DOCUSIGN, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in our 2019 Annual Report on Form 10-K. As discussed in the section titled "Note Regarding Forward-Looking Statements," the following discussion and analysis contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those identified below and those discussed in the section titled "Risk Factors" under Part II, Item 1A in this Quarterly Report on Form 10-Q and in our 2019 Annual Report on Form 10-K. Our fiscal year endsJanuary 31 .
Executive Overview of Third Quarter Results
Overview
DocuSign accelerates the process of doing business for companies and simplifies life for their customers and employees. We accomplish this by transforming the foundational element of business: the agreement. We offer the world's #1 e-signature solution as the core part of our broader software suite for automating the agreement process, which we call theDocuSign Agreement Cloud. It is designed to allow companies of all sizes and across all industries to quickly and easily make nearly every agreement, approval process or transaction digital. It provides comprehensive functionality across e-signature and addresses the broader agreement process. As a result, over 560,000 customers and hundreds of millions of users worldwide utilizeDocuSign to create, upload and send documents for multiple parties to sign electronically. TheDocuSign Agreement Cloud allows users to complete approvals, agreements and transactions faster by building end-to-end processes.DocuSign eSignature integrates with popular business apps, and our functionality can also be embedded using our API. Finally, theDocuSign Agreement Cloud allows our customers to automate and streamline their business-critical workflows to save time and money, while staying secure and legally compliant. We offer access to our platform on a subscription basis with prices based on the functionality our customers require and the quantity of Envelopes provisioned. Similar to the physical envelopes historically used to mail paper documents, an Envelope is a digital container used to send one or more documents for signature or approval to one or more recipients. Our customers have the flexibility to put a large number of documents in an Envelope. For a number of use cases, such as buying a home, multiple Envelopes are used over the course of the process. To drive customer reach and adoption, we also offer for free certain limited-time or feature-constrained versions of our platform. 27 -------------------------------------------------------------------------------- We generate substantially all our revenue from sales of subscriptions, which accounted for 95% of our revenue for both the three months endedOctober 31, 2019 and 2018. Sales of subscriptions accounted for 94% and 95% of our revenue for the nine months endedOctober 31, 2019 and 2018. Our subscription fees include the use of our software suite and access to customer support. Subscriptions generally range from one to three years, and substantially all our multi-year customers pay in annual installments, one year in advance. We also generate revenue from professional and other non-subscription services, which consists primarily of fees associated with providing new customers deployment and integration services. Other revenue includes amounts derived from sales of on-premises solutions. Professional services and other revenue accounted for 5% of our revenue for both the three months endedOctober 31, 2019 and 2018. It accounted for 6% and 5% of our revenue for the nine months endedOctober 31, 2019 and 2018. We anticipate continuing to invest in customer success through our professional services offerings as we believe it plays an important role in accelerating our customers' deployment of our software suite, which helps to drive customer retention and expansion of the use of theDocuSign Agreement Cloud. We offer subscriptions to our software suite to enterprise businesses, commercial businesses and very small businesses ("VSBs"), which we define as companies with fewer than 10 employees and includes professionals, sole proprietorships and individuals. We sell to customers through multiple channels. Our go-to-market strategy relies on our direct sales force and partnerships to sell to enterprises and commercial businesses and our web-based self-service channel to sell to VSBs, which we believe is the most cost-effective way to reach our smallest customers. We offer more than 300 off-the-shelf, prebuilt integrations with the applications that many of our customers already use-including those offered by Google, Microsoft,NetSuite , Oracle, Salesforce, SAP, SAP SuccessFactors and Workday-so that they can create, sign, send and manage agreements from directly within these applications. We have a diverse customer base spanning various industries and countries with no significant customer concentration. No single customer accounted for more than 10% of total revenue for each of the three and nine months endedOctober 31, 2019 and 2018. We focused initially on selling our e-signature solutions to commercial businesses and VSBs, and later expanded our focus to target enterprise customers. To demonstrate this growth over time, the number of our customers with greater than$300,000 in annual contract value (measured in billings) has increased from approximately 30 as ofJanuary 31, 2013 to 401 as ofOctober 31, 2019 . Each of our customer types has a different purchasing pattern. VSBs tend to become customers quickly with very little to no direct sales or customer support interaction and generate smaller average contract values, while commercial and enterprise customers typically involve longer sales cycles, larger contract values and greater expansion opportunities for us.
