Billion Dollar Unicorns: Expect Acquisitions From ServiceNow

According to Gartner, the IT operations management (ITOM) software market grew 7% to reach nearly $21 billion in 2014. The ITOM landscape is undergoing transformation as legacy multi-segment players give way to a new generation of suppliers that are growing more rapidly than the market average. Billion Dollar Unicorn club member ServiceNow (NYSE: NOW) is one such new player in the IT Services Management (ITSM) segment of the ITOM market.

ServiceNow’s Financials

Their second quarter revenues increased 48% over the year to $246.7 million, ahead of the market’s expectations of $241.04 million. Net loss was $61.9 million or $0.40 per share. Non-GAAP profit was $0.04 per share, beating the Street estimate of $0.02 per share.

By segment, revenues from subscriptions grew 51% over the year to $200.5 million and professional services revenues increased 36% to $46.3 million. During the quarter, ServiceNow added 21 new Global 2000 customers including Caterpiller, Novo Nordisk, and Alliant Energy. During the quarter, they added nine new customers with annualized contract value (ACV) over $1 million, and now have a total of 186 customers with ACV over $1 million, a 68% y-o-y increase. Their average contract terms for new customers, upsells, and renewals were 31.1, 26, and 22.6 months, respectively. ACV for global 2000 customers was $804,000, up 34% over the year.

Region-wise, revenues were $174 million in North America, $56 million in EMEA, and $17 million in Asia-Pacific.

Calculated billings were $281.4 million, increasing 50% year-over-year. Their expenses continued to increase, albeit at a slower rate. Sales and marketing expenses increased 48.5% to $136 million and R&D spend increased 50% to $53.3 million.

For the third quarter, ServiceNow projected revenues between $252 million and $257 million and billings between $280 and $285 million. They expect to end the year with revenues of $985 million to $1 billion and billings to grow around 41% to $1.2 billion. The Street was forecasting revenues of $990 million for the year.

Performing Beyond IT

Founded in 2004, ServiceNow had initially focused on the IT segment. But now it is ensuring its continued success by expanding beyond ITSM into other areas like human resources, operations and legal departments. And this strategy is paying off.

Following their acquisition of Intreis to expand their governance, risk and compliance (GRC) solutions, they have recorded their largest transaction of nearly $2 million during the quarter.

ServiceNow Express, a simpler cloud-based ITSM solution for small and medium businesses, landed 74 new customers and seven of the existing customers upgraded to the enterprise version in Q2. The average ACV for Express is between $10,000 and $15,000 while the minimum ACV for Enterprise is $42,000.

Their recently released financial management application has landed six customers and a robust pipeline of pilots and prospects.

The quarter also saw strong performance of emerging products like ServiceWatch and performance analytics solutions. The ACV for their IT operations management portfolio nearly doubled year-over-year, driven by 21 deals larger than $100,000.

By expanding into adjacent areas, ServiceNow has expanded its market opportunity from $6 billion to $45 billion. However, as it expands into these new areas, it is likely to run into more high-profile cloud vendors like Salesforce. In response to a question regarding competition during the earnings call, CEO Frank Slootman said,

“The competitive dynamic is not really changing that much. We look at our top five brands that we replace, that mix has consistently been the same. Most of the energy, if you will, in the marketplace is at the low end, especially the extreme low end, all the way down on the [FMB] side.”

The competition will definitely heat up and it will be interesting to see how ServiceNow keeps up its performance. Their stock is currently trading at $71.94 with a market capitalization of $11.23 billion. It touched a 52-week high of $83.52 in April. I predict more acquisitions as well, to broaden the product portfolio.

More investigation and analysis of Unicorn companies can be found in my latest Entrepreneur Journeys book, Billion Dollar Unicorns. The term Unicorn was coined in a TechCrunch article by Aileen Lee of Cowboy Ventures.

Looking For More Hands-On Advice?

I receive many emails from entrepreneurs who want to discuss their specific businesses. I’m very happy to discuss your situation during my free online 1M/1M Roundtables, held almost every Thursday. During each roundtable, up to five entrepreneurs can pitch their businesses and receive my immediate and straightforward feedback.

To give entrepreneurs all over the world access to Silicon Valley’s knowledge, methodology, and network, I founded the One Million by One Million (1M/1M) global virtual incubator. 1M/1M aims to nurture a million entrepreneurs to reach a million dollars each in annual revenue and beyond, thereby creating a trillion dollars in global GDP and ten million jobs.

For those still testing the waters of entrepreneurship, I’ve written my Entrepreneur Journeys book series to inform and inspire. My newest book, Billion Dollar Unicorns, is now available from Amazon.

If you are interested in entrepreneurship topics and my writings, you can follow me here. I hope to publish articles on LinkedIn every week.

Photo credit: Belgapixel's/Flickr.com.