CROWDSTRIKE HOLDINGS, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this prospectus, particularly in the sections titled "Special Note Regarding Forward-Looking Statements" and "Risk Factors." Our fiscal year end isJanuary 31 , and our fiscal quarters end onApril 30 ,July 31 ,October 31 , andJanuary 31 . Our fiscal years endedJanuary 31, 2020 ,January 31, 2019 , andJanuary 31, 2018 , are referred to herein as fiscal 2020, fiscal 2019, and fiscal 2018, respectively. Overview We foundedCrowdStrike in 2011 to reinvent security for the cloud era. When we started the company, cyberattackers had a decided, asymmetric advantage over existing security products. We turned the tables on the adversaries by taking a fundamentally new approach that leverages the network effects of crowdsourced data applied to modern technologies such as AI, cloud computing, and graph databases. Realizing that the nature of cybersecurity problems had changed but the solutions had not, we built our CrowdStrike Falcon platform to detect threats and stop breaches. We believe we are defining a new category called the Security Cloud, with the power to transform the security industry much the same way the cloud has transformed the CRM, HR, and service management industries. With our Falcon platform, we created the first multi-tenant, cloud native, intelligent security solution capable of protecting workloads across on-premise, virtualized, and cloud-based environments running on a variety of endpoints such as desktops, laptops, servers, virtual machines, and IoT devices. Our Falcon platform is composed of two tightly integrated proprietary technologies: our easily deployed intelligent lightweight agent and our cloud-based, dynamic graph database called Threat Graph. Our solution benefits from crowdsourcing and economies of scale, which we believe enables our AI algorithms to be uniquely effective. We call this cloud-scale AI. We initially provided intelligence and incident response services while we developed our Falcon platform. InJune 2013 , we first began providing EDR capabilities as a single solution. InFebruary 2017 , as we executed on our Falcon platform expansion strategy, we began offering these and additional capabilities as separate cloud modules. This strategic move facilitated new customer adoption and allowed us to further expand within our customer base. Today, we offer 11 cloud modules on our Falcon platform via a SaaS subscription-based model that spans multiple large security markets, including endpoint security, security and IT operations (including vulnerability management), and threat intelligence. OnJune 14, 2019 we closed our initial public offering, or IPO, in which we issued and sold 20,700,000 shares of Class A common stock. The price per share to the public was$34.00 . We received aggregate proceeds of$665.1 million from the IPO, net of underwriters' discounts and commissions and before deducting estimated offering costs of$5.9 million . Upon the closing of the IPO, all shares of our outstanding preferred stock automatically converted into 131,267,586 shares of Class B common stock. In connection with our IPO, all shares of our common stock outstanding prior to our IPO were automatically converted into shares of Class B common stock. TheWorld Health Organization has declared the recent COVID-19 outbreak a public health emergency. The extent of the impact of the COVID-19 on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak; impact on our customers and our sales cycles; impact on our customer, employee, and industry events; and effect on our vendors, all of which are uncertain and cannot be predicted at this time. We are conducting business as usual with modifications to employee travel, employee work locations, and cancellation of certain marketing events, among other modifications. Other companies are taking precautionary and preemptive actions to address COVID-19 and may take further actions that alter their normal business operations. We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state, or local authorities, or that we determine are in the best interests of our employees, customers, partners, suppliers, and stockholders. At this point, the extent to which the COVID-19 may impact our financial condition or results of operations is uncertain. Furthermore, due to our subscription based business model, the effect of the COVID-19 may not be fully reflected in our results of operations until future periods, if at all. 52
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Our Go-To-Market Strategy
We sell subscriptions to our Falcon platform and cloud modules to organizations
across multiple industries. We primarily sell subscriptions to our Falcon
platform and cloud modules through our direct sales team that leverages our
network of channel partners. Our direct sales team is comprised of field sales
and inside sales professionals who are segmented by a customer's number of
endpoints.
We have a low friction land-and-expand sales strategy. When customers deploy our
Falcon platform, they can start with any number of cloud modules and we can
activate additional cloud modules in real time on the same agent already
deployed on the endpoint. This architecture has also allowed us to begin to
offer a free trial of our Falcon Prevent module directly from our website or the
AWS Marketplace , and we plan to extend this capability to additional modules in
the future. Once customers experience the benefits of our Falcon platform, they
often expand their adoption over time by adding more endpoints or purchasing
additional modules. We also use our sales team to identify current customers who
may be interested in free trials of additional cloud modules, which serves as a
powerful driver of our land-and-expand model. By segmenting our sales teams, we
can deploy a low-touch sales model that efficiently identifies prospective
customers.
We began as a solution for large enterprises, but the flexibility and
scalability of our Falcon platform has enabled us to seamlessly offer our
solution to customers of any size-from those with hundreds of thousands of
endpoints to as few as three. We have expanded our sales focus to include any
organization without the need to modify our Falcon platform for small and medium
sized businesses.
A substantial majority of our customers purchase subscriptions with a term of
one year. Our subscriptions are generally priced on a per-endpoint and
per-module basis. We recognize revenue from our subscriptions ratably over the
term of the subscription. We also generate revenue from our incident response
and proactive professional services, which are generally priced on a time and
materials basis. We view our professional services business primarily as an
opportunity to cross-sell subscriptions to our Falcon platform and cloud
modules.
Certain Factors Affecting Our Performance
Adoption of Our Solutions. We believe our future success depends in large part
on the growth in the market for cloud-based SaaS-delivered endpoint security
solutions. Many organizations have not yet abandoned the on-premise legacy
products in which they have invested substantial personnel and financial
resources to design and maintain. As a result, it is difficult to predict
customer adoption rates and demand for our cloud-based solutions.
New Customer Acquisition. Our future growth depends in large part on our ability
to acquire new customers. If our efforts to attract new customers are not
successful, our revenue and rate of revenue growth may decline. We believe that
our go-to-market strategy and the flexibility and scalability of our Falcon
platform allow us to rapidly expand our customer base. Our incident response and
proactive services also help drive new customer acquisitions, as many of these
professional services customers subsequently purchase subscriptions to our
Falcon platform. Many organizations have not yet adopted cloud-based security
solutions, and since our Falcon platform has offerings for organizations of all
sizes, worldwide, and across industries, we believe this presents a significant
opportunity for growth.
Maintain Customer Retention and Increase Sales. Our ability to increase revenue
depends in large part on our ability to retain our existing customers and
increase the ARR of their subscriptions. We focus on increasing sales to our
existing customers by expanding their deployments to more endpoints and selling
additional cloud modules for increased functionality. In February 2017 , we
transitioned our platform from a single offering into highly-integrated
offerings of multiple SKU cloud modules. We initially launched this strategy
with our IT hygiene, next-generation antivirus, EDR, managed threat hunting, and
intelligence modules, and added five additional modules between February 2017
and October 2019 . The Falcon Platform currently has 11 cloud modules that span
endpoint security, security operations, and threat intelligence.
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Invest in Growth. We believe that our market opportunity is large and requires
us to continue to invest significantly in sales and marketing efforts to further
grow our customer base, both domestically and internationally. Our open cloud
architecture and single data model have allowed us to rapidly build and deploy
new cloud modules, and we expect to continue investing in those efforts to
further enhance our technology platform and product functionality. In addition
to our ongoing investment in research and development, we may also pursue
acquisitions of businesses, technologies, and assets that complement and expand
the functionality of our Falcon platform, add to our technology or security
expertise, or bolster our leadership position by gaining access to new customers
or markets. Furthermore, we expect our general and administrative expenses to
increase in dollar amount for the foreseeable future given the additional
expenses for accounting, compliance, and investor relations as we become a
public company.
Key Metrics
We monitor the following key metrics to help us evaluate our business, identify
trends affecting our business, formulate business plans, and make strategic
decisions.
Subscription Customers
We define a subscription customer as a separate legal entity that has entered
into a distinct subscription agreement for access to Falcon platform for which
the term has not ended or with which we are negotiating a renewal contract. We
do not consider our channel partners as customers, and we treat managed service
security providers, who may purchase our products on behalf of multiple
companies, as a single customer. While initially we focused our sales and
marketing efforts on large enterprises, in recent years we have also increased
our sales and marketing to small and medium sized businesses.
The following table sets forth the number of our subscription customers as of
the dates presented:
As of January 31,
2020 2019 2018
(in thousands)
Subscription customers 5,431 2,516 1,242
Year-over-year growth 116 % 103 % 176 %
Annual Recurring Revenue ("ARR")
ARR is calculated as the annualized value of our customer subscription contracts
as of the measurement date, assuming any contract that expires during the next
12 months is renewed on its existing terms. To the extent that we are
negotiating a renewal with a customer after the expiration of the subscription,
we continue to include that revenue in ARR if we are actively in discussion with
such an organization for a new subscription or renewal, or until such
organization notifies us that it is not renewing its subscription.
The following table sets forth our ARR as of the dates presented:
As of January 31,
2020 2019 2018
(dollars in thousands)
Annual recurring revenue
92 % 121 % 140 %
Dollar-Based Net Retention Rate
Our dollar-based net retention rate compares our ARR from a set of subscription
customers against the same metric for those subscription customers from the
prior year. Our dollar-based net retention rate reflects customer renewals,
expansion, contraction, and churn, and excludes revenue from our incident
response and proactive services. We calculate our dollar-based net retention
rate as of period end by starting with the ARR from all subscription customers
as of 12 months prior to such period end, or Prior Period ARR. We then calculate
the ARR from these same subscription customers as of the current period end, or
Current Period ARR. Current Period ARR includes any expansion and is net of
contraction or churn over the trailing 12 months but excludes revenue from new
subscription customers in the current period. We then divide the Current Period
ARR by the Prior Period ARR to arrive at our dollar-based net retention rate.