Financial Results for the Three and Nine Months Ended
Three Months Ended October 31, Nine Months Ended October 31,
(in thousands) 2019 2018 2019 2018
Total revenue $ 249,502 $ 178,385 $ 699,076 $ 501,237
Total costs and expenses 293,499 236,802 850,232 864,932
Total stock-based compensation
expense 52,736 51,748 150,799 361,707
Loss from operations (43,997 ) (58,417 ) (151,156 ) (363,695 )
Net loss (46,598 ) (52,813 ) (160,952 ) (360,214 )
Cash provided by (used in) operating
activities (1,869 ) 4,261 70,191 41,949
Capital expenditures (12,280 ) (227,355 ) (42,071 ) (237,875 )
Cash, cash equivalents and investments were
28
--------------------------------------------------------------------------------Key Factors Affecting Our Performance
We believe that our future performance will depend on many factors, including the following:
Growing Customer Base We are highly focused on continuing to acquire new customers to support our long-term growth. We have invested, and expect to continue to invest, heavily in our sales and marketing efforts to drive customer acquisition. As ofOctober 31, 2019 , we had a total of over 560,000 customers, including over 65,000 enterprise and commercial customers, compared to over 450,000 customers and over 50,000 enterprise and commercial customers as ofOctober 31, 2018 . We define a customer as a separate and distinct buying entity, such as a company, an educational or government institution, or a distinct business unit of a large company that has an active contract to access our software suite. We define enterprise customers as companies generally included in the Global 2000. We generally define commercial customers to include both mid-market companies, which includes companies outside the Global 2000 that have greater than 250 employees, and small-to-medium-sized businesses ("SMBs"), which are companies with between 10 and 249 employees, in each case excluding any enterprise customers. VSBs include companies with fewer than 10 employees. We refer to total customers as all enterprises, commercial businesses and VSBs. We believe that our ability to increase the number of customers using our software suite, particularly the number of enterprise and commercial customers, is an indicator of our market penetration, the growth of our business and our potential future business opportunities. By increasing awareness of our software suite, further developing our sales and marketing expertise and continuing to build features tuned to different industry needs, we have expanded the diversity of our customer base to include organizations of all sizes across nearly every industry.
Retaining and Expanding Contracts with Existing Enterprise and Commercial Customers
Many of our customers have increased spend with us as they have expanded their use of our offerings in both existing and new use cases across their front or back office operations. Our enterprise and commercial customers may start with just one use case and gradually implement additional use cases across their organization once they see the benefits of our software suite. Several of our largest enterprise customers have deployed our platform for hundreds of use cases across their organizations. We believe there is significant expansion opportunity with our customers following their initial adoption of our platform.
Increasing International Revenue
Our international revenue represented 17% of our total revenue for the three months endedOctober 31, 2019 and 2018, and 18% and 17% of our total revenue for the nine months endedOctober 31, 2019 and 2018. We started our international selling efforts in English-speaking common law countries, such asCanada , theUnited Kingdom andAustralia , where we were able to leverage our core technologies due to similar approaches to e-signature in these jurisdictions andthe United States ("U.S."). We have since made significant investments to be able to offer our solutions in select civil law countries. For example, inEurope , we offer Standards-Based Signature technology tailored for electronic IDentification, Authentication and trust Services ("eIDAS"). In addition, to follow longstanding tradition inJapan , we enable signers to upload and apply their personal eHanko stamp to represent their signatures on an agreement. We plan to increase our international revenue by leveraging and continuing to expand the investments we have already made in our technology, direct sales force and strategic partnerships, as well as helping existingU.S. -based customers manage agreements across their international businesses. Additionally, we expect our strategic partnerships in key international markets, including our current relationships with SAP inEurope , to further grow.
Investing for Growth
We believe that our market opportunity is large, and we plan to invest to
continue to support further growth. This includes expanding our sales headcount
and increasing our marketing initiatives. We also plan to continue to invest in
expanding the functionality of our software suite and underlying infrastructure
and technology to meet the needs of our customers across industries.
29
--------------------------------------------------------------------------------Components of Results of Operations
Revenue
We derive revenue primarily from the sale of subscriptions and, to a lesser extent, professional services.
Subscription Revenue. Subscription revenue consists of fees for the use of our software suite and technical infrastructure and access to customer support, which includes phone or email support. We typically invoice customers in advance on an annual basis. We recognize subscription revenue ratably over the term of the contract subscription period beginning on the date access to our software suite is provided, as long as all other revenue recognition criteria have been met. Professional Services and Other Revenue. Professional services revenue includes fees associated with new customers requesting deployment and integration services. We price professional services on a time and materials basis and on a fixed fee basis. We generally have standalone value for our professional services and recognize revenue based on standalone selling price as services are performed or upon completion of services for fixed fee contracts. Other revenue includes amounts derived from sales of on-premises solutions.
Overhead Allocation
We allocate shared overhead costs, such as facilities (including rent, utilities and depreciation on equipment shared by all departments), information technology, information security costs and recruiting to all departments based on headcount. As such, allocated shared costs are reflected in each cost of revenue and operating expense category.
