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OFFON

ANAPLAN, INC.

(PLAN)
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ANAPLAN, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

12/02/2021 | 04:06pm EST
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our condensed consolidated
financial statements and related notes included elsewhere in this
Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year
ended January 31, 2021, filed with the SEC on March 12, 2021. This discussion
contains forward-looking statements that involve risks and uncertainties as
discussed in "Cautionary Note Regarding Forward-Looking Statements" included in
this Quarterly Report on Form 10-Q. Our actual results could differ materially
from those discussed below. Factors that could cause or contribute to such
differences include, but are not limited to, impacts on our business and general
economic conditions due to the current COVID-19 pandemic, those identified below
and those discussed in "Risk Factors" under Part II, Item 1A in this Quarterly
Report on Form 10-Q. Our fiscal year ends January 31.
                                    Overview
Anaplan is a cloud-native enterprise SaaS company and a market leader,
empowering global enterprises to orchestrate transformative business
performance. Our customers rely on the Anaplan platform-powered by our
proprietary Hyperblock® technology-to connect teams, systems, and insights from
across their organizations to continuously adapt to change, transform how they
operate, and reinvent value creation. Our cloud platform empowers enterprises to
orchestrate complex scenario planning and conduct continuous forecasting to
systematically identify possibilities, seize opportunities, and reduce risk.
Users of our platform can view and assess the impact of assumptions on plans and
key performance indicators in real time and across multiple business dimensions.
The Anaplan platform enables businesses to be more agile, make better decisions
and to plan and execute their ongoing digital transformation to compete in
today's digital economy.
Our customers often initially adopt our platform within a specific business
function for one or more planning use cases, but also because our platform has
the potential to be used as an enterprise-wide integrated planning and
forecasting tool and as part of a broader digital transformation initiative. We
sell subscriptions to our cloud-based planning platform primarily through our
direct sales team targeting these customers. We also have a robust partnership
ecosystem that serves as an integral part of our go-to-market strategy and an
extension of our direct sales force. Our strategic consulting and systems
integration partners provide us with a significant source of lead generation and
implementation leverage. These partners act as strategic advisors to senior
executives in corporate, functional, and process transformation initiatives of
organizations. They often promote our platform as their clients examine how to
plan more effectively or seek digital transformation through organizational
change or improved business processes. We also rely on partners with deep
subject-matter expertise in the implementation of specific use cases who can
facilitate implementations for our customers. Our partners also help to drive
thought leadership in promoting Connected Planning and digital transformation.
Once our customers see the benefits and wide applicability of our platform, we
use a "land and expand" sales strategy to encourage our existing customers to
increase the number of users, add new use cases, and expand to additional lines
of business, divisions, and geographies. This expansion often generates a
natural network effect in which the value of our platform to customers increases
as more use cases are adopted, more users are connected, and greater amounts of
data are incorporated in our platform delivering exponential value to our
customers.
We see a greenfield opportunity to help over 70 million knowledge workers around
the world plan more efficiently using Anaplan's platform.
We derive the substantial majority of our revenue from subscriptions for users
on our platform. Our initial subscription term is typically two to three years,
although some customers commit for shorter periods. We generally bill our
customers annually in advance. We also offer professional services, including
consulting, implementation, and training, but are increasingly leveraging our
partners to provide these services. During the three months ended October 31,
2021 and 2020, subscription revenue was $139.3 million and $104.7 million,
respectively, representing a year-over-year subscription revenue growth rate of
33%. During the three months ended October 31, 2021 and 2020, services revenue
was $16.0 million and $10.2 million, respectively. Our subscription revenue as a
percentage of total revenue was 90% and 91% in the three months ended
October 31, 2021 and 2020, respectively. During the nine months ended
October 31, 2021 and 2020, subscription revenue was $388.4 million and
$295.6 million, respectively, representing a year-over-year subscription revenue
growth rate of 31%. During the nine months ended October 31, 2021 and 2020,
services revenue was $41.1 million and $29.6 million, respectively. Our
subscription revenue as a percentage of total revenue was 90% and 91% in the
nine months ended October 31, 2021 and 2020, respectively.
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During the three months ended October 31, 2021 and 2020, our total revenue was
$155.3 million and $114.9 million, respectively. Approximately 47% and 46% of
our total revenue was generated from outside of the United States in the three
months ended October 31, 2021 and 2020, respectively. During the nine months
ended October 31, 2021 and 2020, our total revenue was $429.5 million and
$325.2 million, respectively. Approximately 47% and 45% of our revenue was
generated from outside of the United States in the nine months ended October 31,
2021 and 2020. Our net loss was $41.0 million and $36.8 million in the three
months ended October 31, 2021 and 2020, respectively, and $143.6 million and
$111.9 million in the nine months ended October 31, 2021 and 2020, respectively.
We believe that our focus on customer success allows us to retain and expand the
subscription revenue generated from our existing customers, and is an indicator
of the long-term value of our customer relationships for Anaplan as a whole. We
track our performance in this area by measuring our dollar-based net expansion
rate, which compares our annual recurring revenue from the same set of customers
across comparable periods. The dollar-based net expansion rate was 119% and 114%
as of October 31, 2021, and January 31, 2021, respectively.
Our dollar-based net expansion rate equals the annual recurring revenue at the
end of a period for a base set of customers from which we generated annual
recurring revenue in the year prior to the date of calculation, divided by the
annual recurring revenue one year prior to the date of the calculation for that
same set of customers. Annual recurring revenue is calculated as subscription
revenue already booked and in backlog that will be recorded over the next 12
months, assuming any contract expiring in those 12 months is renewed and
continues on its existing terms and at its prevailing rate of utilization.
The number of customers with greater than $250,000 of annual recurring revenue
was 528 and 453 as of October 31, 2021, and January 31, 2021, respectively. We
monitor this metric and believe it is a useful tool to investors, as an
indicator of the scale of customer adoption and expansion of our platform.
We define calculated billings as total revenue plus the change in deferred
revenue in the period. Calculated billings in any particular period is comprised
of subscription contracts with existing customers (including renewal contracts
and add-on contracts), subscription contracts with new customers, and contracts
for professional services. Calculated billings is intended to provide
information about our subscription revenue growth over time and can typically be
seen as an early indicator of trends in revenue growth. While calculated
billings can increase as our revenues grow, it may significantly fluctuate from
period to period for several reasons, including the timing of contracted
billings, the timing of renewals, and other factors. See Part II, Item 1A, "Risk
Factors-Operational Risks-The sum of our revenue and changes in deferred revenue
may not be an accurate indicator of business activity within a period" for a
description of some limitations in the use of calculated billings.
Calculated billings is calculated as follows:
                                                 Three Months Ended October 31,            Nine Months Ended October 31,
                                                    2021                2020                  2021                  2020
                                                                               (In thousands)
Total revenue                                   $  155,348          $ 