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Since January 2016 , our dollar-based net retention rate has consistently
exceeded 100%, which is primarily attributable to an expansion of endpoints
within, and cross-selling additional cloud modules to, our existing subscription
customers. Our dollar-based net retention rate can fluctuate from period to
period due to large customer contracts in a given period, which may reduce our
dollar-based net retention rate in subsequent periods if the customer makes a
larger upfront purchase and does not continue to increase purchases.
As of January 31,
2020 2019 2018
Dollar-based net retention rate 124 % 147 % 119 %
Our dollar-based net retention rate has varied from quarter to quarter due to a
number of factors and we expect that trend to continue. For example in the
fourth quarter of fiscal 2019, we had an outsized expansion deal that
contributed 11 percentage points to our net retention in that quarter. While we
once again expanded within this account in the fourth quarter of fiscal 2020,
the impact was smaller than the prior year. In addition, we have seen strong
success with our strategy to land bigger deals with more modules, and we are
also seeing an acceleration in our acquisition of new customers. While we view
these two trends as positive developments, they have a natural trade off on our
ability to expand business with existing customers in the near term.
Components of Our Results of OperationsRevenue
Subscription Revenue. Subscription revenue primarily consists of subscription
fees for our Falcon platform and additional cloud modules that are supported by
our cloud-based platform. Subscription revenue is driven primarily by the number
of subscription customers, the number of endpoints per customer, and the number
of cloud modules included in the subscription. We recognize subscription revenue
ratably over the term of the agreement, which is generally one to three years.
Because our subscription customers are generally billed upfront, we have
recorded significant deferred revenue. Consequently, a substantial portion of
the revenue that we report in each period is attributable to the recognition of
deferred revenue relating to subscriptions that we entered into during previous
periods. We typically invoice our customers annually in advance or multi-year in
advance.
Professional Services Revenue. Professional services revenue includes incident
response and proactive services, forensic and malware analysis, and attribution
analysis. Professional services are generally sold separately from subscriptions
to our Falcon platform, although customers frequently enter into a separate
arrangement to purchase subscriptions to our Falcon platform at the conclusion
of a professional services arrangement. Professional services are available
through hourly rate and fixed fee contracts, one-time and ongoing engagements,
and retainer-based agreements. For time and materials and retainer-based
arrangements, revenue is recognized as services are performed. For fixed fee
contracts, we recognize revenue by applying the proportional performance method.
Cost of Revenue
Subscription Cost of Revenue. Subscription cost of revenue consists primarily of
costs related to hosting our cloud-based Falcon platform in data centers,
amortization of our capitalized internal-use software, employee-related costs
such as salaries and bonuses, stock-based compensation expense, benefits costs
associated with our operations and support personnel, software license fees,
property and equipment depreciation, and an allocated portion of facilities and
administrative costs.
As new customers subscribe to our platform and existing subscription customers
increase the number of endpoints on our Falcon platform, our cost of revenue
will increase due to greater cloud hosting costs related to powering new cloud
modules and the incremental costs for storing additional data collected for such
cloud modules and employee-related costs. We intend to continue to invest
additional resources in our cloud platform and our customer support
organizations as we grow our business. The level and timing of investment in
these areas could affect our cost of revenue in the future.
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Professional Services Cost of Revenue. Professional services cost of revenue
consists primarily of employee-related costs, such as salaries and bonuses,
stock-based compensation expense, technology, property and equipment
depreciation, and an allocated portion of facilities and administrative costs.
Gross Profit and Gross Margin
Gross profit and gross margin have been and will continue to be affected by
various factors, including the timing of our acquisition of new subscription
customers, renewals from existing subscription customers, sales of additional
modules to existing subscription customers, the data center and bandwidth costs
associated with operating our cloud platform, the extent to which we expand our
customer support and cloud operations organizations, and the extent to which we
can increase the efficiency of our technology, infrastructure, and data centers
through technological improvements. We expect our gross profit to increase in
dollar amount and our gross margin to increase modestly over the long term,
although our gross margin could fluctuate from period to period depending on the
interplay of these factors. Demand for our incident response services is driven
by the number of breaches experienced by non-customers. Also, we view our
professional services solutions in the context of our larger business and as a
significant lead generator for new subscriptions. Because of these factors, our
services revenue and gross margin may fluctuate over time.
Operating Expenses
Our operating expenses consist of sales and marketing, research and development
and general administrative expenses. For each of these categories of expense,
employee-related expenses are the most significant component, which include
salaries, employee bonuses, sales commissions, and employer payroll tax.
Operating expenses also include an allocated portion of overhead costs for
facilities and IT.
Sales and Marketing. Sales and marketing expenses primarily consist of
employee-related expenses such as salaries, commissions, and bonuses. Sales and
marketing expenses also include stock-based compensation; expenses related to
our Fal.Con customer conference and other marketing events; an allocated portion
of facilities and administrative expenses; and cloud hosting and related
services costs related to proof of value efforts. Prior to February 1, 2019 , we
amortized sales commissions on a straight-line basis to sales and marketing
expense over the term of the subscription. On February 1, 2019 , we adopted ASC
606, and began capitalizing and amortizing sales commissions and any other
incremental payments made upon the initial acquisition of a subscription or
upsells to existing customers to sales and marketing expense over the estimated
customer life, and amortizing any such expenses paid for the renewal of a
subscription to sales and marketing expense over the term of the renewal.
We expect sales and marketing expenses to increase in dollar amount as we
continue to make significant investments in our sales and marketing organization
to drive additional revenue, further penetrate the market, and expand our global
customer base. However, we anticipate sales and marketing costs to decrease as a
percentage of revenue over time.
Research and Development. Research and development expenses primarily consist of
employee-related expenses such as salaries and bonuses; stock-based
compensation, consulting expenses related to the design; development, testing,
and enhancements of our subscription services; and an allocated portion of
facilities and administrative expenses. Our cloud platform is software-driven,
and our research and development teams employ software engineers in the design,
and the related development, testing, certification, and support of these
solutions.
We expect research and development expenses to increase in dollar amount as we
continue to increase investments in our technology architecture and software
platform. However, we anticipate research and development expenses to decrease
as a percentage of our total revenue over time, although our research and
development expenses may fluctuate as a percentage of our total revenue from
period-to-period depending on the timing of these expenses.
General and Administrative. General and administrative expenses consist of
employee-related expenses such as salaries and bonuses; stock-based
compensation; and related expenses for our executive, finance, human resources;
and legal organizations. In addition, general and administrative expenses
include outside legal, accounting, and other professional fees; and an allocated
portion of facilities and administrative expenses.
We expect to incur additional expenses as a result of operating as a public
company. As a result, we expect our general and administrative expenses to
increase in dollar amount. However, we anticipate general and administrative
expenses to decrease as a percentage of our total revenue over time.
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Other Income (Expense), Net. Other income (expense), net, consists primarily of
income earned on our cash equivalents and marketable securities; expense related
to the fair value of warrants for our redeemable convertible preferred stock;
interest expense on our bank facility; and foreign currency transaction gains
and losses.
Provision for Income Taxes. The provision for income taxes consists primarily of
income taxes in certain foreign jurisdictions in which we conduct business, as
well as state income taxes in the United States . We have not recorded any U.S.
federal income tax expense. We maintain a full valuation allowance on our U.S.
federal and state and U.K. deferred tax assets as we have concluded that it is
more likely than not that those deferred assets will not be utilized.
Results of Operations
The following tables set forth our consolidated statements of operations in
dollar amounts and as a percentage of total revenue for each period presented:
Year Ended January 31,
2020 2019 2018
( in thousands)
Revenue
Subscription $ 436,323 $ 219,401 $ 92,568
Professional services 45,090 30,423 26,184
Total revenue 481,413 249,824 118,752
Cost of revenue
Subscription(1)(2) 112,474 69,208 39,857
Professional services(1) 29,153 18,030 14,629
Total cost of revenue 141,627 87,238 54,486
Gross profit 339,786 162,586 64,266
Operating expenses
Sales and marketing(1)(2) 266,595 172,682 104,277
Research and development(1)(2) 130,188 84,551 58,887
General and administrative(1) 89,068 42,217 32,542 Total operating expenses 485,851 299,450 195,706 Loss from operations (146,065) (136,864) (131,440) Interest expense (442) (428) (1,648) Other income (expense), net 6,725 (1,418) (1,473)
Loss before provision for income taxes (139,782) (138,710)
(134,561) Provision for income taxes (1,997) (1,367) (929) Net loss$ (141,779) $ (140,077) $ (135,490)
______________________________
(1)Includes stock-based compensation expense as follows:
Year Ended January 31,
2020 2019 2018
(in thousands)
Subscription cost of revenue $ 5,226 $ 689 $ 89
Professional services cost of revenue 2,486 205 252 Sales and marketing 23,919 5,175 1,386 Research and development 15,403 7,815 3,429 General and administrative 32,906 6,621 7,187
Total stock-based compensation expense
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(2)Includes amortization of acquired intangible assets as follows:
Year Ended January 31,
2020 2019 2018
(in thousands)
Subscription cost of revenue $ 323 $ 327 $ 287
Sales and marketing 123 143 20
Research and development 41 113 321
Total amortization of purchased intangibles $ 487 $ 583 $ 628
Year Ended January 31,
2020 2019 2018
% % %
Revenue
Subscription 91 % 88 % 78 %
Professional services 9 % 12 % 22 %
Total revenue 100 % 100 % 100 %
Cost of revenue
Subscription 23 % 28 % 34 %
Professional services 6 % 7 % 12 %
Total cost of revenue 29 % 35 % 46 %
Gross profit 71 % 65 % 54 %
Operating expenses
Sales and marketing 55 % 69 % 88 %
Research and development 27 % 34 % 50 %
General and administrative 19 % 17 % 27 %
Total operating expenses 101 % 120 % 165 %
Loss from operations (30) % (55) % (111) %
Interest expense - % - % (1) %
Other income (expense), net 1 % (1) % (1) %
Loss before provision for income taxes (29) % (56) % (113) %
Provision for income taxes - % (1) % (1) %
Net loss (29) % (56) % (114) %
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Comparison of Fiscal 2020 and Fiscal 2019
Revenue
The following is a breakdown of total revenue from subscriptions and
professional services for fiscal 2020, as compared to fiscal 2019:
Year Ended
January 31, Change
2020 2019 $ %
(dollars in thousands)
Subscription $ 436,323 $ 219,401 $ 216,922 99 %
Professional services 45,090 30,423 14,667 48 %
Total revenue $ 481,413 $ 249,824 $ 231,589 93 %
Total revenue increased by $231.6 million , or 93%, in fiscal 2020, compared to
fiscal 2019. Subscription revenue accounted for 91% of our total revenue in
fiscal 2020, and 88% in fiscal 2019. Professional services revenue accounted for
9% of our total revenue in fiscal 2020 and 12% in fiscal 2019.
