ANAPLAN, INC. 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 endedJanuary 31, 2020 , filed with theSEC onMarch 30, 2020 . 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 endsJanuary 31 . OverviewAnaplan is pioneering the category of Connected Planning. Our platform enables organizations to make better decisions and to plan and execute their ongoing digital transformation to compete in today's digital economy. We believe Connected Planning is an essential cloud category. It fundamentally transforms planning by connecting all of the people, data, and plans needed to accelerate business value and enable real-time planning and decision-making in rapidly changing business environments. Connected Planning accelerates business value by transforming the way organizations make decisions and placing the power of planning in the hands of every individual at every level within and between organizations. We continue to see the growth in the strategic value of the Connected Planning platform as a foundation for companies to drive digital transformation. Connected Planning represents a fundamental shift from the legacy approach to planning, which is typically confined to the finance department and uses a patchwork of outdated and disconnected tools and manual processes that are often overly complex, slow, inefficient, and static. Connected Planning enables dynamic, collaborative, and intelligent planning across all areas of an organization, including finance, sales, and supply chain, and other corporate functions such as marketing, human resources, and operations. It enables organizations to manage their people, products and customers with agility. We sell subscriptions to our cloud-based planning platform primarily through our direct sales team. We also have strategic partnerships that provide us with a significant source of lead generation and implementation leverage. Our global partners, including global strategic consulting and advisory firms, global systems integrators and technology firms, 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 partner with leading regional consulting firms and implementation partners. These highly skilled regional partners not only provide subject-matter expertise in the implementation of specific use cases, but they also act as an extension of our direct sales force by identifying and referring opportunities to us. We and our partners create templatized solution offerings to further accelerate the implementation, adoption and expansion of our platform. We focus our selling efforts on executives of large enterprises, who are often making a strategic purchase of our platform with the potential for broad use throughout their organizations. We use a "land and expand" sales strategy to capitalize on this potential. Our platform is often initially adopted within a specific line of business, including in finance, sales, and supply chain, and other corporate functions such as marketing, human resources, and operations, for one or more planning use cases. Once customers see the benefits of our platform for their initial use cases, they often increase the number of users, add new use cases, and expand to additional lines of business, divisions, and geographies. We call this the Honeycomb™ effect. This expansion often generates a natural network effect in which the value of our platform 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
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 endedOctober 31, 2020 and 2019, subscription revenue was$104.7 million and$79.7 million , respectively, representing a year-over-year subscription revenue growth rate of 31%. During the three months endedOctober 31, 2020 and 2019, services revenue was$10.2 million and$9.7 million , respectively. Our subscription revenue as a percentage of total revenue was 20
--------------------------------------------------------------------------------
Table of Contents
91% and 89% in the three months endedOctober 31, 2020 and 2019, respectively. During the nine months endedOctober 31, 2020 and 2019, subscription revenue was$295.6 million and$218.4 million , respectively, representing a year-over-year subscription revenue growth rate of 35%. During the nine months endedOctober 31, 2020 and 2019, services revenue was$29.6 million and$31.4 million , respectively. Our subscription revenue as a percentage of total revenue was 91% and 87% in the nine months endedOctober 31, 2020 and 2019, respectively. During the three months endedOctober 31, 2020 and 2019, our total revenue was$114.9 million and$89.4 million , respectively. Approximately 46% and 43% of our total revenue was generated from outside ofthe United States in the three months endedOctober 31, 2020 and 2019, respectively. During the nine months endedOctober 31, 2020 and 2019, our total revenue was$325.2 million and$249.8 million , respectively. Approximately 45% and 43% of our revenue was generated from outside ofthe United States in the nine months endedOctober 31, 2020 and 2019. Our net loss was$36.8 million and$34.7 million in the three months endedOctober 31, 2020 and 2019, respectively, and$111.9 million and$112.5 million in the nine months endedOctober 31, 2020 and 2019. 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 forAnaplan 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 113% and 122% as ofOctober 31, 2020 , andJanuary 31, 2020 , 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 417 and 353 as ofOctober 31, 2020 , andJanuary 31, 2020 , respectively. While achieving and maintaining incremental sales to existing customers requires increasingly sophisticated and costly sales efforts, we believe the introduction of new solutions, features and functionality to our platform, and customers realizing benefits through their initial adoption of our platform, means we have significant opportunities to further expand the use of our platform by our existing customers as well as to attract additional large customers. 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. For example, onOctober 3, 2019 we completed the acquisition ofMintigo Limited , anIsrael -based artificial intelligence/machine learning company, to enhance the predictive capabilities of our solutions. 