This tech company’s analysts are very bullish, with 27 increasing their EPS forecasts for this year, and 19 for next year.
ServiceNow (NOW)
From Canaccord Genuity Research
ServiceNow’s (NOW) good quarter and upbeat forward looking financial opinion justifiably pushed the stock higher after-hours as the firm signed large deals and inked a handful of substantial upsells.
Results showed upside across the board with guidance improved or reiterated on all metrics; number of global 2000 (G2K) customers grew by 23 in the quarter to 705 while annual contract value (ACV)/G2K customer grew 6% – both metrics came in ahead of targets, 18 and 4% respectively, needed to reach 2020 goals; new ACV from emerging products grew to 41% of the mix, up from 40% last quarter and 28% a year ago; notable wins included a $5M net new ACV upsell to a North American G100 financial institution with the largest contract value ever, the largest HR deal ever, which was a $2M upsell to a European G100 financial institution, and the largest Federal deal ever, also a $2M upsell.
NOW reported Q3 revenue of $357.7M, up 37% y-o-y, non-GAAP operating margins of 16.4%, up 110 bps y-o-y, and EPS of $0.23, which were respectively $3.7M, 140 bps and $0.03 ahead of our estimates. Calculated billings came in at $404.3M, up 41% y-o-y, and nicely ahead of our midpoint of guidance estimate by $21.8M. FCF in the quarter was $65.5M, ahead of our $56.5M estimate.
ServiceNow increased its full-year outlook for revenue, billings and profitability. Revenue guidance was increased by $8.5M at the midpoint, while calculated billings was increased by $22.5M at the midpoint and operating margins were increased to 13% from 12%. FCF margins were reiterated at 24% for the year, which now roughly means $332M at the midpoint of revenue.
Looking out to 2020 targets, we continue to believe that NOW can deliver compelling returns over the next several years. Shorter-term, we are increasing our price target by $5.00 to $95.00, which is based on a 26x EV/FCF multiple applied to our newly introduced C2018 estimate of $634.5M plus approximately $1.1B in prospective net cash and assumes roughly 185M fully diluted shares outstanding. This target represents a 7.4x EV/revenue multiple based on our C2018 estimate of $2.23B.
We believe this quarter marks the moment when sentiment will shift for the better, and ServiceNow has reached sufficient scale that it should report smoother, more reassuring quarters in the future. We have no hesitation buying NOW shares at current levels.
Richard Davis, David Hynes Jr., and Mark Belcarz, Canaccord Genuity Research, www.canaccordgenuity.com, 617-371-3711, October 27, 2016