Enterprise workflow software maker ServiceNow (NYSE:NOW) reported strong growth in the Q2 FY2021 earnings announcement, with revenue up 31.5% year on year to $1.4 billion. ServiceNow made a GAAP profit of $59 million, improving on its profit of $40.7 million, in the same quarter last year.
ServiceNow (NOW) Q2 FY2021 Highlights:
- Revenue: $1.4 billion vs analyst estimates of $1.35 billion (3.68% beat)
- EPS (non-GAAP): $1.42 vs analyst estimates of $1.21 (17.5% beat)
- Subscription revenue guidance for Q3 2021 is $1.4 billion at the midpoint
- The company provided subscription revenue guidance for the full year of $5.53 billion at the midpoint
- Free cash flow of $268 million, down 57.2% from previous quarter
- Customers: 1,201 customers paying more than $1m annually
- Gross Margin (GAAP): 76.6%
Founded in 2004, ServiceNow offers 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.
The story of ServiceNow started when Fred Luddy, the founder, wrote the code for the initial working prototype of ServiceNow on a single flight from San Francisco to London, after being frustrated how bad the experience using software at work was compared to the software he was using at home.
As corporations digitize their processes, they build and buy more and more apps and systems that often don’t directly connect with each other. That in effect drives demand for software platforms like ServiceNow, that function as operating systems for the enterprise and are able to tie all the other systems together.
Other providers of software for creating digital workflows include BMC, Oracle (NYSE:ORCL), Salesforce (NYSE:CRM), and SAP (NYSE:SAP).
As you can see below, ServiceNow's revenue growth has been very strong over the last year, growing from quarterly revenue of $1.07 billion, to $1.4 billion.
And unsurprisingly, this was another great quarter for ServiceNow with revenue up an absolutely stunning 31.5% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $49 million in Q2, compared to $109.6 million in Q1 2021. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.
Analysts covering the company are expecting the revenues to grow 24.2% over the next twelve months, although we would expect them to review their estimates once they get to read these results.
Large Customers Growth
You can see below that at the end of the quarter ServiceNow reported 1,201 enterprise customers paying more than $1m annually, an increase of 55 on last quarter. That's in line with the number of contracts wins we are used to seeing over the last year, suggesting that the company is able to maintain its current sales momentum.
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 is left after paying for servers, licences, technical support and other necessary running expenses was at 76.6% in Q2.
That means that for every $1 in revenue the company had $0.76 left to spend on developing new products, marketing & sales and the general administrative overhead. Despite the recent drop this is still, this is still a good gross margin that allows companies like ServiceNow to fund large investments in product and sales during periods of rapid growth and be profitable when they reach maturity.
Key Takeaways from ServiceNow's Q2 Results
With market capitalisation of $114 billion, more than $2.98 billion in cash and with free cash flow over the last twelve months being positive, the company is in a very strong position to invest in growth.
It was good to see ServiceNow outperform Wall St’s revenue expectations this quarter. And we were also glad to see good revenue growth. On the other hand, there was a slight deterioration in gross margin. Overall, this quarter's results seemed pretty positive and shareholders can feel optimistic. The company is down -1.45% on the results and currently trades at $575 per share.
Is Now The Time?
When considering ServiceNow, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. We think ServiceNow is a good business. Its revenue growth has been strong. On top of that, its bountiful generation of free cash flow empowers it to invest in growth initiatives, and its impressive gross margins are indicative of excellent business economics.
The market is certainly expecting long term growth from ServiceNow given its price to sales ratio based on the next twelve months is 18.4. There is definitely a lot of things to like about ServiceNow and looking at the tech landscape right now, it seems that the company trades at a pretty interesting price point.