Cost of Revenue
Cost of Subscription Revenue. Cost of subscription revenue primarily consists of expenses related to hosting our software suite and providing support. These expenses consist of employee-related costs, including salaries, bonuses, benefits, stock-based compensation and other related costs, as well as personnel costs for employees associated with our technical infrastructure and customer support. These expenses also consist of software and maintenance costs, third-party hosting fees, outside services associated with the delivery of our subscription services, amortization expense associated with capitalized internal-use software and acquired intangible assets, credit card processing fees and allocated overhead. We expect our cost of revenue to continue to increase in absolute dollar amounts as we invest in our business. Cost of Professional Services and Other Revenue. Cost of professional services and other revenue consists primarily of personnel costs for our professional services delivery team, travel-related costs and allocated overhead.
Gross Profit and Gross Margin
Gross profit is total revenue less total cost of revenue. Gross margin is gross profit expressed as a percentage of total revenue. We expect that gross profit and gross margin will continue to be affected by various factors including our pricing, timing and amount of investment to maintain or expand our hosting capability, the growth of our software suite support and professional services team, stock-based compensation expenses, amortization of costs associated with capitalized internal use software and acquired intangible assets and allocated overhead. Operating Expenses
Our operating expenses consist of selling and marketing, research and development and general and administrative expenses.
Selling and Marketing Expense. Selling and marketing expense consists primarily
of personnel costs, including sales commissions. These expenses also include
expenditures related to advertising, marketing, promotional events and brand
awareness activities, as well as allocated overhead. We expect selling and
marketing expense to continue to increase in absolute dollars as we enhance our
product offerings and implement marketing strategies.
Research and Development Expense. Research and development expense consists
primarily of personnel costs. These expenses also include non-personnel costs,
such as subcontracting, consulting and professional fees for third-party
development resources and depreciation costs, as well as allocated overhead. Our
research and development efforts focus on
30
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maintaining and enhancing existing functionality and adding new functionality.
We expect research and development expense to increase in absolute dollars as we
invest in the enhancement of our software suite.
General and Administrative Expense. General and administrative expense consists
primarily of personnel costs associated with administrative services such as
legal, human resources, information technology related to internal systems,
accounting and finance. These expenses also include certain third-party
consulting services, certain facilities costs and allocated overhead. We expect
general and administrative expense to increase in absolute dollars to support
the overall growth of our operations.
Interest Expense
After our issuance of the Notes inSeptember 2018 , interest expense consists primarily of contractual interest expense, amortization of discount and amortization of debt issuance costs on our Notes. Prior to the issuance of the Notes, interest expense consisted primarily of commitment fees and amortization of costs related to a loan facility, which was terminated inMay 2018 .
Interest Income and Other Income, Net
Interest income and other income, net, consists primarily of interest earned on our cash, cash equivalents and investments, as well as foreign currency transaction gains and losses.
Provision For (Benefit From) Income Taxes
Our provision for (benefit from) income taxes consists primarily of income taxes in certain foreign jurisdictions where we conduct business, state minimum taxes in theU.S. , and certain tax benefits arising from acquisitions. We have a valuation allowance against ourU.S. deferred tax assets, includingU.S. net operating loss carryforwards. We expect to maintain this valuation allowance for the foreseeable future or until it becomes more likely than not that the benefit of ourU.S. deferred tax assets will be realized by way of expected future taxable income in theU.S. 31 --------------------------------------------------------------------------------
Discussion of Results of Operations
The following table summarizes our historical consolidated statements of operations data:
Three Months Ended October 31, Nine Months Ended October 31,
(in thousands) 2019 2018 2019 2018
Revenue:
Subscription $ 238,072 $ 169,426 $ 660,341 $ 476,085
Professional services and other 11,430 8,959 38,735 25,152
Total revenue 249,502 178,385 699,076 501,237
Cost of revenue:
Subscription 43,178 28,709 115,769 84,204
Professional services and other 18,786 16,364 59,390 55,524
Total cost of revenue 61,964 45,073 175,159 139,728
Gross profit 187,538 133,312 523,917 361,509
Operating expenses:
Sales and marketing 149,231 117,051 430,053 411,915
Research and development 48,758 38,404 133,458 143,047
General and administrative 33,546 36,274 111,562 170,242
Total operating expenses 231,535 191,729 675,073 725,204
