COUPA SOFTWARE INCORPORATED 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 appearing elsewhere in this Annual Report on Form 10-K. As discussed in the section titled "Note About 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, those discussed in "Note About Forward-Looking Statements" and those discussed in the section titled "Risk Factors" under Part I, Item 1A in this Annual Report on Form 10-K. This section of this Form 10-K generally discusses fiscal 2020 and 2019 items and year-to-year comparisons between fiscal 2020 and 2019. Discussions of fiscal 2018 items and year-to-year comparisons between fiscal 2019 and fiscal 2018 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Company's Annual Report on Form 10-K for the fiscal year endedJanuary 31, 2019 . Overview We are a leading provider of business spend management ("BSM") solutions, with a comprehensive, cloud-based platform that connects our customers with more than five million suppliers globally. Our platform provides greater visibility into and control over how companies spend money. Using our platform, businesses are able to achieve real, measurable value and savings that drive their profitability; we call this "Value as a Service." We refer to the process companies use to purchase goods and services as business spend management and to the money that they manage with this process as spend under management. We offer a comprehensive, cloud-based BSM platform that is tightly integrated and delivers a broad range of capabilities that would otherwise require the purchase and use of multiple disparate point applications. The core of our platform consists of procurement, invoicing, expense management, and payments modules that form our transactional engine and capture a company's spend. In addition, our platform offers supporting modules to help companies further manage their spend, including strategic sourcing, spend analysis, contract management, supplier management, and contingent workforce management. We also offer a purchasing program, Coupa Advantage, that leverages the collective buying power of Coupa customers, and we provide benchmarking and insights to customers on our BSM platform through a solution we refer to as Community Intelligence. Moreover, through our Coupa Open Business Network, suppliers of all sizes can easily interact with buyers electronically, thus significantly reducing paper, improving operating efficiencies and reducing costs. We offer access to our platform under a Software-as-a-Service ("SaaS") business model. At the time of initial deployment, our customers often make a set of common functions available to the majority of their licensed employees, as well as incremental modules for select employees and procurement specialists, who we refer to as power users. Customers can rapidly implement our platform, with implementation periods typically ranging from a few weeks to several months. Customers also benefit from software updates that typically require little downtime. We market and sell our solutions to a broad range of enterprises worldwide. We have a diverse, multinational customer base spanning various sizes and industries and no significant customer concentration. No customer accounted for more than 10% of our total revenues for the years endedJanuary 31, 2020 , 2019 and 2018, respectively. We market our platform primarily through a direct sales force and also benefit from leads driven by our partner ecosystem. Our initial contract terms are typically three years, although some customers commit for longer or shorter periods. Substantially all of our customers pay annually, one year in advance. We provide a scaled pricing model based on the number of users per module-as the number of users increases, the subscription price per user decreases. Our subscription fee includes access to our service, technical support and management of the hosting infrastructure. We generally recognize revenues from our subscription fees ratably over the contractual term of the arrangement. We do not charge suppliers who are on our platform to transact with our customers. We believe this approach helps attract more suppliers to our platform and increases the value of our platform to customers. 46 -------------------------------------------------------------------------------- We have continued to make significant expenditures and investments for long-term growth, including investment in our platform and infrastructure to deliver new functionality and modules to meet the evolving needs of our customers and to take advantage of our market opportunity. We intend to continue to increase our investment in sales and marketing, as we further expand our sales teams, increase our marketing activities, and grow our international operations. Internationally, we currently offer our platform inEurope , theMiddle East andAfrica ("EMEA"),Latin America ("LATAM") andAsia-Pacific ("APAC"), includingJapan . The combined revenues from non-U.S. regions, as determined based on the billing address of our customers, constituted 36%, 38% and 35%, respectively, of our total revenues for the years endedJanuary 31, 2020 , 2019 and 2018. We believe there is further opportunity to increase our international revenues in absolute dollars and as a percentage of our total revenues. As a result, we are increasingly investing in our international operations and we intend to expand our footprint in international markets. Operating in international markets requires significant resources and management attention and will subject us to regulatory, economic, and political risks that are different from those inthe United States . Nevertheless the intent to expand our international operations, our international expansion efforts may not be successful in creating additional demand for our platform outside ofthe United States or in effectively selling subscriptions to our platform in any or all of the international markets we enter.
