Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
NOW > SEC Filings for NOW > Form 10-Q on 31-Oct-2012All Recent SEC Filings

Show all filings for SERVICENOW, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for SERVICENOW, INC.


31-Oct-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition, results of operations and cash flows should be read in conjunction with the (1) unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q, and (2) the audited consolidated financial statements and notes thereto and management's discussion and analysis of financial condition and results of operations for the fiscal year ended December 31, 2011 included in the final prospectus for our IPO dated as of, and filed with the Securities and Exchange Commission, or the SEC, pursuant to Rule 424(b)(4) on June 29, 2012 (File No. 333-180486). This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements are often identified by the use of words such as "may," "will," "expect," "believe," "anticipate," "intend," "could," "estimate," or "continue," and similar expressions or variations. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified herein, and those discussed in the section titled "Risk Factors", set forth in Part II, Item 1A of this Form 10-Q and in our other SEC filings, including our final prospectus dated as of June 28, 2012. We disclaim any obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

Overview

ServiceNow is a leading provider of cloud-based services to automate enterprise IT operations. Our service includes a suite of applications built on our proprietary platform that automates workflow and integrates related business processes. We focus on transforming enterprise IT by automating and standardizing business processes and consolidating IT across the global enterprise. Organizations deploy our service to create a single system of record for enterprise IT, to lower operational costs and to enhance efficiency. Additionally, our customers use our extensible platform to build custom applications for automating activities unique to their business requirements.

We offer our service under a Software-as-a-Service, or SaaS, business model. Our subscription fee includes the use of our service and our technical support and management of the hosting infrastructure. We provide a scaled pricing model based on the number of users, in which the subscription price per user decreases as the number of users increases. We generally bill our customers annually in advance. We generate sales through our direct sales team and indirectly through channel partners and third-party referrals. We also generate revenues from professional services for implementation and training.

Many customers initially subscribe to our service to solve a specific and immediate problem. Once their problem is solved, many of our customers deploy additional applications as they become more familiar with our service and apply it to new IT processes. In addition, some customers adopt our platform to build applications that automate various processes for business uses outside of IT such as human resources, facilities and quality control management. A majority of our revenues come from large global enterprise customers. Our total customers grew 58% to 1,346 as of September 30, 2012 from 852 as of September 30, 2011.

We were founded in 2004 and entered into our first commercial contract in 2005. To date, we have funded our business primarily with cash flows from operations. Additionally, we raised net proceeds of $173.3 million in our June 2012 initial public offering after deducting underwriting discounts and commissions and before deducting expenses in connection with the offering of $3.5 million. We continue to invest in the development of our service, infrastructure and sales and marketing to drive long-term growth. In 2011, we significantly changed our executive management team. We hired a new Chief Executive Officer in May 2011, and our founder became Chief Product Officer. We subsequently hired additional key executives across our entire organization including our Chief Financial Officer, Chief Technology Officer, Senior Vice President Worldwide Sales and Services, Senior Vice President Engineering, Vice President Human Resources, Vice President Marketing and Vice President Product Management. We increased our overall employee headcount to 963 as of September 30, 2012 from 491 as of September 30, 2011.

We have achieved significant revenue growth in recent periods. For the three months ended September 30, 2012 and 2011, our revenues grew 88% to $64.3 million from $34.2 million. We incurred a net loss of $13.1 million and generated net income of $0.1 million for the three months ended September 30, 2012 and 2011, respectively. For the nine months ended September 30, 2012 and 2011, our revenues grew 90% to $168.6 million from $88.9 million. We incurred a net loss of $27.4 million and generated net income of $5.1 million for the nine months ended September 30, 2012 and 2011, respectively.

Key Factors Affecting Our Performance

Total customers. We believe total customers is a key indicator of our market penetration, growth and future revenues. We have aggressively invested in and intend to continue to invest in our direct sales force, as well as to pursue additional partnerships within our indirect sales channel. We generally define a customer as an entity with an active service contract as of the measurement date. In situations where there is a single contract that applies to entities with multiple subsidiaries or divisions, universities, or governmental organizations, each entity that has contracted for a separate production instance of our service is counted as a separate customer. Our total customers were 1,346 and 852 as of September 30, 2012 and 2011, respectively.


