Cloud-software company breezes past analysts’ first-quarter earnings forecasts
ServiceNow Inc. Chief Executive Bill McDermott is confident the fledgling company can hit $10 billion in annual revenue. It likely won’t happen this year because of a global pandemic, but it may be inevitable.
“If you do the math, it won’t take long; it is an aspirational goal of ours,” McDermott, who joined ServiceNow NOW, -3.42% last year after a legendary nine-year run as co-CEO and CEO, at SAP SE SAP, -1.32% , told MarketWatch in a phone interview late Wednesday.
It plans to get there through subscriptions, which account for about 95% of revenue. The company said it inked 37 transactions worth more than $1 million in net new annual contract value in the first three months of 2020. Among the new recruits were Merck & Co. Inc. MRK, -2.10% and several government agencies, including the state of California. ServiceNow now has 933 customers with more than $1 million in contract value.
The cloud-software company, a newly minted member of the S&P 500 index SPX, -2.80% and first major cloud-software company to report this quarter, on Wednesday breezed past analyst forecasts, propelling its stock up nearly 9% in after-hours trading. Another cloud heavy-hitter, Salesforce.com Inc. CRM, -3.44% , is scheduled to report May 20, according to FactSet.
ServiceNow reported first-quarter earnings of $48.2 million, or 24 cents a share, compared with a loss of $1.6 million, or a penny a share, in the year-ago period. Adjusted for items such as stock-based compensation, among others, earnings were $1.05 a share compared with 67 cents a share a year ago. Revenue grew 33% to $1.05 billion from $789 million in the year-ago period.
Analysts surveyed by FactSet had estimated adjusted earnings of 95 cents a share on revenue of $1.02 billion on average. For the second quarter, analysts model adjusted earnings of 93 cents a share and sales of $1.06 billion.
The performance offered a vivid display of what McDermott calls a “hungry and humble culture that is the go-to company for digital transformation.” That market, in which both established and new companies increasingly rely on digital technology like cloud computing to solve problems, is expected to grow to $7.4 trillion by 2024, according to market researcher IDC.
ServiceNow would seem to be in a sweet spot as long as companies are willing to spend on information technology — not exactly a slam dunk in the age of COVID-19. Its enterprise cloud-computing portfolio covers customer and facilities service management, cloud and portfolio management, edge encryption, performance analytics and other workflow solutions. McDermott half-jokingly refers to ServiceNow as the “workflow workhorse.”
And the company has grand ambitions. ServiceNow is making a push into artificial intelligence to bolster its cloud-based workflow automation software that helps companies improve productivity. Its inclusion, for example, will lead to better information and analytics, according to Ellen Daley, a former Forrester analyst who is now CEO of consulting agency Acorio, which works with ServiceNow.
“The [billings] guidance takes down the growth outlook for subscription revenue in 2020, but in our view, is still a solid guide in light of the macro backdrop,” Evercore ISI analyst Kirk Materne said in a note Wednesday. He maintained an outperform rating on ServiceNow stock with a price target of $315.
ServiceNow stock is up 19% in the past 12 months, while the S&P 500 index SPX, -2.80% has improved 0.5%.