Key Points
ServiceNow’s backlog ran slightly ahead of revenue growth in Q3 (21% vs. 20.5%, both in constant currency), but the Q4 guide flips that, with backlog growth of 18.5% against a 21.5% revenue guide.
Debt is up about $6 billion since December, and cash and securities are down about $3 billion, as acquisitions took $9.2 billion in cash this year.
ServiceNow (NYSE:NOW)grew third-quarter subscription revenue 21% to about $4 billion, then guided for slower growth next quarter in its 12-month contracted backlog, known as cRPO. Shares fell about 23% in regular trading Thursday morning. Growth is still solid, but the leading indicator is cooling, and deal-related costs are cutting GAAP earnings nearly in half.
Key Numbers
- Subscription revenue: about $3.99 billion, up 21% year over year
- cRPO growth: 21% excluding currency swings, guided to 18.5% for Q4
- GAAP diluted EPS: $0.27, down from $0.48
- Free cash flow: $822 million, up from $592 million
What It Means
cRPO counts contracted revenue due within 12 months, so it leads reported revenue. ServiceNow's fourth-quarter backlog guide trails its own 21.5% currency-neutral subscription revenue guide. When backlog grows slower than revenue, revenue growth usually follows it down. The raised target for AI annual contract value hasn't yet shown up as faster backlog growth.
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Adjusted EPS still rose to $1.00, since it leaves out stock-based pay, severance, and acquisition amortization (a non-cash charge on acquired assets), all of which grew. It can't exclude higher interest costs on new debt and lower interest income from cash spent on deals. Even adjusted subscription gross margin slipped, which may reflect costlier acquired revenue or heavier computing needs. The release gives no organic growth figure (growth excluding acquisitions), so readers can't see how much the deals supplied.
Operating cash flow rose only about 3%, and most of the free cash flow gain came from cutting capital spending sharply. That supports the raised full-year free cash flow margin target, but a spending cut doesn't speed up growth.
What to Watch Next
Watch whether fourth-quarter cRPO growth holds at the guided rate. Also watch whether ServiceNow starts disclosing organic growth, which would show the core business without the deals.
Sharice Wells has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends ServiceNow. The Motley Fool has a disclosure policy.