Business context and reporting period
ServiceNow, Inc. filed this Form 10-K for the fiscal year ended December 31, 2022. The company sells subscription-based enterprise workflow software through its Now Platform, primarily to large organizations; it reported approximately 7,700 enterprise customers. The filing provides annual results, not a separate fourth-quarter financial summary.
Financial performance and position
| Metric | FY 2022 | FY 2021 |
|---|---|---|
| Revenue | $7.245 billion | $5.896 billion |
| Subscription revenue | $6.891 billion | $5.573 billion |
| Gross profit / margin | $5.672 billion / 78% | $4.543 billion / 77% |
| Operating income / margin | $355 million / 4.9% | $257 million / 4.4% |
| Net income | $325 million | $230 million |
| Diluted EPS | $1.60 | $1.13 |
| Operating cash flow | $2.723 billion | $2.191 billion |
| Free cash flow (non-GAAP) | $2.173 billion | $1.799 billion |
Revenue grew 23%; subscription revenue grew 24%. Digital workflow subscription revenue was $6.077 billion, up 24%, and IT Operations Management subscription revenue was $814 million, up 18%. Subscription gross margin improved to 83% from 82%; professional services and other had a gross loss margin of 9%, versus 2% in 2021.
At year-end, cash and cash equivalents were $1.470 billion; cash, cash equivalents and short- and long-term investments totaled $6.4 billion. Total current assets were $6.654 billion and current liabilities $6.005 billion. Debt was $1.486 billion, principally the 1.40% notes due September 2030; the 2022 convertible notes were fully settled at maturity. Remaining performance obligations were $14 billion, up 22%, with 49% expected to be recognized over the next 12 months. Renewal rate was 98% in both years.
Material changes versus the prior year
- Net income rose to $325 million from $230 million; operating income increased to $355 million from $257 million.
- Operating cash flow increased $532 million. Investing cash outflow rose to $2.583 billion from $1.607 billion, primarily reflecting greater net investment purchases, capital spending and non-marketable investments; financing cash outflow was $344 million.
- Other income, net, increased to $71 million from $20 million, mainly due to higher investment income as interest rates rose. The effective tax rate increased to 19% from 8%.
- Stock-based compensation increased to $1.401 billion from $1.131 billion, equal to 19% of revenue in both years.
Outlook, commentary and risks
Management expected 2023 subscription revenue to increase in absolute dollars and slightly as a share of revenue; professional services and other revenue was expected to decrease. It forecast subscription costs to rise slightly as a percentage of revenue and subscription gross margin to decline slightly. The filing does not provide a specific numerical revenue or earnings forecast. Management expected positive operating cash flow in 2023 and said available cash, investments and operating cash flows should cover liquidity needs for at least 12 months.
A significant accounting estimate change extended the estimated useful life of data-center equipment from three to four years, reducing 2022 depreciation expense by $81 million and increasing net income by $76 million, or $0.38 per basic share and $0.37 per diluted share. A full valuation allowance remained against U.S. deferred tax assets; management said a release could become possible within 12 months if sufficient evidence of sustained profitability emerges. The company also reported $1.271 billion in non-cancelable purchase commitments, including a five-year $500 million Microsoft cloud-services agreement, and $895 million of undiscounted operating lease obligations.
Key risks include intense competition, economic weakness affecting customer spending and renewals, cybersecurity or service disruptions, data privacy and residency regulation, foreign-exchange exposure, talent retention, acquisition integration, and public-sector procurement requirements. Management said the Russia-Ukraine conflict had not materially affected results to date but could do so if it worsened. The auditor issued an unqualified opinion on the financial statements and internal controls; subscription revenue recognition for contracts with multiple performance obligations was identified as a critical audit matter. No pending legal proceeding was identified as likely to have a material adverse effect.
Important facts for investors to verify
- Whether subscription growth and the $14 billion RPO translate into recognized revenue at the expected pace.
- The effect of the useful-life estimate change on reported profitability and the sustainability of margins as data-center costs rise.
- Stock-based compensation, share issuance and dilution trends.
- Cash and investment liquidity, investment fair-value losses, contractual commitments and the 2030 debt obligation.
- Developments in U.S. tax valuation allowances, foreign-exchange impacts, cybersecurity, and privacy or data-residency requirements.