ServiceNow Reports Strong Third Quarter 2018 Financial Results

Oct 24, 2018 04:10 pm
SANTA CLARA, Calif. -- 

ServiceNow (NYSE: NOW) today announced financial results for its fiscal third quarter ended September 30, 2018 with subscription revenues of $627 million, representing 39% year-over-year growth.

ServiceNow, Forbes’ No. 1 World’s Most Innovative Company in 2018, is now serving more than 5,000 enterprise customers. During the quarter, ServiceNow closed 25 transactions with more than $1 million in net new annual contract value. The company now has 614 total customers with more than $1 million in annual contract value, representing 37% year-over-year growth.

“We had a strong third quarter, continuing our global momentum and accelerating our role as a strategic partner enabling digital transformation,” said John Donahoe, ServiceNow president and chief executive officer. “This was our largest federal quarter ever, with the US government representing our biggest deals, and underscoring how digital transformation is becoming both a public and private sector imperative worldwide. Digital transformation is about delivering great experiences and unlocking productivity. Our digital workflows help deliver both, helping make work, work better for people.”

“Our first-half momentum continued in Q3 and we delivered another quarter of strong performance setting us up for a great finish in 2018,” said Michael Scarpelli, ServiceNow chief financial officer. “Due to the strong performance, we’re raising revenue, billings and free cash flow guidance for full-year 2018.”

Third Quarter 2018 GAAP and Non-GAAP Results:

The following table summarizes our financial results for the third quarter 2018:

           

Third Quarter 2018
GAAP Results

Third Quarter 2018 Non-GAAP Results(1)
   

Amount
($ millions)

  Year/Year
Growth (%)(2)
Amount
($ millions)
  Year/Year
Growth (%)(2)
 

Adjusted
Amount
($ millions)(3)

 

Adjusted
Year/Year
Growth (%)(2)

Subscription revenues $626.6 39% $629.2 40%
Professional services and other revenues $46.5 9% $47.0 10%
Total revenues $673.1 37% $676.2 37%
 
Subscription billings $674.2 35% $672.2 34%
Professional services and other billings $46.4 1% $46.8 2%
Total billings $720.5 32% $719.0 31%
 
    Amount
($ millions)
  Margin (%) Amount
($ millions)
  Margin (%)        
Subscription gross profit $519.7 83% $537.4 86%
Professional services and other gross profit (loss) ($4.5) (10%) $3.9 8%
Total gross profit $515.2 77% $541.3 80%
Income from operations $9.6 1% $160.7 24%
Net cash provided by operating activities $145.5 22%
Free cash flow $111.6 17%
 
   

Amount
($ millions)

 

Earnings per
Basic/Diluted
Share ($)

Amount
($ millions)

 

Earnings per
Basic/Diluted
Share ($)

       
Net income $8.4 $0.05 / $0.04 $129.0 $0.72 / $0.68
 
 
(1) We report non-GAAP financial measures in addition to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. See the section entitled “Statement Regarding Use of Non-GAAP Financial Measures” for an explanation of non-GAAP measures, and the table entitled “GAAP to Non-GAAP Reconciliation” for a reconciliation of GAAP to non-GAAP measures.
(2) The comparison period amounts used to calculate growth rates have been restated from previously reported amounts to reflect the impact of the full retrospective adoption of Topic 606. For more information regarding Topic 606, refer to our Form 10-Q filed for the quarter ended June 30, 2018.
(3) Non-GAAP subscription revenues, professional services and other revenues, total revenues and professional services billings are adjusted for constant currency. Non-GAAP subscription billings and total billings are adjusted for constant currency and constant billings duration. See the section entitled “Statement Regarding Use of Non-GAAP Financial Measures” for an explanation of non-GAAP measures, and the table entitled “GAAP to Non-GAAP Reconciliation” for a reconciliation of GAAP to non-GAAP measures.
 

Financial Outlook

Our guidance is based on foreign exchange rates as of September 30, 2018 and includes GAAP and non-GAAP financial measures.

The following table summarizes our guidance for the fourth quarter 2018:

  Fourth Quarter 2018

GAAP Guidance

  Fourth Quarter 2018 Non-GAAP Guidance(1)
    Amount
($ millions)
  Year/Year
Growth (%)(2)
Amount
($ millions)
  Year/Year
Growth (%)(2)
 

Adjusted
Amount
($ millions)(3)

 

Adjusted
Year/ Year
Growth (%)(2)

Subscription revenues $660 - $665   32% - 33%     $664 - $669   33% - 34%
Subscription billings $900 - $905 31% $906 - $911 32%
 
              Margin (%)        
Income from operations 21%
 
          Amount
(millions)
           
