10-QPeriod: Q3 FY2014

ServiceNow, Inc. Quarterly Report for Q3 Ended Sep 30, 2014

Filed November 5, 2014For Securities:NOW

Summary

ServiceNow, Inc. (NOW) reported a net loss of $41.1 million for the third quarter of 2014, a significant increase from the $14.7 million net loss in the same period last year. This widening loss is attributed to substantial investments in sales and marketing, and research and development, which grew by 77% and 91% respectively, year-over-year. Despite the increased operating expenses, total revenues saw robust growth of 61% to $178.7 million, driven by a 62% increase in subscription revenues. The company continued to demonstrate strong customer acquisition and retention, with customer count increasing by 32% to 2,514. The upsell rate remained healthy at 34% for the nine-month period, and the renewal rate was an impressive 97% for the trailing twelve months. The acquisition of Neebula Systems Ltd. in July 2014 for approximately $100 million is expected to enhance the company's IT offerings, though it contributed to increased goodwill and intangible assets. While the company continues to invest heavily in growth, leading to a widened net loss, the strong revenue growth, expanding customer base, and high renewal rates suggest positive underlying business momentum. Investors should monitor the company's ability to convert these investments into profitability and manage its expanding operational scale.

Financial Highlights

47 data points
Beta

Revenue

$178.71M

63.0% Gross Margin

Net Income

-$41.05M

-23.0% Net Margin

EPS (Diluted)

$-0.06

Total Assets

$1.30B

Cash & Equivalents

$235.09M

Free Cash Flow

$6.91M

Financial Statements
Beta
Revenue$178.71M
Cost of Revenue$66.09M
Gross Profit$112.63M
R&D Expenses$39.68M
Operating Expenses$147.13M
Operating Income-$34.50M
Net Income-$41.05M
EPS (Basic)$-0.06
Shares Outstanding (Basic)731.68M

Key Highlights

  • 1Total revenues increased by 61% year-over-year to $178.7 million for Q3 2014.
  • 2Subscription revenue, the primary revenue driver, grew by 62% year-over-year to $150.4 million.
  • 3Net loss widened to $41.1 million in Q3 2014, compared to a $14.7 million loss in Q3 2013, primarily due to increased operating expenses.
  • 4Sales and marketing expenses increased by 77% and R&D expenses by 91% year-over-year, reflecting significant investment in growth.
  • 5Customer count grew by 32% year-over-year to 2,514 as of September 30, 2014.
  • 6ServiceNow acquired Neebula Systems Ltd. for approximately $100 million in cash, adding $54 million in goodwill and $56 million in developed technology.
  • 7The company maintained a strong renewal rate of 97% for the trailing twelve months ending September 30, 2014.

Frequently Asked Questions

ServiceNow reported a significant increase in revenue for Q3 2014, up 61% year-over-year to $178.7 million, primarily driven by subscription revenue growth. However, the company also experienced a widening net loss of $41.1 million, up from $14.7 million in the prior year. This is largely due to substantial investments in sales, marketing, and R&D to fuel future growth. The company's outlook indicates continued investment, suggesting that profitability may not be immediate, but the strong customer growth and high renewal rates are positive indicators for long-term potential.

ServiceNow acquired Neebula Systems Ltd. for approximately $100 million in cash on July 11, 2014. This acquisition added $53.9 million in goodwill and $56.2 million in developed technology to the balance sheet. The acquisition's results are included in the consolidated financial statements from the date of purchase. While it contributed to increased operating expenses and intangible assets, it is expected to expand the company's IT service automation capabilities.

ServiceNow's revenue growth is primarily driven by its subscription services, which increased by 62% year-over-year in Q3 2014. Key drivers for this growth include an increase in the total customer count, which grew by 32% to 2,514, and strong customer retention, evidenced by a 97% renewal rate over the trailing twelve months. The company also benefits from an upsell rate of 34% for the nine-month period, indicating its ability to generate additional revenue from existing customers through increased license purchases and adoption of new services.

In November 2013, ServiceNow issued $575 million in 0% convertible senior notes due 2018. These notes have a conversion price of approximately $73.88 per share and are convertible under specific conditions related to stock price performance and corporate events. The accounting treatment for these notes separates them into liability and equity components, resulting in a debt discount that is amortized to interest expense, increasing non-cash interest expenses. ServiceNow also entered into note hedge and warrant transactions to mitigate potential dilution. The significant interest expense related to the amortization of the debt discount is a notable factor impacting the company's net loss.