ServiceNow (NOW) operates in the high-growth software-as-a-service business vertical. The company has a cloud-based software subscription model that ensures a recurring revenue stream.
ServiceNow’s subscription rose 40% YoY (year-over-year) to $543 million in the first quarter, 45% to $585 million in the second quarter, and 39% to $627 million in the third quarter. Subscription sales accounted for 92% of the total sales in the first quarter and 93% of the sales in the second and third quarter.
The company’s subscription sales were 89% of the total revenues in 2016 and 91% of the total revenues in 2017. ServiceNow expects subscription sales to rise 38% YoY to $2.41 billion in 2018.
High contract renewal rate
While subscription revenues account for most of ServiceNow’s total sales, the revenues wouldn’t mean anything if the contract renewal rate is low. A company spends a huge amount of money to acquire a customer.
ServiceNow’s renewal rate in the third quarter was 97%—lower compared to a renewal rate of 98% in the previous two quarters. The high renewal rate indicates huge customer satisfaction levels.
The company’s software subscription model has an average contract duration of three years. ServiceNow has also claimed that over 75% of the customer base subscribes to more than one service—up from 30.0% in 2016.
ServiceNow might be threatened by a new entrant in this space due to a low entry barrier. However, the switching costs remain high. Enterprises have already spent substantial amounts of money on employee training and developing ServiceNow’s products and services.