Subscription revenue increased by $216.9 million , or 99%, in fiscal 2020,
compared to fiscal 2019. This increase was primarily attributable to the
addition of new subscription customers, as we increased our customer base by
116%, from 2,516 subscription customers in fiscal 2019 to 5,431 subscription
customers in fiscal 2020. Subscription revenue from new customers, subscription
revenue from the renewal of existing customers, and subscription revenue from
the sale of additional endpoints and additional modules to existing customers
accounted for 40%, 33%, and 27% of total subscription revenue in fiscal 2020,
respectively. Subscription revenue from new customers, subscription revenue from
the renewal of existing customers, and subscription revenue from the sale of
additional endpoints and additional modules to existing customers accounted for
59%, 23%, and 18% of total subscription revenue in fiscal 2019, respectively.
Professional services revenue increased by $14.7 million , or 48%, in fiscal
2020, compared to fiscal 2019, and was primarily attributable to an increase in
the number of professional service hours performed.
The following is a breakdown of cost of revenue related to subscriptions and
professional services for fiscal 2020, as compared to fiscal 2019:
Year Ended
January 31, Change
2020 2019 $ %
(dollars in thousands)
Subscription $ 112,474 $ 69,208 $ 43,266 63 %
Professional services 29,153 18,030 11,123 62 %
Total cost of revenue $ 141,627 $ 87,238 $ 54,389 62 %
Total cost of revenue increased by $54.4 million , or 62%, in fiscal 2020,
compared to fiscal 2019. Subscription cost of revenue increased by $43.3
million , or 63%, in fiscal 2020, compared to fiscal 2019. The increase in
subscription cost of revenue was primarily due to an increase in
employee-related payroll expenses of $17.1 million driven by a 114% increase in
average headcount which included significant hiring of customer support
employees, an increase in cloud hosting and related services of $10.1 million ,
an increase in stock-based compensation expense of $4.5 million , an increase in
depreciation of data center equipment of $3.8 million , an increase in allocated
overhead costs of $3.7 million , an increase in employee health insurance expense
of $1.1 million , and an increase in the amortization of capitalized internal use
software of $1.0 million .
Professional services cost of revenue increased by $11.1 million , or 62%, in
fiscal 2020, compared to fiscal 2019. The increase in professional services cost
of revenue was primarily due to an increase in employee-related payroll expenses
of $6.5 million driven by an increase in average headcount of 53%, an increase
in stock-based compensation of $2.3 million , an increase in allocated overhead
costs of $0.9 million , and an increase in cloud hosting and related services of
$0.4 million .
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The following is a breakdown of gross profit and gross margin for subscriptions
and professional services for fiscal 2020, as compared to fiscal 2019.
Year Ended
January 31, Change
2020 2019 $ %
(dollars in thousands)
Subscription gross profit $ 323,849 $ 150,193 $ 173,656 116 %
Professional services gross profit 15,937 12,393 3,544 29 %
Total gross profit $ 339,786 $ 162,586 $ 177,200 109 %
Year Ended
January 31,
2020 2019 Change
Subscription gross margin 74 % 68 % 6 %
Professional services gross margin 35 % 41 % (6) %
Total gross margin 71 % 65 % 6 %
Subscription gross margin increased by 6%, in fiscal 2020, compared to fiscal
2019. This increase was a result of moving more of our operations to co-location
data centers from third-party cloud service providers and renegotiating the
terms of a third-party cloud service provider contract. This increase in gross
margin was also due to incentivizing our sales team to drive higher margin
subscriptions and efforts to optimize our channel partner programs and the
uptake of multiple cloud modules by our customer base. Our "collect once, reuse
many" data strategy means that after the first module is paid for and covers the
cost of data storage and most computational costs, each additional subscription
module carries a higher margin. The decrease in professional services gross
margin was due to a decrease in utilization in fiscal 2020 compared to fiscal
2019.
Operating Expenses
Sales and Marketing
The following is a breakdown of sales and marketing expenses for fiscal 2020, as
compared to fiscal 2019:
Year Ended
January 31, Change
2020 2019 $ %
(dollars in thousands)
Sales and marketing expenses $ 266,595 $ 172,682 $ 93,913 54 %
Sales and marketing expenses increased by $93.9 million , or 54%, in fiscal 2020,
compared to fiscal 2019. The increase in sales and marketing expenses was
primarily due to an increase in employee-related payroll expenses of $36.5
million driven by an increase in average sales and marketing headcount of 54%,
an increase in stock-based compensation of $18.7 million , an increase in
marketing programs of $17.3 million , an increase in allocated overhead costs of
$6.8 million , an increase in travel-related costs of $5.4 million , and an
increase in employee health insurance expense of $2.2 million . As a result of
adopting ASC 606 effective February 1, 2019 , our commissions expense in fiscal
2020 was $21.7 million lower than it would have been under ASC 605.
Research and Development
The following is a breakdown of research and development expenses for fiscal
2020, as compared to fiscal 2019:
Year Ended
January 31, Change
2020 2019 $ %
(dollars in thousands)
Research and development expenses
54 %
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Research and development expenses increased by $45.6 million , or 54%, in fiscal
2020, compared to fiscal 2019. This increase was primarily due to an increase in
employee-related payroll expenses of $24.5 million , driven by an increase in
average research and development headcount of 45%. In addition, there was an
increase of $7.6 million in stock-based compensation expense, an increase in
cloud hosting and related costs of $6.3 million , an increase in allocated
overhead costs of $3.7 million , an increase in employee health insurance expense
of $1.3 million , and an increase in travel-related costs of $1.0 million .
