COUCHBASE, 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 and other financial information included elsewhere in this Quarterly Report on Form 10-Q and our final prospectus datedJuly 21, 2021 and filed with theU.S. Securities and Exchange Commission , or theSEC , pursuant to Rule 424(b) under the Securities Act of 1933, as amended, or the Securities Act, onJuly 22, 2021 . This discussion contains forward-looking statements that involve risks and uncertainties. Factors that could cause or contribute to such differences include those identified below and those discussed in the section titled "Risk Factors" and other parts of this Quarterly Report on Form 10-Q. Our historical results are not necessarily indicative of the results that may be expected for any period in the future. The last day of our fiscal year isJanuary 31 . Our fiscal quarters end onApril 30 ,July 31 ,October 31 andJanuary 31 . Our fiscal years endedJanuary 31, 2020 and 2021 are referred to herein as fiscal 2020 and fiscal 2021, respectively.
Overview
Our mission is to empower enterprises to build, manage and operate modern mission-critical applications at the highest scale and performance.Couchbase provides a leading modern database for enterprise applications. Enterprises rely onCouchbase to power the core applications their businesses depend on, for which there is no tolerance for disruption or downtime. Our database is versatile and works in multiple configurations, from cloud to multi- or hybrid-cloud to on-premise environments to the edge, and can be run by the customer or managed by us. We have architected our database on the next-generation flexibility of NoSQL, embodying a "not only SQL" approach. We combine the schema flexibility unavailable with legacy databases with the power and familiarity of the SQL query language, the lingua franca of database programming, into a single, unified platform. Our cloud-native platform provides a powerful modern database that serves the needs of both enterprise architects and application developers. We builtCouchbase for the most important, mission-critical applications for the largest enterprises, with the highest performance, reliability, scalability and agility requirements. Any compromise of these requirements could cause these applications to fail-stopping or delaying package delivery for shipping companies, interrupting reservations for travel companies, or causing product shortages in stores for retailers. We have spent over a decade building a platform architected to solve our customers' most difficult database challenges, from scale to flexibility to deployment. This includes enablingCouchbase to not just simply run in the cloud, but to run anywhere from public clouds to hybrid environments and even all the way to the edge, in truly distributed environments with flexibility in and between those environments. Combined with our performance at scale, we believe this power enables customers to run their most important applications with the effectiveness they require, with the efficiency they desire and in the modern infrastructure environments they demand. With nearly every aspect of our lives being transformed by digital innovation, enterprises are charged with building applications that enable delightful and meaningful customer experiences. Enterprises are increasingly reliant on applications, and applications in turn rely on databases to store, retrieve and operationalize data into action. Today, applications are operating at a scale, speed, and dynamism unheard of just a decade ago. There is an increasing diversity of application types, modalities and delivery and consumption models, and the volume, velocity, and variety of data on which applications rely is growing at an exponential rate. Consequently, the demand on enterprises and their databases is growing exponentially. These trends are poised to continue, applying increasing urgency for enterprises to digitally transform. Indeed, digital transformation has become both a strategic imperative and a competitive necessity for enterprises seeking to thrive in a data-driven world. We designedCouchbase to give enterprises a database for the modern cloud world, overcoming the limitations of legacy database technologies and enabling the high performance, reliability, scalability, and agility required by enterprises to deliver their mission-critical applications. We facilitate a seamless transition for our customers from legacy relational databases to our modern database resulting in better application scalability, user experience and security at the pace that works for them. We believe that both enterprise architects and application developers are key to initiating the transition away from legacy database technologies and that we are uniquely positioned and architected to serve both. We sell our platform through our direct sales force and our growing ecosystem of partners. Our platform is broadly accessible to a wide range of enterprises, as well as governments and organizations. We have customers in a range of industries, including retail and e-commerce, travel and hospitality, financial services and insurance, software and technology, gaming, media and entertainment and industrials. We focus our selling efforts on the largest global enterprises with the most complex data requirements, and we have introduced a new cloud-based managed offering for enterprises looking for a turnkey version of our platform. We have achieved significant growth over our operating history. For the nine months endedOctober 31, 2021 and 2020, our revenue was$88.5 million and$73.9 million , respectively, representing period-over-period growth of 20%. As ofOctober 31, 2021 and 2020, our ARR was$122.3 million and$101.4 million , respectively, representing period-over-period growth of 21%. For the nine months endedOctober 31, 2021 and 2020, our net loss was$45.0 million and$30.3 million , respectively, as we continued to invest in the growth of our business to capture the massive opportunity that we believe is available to us. 24 --------------------------------------------------------------------------------
Initial Public Offering
InJuly 2021 , we completed our initial public offering, or IPO, in which we issued and sold 9,589,999 shares of our common stock at$24.00 per share, which included 1,250,869 shares issued upon exercise of the underwriters' option to purchase additional shares. We received net proceeds of$214.9 million after deducting underwriting discounts and commissions. In connection with the IPO, all 26,710,600 shares of our outstanding redeemable convertible stock automatically converted into an equivalent number of shares of common stock.
