shares rose after the workflow management software provider delivered better-than-expected fourth-quarter results.
ServiceNow (ticker: NOW) posted revenue of $1.61 billion and adjusted earnings of $1.46 per share for the period, matching Wall Street estimates for revenue of $1.6 billion and profit of $1. .43 exceeded. Subscription revenue was $1.52 billion, an increase of 29%, or 32% when adjusted for currency, and slightly above the company’s indicative range. ServiceNow closed the quarter with its current remaining performance commitments — a measure of work to be completed in the next 12 months — of $5.7 billion, up 29%.
ServiceNow said it had 135 transactions in the quarter involving more than $1 million in net new contract value, up 52% from a year ago. The company said the total number of customers with annual sales of $1 million or more has risen to 1,359.
“We have again reported results that significantly exceed high expectations,” ServiceNow CEO Bill McDermott said in a statement. “Customer demand for ServiceNow’s innovative platform is stronger than ever. Our unique culture has made us one of the best workplaces. We are growing as a fast-growing startup with the profitability of a global market leader.”
For the first quarter, ServiceNow sees subscription revenues between $1.61 billion and $1.62 billion, up 25% or 27.5% in constant currency. For the full year, the company expects subscription revenues of $7.02 billion to $7.04 billion, an increase of 26% or 28% in constant currency. The company expects an operating margin of 25% for both the first quarter ended March and the full year.
In a lively interview with Barron’s Late Wednesday, McDermott claimed that the digital transformation trend is alive and kicking and unlikely to be held back by higher interest rates or the recent slump in stock market valuations.
“One of the things the market is realizing is that digital transformation is a growth-stimulating, deflationary force,” says McDermott. He pointed to a recent IDC survey that showed that 85% of corporate chief information officers will maintain or increase their IT budgets by 2022. “The digital possibilities are even expanding,” he said. “And the environment for our services is getting bigger and bigger.”
He also believes that the financial markets will revalue ServiceNow’s business. McDermott noted the rule of thumb in the software-as-a-service business that revenue growth plus free cash flow margins should add up to more than 40 for successful companies. It’s known as the rule of 40. ServiceNow, he said, blows away the rule of 40.
“The market now wants something that they weren’t focused on before — not just growth, but also profitability,” he said. “We are growing as a fast-growing startup, but with the profitability of a global market leader.” ServiceNow is seeing constant currency subscription growth north of 30%, and free cash flow margins above 30% as well, making Rule of 60 a rare business, according to McDermott.
Citi analyst Tyler Radke said in a research note that quarterly quarterly subscription bills were 4% to 5% higher than expected, accelerating again despite “very difficult compounding.” He added that the company appears to be driven by momentum in big deals. Radke maintained his Buy rating for ServiceNow stock, with a price target of $657, for a potential gain of over 35%.
ServiceNow shares rose nearly 10% in after-hours trading Wednesday to $531.80, but the stock remains about 25% below its November peak at just over $700 a share.
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