Billion Dollar Unicorns: ServiceNow Expands Addressable Market

Billion Dollar Unicorn club member ServiceNow (NYSE: NOW) may have been founded to offer IT Service Desk Management capabilities over the cloud. But in recent years, they have diversified their offerings beyond ITSM to include additional enterprise management capabilities including HR, operations, legal, and facilities management. They continue to do so with stellar results as is evident from their recently reported performance.

ServiceNow’s Financials

Their first quarter revenues increased 52% over the year to $212 million, ahead of the market’s expectations of $210.7 million. EPS of $0.02 was also ahead of the break-even that the market was projecting.

By segment, revenues from subscriptions grew 53% over the year to $179.9 million and professional services revenues increased 48% to $32.1 million. During the quarter, they added 23 new Global 2000 customers and saw a 34% increase in the annualized contract value per Global 2000 customer to $746,000.

While they did surpass market expectations on earnings, their expenses are continuing to increase. During the first quarter, sales and marketing expenses increased 58.5% to $110 million and R&D spend increased 60% to $49.8 million.

For the current quarter, they projected revenues of $237 million-$242 million and expect to end the year with revenues of $0.97 billion-$1 billion. The Street was forecasting revenues of $242 million for the quarter and $990 million for the year.

But the market was disappointed with the outlook of their billings growth. During the previous quarter, ServiceNow reported a 48% increase in their gross billings. They are expecting that number to fall to 38%-45% during the current quarter.

ServiceNow’s Cross-Selling Opportunity

ServiceNow may have been traditionally an ITSM player, but recent growth has been driven by other cross-selling opportunities. The company is now seeing increased interest by customers in their add-on platforms for HR and facilities management which are also offered on the cloud. During the previous quarter, these up-sells contributed to 38% of average contract value. Last quarter, they reported 40 deals for human resource management and 38 deals for facilities management automation.

With this in mind, last month ServiceNow announced the new release of their cloud-based software that will be able to address the needs of nearly all departments within an organization. The new release provides customers with the ability to have a dedicated service catalog and knowledge base for each department. Organizations will be able to configure their business processes and workflows and have access to dedicated analytics and dashboards to help improve the performance of their teams. They will now be able to use a single system across functions to request services ranging from contract reviews from legal to purchase orders from finance and collaterals from marketing. Organizations will also be able to see real-time status on the requests and check progress.

They are also ensuring that their offerings have added focus on risk and compliance. Last quarter, they acquired Intréis, a consultancy firm specializing in data governance, risk mitigation, and compliance (GRC) practices at an undisclosed valuation. Through the acquisition, ServiceNow will be able to bring Intréis’ subject matter experts into their fold and integrate the Unified Compliance Framework database of compliance documents into their existing service management offerings. They will be able to help organizations manage risk by aligning the compliance process, including testing and auditing, into their service desk offerings.

ServiceNow believes that the core ITSM market opportunity was worth $6 billion, but these additional offerings expand their addressable market opportunity to nearly $45 billion. No wonder they are going all guns blazing into these newer offerings.

Last week, Fred Luddy, founder of ServiceNow, joined me at a 1M/1M Roundtable. You can listen to the recording here.

Their stock is currently trading at $73.29 with a market capitalization of $11 billion. It touched a 52-week high of $83.52 last week.

More investigation and analysis of Unicorn companies can be found in my latest Entrepreneur Journeys book, Billion Dollar Unicorns. Unicorns will also be discussed with some special guests during our 1M/1M Roundtable programs over the next few weeks. To be a part of the conversation, please register here. The term Unicorn was coined in a TechCrunch article by Aileen Lee of Cowboy Ventures.

This segment is a part in the series : Billion Dollar Unicorns