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 and continue our leadership role in the Connected Planning category. COVID-19 Update The COVID-19 pandemic continues to spread around the world and many governments implemented, and may implement in the future, measures to address the pandemic, including travel restrictions, quarantines and shelter-in-place orders, and business limitations and shutdowns. 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 have taken various measures to prioritize the health and safety of our employees, customers and the communities in which we operate, including shifting our training courses and our customer, marketing and industry events to an online only format. To support the health of our employees, our global workforce now works remotely, and we implemented our business continuity plan with the goal of providing uninterrupted service to our customers. We anticipate that our workforce will continue to work remotely at least through the end of calendar year 2020. Our plan is to slowly move toward normal operations on a market by market basis in accordance with local authority guidelines, and to ensure that our return to work is thoughtful, prudent, and handled with an abundance of caution with the health of our employees being the top priority. When we determine that it is safe for employees to return to work, we have developed health and safety procedures to enable our employees to do so safely. 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. 21
--------------------------------------------------------------------------------
Table of Contents
While the broader implications of the COVID-19 pandemic on our employees, our
results of operations, and overall financial performance remain uncertain, we
have seen and we currently expect our financial performance to be negatively
impacted by the economic effects of the COVID-19 pandemic, at least for the
immediate future. We have seen and expect to continue to see certain of our
customers and prospective customers defer or delay buying decisions and project
implementations, prolonged sales cycles, and an increase in requests for
extended payment terms due to uncertain economic conditions including those
caused by the COVID-19 pandemic. We have seen and expect to continue to see
these deferrals and delays impact our new business pipeline and large deals,
including delays in deals arising out of our strategic relationships with our
global partners. We may also experience contraction in our existing customer
base. 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.
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. Furthermore, we generally recognize subscription
revenue from our customer contracts ratably over the term of the contract.
Therefore, changes in our contracting activity in the near term may not be
apparent as a change to our reported revenue until future periods. See the "Risk
Factors" section 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 the
section titled "Risk Factors". If we are unable to address these challenges, our
business and operating results could be adversely affected.
Market adoption of our platform. Even though we believe Connected Planning is a
strategic imperative for enterprises and that enables them to plan and execute
digital transformations in today's rapidly changing business environment, it is
at an early stage of adoption. 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, and, once they realize the benefits and wide applicability
of our platform, subsequently renewing subscriptions and expanding 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 our large 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.
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, 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. In the
enterprise market, 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.
22--------------------------------------------------------------------------------
Table of Contents
International sales. Our total revenue generated outside ofthe United States during the three and nine months endedOctober 31, 2020 , was approximately 46% and 45%, respectively, of our total revenue. Our total revenue generated outside ofthe United States during the three and nine months endedOctober 31, 2019 , was approximately 43% 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 global and regional partners, including 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 user interface, functionality, and usability of our platform, including in public cloud capabilities to expand the accessibility and reach of our platform, and in machine learning and other artificial intelligence technologies, to further enhance the predictive capabilities 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 91% of our total revenue for the three and nine months endedOctober 31, 2020 , and 89% and 87% for the three and nine months endedOctober 31, 2019 , respectively. 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-cancellable over the contract term. We had remaining performance obligations, or backlog, in the amount of$739.5 million and$656.2 million as ofOctober 31, 2020 andJanuary 31, 2020 , 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, including as a result of the COVID-19 pandemic, may not impact our reported revenue until future periods.
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.
23--------------------------------------------------------------------------------
Table of Contents 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, 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 over the requisite service period. 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. 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.
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 to take advantage of the large opportunity we see in front of us. We continue to incur additional expenses as a result of operating as a public company, including costs to comply with the rules and regulations applicable to companies listed on aU.S. securities exchange and costs related to compliance and reporting obligations pursuant to the rules and regulations of theSEC . 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. 24
--------------------------------------------------------------------------------
Table of Contents
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.
