ServiceNow, Inc. — Form 10-Q Summary
Business context and reporting period
Cloud-based enterprise IT workflow software provider. This unaudited filing covers the quarter and nine months ended September 30, 2012, compared with the corresponding 2011 periods. ServiceNow completed its IPO in July 2012.
Financial performance and liquidity
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Revenue | $64.3m | $34.2m | $168.6m | $88.9m |
| Gross profit / margin | $36.8m / 57% | $22.3m / 65% | $96.8m / 57% | $58.3m / 66% |
| Operating income (loss) | $(13.3)m | $1.0m | $(28.0)m | $6.4m |
| Net income (loss) | $(13.1)m | $0.1m | $(27.4)m | $5.1m |
| Operating cash flow | Not presented for quarter | Not presented for quarter | $32.1m | $36.4m |
- Q3 subscription revenue was $55.3m, up 82%; professional services and other revenue was $9.1m, up 135%. Nine-month revenue rose 90%, led by subscription growth of 86%.
- Q3 gross margin declined to 57% from 65%, principally as subscription costs grew with data-center migration, capacity investment, personnel and depreciation. Subscription gross margin was 68% versus 79%.
- Cash and cash equivalents were $117.0m and short-term investments $139.5m at September 30. Current assets were $331.9m versus current liabilities of $166.7m. The filing presents no borrowings or debt balance.
- Nine-month investing cash use was $172.2m, including $146.9m of investment purchases and $32.2m of property and equipment purchases. Financing cash flow was $189.6m, primarily reflecting IPO proceeds.
- Deferred revenue totaled $148.0m. Stock-based compensation was $18.6m for the first nine months of 2012.
Material changes and notable items
- Customers increased 58% year over year to 1,346. Headcount increased to 963 from 491, supporting sales, product development and infrastructure expansion.
- The company shifted professional-services pricing toward time-and-materials. Professional-services gross margin improved but remained negative: (6)% in Q3 versus (45)% in 2011.
- ServiceNow incurred $2.9m in lease-abandonment costs after relocating its San Diego office and recorded a $3.0m facility-exit obligation. It also signed a 10.5-year Amsterdam office lease with approximately $10.5m of minimum commitments.
- The July IPO issued 10.35m company shares at $18 per share. Net proceeds were reported as approximately $169.7m after underwriting discounts and offering expenses.
Outlook, commentary and risks
- Management expected to complete the transition from managed-service data centers to co-location by year-end 2012. It anticipated exiting related data-center costs beginning in Q1 2013, while continuing infrastructure investment.
- Management expected subscription gross margin to improve during 2013 as subscription revenue growth outpaced cost growth, while noting ongoing capacity investment could partly offset savings. It also expected professional-services margins to improve with the pricing-model change.
- Operating expenses were expected to rise as the company expands sales, research and development, infrastructure and public-company functions. The filing states ServiceNow did not expect to be profitable for the foreseeable future.
- Key risks include service availability and performance—some large customers had experienced reduced availability, performance and functionality at scale—data-center or security incidents, rapid growth and execution demands, competition, customer renewals, international expansion and foreign-exchange exposure.
- The filing describes historical material weaknesses in financial-reporting controls and remediation efforts; management reported disclosure controls effective at a reasonable-assurance level for this quarter. Management said pending legal matters were not expected to have a material adverse effect; customer contracts generally include intellectual-property indemnification provisions.
Important facts for investors to verify
- Whether customer growth, renewals (96% in Q3 2012 versus 98% in Q3 2011) and upsells can sustain subscription growth.
- Whether data-center transition savings materialize and subscription gross margin recovers as management anticipated.
- Whether professional-services profitability improves, given its still-negative gross margin.
- Progress in remediating previously identified internal-control weaknesses and the implications of rapid hiring and expansion.
- Liquidity and capital-spending needs, long-term lease commitments, and the impact of stock compensation and potential dilution.