ServiceNow, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; comparisons are with Q1 2023 unless noted. Amounts are in U.S. dollars. ServiceNow sells cloud-based workflow software through its Now Platform, with subscription revenue accounting for 97% of quarterly revenue.
Financial performance and position
| Metric | Q1 2024 | Q1 2023 / comparison |
|---|---|---|
| Total revenue | $2.603 billion | $2.096 billion; up 24% |
| Subscription revenue | $2.523 billion | $2.024 billion; up 25% |
| Professional services and other revenue | $80 million | $72 million; up 11% |
| Gross profit / gross margin | $2.083 billion / 80% | $1.658 billion / 79% |
| Operating income / operating margin | $332 million / approximately 13% | $144 million / approximately 7% |
| Net income / diluted EPS | $347 million / $1.67 | $150 million / $0.73 |
| Operating cash flow | $1.341 billion | $902 million |
| Free cash flow (non-GAAP) | $1.225 billion | $737 million; up 66% |
Subscription gross margin was 83% in both periods; professional services gross margin improved to 1% from negative 17%. Stock-based compensation was $422 million, or 16% of revenue, compared with $381 million, or 18% of revenue.
At March 31, 2024, cash and cash equivalents were $2.056 billion and short- and long-term investments totaled $6.720 billion, or approximately $8.8 billion combined. Long-term debt, net, was $1.488 billion, representing $1.5 billion principal of 1.40% notes due September 2030. Current assets were $7.372 billion and current liabilities were $7.033 billion.
Remaining performance obligations (RPO) were $17.7 billion, with 48% expected to be recognized over the following 12 months. RPO grew 26% and current RPO grew 21% year over year. The renewal rate was 98%, unchanged from Q1 2023. Customers with annual contract value above $1 million totaled 1,933, up from 1,687.
Material changes and notable items
- Revenue growth was driven primarily by new customer purchases and expansion among existing customers. Digital workflow and ITOM subscription revenue each increased 25% year over year.
- Operating income increased to $332 million from $144 million. Operating expenses rose 16% overall, including a 23% increase in research and development spending.
- Operating cash flow increased 49%, primarily due to higher collections. Investing cash outflow was $918 million, including $194 million for business combinations; financing cash outflow was $259 million, including $175 million of share repurchases and $215 million of taxes paid on net share settlements.
- Effective in 2024, the estimated useful life of data center equipment increased from four to five years. The change reduced Q1 depreciation expense by $29 million and increased net income by $23 million, or $0.11 per share.
- The company initiated cash flow hedges for forecast foreign-currency revenue. Outstanding designated hedge notional was $1.5 billion; $11 million of net gains was expected to be reclassified to subscription revenue within 12 months.
Outlook, risks and contingencies
- Management expects 2024 subscription revenue and professional services revenue to increase in absolute dollars. It expects subscription gross margin to remain relatively flat year over year, professional services gross margin to improve, and sales and marketing expense to decline as a percentage of revenue. These are qualitative expectations; this filing does not provide a clear numerical full-year revenue or earnings guidance range.
- Management expects operating cash flows to remain positive in 2024 and believes cash, investments and expected operating cash flows will meet liquidity needs for at least the next 12 months.
- Management cited macroeconomic uncertainty, including higher interest rates and inflation, and geopolitical conflicts. It reported no material impact to date but warned that worsening conditions could affect results. Foreign-exchange movements, customer contract timing and seasonality can affect reported RPO and operating trends.
- An intellectual-property lawsuit brought by InQuisient alleges patent infringement and seeks injunctive relief and unspecified damages; trial is scheduled for January 2025. The company cannot reasonably estimate any possible loss. A separate internal investigation into potential procurement-process compliance issues related to a government contract is ongoing; timing, outcome and impact are uncertain.
- The company maintains a valuation allowance against California deferred tax assets. Management reported no material changes to the risk factors disclosed in its 2023 Form 10-K and concluded disclosure controls were effective.
Important facts for investors to verify
- How much of reported profit improvement reflects underlying operations versus the $23 million benefit from the data center useful-life estimate change.
- Whether RPO and current RPO growth convert into revenue as expected, considering contract duration, renewal timing and foreign-exchange movements.
- How stock-based compensation, employee equity dilution and the remaining $787 million share-repurchase authorization affect per-share results and capital returns.
- Developments in the InQuisient litigation and the government-contract compliance investigation, including any change in potential financial or operating exposure.
- Free cash flow is a company-defined non-GAAP measure; review its reconciliation and definition alongside GAAP operating cash flow and capital expenditures.