Table of Contents

Investment in growth. We have aggressively invested, and intend to continue to invest, in expanding our operations, increasing our headcount and developing technology to support our growth. We expect our total operating expenses to increase in the foreseeable future, particularly as we continue to expand our sales operations and cloud-based infrastructure. We continue to invest in our sales and marketing organization to drive additional revenues and support the growth of our customer base. Any investments we make in our sales and marketing organization will occur in advance of experiencing any benefits from such investments, so it may be difficult for us to determine if we are efficiently allocating our resources in these areas.

Renewal rate. We calculate our renewal rate by subtracting our attrition rate from 100%. Our attrition rate for a period is equal to the annual contract value from customers that are due for renewal in the period and did not renew, divided by the total annual contract value from all customers due for renewal during the period. Annual contract value is equal to the first twelve months of expected subscription revenues under a contract. We believe our renewal rate is an important metric to measure the long-term value of customer agreements and our ability to retain our customers. Our renewal rate was 96% in both the three and nine months ended September 30, 2012, and 98% and 97% in the three and nine months ended September 30, 2011, respectively.

Upsells. In order for us to continue to grow our business, it is important to generate additional revenue from existing customers. We believe there is significant opportunity to increase the number of subscriptions sold to current customers as customers become more familiar with our platform and adopt our applications to address additional business use cases. Our increase in subscriptions is driven by the increased number of users accessing our suite of on-demand applications, as well as our other enabling technologies, Discovery and Runbook Automation, that are separately priced on a per server basis. We believe our ability to upsell is a key factor affecting our ability to further penetrate our existing customer base. We monitor upsells by measuring the annual contract value of upsells signed in the period as a percentage of our total annual contract value of all contracts signed in the period. Upsells as a percentage of total annual contract value signed was 20% and 27% in the three months ended September 30, 2012 and 2011, respectively and 29% in both the nine months ended September 30, 2012 and 2011.

Investment in infrastructure. We have made and will continue to make substantial investments in new equipment to support growth at our data centers and provide enhanced levels of service to our customers. During the fourth quarter of 2012, we expect to complete our transition from a managed service hosting model to a co-location model and invest in enhancements to our cloud architecture in our co-location data centers. Through the end of 2012, we will continue to incur double rent, accelerated depreciation for certain assets and additional co-location infrastructure investments. Beginning in the first quarter of 2013, we expect to no longer incur costs related to the managed service data centers that we are exiting. During 2013, we will continue to invest in enhancements to our cloud architecture, which are designed to provide our customers with enhanced scalability, data reliability and availability, including the purchase of additional networking infrastructure. We are also evaluating the expansion of our data center locations to address additional geographic markets, which will result in additional investments to our infrastructure if pursued. In addition, we will continue to enter into new office facility leases in the future to accommodate our projected headcount growth at various locations around the world. These new leases may require investments in leasehold improvements, as well as furniture and equipment to support our employees. If we add to our headcount at a faster rate than anticipated, we may incur substantial costs in terminating leases to enter into new leases for larger space.

Professional services model. We believe our investment in professional services facilitates the adoption of our subscription service. As a result, our sales efforts have been focused primarily on our subscription service, rather than the profitability of our professional services business. Historically, our pricing for professional services was predominantly on a fixed-fee basis and the cost of the time and materials incurred to complete these services was often greater than the amount charged to the customer. These factors contributed to our low and negative gross profit percentages from professional services and other of
(6)% and (45)% for the three months ended September 30, 2012 and 2011, respectively, and (6 )% and (20) % for the nine months ended September 30, 2012 and 2011, respectively. The improvement in gross profit percentages was due in part to shifting our pricing model to a time-and-materials basis and pricing our services predominantly based on the anticipated cost of those services.

Platform adoption. Our service includes access to our suite of applications, as well as access to our platform to create customer-built extensions to our suite of applications. Customers may also purchase the use of the platform to develop custom applications. Though in the near term we expect our revenue growth to be primarily driven by the pace of adoption and penetration of our suite of applications, we are investing resources to enhance the development capabilities of our platform. We believe the extensibility and simplicity of our platform is resulting in the broad use of our platform by our customers to create extensions of our applications or custom applications, and will enhance our ability to acquire new customers and increase upsells, and sustain high renewal rates.

Components of Results of Operations

Revenues

Subscription revenues. Subscription revenues are primarily comprised of fees which give customers access to our suite of on-demand applications, as well as access to our platform to build custom applications. Pricing includes multiple instances, hosting and support services, data backup and disaster recovery services, as well as future upgrades offered during the subscription period. In addition, we offer two separately priced enabling technologies, Discovery and Runbook Automation. We typically invoice our customers for subscription fees in annual increments upon initiation of the initial contract or subsequent renewal. Our average initial contract term is approximately 30 months. Our contracts are generally non-cancelable, though customers can terminate for breach if we materially fail to perform.


