10-QPeriod: Q2 FY2016

ServiceNow, Inc. Quarterly Report for Q2 Ended Jun 30, 2016

Filed August 3, 2016For Securities:NOW

Summary

ServiceNow, Inc. (NOW) reported its financial results for the quarter and six months ended June 30, 2016. The company demonstrated strong revenue growth, primarily driven by its subscription services, which increased by 45% year-over-year for the quarter and 47% for the six-month period. While overall revenues showed a healthy upward trend, the company reported a net loss for both periods. A significant factor impacting the net loss was a substantial legal settlement charge of $270 million recognized in the first six months of 2016, related to resolving patent infringement lawsuits with Hewlett Packard Enterprise (HPE) and BMC Software. Despite the reported net loss, the company's operational metrics suggest underlying business strength. Billings, a non-GAAP measure indicating sales volume, grew by 33% year-over-year for the quarter and 37% for the six-month period. The company also saw an increase in large enterprise customers, with the number of customers with an Annual Contract Value (ACV) greater than $1 million growing from 187 to 272 year-over-year. Management anticipates continued revenue growth, though at a decelerating rate, and expects to continue incurring GAAP losses due to ongoing investments and non-cash charges.

Financial Highlights

49 data points
Beta

Revenue

$341.31M

71.7% Gross Margin

Net Income

-$49.63M

-14.5% Net Margin

EPS (Diluted)

$-0.06

Total Assets

$1.71B

Cash & Equivalents

$289.11M

Free Cash Flow

-$172.02M

Financial Statements
Beta
Revenue$341.31M
Cost of Revenue$96.65M
Gross Profit$244.66M
R&D Expenses$70.36M
Operating Expenses$292.94M
Operating Income-$48.28M
Interest Expense$8.25M
Net Income-$49.63M
EPS (Basic)$-0.06
Shares Outstanding (Basic)819.19M

Key Highlights

  • 1Total revenues grew by 38% year-over-year to $341.3 million for the three months ended June 30, 2016, and by 41% to $647.2 million for the six months ended June 30, 2016.
  • 2Subscription revenue, the primary revenue driver, increased by 45% year-over-year for the quarter to $290.7 million and by 47% for the six-month period to $558.1 million.
  • 3The company reported a net loss of $49.6 million for the quarter and $383.0 million for the six months ended June 30, 2016.
  • 4A significant legal settlement charge of $270 million was recorded in the six months ended June 30, 2016, primarily impacting the net loss.
  • 5Billings, a key performance indicator for sales volume, increased by 33% year-over-year to $374.9 million for the quarter and by 37% to $751.6 million for the six-month period.
  • 6The number of customers with an Annual Contract Value (ACV) greater than $1 million increased significantly from 187 as of June 30, 2015, to 272 as of June 30, 2016.
  • 7The company's cash and cash equivalents and short-term investments totaled $806.7 million as of June 30, 2016, providing ample liquidity.

Frequently Asked Questions

ServiceNow's revenue growth was primarily driven by its subscription services. Subscription revenues increased by 45% year-over-year for the quarter and 47% for the six-month period, reflecting strong customer adoption and upsells within its Enterprise Service Management and IT Operations Management solutions.

The reported net loss, particularly for the six-month period, was significantly impacted by a $270 million charge for legal settlements related to patent infringement lawsuits with HPE and BMC Software. Additionally, ongoing investments in sales and marketing, research and development, and stock-based compensation contributed to operating expenses that outpaced revenue growth in certain areas, leading to a GAAP net loss.

Investors may look at non-GAAP measures such as 'billings' and 'free cash flow'. Billings showed robust growth, up 33% for the quarter and 37% for the six months, indicating strong sales activity. While free cash flow turned negative in the first six months of 2016 primarily due to the legal settlement payment, the company maintained a strong liquidity position with over $800 million in cash, cash equivalents, and short-term investments as of June 30, 2016.

The increase in customers with an ACV greater than $1 million, from 187 to 272 year-over-year, signifies successful expansion and deepening relationships with large enterprise clients. This trend suggests that ServiceNow is effectively selling larger, more comprehensive solutions to key strategic accounts, which is a positive indicator for future revenue stability and growth.