IPOs, Initial Public Offerings: pre & post IPO

ServiceNow (NOW)

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Priced at $18, 12.5% above mid-range

Based in  San Diego, California, ServiceNow (NOW) updated its S-1 filing June 19, 2012.  The estimated IPO amount is $186 million at the price range mid-point of $16, with a market capitalization of $1.9 billion.  NOW’s IPO is scheduled for Friday, June 29, 2012.

[S-1] filed June 19, 2012.  The initial S-1 was filed March 30, 2012.

UNDERWRITERS
Manager, Joint Managers:  Morgan Stanley; Citigroup; Deutsche Bank Securities
Co Managers: Barclays; Credit Suisse; UBS Securities; Pacific Crest Securities; Wells Fargo Securities

SUMMARY
NOW provides cloud-based services to automate enterprise IT operations.  For the quarter ended March, 2012 83% of revenue was subscription-based.

On a sequential quarterly basis revenue is increasing nicely, but gross margins have dropped in the March 2012 and December 2012 quarters, resulting in quarterly losses.  For the 12 months ended March 2012 NOW lost $10. 3 million.

Backing out stock compensation the loss is $1 million, which is very good for a subscription based cloud company.

Pre-IPO grade-score summary
. Many IPOs in today’s environment are graded C+ and scored 7
. If the pre-IPO grade is below C+ or the score is below 7,
then our analysts may have some concerns about the company’s
outlook and/or its market segment
. If the pre-ipo grade is above C+ or the score is above 7,
then our analysts believe the company’s overall business outlook
is more favorable
Glossary of IPO Analysis terms

SCORECARD

Mgt

Market

Market Do-

Proprie-

Total

1-5, 5 is high

Growth

mination

tary

rating

20 is perfect

2

2

1.5

1.5

C, 7.5

VALUATION

Valuation Ratios

IPO Mrkt

Price /

Price /

Price /

Price /

% offered

12 months ended March ’12

Cap (mm)

Sales

Earnings

BookValue

TangibleBV

in IPO

ServiceNow (NOW)

$1,925

12.8

-187

12.1

12.1

10%

For the 12 months ended March 31, 2012 NOW lost $10.3 million.  Backing out stock compensation the loss was $1 million.

SEQUENTIAL QUARTER RESULTS

Quarterly results

Dec ’10

March ’11

June ’11

Sept ’11

Dec ’11

March ’12

Revenue

$21

$25

$29

$34

$39

$47

Revenue change over prior qtr

18%

17%

16%

15%

21%

Subscription % of total rev

86%

84%

84%

89%

88%

83%

Gross profit % of rev

65%

63%

68%

65%

59%

55%

Net income (loss) ($mm)

$2.7

$3.0

$2.0

$0.1

-$6.8

-$5.6

Net income (loss) % of rev

13%

12%

7%

0%

-17%

-12%

Stock-based compensation

$0.5

$0.8

$1.1

$2.4

$3.2

$3.9

Adding back stock-comp, 40% tax rate when profitable

$3.0

$3.5

$2.6

$1.6

-$3.6

-$1.7

CONCLUSION
The is a high demand in the stock market for subscription-based companies in growing markets.  Therefore, we expect NOW to pop on the IPO and recommend investors indicate for the IPO stock.

However, IPOdesktop would not chase after NOW in the after-market for several reasons:

  • Gross margins appear to be declining on a quarterly basis
  • Net income is declining and NOW showed losses for the March 2012 and December 2011 quarters.

On the plus side top line revenue continues go grow at a good clip, see quarterly financials above.

SHAREHOLDERS EQUITY
Pre-IPO shareholders equity is $28 million as of March 31, 2012.  On a profoma basis post-IPO equity is $159 million.  At the price range mid-point of $16 the market capitalization if $1.9 billion.

BUSINESS
NOW provides cloud-based services to automate enterprise IT operations.

NOW’s  service includes a suite of applications built on a proprietary platform that automates workflow and integrates related business processes.

NOW focuses on transforming enterprise IT by automating and standardizing business processes and consolidating IT across the global enterprise. Organizations deploy NOW’s service to create a single system of record for enterprise IT, to lower operational costs and to enhance efficiency.

