ServiceNow, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. ServiceNow provides enterprise cloud software for digital workflows, primarily through subscriptions. Unless noted, dollar amounts are in millions.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $1,512 (+31%) | $1,152 | $4,282 (+31%) | $3,269 |
| Subscription revenue | $1,427 (+31%) | $1,091 | $4,050 (+31%) | $3,102 |
| Gross profit / margin | $1,162 / 77% | $900 / 78% | $3,303 / 77% | $2,561 / 78% |
| Operating income | $74 | $69 | $222 | $181 |
| Net income | $63 | $13 | $204 | $102 |
| Diluted EPS | $0.31 | $0.06 | $1.00 | $0.50 |
| Operating cash flow | Not presented as a quarterly figure | $1,347 | $1,101 | |
| Free cash flow (non-GAAP) | Not presented as a quarterly figure | $1,055 | $816 |
Q3 subscription gross margin was 81%, down from 83%; professional services gross margin remained negative at 1% versus negative 3%. Operating expenses rose 31% in Q3 to $1,088, including sales and marketing of $579, R&D of $358, and G&A of $151. Stock-based compensation was $291 for the quarter and $829 for the nine months, approximately 19% of revenue in both periods.
Liquidity, debt and balance sheet
At September 30, 2021, cash and cash equivalents were $1,400, short-term investments $1,631, and long-term investments $1,384. Cash plus short-term investments totaled $3,031; including long-term investments, these resources totaled $4,415. Total debt carrying value was $1,577: $93 current under the 0% convertible 2022 Notes and $1,484 long-term under the 1.40% 2030 Notes. The company said available liquidity and expected operating cash flows should fund needs for at least 12 months.
Nine-month investing cash outflow was $1,248, including $778 for acquisitions, net of cash acquired; financing cash outflow was $351. Total assets were $9,478 and stockholders’ equity $3,534. Operating lease liabilities were $650, with an additional $148 of leases not yet commenced. The 2022 Notes have $96 aggregate principal due June 2022; the company expected to settle approximately $2 of conversions in Q4 2021 based on requests received through the filing date.
Changes and operating indicators
- Revenue grew 31% year over year in both the quarter and year-to-date period, driven by existing-customer purchases and customer growth. Professional services and other revenue rose 39% in both comparisons.
- RPO was $9.7 billion, up 34% year over year; 51% was expected to be recognized over the next 12 months. cRPO increased 32% year over year.
- Customers with ACV above $1 million increased to 1,266 from 1,012. Renewal rate was 98% for Q3 and the nine-month period, compared with 98% and 97%, respectively, in 2020.
- Q3 net income increased to $63 from $13. Comparability includes a $41 loss on extinguishment of 2022 Notes in Q3 2020, versus none in Q3 2021, and a lower Q3 2021 tax provision ($5 versus $13). Nine-month net income also benefited from lower note-extinguishment losses ($3 versus $42).
- Acquisitions included Element AI, LightStep and Swarm64. Goodwill increased from $241 at year-end 2020 to $770 at September 30, 2021, largely reflecting acquisitions.
Outlook, commentary and risks
- Management expected 2021 subscription revenue to increase in absolute dollars and remain relatively flat as a share of revenue. It expected subscription gross margin to decline slightly, citing public-cloud costs for regulated markets and data-residency requirements. Professional-services revenue was expected to rise in dollars, with margin improving as internal utilization optimized.
- Management expected sales and marketing, R&D, and G&A expenses to increase in dollars; sales and marketing was expected to decline slightly as a percentage of revenue, while R&D and G&A were expected to remain relatively flat as percentages. Forecast assumptions used September 2021 foreign-exchange rates.
- Billings, a non-GAAP measure, were $1,465 in Q3 (+29%) and $4,317 for nine months (+30%). Management cautioned that contract timing, duration, seasonality and foreign exchange affect comparisons. Foreign exchange added $10 to Q3 billings and $99 to nine-month billings.
- COVID-19 remained a source of uncertainty, with potential effects on customer spending, contract duration, collections, sales cycles, hiring, offices and operations. Other highlighted risks include privacy and data-residency regulation, cybersecurity incidents, foreign-exchange exposure and competition. A channel partner represented 22% of accounts receivable; no customer exceeded 10% of revenue.
- The company reported no pending legal matter it believed would individually or collectively have a material adverse effect. On October 26, 2021, the board approved a CEO performance-based option award with an approximate $150 value if all service, performance and market conditions are met; no portion can vest before two years from grant.
Investor verification points
- Check whether subscription growth, RPO growth and large-customer additions convert into recognized revenue and cash collections, accounting for seasonality, foreign exchange and contract duration.
- Track gross-margin pressure, infrastructure and data-residency costs, and the effect of acquisition-related amortization.
- Assess the scale and dilution impact of stock-based compensation, outstanding RSUs and the remaining 2022 Warrants.
- Confirm cash requirements and settlement of the 2022 Notes ahead of their June 2022 maturity, alongside lease and investment commitments.
- Monitor COVID-19 effects, cybersecurity and privacy risks, and the provisional purchase-price allocations for recent acquisitions.