10-QPeriod: Q3 FY2012

ServiceNow, Inc. Quarterly Report for Q3 Ended Sep 30, 2012

Filed October 31, 2012For Securities:NOW

Summary

This filing from ServiceNow, Inc. (NOW) for the quarter ending September 29, 2012, provides crucial insights for investors navigating the company's transition as a newly public entity. As an "emerging growth company," ServiceNow is utilizing certain exemptions from reporting requirements, which could impact investor perception and market liquidity. A significant focus is placed on the company's ongoing efforts to remediate material weaknesses identified in its internal control over financial reporting, stemming from past resource constraints as a private company. While the company has hired new finance and accounting personnel and engaged external advisors, the effectiveness of these measures remains a key point of attention, with the potential for material misstatements or adverse opinions if not fully resolved. Investors should also note that ServiceNow has no current plans to pay dividends, meaning returns will primarily be driven by stock appreciation.

Financial Highlights

47 data points
Beta

Revenue

$64.34M

57.1% Gross Margin

Net Income

-$13.05M

-20.3% Net Margin

EPS (Diluted)

$-0.02

Total Assets

$382.20M

Cash & Equivalents

$116.98M

Free Cash Flow

-$2.85M

Financial Statements
Beta
Revenue$64.34M
Cost of Revenue$27.57M
Gross Profit$36.77M
R&D Expenses$10.78M
Operating Expenses$50.12M
Operating Income-$13.35M
Net Income-$13.05M
EPS (Basic)$-0.02
EPS (Diluted)$-0.02
Shares Outstanding (Basic)588.49M
Shares Outstanding (Diluted)588.49M

Key Highlights

  • 1ServiceNow is operating as an "emerging growth company" and is leveraging exemptions from certain reporting requirements, which could affect market perception and liquidity.
  • 2The company is actively working to remediate identified material weaknesses in its internal control over financial reporting, which are attributed to past staffing limitations.
  • 3Significant investments have been made in hiring experienced finance and accounting personnel and engaging external consultants to strengthen internal controls.
  • 4The potential for future material weaknesses or the inability to fully remediate existing ones could lead to inaccurate financial reporting or an adverse audit opinion.
  • 5ServiceNow's management has broad discretion over the use of IPO proceeds, with a significant portion ($83.2 million as of quarter-end) still pending strategic deployment.
  • 6The company currently has no intention of paying cash dividends, with all future earnings expected to be retained for business development and expansion.
  • 7A substantial percentage of outstanding stock (approximately 77% as of September 30, 2012) is held by directors, officers, and principal stockholders, granting them significant control over corporate matters.

Frequently Asked Questions

As an 'emerging growth company,' ServiceNow can take advantage of exemptions from various reporting requirements, such as not needing auditor attestation for internal controls (Section 404b of SOX) and having reduced executive compensation disclosure. While this can lower compliance costs, it may also make investors perceive the stock as less attractive, potentially leading to a less active trading market and increased stock price volatility.

The company identified material weaknesses related to accounting and reporting control processes, account review, complex judgments/estimates, income tax provisions, and the accounting for significant contracts. These arose from a historical lack of sufficient accounting personnel with adequate GAAP knowledge. ServiceNow is addressing this by hiring experienced finance and accounting staff, including a new CFO and VP of Finance, as well as engaging third-party tax and internal audit consultants.

ServiceNow completed its IPO in June 2012, raising net proceeds of approximately $169.7 million. As of September 30, 2012, $83.2 million of these proceeds have been used. The remaining funds are intended to be invested in short-term, interest-bearing, investment-grade securities pending their deployment for business operations and expansion. Management has broad discretion in their application.

No, ServiceNow has historically not paid cash dividends and does not anticipate paying any in the foreseeable future. The company intends to retain all future earnings for the development, operation, and expansion of its business. Consequently, any returns to stockholders will be limited to potential increases in the stock's market value.