Prior to the IPO, all deferred offering costs were capitalized in other
noncurrent assets on the condensed consolidated balance sheets. Deferred
offering costs of
Our Business Model
We generate the substantial majority of our revenue from sales of subscriptions. We derive substantially all of our subscription revenue from the Enterprise Edition of ourCouchbase platform, which includes Couchbase Server, our flagship product, and Couchbase Mobile. TheCouchbase platform is designed to give our customers flexibility to run anywhere the customer chooses, whether deployed in on-premise data centers, mobile, private clouds, public clouds, multi-clouds or hybrid clouds. TheCouchbase platform is licensed per node, which we define as an instance ofCouchbase running on a server. Our platform can be deployed with intentional flexibility between a traditional data center on bare metal servers or within a virtualized or containerized environment, such as VMware or Docker, as well as in a public cloud, such asAmazon Web Services , Microsoft Azure and Google Cloud Platform, with the ability to run in any configuration that a customer desires. Our subscription pricing is based on the computing power and memory per instance, as well as the chosen service level. We offer three different support levels: the Platinum level offers 24/7 support and the shortest response time of 30 minutes; the Gold level offers 24/7 support with a response time of 2 hours; and the Silver level offers7am-5pm local time support, 5 days a week. These response times are for incidences of the highest severity level, which we identify as level P1. The initial response time for levels P2 and P3, which are less severe, are longer. The non-cancelable term of our subscription arrangements typically ranges from one to three years but may be longer or shorter in limited circumstances and is typically billed annually in advance. The timing and billing of large, multi-year contracts can create variability in revenue and deferred revenue between periods. We also derive subscription revenue from a fully-managed offering ofCouchbase Server, called Couchbase Capella, which we introduced inJune 2020 under the name Couchbase Cloud. Couchbase Capella is licensed using an on-demand consumption model or an annual credit model, which provides flexibility and removes the need to license different node types separately. On-demand pricing allows customers to pay only for what they use based on hourly pricing, and the credits purchased through our annual credit model expire only at the end of a 12-month period, rather than ratably over the year. We also provide automatic conversion to on-demand consumption when credits expire or are exhausted. Couchbase Capella credits can be purchased upfront to provide cost savings with volume discounts available based on credit quantity. We offer multiple pricing levels for Couchbase Capella, based on included capabilities and support response time. InOctober 2021 , we expanded Couchbase Capella to include a fully hosted offering. We also generate revenue from services. Our services revenue is derived from our professional services related to the implementation or configuration of our platform and training. We have invested in building our services organization because we believe it plays an important role in customer success, ensuring that our customers fulfill their digital transformation agendas while leveraging our platform, accelerating our customers' realization of the full benefits of our platform and driving increased adoption of our platform. Our go-to-market strategy is focused on large enterprises recognized as leaders in their respective industries who are attempting to solve complicated business problems by digitally transforming their operations. As a result,Couchbase powers some of the largest and most complex enterprise applications worldwide. Through our highly instrumented "sell-to" go-to-market motion, we have built a direct sales organization that understands the strategic needs of enterprises as well as a marketing organization that emphasizes our enablement of digital transformation through our no-compromises approach to performance, resiliency, scalability, agility and total cost of ownership, or TCO, savings. We complement our "sell-to" go-to-market motion with a "buy-from" go-to-market motion, which is focused on targeting the application developer community to drive adoption of our platform. To accomplish this, we offer free Community Editions of some of our products, free trials of our Enterprise Edition of Couchbase Server and Couchbase Capella products and a web browser-based demonstration version of Couchbase Server to further accelerate application developer adoption. We believe these offerings lead to future purchases of the Enterprise Edition. While our Community Edition includes the core functionality of Couchbase Server, it is not suited for mission-critical deployments, as it offers only limited functionality around the scaled performance and security that enterprises require and no direct customer support fromCouchbase .
We also continuously grow and cultivate our cloud provider partner and technology provider ecosystem. Our PartnerEngage program, which serves as our umbrella partner program, is tailored to enable our partners to deliver an excellent experience for
25
--------------------------------------------------------------------------------
customers while achieving profitable growth. For our customers, PartnerEngage
provides more options and enhanced availability to reach
We employ a land-and-expand model centered around our platform offerings, which have a rapid time to production and time to value for our customers, and our sales and customer success organizations, which proactively guide customers to realize strategic and transformative use cases and drive greater adoption of our platform and services. Our marketing organization is focused on building our brand reputation and awareness, which drive customer interest and demand for our platform. As part of these efforts, we host Couchbase Connect.ONLINE, a technical conference for application developers and enterprise architects, which showcases compelling customer testimonials and various use cases of our platform. Our Couchbase Connect offering also provides application developers with helpful resources to help them learn more about our platform, including access to over one hundred and fifty on-demand instructional webinars. We also offerCouchbase Playground , allowing application developers to accessCouchbase's API and Couchbase Academy , which includes role-specific training courses. We have also been successful in retaining our customers and increasing their spend with us over time. Our dollar-based net retention rate was at least 115% for each of the past seven quarters. See the section titled "-Factors Affecting Our Performance" for more information about how we calculate dollar-based net retention rate.