114,875 $ 429,497 $ 325,230 Add: Deferred revenue (end of period)

              323,722            245,031                  323,722            245,031
Less: Deferred revenue (beginning of period)      (296,521)          (214,554)                (295,543)          (220,208)
Calculated billings                             $  182,549          $ 145,352          $       457,676          $ 350,053



We regularly evaluate acquisitions or investment opportunities in complementary
businesses, services and technologies and intellectual property rights as a
means to expand our offerings through a disciplined and strategic acquisition
process. We may continue to make such acquisitions and investments in the
future, and we plan to reinvest a significant portion of our incremental revenue
in future periods to grow our business.
                                COVID-19 Update
The COVID-19 pandemic continues to persist. The broader implications of the
COVID-19 pandemic on our business, results of operations, and overall financial
performance remain uncertain. We have seen and may continue to see in certain
geographies some of our customers and prospective customers defer or delay
buying decisions and project implementations and prolonged sales cycles. These
and other changes in customer demand for our solutions could materially and
adversely impact our business, results of operations, and overall financial
performance in future periods.
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As the impact of the COVID-19 pandemic continues to unfold around the world, we
remain focused on supporting our employees, customers, and partners. In response
to the COVID-19 pandemic, we modified the manner in which we operate and we
required our employees to work remotely, maintained business-related travel
restrictions, and virtualized, postponed or cancelled our sales and marketing,
employee or industry events. We are slowly moving toward normal operations on a
market-by-market basis in accordance with local guidelines, but continue to
employ a hybrid approach in most regions. Our approach may vary among
geographies depending on local guidelines, and may change at any time, including
in response to new or reimposed precautionary measures as the COVID-19 pandemic
evolves. We have developed health and safety procedures to enable our employees
to safely return to our offices. The impact, if any, of these and any additional
operational changes we may implement is uncertain, but we currently believe the
changes we have implemented have not materially affected, and are not expected
to have a material and adverse effect on, our ability to maintain financial
reporting systems, internal control over financial reporting and disclosure
controls and procedures.
The extent to which the ongoing COVID-19 pandemic, and associated global
economic uncertainty, may impact our business will depend on future
developments, including the duration and spread of the pandemic and the
prevalence and virulence of variants of COVID-19; the scope and effectiveness of
precautionary measures designed to contain and prevent the spread of COVID-19;
the availability and effectiveness of vaccines; and the impact on our current
and prospective customers, employees, and partners; all of which are uncertain
and cannot be predicted at this time. While we have developed and continue to
develop plans to help mitigate the negative impact of the pandemic on our
business, these efforts may not be effective and any protracted economic
downturn may limit the effectiveness of our mitigation efforts. In addition,
even after the immediate impacts of the pandemic on the global economy and our
business subside, the residual effects of the pandemic may present additional
challenges to our business that are currently difficult to predict. We are
continuing to monitor the actual and potential effects of the COVID-19 pandemic
on our business. See Part II, Item 1A, "Risk Factors" for further discussion of
the possible impact of the COVID-19 pandemic on our business.
                       Factors Affecting Our Performance
We believe that our future performance will depend on many factors, including
those described below. While these areas present significant opportunity, they
also present risks that we must manage to achieve successful results. See Part
II, Item 1A, "Risk Factors". If we are unable to address these challenges, our
business and operating results could be adversely affected.
Market adoption of our platform.  Our long-term success will depend on
widespread adoption of Connected Planning by enterprises for numerous planning
applications with broad use of those applications within their organizations.
While we believe that we are still in the early stages of penetrating our
addressable market, we have benefited from rapid customer growth.