Loss from operations (43,997 ) (58,417 ) (151,156 ) (363,695 )
Interest expense (7,364 ) (3,503 ) (21,793 ) (3,743 )
Interest income and other
income, net 5,801 3,395 15,549 4,165
Loss before provision for
(benefit from) income taxes (45,560 ) (58,525 ) (157,400 ) (363,273 )
Provision for (benefit from)
income taxes 1,038 (5,712 ) 3,552 (3,059 )
Net loss $ (46,598 ) $ (52,813 ) $ (160,952 ) $ (360,214 )
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The following table sets forth the components of our consolidated statements of operations data as a percentage of revenue:
Three Months Ended October 31 ,
Nine Months Ended
2019 2018 2019 2018
Revenue:
Subscription 95 % 95 % 94 % 95 %
Professional services and other 5 5 6 5
Total revenue 100 100 100 100
Cost of revenue:
Subscription 17 16 17 17
Professional services and other 8 9 8 11
Total cost of revenue 25 25 25 28
Gross profit 75 75 75 72
Operating expenses:
Sales and marketing 60 66 62 82
Research and development 20 22 19 29
General and administrative 13 20 16 34
Total operating expenses 93 108 97 145
Loss from operations (18 ) (33 ) (22 ) (73 )
Interest expense (3 ) (2 ) (3 ) (1 )
Interest income and other
income, net 3 2 2 2
Loss before provision for
(benefit from) income taxes (18 ) (33 ) (23 ) (72 )
Provision for (benefit from)
income taxes 1 (3 ) - -
Net loss (19 )% (30 )% (23 )% (72 )%
The following discussion and analysis are for the three and nine months ended
Revenue
Three Months Ended October
31, Nine Months Ended October 31,
(in thousands, except
for percentages) 2019 2018 % Change 2019 2018 % Change
Revenue:
Subscription $ 238,072 $ 169,426 41 % $ 660,341 $ 476,085 39 %
Professional services
and other 11,430 8,959 28 % 38,735 25,152 54 %
Total revenue $ 249,502 $ 178,385 40 % $ 699,076 $ 501,237 39 %
Subscription Revenue
Subscription revenue increased $68.6 million , or 41%, in the three months ended
October 31, 2019 , and $184.3 million , or 39%, in the nine months ended October
31, 2019 . These increases were primarily attributable to higher subscription
sales to new and existing customers and the addition of offerings related to
SpringCM .
We continue to invest in a variety of customer programs and initiatives, which,
along with expanded customer use cases, have helped increase our subscription
revenue over time. We expect subscription revenue to continue to increase as we
offer new functionality and attract new customers.
33
--------------------------------------------------------------------------------Professional Services and Other Revenue
Professional services and other revenue increased by$2.5 million , or 28%, in the three months endedOctober 31, 2019 , and$13.6 million , or 54%, in the nine months endedOctober 31, 2019 , primarily due to increased engagement of professional services to support our growing customer base and the addition of services fromSpringCM and our strategic partnerships. We expect professional services revenue to continue to increase as we offer new functionality and serve new customers.
Cost of Revenue and Gross Margin
Three Months Ended October 31, Nine Months Ended October 31,
(in thousands, except
for percentages) 2019 2018 % Change 2019 2018 % Change
Cost of revenue:
Subscription $ 43,178 $ 28,709 50 % $ 115,769 $ 84,204 37 %
Professional services
and other 18,786 16,364 15 % 59,390 55,524 7 %
Total cost of revenue $ 61,964 $ 45,073 37 % $ 175,159 $ 139,728 25 %
Gross margin:
Subscription 82 % 83 % (1 )pts 82 % 82 % -
Professional services
and other (64 )% (83 )% 19 pts (53 )% (121 )% 68 pts
Total gross margin 75 % 75 % - 75 % 72 % 3 pts
Cost of Subscription Revenue
Cost of subscription revenue increased
primarily related to higher data center costs; and
? Increases of
compensation, primarily due to higher headcount and the addition of
employees.
Cost of subscription revenue increased $31.6 million , or 37%, in the nine months
ended October 31, 2019 , primarily due to:
? An increase of $20.1 million in operating costs, primarily related to an
increase in reseller partnership fees, higher data center costs and the
addition of SpringCM ;
? An increase of $11.5 million in personnel costs primarily due to higher
headcount; and
? An increase of
These increases were partially offset by a decrease of
Cost of Professional Services and Other Revenue
Cost of professional services and other revenue increased$2.4 million , or 15%, in the three months endedOctober 31, 2019 , primarily due an increase of$1.6 million in personnel costs primarily related to the increased headcount in our professional services organization and the addition ofSpringCM employees.
Cost of professional services and other revenue increased
headcount in our professional services organization and the addition of
? An increase of
addition of
These increases in cost of professional services and other revenue were
partially offset by a decrease of
34
--------------------------------------------------------------------------------Sales and Marketing
Three Months Ended October 31, Nine Months Ended October 31,
(in thousands, except
for percentages) 2019 2018 % Change 2019 2018 % Change
Sales and marketing $ 149,231 $ 117,051 27 % 430,053 411,915 4 %
Percentage of revenue 60 % 66 % 62 % 82 %
Sales and marketing expenses increased
addition of
headcount;
? An increase of
and facility costs;
? An increase of
headcount; and
? An increase of $1.5 million in depreciation and amortization due to the
amortization of certain intangible assets acquired in the SpringCM
acquisition on September 4, 2018 .