Factors Affecting Our Performance
Continuing to Acquire New Customers
We grow our subscription revenue by acquiring new customers. The size of our customer base may vary from period to period for several reasons, including the length of our sales cycle, the effectiveness of our sales and marketing efforts, enterprise application development cycles and the corresponding adoption rates of modern applications that require database solutions like ours. Additionally, our revenue has and will vary as new customers purchase our products due to the fact that we recognize a portion of such subscription revenue upfront. As digital transformation continues to accelerate, we believe thatCouchbase Capella, our fully-managed DBaaS offering, will become increasingly popular as a result of its compelling pricing model, ease of operation, lower TCO, time to market and flexibility. We will continue to offer Couchbase Capella and provide flexible, highly available and differentiated economical options to capture new customers.
Continuing to Expand Within Existing Customers
A significant part of our growth has been, and we expect will continue to be, driven by expansion within our existing customer base. Growth of our revenue from our existing customers results from increases in the scale of their deployment for existing use cases, or when customers utilize our platform to address new use cases. In addition, our professional services organization helps customers deploy new use cases and optimize their existing implementations. Our revenue from our subscription offerings varies depending on the scale and performance requirements of our customers' deployments. We are focusing on growing our subscription revenue, particularly from enterprises, while delivering professional services and training to support this growth. We have been successful in expanding our existing customers' adoption of our platform as demonstrated by our dollar-based net retention rate of at least 115% in each of the past seven quarters. Our dollar-based net retention rate for any period equals the simple arithmetic average of our quarterly dollar-based net retention rate for the four quarters ending with the most recent fiscal quarter. To calculate our dollar-based net retention rate for a given quarter, we start with the ARR, or Base ARR, attributable to our customers, or Base Customers, as of the end of the same quarter of the prior fiscal year. We then determine the ARR attributable to the Base Customers as of the end of the most recent quarter and divide that amount by the Base ARR.
Continuing to Invest in Growth
We expect to continue to invest in our offerings, personnel, geographic presence
and infrastructure in order to drive future growth, as well as to pursue
adjacent opportunities. We expend research and development resources to drive
innovation in our proprietary software to constantly improve the functionality
and performance of our platform and to increase the deployment models available
to our customers. We anticipate continuing to increase our headcount to ensure
that our product development organization drives improvements in our product
offerings, our sales and marketing organization can maximize opportunities for
growing our business and revenue and our general and administrative organization
efficiently supports the growth of our business as well as our effective
operation as a public company.
26
--------------------------------------------------------------------------------Key Business Metrics Annual Recurring Revenue We define ARR as of a given date as the annualized recurring revenue that we would contractually receive from our customers in the month ending 12 months following such date. Based on historical experience with customers, we assume all contracts will be automatically renewed at the same levels unless we receive notification of non-renewal and are no longer in negotiations prior to the measurement date. ARR excludes revenue from on-demand arrangements and services. ARR should be viewed independently of revenue, and does not represent our revenue underU.S. GAAP on an annualized basis, as it is an operating metric that can be impacted by contract start and end dates and renewal dates. ARR is not intended to be a replacement for forecasts of revenue. Although we seek to increase ARR as part of our strategy of targeting large enterprise customers, this metric may fluctuate from period to period based on our ability to acquire new customers and expand within our existing customers. We believe that our ARR is an important indicator of the growth and performance of our business. As of October 31, 2021 2020 (in millions) ARR$ 122.3 $ 101.4 Customers We calculate our total number of customers at the end of each period. We include in this calculation each customer account that has an active subscription contract with us or with which we are negotiating a renewal contract at the end of a given period. Each party with which we enter into a subscription contract is considered a unique customer and, in some cases, a single organization may be counted as more than one customer. Our customer count is subject to adjustments for acquisitions, consolidations, spin-offs and other market activity. We believe that our number of customers is an important indicator of the growth of our business and future revenue trends. As of October 31, 2021 2020 Customers 568 524 Non-GAAP Financial Measures
Non-GAAP Gross Profit and Non-GAAP Gross Margin
We define non-GAAP gross profit and non-GAAP gross margin as gross profit and
gross margin, respectively, excluding stock-based compensation expense recorded
to cost of revenue. We use non-GAAP gross profit and non-GAAP gross margin in
conjunction with GAAP financial measures to assess our performance, including in
the preparation of our annual operating budget and quarterly forecasts, to
evaluate the effectiveness of our business strategies and to communicate with
our board of directors concerning our financial performance.
