Should IBM Buy ServiceNow?

A recent report published by MarketsandMarkets expects the IT Service Management (ITSM) market to grow from $4.41 billion in 2016 to $8.78 billion by 2021, which translates to an annualized growth rate of nearly 15% over the next five years. The growth in the industry is driven by the continuing adoption of mobile and Bring Your Own Device (BYOD) policies across organizations. But that is not the only cloud-based enterprise service that is expanding. Another report by by Gartner estimates the global Public Cloud Services market to grow from $209 billion last year to $383.5 billion by the year 2020 with enterprise offerings of human capital management (HCM), customer relationship management (CRM) and the financial application services becoming the second largest line of business. Gartner expects these services to grow from $38.6 billion last year to $75.7 billion by 2020.

ServiceNow’s Financials

ITSM provider ServiceNow (NYSE: NOW) recently announced impressive second quarter results. Revenues for the second quarter grew an impressive 40% over the year to $478.5 million, ahead of the market’s expectations of $463 million. Loss per share of $0.25 was significantly higher than the Street’s forecast loss of $0.18 for the quarter. Adjusted earnings of $0.22 per share were better than the market’s projected EPS of $0.20.

By segment, Subscription revenues accounted for 87.2% of total revenue and grew 43.5% to $417.1 million. Professional Services revenues grew 21% to $61.5 million. Total billings for the quarter grew 35% to $504.9 million, falling short of the earlier forecast range of 36-37% growth. Subscription billings grew 37% to $456.6 million, and Professional Services and other billings increased 15% to $48.3 million.

ServiceNow began as a Cloud-Based ITSM provider. But it is no longer focused only on ITSM and has diversified its offerings to other cloud-based enterprise services to keep in line with the growing demands of the market. During the quarter, 58% of its net new ACV came outside of ITSM compared with 40% a year ago. The company also noted that today nearly 75% of its customers used more than one ServiceNow product including HR, Customer Service Management and security services. Its HCM offering is seeing strong adoption and it recently added a leading airline to its customer list with net new ACV of almost $3.5 million. Its Customer Service Management product is also doing well and it recently debuted in Gartner’s Magic Quadrant.

For the third-quarter of the year, revenue is expected to grow 36%-37% over the year to $485-$490 million with subscription revenues growing to $440-$444 million and Professional Services and other revenues growing to $45-$46 million. The company forecast billings to grow 34%-35% over the year to $540-$545 million. Analysts are projecting revenues of $480.1 million for the quarter.

For the full-year, ServiceNow forecast revenues of $1.903-$1.913 billion, representing 37%-38% year-over-year growth.

ServiceNow’s AI Growth

ServiceNow recently announced plans to roll out a machine learning engine that will help predict outages, routing, workflow, outcomes, and benchmark performance. The Intelligent Automation Engine leverages the DxContinuum acquisition that ServiceNow completed earlier this year. The Engine will be deployed across the ServiceNow platform and cloud services and will be tailored for each customer account.

Continuing with the AI trend, ServiceNow also announced recently the acquisition of virtual agent technology firm Qlue for an undisclosed sum. Palo Alto-based Qlue was founded in 2015 and has developed a virtual agent bot that enables better communication between companies and their customers – both existing and prospective. Qlue leverages AI to power virtual agents. Its bots are able to answer Frequently Asked Questions and problem diagnostics. ServiceNow plans to leverage Qlue’s virtual agent technologies across its workflows on its platform for IT, HR, customer service, and security.

ServiceNow has been an innovative company all along. Here is my podcast with its founder Fred Luddy, which provides great insight into the person who founded this stellar organization.

Its stock is currently trading at $106.54 with a market cap of $18.64 billion. It has been slowly climbing from the 52-week low of $71.25 it was at in August last year. It had risen to $115.85 earlier last month.

I think that ServiceNow is a great buy for any big tech company looking to make a move in the cloud-based enterprise application market. IBM, for instance, could do well by adding ServiceNow to its portfolio. IBM has been in the dumps of late – steady revenue declines and no sign of recovery in sight. A merger of the two companies would be interesting. They already have a strategic partnership that integrates ServiceNow’s platform with IBM’s analytic tools to help organizations automate their processes. IBM doesn’t have all the cash though. It ended the last quarter with $12.3 billion of cash and marketable securities. That number won’t be enough to buy ServiceNow, which could command a premium of 30%-50% over its market capitalization. However, IBM stock is still worth a lot.

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