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New Orders Drive Deferred and Backlog Revenues for ServiceNow

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Deferred and backlog revenue growth

ServiceNow (NOW) has posted strong growth in deferred and backlog revenues, mainly triggered by record contract wins. In fiscal 2017, the company’s deferred revenues improved by a stellar 44.0% YoY (year-over-year) to $1.3 billion. Likewise, its revenue backlog in the same period grew 37.0% YoY to $2.6 billion. On a combined basis, it grew 39.0% YoY.

In the graph above, we can see the combined growth of both deferred and backlog revenues of ServiceNow in the last five years. During this period, it grew at a CAGR[1. compound annual growth rate] of 29.2%.

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Factors influencing growth

In 4Q17, ServiceNow (NOW) inked 41 new deals valued at more than $1.0 million each. At the end of 4Q17, the annualized contract value (or ACV) grew 40.0% YoY to 477 accounts. In the last four years, it gained an average of 99 accounts valued in excess of $1.0 million every year.

This solid growth in new deals with higher ACV may boost ServiceNow’s deferred and backlog revenue, as well as its free cash flow going forward. The company exited fiscal 2017 with 840 Global 2000 (or G2K) clients, adding 103 accounts during the period.

The company is already on track to achieve 1,000 G2K customers by the end of 2020 and is well ahead of its quarterly addition target of 20 accounts per quarter. In 4Q17, it added 23 new clients. Continuous growth in additional sales or upsells for the company could act as another driver for revenue growth. In 4Q17, its upsells improved 10.0% YoY.

Microsoft (MSFT) reported an 11.0% YoY decline in deferred revenues in its latest reported quarter while IBM (IBM) posted a 5.0% YoY gain.

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