01—Abstract
Summary
Summary of the 10-K filed March 8, 2013. Cited figures are marked; the original filing is the authoritative source.
ServiceNow's first annual report as a public company (fiscal year ended December 31, 2012) shows a fast-growing cloud IT-automation SaaS business that is not yet profitable.
Total revenue rose 90% to $243.7 milliona, driven by subscription revenue up 84% to $204.5 million. Customers grew 55% to 1,512, the renewal rate held at 97%, and backlog reached roughly $379 million, up from $210 million. Investors should weigh this growth against a net loss of $37.3 million, an operating loss of $37.6 million, and a GAAP subscription gross margin that fell from 78% to 69% as the company moved from managed to co-location data centers.
The balance sheet strengthened materially after the June 2012 IPO ($18b/share, about $169.8 million net to the company) and the November 2012 follow-on, which added about $51.0 million net to the company. Cash and cash equivalents were $119.0 million, plus $195.7 million in short-term investments, and stockholders' equity rose to $243.4 million from a deficit of $57.4 million. Operating cash flow was positive at $48.8 million, though capital expenditures of $42.1 million meant free cash flow was modest.
Management expects the company to keep investing heavily in sales, R&D, and infrastructure, so it does not expect to be profitable in the foreseeable future. Key risks include the company's history of service outages affecting large customers, lengthening enterprise sales cycles, competition from BMC, CA, HP, and IBM, and material weaknesses in internal control that management says have been remediated but not yet fully tested under SOX 404.
Concentration of ownership is also notable: insiders and affiliates hold about 42%c of voting stock, including roughly 18% tied to Sequoia Capital and 14% to JMI Equity. The company is an emerging growth company, and it expects to lose that status at the end of 2013.
02—Key points
Key Highlights
- Total revenue grew 90% to $243.7 million in 2012 from $128.1 million in 2011, with subscription revenue up 84% to $204.5 million (84% of total revenue).
- Net loss widened to $37.3 million in 2012 from $6.7 million in the six-month transition period of 2011, and the accumulated deficit reached $105.5 million.
- Subscription gross margin declined to 69% from 78% as the company transitioned to co-location data centers. Total gross margin was 57%, versus 64% in 2011.
- Customer count rose 55% to 1,512, the renewal rate was 97%, and backlog grew 81% to about $379 million.
- Balance sheet strengthened: cash and equivalents of $119.0 million plus $195.7 million in short-term investments, and stockholders' equity of $243.4 million after the IPO and follow-on offering.
- Operating cash flow was $48.8 million, but capex of $42.1 million, mainly for data center infrastructure, limits near-term free cash flow.
- Insiders and affiliates control about 42% of voting stock (Sequoia about 18%, JMI Equity about 14%), and management reports material weaknesses in internal control have been remediated but not yet fully tested under SOX 404.
03—One dollar
Follow one dollar
For each $1.00 of revenue in FY2012, ServiceNow lost $0.15.
- Revenue$243.7M100.0%
- Cost of revenue−$104.0M42.7%
- Gross profit$139.7M57.3%
- Operating costs−$177.3M72.7%
- Operating income−$37.6M15.4%
- Interest, other & tax$236,0000.1%
- Net income−$37.3M15.3%
04—Financials
Financial Highlights
Figures from 10-KFY2012filed March 8, 2013Financial Statements
FY2012 against FY2011
| Line item | FY2012FY2011 | Change |
|---|---|---|
| Revenue | $243.71M$92.64M | +163.1% |
| Cost of Revenue | $104.01M$31.57M | +229.4% |
| Gross Profit | $139.70M$61.07M | +128.8% |
| R&D Expenses | $39.33M$7.00M | +461.6% |
| Operating Expenses | $177.29M$50.51M | +251.0% |
| Operating Income | -$37.58M$10.56M | −455.9% |
| Net Income | -$37.35M$9.83M | −479.9% |
| EPS (Basic) | $-0.10$0.02 | −666.7% |
| EPS (Diluted) | $-0.10$0.02 | −737.5% |
| Shares Outstanding (Basic) | 369.54M90.82M | +306.9% |
| Shares Outstanding (Diluted) | 369.54M140.48M | +163.1% |
05—Questions
Frequently Asked Questions
Is ServiceNow profitable, and when does management expect to be?
No. ServiceNow reported a 2012 net loss of $37.3 million and an operating loss of $37.6 million. Management does not expect to be profitable in the foreseeable future because it plans to keep investing in sales, R&D, cloud infrastructure, and international expansion. It also says revenue growth will likely decelerate as the base grows larger.
How fast is the business growing, and what drives it?
Revenue grew 90% in 2012 and subscription revenue grew 84%. Growth came from new customers (34% of the subscription increase) and upsells to existing customers (66%). Customer count rose 55% to 1,512, average revenue per customer increased to about $190,000 from about $157,000, and headcount rose 79% to 1,077 to support the expansion.
What are the main risks to investors?
Key risks include service outages and defects that could trigger customer credits and churn (some large customers saw reduced availability in 2012), long and unpredictable enterprise sales cycles of six to nine months or more, intense competition from larger vendors such as BMC, CA, HP, and IBM, and the need to scale data center capacity without eroding margins. Additional risks include ongoing SOX compliance work following material weaknesses, concentrated insider ownership, and potential stock price volatility (the stock traded between $22.62 and $41.77 through February 2013).
How is the company funded, and does it need more capital?
The company says its current cash, cash equivalents, short-term investments, and operating cash flow are sufficient for at least the next 12 months. The IPO in June 2012 raised about $169.8 million net, and the November 2012 follow-on raised about $51.0 million net for the company. Management noted that it could raise additional funds if needed, and that it may accelerate investment using proceeds from its offerings.
06—Continue