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ServiceNow valuation dips after subs forecast cut

Strong growth in quarterly financials, investors not convinced

ServiceNow has cut its sales outlook for the year after seeing an increase in economic uncertainty as well as unfavourable currency exchange rates.

Financial analysts were not impressed, and the share price fell.

The workflow and helpdesk software specialist said annual subscription revenues – the bulk of sales – are now expected to grow to between $6.915 and $6.925 billion, down from the $7.03 billion estimated in April.

A couple of percentage points can mean everything to investors, who expressed their feelings by instigating a 6.5 percent share-price drop on the news.

In its Q2 results subscription revenues hit $1.658 billion, up 25 percent on a year earlier, although growth had fallen from 26 percent in Q1. Total revenues reached $1.752 billion, an increase of 24 per cent. Total gross profit reached $1.363 billion, up 78 percent.

Earlier this month ServiceNow's ebullient CEO Bill McDermott told news outlet CNBC the strong US dollar would hit technology stock prices, causing the sector valuations to tumble.

On an investor call late yesterday, he said exchange rates were part of the macro-economic mix causing ServiceNow to adjust its forecasts.

"We always said no one is outrunning the strength of the dollar in this environment and that was what you've seen play out in the market. And we also acknowledge that especially in theaters of operation that are more affected by the macro [economics]," he said.

Software buyers were "lengthening" the cycle of doing deals because of "the great reprioritization," he said.

The point was emphasised by CFO Gina Mastantuono. "We're factoring in throughout the back half of the year slightly longer deal cycles," she said.

But McDermott said the company has a plan, a "very carefully thought-through plan."

The intention is "to not only get the deals that may not have come in at the time we wanted them … but also expedite the Return on Investment conversation at the point of discussion versus the point of proposal to get to the close earlier so companies can factor a larger scale relationship with ServiceNow in."

If our corporate financial jargon translator is correct, he means convincing buyers they will make more savings sooner by using ServiceNow, such that, they are convinced that buying more ServiceNow is a good idea.

ServiceNow's big pitch is to offer users the option of doing the fancy digital transformation type things businesses and corporate leadership like to talk about by helping them embark on the onerous mission to get off intransigent enterprise applications, as McDermott told The Register in May. ®

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