Weighted-average shares used to compute diluted net income per share 190
 
 
(1) We report non-GAAP financial measures in addition to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. See the section entitled “Statement Regarding Use of Non-GAAP Financial Measures” for an explanation of non-GAAP measures, and the table entitled “Reconciliation of Non-GAAP Financial Guidance” for a reconciliation of GAAP to non-GAAP measures.
(2) The comparison period amounts used to calculate growth rates have been restated from previously reported amounts to reflect the impact of the full retrospective adoption of Topic 606. For more information regarding Topic 606, refer to our Form 10-Q filed for the quarter ended June 30, 2018.
(3) Non-GAAP subscription revenues are adjusted for constant currency. Non-GAAP subscription billings are adjusted for constant currency and constant billings duration. See the section entitled “Statement Regarding Use of Non-GAAP Financial Measures” for an explanation of non-GAAP measures, and the table entitled “Reconciliation of Non-GAAP Financial Guidance” for a reconciliation of GAAP to non-GAAP measures.
 

The following table summarizes our updated guidance for full-year 2018:

   

Full-Year 2018
GAAP Guidance

Full-Year 2018 Non-GAAP Guidance(1)
    Amount
($ millions)
 

Year/Year
Growth (%)(2)

Amount
($ millions)
  Year/Year
Growth (%)(2)
 

Adjusted
Amount
($ millions)(3)

 

Adjusted
Year/ Year
Growth (%)(2)

Subscription revenues $2,415 - $2,420   39%     $2,384 - $2,389   37%
Subscription billings $2,830 - $2,835 33% $2,793 - $2,798 31% - 32%
 
              Margin (%)        
Subscription gross profit 85%
Income from operations 20%
Free cash flow 28%
 
          Amount
(millions)
           
Weighted-average shares used to compute diluted net income per share 188
 
 
(1) We report non-GAAP financial measures in addition to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. See the section entitled “Statement Regarding Use of Non-GAAP Financial Measures” for an explanation of non-GAAP measures, and the table entitled “Reconciliation of Non-GAAP Financial Guidance” for a reconciliation of GAAP to non-GAAP measures.
(2) The comparison period amounts used to calculate growth rates have been restated from previously reported amounts to reflect the impact of the full retrospective adoption of Topic 606. For more information regarding Topic 606, refer to our Form 10-Q filed for the quarter ended June 30, 2018.
(3) Non-GAAP subscription revenues are adjusted for constant currency. Non-GAAP subscription billings are adjusted for constant currency and constant billings duration. See the section entitled “Statement Regarding Use of Non-GAAP Financial Measures” for an explanation of non-GAAP measures, and the table entitled “Reconciliation of Non-GAAP Financial Guidance” for a reconciliation of GAAP to non-GAAP measures.
 

The following table compares our updated full-year 2018 guidance against our previously issued full-year 2018 guidance dated July 25, 2018:

 
Comparison of Updated Full-Year 2018 Guidance to Previously Issued Guidance(1)

($ millions)

   

Previous Guidance
Midpoint(2)

  Currency Impact(3)   Duration Impact(4)   Guidance Change  

Current Guidance
Midpoint(5)

GAAP subscription revenues $2,410   ($3)   $0   $11   $2,418
 
Non-GAAP subscription billings(6) $2,820 ($4) $4 $13 $2,833
 
 
(1) Numbers are rounded for presentation purposes.
(2) Refers to previously issued full-year 2018 guidance dated July 25, 2018.
(3) In our guidance, we assume an average daily currency exchange rate for the guidance period based on the rates at the end of the prior quarter for entities reporting in currencies other than U.S. Dollars. Currency impact represents the sum of (i) the impact of the difference between the actual average rates in the period used to calculate our Q3-2018 actual results and the rates as of June 30, 2018 assumed in our previously issued guidance dated July 25, 2018 plus (ii) the impact of the difference between the exchange rates in effect as of September 30, 2018 assumed in our updated full-year 2018 guidance, and the rates as of June 30, 2018 assumed in our previously issued guidance dated July 25, 2018.
(4) Represents the impact of billings greater than 12 months in excess of guidance assumptions.
(5) Represents the updated full-year 2018 guidance presented in the table above.
(6) We report non-GAAP financial measures in addition to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. See the section entitled “Statement Regarding Use of Non-GAAP Financial Measures” for an explanation of non-GAAP measures, and the table entitled “Reconciliation of Non-GAAP Financial Guidance” for a reconciliation of GAAP to non-GAAP measures.
 

Conference Call Details

The conference call will begin at 2 p.m. Pacific Time (21:00 GMT) on October 24, 2018. Interested parties may listen to the call by dialing 844.464.3153 (passcode: 2184619), or if outside North America, by dialing 508.637.5575 (passcode: 2184619). Individuals may access the live teleconference from this webcast link (http://edge.media-server.com/m6/p/ierumzt4).

An audio replay of the conference call and webcast will be available two hours after its completion and will be accessible for 30 days. To hear the replay, interested parties may go to the investor relations section of the ServiceNow website or dial 855.859.2056 (passcode:2184619), or if outside North America, by dialing 404.537.3406 (passcode: 2184619).