Provision for Income Taxes 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,U.K. andIsrael deferred tax assets as we have concluded that it is not more likely than not that the deferred assets will be utilized. 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
2020 2019 2020 2019
(In thousands)
Revenue:
Subscription revenue $ 104,707 $ 79,695 $ 295,648 $ 218,378
Professional services
revenue 10,168 9,715 29,582 31,402
Total revenue 114,875 89,410 325,230 249,780
Cost of revenue:
Cost of subscription revenue
(1) 19,187 13,108 50,520 36,406
Cost of professional
services revenue (1) 10,188 9,376 29,037 30,162
Total cost of revenue 29,375 22,484 79,557 66,568
Gross profit 85,500 66,926 245,673 183,212
Operating expenses:
Research and development (1) 24,629 16,462 72,986 47,963
Sales and marketing (1) 73,893 60,644 218,481 180,931
General and administrative
(1) 22,851 22,344 66,514 65,158
Total operating expenses 121,373 99,450 357,981 294,052
Loss from operations (35,873 ) (32,524 ) (112,308 ) (110,840 )
Interest income (expense),
net (208 ) 1,180 119 3,770
Other income (expense), net (291 ) (2,398 ) 3,385 (2,096 )
Loss before income taxes (36,372 ) (33,742 ) (108,804 ) (109,166 )
Provision for income taxes (420 ) (959 ) (3,114 ) (3,368 )
Net loss $ (36,792 ) $ (34,701 ) $
(111,918 )
(1) Includes stock-based compensation expense as follows: Cost of subscription revenue $
953 $ 689 $ 2,537 $ 1,817
Cost of professional
services revenue 506 539 1,706 1,577
Research and development 5,235 2,790 13,261 7,120
Sales and marketing 12,570 8,927 33,814 23,728
General and administrative 7,696 7,948 23,114 23,072
Total stock-based
compensation expense $ 26,960 $ 20,893 $ 74,432 $ 57,314
25
--------------------------------------------------------------------------------
Table of Contents
Three and Nine Months Ended October 31, 2020 and 2019
Revenue
Three Months Ended October 31, Nine Months Ended October 31,
2020 2019 % Change 2020 2019 % Change
(In thousands, except percentage data)
Subscription revenue $ 104,707 $ 79,695 31 % $ 295,648 $ 218,378 35 %
Professional
services revenue 10,168 9,715 5 29,582 31,402 (6 )
Total revenue $ 114,875 $ 89,410 28 $ 325,230 $ 249,780 30
Total revenue was $114.9 million in the three months ended October 31, 2020 ,
compared to $89.4 million in the three months ended October 31, 2019 , an
increase of $25.5 million , or 28%. Total revenue was $325.2 million in the nine
months ended October 31, 2020 , compared to $249.8 million in the nine months
ended October 31, 2019 , an increase of $75.5 million , or 30%.
Subscription revenue was $104.7 million , or 91%of total revenue, in the three
months ended October 31, 2020 , compared to $79.7 million , or 89% of total
revenue, in the three months ended October 31, 2019 , an increase of $25.0
million , or 31%. The increase in subscription revenue was primarily driven by
existing customers expanding their use of our platform, which accounted for 70%
of the increase, and acquisition of new customers, which accounted for
approximately 30% of the increase.
Subscription revenue was $295.6 million , or 91% of total revenue, in the nine
months ended October 31, 2020 , compared to $218.4 million , or 87% of total
revenue, in the nine months ended October 31, 2019 , an increase of $77.3
million , or 35%. 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 $10.2 million in the three months ended
October 31, 2020 , compared to $9.7 million in the three months ended October 31,
2019 , an increase of $0.5 million , or 5%. The increase in professional services
revenue was primarily driven by timing of our customers' implementation
projects.
Professional services revenue was $29.6 million in the nine months ended
October 31, 2020 , compared to $31.4 million in the nine months ended October 31,
2019 , a decrease of $1.8 million , or 6%. The decrease in professional services
revenue was primarily driven by lower sales of our professional services due to
timing of our customers' implementation projects. This also represents a
continued decline in professional services revenue as a percentage of total
revenue primarily due to our strategy of shifting professional services revenue
to the members of our growing partner ecosystem.
Cost of Revenue
Three Months Ended
October 31,
Nine Months Ended
2020 2019 % Change 2020 2019 % Change
(In thousands, except percentage data)
Cost of subscription
revenue $ 19,187 $ 13,108 46 % $ 50,520 $ 36,406 39 %
Cost of professional
services
revenue 10,188 9,376 9 29,037 30,162 (4 )
Total cost of
revenue $ 29,375 $ 22,484 31 $ 79,557 $ 66,568 20
Total cost of revenue was $29.4 million in the three months ended October 31,
2020 , compared to $22.5 million in the three months ended October 31, 2019 , an
increase of $6.9 million , or 31%. Total cost of revenue was $79.6 million in the
nine months ended October 31, 2020 , compared to $66.6 million in the nine months
ended October 31, 2019 , an increase of $13.0 million , or 20%.