Customer First strategy.  We put the success of our customers at the center of
our culture, strategy, and investments. We view our Customer First strategy as
core to capturing our Connected Planning vision and driving the continued
adoption and expansion in the use of our platform. By aligning our thought
leadership, worldwide development and delivery capabilities, and local sales and
service resources, our Customer First strategy drives exceptional value
throughout our customers' Connected Planning and digital transformation
journeys. Our continued success depends in part on our ability to continue to
put customers at the center of our strategy.
Expansion of existing customers.  We employ a "land and expand" approach, with
many of our customers initially deploying our product for a specific use case
and group of users. Once they realize the benefits and wide applicability of our
platform, many of our customers subsequently renew their subscriptions and
expand the number of users or use cases within and across lines of business and
geographies as they continue unlocking the agile enterprise planning and
operating model across functional boundaries. As a result, we are able to
generate a significant increase in revenue from the expanded use of our platform
across the enterprise. Going forward we are focused on targeting customers where
the opportunity for expansion and need for our planning solutions are greatest.
Our future revenue growth and our ability to achieve and maintain profitability
is dependent upon our ability to maintain existing customer relationships and to
continue to expand our customers' use of our platform.
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Scaling our sales team.  Our ability to achieve significant growth in revenue in
the future will depend, in large part, upon the effectiveness of our sales
leadership and sales efforts, both domestically and internationally. We have
invested and intend to continue to invest in expanding and retaining our sales
leadership and direct sales force, particularly in attracting and retaining
sales personnel with experience selling to larger enterprises. Our ability to
increase our revenue will depend on the new members of our sales force becoming
fully productive and executing expeditiously and effective sales leadership. A
customer's decision to use our platform may be an enterprise-wide decision.
These types of sales require us to provide greater levels of education regarding
the use and benefits of our platform, which involves substantial time, effort,
and costs.
International sales.  Our total revenue generated outside of the United States
during the three and nine months ended October 31, 2021, was
approximately 47% of our total revenue. Our total revenue generated outside of
the United States during the three and nine months ended October 31, 2020, was
approximately 46% and 45%, respectively, of our total revenue. We believe global
demand for our platform will continue to develop as organizations experience the
benefits that our platform can provide to international enterprises with complex
planning needs spanning multiple geographies. Accordingly, we believe there is
significant opportunity to grow our international business. We have invested,
and plan to invest, ahead of this potential demand in personnel, marketing, and
access to data center capacity to support our international growth.
Partner ecosystem.  Our partner ecosystem extends our geographic coverage,
accelerates the usage and adoption of our platform, and enables more efficient
delivery of service solutions. We intend to augment and deepen our partnerships
with strategic and advisory consulting, systems integration, public cloud and
technology firms. We believe our partners' scale and route to market can
significantly contribute to our ability to penetrate our addressable market,
extend our geographic coverage, and extend usage and adoption of our platform.
Product velocity.  We have invested and intend to continue to invest
significantly in research and development in an effort to enhance and expand the
functionality of our platform, to attract and retain development personnel, and
to protect our market-leading technology advantage. We have a well-defined
technology roadmap to introduce new features and functionality to our platform
that we believe will improve our ability to generate revenue by broadening the
appeal of our platform to potential new customers as well as increasing the
opportunities for further expanding the use of our platform by existing
customers. We are also investing to further enhance the functionality,
intelligence, user experience, scale, extensibility and security of our
platform. We will need to continue to focus on bringing cutting-edge technology
to market in order to remain competitive.
                      Components of Results of Operations

