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ServiceNow Projects Sales That Fall Short of Expectations

In Technology
April 25, 2024

(Bloomberg) — ServiceNow Inc. provided an outlook for sales in the quarter that fell just short of analysts’ estimates, suggesting that corporate budgets for software purchases remain tight. The shares declined about 5% in extended trading.

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Subscription sales, which account for the bulk of the company’s revenue, will increase about 22% to $2.53 billion in the period ending in June, ServiceNow said Wednesday in a statement. Analysts, on average, estimated $2.54 billion. Current remaining performance obligations, a measure of contracted sales, will increase about 21% from a year ago, ServiceNow said, also in line with analysts’ estimates.

The shares fell to a low of $692 in extended trading after closing at $746.29 in New York. The stock, which jumped 82% in 2023, has increased 5.6% this far this year, trailing the S&P 500 Information Technology Index by less than 1 percentage point.

The results were “just a bit below what are always high expectations,” for the company, wrote Kirk Materne, an analyst at Evercore ISI. Ahead of results, Guggenheim analyst John DiFucci wrote that ServiceNow’s high valuation meant that any “hiccups” in its earnings report could spur investors to sell the stock.

The Santa Clara, California-based company makes applications that help companies organize and automate their personnel and information technology operations. Late last year, it released a higher priced tier for its platform, which includes tools for generative artificial intelligence. The new AI-oriented tier is ServiceNow’s fastest-growing product ever, Chief Executive Officer Bill McDermott said in an interview. AI products will help boost revenue this year, he added.

In the first quarter, subscription revenue increased 25% to $2.52 billion, in line with analysts’ average estimate, according to data compiled by Bloomberg. Profit, excluding some items, was $3.41 a share, beating the average estimate of $3.16. McDermott attributed the improvement in profit to steady sales growth and low general expenses at the company.

The company had 1,933 customers spending over $1 million per year as of the period ended March 31, an increase of 15% from a year earlier. ServiceNow also highlighted several big deals, saying there were eight transactions in the quarter worth more than $5 million in annual contract value. Customers such as Microsoft Corp. and International Business Machines Corp. helped contribute to the string of large deals, McDermott said.

While other enterprise companies like IBM and Salesforce Inc. have recently evaluated or announced large-scale acquisitions, McDermott said ServiceNow has no plans for any large deals. “We don’t need an acquisition due to our massive growth,” he said.

(Updates with comments from analysts in the fourth paragraph.)

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