Three Months Ended October 31, Nine Months Ended October 31,
2021 2020 2021 2020
(dollars in thousands)
Total revenue $ 30,824 $ 25,653 $ 88,478 $ 73,858
Gross profit $ 27,088 $ 22,517 $ 77,825 $ 65,362
Add: Stock-based compensation expense 136 30 239 91
Non-GAAP gross profit $ 27,224 $ 22,547 $ 78,064 $ 65,453
Gross margin 87.9 % 87.8 % 88.0 % 88.5 %
Non-GAAP gross margin 88.3 % 87.9 % 88.2 % 88.6 %
27
--------------------------------------------------------------------------------
Non-GAAP Operating Loss and Non-GAAP Operating Margin
We define non-GAAP operating loss and non-GAAP operating margin as loss from
operations and operating margin, respectively, excluding stock-based
compensation expense and litigation-related expenses. We use non-GAAP operating
loss and non-GAAP operating margin in conjunction with GAAP measures to assess
our performance, including in the preparation of our annual operating budget and
quarterly forecasts, to evaluate the effectiveness of our business strategies
and to communicate with our board of directors concerning our financial
performance.
Three Months Ended October 31, Nine Months Ended October 31,
2021 2020 2021 2020
(dollars in thousands)
Total revenue $ 30,824 $ 25,653 $ 88,478 $ 73,858
Loss from operations $ (15,491 ) $
(9,079 )
3,353 1,135 7,163 3,342
Add: Litigation-related expenses - - - 213
Non-GAAP operating loss $ (12,138 ) $ (7,944 ) $ (36,427 ) $ (21,521 )
Operating margin (50 )% (35 )% (49 )% (34 )%
Non-GAAP operating margin (39 )% (31 )% (41 )% (29 )%
Non-GAAP Net Loss and Non-GAAP Net Loss Per Share
We define non-GAAP net loss attributable to common stockholders as net loss
attributable to common stockholders excluding stock-based compensation expense
and litigation-related expenses. We use non-GAAP net loss attributable to common
stockholders and non-GAAP net loss per share attributable to common stockholders
in conjunction with GAAP measures to assess our performance, including in the
preparation of our annual operating budget and quarterly forecasts, to evaluate
the effectiveness of our business strategies and to communicate with our board
of directors concerning our financial performance.
Three Months Ended October 31, Nine Months Ended October 31,
2021 2020 2021 2020
(dollars and shares in thousands)
Net loss attributable to common
stockholders $ (15,924 ) $ (11,594 ) $ (47,910 ) $ (32,932 )
Add: Stock-based compensation
expense 3,353 1,135 7,163 3,342
Add: Litigation-related expenses - - - 213
Non-GAAP net loss attributable to
common
stockholders $ (12,571 ) $ (10,459 ) $ (40,747 ) $ (29,377 )
GAAP net loss per share
attributable to common
stockholders $ (0.37 ) $ (2.04 ) $ (2.43 ) $ (5.81 )
Non-GAAP net loss per share
attributable to common
stockholders $ (0.29 ) $ (1.84 ) $ (2.06 ) $ (5.18 )
Weighted average shares
outstanding, basic and diluted 43,440 5,695 19,742 5,672
Free Cash Flow
We define free cash flow as cash used in operating activities less purchases of
property and equipment, which includes capitalized internal-use software costs.
We believe free cash flow is a useful indicator of liquidity that provides our
management, board of directors and investors with information about our future
ability to generate or use cash to enhance the strength of our balance sheet and
further invest in our business and pursue potential strategic initiatives. For
the three months ended October 31, 2021 and 2020, our free cash flow included
cash paid for interest on our long-term debt of $0.1 million and $0.7 million ,
respectively. For the nine months ended October 31, 2021 and 2020, our free cash
flow included cash paid for interest on our long-term debt of $0.6 million and
$3.2 million , respectively.
Three Months Ended October 31, Nine Months Ended October 31,
2021 2020 2021 2020
(in thousands)
Net cash used in operating
activities $ (19,747 ) $ (13,143 ) $ (38,922 ) $ (32,609 )
Less: Purchases of property and
equipment (564 ) (144 ) (814 ) (2,770 )
Free cash flow $ (20,311 ) $ (13,287 ) $ (39,736 ) $ (35,379 )
Net cash used in investing
activities $ (52,527 ) $ (14,289 ) $ (47,625 ) $ (16,915 )
Net cash provided by (used in)
financing activities $ (25,499 ) $ 342 $ 190,848 $ 79,427
28
--------------------------------------------------------------------------------
Impact of COVID-19 The ongoing COVID-19 pandemic and efforts to mitigate its impact have significantly curtailed the movement of people, goods and services worldwide, including in the geographic areas in which we conduct our business operations and from which we generate our revenue. It has also caused societal and economic disruption and financial market volatility, resulting in business shutdowns and reduced business activity. We believe that the COVID-19 pandemic has had a negative impact on our business and results of operations, primarily as a result of:
• delaying or pausing digital transformation and expansion projects and
negatively impacting IT spending, which has caused potential customers to
delay or forgo purchases of subscriptions for our platform and services,
and which has caused some existing customers to request concessions
including extended payment terms or better pricing, fail to renew
subscriptions, reduce their usage or fail to expand their usage of our
platform;
• restricting our sales operations and marketing efforts, reducing the
effectiveness of such efforts in some cases and delaying or lengthening
our sales cycles;
• delaying collections or resulting in an inability to collect accounts
receivable, including as a result of customer bankruptcies; and
• delaying the delivery of professional services and training to our customers.