Revenue

We offer subscriptions to our cloud-based planning platform. We derive our
revenue primarily from subscription fees and, to a lesser degree, from
professional services fees. Subscription revenue consists primarily of fees to
provide our customers access to our cloud-based platform. Professional services
revenue includes fees from assisting customers in implementing and optimizing
the use of our cloud-based platform. These services include implementation,
consulting, and training.
Subscription Revenue
Subscription revenue accounted for 90% of our total revenue for the three and
nine months ended October 31, 2021, and 91% of our total revenue for the three
and nine months ended October 31, 2020. Subscription revenue is driven primarily
by the number of customers, the number of users at each customer, the price of
user subscriptions, and renewal rates.
Subscription fees are recognized ratably as revenue over the contract term
beginning on the date the platform is made available to the customer. Our new
business subscriptions typically have a term of two to three years. We generally
invoice our customers in annual installments at the beginning of each year
within the subscription period. Amounts that have been invoiced are initially
recorded as deferred revenue and are recognized ratably over the subscription
period.
Most of our contracts are non-cancelable over the contract term. We had
remaining performance obligations, or backlog, in the amount of $923.2 million
and $817.6 million as of October 31, 2021 and January 31, 2021, respectively,
consisting of both billed and unbilled consideration.
Because we recognize revenue from subscription fees ratably over the term of the
contract, changes in our contracting activity in the near term may not impact
our reported revenue until future periods.
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Professional Services Revenue
Professional services revenue is generally recognized as the services are
rendered for time and material contracts, or on a proportional performance basis
for fixed price contracts. The substantial majority of our professional service
contracts are on a time and materials basis. Implementations generally take one
to six months to complete depending upon the scope of engagement with the
customer. Our professional services revenue fluctuates from quarter to quarter
as a result of the requirements, complexity, and timing of our customers'
implementation projects.
Cost of Revenue
Cost of Subscription Revenue
Cost of subscription revenue primarily consists of costs related to providing
cloud applications, compensation and other employee-related expenses for data
center staff, including salaries and bonuses, benefits, and stock-based
compensation, payments to outside service providers, customer service, data
center and networking expenses, depreciation expenses, and amortization of
capitalized software development costs.
Cost of Professional Services Revenue
Cost of professional services revenue primarily consists of costs related to
providing implementation and configuration services, optimization services and
training services, personnel-related costs directly associated with our
professional services and training departments, including salaries and bonuses,
benefits, and stock-based compensation, the costs of
contracted third-party vendors, and travel.
Professional services associated with the implementation and configuration of
our subscription platform are performed directly by our services team, as well
as by contracted third-party vendors. When third-party vendors invoice us for
services performed for our customers, those fees are recognized as expense as
incurred.
Operating Expenses
Research and Development
Research and development expenses consist primarily of personnel-related costs
for our development team, including salaries and bonuses, benefits,
stock-based compensation expense, and allocated overhead costs. We have
invested, and intend to continue to invest, in developing technology to support
our growth. We capitalize certain software development costs that are
attributable to developing new features and adding incremental functionality to
our platform, and amortize such costs as costs of subscription revenue over the
estimated life of the new incremental functionality, which is generally two to
three years. We plan to increase our investment in research and development for
the foreseeable future as we focus on further developing our platform and
enhancing its use cases. However, we expect our research and development
expenses to decrease as a percentage of our total revenue over time, although
they may fluctuate as a percentage of our total revenue from period to period.
Sales and Marketing
Sales and marketing expenses consist primarily of personnel-related costs
directly associated with our sales and marketing staff, including salaries and
bonuses, benefits, commissions, and stock-based compensation. Other sales and
marketing costs include promotional events to promote our brand, including our
Anaplan Connected Planning Xperience (CPX) user conferences, advertising, and
allocated overhead costs. We plan to increase our investment in sales and
marketing over the foreseeable future, primarily stemming from increased
headcount in sales and marketing, and investment in brand- and product-marketing
efforts. However, we expect our sales and marketing expenses to decrease as a
percentage of our total revenue over time, although they may fluctuate as a
percentage of our total revenue from period to period.
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General and Administrative
General and administrative expenses consist primarily of personnel-related costs
associated with our executive, finance, legal, and human resources personnel,
including salaries and bonuses, benefits, and stock-based compensation expense,
professional fees for external legal, accounting and other consulting services,
and allocated overhead costs. We expect to increase the size of our general and
administrative function to support the growth of our business and continue to
incur additional expenses as a result of operating as a public company. As a
result, we expect the dollar amount of our general and administrative expenses
to increase for the foreseeable future. However, we expect our general and
administrative expenses to decrease as a percentage of our total revenue over
time, although they may fluctuate as a percentage of our total revenue from
period to period.
Interest Income (Expense), Net
Interest income (expense), net consists primarily of interest income earned on
our cash and cash equivalents, net of interest expense from our finance leases.
Other Income (Expense), Net
Other income (expense), net consists primarily of foreign exchange gains and
losses.
Benefit from (Provision for) Income Taxes
Benefit from (provision for) income taxes consists primarily of income taxes
related to foreign and state jurisdictions in which we conduct business. We
maintain a full valuation allowance on our federal, state and U.K. deferred tax
assets as we have concluded that it is not more likely than not that the
deferred assets will be utilized.
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                             Results of Operations

The following tables set forth selected condensed consolidated statements of operations data for each of the periods indicated:

                                                   Three Months Ended October 31,             Nine Months Ended October 31,
                                                      2021                2020                  2021                   2020
                                                                                  (In thousands)
Revenue:
Subscription revenue                              $  139,343          $ 

104,707 $ 388,437 $ 295,648 Professional services revenue

                         16,005             10,168                    41,060              29,582
Total revenue                                        155,348            114,875                   429,497             325,230
Cost of revenue:
Cost of subscription revenue (1)                      25,627             19,187                    69,601              50,520
Cost of professional services revenue (1)             16,512             10,188                    41,586              29,037
Total cost of revenue                                 42,139             29,375                   111,187              79,557
Gross profit                                         113,209             85,500                   318,310             245,673
Operating expenses:
Research and development (1)                          40,782             24,629                   110,211              72,986
Sales and marketing (1)                               92,859             73,893                   277,610             218,481
General and administrative (1)                        27,732             22,851                    77,362              66,514
Total operating expenses                             161,373            121,373                   465,183             357,981
Loss from operations                                 (48,164)           (35,873)                 (146,873)           (112,308)
Interest income (expense), net                          (122)              (208)                     (404)                119
Other income (expense), net                             (368)              (291)                   (3,202)              3,385
Loss before income taxes                             (48,654)           (36,372)                 (150,479)           (108,804)
Benefit from (provision for) income taxes              7,676               (420)                    6,889              (3,114)
Net loss                                          $  (40,978)         $ 

(36,792) $ (143,590) $ (111,918)