Cost of subscription revenue was $19.2 million in the three months ended
October 31, 2020 , compared to $13.1 million in the three months ended
October 31, 2019 , an increase of $6.1 million , or 46%. The increase in cost of
subscription revenue was primarily due to an increase in hosting and consulting
costs of $2.0 million , an increase in
26--------------------------------------------------------------------------------
Table of Contents
software license and maintenance costs of$1.6 million , an increase in amortization of our equipment leases and capitalized software development costs of$1.2 million , and an increase in salaries and bonuses, and benefits costs of$0.9 million , including stock-based compensation. Cost of subscription revenue was$50.5 million in the nine months endedOctober 31, 2020 , compared to$36.4 million in the nine months endedOctober 31, 2019 , an increase of$14.1 million , or 39%. The increase in cost of subscription revenue was primarily due to an increase in hosting and consulting costs of$3.9 million , an increase in amortization of our equipment leases and capitalized software development costs of$3.6 million , an increase in software license and maintenance costs of$3.0 million , and an increase in salaries and bonuses, and benefits costs of$2.6 million , including stock-based compensation. Cost of professional services revenue was$10.2 million in the three months endedOctober 31, 2020 , compared to$9.4 million in the three months endedOctober 31, 2019 , an increase of$0.8 million , or 9%. The increase in cost of professional services revenue was primarily due to an increase in salaries and bonuses, and benefits costs of$0.6 million , including stock-based compensation. Cost of professional services revenue was$29.0 million in the nine months endedOctober 31, 2020 , compared to$30.2 million in the nine months endedOctober 31, 2019 , a decrease of$1.1 million , or 4%. The decrease in cost of professional services revenue was primarily due to a decrease in the partner implementation costs related to a decrease in partner activity of$1.9 million , and a decrease in travel related expenses of$0.7 million due to the COVID-19 pandemic, partially offset by an increase in salaries and bonuses, and benefits costs of$1.3 million , including stock-based compensation. Gross Profit and Gross Margin Three Months Ended October 31, Nine Months Ended October 31, 2020 2019 % Change 2020 2019 % Change (In thousands, except percentage data) Subscription gross profit$ 85,520 $ 66,587 28 %$ 245,128 $ 181,972 35 % Professional services gross profit (20 ) 339 (106 ) 545 1,240 (56 ) Total gross profit$ 85,500 $ 66,926 28$ 245,673 $ 183,212 34 Subscription gross margin 82 % 84 % 83 % 83 % Professional services gross margin - 3 % 2 % 4 % Total gross margin 74 % 75 % 76 % 73 % Gross profit was$85.5 million in the three months endedOctober 31, 2020 , compared to$66.9 million in the three months endedOctober 31, 2019 , an increase of$18.6 million , or 28%. Gross profit was$245.7 million in the nine months endedOctober 31, 2020 , compared to$183.2 million in the nine months endedOctober 31, 2019 , an increase of$62.5 million , or 34%. 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 endedOctober 31, 2020 . Gross margin was 74% in the three months endedOctober 31, 2020 , compared to 75% in the three months endedOctober 31, 2019 . The decrease was primarily due to higher hosting and consulting costs, partially offset by increase in subscription revenue, which generates a significantly higher gross margin than our professional services revenue, as a percentage of total revenue. Gross margin was 76% in the nine months endedOctober 31, 2020 , compared to 73% in the nine months endedOctober 31, 2019 . The increase was primarily due to the increase in subscription revenue, which generates a significantly higher gross margin than our professional services revenue, as a percentage of total revenue.
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.
27--------------------------------------------------------------------------------
Table of Contents
Operating Expenses
Three Months Ended October 31, Nine Months Ended October 31,
2020 2019 % Change 2020 2019 % Change
(In thousands, except percentage data)
Operating expense:
Research and development $ 24,629 $ 16,462 50 % $ 72,986 $ 47,963 52 %
Sales and marketing 73,893 60,644 22 218,481 180,931 21
General and administrative 22,851 22,344 2 66,514 65,158 2
Total operating expenses $ 121,373 $ 99,450 22 $ 357,981 $ 294,052 22
Research and Development
Research and development expenses were $24.6 million in the three months ended
October 31, 2020 , compared to $16.5 million in the three months ended
October 31, 2019 , an increase of $8.2 million , or 50%. The increase was
primarily due to an increase in salaries and bonuses, and benefits costs related
to an increase in headcount of $5.7 million , including an increase in
stock-based compensation of $2.4 million , an increase in hosting and consulting
costs of $0.7 million and a decrease in capitalized software development costs
of $0.6 million .
