Business context and reporting period
ServiceNow, Inc. filed its Form 10-K for the fiscal year ended December 31, 2015. The company sells cloud-based enterprise service management, IT operations management and related platform subscriptions, alongside professional services. The filing also presents unaudited quarterly results, including the quarter ended December 31, 2015.
Financial and operating performance
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Total revenue | $1,005.5 million | $682.6 million | +47% |
| Subscription revenue | $848.3 million | $567.2 million | +50% |
| Gross profit | $676.1 million | $433.8 million | +56% |
| Gross margin | 67% | 63% | +4 percentage points |
| Operating loss | $(166.4) million | $(151.8) million | Loss increased |
| Net loss | $(198.4) million | $(179.4) million | Loss increased |
| Operating cash flow | $315.1 million | $138.9 million | +127% |
| Free cash flow, non-GAAP | $227.6 million | $84.5 million | +169% |
- Subscription gross margin rose to 78% from 75%; professional services and other gross margin was 7%, down from 8%.
- Stock-based compensation was $257.7 million, or 26% of revenue, up 67% year over year. Management cited higher expenses, particularly stock compensation, as the main reason the net loss widened.
- At year-end, cash and cash equivalents were $412.3 million, short-term investments $388.9 million and long-term investments $422.7 million. The company reported $947.0 million of working capital excluding deferred revenue.
- Convertible senior notes had $575.0 million principal outstanding and a $474.5 million net carrying amount. The notes bear no coupon and mature in November 2018.
- Deferred revenue was $603.8 million, versus $422.2 million a year earlier. Non-GAAP billings were $1.201 billion, up 41%.
- Fourth-quarter revenue was $285.7 million, versus $198.0 million in Q4 2014; net loss was $37.4 million, versus $44.7 million. Quarterly figures are unaudited.
Material changes versus the prior comparable period
- Revenue growth remained substantial but slowed to 47% in 2015 from 61% in 2014. Subscription revenue rose 50%; IT Operations Management subscription revenue grew 84% to $64.7 million, while Enterprise Service Management revenue grew 47% to $783.6 million.
- Gross margin improved by four percentage points, with management attributing subscription margin gains to data-center density and economies of scale.
- Operating cash flow and free cash flow increased considerably. Management attributed the cash flow improvement to non-cash adjustments and favorable changes in operating assets and liabilities, including higher deferred revenue.
- Headcount grew to 3,686 from 2,826. Sales and marketing expense rose 46% and research and development expense 47%.
- The reported enterprise customer count was approximately 3,000, versus 2,300 in 2014; the company changed its customer-count definition in 2015 and restated certain comparative operating metrics. Renewal rate was 98%, compared with 97%; upsell rate was 38%, compared with 43%.
Outlook, risks and unusual items
- Management expected 2016 subscription revenue to grow, IT Operations Management to increase as a share of revenue, and subscription gross margin to rise slightly. It expected sales and marketing, research and development, and general and administrative expenses to increase in dollars, but remain relatively flat as a percentage of revenue. The company expected to continue reporting a GAAP loss in 2016; the filing does not provide a clear numerical revenue or earnings forecast.
- Management warned that revenue growth rates were expected to decline over time. Subscription revenue is recognized over contract terms, so changes in sales and renewals may affect reported revenue with a lag. Customer agreements are seasonally concentrated in the fourth quarter.
- Currency was a headwind: at prior-year exchange rates, 2015 billings would have been $74.3 million higher. The company did not hedge foreign-currency transactions and identified a stronger U.S. dollar as a risk.
- HPE and BMC patent litigation remained unresolved; the company said potential loss or range of loss could not be estimated. The filing describes a second BMC lawsuit filed in February 2016, after year-end. Adverse outcomes could involve damages, royalties, injunctions or product changes.
- Other identified risks include cybersecurity incidents and service outages, intensifying competition and pricing pressure, international expansion, privacy and data-transfer regulation, and dependence on customer renewals and upsells.
- Contractual obligations totaled $896.4 million, including $575.0 million of notes and $316.9 million of operating lease commitments. Management said available resources and operating cash flow were expected to cover liquidity needs for at least 12 months.
Important facts for investors to verify
- Whether subscription growth, renewal performance and customer expansion sustain the reported momentum, while accounting for the revised customer-count definition and slowing growth rate.
- How much operating cash flow and free cash flow reflects durable underlying cash generation versus deferred revenue, stock-based compensation and other non-cash adjustments.
- The scale and trajectory of stock-based compensation, dilution from equity awards, and the effect of convertible notes and associated warrant transactions.
- Progress and potential financial exposure in the HPE and BMC patent cases, including subsequent developments and any change to the currently unestimable loss range.
- The effects of foreign exchange, competitive pricing, new product adoption and international investment on revenue growth and margins.