Investor Presentation Details

An investor presentation providing additional information and analysis can be found at http://investors.servicenow.com.

Statement Regarding Use of Non-GAAP Financial Measures

We report the following non-GAAP financial measures in addition to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP.

  • Revenue Adjusted for Constant Currency. We present revenues adjusted for constant currency to provide a framework for assessing how our business performed excluding the effect of foreign currency rate fluctuations. To present this information, current period results for entities reporting in currencies other than U.S. Dollars are converted into U.S. Dollars at the exchange rates in effect during the prior period presented, rather than the actual exchange rates in effect during the current period. We believe the presentation of revenues adjusted for constant currency facilitates the comparison of revenues year-over-year.
  • Billings. We believe billings is a useful leading indicator regarding the performance of our business. We define subscription billings, professional services and other billings, and total billings as the applicable revenue plus the applicable change in deferred revenue, unbilled receivables and customer deposits as presented or derived from the statement of cash flows. We adjust for constant currency, as described above, and adjust for constant duration by replacing the portion of multi-year billings in excess of twelve months during the current period with the portion of multi-year billings in excess of twelve months during the prior period presented. We believe these adjustments facilitate greater comparability in our billings information year-over-year.
  • Gross Profit, Income from Operations and Net Income. Our non-GAAP presentation of gross profit, income from operations, and net income measures exclude stock-based compensation expense, amortization of debt discount and issuance costs related to our convertible senior notes, loss on early note conversions, amortization of purchased intangibles, legal settlements, business combination and other related costs, and the related income tax effect of these adjustments. We believe the presentation of operating results that exclude these non-cash or non-recurring items provides useful supplemental information to investors and facilitates the analysis of our operating results and comparison of operating results across reporting periods.
  • Free Cash Flow. Free cash flow is defined as net cash provided by (used in) operating activities plus cash paid for legal settlements and repayments of convertible senior notes attributable to debt discount, reduced by purchases of property and equipment. Free cash flow margin is calculated as free cash flow as a percentage of total revenues. We believe information regarding free cash flow and free cash flow margin provides useful information to investors because it is an indicator of the strength and performance of our business operations.

Our presentation of non-GAAP financial measures may not be comparable to similar measures used by other companies. We encourage investors to carefully consider our results under GAAP, as well as our supplemental non-GAAP information and the reconciliation between these presentations, to more fully understand our business. Please see the tables included at the end of this release for the reconciliation of GAAP and non-GAAP results.

Use of Forward-Looking Statements

This release contains “forward-looking statements” regarding our performance, including but not limited to statements in the section entitled “Financial Outlook.” Forward-looking statements are subject to known and unknown risks and uncertainties and are based on potentially inaccurate assumptions that could cause actual results to differ materially from those expected or implied by the forward-looking statements. If any such risks or uncertainties materialize or if any of the assumptions prove incorrect, our results could differ materially from the results expressed or implied by the forward-looking statements we make.

Factors that may cause actual results to differ materially from those in any forward-looking statements include: (i) errors, interruptions, delays, or security breaches in or of our service or datacenters, (ii) our ability to grow at our expected rate of growth, including our ability to convert deferred revenue and backlog into revenue, add and retain customers, sell additional subscriptions to existing customers and enter new geographies and markets, (iii) our ability to continue to release, and gain customer acceptance of, improved versions of our services, (iv) our ability to develop and gain customer acceptance of new products and services, including our platform, (v) our ability to compete successfully against existing and new competitors, and (vi) material changes in the value of foreign currencies relative to the U.S. Dollar.

Further information on these and other factors that could affect our financial results are included in our Form 10-Q for the quarter ended June 30, 2018 and in other filings we make with the Securities and Exchange Commission from time to time.

We undertake no obligation, and do not intend, to update these forward-looking statements, to review or confirm analysts’ expectations, or to provide interim reports or updates on the progress of the current financial quarter.

About ServiceNow

ServiceNow (NYSE: NOW) is making the world of work, work better for people™. Our cloud-based platform and solutions deliver digital experiences that help people do their best work. For more information, visit: www.servicenow.com.

© 2018 ServiceNow, Inc. All rights reserved. ServiceNow, the ServiceNow logo, Now, and other ServiceNow marks are trademarks and/or registered trademarks of ServiceNow, Inc., in the United States and/or other countries. Other company names, product names, and logos may be trademarks of the respective companies with which they are associated.

 

ServiceNow, Inc.

