ServiceNow, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Amounts are in U.S. dollars; financial statements are unaudited.
Business context and key metrics
ServiceNow provides cloud and self-hosted workflow software through its Now Platform, serving technology, employee, customer and creator workflows. Subscription services accounted for 95% of first-half revenue.
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $1.752B (+24%) | $1.409B | $3.474B (+25%) | $2.769B |
| Subscription revenue | $1.658B (+25%) | $1.330B | $3.289B (+25%) | $2.623B |
| Gross profit / margin | $1.363B / 78% | $1.080B / 77% | $2.716B / 78% | $2.141B / 77% |
| Operating income / margin | $22M / 1.3% | $51M / 3.6% | $109M / 3.1% | $148M / 5.3% |
| Net income | $20M | $59M | $95M | $141M |
| Diluted EPS | $0.10 | $0.29 | $0.47 | $0.70 |
| Operating cash flow | Not separately provided | Not separately provided | $1.296B | $1.027B |
| Free cash flow (non-GAAP) | Not separately provided | Not separately provided | $1.052B | $829M |
Financial position and material changes
- At June 30, cash and cash equivalents were $1.664B and investments totaled $3.778B, for $5.442B in combined cash and investments. Current assets were $5.332B versus current liabilities of $4.743B.
- Total debt was $1.485B, all long-term; the $1.5B principal amount of 1.40% notes is due in September 2030. The $2022 Notes matured and were settled in June, with $94M principal repaid in cash during the first half.
- First-half operating cash flow rose 26%, primarily due to higher collections from revenue growth. Capital expenditures were $244M, up from $198M. Cash, cash equivalents and restricted cash declined $62M, versus a $308M decline in the prior-year period.
- Revenue growth did not translate into higher GAAP earnings: Q2 net income fell to $20M from $59M, and first-half net income fell to $95M from $141M. Operating expenses rose 30% in Q2 and 31% in the first half, led by personnel costs and stock-based compensation.
- Stock-based compensation was $352M in Q2 and $677M in the first half. It represented 20% and 19% of revenue, respectively, in those periods.
- Subscription gross margin improved to 83% in Q2 from 81%; professional services had a gross loss margin of 9%, versus 3% a year earlier. Total gross margin increased to 78% from 77%.
Outlook, commentary, risks and unusual items
- Management expected 2022 subscription revenue to increase in absolute dollars and remain relatively flat as a percentage of revenue versus 2021. It expected subscription gross margin to remain relatively flat; professional services gross loss margin to worsen; and major operating expense categories to rise in dollars but remain relatively flat as a percentage of revenue.
- RPO was $11.5B at June 30, up 21% year over year; about 50% was expected to be recognized over the following 12 months. The company reported 1,463 customers with ACV above $1M, versus 1,196 a year earlier, and renewal rates of 99% for Q2 and 98% for the first half.
- A stronger U.S. dollar reduced reported subscription revenue by an estimated $66M in Q2 and $101M in the first half versus prior-year exchange rates. Management expected additional currency headwinds in the second half.
- A change in estimated data-center equipment life from three to four years reduced depreciation expense by $19M in Q2 and $40M in the first half, increasing net income by $16M and $36M, respectively. Management cautioned that the interim results are not necessarily indicative of full-year results.
- After quarter-end, ServiceNow entered a non-cancelable $500M agreement to purchase Microsoft cloud services over five years. It also acquired Hitch Works for $57M and completed a $100M investment in Celonis during the first half.
- Management said the Russia-Ukraine conflict had not materially affected results to date, but warned that escalation, sanctions and related economic disruption could affect customers and operations. The filing also highlights inflation, macroeconomic uncertainty, cybersecurity and supply-chain risks. Management expected available liquidity and operating cash flows to meet needs for at least 12 months.
- The filing reported no pending legal proceedings expected to have a material adverse effect and no material change in market-risk disclosures. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether subscription growth and RPO/cRPO growth continue, including the effects of foreign exchange and contract timing.
- Whether operating expense growth, stock-based compensation and professional-services losses constrain GAAP operating profit and margins.
- The full-year impact of the stronger U.S. dollar and the data-center useful-life estimate change on reported results.
- Cash conversion, capital spending, investment portfolio valuation and liquidity after the Microsoft cloud-services commitment and other contractual obligations.
- How macroeconomic, geopolitical, cybersecurity, trade-compliance and customer-spending risks evolve.