Many of our customers in industries and segments that the COVID-19 pandemic has negatively affected, such as consumer-facing travel and hospitality, in-store retail and in-person entertainment, or COVID-19 impacted customers, have reduced, or failed to expand their usage of our platform. Further, our ability to add new customers, particularly COVID-19 impacted customers, was negatively impacted by the economic environment of the COVID-19 pandemic. As a large portion of our renewals and new customer contracts are entered into in the fourth quarter of our fiscal year, the negative impacts of the COVID-19 pandemic on our business and results of operations, in particular with respect to our COVID-19 impacted customers, are reflected in the fourth quarter of fiscal 2021 and future periods. We estimate that ARR from these COVID-19 impacted customers declined from$14.1 million as ofApril 30, 2020 to$13.6 million as ofApril 30, 2021 , or (3%), while ARR from all of our other customers increased from$75.7 million as ofApril 30, 2020 to$95.9 million as ofApril 30, 2021 , or 27%. In contrast, we estimate that ARR from our customers in the same industries and segments as our COVID-19 impacted customers increased from$10.1 million as ofJanuary 31, 2019 to$14.1 million as ofJanuary 31, 2020 , or 39%, and ARR from all of our other customers increased from$56.9 million as ofJanuary 31, 2019 to$74.0 million as ofJanuary 31, 2020 , or 30%. The COVID-19 pandemic may cause us to continue to experience the foregoing challenges in our business in the future and could have other effects on our business, including disrupting our ability to develop new offerings and enhance existing offerings, market and sell our products and services and conduct business activities generally. In contrast, in the longer term we may also see some positive impacts on our business as a result of the COVID-19 pandemic. We believe the COVID-19 pandemic has accelerated the trend of enterprises seeking to modernize and re-architect their mission-critical applications and the building of new applications to allow them to function in the cloud. The constraining of IT budgets could also further accelerate the adoption and expansion of our platform, as it can effectively support mission-critical applications while providing significant TCO benefits. The COVID-19 pandemic has also driven some temporary cost savings to our business. We have experienced slower growth in certain operating expenses due to reduced business-related travel, deferred hiring for some positions and the virtualization or cancellation of customer and employee events. We have also paused expanding some existing facilities, as well as expanding into new facilities. Following the challenges that we experienced due in large part to the COVID-19 pandemic, we have seen continued growth in our business. More broadly, we believe this growth may accelerate as businesses begin to reopen and existing and prospective COVID-19 impacted customers recover, as our investments in Couchbase Capella begin to gain traction and as our sales and marketing organization is able to operate at full capacity. The impact of the COVID-19 pandemic on our industry continues to evolve, and the full impact on our financial condition and results of operations remains uncertain, including as a result of outbreaks and variants. See the section titled "Risk Factors-Risks Related to Our Industry and Business-The global COVID-19 pandemic has harmed and could continue to harm our business and results of operations" for more information regarding risks related to the COVID-19 pandemic. 29 --------------------------------------------------------------------------------
Components of Results of Operations
Revenue
We derive revenue from sales of subscriptions and services. Our subscription revenue is primarily derived from term-based software licenses to our platform sold in conjunction with post-contract support, or PCS. PCS bundled with software licenses includes internet, email and phone support, bug fixes and the right to receive unspecified software updates and upgrades released when and if available during the subscription term. The software license and PCS revenue is presented as "License" and "Support and other," respectively, in our condensed consolidated statements of operations. License revenue is recognized upon transfer when our customer has received access to our software. PCS revenue, or "Support," is recognized ratably over the term of the arrangement beginning on the date when access to the subscription is made available to our customer. The non-cancelable term of our subscription arrangements typically ranges from one to three years but may be longer or shorter in limited circumstances. "Other" revenue was not material for the periods presented. Our services revenue is derived from our professional services related to the implementation or configuration of our platform and training. Services revenue is recognized over time based on input measures for professional services and upon delivery for training. We expect our revenue may vary from period to period based on, among other things, the timing and size of new subscriptions, the proportion of term license contracts that commence within the period, the rate of customer renewals and expansions and timing and delivery of professional services and training.