(1) Includes stock-based compensation expense as follows: Cost of subscription revenue

                      $    2,184          $     953          $          5,536          $    2,537
Cost of professional services revenue                  1,170                506                     2,992               1,706
Research and development                               9,748              5,235                    25,098              13,261
Sales and marketing                                   16,907             12,570                    51,604              33,814
General and administrative                             8,984              7,696                    23,292              23,114
Total stock-based compensation expense            $   38,993          $  26,960          $        108,522          $   74,432


             Three and Nine Months Ended October 31, 2021 and 2020
Revenue
                                 Three Months Ended October 31,                                   Nine Months Ended October 31,
                                    2021                2020               % Change                  2021                  2020               % Change
                                                                          (In thousands, except percentage data)
Subscription revenue            $  139,343          $ 104,707                     33  %       $       388,437          $ 295,648                     31

%

Professional services revenue       16,005             10,168                     57                   41,060             29,582                     39
Total revenue                   $  155,348          $ 114,875                     35          $       429,497          $ 325,230                     32


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Total revenue was $155.3 million in the three months ended October 31, 2021,
compared to $114.9 million in the three months ended October 31, 2020, an
increase of $40.4 million, or 35%. Total revenue was $429.5 million in the nine
months ended October 31, 2021, compared to $325.2 million in the nine months
ended October 31, 2020, an increase of $104.3 million, or 32%.
Subscription revenue was $139.3 million, or 90% of total revenue, in the three
months ended October 31, 2021, compared to $104.7 million, or 91% of total
revenue, in the three months ended October 31, 2020, an increase of $34.6
million, or 33%. The increase in subscription revenue was primarily driven
by existing customers expanding their use of our platform, which accounted for
74% of the increase, and acquisition of new customers, which accounted for
approximately 26% of the increase.
Subscription revenue was $388.4 million, or 90% of total revenue, in the nine
months ended October 31, 2021, compared to $295.6 million, or 91% of total
revenue, in the nine months ended October 31, 2020, an increase of $92.8
million, or 31%. The increase in subscription revenue was primarily driven by
existing customers expanding their use of our platform, which accounted for 80%
of the increase, and acquisition of new customers, which accounted for
approximately 20% of the increase.
Professional services revenue was $16.0 million in the three months ended
October 31, 2021, compared to $10.2 million in the three months ended
October 31, 2020, an increase of $5.8 million, or 57%. Professional services
revenue was $41.1 million in the nine months ended October 31, 2021, compared to
$29.6 million in the nine months ended October 31, 2020, an increase of $11.5
million, or 39%. The increase in professional services revenue in each period
was primarily driven by sales of our professional services resulting from the
growth of our customer base.
Cost of Revenue
                                Three Months Ended October 31,                               Nine Months Ended October 31,
                                    2021              2020               % Change               2021               2020               % Change
                                                                      (In thousands, except percentage data)
Cost of subscription revenue    $  25,627          $ 19,187                     34  %       $   69,601          $ 50,520                     38  %
Cost of professional services
revenue                            16,512            10,188                     62              41,586            29,037                     43
Total cost of revenue           $  42,139          $ 29,375                     43          $  111,187          $ 79,557                     40


Total cost of revenue was $42.1 million in the three months ended October 31,
2021, compared to $29.4 million in the three months ended October 31, 2020, an
increase of $12.7 million, or 43%. Total cost of revenue was $111.2 million in
the nine months ended October 31, 2021, compared to $79.6 million in the nine
months ended October 31, 2020, an increase of $31.6 million, or 40%.
Cost of subscription revenue was $25.6 million in the three months ended
October 31, 2021, compared to $19.2 million in the three months ended
October 31, 2020, an increase of $6.4 million, or 34%. The increase in cost of
subscription revenue was primarily due to an increase in salaries and
bonuses, and benefits costs of $3.6 million, including stock-based compensation,
an increase in amortization of our equipment leases and capitalized software
development costs of $1.2 million and an increase in hosting costs of $0.8
million.
Cost of subscription revenue was $69.6 million in the nine months ended
October 31, 2021, compared to $50.5 million in the nine months ended October 31,
2020, an increase of $19.1 million, or 38%. The increase in cost of subscription
revenue was primarily due to an increase in salary and bonuses, and benefits
costs of $8.8 million, including stock-based compensation, an increase in
hosting costs of $4.0 million, and an increase in amortization of our equipment
leases and capitalized software development costs of $3.6 million.
Cost of professional services revenue was $16.5 million in the three months
ended October 31, 2021, compared to $10.2 million in the three months ended
October 31, 2020, an increase of $6.3 million, or 62%. The increase in cost of
professional services revenue was primarily due to an increase in the partner
implementation costs related to an increase in partner activity of $4.1 million,
and an increase in salaries and bonuses, and benefits costs of $2.0 million,
including stock-based compensation.
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Cost of professional services revenue was $41.6 million in the nine months ended
October 31, 2021, compared to $29.0 million in the nine months ended October 31,
2020, an increase of $12.6 million, or 43%. The increase in cost of professional
services revenue was primarily due to an increase in the partner implementation
costs related to an increase in partner activity of $7.1 million, and an
increase in salary and bonuses, and benefits costs of $5.1 million, including
stock-based compensation.
Gross Profit and Gross Margin
                                   Three Months Ended October 31,                                      Nine Months Ended October 31,
                                       2021                  2020               % Change                  2021                  2020               % Change
                                                                            (In thousands, except percentage data)
Subscription gross profit       $       113,716           $ 85,520                     33  %       $      318,836           $ 245,128                     30  %
Professional services gross
profit                                     (507)               (20)                 2,435                    (526)                545                   (197)
Total gross profit              $       113,209           $ 85,500                     32          $      318,310           $ 245,673                     30
Subscription gross margin                    82   %             82  %                                          82   %              83  %
Professional services gross
margin                                       (3)  %              -  %                                          (1)  %               2  %
Total gross margin                           73   %             74  %                                          74   %              76  %