Sales and marketing expenses increased $18.1 million , or 4%, in the nine months
ended October 31, 2019 , primarily due to:
? An increase of $62.9 million in personnel costs due to higher headcount, the
addition of
and headcount, as well as the employer portion of payroll taxes related to
restricted stock unit ("RSU") settlements with no such expense in the prior
year;
? An increase of
and facility costs;
? An increase of
due to higher spend for online advertising campaigns;
? An increase of $7.3 million in depreciation and amortization due to the
amortization of the intangible assets acquired in the
? An increase of
on employee-related costs and partner commissions.
These increases in sales and marketing expense were offset by a decrease of
Research and Development
Three Months Ended October 31, Nine Months Ended October 31,
(in thousands, except
for percentages) 2019 2018 % Change 2019 2018 % Change
Research and
development $ 48,758 $ 38,404 27 % 133,458 143,047 (7 )%Percentage of revenue 20 % 22 % 19 % 29 % Research and development expenses increased$10.4 million , or 27%, in the three months endedOctober 31, 2019 , primarily due to increases of$6.7 million in personnel costs and$1.8 million in stock-based compensation, due to higher headcount and the addition ofSpringCM employees. Research and development expenses decreased$9.6 million , or 7%, in the nine months endedOctober 31, 2019 , primarily due to a decrease of$33.6 million in stock-based compensation expense as the nine months endedOctober 31, 2018 included the cumulative catchup of stockbased compensation expense on the effective date of our IPO. This decrease in stock-based compensation was partially offset by: ? An increase of$16.4 million in personnel costs due to higher headcount and
the addition of
? An increase of
and facility costs.
General and Administrative
Three Months Ended October 31, Nine Months Ended October 31,
(in thousands, except
for percentages) 2019 2018 % Change 2019 2018 % Change
General and
administrative $ 33,546 $ 36,274 (8 )% 111,562 170,242 (34 )%
Percentage of revenue 13 % 20 % 16 % 34 %
35-------------------------------------------------------------------------------- General and administrative expenses decreased$2.7 million , or 8%, in the three months endedOctober 31, 2019 , primarily due to: ? A decrease of$4.3 million in stock-based compensation primarily due to fewer grants after our IPO; and ? A decrease of$3.0 million in professional fees, primarily related to advisory and consulting services incurred for our convertible debt and secondary offerings, and the acquisition ofSpringCM inSeptember 2018 .
These decreases in general and administrative expenses were partially offset by
an increase of
General and administrative expenses decreased$58.7 million , or 34%, in the nine months endedOctober 31, 2019 , primarily due to a decrease of$78.8 million in stock-based compensation expense as the nine months endedOctober 31, 2018 included the cumulative catchup of stockbased compensation expense on the effective date of our IPO. This decrease in stock-based compensation was partially offset by: ? An increase of$10.3 million in personnel costs due to higher headcount and
the employer portion of payroll taxes related to RSU settlements compared to
no such expense in the prior year;
? An increase of $4.7 million in allocated overhead due to technology and
facility costs; and
? An increase of
costs partially offset by lower legal and consulting fees.
Interest expense
Three Months Ended October 31, Nine Months Ended October 31,
(in thousands, except
for percentages) 2019 2018 % Change 2019 2018 % Change
Interest expense $ (7,364 ) $ (3,503 ) 110 % (21,793 ) (3,743 ) 482 %
Percentage of revenue (3 )% (2 )% (3 )% (1 )%
Interest expense increased by $3.9 million and $18.1 million in the three and
nine months ended October 31, 2019 , due to interest expense and amortization of
discount and transaction costs on the Notes.
Interest Income and Other Income, Net
Three Months Ended October 31, Nine Months Ended October 31,
(in thousands, except
for percentages) 2019 2018 % Change 2019 2018 % Change
Interest income $ 4,421 $ 3,942 12 % 12,039 7,326 64 %
Foreign currency gain
(loss) 711 (680 ) NM (550 ) 2,947 NM
Other 669 133 403 % 4,060 (6,108 ) NM
Interest income and
other income, net $ 5,801 $ 3,395 71 % $ 15,549 $ 4,165 273 %
Percentage of revenue 3 % 2 % 2 % 2 %
Interest income and other income, net, increased by
Provision for (Benefit from) Income Taxes
Three Months Ended October 31, Nine Months Ended October 31,
(in thousands, except
for percentages) 2019 2018 % Change 2019 2018 % Change
Provision for (benefit
from) income taxes $ 1,038 $ (5,712 ) NM 3,552 (3,059 ) NM
Percentage of revenue 1 % (3 )% - % - %
36-------------------------------------------------------------------------------- Provision for income taxes was$1.0 million and$3.6 million in the three and nine months endedOctober 31, 2019 as compared to benefit from income taxes of$5.7 million and$3.1 million in the three and nine months endedOctober 31, 2018 . The provision in the three and nine months endedOctober 31, 2019 primarily consisted of foreign tax expenses, resulting from foreign earnings in certain foreign jurisdictions, partially offset by excess benefits from stock option settlements while the tax benefit in the three and nine months endedOctober 31, 2018 resulted from the release of a portion of our deferred tax valuation allowance in connection with theSpringCM acquisition.
