ServiceNow, Inc. — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. The filing is an annual report, not a standalone fourth-quarter filing; it also provides quarterly results. ServiceNow sells cloud-based enterprise service-management subscriptions and related professional services.
Financial and operating highlights
| Metric | FY 2014 | FY 2013 | Change |
|---|---|---|---|
| Revenue | $682.6 million | $424.7 million | +61% |
| Subscription revenue | $567.2 million | $349.8 million | +62% |
| Gross profit / margin | $433.8 million / 63% | $269.4 million / 63% | Margin unchanged |
| Operating loss | $151.8 million | $66.3 million | Loss widened |
| Net loss | $179.4 million | $73.7 million | Loss widened |
| Operating cash flow | $138.9 million | $81.7 million | Increased |
Fourth-quarter revenue was $198.0 million versus $125.2 million in the comparable 2013 quarter; quarterly net loss was $44.7 million versus $24.2 million. Subscription revenue represented 83% of FY 2014 revenue. Subscription gross margin held at 75%, while professional services and other gross margin fell to 8% from 10%.
Cash and cash equivalents were $252.5 million at year-end, with $416.3 million of short-term and $266.8 million of long-term investments. The company reported $668.8 million in cash and cash equivalents plus short-term investments. Working capital, excluding deferred revenue, was $809.7 million. Convertible senior notes had $575.0 million principal and a $443.8 million net carrying value; the notes bear no coupon and mature in 2018. Cash used in investing was $316.9 million, including $99.8 million for acquisitions and $54.4 million for property and equipment. Cash provided by financing was $70.8 million.
Growth, spending, and changes from prior year
- Customer count rose to 2,725 from 2,061; customers with annual contract value above $1 million increased to 129 from 67. Renewal rate was 97%, and upsell rate improved to 36% from 31%.
- Operating expenses grew 74% to $585.6 million, driven by expansion in sales, research and development, and administration. Headcount increased to 2,826 from 1,830.
- Stock-based compensation more than doubled to $154.3 million, or 23% of revenue, from $65.6 million, or 15% of revenue.
- Interest and other expense increased to $23.7 million, principally reflecting $29.1 million of non-cash debt discount and issuance-cost amortization on the convertible notes.
- Revenue outside North America was 32% of total. Backlog, defined by the company as future amounts to be invoiced under existing agreements and excluding deferred revenue, rose to approximately $956 million from $608 million.
Outlook, risks, and unusual items
- Management expected a GAAP loss in 2015, with higher stock-based compensation and other expenses. It expected subscription gross margin to improve slightly and professional-services gross margin to remain relatively flat; sales and marketing and R&D were expected to increase in dollars.
- Management said cash, investments, and operating cash generation should cover anticipated liquidity needs for at least 12 months. It expects continued investment in data centers, hiring, international expansion, and office facilities. The 10-K does not provide a clear numerical revenue forecast.
- Neebula Systems was acquired in July 2014 for approximately $100 million in cash, adding IT operations-management technology. Acquisition accounting added substantial goodwill and intangible assets.
- HP and BMC filed patent-infringement lawsuits seeking unspecified damages and injunctions. The company said outcomes were uncertain, could be material, and that it could not reasonably estimate potential losses.
- Key risks include service outages and cybersecurity incidents, scaling and infrastructure demands, competition and pricing pressure, customer renewals and upsells, international and currency exposure, and continued losses despite rapid growth. The company did not hedge foreign-currency transactions at year-end.
- Operating lease commitments totaled approximately $283.6 million before sublease income; the new Santa Clara office lease represented approximately $151.1 million of minimum payments over its initial term.
Most important facts for investors to verify
- Whether growth in subscription revenue, customer expansion, renewal rates, and backlog converts into sustained cash generation and eventual GAAP profitability.
- How much of the widening loss reflects non-cash stock compensation and note-accounting charges, and how those costs trend in 2015.
- The liquidity and repayment or conversion implications of the $575 million notes, including the company’s intended cash settlement of principal.
- Developments and potential financial exposure in the HP and BMC patent cases, which had no estimable loss range in the filing.
- Execution and returns on the Neebula acquisition, international expansion, infrastructure spending, and significant office-lease commitments.