General and Administrative
The following is a breakdown of general and administrative expenses for fiscal
2020, as compared to fiscal 2019:
Year Ended
January 31, Change
2020 2019 $ %
(dollars in thousands)
General and administrative expenses
General and administrative expenses increased by$46.9 million , or 111%, in fiscal 2020, compared to fiscal 2019. The increase in general and administrative expenses was primarily due to an increase in stock-based compensation expense of$26.9 million and an increase in employee-related payroll expenses of$9.9 million , driven by an increase in average general and administrative headcount of 66%. In addition, there was a$3.6 million increase in corporate insurance expense and a$1.6 million increase in allocated overhead costs. Interest and Other Income (expense), Net The following is a breakdown of interest and other expense, net, for fiscal 2020, as compared to fiscal 2019: Year Ended January 31, Change 2020 2019 $ % (dollars in thousands) Interest expense$ (442) $ (428) $ (14) 3 % Other income (expense), net$ 6,725 $ (1,418) $ 8,143 (574) % Interest expense was essentially unchanged in fiscal 2020 compared to fiscal 2019 and is primarily due to the amortization of debt issuance costs on our$150.0 million loan facility which has not been drawn down. Other income (expense), net, was an income of$6.7 million in fiscal 2020 compared to an expense of$1.4 million in fiscal 2019. This increase in other income of$8.1 million was driven primarily by an increase in interest income of$9.0 million due to increased cash balances in fiscal 2020 as a result of our IPO and income from a legal settlement of$1.3 million , partially offset by an increase in the fair value of the redeemable convertible preferred stock warrants of$2.4 million . These warrants were converted to warrants to purchase common stock in connection with our IPO. Provision for Income Taxes The following is a breakdown of the provision for income taxes for fiscal 2019, as compared to fiscal 2020: Year Ended January 31, Change 2020 2019 $ % (dollars in thousands)
Provision for income taxes
We had a provision for income taxes of$2.0 million in fiscal 2020 and a provision for income taxes of$1.4 million in fiscal 2019 resulting in an increase in income tax expense of$0.6 million . The increase was driven primarily by an increase in our international income tax expense of$1.0 million due to increased activity in several countries during fiscal 2020, partially offset by an income tax benefit of$0.4 million related to the unrealized gain on our available-for-sale securities. We maintain a full valuation allowance against our deferred tax assets for US federal and state andU.K. income tax purposes. 61 -------------------------------------------------------------------------------- Table of Contents Comparison of Fiscal 2019 and 2018 Revenue The following is a breakdown of total revenue from subscriptions and professional services for fiscal 2019 and fiscal 2018: Year Ended January 31, Change 2019 2018 $ % (dollars in thousands) Subscription$ 219,401 $ 92,568 $ 126,833 137 % Professional services 30,423 26,184 4,239 16 % Total revenue$ 249,824 $ 118,752 $ 131,072 110 % Total revenue increased by$131.1 million , or 110%, in fiscal 2019, compared to fiscal 2018. Subscription revenue accounted for 88% of our total revenue for fiscal 2019 and 78% for fiscal 2018. Professional services revenue accounted for 12% of our total revenue for fiscal 2019 and 22% for fiscal 2018. Subscription revenue increased by$126.8 million , or 137%, in fiscal 2019, compared to fiscal 2018. This increase was primarily attributable to the addition of new customers, as we increased our subscription customer base by 103% from 1,242 customers as ofJanuary 31, 2018 to 2,516 customers as ofJanuary 31, 2019 . Subscription revenue from new customers, subscription revenue from the renewal of existing customers, subscription revenue from the sale of additional endpoints to existing customers, and subscription revenue from the sale of additional modules to existing customers accounted for 59%, 23% and 18% of total subscription revenue for fiscal 2019, respectively. Professional services revenue grew by$4.2 million , or 16%, in fiscal 2019, compared to fiscal 2018, and was primarily attributable to an increase in the number of professional service hours performed. Cost of Revenue, Gross Profit, and Gross Margin The following is a breakdown of cost of revenue related to subscriptions and professional services for fiscal 2019 and fiscal 2018: Year Ended January 31, Change 2019 2018 $ % (dollars in thousands) Subscription$ 69,208 $ 39,857 $ 29,351 74 % Professional services 18,030 14,629 3,401 23 % Total cost of revenue$ 87,238 $ 54,486 $ 32,752 60 % Total cost of revenue increased by$32.8 million , or 60%, in fiscal 2019, compared to fiscal 2018. Subscription cost of revenue increased by$29.4 million , or 74%, in fiscal 2019, compared to fiscal 2018. The increase in subscription cost of revenue was primarily due to an increase of$11.0 million in cloud hosting and related services, an increase in employee-related expenses of$7.9 million , which includes an increase of$0.6 million in stock-based compensation expense, driven by an increase in average headcount of 151%, an increase in depreciation of data center equipment of$3.7 million , an increase in amortization of internal-use software of$2.0 million , an increase in allocated overhead costs of$1.7 million , and an increase in software license fees of$1.3 million . Professional services cost of revenue increased by$3.4 million , or 23%, in fiscal 2019, compared to fiscal 2018. The increase in professional services cost of revenue was primarily due to an increase in employee-related expenses of$1.9 million driven by an increase in average headcount of 37%, a$0.6 million increase in travel- related costs, an increase of$0.5 million in allocated overhead costs, and a$0.4 million increase in consulting costs. 62 -------------------------------------------------------------------------------- Table of Contents The following is a breakdown of gross profit and gross margin for subscriptions and professional services for fiscal 2019 compared to fiscal 2018: Year Ended January 31, Change 2019 2018 $ % (dollars in thousands) Subscription$ 150,193 $ 52,711 $ 97,482 185 % Professional services 12,393 11,555 838 7 % Total gross profit$ 162,586 $ 64,266 $ 98,320 153 % Year Ended January 31, 2019 2018 Change Subscription gross margin 68 % 57 % 11 % Professional services gross margin 41 % 44 % (3) % Total gross margin 65 % 54 % 11 % Subscription gross margin increased by 11%, in fiscal 2019, compared to fiscal 2018. This increase was a result of moving more of our operations to colocation data centers from third-party cloud service providers and renegotiating the terms of a third-party cloud service provider contract. This increase in gross margin was also due to incentivizing our sales team to drive higher margin subscriptions and efforts to optimize our channel partner programs. Professional services gross margin decreased by 3%, in fiscal 2019, compared to fiscal 2018, primarily due to the lower utilization of professional services personnel. The timing of professional services engagements is highly variable and can result in fluctuations in gross margin on professional services. Operating Expenses Sales and Marketing The following is a breakdown of sales and marketing expenses for fiscal 2019 and fiscal 2018: Year Ended January 31, Change 2019 2018 $ % (dollars in thousands) Sales and marketing expenses$ 172,682 $ 104,277 $ 68,405 66 % Sales and marketing expenses increased by$68.4 million , or 66%, in fiscal 2019, compared to fiscal 2018. The increase in sales and marketing expenses was primarily due to an increase in employee-related expenses of$48.6 million , which includes an increase in stock-based compensation expense of$3.8 million , driven by an increase in average sales and marketing headcount of 73%, an increase in marketing program costs of$7.4 million , an increase in allocated overhead costs of$7.1 million , an increase in travel-related costs of$3.4 million , and an increase in cloud hosting and related services of$0.9 million . Research and Development The following is a breakdown of research and development expenses for fiscal 2019 and fiscal 2018: Year Ended January 31, Change 2019 2018 $ % (dollars in thousands)
Research and development expenses
44 %
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Research and development expenses increased by $25.7 million , or 44%, in fiscal
2019, compared to fiscal 2018. This increase was primarily due to an increase in
employee-related expenses of $19.5 million , which includes an increase of
$4.4 million in stock-based compensation expense, driven by an increase in
average research and development headcount of 36% . In addition, there was an
increase of $3.3 million in allocated overhead costs, an increase in cloud
hosting and related services of $3.1 million , and an increase in travel-related
costs of $0.6 million , partially offset by a decrease in contract labor and
consulting expenses of $1.9 million .
General and Administrative
The following is a breakdown of general and administrative expenses for fiscal
2019 and fiscal 2018:
Year Ended
January 31, Change
2019 2018 $ %
(dollars in thousands)
General and administrative expenses
General and administrative expenses increased by$9.7 million , or 30%, in fiscal 2019, compared to fiscal 2018. The increase in general and administrative expenses was primarily due to an increase in employee-related expenses of$3.9 million , driven by an increase in average general and administrative headcount of 59%. In addition, there was a$3.2 million increase in legal and accounting fees, and a$0.8 million increase in software licensing fees. Interest and Other Expense, Net The following is a breakdown of interest and other expense, net, for fiscal 2019 and fiscal 2018: Year Ended January 31, Change 2019 2018 $ % (dollars in thousands) Interest expense$ (428) $ (1,648) $ 1,220 (74) % Other expense, net$ (1,418) $ (1,473) $ 55 (4) % The decrease in interest expense of$1.2 million was driven primarily by a decrease in the amounts borrowed during fiscal 2019 compared to fiscal 2018. Other expense, net, decreased by$0.1 million , which was driven primarily by an increase in the fair value of the redeemable convertible preferred stock warrants of$3.3 million , offset by an increase in interest income of$2.4 million and a decrease in the amortization of debt issuance costs of$1.0 million . Provision for Income Taxes The following is a breakdown of the provision for income taxes for the years ended fiscal 2019 and fiscal 2018: Year Ended January 31, Change 2019 2018 $ % (dollars in thousands) Provision for income taxes$ (1,367) $ (929) $ (438) 47 %
The increase in the provision for income taxes was driven primarily by an increase in international income tax expense due to our expansion into several countries during fiscal 2019.
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Non-GAAP Financial Measures
In addition to our results determined in accordance with U.S. generally accepted
accounting principles, or GAAP, we believe the following non-GAAP measures are
useful in evaluating our operating performance. We use the following non-GAAP
financial information to evaluate our ongoing operations and for internal
planning and forecasting purposes. We believe that non-GAAP financial
information, when taken collectively, may be helpful to investors because it
provides consistency and comparability with past financial performance. However,
non-GAAP financial information is presented for supplemental informational
purposes only, has limitations as an analytical tool, and should not be
considered in isolation or as a substitute for financial information presented
in accordance with GAAP. In particular, free cash flow is not a substitute for
cash used in operating activities. Additionally, the utility of free cash flow
as a measure of our financial performance and liquidity is further limited as it
does not represent the total increase or decrease in our cash balance for a
given period. In addition, other companies, including companies in our industry,
may calculate similarly-titled non-GAAP measures differently or may use other
measures to evaluate their performance, all of which could reduce the usefulness
of our non-GAAP financial measures as tools for comparison. A reconciliation is
provided below for each non-GAAP financial measure to the most directly
comparable financial measure stated in accordance with GAAP. Investors are
encouraged to review the related GAAP financial measures and the reconciliation
of these non-GAAP financial measures to their most directly comparable GAAP
financial measures and not rely on any single financial measure to evaluate our
business.
We believe that these non-GAAP financial measures as presented in the tables
below, when taken together with the corresponding GAAP financial measures,
provide meaningful supplemental information regarding our performance by
excluding certain items that may not be indicative of our business, results of
operations, or outlook.
Non-GAAP Subscription Gross Profit and Non-GAAP Subscription Gross Margin
We define non-GAAP subscription gross profit and non-GAAP subscription gross
margin as GAAP subscription gross profit and GAAP subscription gross margin,
respectively, excluding stock-based compensation expense and amortization of
acquired intangible assets. We believe non-GAAP subscription gross profit and
non-GAAP subscription gross margin provide our management and investors
consistency and comparability with our past financial performance and facilitate
period-to-period comparisons of operations, as these measures eliminate the
effects of certain variables unrelated to our overall operating performance.