Table of Contents

We generate sales directly through our sales team and, to a lesser extent, through our channel partners. Sales to our channel partners are made at a discount and revenues are recorded at the discounted price when all revenue recognition criteria are met. In addition, in some cases, we pay referral fees to third parties typically ranging from 10% to 20% of the first year's annual contract value. These fees are included in sales and marketing expense.

Professional services and other revenues. Professional services revenues consist of fees associated with the implementation and configuration of our subscription service. Other revenues include customer training and attendance and sponsorship fees for our Knowledge conferences. Historically, our pricing for professional services was predominantly on a fixed-fee basis. However, in December 2011, we began shifting our pricing model to a time-and-materials basis. Going forward, we anticipate the majority of our new business will be priced on a time-and-materials basis. Most of our professional services engagements span four to eight months. Historically, we billed for our fixed price professional services in two installments, with the first installment due up-front and the second installment due at either a specified future date (usually approximately three months from the contract start date) or upon completion of the services. In December 2011, we changed these billing practices to bill for our fixed price professional services in installments based on milestones related to the completion of specified projects or specified dates. Our time-and-materials professional services are generally billed monthly in arrears based on actual hours and expenses incurred. Typical payment terms provide our customers pay us within 30 days of invoice.

Overhead Allocation

Overhead associated with benefits, facilities, IT costs and depreciation, excluding depreciation related to our cloud-based infrastructure, is allocated to our cost of revenues and operating expenses based on headcount.

Cost of Revenues

Subscription cost of revenues. Cost of subscription revenues primarily consists of expenses related to hosting our service and providing support to our customers. These expenses are comprised of data center capacity costs; personnel and related costs directly associated with our cloud infrastructure and customer support, including salaries, benefits, bonuses and stock-based compensation; and allocated overhead.

Professional services and other cost of revenues. Cost of professional services and other revenues consists primarily of personnel and related costs directly associated with our professional services and training departments, including salaries, benefits, bonuses and stock-based compensation; the costs of contracted third-party vendors; and allocated overhead.

Professional services associated with the implementation and configuration of our subscription service are performed directly by our services team, as well as by contracted third-party vendors. Fees paid up-front to our third-party vendors are deferred and amortized to cost of revenues as the professional services are delivered. Fees owed to our third-party vendors are accrued over the same requisite service period. Cost of revenues associated with our professional services engagements contracted with third-party vendors as a percentage of professional services and other revenues was 16% and 66% for the three months ended September 30, 2012 and 2011, respectively, and 27% and 52% for the nine months ended September 30, 2012 and 2011, respectively.

Sales and Marketing Expenses

Sales and marketing expenses consist primarily of personnel and related costs directly associated with our sales and marketing staff, including salaries, benefits, bonuses, commissions and stock-based compensation. Other costs included in this expense are third-party referral fees, marketing and promotional events, including our Knowledge conferences, online marketing, product marketing and allocated overhead.

Research and Development Expenses

Research and development expenses consist primarily of personnel and related costs directly associated with our research and development staff, including salaries, benefits, bonuses and stock-based compensation, and allocated overhead.

General and Administrative Expenses

General and administrative expenses primarily consist of personnel and related costs for our executive, finance, legal, human resources and administrative personnel, including salaries, benefits, bonuses and stock-based compensation; legal, accounting and other professional services fees; other corporate expenses; and allocated overhead.


Table of Contents

Provision for Income Taxes

Provision for income taxes consists of federal, state and foreign income taxes. Due to cumulative losses, we maintain a valuation allowance against our deferred tax assets as of September 30, 2012. We consider all available evidence, both positive and negative, in assessing the extent to which a valuation allowance should be applied against our deferred tax assets.

Results of Operations

To enhance comparability, the following table sets forth our unaudited results
of operations for the periods presented. The period-to-period comparison of
financial results is not necessarily indicative of future results.