Condensed Consolidated Statements of Operations

(in thousands, except share and per share data)

(unaudited)

 
  Three Months Ended   Nine Months Ended

September 30,
2018

 

September 30,
2017

September 30,
2018

 

September 30,
2017

*As Adjusted *As Adjusted
Revenues:
Subscription $ 626,567 $ 449,506 $ 1,755,174 $ 1,239,762
Professional services and other   46,530     42,866     138,201     129,639  
Total revenues   673,097     492,372     1,893,375     1,369,401  
Cost of revenues (1):
Subscription 106,821 81,878 303,918 228,046
Professional services and other   51,037     45,608     150,578     137,652  
Total cost of revenues   157,858     127,486     454,496     365,698  
Gross profit   515,239     364,886     1,438,879     1,003,703  
Operating expenses (1):
Sales and marketing 289,323 217,866 883,893 643,998
Research and development 135,655 98,465 380,839 272,959
General and administrative   80,693     52,465     216,851     150,242  
Total operating expenses   505,671     368,796     1,481,583     1,067,199  
Income (loss) from operations 9,568 (3,910 ) (42,704 ) (63,496 )
Interest expense (11,233 ) (16,566 ) (43,795 ) (36,581 )
Interest income and other income (expense), net   8,895     579     45,520     (177 )
Income (loss) before income taxes 7,230 (19,897 ) (40,979 ) (100,254 )
Provision for (benefit from) income taxes   (1,175 )   2,285     (7,260 )   (754 )
Net income (loss) $ 8,405   $ (22,182 ) $ (33,719 ) $ (99,500 )
Net income (loss) per share - basic $ 0.05   $ (0.13 ) $ (0.19 ) $ (0.58 )
Net income (loss) per share - diluted $ 0.04   $ (0.13 ) $ (0.19 ) $ (0.58 )
Weighted-average shares used to compute net income (loss) per share - basic   178,719,694     171,883,190     177,198,179     170,359,717  
Weighted-average shares used to compute net income (loss) per share - diluted   192,190,899     171,883,190     177,198,179     170,359,717  
 

(1) Includes stock-based compensation as follows:

 
Three Months Ended Nine Months Ended

September 30,
2018

September 30,
2017

September 30,
2018

September 30,
2017

*As Adjusted *As Adjusted
Cost of revenues:
Subscription $ 12,775 $ 8,980 $ 36,604 $ 25,860
Professional services and other 8,407 7,056 24,310 21,548
Sales and marketing 60,132 43,962 169,283 124,650
Research and development 35,527 23,092 97,905 67,624
General and administrative 27,567 17,352 73,207 48,695
 

*As adjusted to reflect the impact of the full retrospective adoption of Topic 606.

 
 
ServiceNow, Inc.
Condensed Consolidated Balance Sheets
(in thousands)
(unaudited)
 
  September 30, 2018   December 31, 2017
*As Adjusted
Assets
Current assets:
Cash and cash equivalents $ 703,629 $ 726,495
Short-term investments 922,411 1,052,803
Accounts receivable, net 424,698 437,051
Current portion of deferred commissions 126,185 109,643
Prepaid expenses and other current assets 115,262 95,959

Total current assets

2,292,185 2,421,951
Deferred commissions, less current portion 247,681 224,252
Long-term investments 457,561 391,442
Property and equipment, net 297,371 245,124
Intangible assets, net 84,006 86,916
Goodwill 143,133 128,728
Other assets 59,505 51,832
Total assets $ 3,581,442 $ 3,550,245
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable $ 43,223 $ 32,109
Accrued expenses and other current liabilities 251,545 253,257
Current portion of deferred revenue 1,363,217 1,210,695
Current portion of convertible senior notes, net 160,972 543,418
Total current liabilities 1,818,957 2,039,479
Deferred revenue, less current portion 41,244 36,120
Convertible senior notes, net 653,638 630,018
Other long-term liabilities 47,419 65,884
Stockholders’ equity 1,020,184 778,744
Total liabilities and stockholders’ equity $ 3,581,442 $ 3,550,245
 

*As adjusted to reflect the impact of the full retrospective adoption of Topic 606.

 
 
ServiceNow, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 
  Three Months Ended   Nine Months Ended
September 30,   September 30, September 30,   September 30,
2018 2017 2018 2017
*As Adjusted *As Adjusted
 
Cash flows from operating activities:
Net income (loss) $ 8,405 $ (22,182 ) $ (33,719 ) $ (99,500 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization 37,874 29,401 106,492 81,808
Amortization of deferred commissions 43,063 25,068 107,367 68,154
Amortization of debt discount and issuance costs 11,233 16,566 43,795 36,581
Stock-based compensation 144,408 100,442 401,309 288,377
Deferred income tax (1,371 ) (1,304 ) (32,297 ) (6,055 )
Gain on marketable equity securities (19,257 )
Repayments of convertible senior notes attributable to debt discount (14,076 ) (101,633 )
Other 6,209 460 4,502 (1,554 )
Changes in operating assets and liabilities, net of effect of business combinations:
Accounts receivable (58,486 ) (9,307 ) 7,454 45,879
Deferred commissions (59,526 ) (44,567 ) (152,521 ) (114,514 )
Prepaid expenses and other assets (521 ) (13,787 ) 1,519 (17,393 )
Accounts payable 7,690 (3,228 ) 5,058 (11,088 )
Deferred revenue 42,969 54,875 174,058 188,291
Accrued expenses and other liabilities (22,370 ) 9,387   9,350   (829 )

