ServiceNow, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015; compared with the corresponding 2014 periods. ServiceNow provides cloud-based enterprise service-management solutions, primarily through annual subscriptions.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Subscription revenue | $223.2m | $150.4m | $603.6m | $400.5m |
| Professional services and other revenue | $37.9m | $28.3m | $116.3m | $84.1m |
| Total revenue | $261.2m | $178.7m | $719.8m | $484.6m |
| Gross profit / margin | $179.3m / 68% | $112.6m / 63% | $481.3m / 66% | $306.4m / 63% |
| Operating loss | $(28.0)m | $(34.5)m | $(135.5)m | $(115.2)m |
| Net loss | $(41.0)m | $(41.1)m | $(161.0)m | $(134.7)m |
| Operating cash flow | Not separately presented for the quarter | Not separately presented for the quarter | $210.0m | $91.3m |
Q3 revenue rose 46% year over year, led by subscription growth of 48%; nine-month revenue rose 49%. Q3 operating loss narrowed, while the nine-month operating and net losses widened. Stock-based compensation was $65.1m in Q3 and $189.5m for the nine months, respectively 25% and 26% of revenue. The filing attributes much of its increase to equity awards and hiring.
Liquidity, debt and other metrics
- At September 30, cash and cash equivalents were $349.1m, short-term investments $379.9m and long-term investments $400.5m. Cash plus short-term investments totaled $729.0m; $76.4m of that amount was held by foreign subsidiaries.
- Operating cash flow for the first nine months was $210.0m; investing cash outflow was $171.0m, including $62.6m of property and equipment purchases; financing cash inflow was $61.8m. Cash and cash equivalents increased $96.6m during the period.
- Convertible notes had a $575.0m principal amount and $466.8m net carrying value. The notes bear no coupon and mature November 1, 2018; management intends to settle principal in cash. The company also held $780.4m of available-for-sale investments, with maturities no longer than 24 months.
- Current liabilities were $634.8m, including $519.5m of current deferred revenue. The filing states that available liquidity and operating cash generation are expected to meet needs for at least the next 12 months.
- Q3 renewal rate was 98% and nine-month renewal rate 97%, versus 98% for both comparable 2014 periods. Upsell rate was 37% for Q3 and 38% for the nine months, down from 43% in each comparable period. Customer count was 2,804, including 206 customers with ACV above $1m.
Management commentary, outlook and material risks
- Management expects to continue incurring a GAAP loss for the remainder of 2015. It expects operating expenses to rise as the company expands sales, marketing, research and development, and administration; it also expects Q4 headquarters-related costs. Subscription gross margin was expected to remain relatively flat for the rest of 2015. No specific numerical revenue or earnings guidance is provided in the supplied filing text.
- Management cited customer growth, renewals and upsells as revenue drivers, while the stronger U.S. dollar reduced reported revenue. At prior-year exchange rates, Q3 revenue would have been about $15.7m higher and nine-month revenue about $47.1m higher. Q3 foreign-exchange transaction losses were $5.1m.
- Headcount increased to 3,402 from 2,611 a year earlier. The company continues investing in infrastructure and international expansion; management cautions that growth investments may not yield expected revenue or profitability.
- Material contingencies include patent-infringement lawsuits brought by Hewlett-Packard and BMC Software. Potential damages are unspecified, outcomes are uncertain, and the company says it cannot estimate a possible loss range. The HP case had partial proceedings stayed; BMC expert discovery was ongoing.
- Key risks highlighted include service outages and cybersecurity incidents, competition, foreign-currency exposure, hiring and scaling demands, customer renewals and upsells, and the possibility that revenue growth will slow before costs adjust. The company did not hedge transactional foreign-currency exposure at the time of filing.
- Disclosure controls were assessed as effective; management reported no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Track subscription growth, renewal and upsell rates, and deferred revenue or billings; customer-count methodology changed in 2015, affecting historical comparability.
- Assess whether improving gross margins can offset rising operating costs and substantial stock-based compensation, and monitor progress toward profitability and positive cash flow.
- Review cash generation, capital expenditures, investment liquidity and the ability to meet the notes’ maturity, conversion or repurchase obligations.
- Monitor currency effects, especially on international revenue and reported earnings, and any future hedging actions.
- Follow developments and potential financial exposure in the HP and BMC litigation, and assess service reliability, cybersecurity and customer-data risks.