Gross profit was $113.2 million in the three months ended October 31, 2021,
compared to $85.5 million in the three months ended October 31, 2020, an
increase of $27.7 million, or 32%. Gross profit was $318.3 million in the nine
months ended October 31, 2021, compared to $245.7 million in the nine months
ended October 31, 2020, an increase of $72.6 million, or 30%. The increase in
gross profit was the result of the increases in our subscription revenue
primarily driven by existing customers expanding their use of our platform and
acquisition of new customers in the three and nine months ended October 31,
2021.
Gross margin was 73% in the three months ended October 31, 2021, compared to 74%
in the three months ended October 31, 2020. The decrease was primarily due to an
increase in professional services revenue, which generates a significantly lower
gross margin than our subscription revenue, as a percentage of total revenue,
and higher partner implementation costs.
Gross margin was 74% in the nine months ended October 31, 2021, compared to 76%
in the nine months ended October 31, 2020. The decrease was primarily due to an
increase in professional services revenue, which generates a significantly lower
gross margin than our subscription revenue, as a percentage of total revenue,
and higher hosting and partner implementation costs.
Our gross margins can fluctuate from quarter to quarter as a result of the
requirements, complexity, and timing of our customers' implementation projects
that can vary significantly.
Operating Expenses
                                          Three Months Ended October 31,                                   Nine Months Ended October 31,
                                             2021                2020               % Change                  2021                  2020               % Change
                                                                                   (In thousands, except percentage data)
Operating expense:
Research and development                 $   40,782          $  24,629                     66  %       $       110,211          $  72,986                     51  %
Sales and marketing                          92,859             73,893                     26                  277,610            218,481                     27
General and administrative                   27,732             22,851                     21                   77,362             66,514                     16
Total operating expenses                 $  161,373          $ 121,373                     33          $       465,183          $ 357,981                     30


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Research and Development
Research and development expenses were $40.8 million in the three months ended
October 31, 2021, compared to $24.6 million in the three months ended
October 31, 2020, an increase of $16.2 million, or 66%. The increase includes an
increase in salaries and bonuses, and benefits costs of $14.5 million (which
included an increase in stock-based compensation of $4.5 million) primarily
related to an increase in headcount, partially offset by an increase in
capitalized software development costs of $1.9 million.
Research and development expenses were $110.2 million in the nine months ended
October 31, 2021, compared to $73.0 million in the nine months ended October 31,
2020, an increase of $37.2 million, or 51%. The increase includes an increase in
salary and bonuses, and benefits costs of $36.0 million (which included an
increase in stock-based compensation of $11.8 million) primarily related to an
increase in headcount, partially offset by an increase in capitalized software
development costs of $4.1 million.
Sales and Marketing
Sales and marketing expenses were $92.9 million in the three months ended
October 31, 2021, compared to $73.9 million in the three months ended
October 31, 2020, an increase of $19.0 million, or 26%. The increase was
primarily due to an increase in salaries and bonuses, and benefits costs related
to an increase in headcount of $17.7 million (which included an increase in
stock-based compensation of $4.3 million and an increase in commission expenses
of $4.0 million) and an increase in consulting expenses of $1.2 million.
Sales and marketing expenses were $277.6 million in the nine months ended
October 31, 2021, compared to $218.5 million in the nine months ended
October 31, 2020, an increase of $59.1 million, or 27%. The increase was
primarily due to an increase in salary and bonuses and benefits costs related to
an increase in headcount of $52.7 million (which included an increase in
stock-based compensation of $17.8 million and an increase in commission expenses
of $10.0 million) and an increase in consulting expenses of $2.7 million.
General and Administrative
General and administrative expenses were $27.7 million in the three months ended
October 31, 2021, compared to $22.9 million in the three months ended
October 31, 2020, an increase of $4.8 million, or 21%. The increase was
primarily due to an increase in salaries and bonuses, and benefits costs of $4.2
million, including stock-based compensation, and an increase in consulting and
professional services of $0.3 million.
General and administrative expenses were $77.4 million in the nine months ended
October 31, 2021, compared to $66.5 million in the nine months ended October 31,
2020, an increase of $10.9 million, or 16%. The increase was primarily due to an
increase in salary and bonuses, and benefits costs related to an increase in
headcount of $8.3 million, including stock-based compensation, and an increase
in consulting and professional services of $2.3 million, partially offset by a
decrease in allowance for credit losses of $0.6 million.
Other Income (Expense), Net
                                 Three Months Ended October
                                             31,                                           Nine Months Ended October 31,
                                    2021              2020              % Change               2021              2020               % Change
                                                                     (In thousands, except percentage data)
Interest income (expense), net  $    (122)         $  (208)                   (41) %       $    (404)         $    119                   (439) %
Other income (expense), net          (368)            (291)                    26             (3,202)            3,385                   (195)



Interest income (expense), net
There was no material fluctuation in interest income (expense), net for the
three months ended October 31, 2021. Interest income (expense), net decreased by
$0.5 million for the nine months ended October 31, 2021. The decrease in
interest income (expense), net was primarily due to lower interest income from
our cash and cash equivalents as a result of lower interest rates in the nine
months ended October 31, 2021 compared to the nine months ended October 31,
2020.

