Nov 30, 2022

ServiceNow Inc. (NOW) Long Term: 6-12 Months Zacks Recommendation: Neutral
(Since: 06/01/22)
$396.85 (As of 11/29/22)
Prior Recommendation: Underperform
Price Target (6-12 Months): $417.00
Short Term: 1-3 Months Zacks Rank: (1-5) 3-Hold

Zacks Style Scores: VGM:C

Value: D Growth: B Momentum: D

Summary Price, Consensus & Surprise

ServiceNow is benefiting from robust growth in subscription
revenues as reflected by the strong third-quarter 2022 results.
The company is riding on the increasing adoption of its
workflows by enterprises undergoing digital transformation. As
businesses, government agencies and others continue to their
infrastructure to cloud, the company is poised to boost uptake
of its Now platform. Further, its expanding global presence,
solid partner base and strategic buyouts are expected to
bolster growth prospects. Strategic alliances with the likes of
Microsoft remain tailwinds. Nevertheless, ServiceNow is
suffering from high inflation, unfavorable forex and
challenging macro-economic environment. Stiff Competition is
a headwind and is expected to hurt prospects in the long haul.
Shares have underperformed the industry year to date.

Data Overview Sales and EPS Growth Rates (Y/Y %)

52 Week High-Low $672.97 - $337.00 Sales EPS

20 Day Average Volume (sh) 1,450,848

Market Cap $80.2 B

YTD Price Change -38.9%

Beta 0.99

Dividend / Div Yld $0.00 / 0.0%

Industry Computers - IT Services

Zacks Industry Rank Top 27% (68 out of 251)

Sales Estimates (millions of $)

Last EPS Surprise 6.0%
Q1 Q2 Q3 Q4 Annual*
Last Sales Surprise -1.3%
2023 2,043 E 2,084 E 2,139 E 2,287 E 8,552 E
EPS F1 Est- 4 week change 0.0%
2022 1,722 A 1,752 A 1,831 A 1,930 E 7,235 E
Expected Report Date 01/25/2023 2021 1,360 A 1,409 A 1,512 A 1,614 A 5,896 A
Earnings ESP -1.1%
EPS Estimates
Q1 Q2 Q3 Q4 Annual*
P/E TTM 58.6
2023 1.95 E 1.87 E 2.22 E 2.63 E 8.66 E
P/E F1 54.4
2022 1.73 A 1.62 A 1.96 A 1.98 E 7.29 E
PEG F1 1.9 2021 1.52 A 1.42 A 1.55 A 1.46 A 5.92 A
P/S TTM 11.6 *Quarterly figures may not add up to annual.

The data in the charts and tables, except the estimates, is as of 11/29/2022. The reports text, the analyst-provided estimates, and the price target
are as of 11/30/2022.

© 2022 Zacks Investment Research, All Rights Reserved 10 S. Riverside Plaza Suite 1600 · Chicago, IL 60606
 Overview
Santa Clara, CA-based ServiceNow Inc. provides cloud computing
services that automate digital workflows to accelerate enterprise IT
operations. The company’s Now Platform enables enterprises to
enhance productivity by streamlining system processes.

By utilizing ServiceNow’s product portfolio, customers can design any

workflow application to reduce the manual time taken by complex
processes, and consequently optimize total cost of ownership or TCO.

The company’s solutions address the needs of many departments

within an enterprise, including IT, human resources (HR), facilities, field
service, marketing, customer service, security, legal and finance.

Now platform is the foundation of the company’s cloud-based services.

The company has three product suites for IT management and

operations. These are IT Service Management (ITSM), IT Operations
Management (ITOM) and IT Business Management (ITBM) solutions.

Non-IT products include Customer Service, HR and Security Operations.

ServiceNow’s end-markets are quite varied, which includes financial

services, consumer products, IT services, health care, government,
education and technology.

In 2020, total revenues came in at $4.519 billion. ServiceNow derives revenues from two sources – subscriptions (95% of 2020 revenues) and
professional services and other (5% of 2020 revenues).

North America, Europe, the Middle East and Africa (EMEA), and Asia Pacific & Other contributed approximately 64%, 26% and 10% of revenues,
respectively in fourth-quarter of 2020.

The company operates data centers in Australia, Brazil, Canada, Hong Kong, Netherlands, Singapore, Switzerland, UK and the U.S.

ServiceNow has approximately 6,900 enterprise customers (as of Dec 31), including more than 44% of the world’s 2,000 largest companies, as
outlined by an annual ranking by the Forbes magazine. The figure also represents more than 80% of the Fortune 500 companies, as defined by
an annual ranking by the Fortune magazine.

