Morningstar | ServiceNow Serves Up Another Strong Quarter; Shares Modestly Undervalued
ServiceNow reported solid first-quarter results with upside to revenue and EPS. Subscription revenue drove upside versus our model as professional services revenue was in line. The company reported strong upside to EPS driven primarily by higher revenue and lower operating expenses. Overall, results reinforce our thesis centering on the company’s land-and-expand strategy. ServiceNow continues to leverage its strength in workflow automation to penetrate existing customers more deeply in IT and more broadly with HR and customer-service-specific products. We maintain our wide moat rating and $290 fair value estimate. We believe there is room to push shares higher with continued quarterly outperformance.Subscription revenue grew 36% year over year to $740 million, surpassing the high end of guidance by $20 million, driven by strength in the federal government. Strength in U.S. federal bubbled up last year at times as well, but not to these levels, as it represented 15% of annual contract value versus just 6% a year ago. Professional services revenue grew 7% to $49 million. Consistent with our thesis, IT-related sales accounted for 55% of ACV compared with 60% a year ago, while non-IT grew to 45% from 40% a year ago. Platform analytics was notably strong. Management noted on the call that the company continues to be seen more as a strategic partner than a software vendor at this point. We expect this to continue over the course of the next several years. The company’s retention remained stellar at 98%.
ServiceNow generated non-GAAP operating margin of 18.9%, compared with 18.1% last year, as it benefited from some operating leverage on the sales and marketing line. Better revenue and better margins drove EPS upside. We believe ServiceNow can continue to deliver annual margin expansion of at least 100 basis points. ServiceNow provided subscription revenue growth guidance of 33%-34% for the second quarter, modestly ahead of our model.
ServiceNow provides enterprise cloud computing services that define, structure, manage and automate digital workflows for global enterprises. The company markets its services to enterprises in a variety of industries, including consumer products, education, financial services, government, health care, information technology (IT) services and technology. The company sells its subscription services through direct sales and, to a lesser extent, through indirect channel sales. The company also provides a portfolio of personnel and other services, both directly and through its network of partners. The company's products include IT service management, IT operations management, IT business management, and security operations.
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