ServiceNow A Collateral Damage?

Early this month when Tableau turned in a disappointing quarter, several cloud stocks took a hammering. ServiceNow (NYSE:NOW) was one of the cloud stocks to undergo a steep price decline of almost 40%. It lost almost $4 billion in value even after beating analyst’s revenue and earnings estimates and becoming the second cloud company to cross $1 billion in revenue.

ServiceNow’s Financials

Fiscal 2015 revenue grew 47% to reach $1 billion. Net loss was $198.4 million or $1.27 per share. Non GAAP net income was $67.4 million or $0.43 per share. Billings grew 41% to $1.2 billion.

Fourth quarter revenues increased 44% over the year to $285.7 million, ahead of the market’s expectations of $281 million. Net loss was $37.4 million or $0.23 per share. Non-GAAP net income was $32.6 million or $0.20 per share, beating the Street estimate of $0.09 per share.

By segment, fourth quarter revenues from subscriptions grew 47% over the year to $244.7 million and professional services revenues increased 32% to $41 million. The company now has 230 customers with Average Contract Value over $1 million, a net increase of 24.

Expenses continued to increase, albeit at a slower rate and showed a marginal decline sequentially. Sales and marketing expenses increased 39.5% to $134 million and R&D spend increased 39% to $58.4 million.

Fourth quarter billings grew 33% to $365.7 million, missing the analyst estimate of $375 million mainly due to a forecasting error made by the company. The error occurred when a large customer switched from making payments once per year to once every six months. The error, which has affected the outlook for fiscal 2016 wasn’t detected till December 15.

For the first quarter, ServiceNow expects revenues between $298 million and $303 million or a growth of 41% to 43%. Analysts expect revenue of $297.8 million. Billings are expected between $360 and $365 million.

ServiceNow expects to end 2016 with revenues between $1.34 billion and $1.37 billion or a growth of 33% to 36% and billings to grow around 33% to $1.6 billion, just in line with analyst estimates. Analysts expect ServiceNow to end 2016 with EPS of $0.63 on revenue of $1.36 billion.

In December, ServiceNow launched the ServiceWatch Suite to reduce the cost, impact, and occurrence of service outages. It connects information about services across the enterprise to what may be causing outages and automatically addresses the issues.

ServiceNow also made available a new software release in December. Called Geneva, it offers a simplified developer environment and enables operating IT as a business. It extends service management further across the enterprise with applications for customer service, security operations, HR service management, and facilities service management.

With this release, it expects its total addressable market to have increased by $60 billion. From a business that was driven primarily on the replacement of legacy, ServiceNow is looking at becoming a strategic platform for its customers. But increasing its addressable market also means that ServiceNow will have more competition from the likes of Salesforce.com and WorkDay.

During the earnings call, CEO Frank Slootman said they’ve already won five or six major customer service projects, mostly against Salesforce and that competition is going to become more intense further into 2016.

Why Did its Stock Plunge?

Although ServiceNow beat analyst expectations, it missed the billings estimate by a wide margin primarily due to ServiceNow’s forecasting error.

The market didn’t react kindly to this error and is perhaps concerned that the modest growth in billings could indicate slowing down of ServiceNow’s top-line growth. The stock plunged 20% after the results.

Several analysts have cut their target price: Credit Suisse from $70 to $60, Goldman Sachs from $87 to $68, Raymond James from $90 to $80, and Robert W. Baird from $85 to $75. Mizuho downgraded ServiceNow to Neutral from Buy and cut its target to $65 from $90. Mizuho downgraded ServiceNow to Neutral from Buy and cut its target to $65 from $90. RBC Capital Markets cut the target price from $90 to $85, but retained it as a Top Pick. Canaccord Genuity has a Buy rating and kept its $90 target.

The Tableau carnage further fuelled its price decline. It is currently trading at $52.04 with a market cap of $8.27 billion. It hit a 52-week low of $46 in early February and a 52-week high of $91.28 in December.