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 Reasons To Buy:
ServiceNow is a dominant name in the IT service market (ITSM). The company continues to Dominant position in the
win market share by replacing legacy on-premise systems with cloud-based processes. G2K ITSM, ITOM markets,
customers contribute approximately 50% of the top-line and the company expects the mix to growing fortune 500
remain steady in the long haul. The growing penetration at Fortune 500 clientele (80%) has customer base, rapid
been driving ServiceNow’s top-line growth. Further, it is focusing primarily on public and big growth in non-ITSM
private entities, rapidly, which will further drive top-line growth in the long run. markets like HR, Security
and product
ServiceNow is rapidly expanding into non-ITSM markets like human resource and security enhancements via
solutions by launching new products and services. Shorter-sales cycle of these new products strategic acquisitions are
(particularly security solutions) as compared with the traditional ITSM business is driving top- key catalysts.
line growth. The company is also focused on strengthening sales team across the different
non-ITSM markets, which will expand customer base.

ServiceNow’s expanding footprint beyond IT presents significant growth opportunities. IT, Customer, Employee and Creator workflows, on a
combined basis, expand the company’s total addressable market (TAM) from $114 billion in 2020 to $175 billion in 2024, witnessing a CAGR
of 11%. Markedly, IT workflows present an estimated TAM of $61 billion. ServiceNow is now witnessing $33-billion-plus market opportunity in
Customer workflows, driven by trends like direct-to-customer, Everything-as-a-service and Work from anywhere. Creator workflows TAM is
anticipated to be $36 billion by 2024. Trends like apps replacing unstructured processes, scarcity of software engineers and fragmented
automation technologies present opportunities for rapid adoption of ServiceNow’s platform. Moreover, the growing need for improving digital
employee experience is a key catalyst in the Employee workflow process that has an anticipated TAM of $20 billion by 2024.

ServiceNow has a strong balance sheet with ample liquidity position. As of Sep 30, 2022, ServiceNow had cash and cash equivalents and
short-term investments of $3.96 billion compared with $3.83 billion as of Jun 30, 2022. In third-quarter 2022, cash from operations was $265
million. ServiceNow generated free cash flow of $103 million in third quarter. Strong liquidity reflects that the company is making investments
in the right direction. Moreover, the cash is available for pursuing strategic acquisitions, investment in growth initiatives and distribution to
shareholders.

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 Reasons To Sell:
ServiceNow faces stiff competition in the non-ITSM markets from the likes of Oracle and Stiff competition in non-
salesforce.com, which are well-established players. Although the company has an edge in the ITSM product segments,
security response market, the customer service and HR solutions faces significant competition modest growth in
from these players. As non-ITSM markets become a larger contributor to the company’s total professional business,
revenue, increasing competition can weigh on growth. Moreover, cut-throat competition can continuing losses, sluggish
hurt pricing power as well as lengthen the sales cycle, which will negatively impact top-line. IT spending, and stretched
valuation are key
Weakness in the IT business and a reduction in enterprise IT spending are headwinds. negatives/
Moreover, higher inflation and the ongoing Russia-Ukraine war are concerning. The
uncertainty in business visibility has impacted investors’ confidence and is likely to remain an
overhang on the company’s performance, at least in the near term.

ServiceNow generates a significant portion of revenues from the International market (35% in 2021, up from 34% in 2020). Adverse foreign
currency exchange rates are likely to impede revenue growth in the near term owing to the strengthening of the U.S. dollar compared with the
Euro and other foreign currencies, which is a significant concern.

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 Last Earnings Report
ServiceNow Q3 Earnings Beat Estimates, Revenues Up Y/Y Quarter Ending 09/2022

ServiceNow reported third-quarter 2022 adjusted earnings of $1.96 per share, which beat the Report Date Oct 26, 2022
Zacks Consensus Estimate by 5.95% and improved 26.5% year over year. Sales Surprise -1.28%
EPS Surprise 5.95%
Our earnings estimate was pegged at $1.86 per share.
Quarterly EPS 1.96
Revenues of $1.83 billion lagged the consensus mark by 1.2% but increased 21.1% year over Annual EPS (TTM) 6.77
year. After adjusting for forex, revenues of $1.93 billion jumped 27.5% year over year.

Subscription revenues improved 22.1% year over year to $1.74 billion. After adjusting for forex, subscription revenues increased 28.5% year over
year to $1.83 billion, surpassing management’s guidance range of $1.750-$1.755 billion.

Professional services and other revenues increased 4.7% year over year to $89 million. After adjusting for forex, professional services and other
revenues increased 12% on a year-over-year basis to $95 million.