Net cash provided by operating activities

145,501   141,824   521,477   458,157  
Cash flows from investing activities:
Purchases of property and equipment (47,987 ) (46,753 ) (136,349 ) (115,856 )
Business combinations, net of cash and restricted cash acquired (5,000 ) (24,940 ) (26,537 )
Purchases of other intangibles (2,750 ) (13,600 ) (6,170 )
Purchases of investments (438,246 ) (286,976 ) (818,159 ) (641,666 )
Purchase of strategic investments (8,839 ) (100 ) (8,839 ) (4,000 )
Sales of investments 39,975 77,968
Maturities of investments 408,473   128,648   861,629   350,597  
Net cash used in investing activities (1) (89,349 ) (210,181 ) (100,283 ) (365,664 )
Cash flows from financing activities:
Net proceeds from borrowings on convertible senior notes 772,127
Repayments of convertible senior notes attributable to principal (40,335 ) (311,520 )
Proceeds from issuance of warrants 54,071
Purchases of convertible note hedges (128,017 )
Repurchases and retirement of common stock (55,000 )
Proceeds from employee stock plans 39,018 35,856 100,437 76,748
Taxes paid related to net share settlement of equity awards (66,737 ) (43,781 ) (221,268 ) (131,130 )
Payments on financing obligations (180 ) (121 ) (756 ) (2,681 )
Net cash (used in) provided by financing activities (68,234 ) (8,046 ) (433,107 ) 586,118  
Foreign currency effect on cash, cash equivalents and restricted cash (1) (2,088 ) 7,725   (9,593 ) 25,765  
Net (decrease) increase in cash, cash equivalents and restricted cash (1) (14,170 ) (68,678 ) (21,506 ) 704,376
Cash, cash equivalents and restricted cash at beginning of period (1) 720,493   1,174,986   727,829   401,932  
Cash, cash equivalents and restricted cash at end of period (1) $ 706,323   $ 1,106,308   $ 706,323   $ 1,106,308  
 

*As adjusted to reflect the impact of the full retrospective adoption of Topic 606.

 
 
(1) During the three months ended December 31, 2017, we adopted Accounting Standards Update 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash,” which requires that amounts generally described as restricted cash or restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. Accordingly, we have recast our prior period condensed consolidated statement of cash flows to conform to the current presentation. The impact of the adoption for the three and nine months ended September 30, 2017 are not material.
 
 
ServiceNow, Inc.
GAAP to Non-GAAP Reconciliation
(in thousands, except share and per share data)
(unaudited)
 
  Three Months Ended     Nine Months Ended  
September 30,   September 30, Growth September 30,   September 30, Growth
2018

2017 (3)

Rates 2018

2017 (3)

Rates
 
Subscription revenues:
GAAP subscription revenues $ 626,567 $ 449,506 39% $ 1,755,174 $ 1,239,762 42%
Effects of foreign currency rate fluctuations 2,643   (34,880 )
Non-GAAP adjusted subscription revenues (1) $ 629,210   40% $ 1,720,294   39%
 
Subscription billings:
GAAP subscription revenues $ 626,567 $ 449,506 39% $ 1,755,174 $ 1,239,762 42%
Change in subscription deferred revenue, unbilled receivables and customer deposits 47,592   51,452   174,261   195,776  
Non-GAAP subscription billings 674,159 500,958 35% 1,929,435 1,435,538 34%
Effects of foreign currency rate fluctuations 2,850 (39,698 )
Effects of fluctuations in billings duration (4,840 ) (3,471 )
Non-GAAP adjusted subscription billings (2) $ 672,169   34% $ 1,886,266   31%
 
Professional services and other revenues:
GAAP professional services and other revenues $ 46,530 $ 42,866 9% $ 138,201 $ 129,639 7%
Effects of foreign currency rate fluctuations 429   (2,985 )
Non-GAAP adjusted professional service and other revenues (1) $ 46,959   10% $ 135,216   4%
 
Professional services and other billings:
GAAP professional services and other revenues $ 46,530 $ 42,866 9% $ 138,201 $ 129,639 7%
Change in professional services and other deferred revenue (148 ) 3,034   8,157   (1,241 )
Non-GAAP professional services and other billings 46,382 45,900 1% 146,358 128,398 14%
Effects of foreign currency rate fluctuations 429   (2,985 )
Non-GAAP adjusted professional services and other billings (2) $ 46,811   2% $ 143,373   12%
 
Total revenues:
GAAP total revenues $ 673,097 $ 492,372 37% $ 1,893,375 $ 1,369,401 38%

