COUPA SOFTWARE INCORPORATED
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our condensed consolidated
financial statements and related notes appearing elsewhere in this Quarterly
Report on Form 10-Q. 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 II, Item 1A in this Quarterly Report on
Form 10-Q.
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
four 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 and expense
management 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, contingent workforce, inventory
management, and our newly released Coupa Pay module. 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. Therefore, we are typically able to capture a majority
of the expected annual recurring revenue opportunity at the inception of our
customer relationships, rather than targeting specific power users at the outset
of the customer relationship with the intention of expanding and getting more
annual recurring revenue at later stages of the customer relationship. 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, multi-national 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 three and nine months ended October
31, 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.
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.
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 in Europe , the Middle East and
Africa , Latin America and Asia-Pacific , including Japan . The combined revenues
from non-U.S. regions, as determined based on the billing address of our
customers, constituted 37% and 38% of our total revenues for the nine months
ended October 31, 2019 and 2018, respectively. 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.
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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 in the United States . While we are gaining additional
experience with international operations, our international expansion efforts
may not be successful in creating additional demand for our platform outside of
the United States or in effectively selling subscriptions to our platform in any
or all of the international markets we enter.
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 2019, 2018, and 2017, the calculated lifetime value of our customers has exceeded six times the associated cost of acquiring them. 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 October 31,
2019 2018
Cumulative spend under management (in billions)
$ 192.5 $ 130.1
Cumulative Spend Under Management
Cumulative spend under management represents the aggregate amount of money that has been transacted through our core Coupa platform for all of our customers collectively since we launched our core platform. We calculate this metric by aggregating the actual transaction data, such as invoices, purchase orders and expenses, from customers on our core Coupa platform. Cumulative spend under management does not include spending data associated with modules from acquired companies. The cumulative spend under management metrics presented above do 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 metrics do illustrate the adoption, scale and value of our platform, which we believe enhances our ability to maintain existing customers and attract new customers.
Deferred Revenue
Our deferred revenue consists of amounts that have been invoiced but that have not yet been recognized as revenues as of the end of a reporting period. We generally sign multiple year subscription contracts for our platform and invoice an initial amount at contract signing followed by subsequent annual invoices. The majority of our deferred revenue balance consists of subscription revenues that are recognized ratably over the contractual period. Our deferred revenue does not include future non-cancellable amounts to be invoiced under our arrangements. These amounts are disclosed as remaining performance obligations as ofOctober 31, 2019 , which includes both deferred revenue and amounts that will be invoiced and recognized as revenue in future periods. As ofOctober 31, 2019 , approximately$593.3 million of revenue is expected to be recognized in future periods from remaining performance obligations, a majority of which is related to multi-year subscription arrangements. 31 --------------------------------------------------------------------------------
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. Subscription revenues also includes 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 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 our notes to our condensed consolidated financial statements. Professional services revenues consist 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 towards completion of the professional services arrangements. 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 Cost of subscription 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 acquired 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.
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 typically either two or three years.
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--------------------------------------------------------------------------------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 for obtaining a noncancelable 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 and allocated overhead costs.
Interest Expense
Interest expense consists primarily of interest expense associated with our 2023 and 2025 convertible senior notes.
