ServiceNow Inc (NOW US) – Strong momentum quells concern about pull-forward in demand
• Impressive cRPO growth and delivering on multiple metrics in 4Q21
• Fundamentals remain solid on the back of broad-based demand; large-sized M&A off the table for now
• FV of USD714 (previously USD801)
Strong set of results – ServiceNow Inc (NOW) delivered subscription revenue of USD1.5b (+29%, or 30% in CC), which was slightly ahead of consensus. Adjusted subscription billings grew at 33% to USD2.4b, while cRPO growth was impressive at 32% YoY (CC), against prior guidance of 28.5%. NonGAAP OPM of 23% was also ~70bps higher than the guide, which in our view demonstrates the continued leverage in NOW’s model. 4Q21 EPS came in at USD1.46, which was ~2% higher than
consensus.
Blazing ahead – During the quarter, NOW delivered on a number of key metrics including (a) IT Service Management featuring in 16 of the top 20 deals, with 19 deals > USD1m, (b) IT Operations Management in 18 of the top 20 deals, with 21 deals > USD1m, (c) Creator Workflows featuring in 19 of the top 20 deals on the back of strengthening demand for broader Enterprise Automation initiatives, (d) renewal rates hitting 99% in 4Q21, following 97-98% renewal rates in the prior 2 quarters.
FV of USD714 – For FY22, NOW is guiding for subscription revenue of USD7,020m – USD7,040m (+26% YoY or +28% YoY in CC). This exceeds consensus, while in itself already embeds an incremental 200 bps of headwinds from FX. We note that the FY22 OPM guide of 25% includes a 100bps tailwind from extending the useful life on its datacenter equipment from 3 to 4 years, and does come slightly under consensus after adjusting for this. Importantly, management has shared that organic growth remains robust and there are no plans at this stage to do a large-sized M&A, which in our view is constructive for margin and FCF growth. All considered, we believe it is fair to conclude that fundamentals for NOW remain solid on the back of broad-based demand, and NOW’s broad applicability and deep understanding in areas such as management, automation, and enterprise workflow improvement should help to create sustainable growth. With this set of results, we would agree with management that there is no evidence of unusual demand pull forward of its business, which has been a general source of concern for many software investors. Still, in light of valuation multiple compression across the software complex on the back of higher inflation and an imminent rate hike cycle, we adjust our forward EV/FCF multiple while still maintaining our ESG valuation premium (as expressed via a lower WACC). All considered, we lower our FV from USD801 to USD714.
ESG Updates
We note that NOW’s ESG rating was upgraded in May’21. The revised assessment of data security considers lower risk exposure for companies, such as ServiceNow, with significant enterprise use products, because of limited access to the end user’s personal data. Yet, with 90% of its FY 2020 revenue coming from stringently regulated US and EU markets, the company may face regulatory risks if its applications experience a major data breach. To mitigate the risks, ServiceNow has accredited its information management system to ISO 27001 and SOC 2 data security standards—a best practice among leading peers. BUY. (Research Team)