The following table presents a reconciliation of our non-GAAP subscription gross
profit to our GAAP subscription gross profit and of our non-GAAP subscription
gross margin to our GAAP subscription gross margin as of the periods presented:
Year Ended January 31,
2020 2019 2018
(dollars in thousands)
GAAP subscription revenue $ 436,323 $ 219,401 $ 92,568
GAAP subscription gross profit $ 323,849 $ 150,193 $ 52,711
Add: Stock-based compensation expense 5,226 689 89
Add: Amortization of acquired intangible assets 323 327 287
Non-GAAP subscription gross profit $ 329,398 $ 151,209 $ 53,087
GAAP subscription gross margin 74 % 68 % 57 %
Non-GAAP subscription gross margin 75 % 69 % 57 %
Non-GAAP Loss from Operations and Non-GAAP Operating Margin
We define non-GAAP loss from operations and non-GAAP operating margin as GAAP
loss from operations and GAAP operating margin, respectively, excluding
stock-based compensation expense, amortization of acquired intangible assets,
and acquisition-related expenses. We believe non-GAAP loss from operations and
non-GAAP operating margin provide our management and investors consistency and
comparability with our past financial performance and facilitate
period-to-period comparisons of operations, as these metrics generally eliminate
the effects of certain variables unrelated to our overall operating performance.
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The following table presents a reconciliation of our non-GAAP loss from
operations to our GAAP loss from operations and our non-GAAP operating margin to
our GAAP operating margin as of the periods presented:
Year Ended January 31,
2020 2019 2018
(dollars in thousands)
GAAP total revenue $ 481,413 $ 249,824 $ 118,752
GAAP loss from operations $ (146,065) $ (136,864) $ (131,440)
Add: Stock-based compensation expense 79,940 20,505 12,343
Add: Amortization of acquired intangible assets 487 583 628
Add: Acquisition-related expenses - - 167
Non-GAAP loss from operations $ (65,638) $ (115,776) $ (118,302)
GAAP operating margin (30) % (55) % (111) %
Non-GAAP operating margin (14) % (46) % (100) %
Free Cash Flow and Free Cash Flow Margin
Free cash flow is a non-GAAP financial measure that we define as net cash
provided by (used in) operating activities less purchases of property and
equipment and capitalized internal use software.
Free cash flow margin is calculated as free cash flow divided by total revenue.
We believe that free cash flow and free cash flow margin are useful indicators
of liquidity that provide useful information to management and investors about
the amount of cash consumed by our operating activities that is therefore not
available to be used for other strategic initiatives. One limitation of free
cash flow and free cash flow margin is that they do not reflect our future
contractual commitments. Additionally, free cash flow does not represent the
total increase or decrease in our cash balance for a given period.
The following table presents a reconciliation of free cash flow and free cash
flow margin to net cash provided by (used in) operating activities:
Year Ended January 31,
2020 2019 2018
(dollars in thousands)
GAAP total revenue $ 481,413 $ 249,824 $ 118,752
GAAP net cash provided by (used in) operating activities 99,943 (22,968) (58,766)
Less: Purchases of property and equipment (80,198) (35,851) (22,906)
Less: Capitalized internal-use software (7,289) (6,794) (6,542)
Free cash flow $ 12,456 $ (65,613) $ (88,214)
GAAP net cash used in investing activities $ (629,631) $ (142,030) $ (28,330)
GAAP net cash provided by financing activities $ 706,144
21 % (9) % (49) %
Less: Purchases of property and equipment as a percentage of revenue
(17) % (14) % (19) %
Less: Capitalized internal-use software as a percentage
of revenue (2) % (3) % (6) %
Free cash flow margin 3 % (26) % (74) %
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Quarterly Results of Operations
The following table sets forth our unaudited quarterly statements of operations
data for each of the quarters indicated. The unaudited quarterly statements of
operations data set forth below have been prepared on the same basis as our
audited consolidated financial statements and, in the opinion of management,
reflect all adjustments, consisting only of normal recurring adjustments, that
are necessary for the fair statement of such data. Our historical results are
not necessarily indicative of the results that may be expected in the future,
and the results for any quarter are not necessarily indicative of results to be
expected for a full year or any other period. The following quarterly financial
data should be read in conjunction with our consolidated financial statements
and the related notes included else wherein this prospectus.
Three Months Ended
April 30, 2018 July 31, 2018 October 31, 2018 January 31, 2019 April 30, 2019 July 31, 2019 October 31, 2019 January 31, 2020
(in thousands)
Revenue
Subscription $ 39,758 $ 49,161 $ 57,651 $ 72,831 $ 85,990 $ 97,575 $ 114,221 $ 138,537
Professional services 7,531 6,540 8,728 7,624 10,087 10,533 10,898 13,572
Total revenue 47,289 55,701 66,379 80,455 96,077 108,108 125,119 152,109
Cost of revenue
Subscription(1)(2) 15,171 14,604 17,302 22,131 23,691 24,946 29,221 34,616
Professional services(1) 4,223 3,971 4,972 4,864 5,582 6,636 8,134 8,801
Total cost of revenue 19,394 18,575 22,274 26,995 29,273 31,582 37,355 43,417
Gross profit 27,895 37,126 44,105 53,460 66,804 76,526 87,764 108,692
Operating expenses
Sales and marketing(1)(2) 36,617 40,113 46,614 49,338 56,843 65,274 68,675 75,803
Research and development(1)(2) 17,615 18,963 25,968 22,005 23,875 31,630 35,992 38,691
General and administrative(1) 6,777 8,477 13,614 13,349 11,861 30,261 21,615 25,331
Total operating expenses 61,009 67,553 86,196 84,692 92,579 127,165 126,282 139,825
Loss from operations (33,114) (30,427) (42,091) (31,232) (25,775) (50,639) (38,518) (31,133)
Interest expense (192) (236) - - (1) (164) (132) (145)
Other income (expense), net (190) (1,852) 303 321 394 (451) 3,579 3,203
Loss before provision for
income taxes (33,496) (32,515) (41,788) (30,911) (25,382) (51,254) (35,071) (28,075)
Provision for income taxes (121) (362) (535) (349) (595) (635) (434) (333)
Net loss $ (33,617) $ (32,877) $ (42,323) $ (31,260) $ (25,977) $ (51,889) $ (35,505) $ (28,408)
Net loss per share
attributable to common
stockholders, basic and
diluted $ (0.77) $ (0.75) $ (0.93) $ (0.67) $ (0.55) $ (0.40) $ (0.17) $ (0.14)
Weighted-average shares used
in computing net loss per
share attributable to common
stockholders, basic and
diluted 43,614 44,105 45,287 46,416 47,205 130,091 204,096 207,565
____________________________
(1) Includes stock-based compensation expense as follows:
Three Months Ended
October 31, January 31, October 31, January 31,
April 30, 2018 July 31, 2018 2018 2019 April 30, 2019 July 31, 2019 2019 2020
(in thousands)
Subscription cost of
revenue $ 63 $ 88 $ 382 $ 156 $ 265 $ 1,233 $ 1,666 $ 2,062
Professional services
cost of revenue 46 57 53 49 103 644 784 955
Sales and marketing 773 1,031 2,137 1,234 1,518 6,638 7,355 8,408
Research and development 448 539 6,245 583 681 4,976 4,696 5,050
General and
administrative 389 509 4,643 1,080 1,185 16,368 7,465 7,888
Total stock-based
compensation expense $ 1,719 $ 2,224 $ 13,460 $ 3,102 $ 3,752 $ 29,859 $ 21,966 $ 24,363
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(2)Includes amortization of acquired intangible assets as follows:
Three Months Ended
January 31, October 31, January 31,
April 30, 2018 July 31, 2018 October 31, 2018 2019 April 30, 2019 July 31, 2019 2019 2020
(in thousands)
Subscription cost of
revenue $ 96 $ 106 $ 20 $ 105 $ 104 $ 97 $ 61 $ 61
Sales and marketing 17 62 32 32 30 32 30 31
Research and development 53 39 10 11 11 10 10 10
Total amortization of
purchased intangibles $ 166 $ 207 $ 62 $ 148 $ 145 $ 139 $ 101 $ 102
Percentage of Revenue Data
The following table presents the components of our statement of operations as a
percentage of total revenue for each of the quarters indicated:
Three Months Ended
April 30, July 31, October 31, January 31, April 30, July 31, October 31, January 31,
2018 2018 2018 2019 2019 2019 2019 2020
Revenue
Subscription 84 % 88 % 87 % 91 % 90 % 90 % 91 % 91 %
Professional services 16 % 12 % 13 % 9 % 10 % 10 % 9 % 9 %
Total revenue 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 %
Cost of revenue
Subscription 32 % 26 % 27 % 28 % 25 % 23 % 23 % 23 %
Professional services 9 % 7 % 7 % 6 % 6 % 6 % 7 % 6 %
Total cost of revenue 41 % 33 % 34 % 34 % 30 % 29 % 30 % 29 %
Gross margin 59 % 67 % 66 % 66 % 70 % 71 % 70 % 71 %
Operating expenses
Sales and marketing 78 % 73 % 69 % 61 % 59 % 60 % 55 % 50 %
Research and development 38 % 34 % 39 % 27 % 25 % 29 % 29 % 25 %
General and
administrative 14 % 15 % 21 % 17 % 12 % 28 % 17 % 17 %
Total operating expenses 130 % 122 % 129 % 105 % 96 % 118 % 101 % 92 %
Loss from operations (70) % (55) % (63) % (39) % (27) % (47) % (31) % (20) %
Interest expense - % - % - % - % - % - % - % - %
Other income (expense),
net - % (3) % - % - % - % - % 3 % 2 %
Loss before provision
for income taxes (71) % (58) % (63) % (39) % (26) % (47) % (28) % (18) %
Provision for income
taxes - % (1) % (1) % - % (1) % (1) % - % - %
Net loss (71) % (59) % (64) % (39) % (27) % (48) % (28) % (19) %
Quarterly Revenue Trends
Total revenue increased sequentially in each of the quarters presented primarily
due to our addition of new customers, as well as sales of additional endpoints
and modules to existing customers. We typically receive a higher percentage of
our annual orders from new customers, as well as renewal orders from existing
customers, in our fourth fiscal quarter as compared to other quarters due to the
annual budget approval process of many of our customers. However, because we
recognize revenue ratably over the term of our subscription contracts, a
substantial portion of the revenue that we report in each period is attributable
to orders that we received during previous periods. Consequently, increases or
decreases in new sales or renewals in any one period may not be immediately
reflected in our revenue for that period and may negatively affect our revenue
in future periods. Accordingly, the effect of downturns in sales and market
acceptance of our cloud platform, and potential changes in our rate of renewals,
may not be fully reflected in our results of operations until future periods.