Effects of foreign currency rate fluctuations

3,072   (37,865 )
Non-GAAP adjusted total revenues (1) $ 676,169   37% $ 1,855,510   35%
 
Total billings:
GAAP total revenues $ 673,097 $ 492,372 37% $ 1,893,375 $ 1,369,401 38%
Change in total deferred revenue, unbilled receivables and customer deposits 47,444   54,486   182,418   194,535  
Non-GAAP total billings 720,541 546,858 32% 2,075,793 1,563,936 33%
Effects of foreign currency rate fluctuations 3,279 (42,683 )
Effects of fluctuations in billings duration (4,840 ) (3,471 )
Non-GAAP adjusted total billings (2) $ 718,980   31% $ 2,029,639   30%
 
Cost of revenues:
GAAP subscription cost of revenues $ 106,821 $ 81,878 $ 303,918 $ 228,046
Stock-based compensation (12,775 ) (8,980 ) (36,604 ) (25,860 )
Amortization of purchased intangibles (4,879 ) (3,581 ) (13,930 ) (10,849 )
Non-GAAP subscription cost of revenues $ 89,167   $ 69,317   $ 253,384   $ 191,337  
 
GAAP professional services and other cost of revenues $ 51,037 $ 45,608 $ 150,578 $ 137,652
Stock-based compensation (8,407 ) (7,056 ) (24,310 ) (21,548 )
Non-GAAP professional services and other cost of revenues $ 42,630   $ 38,552   $ 126,268   $ 116,104  
 
Gross profit (loss):
GAAP subscription gross profit $ 519,746 $ 367,628 $ 1,451,256 $ 1,011,716
Stock-based compensation 12,775 8,980 36,604 25,860
Amortization of purchased intangibles 4,879   3,581   13,930   10,849  
Non-GAAP subscription gross profit $ 537,400   $ 380,189   $ 1,501,790   $ 1,048,425  
 
GAAP professional services and other gross loss $ (4,507 ) $ (2,742 ) $ (12,377 ) $ (8,013 )
Stock-based compensation 8,407   7,056   24,310   21,548  
Non-GAAP professional services and other gross profit $ 3,900   $ 4,314   $ 11,933   $ 13,535  
 
GAAP gross profit $ 515,239 $ 364,886 $ 1,438,879 $ 1,003,703
Stock-based compensation 21,182 16,036 60,914 47,408
Amortization of purchased intangibles 4,879   3,581   13,930   10,849  
Non-GAAP gross profit $ 541,300   $ 384,503   $ 1,513,723   $ 1,061,960  
 
Gross margin:
GAAP subscription gross margin 83 % 82 % 83 % 82 %
Stock-based compensation as % of subscription revenues 2 % 2 % 2 % 2 %
Amortization of purchased intangibles as % of subscription revenues 1 % 1 % 1 % 1 %
Non-GAAP subscription gross margin 86 % 85 % 86 % 85 %
 
GAAP professional services and other gross margin (10 %) (6 %) (9 %) (6 %)
Stock-based compensation as % of professional services and other revenues 18 % 16 % 18 % 16 %
Non-GAAP professional services and other gross margin 8 % 10 % 9 % 10 %
 
GAAP gross margin 77 % 74 % 76 % 73 %
Stock-based compensation as % of total revenues 3 % 3 % 3 % 3 %
Amortization of purchased intangibles as % of total revenues 0 % 1 % 1 % 2 %
Non-GAAP gross margin 80 % 78 % 80 % 78 %
 
Operating expenses:
GAAP sales and marketing expenses $ 289,323 $ 217,866 $ 883,893 $ 643,998
Stock-based compensation (60,132 ) (43,962 ) (169,283 ) (124,650 )
Amortization of purchased intangibles   (117 )   (351 )
Non-GAAP sales and marketing expenses $ 229,191   $ 173,787   $ 714,610   $ 518,997  
 
GAAP research and development expenses $ 135,655 $ 98,465 $ 380,839 $ 272,959
Stock-based compensation

(35,527

)

(23,092

)

(97,905

)

(67,624

)
Amortization of purchased intangibles

(455

)

(455

)

(1,365

)

(1,365

)
Non-GAAP research and development expenses $ 99,673   $ 74,918  

$

281,569   $ 203,970  
 
GAAP general and administrative expenses $ 80,693 $ 52,465 $ 216,851 $ 150,242
Stock-based compensation

(27,567

)

(17,352

)

(73,207

)

(48,695

)
Amortization of purchased intangibles

(1,047

)

(681

)

(2,882

)

(1,734

)
Business combination and other related costs

(300

)

(154

)

(964

)

(1,504

)
Non-GAAP general and administrative expenses $ 51,779   $ 34,278   $ 139,798   $ 98,309  
 
GAAP total operating expenses $ 505,671 $ 368,796 $ 1,481,583 $ 1,067,199
Stock-based compensation

