ServiceNow, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2016; filed August 3, 2016. ServiceNow provides enterprise cloud software, primarily through annual subscriptions.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $341.3 million (+38%) | $246.7 million | $647.2 million (+41%) | $458.7 million |
| Subscription revenue | $290.7 million (+45%) | $200.5 million | $558.1 million (+47%) | $380.4 million |
| Gross profit / margin | $244.7 million / 71% | $167.0 million / 68% | $456.3 million / 70% | $302.1 million / 66% |
| Operating loss | $48.3 million | $53.2 million | $372.4 million | $107.5 million |
| Net loss | $49.6 million | $61.9 million | $383.0 million | $120.0 million |
| Net loss per share | $0.30 | $0.40 | $2.35 | $0.78 |
Q2 subscription growth was attributed to upsells and a larger customer base. IT Operations Management subscription revenue rose 81% in Q2 to $26.0 million; Enterprise Service Management revenue rose 42% to $264.7 million. Subscription gross margin improved to 81% in Q2 from 77%; professional services and other gross margin fell to 20% from 26%, partly reflecting lower utilization. H1 overall results include a $270 million legal-settlement charge; excluding this unusual charge, the reported H1 operating loss and net loss would be substantially lower, but the filing does not provide an adjusted figure.
Cash flow, liquidity and debt
- Cash and cash equivalents were $289.1 million at June 30, 2016, versus $412.3 million at year-end 2015. Cash plus short-term investments totaled $806.7 million; long-term investments were another $224.4 million.
- H1 operating cash flow was negative $69.5 million, compared with positive $147.6 million in 2015. The company attributed the decline primarily to $267.5 million in cash paid for legal settlements.
- H1 capital expenditures were $52.9 million; free cash flow, as defined by the company, was negative $122.4 million, versus positive $105.7 million a year earlier.
- Current liabilities were $852.1 million, including $697.9 million of current deferred revenue. Deferred revenue is not equivalent to funded debt.
- Convertible notes had $575 million principal and a $490.9 million net carrying value, due November 2018. The notes carry a 0% coupon; the company intends to settle principal in cash. They were not convertible as of June 30, 2016.
- Management stated existing cash, investments and expected operating cash generation should meet liquidity needs for at least the next 12 months.
Changes, outlook and notable matters
- Billings, a non-GAAP measure defined as revenue plus the change in deferred revenue, increased 33% in Q2 to $374.9 million and 37% in H1 to $751.6 million.
- The company reported 272 customers with annual contract value above $1 million, up from 187 a year earlier; renewal rate was 97%. It had 681 Global 2000 customers, compared with 577.
- HPE and BMC patent disputes were settled and dismissed. The settlements resulted in a $270 million H1 expense and $267.5 million cash payment; the filing says no financial obligations remain under the settlements.
- Management expected subscription revenue to continue growing, with IT Operations Management increasing as a share of revenue. It expected subscription gross margin to remain relatively flat, continued GAAP losses for the remainder of 2016, and rising operating expenses in dollars. The filing provides no specific full-year revenue or earnings guidance.
- Operating lease commitments were approximately $280 million. The company anticipated the new lease accounting standard would materially affect its balance sheet, but not materially affect expense recognition.
- Other material risks include anticipated deceleration in revenue growth, competitive pricing, execution in newer product and international markets, customer renewals, cybersecurity and service availability, foreign-exchange exposure, and the ability to recruit and retain employees. Founder and Chief Product Officer Frederic Luddy had announced plans to retire before year-end 2016.
- Stock-based compensation was $78.1 million in Q2 and $153.4 million in H1. ServiceNow early adopted new stock-compensation accounting, recognizing $1.7 million of excess tax benefits in the tax provision.
Important facts for investors to verify
- How much of reported H1 cash-flow weakness and losses is attributable to the one-time settlements, and how operating cash flow performs after those payments.
- Whether billings, deferred revenue, renewal rates and large-customer growth continue to support subscription revenue growth.
- Whether subscription-margin gains persist while professional-services utilization and margins recover.
- The scale of ongoing stock-based compensation, dilution from equity awards, and potential dilution under the convertible notes and warrants.
- Liquidity needs for growth investment, acquisitions and the November 2018 note maturity, alongside the company’s cash-settlement intention.
- Progress on new products and international expansion, and any developments in cybersecurity, service reliability, foreign exchange, tax examinations or other legal matters.