Liquidity and Capital Resources
Our principal sources of liquidity were cash and cash equivalents, investments and cash generated from operations. As ofOctober 31, 2019 , we had$653.8 million in cash and cash equivalents and short-term investments. We also had$257.8 million in long-term investments that provide additional capital resources. Since inception we have financed our operations primarily through equity financings and payments by our customers for use of our product offerings and related services. In addition, inSeptember 2018 we issued and sold$575 million in aggregate principal amount of 0.5% Convertible Senior Notes due 2023, which are further described in Note 9. We believe our existing cash and cash equivalents will be sufficient to meet our working capital and capital expenditures needs over at least the next 12 months. While we generated positive cash flows from operations of$70.2 million in the nine months endedOctober 31, 2019 , we have generated losses from operations in the past as reflected in our accumulated deficit of$1.1 billion as ofOctober 31, 2019 . We expect to continue to incur operating losses for the foreseeable future due to the investments we intend to make and may require additional capital resources to execute strategic initiatives to grow our business. We typically invoice our customers annually in advance. Therefore, a substantial source of our cash is from such invoices, which are included on our consolidated balance sheets as accounts receivable until collection and contract liabilities. Our accounts receivable decreased by$15.1 million in the nine months endedOctober 31, 2019 , compared to a decrease of$1.4 million in the nine months endedOctober 31, 2018 , which resulted in a$13.7 million increase in cash provided by operating activities year over year. Accordingly, collections from our customers have a material impact on our cash flows from operating activities. Contract liabilities consists of the unearned portion of billed fees for our subscriptions, which is subsequently recognized as revenue in accordance with our revenue recognition policy. As ofOctober 31, 2019 , we had contract liabilities of$433.1 million , compared to$388.8 million as ofJanuary 31, 2019 . The increase in contract liabilities resulted in net cash provided by operating activities of$44.3 million . Therefore, our growth in billings to existing and new customers has a net beneficial impact on our cash flows from operating activities, after consideration of the impact on our accounts receivable. Our future capital requirements will depend on many factors including our growth rate, customer retention and expansion, the timing and extent of spending to support our efforts to develop our software suite, the expansion of sales and marketing activities and the continuing market acceptance of our software suite. We may in the future enter into arrangements to acquire or invest in complementary businesses, technologies and intellectual property rights. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, operating results and financial condition would be adversely affected.
Cash Flows
The following table summarizes our cash flows for the periods indicated:
Nine Months Ended October 31,
(in thousands) 2019 2018 $ Change Net cash provided by (used in): Operating activities$ 70,191 $ 41,949 $ 28,242 Investing activities (350,795 ) (237,875 ) (112,920 ) Financing activities (39,153 ) 1,034,171 (1,073,324 ) Effect of foreign exchange on cash and cash equivalents (310 ) (1,181 ) 871 Net change in cash, cash equivalents and restricted cash$ (320,067 ) $ 837,064 $ (1,157,131 ) 37
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Cash Flows from Operating Activities
Cash provided by operating activities increased by$28.2 million . This change was primarily due to a decrease of$199.3 million in net loss, partially offset by a decrease of$142.9 million in non-cash expenses. The decrease in non-cash expenses was primarily due to a$210.9 million decrease in in stock-based compensation expense as the nine months endedOctober 31, 2018 included the cumulative catchup of stockbased compensation expense on the effective date of our IPO. This decrease was partially offset by higher non-cash amortization expenses in the nine months endedOctober 31, 2019 . Net cash used in operating assets and liabilities increased by$28.1 million primarily due to an increase of$25.3 million in cash used in deferred contract acquisition and fulfillment costs and$10.9 million in payments of operating lease liabilities. These were partially offset by an increase of$13.7 million in cash provided from changes in accounts receivable and$11.9 million in cash provided from changes in accounts payable and accrued expenses due to the timing of cash receipts and payments.
Cash Flows from Investing Activities
Net cash used in investing activities increased by$112.9 million . This change was primarily due to$308.7 million net purchases of marketable securities and other investments and a$23.0 million higher spending on purchases of property and equipment. The increase was partially offset by the net cash paid to acquireSpringCM of$218.8 million in the nine months endedOctober 31, 2018 .