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 condensed 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 a valuation allowance for deferred tax assets for the nine months endedOctober 31, 2019 , partially offset by tax expenses related to foreign and state jurisdictions. We maintain a full valuation allowance on net deferred tax assets of ourU.S. entities as we have concluded that it is not more likely than not that the deferred assets will be utilized. 33
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Results of Operations
The following tables set forth selected condensed consolidated statements of
operations data and such data as a percentage of total revenues for each of the
periods indicated:
Three Months Ended Nine Months Ended
October 31, October 31,
2019 2018 2019 2018
(in thousands)
Revenues:
Subscription $ 90,175 $ 60,559 $ 246,614 $ 165,899
Professional services and other 11,609 6,896 31,653 19,559
Total revenues 101,784 67,455 278,267 185,458
Cost of revenues:
Subscription 23,752 13,990 63,217 36,937
Professional services and other 13,542 7,674 35,896 21,492
Total cost of revenues 37,294 21,664 99,113 58,429
Gross profit 64,490 45,791 179,154 127,029
Operating expenses:
Research and development 23,460 16,077 67,838 42,693
Sales and marketing 39,145 25,622 112,575 76,862
General and administrative 18,830 14,010 56,297 40,085
Total operating expenses 81,435 55,709 236,710 159,640
Loss from operations (16,945 ) (9,918 ) (57,556 ) (32,611 )
Interest expense (13,188 ) (3,181 ) (24,874 ) (9,276 )
Interest income and other, net 4,076 1,112 6,479 1,562
Loss before provision for (benefit from)
income taxes (26,057 ) (11,987 ) (75,951 ) (40,325 )
Provision for (benefit from) income
taxes 260 (2,342 ) (9,172 ) (1,372 )
Net loss $ (26,317 ) $ (9,645 ) $ (66,779 ) $ (38,953 )
Three Months Ended Nine Months Ended
October 31, October 31,
2019 2018 2019 2018
Revenues:
Subscription 89 % 90 % 89 % 89 %
Professional services and other 11 10 11 11
Total revenues 100 100 100 100
Cost of revenues:
Subscription 23 21 23 20
Professional services and other 13 11 13 12
Total cost of revenues 36 32 36 32
Gross profit 64 68 64 68
Operating expenses:
Research and development 23 24 24 23
Sales and marketing 38 38 40 41
General and administrative 18 21 20 22
Total operating expenses 79 83 84 86
Loss from operations (15 ) (15 ) (20 ) (18 )
Interest expense (13 ) (5 ) (9 ) (5 )
Interest income and other, net 4 2 2 1
Loss before provision for (benefit
from) income taxes (24 ) (18 ) (27 ) (22 )
Provision for (benefit from) income
taxes - (3 ) (3 ) (1 )
Net loss (24 ) % (15 ) % (24 ) % (21 ) %
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Three Months Ended
Revenues
Three Months Ended
October 31,
2019 2018 % Change
(in thousands)
Subscription $ 90,175 $ 60,559 49 %
Professional services and other 11,609 6,896 68 %
Total revenues $ 101,784 $ 67,455 51 %
Total revenues were $101.8 million for the three months ended October 31, 2019
compared to $67.5 million for the three months ended October 31, 2018 , an
increase of $34.3 million , or 51%. Subscription services revenues were $90.2
million , or 89% of total revenues, for the three months ended October 31, 2019 ,
compared to $60.6 million , or 90% of total revenues, for the three months ended
October 31, 2018 . 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, 2019 , and during
the nine months ended October 31, 2019 . Professional services revenues were
$11.6 million for the three months ended October 31, 2019 compared to $6.9
million for the three months ended October 31, 2018 . The increase of $4.7
million , or 68%, was primarily due to an increase in customers and training
revenues, and new revenues generated from an acquisition completed during the
fiscal year ended January 31, 2019 , and during the nine months ended October 31,
2019 .
Cost of Revenues
Three Months Ended
October 31,
2019 2018 % Change
(in thousands)
Subscription $ 23,752 $ 13,990 70 %
Professional services and other 13,542 7,674 76 %
Total cost of revenues $ 37,294 $ 21,664 72 %
Cost of subscription services was $23.8 million for the three months ended
October 31, 2019 compared to $14.0 million for the three months ended October
31, 2018 , an increase of $9.8 million , or 70%. The increase in cost of
subscription services was primarily due to increases of $3.5 million increase in
intangible and capitalized software development cost amortization, $3.2 million
in hosting fees to accommodate increased customer spend, $1.7 million in
employee compensation costs related to higher headcount, including stock-based
compensation costs, and $1.4 million in other costs driven by our overall
growth.
