ServiceNow, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013, compared with the three months ended March 31, 2012. ServiceNow provides cloud-based software to automate enterprise IT operations, primarily through subscriptions billed annually in advance.
Key financial metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total revenue | $85.9 million | $47.4 million | +81% |
| Subscription revenue | $71.6 million | $39.5 million | +81% |
| Professional services and other revenue | $14.4 million | $7.9 million | +82% |
| Gross profit | $53.6 million | $26.2 million | +105% |
| Gross margin | 63% | 55% | +8 percentage points |
| Operating expenses | $66.5 million | $31.8 million | +109% |
| Operating loss | $(12.9) million | $(5.6) million | Loss widened |
| Net loss | $(13.4) million | $(5.6) million | Loss widened |
| Net loss per share, diluted | $(0.10) | $(0.23) | — |
| Cash from operating activities | $15.0 million | $16.1 million | Down $1.1 million |
| Capital expenditures | $10.4 million | $8.6 million | Up $1.9 million |
At March 31, 2013, cash and cash equivalents were $144.8 million and short-term investments were $194.1 million; total current assets were $447.2 million and current liabilities were $229.1 million. Deferred revenue totaled $194.8 million. The balance sheet reports no borrowings or debt line item. Total liabilities were $252.0 million and stockholders’ equity was $263.9 million. Operating cash flow less capital expenditures was approximately $4.6 million, versus $7.5 million in Q1 2012.
Material changes and business performance
- Revenue growth reflected new customers, renewals and expansion sales to existing customers. Customer count rose 53% to 1,640 from 1,074.
- Management reported a 96% renewal rate in both periods and an upsell rate of 33% in Q1 2013 versus 32% in Q1 2012. Trailing-twelve-month renewal and upsell rates were 96% and 31%, respectively.
- Subscription gross margin improved to 74% from 72%. Professional services gross margin improved to 3% from negative 30%, following pricing and delivery-model changes.
- Operating expenses rose substantially as the company expanded sales and marketing, research and development, administration, staffing and infrastructure. Headcount increased to 1,269 from 728 year over year.
- Stock-based compensation was $12.0 million, compared with $3.9 million a year earlier. The accumulated deficit was $118.8 million.
Outlook, risks and unusual items
- Management said cash, investments and operating cash flows were expected to fund operations for at least the next 12 months, barring unforeseen circumstances. It expects operating expenses to rise as it invests in growth and stated it did not expect to be profitable for the foreseeable future.
- For Q2 2013, management expected subscription gross margin of 72%–73% and professional services and other gross margin of 17%–19%. It expected approximately $4.0 million of Knowledge conference revenue and $8.0–$9.0 million of related sales and marketing expenses. Excluding Knowledge, professional-services gross profit was expected to decrease slightly from Q1. The filing does not provide clear overall revenue or earnings guidance.
- Principal risks include service availability, performance and security; scaling data-center capacity and operations; intense competition and pricing pressure; customer renewal and sales-cycle uncertainty; international and foreign-currency exposure; and potential difficulty managing rapid growth. A few large customers had recently experienced reduced availability, performance or functionality at scale.
- Operating leases totaled $113.8 million in future minimum payments, including $9.6 million related to a former San Diego office. The company disclosed ordinary-course litigation but no pending matter it believed would have a material adverse effect; customer contracts include intellectual-property indemnities.
- The cash-flow statement reflects a $3.0 million correction of an immaterial prior-period classification of securities as short-term investments rather than cash equivalents. Management said disclosure controls were effective; it also described previously identified material weaknesses as believed remediated, while noting required Section 404 documentation and testing were not complete.
Most important facts for investors to verify
- Whether subscription growth, customer additions, renewal rates and upsells remain strong, and how much deferred revenue converts to recognized revenue.
- Whether infrastructure investment supports service reliability and customer scale without undermining subscription margins or operating cash flow.
- Whether expense growth and stock-based compensation moderate enough to improve the path to profitability.
- Progress on internal-control documentation and testing, and any developments in service disruptions, security, indemnity or legal exposures.
- Future cash requirements, including capital spending and the company’s substantial operating lease commitments.