ServiceNow: Collateral Damage?

| About: ServiceNow (NOW)


Although ServiceNow beat analyst expectations, it missed a key estimate by a wide margin.

The market didn't react kindly.

The carnage experienced recently by Tableau further fueled the price decline in ServiceNow's shares.

Early this month, when Tableau (NYSE:DATA) turned in a disappointing quarter, several cloud stocks took a hammering. ServiceNow (NYSE:NOW) was one of the cloud stocks to undergo a steep price decline of almost 40%. It lost almost $4 billion in value even after beating analysts' revenue and earnings estimates and becoming the second cloud company to cross $1 billion in revenue.

ServiceNow's Financials

Fiscal 2015 revenue grew 47% to reach $1 billion. Net loss was $198.4 million, or $1.27 per share. Non-GAAP net income was $67.4 million, or $0.43 per share. Billings grew 41% to $1.2 billion.

Fourth-quarter revenues increased 44% over the year to $285.7 million, ahead of the market's expectations of $281 million. Net loss was $37.4 million, or $0.23 per share. Non-GAAP net income was $32.6 million, or $0.20 per share, beating the Street estimate of $0.09 per share.

By segment, fourth-quarter revenues from subscriptions grew 47% over the year to $244.7 million, and professional services revenues increased 32% to $41 million. The company now has 230 customers with Average Contract Value over $1 million, a net increase of 24.

Expenses continued to increase, albeit at a slower rate and showed a marginal decline sequentially. Sales and marketing expenses increased 39.5% to $134 million, and R&D spend increased 39% to $58.4 million.

Fourth-quarter billings grew 33% to $365.7 million, missing the analyst estimate of $375 million, mainly due to a forecasting error made by the company. The error occurred when a large customer switched from making payments once per year to once every six months. The error, which has affected the outlook for fiscal 2016, wasn't detected till December 15.

For the first quarter, ServiceNow expects revenues between $298 million and $303 million or a growth of 41% to 43%. Analysts expect revenue of $297.8 million. Billings are expected between $360 million and $365 million.

ServiceNow expects to end 2016 with revenues between $1.34 billion and $1.37 billion or a growth of 33% to 36%, and billings to grow around 33% to $1.6 billion, just in line with analyst estimates. Analysts expect the company to end 2016 with an EPS of $0.63 on revenue of $1.36 billion.

In December, ServiceNow launched the ServiceWatch Suite to reduce the cost, impact and occurrence of service outages. It connects information about services across the enterprise to what may be causing outages and automatically addresses the issues.

The company also made available a new software release in December. Called Geneva, it offers a simplified developer environment and enables operating IT as a business. It extends service management further across the enterprise with applications for customer service, security operations, HR service management, and facilities service management.

With this release, the company expects its total addressable market to have increased by $60 billion. From a business that was driven primarily on the replacement of legacy, ServiceNow is looking at becoming a strategic platform for its customers. But increasing its addressable market also means that ServiceNow will have more competition from the likes of (NYSE:CRM) and Workday (NYSE:WDAY).

During the earnings call, CEO Frank Slootman said the company has already won five or six major customer service projects, mostly against Salesforce, and that competition is going to become more intense further into 2016.

Why Did its Stock Plunge?

Although ServiceNow beat analyst expectations, it missed the billings estimate by a wide margin, primarily due to its forecasting error. The market didn't react kindly to this error, and is perhaps concerned that the modest growth in billings could indicate a slowing down of top-line growth. The stock plunged 20% after the results.

Several analysts have cut their target price: Credit Suisse from $70 to $60, Goldman Sachs from $87 to $68, Raymond James from $90 to $80, and Robert W. Baird from $85 to $75. Mizuho downgraded ServiceNow to Neutral from Buy and cut its target to $65 from $90. RBC Capital Markets cut the target price from $90 to $85, but retained it as a Top Pick. Canaccord Genuity has a Buy rating and kept its $90 target.

The Tableau carnage further fueled NOW's price decline. It is currently trading at $52.04 with a market cap of $8.27 billion. It hit a 52-week low of $46 in early February and a 52-week high of $91.28 in December.