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Oops! Forecasting Error Hammers ServiceNow as Shares Fall 20 Percent.

A mistake in assumptions causes shareholders in the cloud software company to swoon.


What was supposed to be a celebration of a big milestone has turned into something else entirely for shareholders of the cloud software company ServiceNow.

The company’s fourth quarter results, reported yesterday, crushed the expectations of analysts: earnings per share was 18 cents, double the consensus view of 9 cents, while revenue at nearly $286 million beat the $281 million forecast and rose 44 percent after backing out the effects of currency exchange rates.

But today shares fell more than 20 percent and brought the shares of other cloud software companies — including and Workday — along with it. See the five-day chart below.

Via Google Finance

Why? Billings were just shy of $366 million in the quarter, not the $375 million analysts had been looking for. Oops. On a conference call with analysts, CFO Michael Scarpelli said the company made an “error in its forecasting” which affected its guidance for the coming year. “If that error did not occur, we would have landed within the midpoint of our range,” he said.

The error, which stemmed partially from a large customer switching from paying once a year to every six months — affected billings, an important figure for cloud software companies.

Billings combines revenue (money collected for services delivered during the quarter) with deferred revenue (money that’s known to be coming in for services that haven’t been delivered yet). Analysts had expected billings of about $375 million for the current quarter, and north of $1.6 billion based on prior guidance from ServiceNow. The error that affected the outlook wasn’t caught until Dec. 15.

In the immortal words of Homer Simpson: “Doh!”

ServiceNow’s market valuation fell by more than $3 billion. Shareholder jitters extended to the other two cloud software flag-bearers, Salesforce and Workday, which fell 2 percent and 4 percent respectively.

Analysts who cover ServiceNow were quick to counsel against hasty judgements.

“Back up the truck” and buy more was the advice of Canaccord analyst Richard Davis.

“While at first blush the quarter/guide looked bad, after walking through a forecasting error … the story doesn’t change materially,” wrote Matthew Hedberg of RBC Capital Markets.

ServiceNow offers cloud-based software and services that help other companies automate their corporate IT environment. The company didn’t comment on the error in addition to what was discussed on the conference call.

Despite the forecasting snafu, CEO Frank Slootman said its pipeline of future business looks promising.

“We really have quite strong visibility in how the business plays out from one quarter to the next,” he said on the conference call. “It’s a nice thing about the SaaS business where you have also big backlogs and deferred [revenue] that it’s really rock solid that way. We really don’t depend on one quarter or another being an outlier either to the positive or the negative.”

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