(123,226

)

(84,406

)

(340,395

)

(240,969

)
Amortization of purchased intangibles

(1,502

)

(1,253

)

(4,247

)

(3,450

)
Business combination and other related costs

(300

)

(154

)

(964

)

(1,504

)
Non-GAAP total operating expenses $ 380,643   $ 282,983   $ 1,135,977   $ 821,276  
 
Income (loss) from operations:
GAAP income (loss) from operations $ 9,568 $ (3,910 ) $ (42,704 ) $ (63,496 )
Stock-based compensation

144,408

100,442

401,309

288,377

Amortization of purchased intangibles

6,381

4,834

18,177

14,299

Business combination and other related costs

300

 

154

 

964

 

1,504

 
Non-GAAP income from operations $ 160,657   $ 101,520   $ 377,746   $ 240,684  
 
Operating margin:
GAAP operating margin

1

%

(1

%)

(2

%)

(5

%)
Stock-based compensation as % of total revenues

21

%

20

%

21

%

21

%
Amortization of purchased intangibles as % of total revenues

2

%

2

%

1

%

2

%
Business combination and other related costs as % of total revenues

0

%

0

%

0

%

0

%
Non-GAAP operating margin

24

%

21

%

20

%

18

%
 
 
Net income (loss):
GAAP net income (loss) $ 8,405 $ (22,182 ) $ (33,719 ) $ (99,500 )
Stock-based compensation

144,408

100,442

401,309

288,377

Amortization of purchased intangibles

6,381

4,834

18,177

14,299

Business combination and other related costs

300

154

964

1,504

Amortization of debt discount and issuance costs for the convertible senior notes

11,233

16,566

43,795

36,581

Loss on early note conversions

190

4,063

Income tax expense effects related to the above adjustments

(41,913

)

(30,387

)

(109,819

)

(77,716

)
Non-GAAP net income $ 129,004   $ 69,427   $ 324,770   $ 163,545  
 
Net income (loss) per share - basic and diluted:
GAAP net income (loss) per share - basic $ 0.05   $ (0.13 ) $ (0.19 ) $ (0.58 )
GAAP net income (loss) per share - diluted $ 0.04   $ (0.13 ) $ (0.19 ) $ (0.58 )
Non-GAAP net income per share - basic $ 0.72   $ 0.40   $ 1.83   $ 0.96  
Non-GAAP net income per share - diluted $ 0.68   $ 0.38   $ 1.73   $ 0.91  
 
GAAP weighted-average shares used to compute net income (loss) per share - basic

178,719,694

 

171,883,190

 

177,198,179

 

170,359,717

 
 
GAAP weighted-average shares used to compute net income (loss) per share - diluted

192,190,899

171,883,190

177,198,179

170,359,717

Effect of dilutive time-based stock awards (4)

8,104,457

7,670,540

8,562,871

In-the-money portion of convertible senior notes (4)

(3,192,806

)

Warrants (4)

261,456

2,932,637

Stock awards with performance conditions not yet satisfied (4)

348,689

 

171,401

 

239,162

 

90,125

 
Non-GAAP weighted-average shares used to compute net income per share - diluted

189,346,782

 

180,420,504

 

188,040,518

 

179,012,713

 
 
Free cash flow:
GAAP net cash provided by operating activities $ 145,501 $ 141,824 $ 521,477 $ 458,157
Purchases of property and equipment

(47,987

)

(46,753

)

(136,349

)

(115,856

)
Repayments of convertible senior notes attributable to debt discount

14,076

 

 

101,633

 

 
Non-GAAP free cash flow $ 111,590   $ 95,071   $ 486,761   $ 342,301  
 
Free cash flow margin:
GAAP net cash provided by operating activities as % of total revenues

22

%

29

%

28

%

33

%
Purchases of property and equipment as % of total revenues

(7

%)

(10

%)

(7

%)

(8

%)
Repayments of convertible senior notes attributable to debt discount as % of total revenues

2

%

%

5

%

%
Non-GAAP free cash flow margin

17

%

19

%

26

%

25

%
 
(1) Adjusted revenues and the corresponding growth rates are derived by applying the exchange rates in effect during the comparison period rather than the actual exchange rates in effect during the current period.
(2) Adjusted billings and the corresponding growth rates are derived by applying the exchange rates in effect during the comparison period rather than the actual exchange rates in effect during the current period, and by replacing the portion of multi-year billings in excess of twelve months during the current period with the portion of multi-year billings in excess of twelve months during the comparison period.
(3) Amounts in the comparison period have been restated for Topic 606 and are unaudited. Effects of foreign currency rate fluctuations and fluctuations in billing durations are not applicable for the comparison period.
(4) Effect of dilutive time-based stock awards, in-the-money portion of convertible senior notes and warrants are included in the GAAP weighted-average diluted shares in periods where we have GAAP net income. We exclude the in-the-money portion of convertible senior notes for non-GAAP weighted-average diluted shares as they are covered by our note hedges. We include stock awards with performance conditions not yet satisfied as we believe it is probable that the performance condition will be met.
 

