TLDR
- ServiceNow (NOW) stock was down 19% at $121.70 in Thursday premarket trading after Q3 earnings.
- Adjusted EPS of $1.00 missed the $1.02 estimate, while revenue of $4.11 billion beat the $4.10 billion estimate.
- CEO Bill McDermott blamed the 2-cent miss on interest costs from acquisitions completed in April.
- The AI annual contract value target rose to $1.7 billion, up 70% from the start of the year.
- Q4 subscription revenue is guided to $4.245 billion to $4.255 billion, and the full-year free cash flow margin target rose to 36%.
ServiceNow (NOW) stock was down 18.94% at $121.70 in premarket trading Thursday. The drop followed third-quarter results that beat on revenue but missed on earnings.
Revenue came in at $4.11 billion, just above the $4.10 billion estimate. That is growth of 20.5% from a year ago.
Adjusted earnings were $1.00 per share, short of the $1.02 analysts expected. A two-cent miss was enough to rattle the stock.
Subscription revenue rose 21% to $3.99 billion. Remaining performance obligations grew 22% to $29.7 billion.
Current remaining performance obligations were $13.65 billion, up 20.5%. The company also closed 19 deals above $5 million in net new annual contract value, up more than 135%.
Why the Earnings Missed
McDermott blamed the miss on interest costs from acquisitions completed in April. Interest expense was $81 million in the quarter, up from $6 million a year ago.
GAAP net income fell to $277 million, or $0.27 per share. A year ago it was $502 million, or $0.48 per share.
McDermott said operating margin grew 150 basis points despite the deals. He pointed to subscription growth, backlog and free cash flow as better gauges of the business.
Non-GAAP operating margin was 32.5%, down from 33.5% a year ago. Free cash flow rose to $822 million from $592 million.
Speaking with CNBCās Jim Cramer, McDermott called ServiceNow a āunicorn growth company.ā He said its āRule of 57ā pairs 21% subscription growth with a 36% free cash flow margin.
Guidance and AI Demand
For the fourth quarter, ServiceNow expects subscription revenue of $4.245 billion to $4.255 billion. That implies growth of about 22.5% to 23%.
Full-year subscription revenue is guided to $15.78 billion to $15.79 billion. The free cash flow margin target rose 100 basis points to 36%.
The AI annual contract value target rose to $1.7 billion, up 70% from the start of the year. It is the second raise this year, after a start at $1 billion.
McDermott said AI token use jumped 13-fold from a year ago. He said the company faces no major limits on computing power, memory or data centers.
ServiceNow expanded its OpenAI partnership, starting with a plugin for ChatGPT. Hewlett Packard Enterprise (HPE) picked the company for customer support, and Stagwell is moving four service desks onto its platform.
The company also launched the Control Tower Alliance, with members including Anthropic, AWS, Cisco, NVIDIA and OpenAI. NVIDIA OpenShell will enforce governance rules that ServiceNow sets.
ServiceNow will present at the BMO conference on November 12 and the RBC conference on November 17. Executives also speak at Wells Fargo on December 8 and Barclays on December 9.
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