ServiceNow has been benefiting from the rising adoption of its workflows by enterprises undergoing digital transformation. The company now has
1,530 total customers with more than $1 million in annual contract value, representing 22% year-over-year growth in customers.

Customers with contract value worth $10 million grew 60% year over year in the reported quarter. The renewal rate was 98% in the reported
quarter, flat year over year.

During the reported quarter, ServiceNow closed 69 transactions with more than $1 million in new annual contract value.

As of Sep 30, 2022, current remaining performance obligations (cRPO) were $5.87 billion, up 18% year over year. On a constant currency basis,
cRPO increased 25%.

Remaining performance obligations, on a constant currency basis, rose 24.5% year over year to $12.1 billion after adjusting for forex.

Operating Details

In the third quarter, the non-GAAP gross margin was 82.4%, which expanded 130 basis points (bps) on a year-over-year basis.

Subscription gross margin of 86.2% expanded 120 bps year over year. Professional services and other gross margins were 7% compared with
the year-ago quarter’s figure of 16.5%.

Total operating expenses, on a non-GAAP basis, were $1.03 billion in the reported quarter, up 23.1% year over year. As a percentage of
revenues, operating expenses increased 90 bps on a year-over-year basis.

ServiceNow’s non-GAAP operating margin expanded 40 bps on a year-over-year basis to 26.2%.

Balance Sheet & Cash Flow

As of Sep 30, 2022, ServiceNow had cash and cash equivalents and short-term investments of $3.96 billion compared with $3.83 billion as of Jun
30, 2022.

During the reported quarter, cash from operations was $265 million compared with $433 million in the previous quarter.

ServiceNow generated a free cash flow of $103 million in the reported quarter, down from $287 million reported in the prior quarter.

Guidance

For fourth-quarter 2022, subscription revenues are projected between $1.834 billion and $1.839 billion, suggesting an improvement in the range
of 20-21% year over year on a GAAP basis. At constant currency, subscription revenues are expected to grow in the 26-27% range.

cRPO is expected to grow 26% year over year on a non-GAAP basis and 20% on a GAAP basis. Unfavorable forex is expected to hurt
subscription revenues by $330 million.

ServiceNow expects the non-GAAP operating margin to be 26%.

For 2022, ServiceNow expects subscription revenues to be $6.865-$6.870 billion, which suggests a rise of 23% over 2021 on a GAAP basis. At
constant currency, subscription revenues are expected to grow 28.5% over 2021.

Unfavorable forex is expected to hurt subscription revenues by $290 million in 2022.

ServiceNow expects the non-GAAP subscription gross margin to be 86% and the non-GAAP operating margin to be 25%. Moreover, the non-
GAAP free cash flow margin is expected to be 29%.

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 Recent News
On Oct 6, ServiceNow announced that it has won a single award, Blanket Purchase Agreement, with the U.S. Department of Health and Human
Services, which is part of the U.S. General Services Administration. The agreement is in partnership with Carahsoft Technology and has an
estimated value of $250 million for a five-year performance period, through 2027.

On Oct 5, ServiceNow announced that it has signed an agreement to acquire observability and log management innovator, Era Software.

On Sep 21, ServiceNow announced the Now Platform Tokyo release, which is designed to help organizations navigate complex business
challenges amid an uncertain macro environment. The release features tools related to Enterprise Asset Management, Supplier Lifecycle
Management and ESG Management. It also offers tools like Manager Hub, Admin Center and Issue Auto Resolution for Human Resources,
which help enterprises in developing talent and retention.

Moreover, the Now Platform Tokyo release includes the ServiceNow Vault as well as new AI-powered tools like Task Intelligence for Customer
Service Management, Automation Center, DevOps Config, Operational Resilience Management and ITSM Pro+. These solutions help
organizations operate more efficiently and power more resilient business models.

On Jun 27, ServiceNow launched Lightstep Notebooks to help speed up troubleshooting for SREs and developers.

On Jun 3, ServiceNow announced that it has signed an agreement to acquire Hitch works, a skill mapping and intelligence company.

Valuation
ServiceNow shares are down 38.8% in the year-to-date period and 33.8% in the trailing 12-month period. Stocks in the Zacks sub-industry and
the Zacks Computer & Technology sector are down 30.9% and 33.6% in the year-to-date period, respectively. In the past year, the Zacks sub-
industry and the sector are down 26.9% and 32.5%, respectively.

The S&P 500 index is down 18.1% in the year-to-date period and 13.9% in the past year.

The stock is currently trading at 9.25X trailing 12-month sales compared with 4.41X for the Zacks sub-industry, 2.98X for the Zacks sector and
3.42X for the S&P 500 index.