Recent Business Developments
InMay 2019 , we completed the acquisition ofExari Group, Inc. for consideration of approximately$214.6 million in cash, or$208.3 million net of cash acquired. The acquisition extends our BSM platform with advanced contract lifecycle management capabilities to enable companies to comprehensively manage their contract lifecycle and operationalize their contracts against spend transactions. InJune 2019 , we issued$805.0 million aggregate principal amount of 0.125% Convertible Senior Notes due 2025. In conjunction with the issuance of the notes, we purchased capped call at price of$118.7 million . The net proceeds from the issuance of the 2025 Notes were$667.4 million , net of debt issuance costs, including the underwriting discount and the cash used to purchase the capped call. InDecember 2019 , we completed the acquisition ofYapta, Inc. , a leader in the travel price optimization market whose technology dynamically monitors airfare and hotel prices, identifies savings opportunities, and rebooks reservations when prices drop. We paid aggregate consideration of approximately$111.2 million in cash (which amount includes$9.8 million that is being held in escrow for 15 months after the transaction closing date and$12.5 million payable upon the achievement of Yapta's revenue target during the twelve months starting from the transaction closing date). This technology will be an integral part of our travel and expense portfolio. This acquisition was not a significant acquisition under Regulation S-X. Our Business Model Our business model focuses on maximizing the lifetime value of a customer relationship, and we continue to make significant investments in order to grow our customer base. Due to our subscription model, we recognize subscription revenues ratably over the term of the subscription period. As a result, the profitability of a customer to our business in any particular period depends in part upon how long a customer has been a subscriber on our platform. In general, the associated upfront costs with respect to new customers are higher in the first year than the aggregate revenues we recognize from those new customers in the first year. We believe that, over time, as our customer base grows and a relatively higher percentage of our subscription revenues are attributable to renewals versus new customers or upsells to existing customers, associated sales and marketing expenses and other allocated upfront costs as a percentage of revenues will decrease, subject to investments we plan to make in our business. Over the lifetime of the customer relationship, we also incur sales and marketing costs to manage the account, renew or upsell the customer to more modules and more users. However, these costs are significantly less than the costs initially incurred to acquire the customer. We calculate the lifetime value of our customers and associated customer acquisition costs for a particular year by comparing (i) gross profit from net new subscription revenues for the year multiplied by the inverse of the estimated subscription renewal rate to (ii) total sales and marketing expense incurred in the preceding year. On this basis, we estimate that for each of fiscal 2020, 2019 and 2018, the calculated lifetime value of our customers has exceeded six times the associated cost of acquiring them. 47
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Key Metrics
We review the following key metrics to evaluate our business, measure our
performance, identify trends affecting our business, formulate business plans
and make strategic decisions:
As of January 31,
2020 2019 2018
Cumulative spend under management ($ billions)
$ 680.2 Remaining performance obligations ($ millions)$ 724.9 $ 498.6 N/A Deferred revenue ($ millions)$ 261.8 $ 182.6 $ 128.0 Total customers 1,390 988 717
Cumulative Spend Under Management
Cumulative spend under management represents the aggregate dollar value of transactions through our core platform for all of our customers collectively since we launched our core platform. We define our core platform as our procurement, invoicing and expense management modules. We calculate this metric by aggregating the actual transaction data for purchase orders, invoices and expenses from customers using our core platform. Cumulative spend under management does not include spending data or transactions associated with modules from acquired companies. We regularly review our process for calculating this metric and periodically make adjustments to improve its accuracy. We believe that any such adjustments are immaterial unless otherwise stated. The cumulative spend under management metric presented above does not directly correlate to our revenue or results of operations because we do not generally charge our customers based on actual usage of our core platform. However, we believe the cumulative spend under management metric does illustrate the adoption, scale and value of our platform, which we believe enhances our ability to maintain existing customers and attract new customers.
Remaining Performance Obligaions and Deferred Revenue
Remaining performance obligations represents the amount of consideration allocated to unsatisfied performance obligations related to non-cancelable contracts, which include both the deferred revenue balance and amounts that will be invoiced and recognized as revenue in future periods. In calculating the remaining performance obligation amount, we elected to apply the two expedients under the revenue standard to exclude remaining performance obligations amounts related to contracts that are twelve months or less and contracts where revenue is being recognized under the as-invoiced method. In addition, we generally execute multiple year subscription contracts for our platform and invoice an initial amount at contract signing followed by subsequent annual invoices. At any point in the contract term, there might be amounts that are not due for billing yet. These amounts are not recorded in our consolidated financial statements, and are considered to be part of the remaining performance obligations amount.
