ServiceNow Earnings Beat Estimates, but the Stock Is Dropping Anyway

ServiceNow posted better-than-expected fourth-quarter financial results on Wednesday. The enterprise workflow software company’s solid performance could help take some of the sting out of Tuesday’s disappointing guidance from Microsoft. The company also saw weakness in its PC software business. The stock initially rallied 5%, but gave back its gains.

The company also saw weakness in its PC software business. The stock initially rallied 5%, but gave back its gains. The company's PC software business has been weak recently, and this caused the stock to rally 5% at first, but it gave back its gains shortly after.

ServiceNow (ticker: NOW) posted revenue of $1.94 billion for the quarter, up 20% from a year ago, or 25.5% adjusted for currency. This is ahead of the company’s guidance range of $1.834 billion to $1.839 billion, but in line with the Street consensus. Subscription revenue was $1.86 billion, up 22%, or 27.5% in constant currency. This is slightly higher than the Street’s view at $1.84 billion.

The company lowered its guidance for earnings reported under GAAP, but raised its outlook on the number adjusted for foreign-exchange rates.

ServiceNow reported earnings of $2.28 per share on an adjusted basis, beating analyst expectations of $2.02 per share. On a GAAP basis, the company earned 74 cents per share.

At the end of the quarter, the company's remaining performance obligations totaled $6.94 billion, an increase of 22% (or 25.5% when adjusted for currency). This was below the company's projection of 20% growth (or 26% when adjusted for currency). RBC Capital analyst Matthew Hedberg said in a research note that, by this measure, the results were "somewhat disappointing."

After ServiceNow released its earnings report, its stock price dropped 1.5% in pre-market trading. Earlier in the after-hours session, the stock price had fallen as much as 8%.

"ServiceNow is continuing to perform exceptionally well," ServiceNow CEO Bill McDermott said in a statement. "Our strong Q4 results show that the secular trend of digitization is here to stay."

For the March quarter, ServiceNow is projecting subscription revenue of $1.99 billion to $2 billion, up between 22% and 22.5%, or 25% to 25.5% adjusted for currency. This is higher than the Street's projection of $1.95 billion. The company expects operating margin in the quarter of 24% on an adjusted basis, down from 28% in the December quarter.

The company is projecting subscription revenue of $8.44 billion to $8.5 billion for all of 2023, which is ahead of the Street consensus at $8.34 billion. ServiceNow expects an operating margin of 26% and a free cash flow margin of 30%.

In an interview with Barron's, McDermott said that the company is benefiting from IT buyers who are trying to do more with less and digitize things that people used to do manually.

McDermott warned that if companies don't invest in digital transformation in the short term, they will fall behind in the mid-term and may not be around in the long term.