Cost of Revenue
Cost of subscription revenue primarily consists of personnel-related costs associated with our customer support organization, including salaries, bonuses, benefits and stock-based compensation, expenses associated with software and subscription services dedicated for use by our customer support organization, third-party cloud infrastructure expenses, amortization of costs associated with capitalized internal-use software related to Couchbase Capella and allocated overhead. There is no cost of revenue associated with our license revenue. We expect our cost of subscription revenue to increase in absolute dollars as our subscription revenue increases and as we continue to amortize capitalized internal-use software costs related to Couchbase Capella. Cost of services revenue primarily consists of personnel-related costs associated with our professional services and training organization, including salaries, bonuses, benefits and stock-based compensation, costs of contracted third-party partners for professional services, expenses associated with software and subscription services dedicated for use by our professional services and training organization, travel-related expenses and allocated overhead. We expect our cost of services revenue to increase in absolute dollars as our services revenue increases.
Gross Profit and Gross Margin
Our gross profit and gross margin have been and will continue to be affected by various factors, including the average sales price of our subscriptions and services, the mix of subscriptions and services we sell and the associated revenue, the mix of geographies into which we sell and transaction volume growth. We expect our gross profit and gross margin to fluctuate in the near term depending on the interplay of these factors, and for gross margin to decline modestly in the long term as we introduce additional platform capabilities and product offerings and continue to expand our client base outside ofthe United States .
Operating Expenses
Our operating expenses consist of research and development, sales and marketing and general and administrative expenses. Personnel-related costs are the most significant component of operating expenses and consist of salaries, bonuses, benefits, sales commissions and stock-based compensation expenses.
Research and Development
Research and development expenses consist primarily of personnel-related costs, expenses associated with software and subscription services dedicated for use by our research and development organization, depreciation and amortization of property and equipment and allocated overhead. We expect that our research and development expenses will increase in absolute dollars as we continue to invest in the features and functionalities of our platform. We expect research and development expenses to fluctuate as a percentage of revenue in the near term, but to decrease as a percentage of revenue over the long term as we achieve greater scale in our business.
Sales and Marketing
Sales and marketing expenses consist primarily of personnel-related costs,
expenses associated with software and subscription services dedicated for use by
our sales and marketing organization, costs of general marketing and promotional
activities, amortization of deferred commissions, fees for professional services
related to sales and marketing, travel-related expenses and allocated overhead.
We expect that our sales and marketing expenses will increase in absolute
dollars as we continue to expand our sales and marketing
30
--------------------------------------------------------------------------------
efforts to attract new customers and deepen our engagement with existing
customers. We expect sales and marketing expenses to fluctuate as a percentage
of revenue in the near term as we continue to invest in growing the reach of our
platform through our sales and marketing efforts, but to decrease as a
percentage of revenue over the long term as we achieve greater scale in our
business.
General and Administrative
General and administrative expenses consist primarily of personnel-related costs associated with our finance, legal, human resources and other administrative personnel. In addition, general and administrative expenses include non-personnel costs, such as fees for professional services such as external legal, accounting and other professional services, expenses associated with software and subscription services dedicated for use by our general and administrative organization, certain taxes other than income taxes and allocated overhead. We expect 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 a national securities exchange, costs related to compliance and reporting obligations and increased expenses for insurance, investor relations and professional services. We expect that our general and administrative expenses will increase in absolute dollars as we continue to invest in the growth of our business and operate as a publicly-traded company. We expect general and administrative expenses to fluctuate as a percentage of revenue in the near term, but to decrease as a percentage of revenue over the long term as we achieve greater scale in our business.
Interest Expense
Interest expense consists primarily of interest, prepayment penalties and end-of-term charges for our term loan and interest charges for our Credit Facility.
Other Income (Expense), Net
Other income (expense), net consists primarily of foreign currency gains and losses related to the impact of transactions denominated in a foreign currency, gain on a legal settlement and interest income.
