ServiceNow, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; filed August 7, 2013. ServiceNow provides cloud-based software for automating enterprise IT operations, sold principally through subscription contracts recognized over their terms.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $102.2 million | $56.8 million | $188.2 million | $104.2 million |
| Subscription revenue | $80.4 million | $46.8 million | $151.9 million | $86.4 million |
| Gross margin | 65% | 60% | 64% | 58% |
| Operating loss | $19.3 million | $9.1 million | $32.3 million | $14.7 million |
| Net loss | $21.4 million | $8.7 million | $34.8 million | $14.4 million |
| Net loss per share | $0.16 | $0.32 | $0.26 | $0.55 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $24.8 million | $23.0 million |
Q2 revenue grew 80% year over year; first-half revenue grew 81%. Subscription revenue was 79% of Q2 revenue. Despite higher gross margin, operating expenses rose faster than revenue: first-half sales and marketing increased 96%, research and development 122%, and general and administrative 108% year over year.
Six-month operating cash flow benefited from $40.6 million of deferred-revenue growth and substantial noncash charges, including $26.9 million of stock-based compensation. Accounts receivable and deferred commissions increased $15.9 million and $20.8 million, respectively.
Financial position and liquidity
- At June 30, cash and cash equivalents were $120.2 million; short- and long-term investments totaled $225.9 million. The company reported $346.1 million of cash, cash equivalents and investments in its fair-value table.
- Total current assets were $376.8 million and current liabilities were $249.2 million. Current deferred revenue was $192.4 million.
- Total liabilities were $274.4 million and stockholders’ equity was $267.9 million. The balance sheet presents no borrowings; the filing does not separately discuss debt facilities.
- Investing activities used $56.4 million in the first half, including $22.2 million of property and equipment purchases. Financing activities provided $33.7 million, primarily from employee stock plans.
- Operating lease commitments totaled $113.8 million, including $9.2 million related to a former San Diego office. Management said available cash, investments and operating cash flow should fund needs for at least 12 months, barring unforeseen circumstances.
Changes, outlook and notable items
- Customer count increased 48% year over year to 1,778. Renewal rates were 94% for Q2 and 95% for the first half, versus 95% and 96% in the comparable 2012 periods. The reported upsell rate declined to 25% for Q2 and 28% for the first half, from 36% and 34%.
- Headcount grew to 1,443 from 882 a year earlier. Management expects operating expenses to rise in dollar terms, generally declining as a percentage of revenue; it expects subscription and professional-services gross margins to decline slightly in the near term as it invests in infrastructure and service personnel. No specific revenue or earnings guidance is provided.
- The Knowledge conference contributed $5 million of first-half revenue and materially supported professional-services-and-other gross margin. Management noted that conference costs are recorded in sales and marketing.
- On July 1, 2013, ServiceNow acquired Mirror42 B.V. for $13.3 million in cash; purchase accounting was pending. Q2 general and administrative expense included $0.6 million of related transaction costs.
- The filing identifies recent availability, performance and functionality issues experienced by a few large customers at scale. Key risks include service disruption and security incidents, scaling infrastructure, rapid growth and hiring, competition and pricing pressure, customer renewals, international and foreign-exchange exposure, and execution of acquisitions. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
- ServiceNow reported an immaterial $3.0 million correction involving securities misclassified as short-term investments rather than cash equivalents at December 31, 2012. The filing says no investment impairments were considered other-than-temporary. Management also disclosed a full valuation allowance on federal and state deferred tax assets.
Most important facts for investors to verify
- Whether customer growth, renewals and upsells sustain subscription growth, particularly given the lower reported upsell rate.
- Whether infrastructure investment and customer-scale performance issues affect service reliability, subscription gross margin or customer retention.
- How quickly operating expenses and stock-based compensation grow relative to revenue, and whether losses narrow as management expects expenses to decline as a share of revenue.
- Whether positive operating cash flow remains sustainable given its reliance on deferred-revenue growth and noncash adjustments.
- The completed accounting, integration costs and business contribution of the Mirror42 acquisition, along with the company’s substantial lease commitments.