The remaining performance obligations amount is intended to provide visibility into future revenue streams. We expect remaining performance obligations to fluctuate up or down from period to period for several reasons, including amounts, timing, and duration of customer contracts, as well as timing of billing cycles for each order.
Our deferred revenue consists of amounts that have been invoiced but not yet recognized as revenues as of the end of a reporting period. The majority of our deferred revenue balance consists of subscription revenues that are recognized ratably over the related contractual period.
Total Customers
We generally define a customer as a separate and distinct entity (such as a
company or an educational or government institution), a distinct business unit
of a large corporation or a partner organization, in each case that have an
active contract with us to access our services. We believe the number of total
customers is a key indicator of our market penetration, growth and future
revenues. Our ability to attract new customers is primarily affected by the
effectiveness of our marketing programs and our direct sales force. Accordingly,
we have assertively invested in and intend to continue to invest in our direct
sales force. In addition, we are continuing to pursue additional partnerships
with global systems integrators and other strategic partners.
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--------------------------------------------------------------------------------Components of Results of Operations
Revenues
We offer subscriptions to our cloud-based BSM platform, including procurement, invoicing and expense management. We derive our revenues primarily from subscription fees and professional services fees. Subscription revenues consist primarily of fees to provide our customers access to our cloud-based platform, which includes routine customer support at no additional cost. Professional services fees include deployment services, optimization services, and training. Subscription revenues are a function of renewal rates, the number of customers, the number of users at each customer, the number of modules subscribed to by each customer, and the price of our modules. Generally, subscription fees are recognized ratably as revenues over the contract term beginning on the date the application is made available to the customer. Our new business subscriptions typically have a term of three years, although some customers commit for longer or shorter periods. We generally invoice our customers in annual installments at the beginning of each year in the subscription period. Amounts that have been invoiced are initially recorded as deferred revenue and are recognized ratably over the subscription period. Amounts that will be invoiced and recognized as revenue in future periods are reflected as remaining performance obligations within the notes to our consolidated financial statements. Professional services revenues and other consists primarily of fees associated with the implementation and configuration of our subscription service. Professional services are generally sold on a time-and-materials or fixed-fee basis. Revenue for both time-and-material and fixed-fee arrangements are recognized over-time as the services are performed. We have the ability to reasonably measure progress toward complete satisfaction of the professional services arrangement. For fixed-fee arrangements, we recognize revenue on the basis of performed hours relative to the total estimated hours to complete satisfaction of the professional service arrangement. Our professional services engagements typically span from a few weeks to several months. For this reason, our professional services revenues may fluctuate significantly from period to period. The terms of our typical professional services arrangements provide that our customers pay us within 30 days from the invoice date. Fixed-fee services arrangements are generally invoiced in advance. We have made significant investments in our professional services business that are designed to ensure customer success and adoption of our platform. We are continuing to invest in expanding our professional services partner ecosystem to further support our customers. As the professional services practices of our partner firms continue to develop, we expect them to increasingly contract directly with our subscription customers and we incentivize our sales force to further this objective. Cost of Revenues Subscription Services Cost of subscription services consists primarily of expenses related to hosting our service and providing customer support. Significant expenses are comprised of data center capacity costs; personnel and related costs directly associated with our cloud infrastructure and customer support, including salaries, benefits, bonuses and stock-based compensation; allocated overhead; amortization of developed technology and capitalized software development costs.
Professional Services and Other Cost of Revenues
Cost of professional services and other cost of revenues consist primarily of
personnel and related costs directly associated with our professional services
and training departments, including salaries, benefits, bonuses and stock-based
compensation; the costs of contracted third-party vendors; and allocated
overhead. These costs are generally expensed in the period incurred.
Professional services associated with the implementation and configuration of
our subscription platform are performed directly by our services team, as well
as by contracted third-party vendors. In cases in which third party vendors
invoice us for services performed for our customers, those fees are accrued over
the requisite service period.
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Operating Expenses
Research and Development
Research and development expenses consist primarily of personnel costs of our development team, including salaries, benefits, bonuses, stock-based compensation expense and allocated overhead costs. Our cycle of frequent updates has facilitated rapid innovation and the introduction of new modules throughout our history. We have aggressively invested, and intend to continue to invest, in developing technology to support our growth. We capitalize certain software development costs that are attributable to developing new modules and features and adding incremental functionality to our platform, and we amortize such costs as costs of subscription revenues over the estimated life of the new application or incremental functionality, which is either two years or three years.
