10-QPeriod: Q2 FY2013

ServiceNow, Inc. Quarterly Report for Q2 Ended Jun 30, 2013

Filed August 7, 2013For Securities:NOW

Summary

This filing covers ServiceNow's (NOW) performance and operational status for the period ending June 29, 2013. As an "emerging growth company" at the time, ServiceNow highlighted its ability to leverage certain regulatory exemptions, though it irrevocably elected to adopt new accounting standards promptly. The company detailed significant investments in its finance and accounting teams and internal controls to address past material weaknesses, expressing confidence in their remediation while acknowledging the ongoing compliance burdens of being a public company. ServiceNow also discussed its strategy of potential acquisitions and investments, warning investors about potential integration challenges, dilution, and the diversion of management resources. The company reiterated its focus on reinvesting earnings for growth, stating no intention to pay dividends, with shareholder returns primarily dependent on stock appreciation. Finally, it noted the volatility of its stock price, influenced by various factors including operating results and market sentiment, and acknowledged that a significant portion of its stock is held by insiders, granting them considerable control.

Financial Highlights

43 data points
Beta

Revenue

$102.22M

64.8% Gross Margin

Net Income

-$21.41M

-20.9% Net Margin

EPS (Diluted)

$-0.03

Total Assets

$542.33M

Cash & Equivalents

$120.23M

Free Cash Flow

-$2.08M

Financial Statements
Beta
Revenue$102.22M
Cost of Revenue$36.00M
Gross Profit$66.22M
R&D Expenses$17.95M
Operating Expenses$85.57M
Operating Income-$19.34M
Net Income-$21.41M
EPS (Basic)$-0.03
EPS (Diluted)$-0.03
Shares Outstanding (Basic)672.27M

Key Highlights

  • 1ServiceNow is operating as an "emerging growth company" and has chosen to forgo certain regulatory exemptions, committing to new accounting standards immediately.
  • 2The company has made significant investments in its finance, accounting, and internal audit departments to address and remediate previously identified material weaknesses in internal controls.
  • 3Despite believing material weaknesses are remediated, ServiceNow cautions that full compliance and testing under Sarbanes-Oxley Act Section 404 are ongoing, with potential risks if not successfully maintained.
  • 4The company is exploring strategic acquisitions and investments, but warns of potential integration difficulties, dilution to existing shareholders, and management distraction.
  • 5ServiceNow has used all net proceeds from its June 2012 IPO for data center expansion, office build-outs, and general corporate purposes.
  • 6The company does not intend to pay dividends and expects future returns to shareholders to be driven by stock price appreciation.
  • 7Market price of ServiceNow's common stock is expected to be volatile due to various company-specific and market-wide factors, with a significant portion of stock controlled by directors, officers, and principal stockholders.

Frequently Asked Questions

As of this filing, ServiceNow is an "emerging growth company" under the JOBS Act. While this status allows for certain exemptions from reporting requirements (e.g., auditor attestation for internal controls), the company has elected to adopt new accounting standards early and will cease to be an emerging growth company at the end of 2013. This means investors should be aware of both the temporary flexibility and the upcoming transition to stricter public company reporting standards.

ServiceNow has invested significantly in hiring experienced finance and accounting personnel and engaging consultants to address previously identified material weaknesses in its internal control over financial reporting. While the company believes these weaknesses have been remediated, it emphasizes that full documentation and testing under Sarbanes-Oxley Act Section 404 are ongoing. There's a risk that further testing could reveal new weaknesses or incomplete remediation, potentially impacting financial reporting accuracy and leading to adverse opinions or regulatory scrutiny.

ServiceNow is actively considering acquisitions and investments to fuel growth. However, these carry risks of integration challenges, potential dilution from issuing new equity, and diversion of management focus. The company currently has no plans to pay cash dividends, indicating that investors seeking returns should primarily expect them from potential increases in the company's stock price.

ServiceNow has fully utilized the net proceeds of approximately $169.8 million from its IPO, which closed in July 2012. These funds have been allocated to expanding data center operations, building out office facilities, and for general working capital and corporate purposes.