Professional services revenue is dependent upon the number of hours performed in
a quarter and can vary from period to period.
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Quarterly Cost of Revenue Trends
Total cost of revenue increased sequentially in each of the quarters presented
except for the three months ended July 31, 2018 , when it decreased. The
increases were primarily driven by expanded use of our cloud platform by
existing and new customers, which resulted in increased data center costs, and
due to an expansion in our customer support and cloud operations organizations
to support our growth. These increases were tempered by cost savings as a result
of moving more of our operations to colocation data centers from third-party
cloud service providers and renegotiating the terms of a third-party cloud
service provider contract, and these changes had a larger impact on total cost
of revenue in the three months ended July 31, 2018 .
Quarterly Gross Margin Trends
The overall increase in gross margin over the course of the periods presented
was enabled primarily by an increase in our revenue and, to a lesser extent, by
the increased efficiency of our technology, infrastructure, and data centers
through technological improvements, even as our customers expanded their use of
our cloud platform. The increase in gross margin during the quarters presented
was the result of moving more of our operations to colocation data centers from
third-party cloud service providers and renegotiating the terms of a third-party
cloud service provider contract. The increase in gross margin was also due to
incentivizing our sales team to drive higher margin subscriptions and efforts to
optimize our channel partner programs.
Quarterly Expense Trends
Operating expenses generally have increased sequentially for each of the
quarters presented except for the three months ended January 31, 2019 and the
three months ended October 31, 2019 primarily due to increases in employee
related expenses associated with increases in our headcount to support our
growth. We intend to continue to make the significant investments to support our
sales and marketing related activities to acquire new customers that we believe
will position the Company for future growth. We also intend to invest in
research and development efforts to add new features to and enhance the
functionality of our existing cloud platform, and to ensure the reliability,
availability, and scalability of our solutions.
The significant increase in sales and marketing, research and development, and
general and administrative expenses during the three months ended October 31,
2018 was primarily due to an increase of $1.0 million , $5.7 million , and
$3.9 million , respectively, in stock-based compensation expense primarily from
the third-party tender offer transaction that was executed among certain of our
employees and directors and certain of our stockholders. Operating expenses,
particularly general and administrative expenses, increased significantly during
the three months ended July 31, 2019 due to the stock based compensation of
$17.3 million related to the performance based vesting condition for our
outstanding RSUs being met during the quarter. We expect operating expenses to
continue to increase for the foreseeable future.
The increase in Other income (expense), net during the three months ended
July 31, 2018 was due to an increase in the fair value of our redeemable
convertible preferred stock warrants of $2.1 million . The increase in Other
income (expense), net during the three months ended October 31, 2019 was
primarily driven by interest income of $4.1 million . The increase in Other
income (expense), net during the three months ended January 31, 2020 was
primarily driven by interest income of $3.4 million . Interest income has
increased in recent quarters due to the investment of the proceeds of our IPO
which closed on June 14, 2019 .
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Liquidity and Capital Resources
In June 2019 , upon completion of our IPO, we received net proceeds of $659.2
million , after deducting underwriters' discounts and commissions and offering
expenses of $44.8 million .
Prior to our IPO, we financed our operations principally through private
placements of our equity securities, payments received from customers using our
Falcon platform and professional services, and borrowings under our credit
facility. As of January 31, 2020 , we had cash and cash equivalents, consisting
of money market funds and corporate debt securities, of $264.8 million , and
marketable securities, consisting of corporate debt securities, asset backed
securities, and U.S. treasury securities, of $647.3 million . Our cash and cash
equivalents primarily consist of highly liquid investments.
Since our inception, we have generated operating losses, as reflected in our
accumulated deficit of $637.5 million as of January 31, 2020 . We expect to
continue to incur operating losses for the foreseeable future due to the
investments we intend to continue to make in sales and marketing and research
and development, and due to additional general and administrative costs incurred
as a result of operating as a public company. As a result, we may require
additional capital resources to execute strategic initiatives to grow our
business.
We typically invoice our subscription customers annually in advance. Therefore,
a substantial source of our cash is from such prepayments, which are included on
our consolidated balance sheets as deferred revenue. Deferred revenue primarily
consists of billed fees for our subscriptions, prior to satisfying the criteria
for revenue recognition, which are subsequently recognized as revenue in
accordance with our revenue recognition policy. As of January 31, 2020 , we had
deferred revenue of $571.2 million , of which $413.0 million was recorded as a
current liability and is expected to be recorded as revenue in the next 12
months, provided all other revenue recognition criteria have been met.
Cash Flows
The following table summarizes our cash flows for the periods presented:
Year Ended January 31,
2020 2019 2018
(in thousands)
Net cash provided by (used in) operating activities $ 99,943 $ (22,968) $ (58,766)
Net cash used in investing activities $ (629,631) $ (142,030) $ (28,330)
Net cash provided by financing activities $ 706,144 Operating Activities Net cash provided by operating activities during fiscal 2020 was$99.9 million , which resulted from a net loss of$141.8 million , adjusted for non-cash charges of$144.3 million and net cash inflow of$97.5 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of$79.9 million in stock-based compensation expense,$35.5 million of amortization of deferred contract acquisition costs,$23.0 million of depreciation and amortization, and$6.0 million due to the change in the fair value of our redeemable convertible preferred stock warrant liability. The net cash inflow from changes in operating assets and liabilities was primarily due to a$280.8 million increase in deferred revenue and$17.5 million increase in accrued payroll and benefits, partially offset by a$86.6 million increase in deferred contract acquisition costs,$73.1 million increase in accounts receivable, and a$43.5 million increase in prepaid expenses and other assets. Net cash used in operating activities during fiscal 2019 was$23.0 million , which resulted from a net loss of$140.1 million , adjusted for non-cash charges of$67.8 million and net cash inflow of$49.3 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of$28.6 million of amortization of deferred commissions,$20.5 million in stock-based compensation expense,$14.8 million of depreciation and amortization, and$3.6 million due to the change in the fair value of our redeemable convertible preferred stock warrant liability. The net cash inflow from changes in operating assets and liabilities was primarily due to a$131.1 million increase in deferred revenue, partially offset by a$45.1 million increase in deferred contract acquisition costs, and a$33.4 million increase in accounts receivable. 70 -------------------------------------------------------------------------------- Table of Contents Net cash used in operating activities during fiscal 2018 was$58.8 million , which resulted from a net loss of$135.5 million , adjusted for non-cash charges of$34.3 million and net cash inflow of$42.4 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of$12.5 million of amortization of deferred commissions,$12.3 million of stock-based compensation expense, and$7.1 million of depreciation and amortization. The net cash inflow from changes in operating assets and liabilities was primarily the result of an$82.2 million increase in deferred revenue from advance invoicing in accordance with our subscriptions and a$23.7 million increase in accounts payable and accrued expenses, partially offset by a$25.3 million increase in deferred contract acquisition costs and an increase in accounts receivable of$35.3 million . Investing Activities Net cash used in investing activities during fiscal 2020 of$629.6 million was primarily due to purchases of marketable securities of$779.7 million , purchases of property and equipment of$80.2 million , and capitalized internal-use software of$7.3 million , partially offset by maturities of marketable securities of$229.0 million and proceeds from sales of marketable securities of$9.6 million . Net cash used in investing activities during fiscal 2019 of$142.0 million was primarily due to purchases of marketable securities of$199.3 million , purchases of property and equipment of$35.9 million , and capitalized internal-use software of$6.8 million , partially offset by maturities of marketable securities of$100.0 million . Net cash used in investing activities during fiscal 2018 of$28.3 million was primarily due to purchases of property and equipment of$22.9 million , capitalization of internal-use software of$6.5 million , cash used in business combinations of$6.5 million , and the purchase of marketable securities of$9.6 million , partially offset by maturities of marketable securities of$17.5 million . Financing Activities Net cash provided by financing activities of$706.1 million during fiscal 2020 was primarily due to our IPO. OnJune 14, 2019 , we closed our IPO in which we sold 20,700,000 shares of Class A common stock. The shares were sold at a public offering price of$34.00 per share for net proceeds of$665.1 million , after deducting underwriters' discounts and commissions. In addition, there were proceeds from the exercise of stock options of$21.5 million , proceeds from issuance of common stock under the employee stock purchase plan of$12.4 million , proceeds from issuance of common stock upon exercise of early exercisable stock options of$10.3 million and$2.3 million in claims settlement under Section 16(b) of the Securities Exchange Act of 1934, partially offset by payments of deferred offering costs in the amount of$5.9 million . InDecember 2019 , a security holder paid us$2.3 million to settle a claim under Section 16(b) of the Securities Exchange Act of 1934. Section 16(b) requires certain persons and entities whose securities trading activities result in "short swing" profits to repay such profits to the issuer of the security. This payment was recorded as an increase to stockholders' equity and as cash provided by financing activities in our consolidated statement of cash flows for the fiscal year endedJanuary 31, 2020 . Net cash provided by financing activities of$190.4 million during fiscal 2019 was primarily due to$206.9 million in net proceeds from the issuance of our Series E redeemable convertible preferred stock,$10.0 million in proceeds from our revolving line of credit, and$3.9 million from the exercise of stock options, partially offset by a repayment on our line of credit of$20.0 million , a repayment on our outstanding bank loan of$6.2 million , the repurchase of stock options of$2.3 million , and payments of indemnity holdback and contingent consideration of$2.1 million . Net cash provided by financing activities of$126.8 million during fiscal 2018 was primarily due to$130.4 million in net proceeds from the issuance of shares of our Series D and Series D-1 redeemable convertible preferred stock,$10.0 million in proceeds from our revolving line of credit,$3.7 million from the exercise of stock options, and the repayment of notes receivable from related parties of$2.4 million , partially offset by a repayment on our outstanding bank loan of$19.3 million . 