Sales and Marketing
Sales and marketing expenses consist primarily of personnel and related costs directly associated with our sales and marketing staff, including salaries, benefits, bonuses, commissions and stock-based compensation. Commissions earned by our sales force that are considered incremental costs of obtaining a noncancellable subscription contract are deferred and amortized over a period of benefit that we have determined to be five years. Other sales and marketing costs include promotional events to promote our brand, including our INSPIRE conferences, advertising, allocated overhead and amortization of customer relationships and trademark. General and Administrative General and administrative expenses consist of personnel costs and related expenses for executive, finance, legal, human resources, recruiting, and administrative personnel, including salaries, benefits, bonuses and stock-based compensation expense; professional fees for external legal, accounting, recruiting and other consulting services; allocated overhead costs; and legal settlements. Interest Expense Interest expense consists primarily of interest expense and the amortization of debt discount and issuance costs associated with our convertible senior notes issued inJanuary 2018 andJune 2019 .
Interest Income and Other, Net
Interest income and Other, net consists primarily of interest income earned on our investments in marketable securities and cash and cash equivalents, in addition to the effects of exchange rates on our foreign currency-denominated asset and liability balances. All translation adjustments are recorded as foreign currency gains (losses) in the consolidated statements of operations.
Provision for (Benefit from) Income Taxes
Provision for income taxes consists primarily of income taxes related to foreign and state jurisdictions in which we conduct business. Benefit from income taxes is primarily related to the release of valuation allowances for deferred tax assets for the year endedJanuary 31, 2020 , partially offset by income taxes related to foreign and state jurisdictions. We maintain a full valuation allowance on net deferred tax assets of ourU.S. and the majority of our international entities as we have concluded that it is not more likely than not that the deferred assets will be utilized. 50
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Results of Operations
The following tables set forth selected consolidated statements of operations
data and such data as a percentage of total revenues for each of the periods
indicated:
For the year ended
January 31,
2020 2019 2018
(in thousands)
Revenues:
Subscription services $ 345,261 $ 233,428 $ 164,865
Professional services and other 44,458 26,938 21,915
Total revenues 389,719 260,366 186,780
Cost of revenues:
Subscription services 89,452 53,153 36,481
Professional services and other 49,764 30,301 23,425
Total cost of revenues 139,216 83,454 59,906
Gross profit 250,503 176,912 126,874
Operating expenses:
Research and development 93,089 61,608 44,536
Sales and marketing 155,216 105,659 88,722
General and administrative 75,623 57,005 38,578
Total operating expenses 323,928 224,272 171,836
Loss from operations (73,425 ) (47,360 ) (44,962 )
Interest expense (37,658 ) (12,518 ) (502 )
Interest income and other, net 9,316 3,817 3,307
Loss before provision for (benefit from) income taxes (101,767 ) (56,061 ) (42,157 ) Provision for (benefit from) income taxes (10,935 ) (537 ) 1,648 Net loss$ (90,832 ) $ (55,524 ) $ (43,805 ) For the year ended January 31, 2020 2019 2018 Revenues: Subscription services 89 % 90 % 88 % Professional services and other 11 10 12 Total revenues 100 100 100 Cost of revenues: Subscription services 23 20 20 Professional services and other 13 12 13 Total cost of revenues 36 32 33 Gross profit 64 68 67 Operating expenses: Research and development 24 24 24 Sales and marketing 40 41 48 General and administrative 19 22 21 Total operating expenses 83 87 93 Loss from operations (19 ) (19 ) (26 ) Interest expense (10 ) (5 ) - Interest income and other, net 2 1
2
Loss before provision for (benefit from) income taxes (27 ) (23 )
(24 )
Provision for (benefit from) income taxes (3 ) - 1
Net loss (24 ) % (23 ) % (25 ) %
51
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Fiscal Years Ended
Revenues
For the year ended
January 31, 2019 to 2020
2020 2019 % Change
(in thousands)
Subscription services $ 345,261 $ 233,428 48 %
Professional services and other 44,458 26,938 65 %
Total revenues $ 389,719 $ 260,366 50 %
Total revenues were $389.7 million for the fiscal year ended January 31, 2020
compared to $260.4 million for the fiscal year ended January 31, 2019 , an
increase of $129.3 million , or 50%. Subscription services revenues were $345.3
million , or 89% of total revenues, for the fiscal year ended January 31, 2020 ,
compared to $233.4 million , or 90% of total revenues, for the fiscal year ended
January 31, 2019 . This increase in absolute dollars was primarily due to the
acquisition of new customers and the sale of additional modules and users to
existing customers, and to a lesser extent, new revenues generated by the
acquisitions completed during the fiscal year ended January 31, 2020 .