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Other income (expense), net
There was no material fluctuation in other income (expense), net for the three
months ended October 31, 2021. Other income (expense), net was an expense of
$3.2 million in the nine months ended October 31, 2021, compared to income of
$3.4 million in the nine months ended October 31, 2020, an increase in expense
of $6.6 million, or 195%. The change was primarily due to currency
fluctuations and the related remeasurements during the periods.
Benefit from (Provision for) Income Taxes
                                 Three Months Ended October
                                             31,                                            Nine Months Ended October 31,
                                    2021              2020              % Change               2021              2020               % Change
                                                                     (In thousands, except percentage data)
Benefit from (provision for)
income taxes                    $   7,676          $  (420)                 (1,928) %       $  6,889          $ (3,114)                  (321) %



The income tax benefit was $7.7 million in the three months ended October 31,
2021, compared to income tax expense of $0.4 million in the three months ended
October 31, 2020, an increase in income tax benefit of $8.1 million or 1928%.
The increase in income tax benefit was primarily due to the release of valuation
allowance related to our Israel deferred tax assets.
The income tax benefit was $6.9 million in the nine months ended October 31,
2021, compared to income tax expense of $3.1 million in the nine months ended
October 31, 2020, an increase in income tax benefit of $10.0 million, or 321%.
The increase in income tax benefit was primarily due to the release of valuation
allowance related to our Israel deferred tax assets, a reduction in discrete tax
expenses and a decrease in taxable income generated from intercompany cost-plus
arrangements in certain European and Asian countries.
                        Liquidity and Capital Resources
As of October 31, 2021, our principal sources of liquidity were cash and cash
equivalents totaling $312.4 million, which were held for working capital
purposes and strategic initiatives. Our cash equivalents are comprised primarily
of money market funds and bank deposits.
Cash from operations could be affected by various risks and uncertainties,
including but not limited to, the effects of the COVID-19 pandemic and other
risks detailed in Part II, Item 1A, "Risk Factors". We believe our existing cash
and cash equivalents will be sufficient to meet our projected operating
requirements for at least the next 12 months. Our future capital requirements
will depend on many factors, including our pace of growth, subscription renewal
activity, the timing and extent of spend to support research and development
efforts, the expansion of sales and marketing activities, the introduction of
new and enhanced platform offerings, and the continuing market acceptance of the
platform. We may in the future enter into arrangements to acquire or invest in
complementary businesses, services and technologies, and intellectual property
rights. We may be required to seek additional equity or debt financing. In the
event that additional financing is required from outside sources, we may not be
able to raise it on terms acceptable to us or at all. If we are unable to raise
additional capital when desired, our business, operating results, and financial
condition would be adversely affected.
Loan and Credit Facility Agreements
In April 2020, we entered into the Third Amendment to Credit Agreement and First
Amendment to Collateral Agreement with Wells Fargo as administrative agent and a
lender (the "Third Amendment"). Among other things, the Third Amendment further
amends the Credit Agreement entered into with Wells Fargo in April 2018, as
amended in September 2018 and October 2019 (the "Credit Agreement") in order to
(1) increase the aggregate revolving credit commitment amount by $20.0 million,
so that we may borrow up to $60.0 million under a secured revolving credit
facility, subject to the terms of the Credit Agreement including the accounts
receivable borrowing base, for general corporate purposes, and (2) extend the
maturity date of the revolving credit facility until April 23, 2022. Also,
pursuant to the Third Amendment, any loans drawn on the credit facility will
incur interest at a rate equal to the highest of (A) the prime rate, (B) the
federal funds rate plus 0.5%, and (C) the one-month LIBOR plus 1%. Interest is
payable monthly in arrears with the principal and any accrued and unpaid
interest due on April 23, 2022. As of October 31, 2021 and January 31, 2021, we
had not drawn down any amounts under this agreement.
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As part of the Credit Agreement, we granted Wells Fargo a first priority lien in
our accounts receivable, all of the issued shares of capital stock and equity
interests in certain of our subsidiaries, and other corporate assets and agreed
not to pledge our intellectual property to other parties. The Credit Agreement,
as amended by the Third Amendment, includes affirmative and negative covenants,
including financial covenants requiring the maintenance of: (1) minimum tangible
net worth (defined as assets, excluding intangible assets, less liabilities) as
of the last day of any fiscal quarter of not less than $150.0 million for any
fiscal quarter ending on or prior to January 31, 2021 and $125.0 million for any
fiscal quarter ending thereafter, and (2) minimum billings for the most recent
twelve months ending as of the last day of any fiscal quarter of not less than
$350.0 million. As of October 31, 2021, we were in compliance with the financial
covenants contained in the Credit Agreement.
Cash Flows
The following table summarizes our cash flows for the periods presented:
                                                                        

