Wall Street wobbles on subscriptions outlook, but ServiceNow continues to deliver strong growth

It falls to all tech high-fliers to fail to satiate Wall Street’s greed at some point in their growth despite turning in positive numbers. This week it’s ServiceNow’s turn.

On the face of it, the firm’s second quarter numbers were strong. The firm turned in a loss of $11.1 million, down year-on-year from $52.7 million, while revenues rose to $833.9 million, up 32% from $631.1 million last year. Those are ahead of analyst consensus expectations.

The company also reported 39 transactions worth over $1 million in net new annual contract value were signed during the quarter, bringing the total number of such customers to 766, a 33% year-on-year growth, while the renewal rate stands at 98%. CEO John Donahoe said:

Seventeen of our top 20 deals involved three or more products. And we landed several large deals in the financial services, technology and automotive industry that involved multiple IT products. In fact, we signed one of our largest new customer deals ever with a major financial institution, which purchased most of our IT portfolio.

We also had significant wins in CSM (Customer Service Management) with three deals over $1 million. Our customer workflow products enhanced customer operations management. We help customers manage better their inbound contacts, identifying the root causes of customer issues, working to fix those issues to prevent future problems and automating self-help solutions that creates great experiences and better outcomes.

So what gave Wall Street room to grumble? For that, look to subscription revenues. Again, the growth here is strong – up 33% to $781 million. But Wall Street had been looking for more. ServiceNow’s outlook for the rest of the year – $836 million-$841 million in the third quarter, and $3.29 billion-$3.3 billion for the full year – also fell short, sending the share price down.

Government push

On a more positive note, ServiceNow last week signed an extended partnership deal with Microsoft to use Azure as a preferred – not exclusive – cloud platform with an eye to expanding its government footprint in the first instance and other highly-regulated sectors beyond that. Donahoe explained:

This partnership will enable us to more fully leverage and integrate our platform and products with Microsoft’s leading enterprise technology and capabilities. And using Microsoft Azure for workloads in highly regulated industries will help accelerate digital transformation for enterprise and public sector customers.

With ServiceNow available through Azure Government, US government agencies will be able to leverage the compliance coverage across regulatory standards available through Azure. The US Federal Government continues to look to ServiceNow as an important strategic partner as it modernizes its IT infrastructure and accelerates the use of modern technology to digitally transform how they operate.

He added:

This actually started in some ways last year, when we announced an intent to work with Microsoft with particular focus on the US Federal business. What that really led to was the realization that we could take advantage of the highest security clearance that Azure has in the Federal business. There are certain data sovereignty and other security requirements we have – what’s called IL-4 or FedRAMP High – which has enabled us to build a tremendous Federal business.

Microsoft has the absolute highest security clearance IL-6. And so we just determined that it would have made sense building that data center capacity for that market as well as for few other Federal markets, for Federal Government markets that we take advantage of Azure and as part of that. So we’re taking that into their capability and then that’s led to a broader conversation around how we can work together and combined our go-to-market efforts.

Our product lines are very complementary with each other. In fact, we have over 20 integrations with Microsoft products that’s the largest of any partner, customers really look to us to work seamlessly together. So, we’re coming together to try to make it easier for customers and easier for our go-to-market teams to support each other, both in the Federal market, but also, we think over time in the general marketplace.

It’s not just the US government sector that is in focus here, he added, citing Germany as a case in point:

One of the markets that we’re particularly focused on and excited about is Germany. Germany was, relative to other markets, a little later in embracing cloud. German multi-nationals, the German government had more questions are around security of cloud, privacy of data and things…we’ve been having some of the European governments saying we want to do business with you but you got to have global data sovereignty or you got to have complied with local data regulations and that’s where the Azure partnership potentially future partnerships like that will help us accelerate our ability to serve that part of the European business.

Partnering

Such tie-ups are becoming a bigger part of the ServiceNow ecosystem, added Donahoe:

We’re now being far more strategic in our segmentation of our partners, because we work with the very largest ones, the Accentures, the Deloittes, the KPMGs, the DXCs, the IBMs as well as the next year as well, and we’re just doing fundamental blocking and tackling. Many of these partners say that we are the fastest growing practice in their organization.

Such alliances also enable incursions and expansions into new markets. For example, the firm is partnering with Deloitte as part of a push further into the finance sector. Donahoe said:

Deloitte will serve as the lead launch partner for a new financial operations management product…Our first application is Finance Close Automation, a natural extension of ServiceNows’ workflows and platform capabilities. Finance Close Automation will help finance and accounting teams digitize their workflows to reduce finance close risk, improve team satisfaction and accelerate the finance close process.

The target of the finance push is what ServiceNow’s own CFO Michael Scarpelli calls “the white spaces being served in e-mail and Excel spreadsheets today”. Donahoe expands:

There are a lot of finance processes that are highly manual, but not [a lot] of the ERP providers focus on. There’s really no-one else focusing on [how] finance closes the books, classes my spreadsheet, e-mail and other things. Our platform is very well suited to help addressing those.

We’re also very I think cognizant and humble that we’re not going to do all the internal go-to-market calling on the CFO. That’s why partnering with Deloitte as our early partner, partnering with really the ERP providers, partnering with others, that we view this as a way to piggyback on others that are serving in that market…I almost consider [our product] a feature on top of their products. And we think there is a good opportunity there over time but we’ll see, still early days.

My take

A bump in the road as far as Wall Street was concerned, but it’s the same scenario that we’ve seen time and again with firms in high-growth ascendency – the need for speed takes over among investors, any perceived sign of a slowdown and disappointment kicks in and the share price takes a short-term hit. In reality, ServiceNow’s ongoing performance continues to impress. Adjusting expectations for the rest of the year now ought to calm overly-twitchy Wall Street watchers. Keep calm and carry on – nothing to worry about here long term.