Cash Flows from Financing Activities
Net cash used in financing activities in the nine months endedOctober 31, 2019 primarily consisted of$125.3 million used to remit tax withholding obligations on RSUs settled in the period, partially offset by proceeds from exercises of stock options and purchases under the ESPP. Net cash provided by financing activities in the nine months endedOctober 31, 2018 , primarily consisted of net proceeds of$529.3 million from the issuance of common stock in our IPO and$560.8 million from the issuance of the Notes. Contractual Obligations and Commitments Our principal contractual obligations and commitments consist of obligations under the Notes (including principal and coupon interest), operating leases, as well as noncancelable contractual commitments that primarily relate to cloud infrastructure support and sales and marketing activities. Refer to Note 9 for more information on the Notes and Note 10 and Note 11 for all other commitments.
As of
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any
off-balance sheet financing arrangements or any relationships with
unconsolidated entities or financial partnerships, including entities sometimes
referred to as structured finance or special purpose entities, that were
established for the purpose of facilitating off-balance sheet arrangements or
other contractually narrow or limited purposes.
38
--------------------------------------------------------------------------------Critical Accounting Policies and Estimates
We prepare our financial statements in accordance withU.S. generally accepted accounting principles ("GAAP"). Preparing these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates. The critical accounting estimates, assumptions and judgments that we believe to have the most significant impact on our consolidated financial statements are revenue recognition, deferred contract acquisition costs, stock-based compensation, business combinations and valuation of goodwill and other acquired intangible assets and income taxes.
There have been no material changes to our critical accounting policies and estimates as described in our 2019 Annual Report on Form 10-K.
Recent Accounting Pronouncements
Refer to Note 1 to our consolidated financial statements included elsewhere in
this Quarterly Report on Form 10-Q for recently issued accounting pronouncements
not yet adopted as of the date of this report.
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--------------------------------------------------------------------------------Non-GAAP Financial Measures and Other Key Metrics
To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, we use certain non-GAAP financial measures, as described below, to understand and evaluate our core operating performance. These non-GAAP financial measures, which may be different than similarly titled measures used by other companies, are presented to enhance investors' overall understanding of our financial performance and should not be considered a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. We believe that these non-GAAP financial measures provide useful information about our financial performance, enhance overall understanding of our past performance and future prospects, and allow for greater transparency with respect to important metrics used by our management for financial and operational decision-making. We present these non-GAAP measures to assist investors in seeing our financial performance using a management view, and because we believe that these measures provide an additional tool for investors to use in comparing our core financial performance over multiple periods with other companies in our industry. Non-GAAP gross profit, non-GAAP subscription gross profit, non-GAAP professional services and other gross profit, non-GAAP gross margin, non-GAAP income (loss) from operations, non-GAAP operating margin and non-GAAP net income (loss): We define these non-GAAP financial measures as the respective GAAP measures, excluding expenses related to stock-based compensation, employer payroll tax on employee stock transactions, amortization of acquisition-related intangibles, amortization of debt discount and issuance costs from our convertible senior notes issued inSeptember 2018 , and, as applicable, other special items. The amount of employer payroll tax-related items on employee stock transactions depend on our stock price and other factors that are beyond our control and that do not correlate to the operation of the business. We believe it is useful to exclude these expenses in order to better understand the long-term performance of our core business and to facilitate comparison of our results to those of peer companies and over multiple periods. Free cash flows: We define free cash flow as net cash provided by (used in) operating activities less purchases of property and equipment. We believe free cash flow is an important liquidity measure of the cash (if any) that is available, after purchases of property and equipment, for operational expenses, investment in our business and to make acquisitions. Free cash flow is useful to investors as a liquidity measure because it measures our ability to generate or use cash in excess of our capital investments in property and equipment. Once our business needs and obligations are met, cash can be used to maintain a strong balance sheet and invest in future growth. Billings: We define billings as total revenue plus the change in our contract liabilities and refund liability less contract assets and unbilled accounts receivable in a given period. Billings reflects sales to new customers plus subscription renewals and additional sales to existing customers. Only amounts invoiced to a customer in a given period are included in billings. We believe billings is a key metric to measure our periodic performance. Given that most of our customers pay in annual installments one year in advance, but we typically recognize a majority of the related revenue ratably over time, we use billings to measure and monitor our ability to provide our business with the working capital generated by upfront payments from our customers. 