Also, NOW’s customers use the extensible platform to build custom applications for automating activities unique to their business requirements.

CUSTOMER GROWTH
A majority of NOW’s revenues comes from large, global enterprise customers.

Total customers grew 61% from 668 as of March 31, 2011 to 1,074 as of March 31, 2012. NOW’s customers operate in a wide variety of industries, including financial services, consumer products, IT services, health care and technology.

GROWTH STRATEGY
Expand the customer base
NOW believes the global market for next-generation enterprise IT operations management is large and underserved.

NOW intends to invest in its direct sales force and strategic resellers as well as data center footprints. In particular, NOW grew its sales and marketing team from 140 as of June 30, 2011 to 270 as of March 31, 2012.

Further penetrate existing customer base
Also, NOW believes there are significant cross-sell opportunities for the separately licensed Discovery and Runbook Automation technologies.

Expand internationally
NOW is investing in new geographies, including investment in direct and indirect sales channels, data centers, professional services, customer support and implementation partners.

INTELLECTUAL PROPERTY
NOW only recently began to develop a strategy to seek patent protections for its technology.

COMPETITION
Primary competitors include BMC Software, Inc., CA, Inc., Hewlett-Packard and International Business Machines, all of which can bundle competing products and services with other software offerings, or offer them at a low price as part of a larger sale.

In addition, many of competitors offer SaaS solutions and may make acquisitions of businesses or assets that improve their service offerings. Further, other established SaaS providers not currently operating in enterprise IT operations management may expand their services to compete with NOW’s service.

VENTURE CAPITAL
Pre-IPO ownership, 76% by venture firms.
Entities affiliated with JMI Equity, 54%
Entities affiliated with Sequoia Capital, 22%

EMPLOYEES
As of March 31, 2012, NOW had 729 full-time employees worldwide.

USE OF PROCEEDS
NOW expected to net $151 million from sale of nine million shares.  Shareholders intend to sell 2.65 million shares.

NOW says the purpose of it’s IPO is to create a public market for its common stock, obtain additional capital, facilitate future access to the public equity markets, increase awareness of NOW among potential customers and improve NOW’s competitive position

FINANCIALS

ServiceNow NOW, C, 7

Post IPO shares: 120mm

Cloud-based workflow automation June fiscal

Dec 6mos ’11

Dec 6mos ’12

San Diego, CA

2009

2010

2011

2011

2012

IPO Mkt

Revenues ($mm)

$19

$43

$93

$38

$73

Cap (mm)

Subscription % of total rev

92%

92%

85%

87%

88%

$1,925

Gross profit % of rev

59%

63%

66%

66%

62%

@$16

Net income (loss) ($mm)

-$6

-$30

$10

$5

-$7

Net income (loss) % of rev

-31%

-69%

11%

13%

-9%

Quarterly results

Dec ’10

March ’11

June ’11

Sept ’11

Dec ’11

March ’12

Revenue

$21

$25

$29

$34

$39

$47

Revenue change over prior qtr

18%

17%

16%

15%

21%

Subscription % of total rev

86%

84%

84%

89%

88%

83%

Gross profit % of rev

65%

63%

68%

65%

59%

55%

Net income (loss) ($mm)

$2.7

$3.0

$2.0

$0.1

-$6.8

-$5.6

Net income (loss) % of rev

13%

12%

7%

0%

-17%

-12%

Stock-based compensation

$0.5

$0.8

$1.1

$2.4

$3.2

$3.9

Adding back stock-comp, 40% tax rate when profitable

$3.0

$3.5

$2.6

$1.6

-$3.6

-$1.7

Valuation Ratios

IPO Mrkt

Price /

Price /

Price /

Price /

% offered

12 months ended March ’12

Cap (mm)

Sales

Earnings

BookValue

TangibleBV

in IPO

ServiceNow (NOW)

$1,925

12.8

-187

12.1

12.1

10%

SCORECARD

Mgt

Market

Market Do-

Proprie-

Total

1-5, 5 is high

Growth

mination

tary

rating

20 is perfect

2

2.5

1.5

1.5

C, 7.5

 

 

 

 

 

 

 

 

 

 

 

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