Research and development expenses were $73.0 million in the nine months ended
October 31, 2020 , compared to $48.0 million in the nine months ended October 31,
2019 , an increase of $25.0 million , or 52%. The increase was primarily due to an
increase in salaries and bonuses, and benefits costs related to an increase in
headcount of $17.1 million , including an increase in stock-based compensation of
$6.1 million , and an increase in hosting and consulting costs of $3.4 million ,
partially offset by an increase in capitalized software development costs of
$0.8 million .
Sales and Marketing
Sales and marketing expenses were $73.9 million in the three months ended
October 31, 2020 , compared to $60.6 million in the three months ended
October 31, 2019 , an increase of $13.2 million , or 22%. The increase was
primarily due to an increase in salaries and bonuses, and benefits costs related
to an increase in headcount of $13.6 million , including an increase in
stock-based compensation of $3.6 million and an increase in commission expenses
of $2.6 million , partially offset by a reduction of $3.2 million of
discretionary spend such as marketing events and travel related expenses due to
the COVID-19 pandemic.
Sales and marketing expenses were $218.5 million in the nine months ended
October 31, 2020 , compared to $180.9 million in the nine months ended
October 31, 2019 , an increase of $37.6 million , or 22%. The increase was
primarily due to an increase in salaries and bonuses, and benefits costs related
to an increase in headcount of $42.1 million , including an increase in
stock-based compensation of $10.1 million and an increase in commission expenses
of $8.3 million , partially offset by a reduction of $10.7 million of
discretionary spend such as marketing events and travel related expenses due to
the COVID-19 pandemic.
General and Administrative
General and administrative expenses were $22.9 million in the three months ended
October 31, 2020 , compared to $22.3 million in the three months ended
October 31, 2019 , an increase of $0.5 million , or 2%. The increase was primarily
due to an increase in salaries and bonuses, and benefits costs of $1.3 million ,
including stock-based compensation, partially offset by a decrease in workplace
and recruiting expenses of $0.8 million .
General and administrative expenses were $66.5 million in the nine months ended
October 31, 2020 , compared to $65.2 million in the nine months ended October 31,
2019 , an increase of $1.4 million , or 2%. The increase was primarily due to an
increase in salaries and bonuses, and benefits costs related to an increase in
headcount of $3.6 million , including stock-based compensation and an increase in
allowance for credit losses of $0.9 million primarily stemming from the COVID-19
pandemic, partially offset by decreases in workplace and recruiting expenses of
$1.7 million , and other general expenses.
28--------------------------------------------------------------------------------
Table of Contents
Other Income (Expense), Net
Three Months Ended October 31, Nine Months Ended October 31,
2020 2019 % Change 2020 2019 % Change
(In thousands, except percentage data)
Interest income
(expense), net $ (208 ) $ 1,180 (118 ) % $ 119 $ 3,770 (97 ) %
Other income
(expense), net (291 ) (2,398 ) (88 ) 3,385 (2,096 ) (261 )
Interest Income (expense), net
Interest income (expense), net decreased by$1.4 million in the three months endedOctober 31, 2020 . Interest income (expense), net decreased by$3.7 million in the nine months endedOctober 31, 2020 . 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 three and nine months endedOctober 31, 2020 compared to the three and nine months endedOctober 31, 2019 , respectively. Other Income (Expense), net Other income (expense), net was a loss of$0.3 million in the three months endedOctober 31, 2020 , compared to a loss of$2.4 million in the three months endedOctober 31, 2019 , a decrease in expense of$2.1 million , or 88%. Other income (expense), net was a gain of$3.4 million in the nine months endedOctober 31, 2020 , compared to a loss of$2.1 million in the nine months endedOctober 31, 2019 , an increase in income of$5.5 million , or 261%. The change was primarily due to currency fluctuations and the related remeasurements during the periods. Provision for Income Taxes Three Months Ended October 31, Nine Months Ended October 31, 2020 2019 % Change 2020 2019 % Change (In thousands, except percentage data) Provision for income taxes $ (420 ) $ (959 ) (56 ) %$ (3,114 ) $ (3,368 ) (8 ) % The provision for income taxes was$0.4 million in the three months endedOctober 31, 2020 , compared to$1.0 million in the three months endedOctober 31, 2019 , a decrease of,$0.6 million or 56%. The decrease in provision for income taxes was primarily due to a decrease in income generated from intercompany cost-plus arrangements in certain European and Asian countries. The provision for income taxes was$3.1 million in the nine months endedOctober 31, 2020 , compared to$3.4 million in the nine months endedOctober 31, 2019 , a decrease of$0.3 million , or 8%. The decrease in provision for income taxes was primarily due to a decrease in income generated from intercompany cost-plus arrangements in certain European and Asian countries, partially offset by discrete tax expenses relating to gains from intercompany transactions. Liquidity and Capital Resources As ofOctober 31, 2020 , our principal sources of liquidity were cash and cash equivalents totaling$296.8 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, such as timing of cash collections from our customers and other risks detailed in "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. 29