Provision for Income Taxes
Provision for income taxes consists primarily of income taxes in certain foreign jurisdictions in which we conduct business. We recorded a full valuation allowance against ourU.S. deferred tax assets as we have determined that it is not more likely than not that the deferred tax assets will be realized. The cash tax expenses are impacted by each jurisdiction's individual tax rates, laws on the timing of recognition of income and deductions and availability of NOLs and tax credits. Our effective tax rate could be adversely affected to the extent earnings are lower than anticipated in countries that have lower statutory rates and higher than anticipated in countries that have higher statutory rates. 31 --------------------------------------------------------------------------------
Results of Operations
The following table sets forth our condensed consolidated statements of operations for the periods indicated (in thousands):
Three Months Ended October 31, Nine Months Ended October 31,
2021 2020 2021 2020
Revenue:
License $ 3,774 $ 3,010 $ 12,468 $ 8,550
Support and other 25,234 21,078 71,034 60,347
Total subscription revenue 29,008 24,088 83,502 68,897
Services 1,816 1,565 4,976 4,961
Total revenue 30,824 25,653 88,478 73,858
Cost of revenue:
Subscription(1) 2,094 1,840 6,218 4,113
Services(1) 1,642 1,296 4,435 4,383
Total cost of revenue 3,736 3,136 10,653 8,496
Gross profit 27,088 22,517 77,825 65,362
Operating expenses:
Research and development(1) 13,103 10,109 38,267 28,388
Sales and marketing(1) 22,817 17,443 65,714 51,145
General and administrative(1) 6,659 4,044 17,434 10,905
Total operating expenses 42,579 31,596 121,415 90,438
Loss from operations (15,491 ) (9,079 ) (43,590 ) (25,076 )
Interest expense (133 ) (746 ) (630 ) (4,762 )
Other income (expense), net (51 ) (86 ) (44 ) 221
Loss before income taxes (15,675 ) (9,911 ) (44,264 ) (29,617 )
Provision for income taxes 249 237 729 719
Net loss $ (15,924 ) $ (10,148 ) $ (44,993 ) $ (30,336 )
(1) Includes stock-based compensation expense as follows:
Three Months Ended October 31, Nine Months Ended October 31,
2021 2020 2021 2020
(in thousands)
Cost of revenue-subscription $ 66 $ 16 $ 123 $ 50
Cost of revenue-services 70 14 116 41
Research and development 1,085 328 2,224 968
Sales and marketing 1,292 337 2,521 1,013
General and administrative 840 440 2,179 1,270Total stock-based compensation expense $ 3,353 $
1,135 $ 7,163 $ 3,342
32
--------------------------------------------------------------------------------
The following table sets forth our condensed consolidated statements of operations data expressed as a percentage of revenue:
Three Months Ended October 31, Nine Months Ended October 31,
2021 2020 2021 2020
Revenue:
License 12 % 12 % 14 % 12 %
Support and other 82 82 80 82
Total subscription revenue 94 94 94 93
Services 6 6 6 7
Total revenue 100 100 100 100
Cost of revenue:
Subscription 7 7 7 6
Services 5 5 5 6
Total cost of revenue 12 12 12 12
Gross profit 88 88 88 88
Operating expenses:
Research and development 43 39 43 38
Sales and marketing 74 68 74 69
General and administrative 22 16 20 15
Total operating expenses 138 123 137 122
Loss from operations (50 ) (35 ) (49 ) (34 )
Interest expense * (3 ) (1 ) (6 )
Other income (expense), net * * * *
Loss before income taxes (51 ) (39 ) (50 ) (40 )
Provision for income taxes 1 1 1 1
Net loss (52 )% (40)% (51 )% (41)%
* Represents less than 1%
Note: Certain figures may not sum due to rounding.
Comparison of Three and Nine Months Ended
Revenue
Three Months Ended
October 31, Nine Months Ended October 31,
2021 2020 $ Change % Change 2021 2020 $ Change % Change
(dollars in thousands) (dollars in thousands)
Revenue
License $ 3,774 $ 3,010 $ 764 25 % $ 12,468 $ 8,550 $ 3,918 46 %
Support and other 25,234 21,078 4,156 20 % 71,034 60,347 10,687 18 %
Total subscription
revenue 29,008 24,088 4,920 20 % 83,502 68,897 14,605 21 % Services 1,816 1,565 251 16 % 4,976 4,961 15 0 % Total revenue$ 30,824 $ 25,653 $ 5,171 20 %$ 88,478 $ 73,858 $ 14,620 20 % Subscription revenue increased by$4.9 million , or 20%, during the three months endedOctober 31, 2021 compared to the three months endedOctober 31, 2020 . The increase in subscription revenue was due to an increase in revenue from existing customers and new customers, as we increased our customer base from 524 customers as ofOctober 31, 2020 to 568 customers as ofOctober 31, 2021 . Approximately 81% of the increase in revenue was attributable to growth from existing customers, and the remaining increase was attributable to new customers. Subscription revenue increased by$14.6 million , or 21%, during the nine months endedOctober 31, 2021 compared to the nine months endedOctober 31, 2020 . Approximately 82% of the increase in revenue was attributable to growth from existing customers, and the remaining increase was attributable to new customers. 33 -------------------------------------------------------------------------------- Services revenue increased by$0.3 million , or 16%, during the three months endedOctober 31, 2021 compared to the three months endedOctober 31, 2020 . The increase in services revenue was primarily due to an increase in the number of professional services hours performed. Services revenue remained relatively flat during the nine months endedOctober 31, 2021 compared to the nine months endedOctober 31, 2020 . There was a similar number of professional services hours performed during the nine months endedOctober 31, 2021 compared to the nine months endedOctober 31, 2020 .
