margin was 82.8%, which expanded 20 basis points (bps) on a year-over-year basis.
The subscription gross margin of 85.7% contracted 80 bps year over year. The professional services and other gross margins were 2.8% compared with the year-ago quarter’s figure of 14.3%.
Total operating expenses, on a non-GAAP basis, were $1.51 billion in the reported quarter, up 19.6% year over year. As a percentage of revenues, operating expenses decreased 130 bps on a year-over-year basis.
ServiceNow’s non-GAAP operating margin expanded 100 bps on a year-over-year basis to 26.3%.
Balance Sheet & Cash Flow
As of Mar 31, 2023, the company had cash and cash equivalents, and short-term investments of $4.91 billion compared with $4.28 billion as of Dec 31, 2022.
In the reported quarter, cash from operations was $902 million compared with $1.16 billion in the previous quarter.
ServiceNow generated a free cash flow of $737 million in the reported quarter, down from the $770 billion reported in the prior quarter.
Guidance
For second-quarter 2023, subscription revenues are projected between $2.040 billion and $2.045 billion, suggesting a year-over-year improvement of 23-23.5% on a GAAP basis. At constant currency, subscription revenues are expected to grow 23.5-24%.
cRPO is expected to grow 22.5% year over year on a non-GAAP basis and 23% on a GAAP basis.
ServiceNow expects the non-GAAP operating margin to be 23%.
For 2023, the company expects subscription revenues of $8.470-$8.520 billion, which suggests a rise of 23-23.5% over 2022 on a GAAP basis. At constant currency, subscription revenues are expected to grow between 23% and 23.5% over 2022.
ServiceNow expects the non-GAAP subscription gross margin to be 84% and the non-GAAP operating margin to be 26%. Moreover, the free cash flow margin is expected to be 30%.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended upward during the past month.
The consensus estimate has shifted 32.61% 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 a D. Charting a somewhat similar path, the stock was allocated a grade of F on the value side, putting it in the bottom 20% quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise ServiceNow has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.
Performance of an Industry Player
ServiceNow is part of the Zacks Computers - IT Services industry. Over the past month, Infosys (INFY), a stock from the same industry, has gained 2.3%. The company reported its results for the quarter ended March 2023 more than a month ago.
Infosys reported revenues of $4.55 billion in the last reported quarter, representing a year-over-year change of +6.4%. EPS of $0.18 for the same period compares with $0.18 a year ago.
For the current quarter, Infosys is expected to post earnings of $0.18 per share, indicating a change of +12.5% from the year-ago quarter. The Zacks Consensus Estimate has changed -1.4% over the last 30 days.
Infosys has a Zacks Rank #3 (Hold) based on the overall direction and magnitude of estimate revisions. Additionally, the stock has a VGM Score of D.
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