Cost of professional services was $13.5 million for the three months ended
October 31, 2019 compared to $7.7 million for the three months ended October 31,
2018 , an increase of $5.8 million , or 76%. The increase in cost of professional
services was primarily due to an increase of $3.6 million in employee
compensation costs related to higher headcount, including stock-based
compensation costs, $1.2 million for professional and outside services primarily
related to new customer implementation and $1.0 million in other costs driven by
our overall growth.
Gross Profit
Three Months Ended
October 31,
2019 2018 % Change
(in thousands)
Gross profit $ 64,490 $ 45,791 41 %
Gross profit was $64.5 million for the three months ended October 31, 2019 ,
compared to $45.8 million for the three months ended October 31, 2018 , an
increase of $18.7 million , or 41%. 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 ended January 31,
2019 , and during the nine months ended October 31, 2019 . Gross margin was 64%
for the three months ended October 31, 2019 , compared to 68% for the three
months ended October 31, 2018 .
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Operating Expenses
Research and Development
Three Months Ended
October 31,
2019 2018 % Change
(in thousands)
Research and development $ 23,460 $ 16,077 46 %
Research and development expenses were $23.5 million for the three months ended
October 31, 2019 compared to $16.1 million for the three months ended October
31, 2018 , an increase of $7.4 million , or 46%. The increase was primarily due to
increases of $7.4 million in employee compensation costs related to higher
headcount, including stock-based compensation costs. 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
Three Months Ended
October 31,
2019 2018 % Change
(in thousands)
Sales and marketing $ 39,145 $ 25,622 53 %
Sales and marketing expenses were $39.1 million for the three months ended
October 31, 2019 compared to $25.6 million for the three months ended October
31, 2018 , an increase of $13.5 million , or 53%. The increase was primarily due
to an increase of $9.2 million in employee compensation costs related to higher
headcount, including stock-based compensation costs, an increase of $3.1 million
related to allocated facilities, travel and other costs, and a $1.2 million
increase in customer relationship amortization 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
Three Months Ended
October 31,
2019 2018 % Change
(in thousands)
General and administrative $ 18,830 $ 14,010 34 %
General and administrative expenses were $18.8 million for the three months
ended October 31, 2019 compared to $14.0 million for the three months ended
October 31, 2018 , an increase of $4.8 million , or 34%. The increase was
primarily due to $3.5 million in employee compensation costs related to higher
headcount, including stock-based compensation costs, an increase of $0.8 million
related to allocated facilities and other costs driven by our overall growth,
and an increase of $0.5 million for professional and outside service costs
related to acquisition cost for the recently completed acquisitions. We expect
general and administrative expenses will continue to increase in fiscal 2020 in
absolute dollars due to the growth of our company.
Interest Expense
Three Months Ended
October 31,
2019 2018 % Change
(in thousands)
Interest expense $ 13,188 $ 3,181 315 %
Interest expense was $13.2 million for the three months ended October 31, 2019
compared to $3.2 for the three months ended October 31, 2018 . The $10.0 million
increase in interest expense was primarily due to amortization of the debt
discount and issuance costs on our convertible senior notes issued in the second
quarter of fiscal 2020.
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Interest Income and Other, Net
Three Months Ended
October 31,
2019 2018 % Change
(in thousands)
Interest income and other, net $ 4,076 $ 1,112 267 %
Interest income and other, net was $4.1 million for the three months ended
October 31, 2019 compared to $1.1 million for the three months ended October 31,
2018 . The increase in other income, net was due to $1.9 million increase in
interest income earned from our larger balances of cash, cash equivalents and
marketable securities, and $1.1 million increase in net currency gain, primarily
driven by the strengthening of the British Pound during the period.
