ServiceNow, Inc. — Q2 2015 Form 10-Q
Business context and reporting period. ServiceNow provides cloud-based enterprise service-management software, primarily through annual subscriptions. This unaudited filing covers the quarter and six months ended June 30, 2015; comparisons are with the corresponding 2014 periods. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $246.7M | $166.8M | $458.7M | $305.8M |
| Subscription revenue | $200.5M | $132.7M | $380.4M | $250.1M |
| Gross profit / margin | $167.0M / 68% | $107.8M / 65% | $302.1M / 66% | $193.8M / 63% |
| Operating loss | ($53.2M) | ($44.5M) | ($107.5M) | ($80.7M) |
| Net loss | ($61.9M) | ($50.4M) | ($120.0M) | ($93.7M) |
| Net loss per share | ($0.40) | ($0.35) | ($0.78) | ($0.65) |
- Growth and operating trends: Q2 revenue increased 48% year over year; first-half revenue grew 50%. Subscription revenue grew 51% in Q2 and 52% in the first half. Billings, a company-defined non-GAAP measure, increased 50% to $281.4M in Q2 and 49% to $549.2M for the first half.
- Cash flow: First-half operating cash flow was $147.0M, versus $66.3M in 2014. Investing used $99.3M, including $41.8M of property and equipment purchases and a $10.0M strategic investment; financing provided $29.8M. Cash and cash equivalents rose to $325.4M from $252.5M at year-end.
- Liquidity and debt: Cash, cash equivalents and short-term investments totaled $722.5M; long-term investments were $333.3M. Convertible notes had a $459.0M net carrying amount against $575.0M principal, are zero-coupon and mature in November 2018. Management said available resources and operating cash flow should meet needs for at least 12 months.
- Other balance-sheet measures: Total assets were $1.563B and total liabilities $1.100B at June 30, 2015. Current liabilities included $487.6M of deferred revenue. Stockholders’ equity was $463.1M.
Material changes versus prior comparable periods
- Gross margin improved to 68% in Q2 and 66% for the first half, from 65% and 63%, respectively. Subscription gross margin increased to 77% from 75% in Q2 and to 77% from 74% for the first half. First-half professional-services-and-other gross margin declined to 12% from 15%.
- Operating expenses grew substantially: Q2 sales and marketing rose 49%, research and development 50%, and general and administrative 22%. First-half stock-based compensation was $124.4M, up 86% year over year, equal to 27% of revenue versus 22%.
- First-half operating cash flow more than doubled, helped by noncash adjustments and working-capital changes, including higher deferred revenue associated with increased sales. Capital expenditures increased to $41.8M from $27.4M.
- The stronger U.S. dollar reduced reported revenue: at prior-year exchange rates, Q2 revenue would have been approximately $17.7M higher and first-half revenue $31.4M higher. Management reported 97% renewal rates in both Q2 and the first half; Q2 upsell rate was 43%, compared with 40% (recast under a revised customer definition).
Outlook, commentary, risks and unusual items
- No specific numerical revenue or earnings guidance is provided in the supplied filing text. Management expects a GAAP loss for the remainder of 2015 and continued growth in stock-based compensation. It expects operating expenses to rise in absolute dollars; subscription gross margin was expected to remain relatively flat for the rest of the year.
- Management cited continued investment in sales capacity, product development, data centers and international expansion. Employee headcount increased to 3,187 from 2,328 a year earlier. The company expects professional-services revenue to grow more slowly than subscription revenue.
- The annual Knowledge conference contributed $10.9M of Q2 revenue, with $21.0M of related sales-and-marketing expense. Conference revenue and expense are concentrated in the quarter in which the event occurs.
- Two patent cases pose potentially material but unquantifiable exposure: Hewlett-Packard’s case (four of eight asserted patent claims were ruled invalid at summary judgment) and BMC Software’s case. The company says outcomes and any potential losses cannot be reasonably estimated.
- Key stated risks include cyberattacks or service outages, intense competition, ability to retain and expand customers, scaling infrastructure, foreign-exchange movements, international regulatory and data-privacy requirements, and the possibility that growth investments will not produce sufficient returns. The company had no foreign-currency hedging program at the time.
- The IRS examination for tax years 2011 is under protest; years 2005–2014 remain open to examination in most jurisdictions. Management said it had reserved for adjustments but could not estimate the full range of possible changes in unrecognized tax benefits.
Important facts for investors to verify
- Whether subscription growth, billings and customer expansion continue, and how reported growth is affected by currency movements and the changed customer-count definition.
- Whether operating cash flow remains strong after considering deferred-revenue timing, capital spending and the large noncash stock-based compensation expense.
- Trends in operating losses, stock-based compensation and share dilution; 49.9M shares were reserved for future issuance at June 30, 2015.
- Liquidity available for operating needs and potential cash settlement obligations under the 2018 convertible notes, including conversion or fundamental-change provisions.
- Developments and potential financial impact of the HP and BMC litigation, as well as tax examinations and other contingencies.