By Jeremy C. Owens and Jon Swartz
A previously published version of this story incorrectly reported the number of ServiceNow’s top deals including four or more products. The story has been corrected.
ServiceNow Inc. shares fell in late trading Wednesday despite an earnings beat, as the software company’s holiday-season guidance did not handily beat expectations as some analysts expected.
ServiceNow /zigman2/quotes/202729495/composite NOW -1.65% reported third-quarter earnings of $63 million, or 31 cents a share, on sales of $1.51 billion, up from $1.15 billion a year ago. After adjusting for stock compensation and other effects, the cloud-software company reported earnings of $1.55 a share, up from $1.21 a share a year ago.
Analysts on average expected adjusted earnings of $1.39 a share on sales of $1.48 billion, according to FactSet.
Investors tend to judge ServiceNow on its subscription revenue, which comprises nearly its entire sales total, and billings, which represents contracted revenue in the quarter. In the third quarter, ServiceNow reported subscription revenue of $1.43 billion and subscription billings of roughly $1.38 billion, while analysts were expecting $1.41 billion and $1.32 billion, respectively.
As ServiceNow expands beyond standard IT deals and into digital transformation contracts, the value of new deals is increasing. This quarter, the company reported 63 new deals of more than $1 million in annual contract value, up 50% year-over-year. More important, all of the company’s top 20 deals in the third quarter included four or more products.
“There is need for a new technology foundation among [chief information officers],” ServiceNow Chief Executive Bill McDermott told MarketWatch late Wednesday. “Some 500 million new applications will need to be built by enterprises in the next two and a half years. There are not enough engineers in the world to do that; ServiceNow offers a hyper-automation layer” to achieve it.
ServiceNow shares declined 4% in extended trading following the release of the results, after closing with a 1.8% decline at $664.76. The disappointment seemed to stem from an in-line forecast that analysts had highlighted as the most important offering within the report, while looking for a big beat.
Heading into the print, analysts reported whispers that the fourth quarter would be more important to the company’s second-half performance than the third. UBS analysts wrote earlier this week that “ServiceNow has already prepped the Street to expect more of a 4Q skew,” and Jeffries analysts wrote that “the buy-side is primarily focused on 4Q guidance.”
“With ServiceNow’s valuation near [all-time highs], investors seem focused on whether ServiceNow can deliver robust 4Q guidance against a tough compand already-high expectations,” wrote the Jefferies analysts, who have a buy rating and $675 price target on the stock.
ServiceNow guided for fourth-quarter subscription revenue of roughly $1.52 billion and billings of roughly $2.31 billion, while analysts an average were expecting $1.51 billion and $2.31 billion respectively, according to FactSet.
ServiceNow’s stock has gained 20.6% so far this year, slightly behind the gain of 21.8% for the S&P 500 index /zigman2/quotes/210599714/realtime SPX -0.84% , which counts ServiceNow as a component.
Contributing: Jon Swartz.