Servicenow, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with the three months ended March 31, 2022 unless noted. ServiceNow provides enterprise workflow software and related services through its Now Platform. Financial figures are in U.S. dollars, millions, except per-share data and percentages.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenue | $2,096 | $1,722 | +22% |
| Subscription revenue | $2,024 | $1,631 | +24% |
| Professional services and other revenue | $72 | $91 | -21% |
| Gross profit / gross margin | $1,658 / 79% | $1,353 / 79% | +23% profit |
| Operating income | $144 | $87 | +66% |
| Net income | $150 | $75 | +100% |
| Diluted EPS | $0.73 | $0.37 | +97% |
| Cash from operations | $902 | $863 | +5% |
| Free cash flow (non-GAAP) | $737 | $770 | -4% |
Subscription gross margin was 83% in both periods. Professional services and other gross margin was negative 17%, versus negative 3%, as revenue declined faster than related costs. Operating expenses rose 20% to $1,514 million, including sales and marketing of $823 million (+22%), research and development of $492 million (+19%), and general and administrative of $199 million (+11%). Stock-based compensation was $381 million, or 18% of revenue, versus $325 million, or 19%.
Subscription growth was reported across digital workflow products ($1,790 million, +24%) and ITOM products ($234 million, +23%). Revenue outside North America was 36% of total, versus 35%. Management said stronger U.S. dollar exchange rates reduced Q1 subscription revenue by $44 million compared with translation at prior-year exchange rates; they also reduced cost of revenue and sales and marketing expense by $9 million and $15 million, respectively.
Liquidity, cash flow and debt
At March 31, 2023, cash and cash equivalents were $1,852 million and short- and long-term investments totaled $5,301 million, or approximately $7.2 billion in cash and investments. Current assets were $6,734 million and current liabilities were $5,761 million. Long-term debt, net, was $1,486 million, unchanged from year-end; the notes have $1.5 billion principal due in 2030 and a 1.40% fixed coupon. Operating cash flow was $902 million; capital expenditures were $165 million, resulting in reported free cash flow of $737 million. Cash, cash equivalents and restricted cash increased by $384 million during the quarter.
Net cash used in investing was $524 million, primarily reflecting purchases of investments and property and equipment. The company stated that cash flows from operations and cash, cash equivalents and investments should meet liquidity needs for at least the next 12 months. It reported no liquidity impact from recent bank failures and said its cash is distributed among several large financial institutions.
Material changes, outlook and risks
- Remaining performance obligations were $14.0 billion, with approximately 50% expected to be recognized over the next 12 months. RPO increased 22% year over year; current RPO increased 23%. Customers with ACV above $1 million numbered 1,682, up from 1,403. Renewal rate was 98% in both periods.
- Management expects 2023 subscription revenue to rise in absolute dollars and slightly as a share of revenue; professional services and other revenue to decline; subscription costs to rise and subscription gross margin to decrease slightly. It expects operating expenses to increase in dollars, with sales and marketing declining slightly as a share of revenue, and R&D and G&A remaining relatively flat as a share of revenue. No precise full-year revenue or earnings guidance is provided in this filing.
- The U.S. federal and state deferred-tax-asset valuation allowance remained in place. Management said sustained U.S. profitability could provide sufficient evidence to release it before Q4 2023; any release could reduce income tax expense by an estimated $1.0 billion to $1.2 billion in the fiscal year recorded. Timing and amount are uncertain.
- Macroeconomic uncertainty, inflation, rising interest rates, foreign-exchange movements and the Russia-Ukraine conflict were identified as factors to monitor. Management did not expect a material impact from the conflict at the time of filing but warned worsening disruption could affect results. Available-for-sale securities had $59 million of gross unrealized losses at quarter-end; management did not consider the decline other-than-temporary and reported no material credit impairment.
- The company disclosed ordinary-course litigation and customer indemnification obligations, but said it was not party to legal proceedings expected to have a material adverse effect. It also disclosed a non-cancellable $500 million, five-year Microsoft cloud-services commitment entered into in 2022. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting during the quarter.
Investor verification points
- Check subsequent RPO and current RPO growth, renewal rate, and customer expansion against the reported 22% and 23% growth and 98% renewal rate.
- Track whether subscription growth and margins meet management’s directional 2023 outlook, particularly infrastructure costs and regulated-market support.
- Review free cash flow conversion: operating cash flow increased, but free cash flow declined 4% as capital expenditures rose.
- Assess the timing and evidence for any U.S. valuation-allowance release; the potential $1.0 billion to $1.2 billion tax benefit is conditional, not guidance or a recorded gain.
- Monitor stock-based compensation and dilution: Q1 expense was $381 million, and 8.4 million RSUs were outstanding at quarter-end.
- Review investment portfolio valuation and liquidity, foreign-exchange exposure, lease commitments, and the $1.5 billion 2030 note maturity.