ServiceNow, Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also reports quarterly results; FY2013 Q4 ended December 31, 2013. Figures are in U.S. dollars.
Business context
ServiceNow provides cloud-based SaaS applications and a platform for automating IT service workflows and developing enterprise applications. It primarily serves large enterprises. Subscription revenue is recognized over the contract term; initial contract terms averaged approximately 33 months. The company reported 2,061 customers at year-end, up 36% from 1,512 a year earlier.
Key financial metrics
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Total revenue | $424.7 million | $243.7 million | +74% |
| Subscription revenue | $349.8 million | $204.5 million | +71% |
| Professional services and other revenue | $74.8 million | $39.2 million | +91% |
| Gross profit / margin | $269.4 million / 63% | $139.7 million / 57% | Margin +6 percentage points |
| Operating loss | $(66.3) million | $(37.6) million | Loss widened |
| Net loss | $(73.7) million | $(37.3) million | Loss widened |
| Operating cash flow | $81.7 million | $48.8 million | +68% |
Subscription gross margin improved to 75% from 69%; professional services and other gross margin improved to 10% from negative 4%. The company reported Q4 revenue of $125.2 million and a net loss of $24.2 million, compared with Q4 2012 revenue of $75.2 million and a net loss of $9.9 million. The quarterly table’s per-share data contain apparent transcription inconsistencies; verify against the filed statements.
At December 31, 2013, cash and cash equivalents were $366.3 million, short-term investments $268.3 million, and long-term investments $255.4 million. Cash plus short-term investments totaled $634.6 million; total cash and investments were approximately $889.9 million. Working capital excluding deferred revenue was $722.2 million. Total assets were $1.17 billion and stockholders’ equity was $394.3 million. Operating cash flow was positive despite the GAAP net loss, with stock-based compensation of $65.6 million among significant non-cash adjustments.
Cash used in investing activities was $402.8 million, including investment purchases, $55.3 million of property and equipment purchases, and the $13.3 million Mirror42 acquisition. Cash provided by financing activities was $568.6 million, primarily reflecting the convertible-note financing. Backlog, defined as future amounts to be invoiced and excluded from deferred revenue, was $608.4 million, up from $379.0 million.
Material changes versus FY2012
- Revenue rose 74%, supported by new customers, renewals and customer expansions; the upsell rate was 31% versus 30%, while the renewal rate was 96% versus 97%.
- Gross margin increased six percentage points, reflecting stronger subscription margins and improved professional-services project scoping, pricing and utilization.
- Operating expenses rose 89% to $335.7 million. Sales and marketing increased 88%, research and development 100%, and general and administrative 81%, reflecting hiring and growth investments.
- Year-end headcount increased to 1,830 from 1,077. International markets generated 30% of revenue, compared with 29% in 2012.
- In November 2013, the company issued $575 million of 0% convertible senior notes due 2018. Their balance-sheet carrying amount was $414.8 million after unamortized discount. The notes generated $3.5 million of 2013 discount and issuance-cost amortization expense.
Outlook, risks and unusual items
- Management expected 2014 subscription gross margin to remain relatively flat, as well as professional services gross margin. It expected sales and marketing and research and development costs to rise in both dollars and as a share of revenue; general and administrative costs were expected to increase in dollars but remain flat as a share of revenue.
- Management said existing cash and cash generated from operations should meet liquidity needs for at least the next 12 months. It also expected approximately $29.1 million of 2014 amortization expense related to the notes.
- The company cautioned that revenue growth would likely decelerate and that substantial hiring and infrastructure investment might not produce sufficient growth, profitability or positive operating cash flow. Other key risks include service outages or security breaches, competition and pricing pressure, customer renewals, international expansion, and foreign-currency and tax exposure.
- On February 6, 2014, Hewlett-Packard sued, alleging that some ServiceNow services infringe eight patents and seeking unspecified damages and an injunction. ServiceNow said it would defend the case; the filing states that the potential loss could not be reasonably estimated.
- Revenue growth and margin comparisons should be considered alongside substantial stock-based compensation, the subscription model’s deferred revenue timing, and the 2013 change in debt and investment balances.
Most important facts for investors to verify
- Whether customer additions, the 96% renewal rate and 31% upsell rate remain durable as the customer base scales.
- Whether subscription and professional-services margins meet management’s 2014 expectations while operating expenses continue to grow.
- The quality and convertibility terms of the $575 million notes, their future cash-settlement needs, and the potential dilution from the related warrants and equity awards.
- Cash generation relative to capital spending, deferred commissions, and the growth of deferred revenue and backlog.
- Developments and potential financial exposure in the HP patent litigation, and any significant service reliability or security incidents.