Over the past five years, the stock has traded as high as 21.28X and as low as 7.97X, with a five-year median of 12.23X. Our Neutral
recommendation indicates that the stock will perform in line with the market. Our $417 price target reflects 9.71X forward 12-month sales.

The table below shows summary valuation data for NOW

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 Industry Analysis Zacks Industry Rank: Top 27% (68 out of 251) Top Peers
Company (Ticker) Rec Rank
ASGN Incorporated (ASGN) Neutral

Cognizant Technology Solutions Neutral

Corporation (CTSH)
Amdocs Limited (DOX) Neutral

EPAM Systems, Inc. (EPAM) Neutral

Fair Isaac Corporation (FICO) Neutral

Microsoft Corporation (MSFT) Neutral

Science Applications International Neutral

Corporation (SAIC)
Vertiv Holdings Co. (VRT) Neutral

Industry Comparison Industry: Computers - It Services Industry Peers

NOW X Industry S&P 500 ASGN DOX VRT

Zacks Recommendation (Long Term) Neutral - - Neutral Neutral Neutral

Zacks Rank (Short Term) - -

VGM Score - -
Market Cap 80.16 B 625.73 M 30.64 B 4.34 B 11.31 B 4.98 B
# of Analysts 14 3.5 13 4 3 3
Dividend Yield 0.00% 0.00% 1.62% 0.00% 1.83% 0.08%
Value Score - -
Cash/Price 0.05 0.17 0.04 0.05 0.07 0.05
EV/EBITDA 73.99 0.63 13.72 11.84 12.54 16.21
PEG Ratio 1.93 1.26 2.09 0.94 1.28 1.26
Price/Book (P/B) 17.72 2.51 3.38 2.36 3.18 3.93
Price/Cash Flow (P/CF) 73.09 11.50 13.57 11.87 13.74 9.70
P/E (F1) 54.59 24.93 17.82 13.27 14.69 22.76
Price/Sales (P/S) 11.59 2.41 2.61 0.97 2.47 0.91
Earnings Yield 1.84% 3.09% 5.51% 7.53% 6.80% 4.39%
Debt/Equity 0.33 0.01 0.61 0.57 0.22 2.54
Cash Flow ($/share) 5.43 0.44 8.16 7.34 6.28 1.36
Growth Score - -
Hist. EPS Growth (3-5 yrs) 103.86% 15.30% 10.68% 13.50% 6.21% 77.27%
Proj. EPS Growth (F1/F0) 23.14% 1.37% 6.71% 19.93% 10.75% -23.68%
Curr. Cash Flow Growth 35.68% 20.63% 17.27% 10.40% 5.99% 2.92%
Hist. Cash Flow Growth (3-5 yrs) 47.00% 18.44% 10.93% 13.63% 2.21% NA
Current Ratio 1.24 1.74 1.23 2.28 1.60 1.62
Debt/Capital 24.72% 9.02% 39.71% 36.39% 18.04% 71.79%
Net Margin 2.90% -10.60% 13.00% 6.63% 12.01% 1.32%
Return on Equity 7.22% -12.60% 17.72% 18.34% 16.62% 7.92%
Sales/Assets 0.63 0.70 0.55 1.27 0.70 0.79
Proj. Sales Growth (F1/F0) 22.70% 2.49% 7.59% 13.90% 7.30% 15.00%
Momentum Score - -
Daily Price Chg -1.26% -0.71% -0.16% -1.23% -0.15% 0.76%
1 Week Price Chg 1.96% 0.32% -1.15% 2.51% 3.10% -0.72%
4 Week Price Chg -5.19% -3.64% 2.63% 2.42% 1.93% -11.05%
12 Week Price Chg -7.81% -11.15% 1.26% -8.79% 3.74% 18.07%
52 Week Price Chg -38.73% -57.96% -13.34% -28.44% 23.60% -48.52%
20 Day Average Volume 1,450,848 503,499 2,003,447 216,219 533,977 3,092,133
(F1) EPS Est 1 week change 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
(F1) EPS Est 4 week change -0.04% 0.00% 0.00% 0.00% -1.47% 1.75%
(F1) EPS Est 12 week change 1.90% 0.00% -0.30% -1.87% -1.02% -4.92%
(Q1) EPS Est Mthly Chg -1.25% 0.00% -0.50% 0.00% -3.54% 0.00%

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 Zacks Stock Rating System
We offer two rating systems that take into account investors' holding horizons: Zacks Rank and Zacks Recommendation. Each provides valuable
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Growth Score
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This report contains independent commentary to be used for informational purposes only. The analysts contributing to this report do
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