ServiceNow, Inc. — FY2021 Form 10-K
Reporting period: Year ended December 31, 2021; filed February 3, 2022. This is an annual filing, not a standalone Q4 report, so the figures below are full-year unless stated otherwise. ServiceNow sells cloud-based workflow software and related services through its Now Platform, spanning IT, Employee, Customer and Creator workflows.
Financial performance
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Revenue | $5.896B | $4.519B | +30% |
| Subscription revenue | $5.573B | $4.286B | +30% |
| Gross profit / margin | $4.543B / 77% | $3.532B / 78% | Margin down 1 point |
| Operating income / margin | $257M / 4.4% | $199M / 4.4% | Income +29% |
| Net income / diluted EPS | $230M / $1.13 | $119M / $0.59 | Net income +94% |
| Operating cash flow | $2.191B | $1.786B | +23% |
| Free cash flow (non-GAAP) | $1.799B | $1.367B | +32% |
| Billings (non-GAAP) | $6.850B | $5.229B | +31% |
| Remaining performance obligations | $11.5B | — | +29%; 49% current |
Subscription revenue was 95% of total revenue. Digital workflow subscriptions were $4.882B (+30%) and IT Operations Management subscriptions were $691M (+29%). More than 1,359 customers had annual contract value above $1M, versus 1,085 a year earlier; the reported renewal rate was 98% in both years.
Liquidity, debt and balance sheet
- Cash, cash equivalents and investments totaled $4.9B at year-end, versus $4.6B in 2020. Current assets were $5.220B and current liabilities $4.949B.
- Debt carrying value was $1.576B: $1.484B of 1.40% notes due in 2030 and $92M of 0% convertible notes due in 2022. The remaining 2022 notes were expected to be settled in cash by June 2022.
- Management said cash, investments and expected operating cash flows should cover liquidity needs for at least 12 months. Operating lease liabilities were $638M; non-cancelable purchase commitments were $383M.
- Capital expenditures were $392M. Investing cash use was $1.607B, including $785M for business combinations, net of cash acquired. Financing cash use was $506M.
Changes, outlook and management commentary
- Revenue growth was driven by customer expansion and increased customer count. Professional services and other revenue grew 39% to $323M.
- Operating expenses rose: sales and marketing +24% to $2.292B, research and development +36% to $1.397B, and general and administrative +31% to $597M. Stock-based compensation increased to $1.131B, or 19% of revenue.
- FY2021 subscription gross margin eased to 82% from 83%; total gross margin declined to 77% from 78%. Management attributed cost growth to hiring, expanded data-center capacity and costs supporting regulated-market customers.
- For 2022, management expected subscription revenue and professional-services revenue to grow in dollars, with their revenue shares relatively flat. It expected operating expenses to rise in dollars but remain broadly flat as a percentage of revenue. Subscription gross margin was expected to increase slightly.
- A January 2022 estimate change extended data-center equipment useful life from three to four years. Management estimated this would increase FY2022 operating income by approximately $80M.
- Management cited continued investment in international growth, product development, customer support, cybersecurity and ESG. In 2021, acquisitions included LightStep ($512M), Element AI ($228M) and Swarm64 ($32M); a $100M investment in Celonis was expected to settle in Q1 2022.
Risks, contingencies and unusual items
- Key risks include intense competition, execution of product innovation and large customer implementations, partner dependence, cybersecurity and service disruptions, talent retention, and privacy, data-residency and regulatory requirements.
- COVID-19, macroeconomic uncertainty, inflation, foreign-exchange movements and geopolitical or climate-related disruptions could affect customer spending, costs and operations. International revenue was 36% of total, up from 35%.
- The effective tax rate fell to 8% from 21%, principally due to jurisdictional earnings mix and an acquisition-related valuation-allowance release. The company retained a full valuation allowance on U.S. federal and state deferred tax assets; tax rates may fluctuate.
- Acquisition and equity compensation effects are notable: goodwill rose to $777M from $241M, and stock-based compensation was $1.131B. The CEO and certain executives received one-time performance-based awards with $232M total grant-date fair value.
- Management reported no pending legal proceeding expected to have a material adverse effect. The auditor issued an unqualified opinion on the financial statements and internal controls; subscription revenue recognition for contracts with multiple performance obligations was identified as a critical audit matter.
Important facts for investors to verify
- How recurring subscription growth, RPO growth and 98% renewal performance translate into recognized revenue and cash collections.
- Whether margin improvement in 2022 offsets higher hosting, support, hiring, travel and stock-compensation costs; assess the effect of the useful-life estimate change separately.
- Cash settlement of the remaining 2022 convertible notes and the potential dilution from the remaining 2022 warrants.
- Acquisition integration and returns, particularly the growth and amortization effects of LightStep and other 2021 purchases.
- Exposure to cybersecurity, data-residency, government-contracting and foreign-exchange risks, along with the sustainability of the current tax valuation allowance.