Provision for (Benefit From) Income Taxes
Three Months Ended
October 31,
2019 2018 % Change
(in thousands)
Provision for (benefit from) income taxes
(111 %) Provision for income taxes was$0.3 million for the three months endedOctober 31, 2019 compared to benefit from income taxes of$2.3 million for the three months endedOctober 31, 2018 . Provision for income taxes for the three months endedOctober 31, 2019 was primarily related to foreign and state jurisdictions. Benefit from income taxes for the three months endedOctober 31, 2018 is primarily related to the release of a valuation allowance for deferred tax assets, 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.
Nine Months Ended
Revenues
Nine Months Ended
October 31,
2019 2018 % Change
(in thousands)
Subscription $ 246,614 $ 165,899 49 %
Professional services and other 31,653 19,559 62 %
Total revenues $ 278,267 $ 185,458 50 %
Total revenues were $278.3 million for the Nine months ended October 31, 2019
compared to $185.5 million for the nine months ended October 31, 2019 , an
increase of $92.8 million , or 50%. Subscription services revenues were $246.6
million , or 89% of total revenues, for the nine months ended October 31, 2019 ,
compared to $165.9 million , or 89% of total revenues, for the nine months ended
October 31, 2018 . 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, 2019 and during
the nine months ended October 31, 2019 . Professional services revenues were
$31.7 million for the nine months ended October 31, 2019 compared to $19.6
million for the nine months ended October 31, 2018 . The increase of $12.1
million , or 62%, was primarily due to an increase in customers and training
revenues, and new revenues generated from acquisitions completed during the
fiscal year ended January 31, 2019 and during the nine months ended October 31,
2019 .
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Cost of Revenues
Nine Months Ended
October 31,
2019 2018 % Change
(in thousands)
Subscription $ 63,217 $ 36,937 71 %
Professional services and other 35,896 21,492 67 %
Total cost of revenues $ 99,113 $ 58,429 70 %
Cost of subscription services was $63.2 million for the nine months ended
October 31, 2019 compared to $36.9 million for the nine months ended October 31,
2018 , an increase of $26.3 million , or 71%. The increase in cost of subscription
services was primarily due to increases of $8.9 million in hosting fees to
accommodate increased customer spend, $8.5 million increase in intangible
amortization, $5.9 million in employee compensation costs related to higher
headcount, including stock-based compensation costs, and $3.0 million in other
costs driven by our overall growth.
Cost of professional services was $35.9 million for the nine months ended
October 31, 2019 compared to $21.5 million for the nine months ended October 31,
2018 , an increase of $14.4 million , or 67%. The increase in cost of professional
services was primarily due to an increase of $9.1 million in employee
compensation costs related to higher headcount, including stock-based
compensation costs, $2.9 million for professional and outside services primarily
related to new customers implementation and $2.4 million in other costs driven
by our overall growth.
Gross Profit
Nine Months Ended
October 31,
2019 2018 % Change
(in thousands)Gross profit$ 179,154 $ 127,029 41 % Gross profit was$179.2 million for the nine months endedOctober 31, 2019 , compared to$127.0 million for the nine months endedOctober 31, 2018 , an increase of$52.1 million , or 41%. The increase in gross profit was primarily due to the acquisition of new customers, and the sale of new additional users or modules to existing customers, in addition and to a lesser extent, new revenues generated by the acquisitions completed during the fiscal year endedJanuary 31, 2019 , and during the nine months endedOctober 31, 2019 . Gross margin was 64% for the nine months endedOctober 31, 2019 , compared to 68% for the nine months endedOctober 31, 2018 . Operating Expenses Research and Development Nine Months Ended October 31, 2019 2018 % Change (in thousands) Research and development$ 67,838 $ 42,693 59 % Research and development expenses were$67.8 million for the nine months endedOctober 31, 2019 compared to$42.7 million for the nine months endedOctober 31, 2018 , an increase of$25.1 million , or 59%. The increase was primarily due to increases of$22.6 million in employee compensation costs related to higher headcount, including stock-based compensation costs,$4.9 million related to allocated facilities and other costs driven by our overall growth, offset by an increase of$2.4 million in development costs capitalized in the period. 38 --------------------------------------------------------------------------------
Sales and Marketing
Nine Months Ended
October 31,
2019 2018 % Change
(in thousands)
Sales and marketing $ 112,575 $ 76,862 46 %
Sales and marketing expenses were $112.6 million for the nine months ended
October 31, 2019 compared to $76.9 million for the nine months ended October 31,
2018 , an increase of $35.7 million , or 46%. The increase was primarily due to an
increase of $24.8 million in employee compensation costs related to higher
headcount, including stock-based compensation costs, an increase of $7.6 million
related to allocated facilities, travel and other costs, and a $3.3 million
increase in customer relationship amortization.