71 -------------------------------------------------------------------------------- Table of Contents Debt Obligations InApril 2019 , we entered into a Credit Agreement withSilicon Valley Bank and other lenders, to provide a revolving line of credit of up to$150.0 million , including a letter of credit sub-facility in the aggregate amount of$10.0 million , and a swingline sub-facility in the aggregate amount of$10.0 million . We also have the option to request an incremental facility of up to an additional$75.0 million from one or more of the lenders under the Credit Agreement. The amount we may borrow under the Credit Agreement may not exceed the lesser of$150.0 million or our ordinary course recurring subscription revenue for the most recent month, as determined under the Credit Agreement, multiplied by a number that is (i) 6, for the first year after entry into the Credit Agreement; (ii) 5, for the second year after entry into the Credit Agreement; and (iii) 4, thereafter. Under the terms of the Credit Agreement, revolving loans may be either Eurodollar Loans or ABR Loans. Outstanding Eurodollar Loans incur interest at the Eurodollar Rate, which is defined in the Credit Agreement as LIBOR (or any successor thereto), plus a margin between 2.50% and 3.00%, depending on usage. Outstanding ABR Loans incur interest at the highest of (a) the Prime Rate, as published by theWall Street Journal , (b) the federal funds rate in effect for such day plus 0.50%, and (c) the Eurodollar Rate plus 1.00%, in each case plus a margin between 1.50% and 2.00%, depending on usage. We are charged a commitment fee of 0.2% to 0.3% per year for committed but unused amounts. The Credit Agreement will terminate onApril 19, 2022 . The Credit Agreement is collateralized by substantially all of our current and future property, rights, and assets, including, but not limited to, cash, goods, equipment, contractual rights, financial assets, and intangible assets of the Company and our subsidiaries. The Credit Agreement contains covenants limiting our ability to, among other things, dispose of assets, undergo a change in control, merge or consolidate, make acquisitions, incur debt, incur liens, pay dividends, repurchase stock, and make investments, in each case subject to certain exceptions. The Credit Agreement also contains financial covenants requiring us to maintain the year-over-year growth rate of our ordinary course recurring subscription revenue above specified rates and to maintain minimum liquidity at specified levels. The Credit Agreement also contains events of default that include, among others, non-payment of principal, interest, or fees, breach of covenants, inaccuracy of representations and warranties, cross defaults to certain other indebtedness, bankruptcy and insolvency events, and material judgments. We were in compliance with all covenants as ofJanuary 31, 2020 . No amounts were outstanding under the Credit Agreement as ofJanuary 31, 2020 . Strategic Investments InJuly 2019 , we agreed to commit up to$10.0 million to a newly formed entity,CrowdStrike Falcon Fund LLC ("Falcon Fund "), in exchange for 50% of the sharing percentage of any distribution byFalcon Fund . Additionally, entities associated with Accel, a holder of more than 5% of our capital stock, also agreed to commit up to$10.0 million toFalcon Fund and collectively own the remaining 50% of the sharing percentage ofFalcon Fund .Falcon Fund is in the business of purchasing, selling, investing and trading in minority equity and convertible debt securities of privately-held companies that develop applications that have potential for substantial contribution toCrowdStrike and its platform.Falcon Fund has a duration of ten years which may be extended for three additional years. At dissolution,Falcon Fund will be liquidated and the remaining assets will be distributed to the investors based on their sharing percentage. As ofJanuary 31, 2020 , we have made a contribution toFalcon Fund totaling$0.5 million . This$0.5 million and the matching$0.5 million contribution by Accel has been invested in the Series B preferred stock of a private company that develops and sells a SaaS-based cyber hygiene product. Contractual Obligations and Commitments
The following table summarizes our contractual obligations as of
Payments Due by Fiscal Year
Total 2021 2022 2023 2024 2025 Thereafter
(in thousands)
Operating leases(1) $ 50,686 $ 9,958 $
9,869
63,511 76,491 10,207 9,832 2,723 3,236
Other purchase obligations(3) 32,327 19,960 12,240 57 57 13 - Total$ 249,013 $ 93,429 $ 98,600 $ 19,641 $ 19,259 $ 11,177 $ 6,907 72
-------------------------------------------------------------------------------- Table of Contents ______________________________ (1)Relates to our facilities worldwide. (2)Relates to non-cancelable commitments to data center vendors. (3)Relates to non-cancelable purchase commitments with various parties to purchase products and services entered into in the normal course of business. Indemnification Our subscription agreements contain standard indemnification obligations. Pursuant to these agreements, we will indemnify, defend, and hold the other party harmless with respect to a claim, suit, or proceeding brought against the other party by a third party alleging that our intellectual property infringes upon the intellectual property of the third party, or results from a breach of our representations and warranties or covenants, or that results from any acts of negligence or willful misconduct. The term of these indemnification agreements is generally perpetual any time after the execution of the agreement. Typically, these indemnification provisions do not provide for a maximum potential amount of future payments we could be required to make. However, in the past we have not been obligated to make significant payments for these obligations and no liabilities have been recorded for these obligations on our consolidated balance sheet as ofJanuary 31, 2020 orJanuary 31, 2019 . We also indemnify our officers and directors for certain events or occurrences, subject to certain limits, while the officer is or was serving at our request in such capacity. The maximum amount of potential future indemnification is unlimited. However, our director and officer insurance policy limits our exposure and enables us to recover a portion of any future amounts paid. Historically, we have not been obligated to make any payments for these obligations and no liabilities have been recorded for these obligations on our consolidated balance sheet as ofJanuary 31, 2020 orJanuary 31, 2019 . Off-Balance Sheet Arrangements We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities. We do not have any outstanding derivative financial instruments, off-balance sheet guarantees, interest rate swap transactions, or foreign currency forward contracts. Critical Accounting Policies and Estimates Our management's discussion and analysis of financial condition and results of operations is based upon our financial statements and notes to our financial statements, which were prepared in accordance with GAAP. The preparation of the financial statements requires our management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Our management evaluates our estimates on an ongoing basis, including those related to the allowance for doubtful accounts, the carrying value and useful lives of long-lived assets, the fair value of financial instruments, the recognition and disclosure of contingent liabilities, income taxes, and stock-based compensation. We base our estimates and judgments on our historical experience, knowledge of factors affecting our business and our belief as to what could occur in the future considering available information and assumptions that are believed to be reasonable under the circumstances. The accounting estimates we use in the preparation of our financial statements will change as new events occur, more experience is acquired, additional information is obtained and our operating environment changes. Changes in estimates are made when circumstances warrant. Such changes in estimates and refinements in estimation methodologies are reflected in our reported results of operations and, if material, the effects of changes in estimates are disclosed in the notes to our financial statements. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty and actual results could differ materially from the amounts reported based on these estimates. The critical accounting estimates, assumptions and judgments that we believe have the most significant impact on our consolidated financial statements are described below. Revenue Recognition We adopted Accounting Standards Codification ("ASC") Topic 606, Revenue From Contracts With Customers ("ASC 606") onFebruary 1, 2019 , using the modified retrospective transition method. Under this method, results for reporting periods beginning onFebruary 1, 2019 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with historic accounting under Topic 605. 73 -------------------------------------------------------------------------------- Table of Contents We recorded a cumulative effect adjustment to opening accumulated deficit of$23.4 million , net of tax, as of the date of adoption. The change resulted from a$23.7 million reduction in commissions expense offset by a$0.3 million reduction in revenue. The adoption of ASC 606 had no impact on net cash provided by or used in operating, investing, or financing activities in our consolidated statements of cash flows for the year endedJanuary 31, 2020 . As a result of adopting ASC 606 effectiveFebruary 1, 2019 , our commissions expense for the year endedJanuary 31, 2020 was$21.7 million lower than it would have been under ASC 605, respectively. Under ASC 606, we report our revenues in two categories: (i) subscriptions and (ii) professional services. Revenues are recognized when control of these services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those services. We determine revenue recognition through the following steps: (1)Identification of the contract, or contracts, with a customer We consider the terms and conditions of contracts with customers and our customary business practices in identifying contracts under ASC 606. We determine we have a contract with a customer when the contract is approved, each party's rights regarding the services to be transferred can be identified, payment terms for the services can be identified, we have determined that the customer has the ability and intent to pay, and the contract has commercial substance. We apply judgment in determining the customer's ability and intent to pay, which is based on a variety of factors, including the customer's historical payment experience or, in the case of a new customer, credit and financial information pertaining to the customer. (2)Identification of the performance obligations in the contract Performance obligations promised in a contract are identified based on the services that will be transferred to the customer that are both capable of being distinct, meaning that the customer can benefit from the service either on its own or together with other resources that are readily available from us or from third parties, and are distinct in the context of the contract, meaning that the transfer of the services is separately identifiable from other promises in the contract. Our performance obligations in our contracts with customers consist of (i) subscription and support services and (ii) professional services. (3)Determination of the transaction price The transaction price is determined based on the consideration to which we are expected to be entitled in exchange for transferring services to the customer. Variable consideration is included in the transaction price if it is probable that a significant future reversal of cumulative revenue under the contract will not occur. None of our contracts contains a significant financing component. (4)Allocation of the transaction price to the performance obligations in the contract If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price ("SSP"). (5)Recognition of revenue when, or as, we satisfy a performance obligation Revenue is recognized at the time the related performance obligation is satisfied by transferring the promised service to the customer. Revenue is recognized when control of the services is transferred to the customer, in an amount that reflects the consideration expected to be received in exchange for those services. We generate all our revenue from contracts with customers. 