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ServiceNow Lifts Operating Income by $21 Million With Accounting Change
Technology platform’s operating margins would have fallen 370 bps without new useful life estimates.
April 28, 2022
ServiceNow (NOW), a technology platform that enables workflow automation, would have reported a much larger decline in operating margin in its most recent quarter if not for an accounting change that just took effect. Beginning in FY22, ServiceNow increased the estimated useful life of its data center equipment from three to four years.
The change reduced ServiceNow’s depreciation expense in the quarter by $21 million and increased net income by $20 million, or $0.10 per share. If we use ServiceNow’s adjusted earnings— which does not count items like stock based compensation as expenses— the change lifted ServiceNow’s operating margin 120 basis points (bps) to 24.8%.
Even with the change, adjusted operating margin fell year-over-year by 250 basis points from 27.3%. Without the change, adjusted operating margin would have declined more significantly from the prior year— by 370 bps to 23.6%.
The change accounted for 4.8% of the quarter’s operating income and 5.7% of diluted earnings per share (EPS).
ServiceNow isn’t alone in extending the useful lives of certain assets. Last year we detailed how Google and Microsoft added more than $4 billion to annual operating income by extending useful life estimates. We also predicted more companies would make similar accounting changes this year to preserve margins in an inflationary environment.
Related: ORCL, SAP, CRM, WDAY,
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