Cloud computing, the practice of using servers hosted on the internet to access and process computing resources, is one of the biggest trends in the world of IT. It has been described as the next stage in the internet’s evolution, offering consumers and businesses a way to access computing resources on demand and at significantly reduced costs.
ServiceNow Inc. (NOW) operates in this rapidly expanding industry, specializing in software-as-a-service (SaaS) management solutions, according to its annual report to the United States Securities and Exchange Commission. SaaS is one of the principal business models for delivering cloud services (platform-as-a-service and infrastructure-as-a-service being the other two). As a SaaS provider, ServiceNow offers enterprise management solutions over the internet through a simplified on-demand interface.
The company was founded in 2004 by Fred Luddy under the name Glidesoft, Inc. The company changed its name to ServiceNow in 2006. Headquartered in Santa Clara, California, it operates a total of 15 offices in the United States and Mexico. As of December 31, 2013, the company employed a total of 1,830 full-time workers.
ServiceNow went public in 2012 with an initial public offering of $210 million.
Understanding the Business
As an enterprise cloud solutions provider, ServiceNow allows companies to manage their IT service relationships in a streamlined fashion.
According to the company’s website, ServiceNow offers “a portfolio of robust cloud-based products that automate and manage enterprise solutions,” including IT service automation applications, service automation platforms and custom application development. The company’s proprietary cloud platform allows clients to build a single system for their global IT operations, thereby optimizing performance and reducing costs associated with infrastructure management and other IT processes.
By switching over to the cloud, companies can automate many of their IT-related tasks and save money associated with purchasing, managing and maintaining traditional IT software and hardware.
ServiceNow operates in a number of high profile industries, including financial services, information technology, consumer products and healthcare services. The company targets large enterprises in these and other industries.
ServiceNow offers 24/7 customer support, as well as a self-service technical support portal.
Metrics and Measures
ServiceNow (NOW) was the first technology company to be taken public by Morgan Stanley since Facebook. The stock surged 37 percent in its debut. Since then, share prices have nearly quadrupled.
ServiceNow has seen its revenues climb more than 2,100 percent between fiscal year 2009 and the year ended December 31, 2013. Naturally, this staggering growth rate is expected to moderate in the future as the company matures.
The company saw its revenues increase 20 percent in the second quarter of 2014 to reach $166.8 million. Year-on-year, this translated into a gain of 63 percent. ServiceNow added 169 customers in the second quarter, bringing its total to 2,365. The company enjoys an impressive renewal rate of 98 percent, with upsells accounting for 33 percent of annual contract value in the second quarter. Revenue per customer increased 21 percent year-on-year.
Total billings increased 3 percent quarter-on-quarter and 59 percent annually to reach $187.1 million.
The company posted a GAAP net loss of $50.4 million in the second quarter, which translates into a loss of $0.35 per basic and diluted share. In non-GAAP terms, the company posted a second quarter net loss of $9.8 million, which translates into a loss of $0.07 per basic and diluted share.
A stronger-than-forecast second quarter boosted the company’s annual revenue projections to between $663 million and $673 million. Subscription services are expected to account for more than 83 percent of total revenues, with professional and other services accounting for the remainder.
The Investment Case
The company holds a “strong buy” rating on several websites, including NASDAQ. Analysts are confident the company can grow as more businesses abandon traditional IT service agreements in favor of its cloud platform.
Despite its sweeping success, investors should note that ServiceNow faces stiff competition from the likes of International Business Machines (IBM), Hewlett-Packard (HP) and MBC Software Inc. According to the company’s annual report, it expects competition to intensify as “the market for automating and managing IT service relationships matures.”
Analysts are confident the company will post stronger fundamentals in the year ahead. Analysts at Barclays boosted their price target on shares to $76 from $66. Morgan Stanley, which has issued a “buy” rating on the stock, raised its price target to $74.
Described as a momentum stock, ServiceNow is expected to capitalize on the growing shift toward cloud solutions. This shift is occurring not just in the enterprise market, but in the consumer segment as well. Prospective investors would be surprised to learn just how pervasive cloud technology has become. Global cloud revenues are expected to top $200 billion in 2014 and could reach $555 billion by 2020, according to forecasts.
Investors looking to enter the rapidly expanding cloud economy will find plenty of opportunity with ServiceNow. The company’s performance since 2009 is reflective of the high growth nature of the cloud computing industry. In less than four years, ServiceNow has seen its annual revenues climb from $19.3 million to $424.7 million. The consensus has spoken: ServiceNow is definitely a “buy”.