Rating Action: Moody’s assigns Baa1 rating to ServiceNow’s senior notes
Global Credit Research – 06 Aug 2020
New York, August 06, 2020 — Moody’s Investors Service (“Moody’s”) assigned a Baa1 rating to ServiceNow, Inc’s (“ServiceNow”) proposed senior unsecured notes. ServiceNow plans to use net proceeds from the notes offering to repurchase up to $500 million of the outstanding convertible notes due in 2022 and augment its cash position.
Assignments:
..Issuer: ServiceNow, Inc.
….Senior Unsecured Regular Bond/Debenture, Assigned Baa1
RATINGS RATIONALE
The Baa1 senior unsecured rating reflects ServiceNow’s track record of solid organic growth driven by product innovation and its position as the market leader in the IT Service Management (ITSM) segment of the enterprise software market. Moody’s expects subscription revenue growth in the low to mid 20% range over the next 2 to 3 years driven by the company’s high customer renewal rates and a growing penetration of a broader portfolio of IT, customer and employee workflow automation software products that address a large market.
The rating is additionally supported by ServiceNow’s strong liquidity with $3.1 billion in cash and investments (before the financing transactions) and Moody’s expectation for growth in free cash flow to about $1.5 billion over the next 12 to 18 months. The increasing mix of new software bookings outside of ServiceNow’s core IT workflows will lead to a greater revenue diversification and demonstrates the company’s success in growing sales from its more recent products. ServiceNow’s growing base of recurring subscription revenues and operating leverage position the company well for sustained increases in operating margins. Its growing backlog of contracted revenues ($7 billion of remaining performance obligations) provides good visibility into revenues and operating cash flow in the intermediate term.
The Baa1 rating incorporates Moody’s expectation that ServiceNow will maintain a conservative financial strategy, including a strong cash position relative to debt and total debt to EBTIDA at or below 2x (incorporating Moody’s standard analytical adjustments and growth in deferred revenues). Moody’s does not expect the company to initiate a dividend or repurchase shares over the next several years, and expects it to reinvest its free cash flow into its business and make targeted, “tuck-in acquisitions” toward its goal of growing revenues to $10 billion.
The key risks to the rating include potential execution challenges in sustaining high growth rates amid increasing competition. Moody’s expects a significant portion of ServiceNow’s growth to come from software products outside of its core ITSM market that will have an increasing overlap with the products offered by the cloud platform and enterprise applications software vendors. ServiceNow has primarily grown through innovation and “tuck-in” acquisitions and management believes it can achieve its $10 billion long term revenue goal with its existing product portfolio and innovation capability. However, as a growth-oriented company with large addressable markets, Moody’s believes that there is the potential for event risk over time from debt-financed acquisitions that result in elevated integration risks and increased debt levels. At the same time, ServiceNow’s strong operating cash flow growth provides increasing flexibility to finance acquisitions with internal cash resources.
The stable outlook reflects Moody’s expectations that the company will maintain strong liquidity and a modestly leveraged capital structure. Moody’s expects ServiceNow to generate strong revenue and operating profit growth, and maintain or strengthen its market positions in its key product categories.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The ratings could be upgraded if ServiceNow continues to diversify its revenues, generates strong revenue and operating profit growth, develops a longer track record of conservative financial strategies and commits to sustaining a highly conservative credit profile. Conversely, the rating could be downgraded if revenue growth rates decelerate meaningfully below expectations or operating margins face sustained pressure. In addition, a shift toward an aggressive financial policy that favors shareholders or debt-funded acquisitions that result in free cash flow to debt (Moody’s adjusted) sustained below 20% or the failure to maintain a robust liquidity position could trigger a downgrade.
ServiceNow is a leading provider of software solutions to manage IT, customer and employee workflows that are delivered via its NOW cloud platform.
The principal methodology used in this rating was Software Industry published in August 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1130740. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
For further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The rating has been disclosed to the rated entity or its designated agent (s) and issued with no amendment resulting from that disclosure.
This rating is solicited. Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the EU and is endorsed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
Raj Joshi VP - Senior Credit Officer Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Lenny J. Ajzenman Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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