ServiceNow, Inc. — Q1 2022 Form 10-Q
Business context and period: The filing covers the three months ended March 31, 2022, compared with the same quarter of 2021. ServiceNow sells enterprise workflow software through its Now Platform, primarily as subscriptions.
Financial results and position
| Metric | Q1 2022 | Q1 2021 / prior date |
|---|---|---|
| Total revenue | $1.722 billion | $1.360 billion; up 27% |
| Subscription revenue | $1.631 billion | $1.293 billion; up 26% |
| Professional services and other revenue | $91 million | $67 million; up 36% |
| Gross profit / gross margin | $1.353 billion / 79% | $1.061 billion / 78% |
| Operating income / margin | $87 million / approximately 5% | $97 million / approximately 7% |
| Net income | $75 million; diluted EPS $0.37 | $82 million; diluted EPS $0.41 |
| Operating cash flow | $863 million | $727 million |
| Free cash flow, non-GAAP | $770 million | $620 million |
| Cash and cash equivalents | $2.252 billion | $1.728 billion at Dec. 31, 2021 |
| Cash, cash equivalents and investments | $5.498 billion | — |
| Total debt, net | $1.572 billion, including $88 million current | $1.576 billion at Dec. 31, 2021 |
Revenue growth reflected increased purchases by new and existing customers. Subscription revenue included $77 million recognized upfront from self-hosted software delivery. Digital workflow revenue grew 27% to $1.440 billion; ITOM revenue grew 18% to $191 million. North America contributed $1.116 billion, EMEA $434 million and Asia Pacific and other $172 million.
Changes and operating trends
- Net income fell about 9% year over year despite 27% revenue growth. Operating expenses rose 31% to $1.266 billion, led by sales and marketing (up 28%), research and development (up 32%) and general and administrative (up 42%).
- Stock-based compensation increased 27% to $325 million, equal to 19% of revenue.
- Subscription gross margin improved to 83% from 82%; professional services gross loss narrowed to 3% from 6%. Total gross margin rose to 79% from 78%.
- RPO was $11.5 billion, with approximately 50% expected to be recognized in the following 12 months. RPO and current RPO grew 30% and 29%, respectively, year over year. Customers with ACV above $1 million increased to 1,401 from 1,131; renewal rate was 98% versus 97%.
- Cash from operations increased primarily due to higher collections. Investing cash outflow was $280 million, including a $100 million investment in Celonis; financing cash outflow was $51 million.
Outlook, commentary and risks
- Management expected 2022 subscription revenue and professional services revenue to increase in absolute dollars, while each remained relatively flat as a share of revenue compared with 2021. No specific full-year revenue target is stated in the provided filing text.
- Management expected operating cash flows to remain positive in 2022 and said cash, investments and operating cash flows should meet liquidity needs for at least the next 12 months.
- The remaining $88 million principal of the 2022 convertible notes was due June 1, 2022, and management expected to settle it in cash. The $1.5 billion 2030 Notes mature September 1, 2030.
- A useful-life estimate change for data-center equipment, from three to four years, reduced Q1 depreciation expense by $21 million and increased net income by $20 million, or $0.10 per share. This is a material comparability item when assessing reported earnings.
- The stronger U.S. dollar reduced reported subscription revenue by an estimated $35 million versus prior-year exchange rates; it also lowered reported cost of revenue and sales and marketing expense by $6 million and $9 million, respectively.
- Management cited uncertainty from COVID-19, the Russia-Ukraine conflict, inflation and broader economic conditions. The company said Russia-related revenue and receivables were immaterial, but escalation or wider sanctions could affect customers and business opportunities. Cybersecurity, service disruption, data protection and third-party supply-chain attacks are highlighted risks.
- Unrealized investment losses increased; management did not consider the available-for-sale debt-security declines other-than-temporary and said credit-related impairment was not material. One channel partner represented 10% of receivables at quarter-end.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. It said pending legal matters were not expected to have a material adverse effect.
Important facts for investors to verify
- How much reported earnings growth or decline reflects the $20 million depreciation-estimate benefit and the substantial stock-based compensation expense.
- Whether RPO growth converts into revenue as expected, considering foreign exchange, contract duration, renewal timing and self-hosted offerings.
- The cash settlement and final share effects of the 2022 Notes and remaining 2022 Warrants, which could be dilutive depending on share prices.
- Whether subscription and total gross margins remain consistent with management’s expectations as data-center, regulated-market and customer-support costs rise.
- Potential effects of cybersecurity incidents, macroeconomic conditions, currency movements and geopolitical developments on renewals, customer spending and operating costs.