ServiceNow, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with Q1 2014 unless otherwise stated. ServiceNow provides cloud-based enterprise service-management and automation solutions, primarily through annual subscriptions.
Financial performance and condition
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Total revenue | $212.0 million | $139.1 million; up 52% |
| Subscription revenue | $179.9 million | $117.4 million; up 53% |
| Professional services and other revenue | $32.1 million | $21.7 million; up 48% |
| Gross profit / margin | $135.1 million / 64% | $86.0 million / 62% |
| Operating loss | $54.2 million | $36.2 million |
| Net loss / diluted loss per share | $58.1 million / $0.38 | $43.3 million / $0.30 |
| Operating cash flow | $67.4 million | $24.2 million |
| Cash and cash equivalents | $308.0 million | $252.5 million at December 31, 2014 |
| Short-term and long-term investments | $437.0 million and $253.6 million | $416.3 million and $266.8 million at December 31, 2014 |
| Convertible notes | $451.3 million carrying value; $575.0 million principal | 0% notes due November 2018 |
Gross margin improved by 2 percentage points. Subscription gross margin rose to 76% from 73%, while professional services and other gross margin declined to negative 7% from negative 1%. Operating expenses increased 55% to $189.3 million, faster than revenue, including sales and marketing up 59%, research and development up 60%, and general and administrative up 36%. Stock-based compensation nearly doubled to $58.1 million, or 27% of revenue versus 21%.
At quarter-end, current assets were $983.9 million and current liabilities $540.9 million. Cash, cash equivalents and short-term investments totaled $745.0 million; including long-term investments, liquid resources were approximately $998.6 million. Deferred revenue totaled $463.3 million. Operating cash flow benefited from non-cash expenses and working-capital movements, including higher deferred revenue. Investing cash use was $34.3 million, including $26.7 million of property and equipment purchases; financing cash inflow was $29.7 million, primarily from employee stock plans.
Material changes and operating indicators
- Billings increased 48% to $267.8 million. Management calculated billings as revenue plus the change in deferred revenue.
- Revenue growth reflected upsells, renewals and customer growth. Reported customers numbered 2,461 versus 1,914, under a revised customer-count definition; the revised definition reduced the comparable March 2014 count by 281.
- Renewal rate was 97% in both periods. Upsell rate decreased to 32% from 45%; management attributed the decline mainly to a larger renewal ACV base and expected the 2015 rate to be below 2014.
- Customers with ACV above $1 million increased to 168 from 96; Global 2000 customers rose to 545 from 452. Management said new-customer growth was affected by lower sales productivity and an immature new-opportunity pipeline.
- Foreign exchange was a headwind: at prior-year exchange rates, Q1 2015 revenue would have been $13.7 million higher and billings $19.8 million higher. The company recorded a $3.8 million foreign-currency transaction gain, compared with $0.5 million a year earlier.
- Headcount grew to 3,047 from 2,103 a year earlier.
Outlook, commentary and risks
- Management expected a GAAP loss for the remainder of 2015, with stock-based compensation expected to increase in dollars and as a share of revenue. It expected subscription gross margin to remain relatively flat for the rest of the year; operating expenses were expected to rise in dollars, with some expense categories expected to decline or remain relatively flat as a percentage of revenue.
- Management expected professional services and other revenue to grow more slowly than subscription revenue. It anticipated $10.8 million of Knowledge conference revenue and approximately $23.1 million of related sales and marketing expense in Q2 2015.
- Management said existing cash, investments and operating cash generation should cover liquidity needs for at least the next 12 months. Future needs depend on growth, operating results, acquisitions and capital spending.
- Currency strength reduced reported revenue and billings; the company had not hedged transactional foreign-currency exposure, though it was evaluating potential hedging.
- Significant contingencies include patent litigation brought by Hewlett-Packard and BMC Software. In March 2015, the court found four of HP’s eight asserted patent claims invalid; both cases remained ongoing, with unspecified damages sought. The company could not estimate potential losses, and an adverse outcome could be material.
- Other disclosed risks include cybersecurity incidents, service disruptions, intense competition, sales-force productivity and execution, customer renewal and expansion, international operations, and the ability to scale infrastructure. The filing also notes that subscription revenue is recognized over contract terms, so changes in sales may affect results with a lag.
- The February 2015 Intreis acquisition had $1.6 million of consideration, including $1.4 million allocated to goodwill, and was not material to consolidated results. The company also reported a financing obligation associated with its Tel Aviv office building.
Important facts for investors to verify
- Whether subscription growth, renewals and customer expansion sustain billings and deferred-revenue growth, particularly given the lower upsell rate and reported pipeline productivity concerns.
- How much of operating cash flow reflects recurring cash generation versus non-cash compensation and deferred-revenue or other working-capital changes.
- The trajectory of stock-based compensation, GAAP losses, services margins and sales-and-marketing investment.
- The impact of foreign exchange on reported results and whether management adopts hedging.
- Developments in the HP and BMC patent cases, potential exposure and any effects on customers or services.
- The company’s ability to fund growth and meet obligations related to the 2018 notes, including potential cash settlement or repurchase requirements.