Servicenow, Inc. — 2020 Form 10-K Summary
Business context and reporting period
ServiceNow provides cloud-based digital workflow software through its Now Platform, spanning IT, employee, customer and custom-application workflows. This is the annual report for the fiscal year ended December 31, 2020, not a standalone quarterly filing; Q4 figures are noted where available.
Financial performance and liquidity
| Metric | FY 2020 | FY 2019 |
|---|---|---|
| Total revenue | $4.519 billion | $3.460 billion |
| Subscription revenue | $4.286 billion | $3.255 billion |
| Professional services and other revenue | $234 million | $205 million |
| Gross profit / gross margin | $3.532 billion / 78% | $2.664 billion / 77% |
| Operating income (loss) | $199 million | $42 million |
| Net income | $119 million | $627 million |
| Diluted earnings per share | $0.59 | $3.18 |
| Cash provided by operating activities | $1.787 billion | $1.236 billion |
| Free cash flow (non-GAAP) | $1.367 billion | $971 million |
- Subscription revenue was 95% of total revenue. Digital workflow products generated $3.749 billion, up 33%; IT Operations Management generated $537 million, up 21%.
- Q4 2020 revenue was $1.250 billion, versus $952 million in Q4 2019. Q4 net income was $17 million, versus $599 million in Q4 2019.
- At year-end, cash and cash equivalents were $1.677 billion, short-term investments $1.415 billion and long-term investments $1.468 billion. Total assets were $8.715 billion.
- Long-term debt had a $1.640 billion carrying value. The company issued $1.5 billion of 1.40% notes due 2030 and ended the year with $169 million principal outstanding on its 0% convertible notes due 2022.
- Deferred revenue was $3.008 billion. Remaining performance obligations were $8.9 billion, with 49% expected to be recognized over the following 12 months. The company reported a 98% renewal rate and 1,093 customers with ACV above $1 million.
- Stock-based compensation was $870 million, or 19% of revenue. The auditor gave unqualified opinions on the financial statements and internal control; subscription revenue recognition for contracts with multiple performance obligations was identified as a critical audit matter.
Material changes versus the prior comparable period
- Revenue increased 31%, led by subscription growth from existing customers and a larger customer base. Operating income rose to $199 million from $42 million.
- Net income fell substantially from 2019, principally because 2019 included a $574 million tax benefit from releasing a valuation allowance on Irish deferred tax assets. The 2020 effective tax rate was 21%, compared with negative 833% in 2019.
- Operating cash flow rose to $1.787 billion. Investing cash outflow increased to $1.507 billion, mainly reflecting higher investment purchases, capital spending and acquisitions.
- Debt increased following the 2030 notes issuance, while the company repurchased $497 million principal of 2022 notes and paid cash to settle $116 million principal of conversions during 2020.
Outlook, management commentary and risks
- For 2021, management expected subscription revenue to increase in dollars and remain relatively flat as a share of revenue. It expected subscription gross margin to decrease slightly. Operating expense categories were expected to rise in dollars but remain relatively flat as a share of revenue.
- Management said it had sufficient cash, investments and expected operating cash flow for at least the next 12 months, including planned spending and expected early conversions of 2022 notes.
- COVID-19 accelerated customer interest in digital workflows, but also contributed to delayed or curtailed spending, longer sales cycles and payment terms, and uncertainty about customer demand and future operating conditions. The company continued remote work and warned of possible operational, workplace, cyber-security and data-center impacts.
- Other highlighted risks include intense competition and pricing pressure; cybersecurity incidents or service disruptions; privacy and cross-border data regulations; dependence on partners and successful customer implementations; international, foreign-exchange and tax exposures; and integration risks from acquisitions.
- Unusual items include the $47 million loss on extinguishment and early conversions of 2022 notes, the 2019 Irish tax benefit, and a subsequent-event acquisition of Element AI for approximately $230 million in January 2021. Management reported no pending legal matter expected to have a material adverse effect.
Most important facts for investors to verify
- Whether subscription growth, RPO conversion and renewal performance remain strong, particularly as COVID-related customer and sales-cycle effects evolve.
- How much reported profitability is affected by stock-based compensation, acquisition-related amortization, and the unusually large 2019 tax benefit; review GAAP results alongside non-GAAP measures.
- Cash requirements and potential dilution from remaining 2022 convertible notes and warrants, as well as the terms and integration progress of the Element AI acquisition.
- Whether 2021 margin and expense expectations are achieved, including the forecast slight decline in subscription gross margin.
- Exposure to cybersecurity, service availability, privacy regulation, foreign exchange, and customer or partner implementation risks.