ServiceNow Growing Through Addition Of Capital-Efficient Startups

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According to researchers, the global IT Service Management applications market is expected to grow at nearly 10% annually to $2.8 billion by 2022 from $2.6 billion in 2017. ServiceNow (NYSE: NOW) is the leading vendor in the market followed by Atlassian Software. ServiceNow’s market share is estimated to have grown 42% in 2017.

ServiceNow’s Financials

ServiceNow recently reported an impressive first quarter. Revenues for the quarter grew 30% over the year to $715.4 million but missed the market’s expectations of $717.8 million. It ended the quarter with a net income of $7 million, compared with a net loss of $17.3 million reported a year ago. Adjusted diluted EPS came in at $0.77, significantly ahead of the market’s forecast of $0.64 for the quarter. The earnings also reported an impressive growth over previous year’s EPS of $0.43. This was the fourth consecutive quarter that the company surpassed consensus EPS estimates.

By segment, subscription revenues, adjusted for constant currency, grew 35% to $673.6 million, ahead of the management’s guided range of $664-$669 million. On an adjusted basis, professional services and other revenues grew 2% to $50.1 million.

Total billings grew 39% over the year to $1.02 billion. This was the first quarter ever that ServiceNow exceeded the billion dollar mark for its billings. Non-GAAP adjusted subscription billings grew 39% to $958.9 million and Professional services and other billings grew 30% to $61.9 million.

ServiceNow ended the year with revenues growing 35% over the year to $2.6 billion with an EPS of $2.49.

For the current quarter, ServiceNow forecast subscription billings of $736-$741 million. It expects its subscription revenues to come in at $3.256-$3.276 billion for the quarter. The market is looking for revenues of $762.92 million in total revenues with an EPS of $0.67 for the current quarter and revenues of $3.36 billion with an EPS of $3.11 for the current fiscal. ServiceNow is targeting revenues of more than $4 billion by the year 2020.

ServiceNow’s Growth Focus

Over the past few years, ServiceNow has been diversifying from being a pure IT Service management vendor to an enterprise-wide software service provider. Those efforts are paying off. Both its HR and customer service products now have more than 20 customers doing more than $1 million. 19 of its top 20 deals in the quarter now bill for 3 or more products. ServiceNow believes that it is able to deliver this growth by continuously innovating its product line-up that focuses on improving user experience and user interface, creating simple, intuitive mobile experiences, and making its platform and product easier to deploy and upgrade. The focus for ServiceNow this year is improving its mobile capabilities and user experience. It wants to help organizations manage the nearly 30%-40% of an employee’s workday that is squandered on administrative, redundant, and low-value tasks.

To help with these goals, the company made a few small acquisitions last year. Some of them include San Francisco-based FriendlyData that provides a natural language interface for databases. FriendlyData was privately held and had raised a modest $280,000 in funding from investors prior to the acquisition. It had also acquired Parlo, a Sunnyvale-based vendor of an AI and natural language understanding based workforce solution. Prior to the acquisition, Parlo had raised $3.1 million. Last year, it also acquired VendorHawk, the provider of cloud-based application that centralizes cost implications and enables users to make smarter decisions about SaaS and software vendors. VendorHawk had raised $1.3 million in funding prior to the acquisition. Terms of these acquisitions have not been disclosed.

ServiceNow has been carefully building its capabilities through the addition of bootstrapped or smaller, capital-efficient startups. It is a move that appears to have stood it in good stride so far. What other similar technologies or capabilities should ServiceNow be looking to acquire? What smaller startups are out there that it could benefit from?

Its stock is currently trading at $234.01 with a market cap of $41.96 billion. The stock has climbed from the year low of $137.60 that it was trading at a year ago. ServiceNow’s stock has delivered stellar gains over the last three years. It has tripled in value since January 2016. Analysts estimate the growth to continue as some predict that it will cross the $10 billion revenue mark by 2025.

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Photo credit: Donny Gonzo/Flickr.com.