General and Administrative
Nine Months Ended
October 31,
2019 2018 % Change
(in thousands)
General and administrative $ 56,297 $ 40,085 40 %
General and administrative expenses were $56.3 million for the nine months ended
October 31, 2019 compared to $40.1 million for the nine months ended October 31,
2018 , an increase of $16.2 million , or 40%. The increase was primarily due to
$10.7 million in employee compensation costs related to higher headcount,
including stock-based compensation costs, an increase of $3.3 million for
professional and outside service costs related to acquisition cost for the
recently completed acquisitions, and an increase of $2.2 million related to
allocated facilities and other costs driven by our overall growth.
Interest Expense
Nine Months Ended
October 31,
2019 2018 % Change
(in thousands)
Interest expense $ 24,874 $ 9,276 168 %
Interest expense was $24.9 million for the nine months ended October 31, 2019
compared to $9.3 million for the nine months ended October 31, 2018 . The $15.6
million increase in interest expense was primarily due to the amortization of
the debt discount and issuance costs on our convertible senior notes issued in
the second quarter of fiscal 2020.
Interest Income and Other, Net
Nine Months Ended
October 31,
2019 2018 % Change
(in thousands)
Interest income and other, net $ 6,479 $ 1,562 315 %
Interest income and other, net was $6.5 million for the nine months ended
October 31, 2019 compared to $1.6 million for the nine months ended October 31,
2018 . The increase was due to $3.7 million increase in interest income earned
from our greater balances of cash, cash equivalents and marketable securities,
and $1.2 million lower in net currency losses, primarily driven by the
strengthened British Pound during the period.
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Benefit From Income Taxes
Nine Months Ended
October 31,
2019 2018 % Change
(in thousands)
Benefit from income taxes $ 9,172 $ 1,372 NM
Benefit from income taxes was $9.2 million for the nine months ended October 31,
2019 compared to benefit from income taxes of $1.4 million for income taxes for
the nine months ended October 31, 2018 . The benefit from income taxes during the
nine months ended October 31, 2019 was primarily related to the release of a
valuation allowance for deferred tax assets from the Exari acquisition,
partially offset by income taxes related to foreign and state jurisdictions. The
benefit from income taxes during the nine months ended October 31, 2018 was
primarily related to the release of a valuation allowance for deferred tax
assets from the Aquiire acquisition, partially offset by income taxes related to
foreign and state jurisdictions.