Professional services revenues were $44.5 million for the fiscal year ended
January 31, 2020 compared to $26.9 million for the fiscal year ended January 31,
2019 . The increase of $17.6 million , or 65%, was primarily due to an increase in
customers and training revenues, and revenues generated from acquisitions
completed during the fiscal year ended January 31, 2020 .
Cost of Revenues
For the year ended
January 31, 2019 to 2020
2020 2019 % Change
(in thousands)
Subscription services $ 89,452 $ 53,153 68 %
Professional services and other 49,764 30,301 64 %
Total cost of revenues $ 139,216 $ 83,454 67 %
Cost of subscription services was $89.5 million for the fiscal year ended
January 31, 2020 compared to $53.2 million for the fiscal year ended January 31,
2019 , an increase of $36.3 million , or 68%. The increase in cost of subscription
services was primarily due to increases of $12.5 million in hosting fees to
accommodate increased customer spend, $12.2 million increase in intangible
amortization, $7.6 million increase in employee compensation costs related to
higher headcount, including stock-based compensation costs and $4.0 million in
other costs driven by our overall growth.
Cost of professional services was $49.8 million for the fiscal year ended
January 31, 2020 , compared to $30.3 million for the fiscal year ended January
31, 2019 , an increase of $19.5 million , or 64%. The increase in cost of
professional services was primarily due to an increase of $12.2 million in
employee compensation costs related to higher headcount, including stock-based
compensation costs, $4.0 million for professional and outside services primarily
related to customers implementation, and $3.3 million in other costs driven by
our overall growth.
Gross Profit
For the year ended
January 31, 2019 to 2020
2020 2019 % Change
(in thousands)
Gross profit $ 250,503 $ 176,912 42 %
52
-------------------------------------------------------------------------------- Gross profit was$250.5 million for the fiscal year endedJanuary 31, 2020 , compared to$176.9 million for the fiscal year endedJanuary 31, 2019 , an increase of$73.6 million , or 42%. The increase in gross profit was primarily due to the acquisition of new customers, and the sale of new additional users or modules to existing customers, in addition and to a lesser extent, new revenues generated by the acquisitions completed during the fiscal year endedJanuary 31, 2020 . Gross margin was 64% for the fiscal year endedJanuary 31, 2020 , compared to 68% for the fiscal year endedJanuary 31, 2019 . The decrease in gross margin was primarily due to the increase in amortization of developed technology assets related to the acquisitions completed during the year endedJanuary 31, 2020 . Operating Expenses Research and Development For the year ended January 31, 2019 to 2020 2020 2019 % Change (in thousands) Research and development$ 93,089 $ 61,608 51 % Research and development expenses were$93.1 million for the fiscal year endedJanuary 31, 2020 compared to$61.6 million for the fiscal year endedJanuary 31, 2019 , an increase of$31.5 million , or 51%. The increase was primarily due to increases of$29.0 million in employee compensation costs related to higher headcount, including stock-based compensation costs, and$2.5 million net of other costs including allocated facilities costs driven by our overall growth. We expect research and development expenses will continue to increase in fiscal 2020 in absolute dollars as we continue to invest in research and development activities. Sales and Marketing For the year ended January 31, 2019 to 2020 2020 2019 % Change (in thousands) Sales and marketing$ 155,216 $ 105,659 47 % Sales and marketing expenses were$155.2 million for the fiscal year endedJanuary 31, 2020 , compared to$105.7 million for the fiscal year endedJanuary 31, 2019 , an increase of$49.5 million , or 47%. The increase was primarily due to an increase of$34.2 million in employee compensation costs related to higher headcount, including stock-based compensation costs,$4.5 million increase in customer relationship amortization and an increase of$10.8 million related to allocated facilities, travel and other costs. We expect sales and marketing expenses will increase in fiscal 2020 due to the continuing expansion of our global sales and marketing activities. General and Administrative For the year ended January 31, 2019 to 2020 2020 2019 % Change (in thousands) General and administrative$ 75,623 $ 57,005 33 % General and administrative expenses were$75.6 million for the fiscal year endedJanuary 31, 2020 compared to$57.0 million for the fiscal year endedJanuary 31, 2019 , an increase of$18.6 million , or 33%. The increase was primarily due to$14.2 million in employee compensation costs related to higher headcount, including stock-based compensation costs, an increase of$1.7 million for professional and outside service costs related to acquisition cost for the recently completed acquisitions, and an increase of$2.7 million related to allocated facilities and other costs driven by our overall growth. We expect general and administrative expenses will continue to increase in fiscal 2021 in absolute dollars due to the growth of our company. 53 --------------------------------------------------------------------------------
Interest Expense
For the year ended
January 31, 2019 to 2020
2020 2019 % Change
(in thousands)
Interest expense $ 37,658 $ 12,518 NM
Interest expense was $37.7 million for the fiscal year ended January 31, 2020 ,
compared to $12.5 million for the fiscal year ended January 31, 2019 . The $25.2
million increase in interest expense was primarily due amortization of the debt
discount and issuance costs and accrued interest on our convertible senior notes
issued on June 2019 .
