UPDATED 19:14 EDT / OCTOBER 25 2017

CLOUD

ServiceNow beats forecasts, but slowing growth rate unsettles investors

ServiceNow Inc. beat forecasts on quarterly revenue and profit, but a weaker-than-expected forecast for subscription revenues spooked investors, who knocked the stock back about 4 percent in after-hours trading.

The maker of cloud-based workflow automation and service management software maintained its historically scorching growth rates with a 37 percent increase in quarterly revenue over the same period last year and a 41 percent jump in subscription sales. Earnings-per-share of 40 cents beat consensus estimates by two cents.

“It was another strong quarter, with great top-line growth and even better subscription growth,” said David Vellante, chief analyst at Wikibon, a sister company of SiliconANGLE. “It beat consensus earnings and met consensus revenue with strong guidance above estimates. What’s not to like?”

Apparently the growth rate. The company slightly lowered its full-year guidance on subscription revenues to $1.28 billion, although it increased subscription billings expectations to between $2.080 and $2.085 billion, or about $100 million above earlier estimates. Still, revenue growth declined from 41 percent in the third quarter of 2016 and full-year guidance of 34 percent total revenue growth is well below the 52 percent recorded for all of 2016.

“I think the street is used to ServiceNow beating, not meeting, revenue guidance,” Vellante said. He noted that the stock is up over 70 percent over the past 12 months, “so a little profit-taking is in order.”

Margins to die for

By most measures, ServiceNow’s business model is one of which most software executives can only dream. Subscriptions, which are the most profitable part of the business, brought in $449.5 million, up 41 percent over the same quarter last year. Subscriptions comprised 91 percent of total revenues. Billings, which are an important indicator of future performance, rose 35 percent, to $546.1 million. Gross profit from subscriptions of $386.1 million were 85 percent of total subscription revenue, and renewal rates stood at 97 percent. Those kinds of margins are the reason so many on-premises software providers are scrambling to shift to the cloud.

They’re also the reason ServiceNow is damping down its low-margin professional services business. Billings there rose a healthy 12 percent to $46.5 million in the quarter, but executives adjusted full-year expectations to $194 million, or growth of only 8 percent, and said they’re actively trying to move more services and support to their partner network.

Chief Executive John Donahoe (pictured) said the company closed 22 deals of more than $1 million in the quarter. “All products are tracking well for the year,” he said. “We are focused on finishing the year strong.” ServiceNow has 800 customers within the ranks of the global 2000 and signed its largest federal contract ever in the quarter, for $7 million.

The company is also doing well at diversifying its revenue streams. Its flagship service management product contributed 49 percent of new contract value in the quarter, down from 59 percent last year. Meanwhile, information technology operations management revenues grew from 29 percent to 36 percent over the same period. The company said 15 of its top 20 new deals in the quarter included four or more products and that the percentage of single-product customers fell to 25 percent from 31 percent in the same quarter last year.

The company’s relatively new human resources services delivery product now has 119 Global 2000 customers and the security operations product closed its first $1 million-plus deal in the past quarter, Donahoe said. “Our customers are picking three to five cloud platforms they want to work with and we’re one of them,” he said. “This whole theme of digitizing the enterprise and automate workflows is creating demand, and I think we’ll see more large customer relationships over time.”

Vellante said fundamentals continue to be strong. “ServiceNow remains one of the strongest plays in enterprise technology,” he said. “The only criticism I hear from customers is around pricing. But the value enterprises are getting offsets these concerns, and that’s why the company continues to thrive.”

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