Nine Months Ended October 31,

                                                                           2021                 2020
                                                                               (In thousands)
Net cash provided by (used in) operating activities                  $       2,087          $ (14,935)
Net cash used in investing activities                                      (19,296)           (12,909)
Net cash provided by financing activities                                   11,826             15,896


Operating Activities
Net cash provided by operating activities of $2.1 million for the nine months
ended October 31, 2021, reflecting a net loss of $143.6 million and non-cash
release of deferred tax valuation allowance of $7.6 million, adjusted by
non-cash charges for stock-based compensation of $108.5 million, amortization of
deferred commissions of $31.0 million, depreciation and amortization of $21.5
million, amortization of operating lease right-of-use assets and accretion of
operating lease liabilities of $7.5 million, non-cash foreign currency
remeasurement losses of $1.6 million and other non-cash items of $0.6 million.
Changes in working capital were unfavorable to cash flows from operations by
$17.4 million primarily due to an increase in deferred commissions of $49.3
million related to commissions capitalized on our sales, net payments for
operating lease liabilities of $7.0 million and an increase in prepaid expenses
and other current assets of $3.1 million, partially offset by an increase in
deferred revenue balance of $29.3 million due to increased customer billings, a
decrease in accounts receivable of $7.2 million due to timing of collections and
an increase in accounts payable and accrued expenses of $5.6 million due to
timing of payments.
Net cash used in operating activities of $14.9 million for the nine months ended
October 31, 2020, was primarily due to a net loss of $111.9 million and non-cash
foreign currency remeasurement gains of $3.2 million, partially offset by
non-cash charges for stock-based compensation of $74.4 million, amortization of
deferred commissions of $24.4 million, depreciation and amortization of $18.9
million, amortization of operating lease right-of-use assets and accretion of
operating lease liabilities of $7.6 million, and other non-cash items of $2.6
million. Changes in working capital were unfavorable to cash flows from
operations by $27.9 million primarily due to an increase in deferred commissions
of $43.4 million related to commissions capitalized on our sales, an increase in
accounts receivable of $22.0 million primarily due to increased customer
billings, and net payments for operating lease liabilities of $6.9 million, and,
partially offset by an increase in deferred revenue balance of $26.8 million due
to increased customer billings, an increase in accounts payable and accrued
expenses of $10.3 million due to timing of payments, and an increase in other
noncurrent liabilities of $7.5 million.
Investing Activities
Net cash used in investing activities for the nine months ended October 31, 2021
of $19.3 million was related to the capitalization of internal-use software of
$10.2 million as we expanded our platform and increased our development efforts,
and purchases of property and equipment of $9.1 million related to our growth.
Net cash used in investing activities for the nine months ended October 31, 2020
of $12.9 million was related to the capitalization of internal-use software of
$7.7 million as we expanded our platform and increased our development efforts,
and purchases of property and equipment of $5.2 million related to our growth.
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Financing Activities
Net cash provided by financing activities for the nine months ended October 31,
2021 of $11.8 million consisted primarily of $11.5 million in proceeds from
employee stock purchase plan and $7.9 million in proceeds from the exercise of
stock options, partially offset by $7.6 million principal payment
on finance lease obligations.
Net cash provided by financing activities for the nine months ended October 31,
2020 of $15.9 million consisted primarily of $12.6 million in proceeds from the
exercise of stock options and $9.5 million in proceeds from employee stock
purchase plan, partially offset by $6.2 million principal payment on finance
lease obligations.
                    Commitments and Contractual Obligations
There were no material changes outside of the ordinary course of business in our
contractual obligations and commitments during the nine months ended October 31,
2021 from the contractual obligations and commitments disclosed in our Annual
Report on Form 10-K for the fiscal year ended January 31, 2021 filed with the
SEC on March 12, 2021.
                         Off-Balance Sheet Arrangements
Through October 31, 2021, we did not have any relationships with unconsolidated
organizations or financial partnerships, such as structured finance or special
purpose entities that would have been established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes.
                   Critical Accounting Policies and Estimates
Our condensed consolidated financial statements have been prepared in accordance
with U.S. GAAP. The preparation of these condensed consolidated financial
statements requires us to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenue and expenses, and related
disclosures. We base our estimates on historical experience and on various other
assumptions that we believe are reasonable under the circumstances. We evaluate
our estimates and assumptions on an ongoing basis. Actual results may differ
from these estimates. To the extent that there are material differences between
these estimates and our actual results, our future financial statements will be
affected.
During the nine months ended October 31, 2021, there were no significant changes
to our critical accounting policies and estimates as described in the financial
statements contained in the Annual Report on Form 10-K for the year ended
January 31, 2021 filed with the SEC on March 12, 2021.
                        Recent Accounting Pronouncements
See "Summary of Business and Significant Accounting Policies" in Note 1 of the
notes to our unaudited condensed consolidated financial statements included in
Part I, Item 1 of this Form 10-Q.

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