40 --------------------------------------------------------------------------------
Reconciliation of gross profit and gross margin:
Three Months Ended October 31, Nine Months Ended October 31,
(in thousands) 2019 2018 2019 2018
GAAP gross profit $ 187,538 $ 133,312 $ 523,917 $ 361,509
Add: Stock-based compensation 7,150 5,976 20,808 36,386
Add: Amortization of
acquisition-related intangibles 1,348 1,632 4,356 4,303
Add: Acquisition-related expenses - 108 - 108
Add: Employer payroll tax on
employee stock transactions 715 - 1,908 -
Non-GAAP gross profit $ 196,751 $ 141,028 $ 550,989 $ 402,306
GAAP gross margin 75 % 75 % 75 % 72 %
Non-GAAP adjustments 4 % 4 % 4 % 8 %
Non-GAAP gross margin 79 % 79 % 79 % 80 %
GAAP subscription gross profit
$ 544,572 $ 391,881 Add: Stock-based compensation 3,534 2,398 8,931 13,941 Add: Amortization of acquisition-related intangibles 1,348 1,632 4,356 4,303 Add: Employer payroll tax on employee stock transactions 337 - 769 -
Non-GAAP subscription gross profit
$ 558,628 $ 410,125 GAAP subscription gross margin 82 % 83 % 82 % 82 % Non-GAAP adjustments 2 % 2 % 3 % 4 % Non-GAAP subscription gross margin 84 % 85 % 85 % 86 % GAAP professional services and other gross loss$ (7,356 ) $ (7,405 ) $ (20,655 ) $ (30,372 ) Add: Stock-based compensation 3,616 3,578 11,877 22,445 Add: Acquisition-related expenses - 108 - 108 Add: Employer payroll tax on employee stock transactions 378 - 1,139 - Non-GAAP professional services and other gross loss$ (3,362 ) $ (3,719 ) $ (7,639 ) $ (7,819 ) GAAP professional services and other gross margin (64 )% (83 )% (53 )% (121 )% Non-GAAP adjustments 35 % 41 % 33 % 90 % Non-GAAP professional services and other gross margin (29 )% (42 )% (20 )% (31 )% 41
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Reconciliation of income (loss) from operations and operating margin:
Three Months Ended October 31, Nine Months Ended October 31,
(in thousands) 2019 2018 2019 2018
GAAP operating loss $ (43,997 ) $ (58,417 ) $ (151,156 ) $ (363,695 )
Add: Stock-based compensation 52,736 51,748 150,799 361,707
Add: Amortization of
acquisition-related intangibles 4,305 3,889 13,458 8,090
Add: Acquisition-related expenses - 1,768 - 1,768
Add: Employer payroll tax on
employee stock transactions 3,844 - 13,463 -
Non-GAAP operating income (loss)
$ 26,564 $ 7,870 GAAP operating margin (18 )% (33 )% (22 )% (73 )% Non-GAAP adjustments 25 % 32 % 26 % 75 % Non-GAAP operating margin 7 % (1 )% 4 % 2 %
Reconciliation of net income (loss):
Three Months Ended October 31, Nine Months Ended October 31,
(in thousands, except per share
data) 2019 2018 2019 2018
GAAP net loss $ (46,598 ) $ (52,813 ) $ (160,952 ) $ (360,214 )
Add: Stock-based compensation 52,736 51,748 150,799 361,707
Add: Amortization of
acquisition-related intangibles 4,305 3,889 13,458 8,090
Add: Acquisition-related expenses - 1,839 - 1,839
Add: Employer payroll tax on
employee stock transactions 3,844 - 13,463 -
Add: Amortization of debt discount
and issuance costs 6,645 3,147 19,647 3,147
Less: Tax benefit from SpringCM
acquisition(1) - (7,369 ) - (7,369 )
Non-GAAP net income $ 20,932 $ 441 $ 36,415 $ 7,200 (1) Represents a tax benefit related to the release of a portion of our deferred
tax asset valuation allowance resulting from the
Computation of free cash flow:
Three Months Ended October 31, Nine Months Ended October 31,
(in thousands) 2019 2018 2019 2018
Net cash provided by (used in)
operating activities $ (1,869 ) $ 4,261 $ 70,191 $ 41,949
Less: Purchase of property and
equipment (12,280 ) (8,576 ) (42,071 ) (19,096 )
Non-GAAP free cash flow $ (14,149 ) $ (4,315 ) $ 28,120 $ 22,853
Net cash used in investing
activities $ (19,067 ) $ (227,355 ) $ (350,795 ) $ (237,875 )
Net cash provided by (used in)
financing activities $ (6,186 ) $ 498,070 $ (39,153 ) $ 1,034,171
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Computation of billings:
Three Months Ended October 31, Nine Months Ended October 31,
(in thousands) 2019 2018 2019 2018
Revenue $ 249,502 $ 178,385 $ 699,076 $ 501,237
Add: Contract liabilities and refund
liability, end of period 435,898 330,060 435,898 330,060
Less: Contract liabilities and
refund liability, beginning of
period (412,953 ) (300,426 ) (390,887 ) (282,943 )
Add: Contract assets and unbilled
accounts receivable, beginning of
period 17,757 16,196 13,436 16,899
Less: Contract assets and unbilled
accounts receivable, end of period (20,805 ) (15,229 ) (20,805 ) (15,229 )
Less: Contract liabilities and
refund liability contributed by the
acquisition of SpringCM - (11,002 ) - (11,002 )
Non-GAAP billings $ 269,399 $ 197,984 $ 736,718 $ 539,022
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