Interest Income and Other, Net
For the year ended
January 31, 2019 to 2020
2020 2019 % Change
(in thousands)
Interest income and other, net $ 9,316 $ 3,817 NM
Interest income and other, net was $9.3 million for the fiscal year ended
January 31, 2020 compared to $3.8 million for the fiscal year ended January 31,
2019 . The increase in other income, net was due to a $5.3 million increase in
interest income earned from our greater investments in marketable securities and
money market funds, and $0.2 million decrease in net currency loss.
Benefit From Income Taxes
For the year ended
January 31, 2019 to 2020
2020 2019 % Change
(in thousands)
Benefit from income taxes $ (10,935 ) $ (537 ) NM
The benefit from income taxes was $10.9 million for the fiscal year ended
January 31, 2020 , compared to benefit from income taxes of $0.5 million for the
fiscal year ended January 31, 2019 . Benefit from income taxes for the fiscal
year ended January 31, 2020 is primarily related to the release of valuation
allowances for deferred tax assets from acquisitions completed during the year,
partially offset by income taxes related to foreign and state jurisdictions. We
maintain a full valuation allowance on net deferred tax assets of our U.S. and
the majority of our international entities as we have concluded that it is not
more likely than not that the deferred assets will be utilized.
Fiscal Years Ended
For a comparison of our results of operations for the fiscal years endedJanuary 31, 2019 and 2018, see Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the fiscal year endedJanuary 31, 2019 , filed with theSEC onMarch 27, 2019 .
Liquidity and Capital Resources
Our principal sources of liquidity are cash, cash equivalents, marketable securities, and cash generated from operations. As ofJanuary 31, 2020 , we had cash and cash equivalents of$268.0 million , and marketable securities of$499.2 million . We had outstanding 2023 Notes and 2025 Notes with outstanding aggregate principal amounts of$230.0 million and$805.0 million , respectively, as ofJanuary 31, 2020 . 54 -------------------------------------------------------------------------------- For more than twenty trading days during the thirty consecutive trading days endedJanuary 31, 2020 , the last reported sale price of our common stock exceeded 130% of the conversion price of the 2023 Notes. As a result, the 2023 Notes are convertible at the option of the holders. We have the ability to settle the Convertible Notes in cash, shares of our common stock, or a combination of cash and shares of our common stock at our own election. As ofJanuary 31, 2020 , we received conversion requests on the 2023 Notes for an aggregate principal amount of$89.5 million . We elected to settled the principal amount of the conversion requests in cash and incremental conversion value in shares. The conversion requests are expected to be settled during the quarter endingApril 30, 2020 . The 2025 Notes were not convertible as ofJanuary 31, 2020 . It is our current intent to settle conversions of the remaining 2023 Notes and the 2025 Notes through combination settlement, which involves repayment of the principal portion in cash and any excess of the conversion value over the principal amount in shares of our common stock. We have decided not to exercise the capped calls entered into in conjuction with the 2023 Notes. In conjunction with the issuance of the Convertible Notes, we entered into capped call transactions that reduces our exposure to additional cash payments above principal balances in the event of a cash conversion of the Convertible Notes. We may owe additional cash to the noteholders upon early conversion if our stock price exceeds$63.821 per share for the 2023 Notes or$295.55 for the 2025 Notes. Although our incremental exposure to the additional cash payment above the principal amount of the Convertible Notes is reduced by the capped calls, conversion of the Convertible Notes by noteholders may cause dilution to the ownership interests of existing stockholders. Our cash equivalents are comprised primarily of bank deposits and money market funds. We believe our existing cash and cash equivalents and marketable securities will be sufficient to meet our projected operating requirements for at least the next 12 months from the filing of this annual report. Our future capital requirements will depend on many factors, including our pace of growth, subscription renewal activity, the timing and extent of spend to support development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced services offerings and the continuing market acceptance of our services. We have in the past and believe that it is likely we will in the future enter into arrangements to acquire or invest in complementary businesses, services and 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.
