ServiceNow (NYSE:NOW) Reports Beat and Raise Quarter, Stock Soars

Full Report / January 30, 2024

Enterprise workflow software maker ServiceNow (NYSE:NOW) reported results ahead of analysts' expectations in Q4 FY2023, with revenue up 25.6% year on year to $2.44 billion. It made a non-GAAP profit of $3.11 per share, improving from its profit of $2.29 per share in the same quarter last year.

ServiceNow (NOW) Q4 FY2023 Highlights:

  • Market Capitalization: $154.1 billion
  • Revenue: $2.44 billion vs analyst estimates of $2.40 billion (1.5% beat)
  • EPS (non-GAAP): $3.11 vs analyst estimates of $2.78 (11.9% beat)
  • Subscription Revenue Guidance for Q1 2024 is $2.51 billion at the midpoint, below analyst estimates of $2.54 billion
  • Management's subscription revenue guidance for the upcoming financial year 2024 is $10.57 billion at the midpoint, implying 21.7% growth (slightly above expectations of $10.50 billion)
  • RPO (Remaining Performance Obligations) and cRPO (current) guidance for Q1 2024 also exceeded expectations, as did operating margin guidance
  • Free Cash Flow of $1.34 billion, up from $175 million in the previous quarter
  • Customers: 1,897 customers paying more than $1m annually
  • Gross Margin (GAAP): 78.8%, in line with the same quarter last year

Founded by Fred Luddy, who wrote the code for the company's initial prototype on a flight from San Francisco to London, ServiceNow (NYSE:NOW) offers a software-as-a-service platform that helps companies become more efficient by allowing them to automate workflows across IT, HR, and customer service.

A simple example would be a new employee on-boarding, which is typically a multi-departmental experience, and involves getting a badge from security, desk from facilities, laptop from IT, dealing with finance, compliance and HR. With ServiceNow, employees are able to do all that through a self-help portal, saving significant amounts of time. The key to the success of the Now platform is allowing the companies to design and build these workflows in a no-code environment, without needing any software developers.

ServiceNow's clients can sell their custom workflow applications to other users in the ServiceNow App Store and as a result, ServiceNow is generally most useful for larger customers, who have many complex workflows that may (for example) require a multitude of approvals as well as being time sensitive. In turn, large customers are more valuable to ServiceNow, as they are likely to need more users and thus generate more revenue and a greater number of custom workflows for sale in the App Store.

Automation Software

The whole purpose of software is to automate tasks to increase productivity. Today, innovative new software techniques, often involving AI and machine learning, are finally allowing automation that has graduated from simple one- or two-step workflows to more complex processes integral to enterprises. The result is surging demand for modern automation software.

Other providers of software for creating digital workflows include BMC, Oracle (NYSE:ORCL), Salesforce (NYSE:CRM), and SAP (NYSE:SAP).

Sales Growth

As you can see below, ServiceNow's revenue growth has been strong over the last two years, growing from $1.61 billion in Q4 FY2021 to $2.44 billion this quarter.

ServiceNow Total Revenue

This quarter, ServiceNow's quarterly revenue was once again up a very solid 25.6% year on year. On top of that, its revenue increased $149 million quarter on quarter, a solid improvement from the $138 million increase in Q3 2023. Thankfully, that's a slight re-acceleration of growth.

For the upcoming financial year, management expects subscription revenue to be $10.57 billion at the midpoint, implying 21.7% forecasted year-on-year growth.

Large Customers Growth

This quarter, ServiceNow reported 1,897 enterprise customers paying more than $1m annually, an increase of 108 from the previous quarter. That's quite a bit more contract wins than last quarter and quite a bit above what we've typically observed in past quarters, demonstrating that the business has good sales momentum. We've no doubt shareholders will take this as an indication that the company's go-to-market strategy is working very well.

ServiceNow customers paying more than $1m annually


What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. ServiceNow's gross profit margin, an important metric measuring how much money there's left after paying for servers, licenses, technical support, and other necessary running expenses, was 78.8% in Q4.

ServiceNow Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.79 left to spend on developing new products, sales and marketing, and general administrative overhead. ServiceNow's impressive gross margin allows it to fund large investments in product and sales during periods of rapid growth and achieve profitability when reaching maturity. It's also comforting to see its gross margin remain stable, indicating that ServiceNow is controlling its costs and not under pressure from its competitors to lower prices.

Cash Is King

If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. ServiceNow's free cash flow came in at $1.34 billion in Q4, up 31.8% year on year.

ServiceNow Free Cash Flow

ServiceNow has generated $2.70 billion in free cash flow over the last 12 months, an eye-popping 29.7% of revenue. This robust FCF margin stems from its asset-lite business model, scale advantages, and strong competitive positioning, giving it the option to return capital to shareholders or reinvest in its business while maintaining a healthy cash balance.

Key Takeaways from ServiceNow's Q4 Results

We were impressed by ServiceNow's significant improvement in new large contract wins this quarter. We were also happy its revenue narrowly outperformed Wall Street's estimates. Zooming out, we think this was a great quarter that shareholders will appreciate. The stock is up 1.1% after reporting and currently trades at $773 per share.

Is Now The Time?

ServiceNow may have had a favorable quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

We think ServiceNow is a good business. We'd expect growth rates to moderate from here, but its revenue growth has been solid over the last two years. On top of that, its bountiful generation of free cash flow empowers it to invest in growth initiatives and its impressive gross margins indicate excellent business economics.

ServiceNow's price-to-sales ratio based on the next 12 months of 14.7x indicates that the market is certainly optimistic about its growth prospects. There's definitely a lot of things to like about ServiceNow and looking at the tech landscape right now, it seems that it doesn't trade at an unreasonable price point.

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