Basics – Grade A deal, $186M size at $16 mid-point, some secondary shares (23%), market cap $1.9B, ~10x current revenues, NYSE: NOW.
Interesting opening speech by the founder of the company. Notes that the most popular database is Microsoft Excel and that for most people things start with filling out a form. Points out that the IT management space is served by four large, old and uninspiring companies. A simple construct of “request-respond-fulfill” can scale up from the simplest tasks to the most complex.
Applications include incident management, change management and analyzing failures across nearly all industries. This basic approach means that many systems can be consolidated and streamlined. Started selling in July of 2005 when SaaS was still a very new concept and business model. Nice intro. “One of the best I did is bring in a real CEO…”
CEO is no-nonsense. Highlights growth, and what is described as a “super agile cloud-based platform” designed to be usable by non-IT experts. IT is under huge pressure, CIO tenure has shrunk dramatically.
The core product is a set of operational applications that provide incident, problem, change and knowledge management combined with collaboration tools including live feeds and chat. In addition there are management tools on top and infrastructure applications underneath. Having a single software stack to do this does provide a level of integration and functionality that isn’t possible otherwise.
ServiceNow is also benefiting from customer-built applications that run on the platform and they have a plan to enable more 3rd party applications. The core of the management team comes from Peregrine Systems and includes executives from Data Domain (acquired by EMC.)
In terms of size the company is approaching the $200M revenue run-rate and has a large deferred revenue and backlog of $248M. Average contract length is 30 months. Customer count is increasing and average revenue per customer has increased from $112K in 2011 to $131K in the 9 months ended March 2012. The ARPC has is up from $83K in 2009.
Renewal rates are 95%+ with 25-30% done at increasing contract sizes. A recent decline in gross margin is noted by management (81% to 73%) and is related to a change in delivery strategy that results in some doubling up of expenses and increased headcount. Margins will continue to decline during 2012 and then increase starting in 2013 as they cut over to the new infrastructure, eliminating duplicate costs. Services model is also changing to a time and materials business rather than fixed price offerings.
Margins are going in the wrong direction and will continue to do so for the rest of 2012. But the past fiscal year achievement of 15% operating margins shows that the company is likely to achieve their 20%+ operating margin targets in the next few years.
This is a widely anticipated deal and should do well. It’s in our core coverage so we will be working up a full research note including intrinsic valuation.
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