Operating Activities
Cash provided by operating activities for the fiscal year endedJanuary 31, 2020 was$68.2 million compared to$37.4 million for the year endedJanuary 31, 2019 . This increase was driven by growth in customer billings and collections on accounts receivable, partially offset by increased payments for operating expenses.
Investing Activities
Cash used in investing activities for the fiscal year endedJanuary 31, 2020 of$637.9 million was primarily related to the net purchase of marketable securities of$317.5 million ,$308.4 million spent on business acquisitions, net of cash acquired, and purchases of property and equipment of$12.0 million .
Financing Activities
Cash provided by financing activities for the fiscal year endedJanuary 31, 2020 of$696.7 million , was primarily due to net proceeds of$667.4 million obtained from the issuance of 2025 Notes and the purchase of the associated capped calls,$29.3 million from the exercise of stock options and issuance of our common stock under the stock purchase and stock option plans.
Off-Balance Sheet Arrangements
ThroughJanuary 31, 2020 , we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. 55
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Commitments and Contractual Obligations
Our principal commitments and contractual obligations consist of our Convertible Notes, obligations under operating leases for office facilities and contractual purchase obligations for hosting services that support our business operations. The following table summarizes our non-cancelable contractual obligations as ofJanuary 31, 2020 . Payments due by period Less Than More Than Total 1 Year 1-3 Years 3-5 Years 5 Years (in thousands) Convertible senior notes(1)$ 1,035,000 $ 96,047 $ 133,953 $ 805,000 $ - Aggregate interest obligation(1)(2) 7,041 1,509 4,023 1,509 - Operating lease obligations 38,363 10,128 17,347 9,938 950 Purchase obligations 7,000 7,000 - - -
Total contractual obligations
(1) The conversion period for the Convertible Notes was open as ofJanuary 31, 2020 , and as such the net carrying value of the Convertible Notes is included within current liabilities on our Consolidated Balance Sheet. The
principal balances of the Convertible Notes are reflected in the payment
period in the table above based on the contractual maturity assuming no
conversion.
(2) Represents estimated aggregate interest obligations for our outstanding
Convertible Notes that are payable in cash.
Critical Accounting Policies and Estimates
Our management's discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues generated and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management's judgments and estimates.
Revenue Recognition
We derive our revenues primarily from subscription services fees and professional services fees. Revenues are recognized when control of these services are transferred to our customers in an amount that reflects the consideration we expect to be entitled to in exchange for those services. Revenues are recognized net of applicable taxes imposed on the related transaction. Our revenue recognition policy follows guidance from Accounting Standards Codification 606, Revenue from Contracts with Customers (Topic 606).
We determine revenue recognition through the following five-step framework:
• Identification of the contract, or contracts, with a customer; • Identification of the performance obligations in the contract; • Determination of the transaction price;
• Allocation of the transaction price to the performance obligations in
the contract; and
• Recognition of revenue when, or as, we satisfy a performance obligation.
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Subscription Services Revenues
We offer subscriptions to our cloud-based business spend management platform, including procurement, invoicing and expense management. Subscription services revenues consist primarily of fees to provide our customers access to our cloud-based platform, which includes routine customer support. Subscription service contracts do not provide customers with the right to take possession of the software, are non-cancelable, and do not contain general rights of return. Generally subscription revenues are recognized ratably over the contractual term of the arrangement, beginning on the date that the service is made available to the customer. Subscription contracts typically have a term of three years with invoicing occurring in annual installments at the beginning of each year in the subscription period. Subscription revenues also include fees to provide support and updates to legacy Exari customers. The support and update revenues associated with these customers are recognized ratably over the contract term.
Professional Services Revenues
We offer professional services which include deployment services, optimization services, and training. Professional services are generally sold on a time-and-materials basis or fixed-fee basis. For services billed on a time-and-materials basis, revenue is recognized over time as services are performed. For services billed on a fixed-fee basis, invoicing typically occurs in advance, and revenue is recognized over time based on the proportion performed.
