ServiceNow, Inc. — Q1 2021 Form 10-Q
Business context and reporting period. Unaudited results for the three months ended March 31, 2021, compared with Q1 2020. ServiceNow sells subscription-based digital workflow software, primarily to large enterprises.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenue | $1.360B | $1.046B | +30% |
| Subscription revenue | $1.293B | $995M | +30% |
| Professional services and other revenue | $67M | $51M | +31% |
| Gross profit / gross margin | $1.061B / 78% | $823M / 79% | Margin down 1 percentage point |
| Operating income | $97M | $49M | +98% |
| Net income / diluted EPS | $82M / $0.41 | $48M / $0.24 | |
| Operating cash flow | $727M | $492M | +48% |
| Free cash flow (non-GAAP) | $620M | $409M | +52% |
| Billings (non-GAAP) | $1.435B | $1.103B | +30% |
At March 31, cash and cash equivalents were $1.821B, short-term investments $1.635B and long-term investments $1.348B. Long-term debt, net, was $1.611B; principal outstanding was $1.635B, including $135M of 2022 convertible notes and $1.5B of 2030 notes. Total liabilities were $5.785B and stockholders’ equity was $3.037B. Non-cancelable remaining performance obligations were $8.8B, with approximately 50% expected to be recognized over the next 12 months.
Material changes and notable items
- Revenue growth was driven by increased purchases from existing customers and customer growth. Digital workflow revenue rose 30% to $1.131B; ITOM revenue rose 28% to $162M.
- Operating income increased as revenue growth outpaced expense growth. Gross margin eased to 78%, including subscription gross margin of 82% versus 84% a year earlier. Professional services remained loss-making, but its gross loss margin improved to 6% from 23%.
- Stock-based compensation rose to $256M from $189M, equal to 19% of revenue versus 18% a year earlier.
- Operating cash flow benefited from higher operating income and customer collections. Investing cash outflow was $437M, including $225M for business combinations, net of cash acquired; financing cash outflow was $124M.
- ServiceNow acquired Element AI for $228M cash in January; acquired technology and goodwill were recorded, and its results were not material to date. It also completed the Intellibot acquisition on April 16, 2021; purchase-price allocation was still under evaluation.
Outlook, risks and contingencies
- Management expected 2021 subscription revenue to rise in absolute dollars, while remaining relatively flat as a share of revenue; professional services revenue was also expected to rise in dollars. No specific full-year revenue or earnings guidance was provided in the filing text.
- Management expected subscription gross margin to decline slightly in 2021, citing costs to move regulated-market customers to public cloud and evolving data-residency requirements. Operating expenses were expected to increase in dollars but remain relatively flat as a percentage of revenue.
- The company said cash, investments and expected operating cash flows should cover liquidity needs for at least the next 12 months. It expected to pay approximately $30M of 2022 note principal in Q2 2021 based on conversion requests received through the filing date; additional conversions could occur.
- COVID-19 could affect customer demand and spending, contract duration, collections, payment terms and sales cycles. Management said the duration and financial effects remained uncertain; the pandemic had not materially affected Q1 tax estimates.
- The company maintained a full valuation allowance on U.S. federal and state deferred tax assets and warned that its effective tax rate could fluctuate significantly. One channel partner represented 13% of accounts receivable at quarter-end; no customer exceeded 10% of revenue.
- Ordinary-course litigation was disclosed, but management did not identify pending proceedings expected to have a material adverse effect. Lease commitments included $340M of undiscounted payments for leases not yet commenced.
Important facts for investors to verify
- Whether subscription growth, RPO conversion and large-customer growth remain durable; customers with ACV above $1M rose to 1,146 from 933 a year earlier.
- How subscription margin and professional-services profitability develop as hosting, data-residency and customer-support costs change.
- The scale and continuing effect of stock-based compensation and potential dilution, including 2022 convertible notes and warrants.
- Cash use for acquisitions, capital expenditures, leases and cash settlement of convertible notes, alongside reported free cash flow.
- COVID-19 effects, foreign-exchange exposure and tax-rate variability; free cash flow and billings are non-GAAP measures and may not be comparable across companies.