74 -------------------------------------------------------------------------------- Table of Contents Subscription Revenue Our Falcon Platform technology solutions are SaaS offerings designed to continuously monitor, share, and mitigate risks from determined attackers. Customers do not have the right to take possession of the cloud-based software platform. Fees are based on several factors, including the solutions subscribed for by the customer and the number of endpoints purchased by the customer. The subscription fees are typically payable within 30 to 60 days after the execution of the arrangement, and thereafter upon renewal or subsequent installment. We initially record the subscription fees as deferred revenue and recognize revenue on a straight-line basis over the term of the agreement. Professional Services Revenue We offer several types of professional services including incident response and forensic services, surge forensic and malware analysis, and attribution analysis, which are focused on responding to imminent and direct threats, assessing vulnerabilities, and recommending solutions. The professional services are available through hourly rate and fixed fee contracts, one-time and ongoing engagements, and retainer-based agreements. Revenue for time and materials arrangements is recognized as services are performed and revenue for fixed fees is recognized on a proportional performance basis as the services are performed. Contracts with Multiple Performance Obligations Some contracts with customers contain multiple promised services consisting of subscription and professional services that are distinct and accounted for separately. The transaction price is allocated to the separate performance obligations on a relative SSP basis. The SSP is the price at which we would sell promised subscription or professional services separately to a customer. Judgment is required to determine the SSP for each distinct performance obligation. We determine SSP based on our overall pricing objectives, taking into consideration the type of subscription or professional service and the number of endpoints. Variable Consideration Revenue from sales is recorded at the net sales price, which is the transaction price, and includes estimates of variable consideration. The amount of variable consideration that is included in the transaction price is constrained and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue will not occur when the uncertainty is resolved. If subscriptions do not meet certain service level commitments, our customers are entitled to receive service credits, and in certain cases, refunds, each representing a form of variable consideration. We have historically not experienced any significant incidents affecting the defined levels of reliability and performance as required by our subscription contracts. Accordingly, any estimated refunds related to these agreements in the consolidated financial statements is not material during the periods presented. We provide rebates and other credits within our contracts with certain resellers, which are estimated based on the most likely amounts expected to be earned or claimed on the related sales transaction. Overall, the transaction price is reduced to reflect our estimate of the amount of consideration to which we are entitled based on the terms of the contract. Estimated rebates and other credits were not material during the periods presented. Stock-Based Compensation We account for stock-based awards granted to employees and directors based on the awards' estimated grant date fair value. We estimate the fair value of our stock options using the Black-Scholes option-pricing model. The resulting fair value is recognized on a straight-line basis over the period during which the employee or director is required to provide service in exchange for the award, usually the vesting period, which is generally four years. We account for forfeitures as they occur. Prior to our adoption of ASU 2018-07, stock-based awards issued to non-employees were accounted for at fair value determined by using the Black-Scholes option-pricing model. We believe that the fair value of the stock options is more reliably measured than the fair value of the services received. The fair value of each non-employee stock-based award is remeasured each period until a commitment date is reached, which is generally the vesting date. We early adopted ASU 2018-07 onFebruary 1, 2019 and began accounting for stock-based awards issued to non-employees the same as we account for stock-based awards issued to employees. The effect on our consolidated financial statements for the year endedJanuary 31, 2020 was not material. 75 -------------------------------------------------------------------------------- Table of Contents Restricted stock units ("RSUs") granted under the 2011 Plan are subject to a service-based vesting condition and a performance-based vesting condition. The service-based vesting condition is generally satisfied based on one of three vesting schedules: (i) vesting of one-fourth of the RSUs on the first "Company vest date" (defined asMarch 20 ,June 20 ,September 20 , orDecember 20 ) on or following the one-year anniversary of the vesting commencement date with the remainder of the RSUs vesting in twelve equal quarterly installments thereafter, subject to continued service, (ii) vesting in sixteen equal quarterly installments beginning onDecember 20, 2018 , subject to continued service, or (iii) vesting in eight equal quarterly installments beginning onDecember 20, 2022 , subject to continued service. The performance-based vesting condition is satisfied on the earlier of (i) a change in control, in which the consideration paid to holders of shares is either cash, publicly traded securities, or a combination thereof, or (ii) our first vest date to occur following the expiration of the lock-up period upon an IPO, subject to continued service through such change in control or lock-up expiration, as applicable. None of the RSUs vest unless the performance-based vesting condition is satisfied. Upon the completion of the IPO, the performance-based vesting condition was met and we recognized$17.3 million of deferred expense related to RSUs as of that date in our consolidated statement of operations. Upon its IPO, the Company began issuing RSUs to its employees that generally have only a service condition. The valuation of such RSUs is based solely on the fair value of the Company's stock price on the date of grant. Performance-based stock units ("PSUs") granted under the 2019 Plan are subject to a performance-based vesting condition. With regard to the performance conditions, the fair value of new or modified awards is equal to the grant date fair market value of our common stock. PSUs generally vest over a four-year period based on the achievement of specified performance targets for the fiscal year endedJanuary 31, 2020 and subject to continued service through the applicable vesting dates. The compensation cost is recognized over the requisite service period when it is probable that the performance condition will be satisfied. Business Combinations We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed, and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from acquired users, acquired technology, trade names from a market participant perspective, useful lives and discount rates. Management's estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. During the measurement period, which is 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, any subsequent adjustments are recorded in the consolidated statement of operations. Strategic Investments InJuly 2019 , we agreed to commit up to$10.0 million to a newly formed entity,CrowdStrike Falcon Fund LLC ("Falcon Fund ") in exchange for 50% of the sharing percentage of any distribution byFalcon Fund . Entities associated with Accel, a holder of more than 5% of the our capital stock, also agreed to commit up to$10.0 million toFalcon Fund , and collectively own the remaining 50% of the sharing percentage ofFalcon Fund .Falcon Fund is in the business of purchasing, selling, investing and trading in minority equity and convertible debt securities of privately-held companies that develop applications that have potential for substantial contribution toCrowdStrike and its platform. We are the manager of theFalcon Fund and control the investment decisions and day-to-day operations and accordingly consolidate theFalcon Fund .Falcon Fund has a duration of ten years and may be extended for three additional years. At dissolution,Falcon Fund will be liquidated and the remaining assets will be distributed to the investors based on their respective sharing percentage. During the year endedJanuary 31, 2020 , bothCrowdStrike and Accel had made a contribution toFalcon Fund totaling$0.5 million each. The total of$1.0 million has been invested in the Series B preferred stock of a private company that develops and sells a SaaS-based cyber hygiene product. We have elected the measurement alternative for the non-marketable equity investments of theFalcon Fund where eligible. Under the measurement alternative, the equity investments are measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The non-marketable equity investments of theFalcon Fund are valued using significant unobservable inputs or data in inactive markets which requires judgment due to the absence of market prices and inherent lack of liquidity. As a result, there could be volatility in the our consolidated statements of operations in future periods due to the valuation and timing of identical or similar investments of the same issuer. 76 -------------------------------------------------------------------------------- Table of Contents Income Taxes We account for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are determined based on differences between the financial statement and tax basis of assets and liabilities and net operating loss and credit carryforwards using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. We account for unrecognized tax benefits using a more-likely-than-not threshold for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. We establish a liability for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. We record an income tax liability, if any, for the difference between the benefit recognized and measured and the tax position taken or expected to be taken on our tax returns. To the extent that the assessment of such tax positions changes, the change in estimate is recorded in the period in which the determination is made. The liability is adjusted considering changing facts and circumstances, such as the outcome of a tax audit. The provision for income taxes includes the impact of liability provisions and changes to the liability that are considered appropriate. We maintain a full valuation allowance against our deferred tax assets inthe United States and theU.K. , the changes resulted in no additional tax expense during the year endedJanuary 31, 2020 . We do not expect that changes in the liability for unrecognized tax benefits for the next twelve months will have a material impact on our consolidated financial statements. JOBS Act Accounting Election We are an emerging growth company, as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued after the enactment of the JOBS Act until those standards apply to private companies. We have elected to use this extended transition period under the JOBS Act. Recently Issued Accounting Pronouncements See Note 2, "Summary of Significant Accounting Policies", of our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for more information about the impact of certain recent accounting pronouncements on our consolidated financial statements. 77
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