Significant Judgments
Our contracts with customers often include promises to transfer multiple
products and services to a customer. For these contracts, we account for
individual performance obligations separately if they are distinct. Subscription
services and professional services are both distinct performance obligations
that are accounted for separately. In contracts with multiple performance
obligations, the transaction price is allocated to each separate performance
obligations on a relative standalone selling price basis.
The determination of standalone selling price ("SSP") for each distinct
performance obligations requires judgment. We determine SSP for performance
obligations based on overall pricing objectives, which take into consideration
market conditions and entity-specific factors. This includes a review of
historical sales data related to the size of arrangements, the cloud
applications being sold, customer demographics and the numbers and types of
users within the arrangements. We use a range of amounts to estimate SSP for
performance obligations. There is typically more than one SSP for individual
products and services due to the stratification of those products and services
by certain considerations such as size and type of customer.
Deferred Commissions
Commissions are earned by sales personnel upon the execution of the sales contract by the customer, and commission payments are made shortly after they are earned. Commission costs can be associated specifically with subscription and professional services arrangements. Commissions earned by our sales personnel are considered incremental and recoverable costs of obtaining a contract with a customer. These costs are deferred and then amortized over a period of benefit of five years. We determined the period of benefit by taking into consideration our past experience with customers, future cash flows expected from customers, industry peers and other available information.
We capitalized commission costs of
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Business Combinations
We account for acquisitions of entities that include inputs and processes and have the ability to create outputs as business combinations. For acquired businesses, we record tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition dates. The excess of the purchase price over those fair values is recorded as goodwill. During the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the consolidated statements of operations. Accounting for business combinations requires our management to make significant estimates and assumptions at the acquisition date, including estimated fair value of acquired intangible assets, and related amortization period. The estimates of fair value require management to also make estimates of, among other things, future expected cash flows, discount rates or expected costs to reproduce an asset. Although we believe the assumptions and estimates we have made in the past have been reasonable and appropriate, these estimates are based on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. We review goodwill for impairment annually during the fourth quarter or more frequently if events or changes in circumstances would more likely than not reduce the fair value of our single reporting unit below its carrying value. As ofJanuary 31, 2020 , no impairment of goodwill has been identified.
Acquired finite-lived intangible assets are amortized over their estimated useful lives. We evaluate the recoverability of our intangible assets for possible impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. We have not recorded any significant impairment charges during the years presented.
In addition to the recoverability assessment, we routinely review the remaining estimated useful lives of our finite-lived intangible assets. If we modify the estimated useful life assumption for any asset, the remaining unamortized balance would be amortized over the revised estimated useful life.
Convertible Notes
We account for the issued Convertible Senior Notes ("Convertible Notes") as
separate liability and equity components. The carrying amount of the liability
component was calculated by measuring the fair value of a similar liability that
does not have an associated convertible feature using a discounted cash flow
model with a discount rate determined using observable yields for stand-alone
debt instruments with a comparable credit rating and term. The carrying amount
of the equity component representing the conversion option was determined by
deducting the fair value of the liability component from the par value of the
Convertible Notes as a whole. This difference represents a debt discount that is
amortized to interest expense over the term of the Convertible Notes using the
effective interest rate method. The equity component is not remeasured as long
as it continues to meet the conditions for equity classification. We allocated
issuance costs incurred to the liability and equity components. Issuance costs
attributable to the liability component are being amortized to expense over the
respective term of the Convertible Notes, and issuance costs attributable to the
equity components were netted with the respective equity component in additional
paid in capital.
To the extent that we receive note conversion requests prior to the maturity of
the Convertible Notes, a portion of the equity component is classified as
temporary equity, which is measured as the difference between the principal and
net carrying amount of the notes requested for conversion. Upon settlement of
the conversion requests, the difference between the fair value and the amortized
book value of the liability component of the Convertible Notes requested for
conversion is recorded as a gain or loss on early note conversion. The fair
value of the Convertible Notes are measured based on a similar liability that
does not have an associated convertible feature over the remaining term of the
Convertible Notes.
Recent Accounting Pronouncements
Refer to Note 2, "Significant Accounting Policies" in the Notes to Consolidated
Financial Statements included elsewhere in this Annual Report for analysis of
recent accounting pronouncements that are applicable to our business.
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