The Street Is Mostly Bullish On ServiceNow

ServiceNow Inc NOW reported second-quarter results, highlighted by a modest billings beat. Revenue grew by 35% year-over-year and subscription revenue was higher by 36% year-over-year. Management lifted GAAP subscription revenue guidance for the full fiscal year from $3.243 billion to $3.25 billion at the midpoint.

Modest Upside Versus Expectations

ServiceNow's billings and subscriptions adjusted for currency changes and duration came in just 1.4% above expectations, Raymond James' Michael Turits wrote in a note. Management's third-quarter revenue guidance came in just inline with the midpoint of the Street's consensus estimate at $833 million while subscription billings of $848-$853 million missed expectations of $878 million.

Management said fourth-quarter activity will increase, however, which prompted the company to lift its full year outlook.

"We continue to view ServiceNow as the dominant, though still not fully penetrated ITSM leader, and with its broadening cloud-based enterprise workflow product and platform offering as one of the 2-3 top strategic enterprise SaaS vendors," the analyst wrote.

Timing Played A Factor

ServiceNow's subscription revenue was impacted by multiple large self-hosted contract renewals which didn't close prior to the end of the second quarter, KeyBanc Capital Markets' Rob Owens wrote in a note. These deals recognize revenue up front that impacted second-quarter revenue, but are on track to close in the third quarter.

Management also noted it closed a few renewals in the second quarter, which weren't due to renew until later on in the year.

"The business continues to grow at a torrid pace despite its overall scale and strong FCF margin at 28+%," Owens wrote.

Numbers That Matter

ServiceNow ended the quarter with 33% more customers who spend at least $1 million a year at 766, Mizuho Group's Gregg Moskowitz wrote in a note. The figure includes 98 customers who spend at least $5 million a year which is up 72% from last year.

Encouragingly, the company inked one of its largest deals in its history with a new financial services customer. ServiceNow also signed its first ever Finance Close Automation deal which was the largest first purchase order in any business unit in history.

"NOW remains extremely well positioned, and we continue to expect good billings and revenue growth for the foreseeable future, aided by high demand for workflow automation, strong cross-sell, and entry into new markets," the analyst wrote.

Ratings And Price Targets

• Raymond James maintains a Strong Buy rating on ServiceNow's stock with a price target lifted from $340 to $342.
• Mizuho maintains at Buy, unchanged $308 price target.
• KeyBanc maintains at Overweight, price target lifted from $270 to $320.

Shares of ServiceNow were trading lower by 3% at $287.77 Thursday afternoon.

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