ServiceNow, Inc.

Reconciliation of Non-GAAP Financial Guidance

The financial guidance provided below is an estimate based on information available as of September 30, 2018. The comparison period amounts and the related growth rates have been adjusted from previously reported amounts to reflect the impact of the full retrospective adoption of Topic 606. The company’s future performance and financial results are subject to risks and uncertainties, and actual results could differ materially from the guidance set forth below. Some of the factors that could affect the company’s financial results are stated above in this press release. Further information on these and other factors that could affect our financial results are included in our Form 10-Q for the quarter ended June 30, 2018 and in other filings we make with the Securities and Exchange Commission from time to time, including our Form 10-Q that will be filed for the quarter ended September 30, 2018. The company assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates.

  Three Months Ended    
December 31, 2018   December 31, 2017 (3) Growth Rates
 
GAAP subscription revenues $660 - $665 million $500 million 32% - 33%
 
Effects of foreign currency rate fluctuations 4 million
 
Non-GAAP adjusted subscription revenues (1) $664 - $669 million 33% - 34%
 
GAAP subscription revenues $660 - $665 million $500 million 32% - 33%
 
Change in subscription deferred revenue, unbilled receivables and customer deposits 240 million 188 million
   
Non-GAAP subscription billings $900 - $905 million $688 million 31%
 
Effects of foreign currency rate fluctuations 6 million
 
Effects of fluctuations in billings duration 0 million
 
Non-GAAP adjusted subscription billings (2) $906 - $911 million 32%
 
GAAP operating margin 1%
 
Stock-based compensation expense as % of total revenues 19%
 
Amortization of purchased intangibles as % of total revenues 1%
 
Non-GAAP operating margin 21%
 
GAAP weighted-average shares used to compute net income per share - diluted 192 million
 
In-the-money portion of convertible senior notes (4) (2) million
 
Non-GAAP weighted-average shares used to compute net income per share - diluted 190 million
 
Twelve Months Ended  
December 31, 2018 December 31, 2017 (3) Growth Rates
 
GAAP subscription revenues $2,415 - $2,420 million $1,740 million 39%
 
Effects of foreign currency rate fluctuations (31) million
 
Non-GAAP adjusted subscription revenues (1) $2,384 - $2,389 million 37%
 
GAAP subscription revenues $2,415 - $2,420 million $1,740 million 39%
 
Change in subscription deferred revenue, unbilled receivables and customer deposits 415 million 384 million
   
Non-GAAP subscription billings $2,830 - $2,835 million $2,124 million 33%
 
Effects of foreign currency rate fluctuations (34) million
 
Effects of fluctuations in billings duration (3) million
 
Non-GAAP adjusted subscription billings (2) $2,793 - $2,798 million 31% - 32%
 
GAAP subscription gross margin 82%
 
Stock-based compensation expense as % of subscription revenues 2%
 
Amortization of purchased intangibles as % of subscription revenues 1%
 
Non-GAAP subscription margin 85%
 
GAAP operating margin (2%)
 
Stock-based compensation expense as % of total revenues 21%
 
Amortization of purchased intangibles as % of total revenues 1%
 
Business combination and other related costs as % of total revenues 0%
 
Non-GAAP operating margin 20%
 
GAAP net cash provided by operating activities as % of total revenues 30%
 
Purchases of property and equipment as % of total revenues (8%)
 
Repayments of convertible senior notes attributable to debt discount as % of total revenues 6%
 
Non-GAAP free cash flow margin 28%
 
GAAP weighted-average shares used to compute net loss per share - diluted 178 million
 
Effect of dilutive securities (stock options, restricted stock units and warrants) 10 million
 
Non-GAAP weighted-average shares used to compute net income per share - diluted 188 million
 
(1) Adjusted revenues and the corresponding growth rates are derived by applying the exchange rates in effect during the comparison period rather than the forecasted exchange rates for the guidance period.
(2) Adjusted billings and the corresponding growth rates are derived by applying the exchange rates in effect during the comparison period rather than the forecasted exchange rates for the guidance period, and by replacing the forecasted portion of multi-year billings in excess of twelve months for the guidance period with the actual portion of multi-year billings in excess of twelve months during the comparison period.
(3) Effects of foreign currency rate fluctuations and fluctuations in billing durations are not applicable for the comparison period.
(4) We exclude the in-the-money portion of convertible senior notes for non-GAAP weighted-average diluted shares as they are covered by our note hedges.
 

ServiceNow, Inc.
Media Contact:
Joanne Blum, 310-489-7278
[email protected]
or
Investor Contact:
Jimmy Sexton, 669-262-1430
[email protected]