10-QPeriod: Q3 FY2018

ServiceNow, Inc. Quarterly Report for Q3 Ended Sep 30, 2018

Filed November 7, 2018For Securities:NOW

Summary

ServiceNow, Inc. (NOW) reported solid financial performance for the quarter ending September 30, 2018. Total revenues grew by a strong 37% year-over-year to $673.1 million, driven primarily by a 39% increase in subscription revenues, which now constitute 93% of total revenues. This growth was fueled by increased purchases from existing customers and a growing customer base. Despite this revenue expansion, the company reported a net income of $8.4 million, a significant improvement from the net loss of $22.2 million in the same period last year, indicating a return to profitability. The company's gross profit margin improved to 77% from 74% in the prior year's quarter, reflecting improved efficiencies in subscription cost of revenues. Operating expenses also grew, largely due to investments in sales and marketing to drive growth and increased headcount. However, the company is effectively managing these expenses, as seen in the positive income from operations of $9.6 million, a substantial swing from the operating loss of $3.9 million in the prior year. The adoption of ASC Topic 606, "Revenue from Contracts with Customers," was fully retrospective and impacted prior period reporting, but the current period results demonstrate the company's ability to generate strong revenue growth and improved profitability.

Financial Highlights

52 data points
Beta

Revenue

$673.10M

76.5% Gross Margin

Net Income

$8.40M

1.2% Net Margin

EPS (Diluted)

$0.01

Total Assets

$3.58B

Cash & Equivalents

$706.32M

Free Cash Flow

$97.51M

Financial Statements
Beta
Revenue$673.10M
Cost of Revenue$157.86M
Gross Profit$515.24M
R&D Expenses$135.66M
Operating Expenses$505.67M
Operating Income$9.57M
Interest Expense$11.23M
Net Income$8.40M
EPS (Basic)$0.01
EPS (Diluted)$0.01
Shares Outstanding (Basic)893.60M
Shares Outstanding (Diluted)960.95M

Key Highlights

  • 1Total revenues increased by 37% year-over-year to $673.1 million, driven by strong subscription revenue growth.
  • 2Subscription revenues grew by 39% year-over-year to $626.6 million, now representing 93% of total revenues.
  • 3The company returned to profitability with a net income of $8.4 million, a significant improvement from a net loss of $22.2 million in Q3 2017.
  • 4Gross profit margin improved to 77% from 74% in the prior year's quarter, indicating improved operational efficiency.
  • 5Income from operations turned positive at $9.6 million, a substantial improvement from an operating loss of $3.9 million in Q3 2017.
  • 6The company ended the quarter with $703.6 million in cash and cash equivalents, with strong operating cash flow generation.
  • 7Customer count for those with Annual Contract Value (ACV) greater than $1 million increased significantly to 614 from 447 in the prior year.

Frequently Asked Questions

The primary driver of ServiceNow's revenue growth is its subscription revenue, which increased by 39% year-over-year to $626.6 million. This growth is attributed to increased purchases from existing customers and an expanding customer base, reflecting strong demand for its enterprise cloud computing solutions.

ServiceNow adopted Topic 606, "Revenue from Contracts with Customers," retrospectively. This impacted prior period reporting, as reflected in the 'as adjusted' figures. For the current period (Q3 2018), the adoption primarily affected the timing of revenue and commission expense recognition. The company notes that the adoption did not materially alter the current period's financial results compared to what would have been reported without the standard, but it provides a more accurate reflection of revenue recognition over the contract term.

The company has shown a significant improvement in profitability, moving from a net loss in the prior year to a net income in the current quarter. While operating expenses, particularly in sales and marketing, are increasing due to investments in growth, the company expects continued revenue growth and aims to maintain profitability. Investments in R&D and sales & marketing are expected to continue to drive long-term growth, and the company expects subscription revenues to grow both in absolute dollars and as a percentage of total revenues.

ServiceNow has been actively managing its convertible debt. During the nine months ended September 30, 2018, the company settled a significant portion of its 2018 Notes in cash, resulting in a loss on early note conversions. The remaining 2018 Notes matured and were repaid in November 2018. The 2022 Notes became convertible at the holders' option starting in July 2018. The company has also utilized note hedges and warrants to mitigate potential dilution from these convertible instruments.