Liquidity and Capital Resources
Our principal sources of liquidity were cash, cash equivalents, marketable securities, and cash generated from operations. As ofOctober 31, 2019 , we had cash and cash equivalents of$587.0 million , and marketable securities of$255.3 million . We had outstanding 2023 Notes and 2025 Notes with principal amount of$230 million and$805 million , respectively, as ofOctober 31, 2019 . For more than twenty trading days during the thirty consecutive trading days endedOctober 31, 2019 , 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 and the$183.9 million carrying amount of the 2023 Notes was classified as a short-term liability atOctober 31, 2019 . 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. The 2025 Notes were not convertible as ofOctober 31, 2019 . 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. It is our current intent to settle conversions of the 2023 Notes and 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. 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. 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 may 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 was
Cash provided by operating activities of$28.0 million for the nine months endedOctober 31, 2018 , was due to a net loss of$39.0 million , net accretion of discounts and amortization of premiums on marketable securities for$1.0 million , and other non-cash items for$0.4 million , offset by stock-based compensation of$38.7 million , depreciation and amortization, including deferred commissions, of$10.8 million , and amortization of debt discount and issuance costs of$8.6 million . The net change in operating assets and liabilities was favorable primarily due to a$12.4 million decrease in accounts receivable from the collection of customer payments which is typically higher in the first half of our fiscal year, in addition to other operating activities generating a cash inflow of$10.1 million , partially offset by increases of$8.5 million in deferred commissions,$3.3 million in prepaid expenses and other current assets mainly due to a prepayment to a hosting service provider, and$0.5 million in other assets. 40
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Investing Activities
Cash used in investing activities for the nine months endedOctober 31, 2019 of$293.0 million was primarily related to$74.6 million of net purchase of short-term marketable securities,$208.5 million spent on business acquisitions, and$9.9 million for purchases of property and equipment. Cash used in investing activities for the nine months endedOctober 31, 2018 of$231.6 million was primarily related to the purchase of marketable securities of$209.3 million ,$49.2 million spent on business acquisitions, and$4.9 million for purchases of property and equipment, offset by$31.8 million for maturities of marketable securities. Financing Activities Cash provided by financing activities for the nine months endedOctober 31, 2019 of$693.0 million was primarily due to net proceeds of$667.4 million from the issuance of the 2025 Notes and the purchase of the associated capped calls,$14.1 million proceeds from the exercise of stock options and$11.5 million from the proceeds received for common stock issued under the ESPP plan during the quarter. Cash provided by financing activities for the nine months endedOctober 31, 2018 of$18.3 million was primarily due to$10.1 million in proceeds from the exercise of stock options and$8.8 million from the proceeds received for common stock issued under the ESPP plan, offset by the payment of$0.6 million in issuance costs related to the issuance of our convertible notes inJanuary 2018 .
Off-Balance Sheet Arrangements
ThroughOctober 31, 2019 , we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Commitments and Contractual Obligations
Our principal commitments and contractual obligations consist of our Convertible Notes, obligations under operating leases for office facilities and contractual purchase obligations for hosting services that support our business operations. The following table summarizes our non-cancelable contractual obligations as ofOctober 31, 2019 : Payments Due by Period Less Than More Than Total 1 Year 1-3 Years 3-5 Years 5 Years (in thousands) Convertible senior notes (1)$ 1,035,000 $ - $ -$ 230,000 $ 805,000 Aggregate interest obligations (1)(2) 9,068 1,880 3,738 2,444 1,006 Operating lease obligations 38,312 9,457 16,941 10,751 1,163 Purchase obligations 12,000 5,000 7,000 - - Total contractual obligations$ 1,094,380 $ 16,337 $
27,679
(1) The conversion period for the 2023 Notes was open as of
as such the net carrying value of the 2023 Notes is included within current
liabilities on our condensed Consolidated Balance Sheet. The principal
balances of $230 million of the 2023 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.
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With the exception of changes described within Note 2, "Significant Accounting
Policies" due to the adoption of ASU No. 2016-02, there have been no material
changes to our critical accounting policies and estimates as compared to the
critical accounting policies and estimates disclosed in our Annual Report on
Form 10-K for the year ended January 31, 2019 .
Recent Accounting Pronouncements
Refer to Note 2, "Significant Accounting Policies" in the notes to our condensed consolidated financial statements for analysis of recent accounting pronouncements that are applicable to our business.