                                                      Three Months Ended             Nine Months Ended
                                                        September 30,                  September 30,
                                                     2012            2011           2012            2011
                                                                       (in thousands)
Revenues:
Subscription                                       $  55,279       $ 30,331       $ 141,640       $ 76,331
Professional services and other                        9,066          3,866          26,910         12,563

Total revenues                                        64,345         34,197         168,550         88,894

Cost of revenues(1):
Subscription                                          17,931          6,323          43,182         15,538
Professional services and other                        9,643          5,609          28,519         15,095

Total cost of revenues                                27,574         11,932          71,701         30,633

Gross profit                                          36,771         22,265          96,849         58,261

Operating expenses(1):
Sales and marketing                                   28,140         13,980          74,356         34,375
Research and development                              10,783          2,757          26,098          7,003
General and administrative                            11,195          4,509          24,441         10,471

Total operating expenses                              50,118         21,246         124,895         51,849

Income (loss) from operations                        (13,347 )        1,019         (28,046 )        6,412
Interest and other income (expense), net                 615           (729 )         1,148           (412 )

Income (loss) before provision for income taxes      (12,732 )          290         (26,898 )        6,000
Provision for income taxes                               321            169             519            852

Net income (loss)                                  $ (13,053 )     $    121       $ (27,417 )     $  5,148

(1) Stock-based compensation included in the statements of operations data above was as follows:

                                                 Three Months Ended                                Nine Months Ended
                                                   September 30,                                     September 30,
                                           2012                     2011                     2012                     2011
                                                                            (in thousands)
Cost of revenues:
Subscription                         $           1,276        $             201        $           2,514        $             524
Professional services and other                    495                       71                      964                      151
Sales and marketing                              2,899                      800                    6,852                    1,373
Research and development                         1,919                      263                    4,121                      524
General and administrative                       1,624                    1,056                    4,137                    1,652


Table of Contents

                                                Three Months Ended                                   Nine Months Ended
                                                  September 30,                                        September 30,
                                         2012                       2011                      2012                       2011
                                                                  (as a percentage of total revenues)
Revenues:
Subscription                                      86 %                       89 %                      84 %                       86 %
Professional services and
other                                             14                         11                        16                         14

Total revenues                                   100                        100                       100                        100
Cost of revenues:
Subscription                                      28                         18                        26                         17
Professional services and
other                                             15                         17                        17                         17

Total cost of revenues                            43                         35                        43                         34

Gross profit                                      57                         65                        57                         66

Operating expenses:
Sales and marketing                               44                         41                        44                         39
Research and development                          17                          8                        15                          8
General and administrative                        17                         13                        15                         12

Total operating expenses                          78                         62                        74                         59

Income (loss) from operations                    (21 )                        3                       (17 )                        7
Interest and other income
(expense), net                                     1                         (2 )                       1                         -

Income (loss) before
provision for income taxes                       (20 )                        1                       (16 )                        7
Provision for income taxes                        -                          -                         -                           1

Net income (loss)                                (20 )%                       1 %                     (16 )%                       6 %

                                          Three Months Ended                              Nine Months Ended
                                            September 30,                                   September 30,
                                     2012                    2011                    2012                    2011
                                                                    (in thousands)
Revenues by geography
North America                   $       45,509          $       24,513          $      120,124          $       65,929
Europe                                  16,133                   8,574                  42,027                  21,856
Asia Pacific and other                   2,703                   1,110                   6,399                   1,109

Total revenues                  $       64,345          $       34,197          $      168,550          $       88,894

                                         Three Months  Ended                           Nine Months  Ended
                                            September 30,                                September 30,
                                     2012                   2011                  2012                   2011
                                                       (as a percentage of total revenues)
Revenues by geography
North America                               71 %                   72 %                  71 %                   74 %
Europe                                      25                     25                    25                     25
Asia Pacific and other                       4                      3                     4                      1

Total revenues                             100 %                  100 %                 100 %                  100 %


Table of Contents

Comparison of the three months ended September 30, 2012 and 2011

Revenues

                                            Three Months Ended
                                               September 30,
                                            2012             2011        % Change
                                          (dollars in thousands)
      Revenues:
      Subscription                      $     55,279       $ 30,331             82 %
      Professional services and other          9,066          3,866            135 %

      Total revenues                    $     64,345       $ 34,197             88 %

      Percentage of revenues:
      Subscription                                86 %           89 %
      Professional services and other             14             11

      Total                                      100 %          100 %

Revenues increased $30.1 million, primarily due to the increase in subscription revenues of $24.9 million. Of the total increase in subscription revenues, 59% . . .

  Add NOW to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for NOW - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial      Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.