10-QPeriod: Q2 FY2018

ServiceNow, Inc. Quarterly Report for Q2 Ended Jun 30, 2018

Filed August 8, 2018For Securities:NOW

Summary

ServiceNow, Inc. (NOW) reported its financial results for the second quarter and first half of 2018. The company experienced strong revenue growth, particularly in subscription revenue, which increased by 45% year-over-year for the quarter and 43% for the first half. This growth was driven by increased purchases from existing customers and a growing customer base. Despite the revenue growth, ServiceNow continued to operate at a net loss, though the loss narrowed compared to the prior year. This is attributed to significant investments in sales and marketing, research and development, and general administrative expenses, as well as increased stock-based compensation. The adoption of Topic 606 (ASC 606) for revenue recognition, implemented retrospectively, had a significant impact on prior period financial statements, particularly regarding the timing of revenue recognition for on-premises offerings and the capitalization and amortization of deferred commissions. The company also reported a favorable impact on billings and a reduction in net loss due to the adoption of Topic 606 and gains from marketable equity securities. From a liquidity perspective, ServiceNow maintained a healthy cash and cash equivalents balance. The company generated positive cash flow from operations, which was sufficient to cover investing and financing activities, including a significant repayment of convertible senior notes during the period. The company expects its current resources to be sufficient to meet liquidity needs for at least the next 12 months.

Financial Statements
Beta

Key Highlights

  • 1Total revenues increased by 41% year-over-year to $631.1 million for the second quarter of 2018, driven by a 45% increase in subscription revenues.
  • 2For the first six months of 2018, total revenues grew by 39% year-over-year to $1.22 billion, with subscription revenues up 43%.
  • 3The company reported a net loss of $52.7 million for the second quarter of 2018, a decrease from the $55.8 million net loss in the same period of 2017, indicating a narrowing of losses.
  • 4Operating expenses, particularly in sales and marketing (up 40% year-over-year) and research and development (up 42% year-over-year), increased significantly as the company continued to invest in growth.
  • 5ServiceNow adopted ASC 606, "Revenue from Contracts with Customers," retrospectively, which impacted prior period financial statements, particularly regarding deferred commissions and on-premises revenue recognition.
  • 6Billings, a key non-GAAP metric, increased by 34% year-over-year to $665.9 million for the second quarter of 2018.
  • 7The company maintained strong operating cash flow, generating $376.0 million for the first six months of 2018, an increase from $316.3 million in the prior year.

Frequently Asked Questions

ServiceNow adopted Topic 606 (ASC 606), "Revenue from Contracts with Customers," retrospectively. This adoption significantly changed the timing of revenue recognition for on-premises offerings and the accounting for deferred commissions, impacting prior period financial statements and balance sheet accounts like deferred revenue and deferred commissions. The adoption also resulted in a one-time indirect tax benefit related to intercompany adjustments.

ServiceNow demonstrated strong revenue growth, particularly in subscription revenues, which increased by 45% year-over-year in the second quarter and 43% year-over-year in the first half of 2018. This growth is primarily attributed to increased purchases from existing customers and an expansion of the company's customer base.

ServiceNow continued to report a net loss in the second quarter and first half of 2018. However, the net loss narrowed compared to the same periods in 2017. The net loss for Q2 2018 was $52.7 million, down from $55.8 million in Q2 2017. This trend suggests the company is managing its expenses relative to its revenue growth, although significant investments are still being made in growth areas.

ServiceNow maintains a strong liquidity position with substantial cash and cash equivalents and investments. The company generated robust operating cash flow, totaling $376.0 million for the first six months of 2018, an increase of 19% year-over-year. This cash flow, combined with existing balances, is expected to be sufficient to meet liquidity needs for at least the next 12 months, including debt obligations and investments in growth.