NonGAAP Financial Measures
In addition to our results determined in accordance withU.S. generally accepted accounting principles, or GAAP, we believe the following nonGAAP measures are useful in evaluating our operating performance. We regularly review the measures set forth below as we evaluate our business (in thousands). Three Months Ended Nine Months Ended October 31, October 31, 2019 2018 2019 2018 Non-GAAP operating profit$ 11,550 $ 5,763 $ 18,589 $ 10,109 Non-GAAP net profit$ 14,164 $ 5,461 $ 21,617 $ 8,221 Free cash flows$ 22,143 $ 2,565 $ 36,015 $ 23,093 We define nonGAAP operating profit as loss from operations before stockbased compensation and amortization of acquired intangible assets. We define nonGAAP net profit as net loss before stockbased compensation, amortization of acquired intangible assets, amortization of debt discount and issuance costs, and related tax effects, including non-recurring income tax adjustments. We define free cash flows as operating cash flows less purchases of property and equipment. We believe nonGAAP operating profit and non-GAAP net profit provide investors and other users of our financial information consistency and comparability with our past financial performance and facilitate period to period comparisons of operations. We believe nonGAAP operating profit and non-GAAP net profit are useful in evaluating our operating performance compared to that of other companies in our industry, as these metrics generally eliminate the effects of certain items that may vary for different companies for reasons unrelated to overall operating performance. We believe information regarding free cash flows provides useful information to investors because it is an indicator of the strength and performance of our business operations. We use nonGAAP operating profit, non-GAAP net profit and free cash flows in conjunction with traditional GAAP measures as part of our overall assessment of our performance, including the preparation of our annual operating budget and quarterly forecasts, to evaluate the effectiveness of our business strategies and to communicate with our board of directors concerning our financial performance. Our definitions may differ from the definitions used by other companies and therefore comparability may be limited. In addition, other companies may not publish these or similar metrics. Thus, our nonGAAP operating profit, non-GAAP net profit and free cash flows should be considered in addition to, not as substitutes for, or in isolation from, measures prepared in accordance with GAAP. We compensate for these limitations by providing investors and other users of our financial information a reconciliation of nonGAAP operating profit to loss from operations, non-GAAP net profit to net loss, and free cash flows to operating cash flows. We encourage investors and others to review our financial information in its entirety, not to rely on any single financial measure and to view nonGAAP operating profit, non-GAAP net profit, and free cash flows in conjunction with loss from operations, net loss, and the condensed consolidated statements of cash flows. The following tables provide a reconciliation of loss from operations to nonGAAP operating profit, from net loss to non-GAAP net profit, and from net cash provided by operating activities to free cash flows (in thousands): Three Months Ended Nine Months Ended October 31, October 31, 2019 2018 2019 2018 Loss from operations$ (16,945 ) $ (9,918 ) $ (57,556 ) $ (32,611 ) Stock-based compensation 21,955 13,820 60,068 38,690 Amortization of acquired intangible assets 6,540 1,861 16,077 4,030 Non-GAAP operating profit$ 11,550 $ 5,763 $ 18,589 $ 10,109 42
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Three Months Ended Nine Months Ended
October 31, October 31,
2019 2018 2019 2018
Net loss $ (26,317 ) $ (9,645 ) $ (66,779 ) $ (38,953 )
Stock-based compensation 21,955 13,820 60,068 38,690
Amortization of acquired intangible 6,540 1,861 16,077 4,030
assets
Amortization of debt discount and 12,352 23,350 8,595
issuance costs 2,953
Income tax effects and adjustments (366 ) (3,528 ) (11,099 ) (4,141 )
Non-GAAP net profit $ 14,164 $ 5,461 $ 21,617 $ 8,221
Three Months Ended Nine Months Ended
October 31, October 31,
2019 2018 2019 2018
Net cash provided by operating activities $ 25,832 $ 4,019 $ 45,877 $ 27,963
Less: purchases of property and equipment (3,689 ) (1,454 ) (9,862 ) (4,870 )
Free cash flows $ 22,143 $ 2,565 $ 36,015 $ 23,093
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