--------------------------------------------------------------------------------
Table of Contents
Loan and Credit Facility Agreements
InApril 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 inApril 2018 , as amended inSeptember 2018 andOctober 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 untilApril 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 onApril 23, 2022 . As ofOctober 31, 2020 andJanuary 31, 2020 , we had not drawn down any amounts under this agreement. 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 toJanuary 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 ofOctober 31, 2020 , we were in compliance with the financial covenants. Cash Flows
The following table summarizes our cash flows for the periods presented:
Nine Months Ended October 31,
2020 2019
(In thousands)
Net cash used in operating activities
(12,909 ) (39,668 )
Net cash provided by financing activities 15,896 35,699
Operating Activities
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 .
Net cash used in operating activities of $12.8 million for the nine months ended
October 31, 2019 was primarily due to a net loss of $112.5 million , partially
offset by non-cash charges for stock-based compensation of $57.3 million ,
depreciation and amortization of $14.4 million , amortization of deferred
commissions of $14.1 million , and amortization of operating lease right-of-use
assets and accretion of operating lease liabilities of $7.8 million . Changes in
working capital were favorable to cash flows from operations by $4.7 million
primarily due to an increase in deferred revenue balance of $39.4 million due to
increases in sales, an increase in accounts payable and accrued expenses of
$16.0 million due to our growth and the timing of payments, a decrease in
prepaid expenses and other current assets of $1.8 million , partially offset by
an increase in deferred commissions of $36.1 million related to increases in our
sales, payments for operating lease liabilities of $7.6 million , an increase in
accounts receivable of $5.3 million due to increased customer billings, a
decrease in other noncurrent liabilities of $3.3 million , and an increase in
other noncurrent assets of $0.2 million .
30--------------------------------------------------------------------------------
Table of Contents Investing Activities Net cash used in investing activities for the nine months endedOctober 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. Net cash used in investing activities for the nine months endedOctober 31, 2019 of$39.7 million was related to the net cash payment of$29.2 million for our acquisition ofMintigo , the capitalization of internal-use software of$8.0 million as we expanded the platform and increased our development efforts, and purchases of property and equipment of$2.5 million related to our growth.
Financing Activities
Net cash provided by financing activities for the nine months endedOctober 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. Net cash provided by financing activities for the nine months endedOctober 31, 2019 of$35.7 million consisted primarily of$18.9 million in proceeds from the exercise of stock options,$11.5 million from the repayment of promissory notes, and$9.1 million in proceeds from sales of stock under our employee stock purchase plan, partially offset by$3.8 million principal payment on finance lease obligations. Commitments and Contractual Obligations Except as discussed in Note 10 to our unaudited condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q, there were no material changes outside of the ordinary course of business in our contractual obligations and commitments during the nine months endedOctober 31, 2020 from the contractual obligations and commitments disclosed in our Annual Report on Form 10-K for the fiscal year endedJanuary 31, 2020 filed with theSEC onMarch 30, 2020 . Off-Balance Sheet Arrangements ThroughOctober 31, 2020 , we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Critical Accounting Policies and Estimates Our condensed consolidated financial statements have been prepared in accordance withU.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 endedOctober 31, 2020 , 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 endedJanuary 31, 2020 filed with theSEC onMarch 30, 2020 . 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. 31
--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source