Cost of Revenue, Gross Profit and Gross Margin
Three Months Ended
October 31, Nine Months Ended October 31,
2021 2020 $ Change % Change 2021 2020 $ Change % Change
(dollars in thousands) (dollars in thousands)
Cost of revenue:
Subscription $ 2,094 $ 1,840 $ 254 14 % $ 6,218 $ 4,113 $ 2,105 51 %
Services 1,642 1,296 346 27 % 4,435 4,383 52 1 %
Total cost of
revenue $ 3,736 $ 3,136 $ 600 19 % $ 10,653 $ 8,496 $ 2,157 25 %
Gross profit $ 27,088 $ 22,517 $ 77,825 $ 65,362
Gross margin 87.9 % 87.8 % 88.0 % 88.5 %
Headcount (at
period end) 59 48 59 48
Cost of subscription revenue increased by $0.3 million , or 14%, during the three
months ended October 31, 2021 compared to the three months ended October 31,
2020 . The increase in cost of subscription revenue was primarily due to an
increase of $0.3 million in personnel-related costs associated with increased
headcount.
Cost of subscription revenue increased by $2.1 million , or 51%, during the nine
months ended October 31, 2021 compared to the nine months ended October 31,
2020 . The increase in cost of subscription revenue was primarily due to an
increase of $1.1 million in personnel-related costs associated with increased
headcount and an increase of $1.0 million related to the amortization of costs
associated with capitalized internal-use software related to Couchbase Capella.
Cost of services revenue increased by $0.3 million , or 27%, during the three
months ended October 31, 2021 compared to the three months ended October 31,
2020 . The increase in cost of services revenue was primarily due to an increase
of $0.3 million in personnel-related costs associated with increased headcount
and an increase of less than $0.1 million related to an increase in contracted
third-party professional services.
Cost of services revenue increased by less than $0.1 million , or 1%, during the
nine months ended October 31, 2021 compared to the nine months ended October 31,
2020 . The increase in cost of services revenue was primarily due to an increase
of $0.4 million in personnel-related costs associated with increased headcount
and an increase of $0.1 million related to software and subscription services
dedicated for use by our professional services and training organization. These
increases were partially offset by a decrease of $0.3 million related to a
reduction in contracted third-party professional services and a decrease of
$0.2 million in travel-related costs due to COVID-19 restrictions.
Gross margin increased slightly during the three months ended October 31, 2021
compared to the three months ended October 31, 2020 , primarily due to the mix of
subscriptions and services we sell and the associated revenue. Gross margin
decreased during the nine months ended October 31, 2021 compared to the nine
months ended October 31, 2020 , primarily due to the amortization of
capitalized internal-use software related to Couchbase Capella which began in
the second half of fiscal 2021.
Research and Development
Three Months Ended
October 31, Nine Months Ended October 31,
2021 2020 $ Change % Change 2021 2020 $ Change % Change
(dollars in thousands) (dollars in thousands)
Research and
development $ 13,103 $ 10,109 $ 2,994 30 % $ 38,267 $ 28,388 $ 9,879 35 %
Percentage of
revenue 43 % 39 % 43 % 38 %
Headcount (at
period end) 249 191 249 191
Research and development increased by $3.0 million , or 30%, during the three
months ended October 31, 2021 compared to the three months ended October 31,
2020 . The increase in research and development expenses was primarily due to an
increase of $2.7 million in personnel-related costs associated with increased
headcount.
34
-------------------------------------------------------------------------------- Research and development increased by$9.9 million , or 35%, during the nine months endedOctober 31, 2021 compared to the nine months endedOctober 31, 2020 . The increase in research and development expenses was primarily due to an increase of$9.1 million in personnel-related costs associated with increased headcount. Sales and Marketing Three Months Ended October 31, Nine Months Ended October 31, 2021 2020 $ Change % Change 2021 2020 $ Change % Change (dollars in thousands) (dollars in thousands) Sales and Marketing$ 22,817 $ 17,443 $ 5,374 31 %$ 65,714 $ 51,145 $ 14,569 28 % Percentage of revenue 74 % 68 % 74 % 69 % Headcount (at period end) 279 229 279 229 Sales and marketing increased by$5.4 million , or 31%, during the three months endedOctober 31, 2021 compared to the three months endedOctober 31, 2020 . The increase in sales and marketing expenses was primarily due to an increase of$4.4 million in personnel-related costs associated with increased headcount and an increase of$0.4 million in sales and marketing program expenses primarily associated with costs of general marketing and promotional activities as we continue to expand our sales and marketing efforts to attract new customers and deepen our engagement with existing customers. Sales and marketing increased by$14.6 million , or 28%, during the nine months endedOctober 31, 2021 compared to the nine months endedOctober 31, 2020 . The increase in sales and marketing expenses was primarily due to an increase of$13.0 million in personnel-related costs associated with increased headcount and an increase of$1.3 million in sales and marketing program expenses primarily associated with costs of general marketing and promotional activities as we continue to expand our sales and marketing efforts to attract new customers and deepen our engagement with existing customers. This was partially offset by a decrease of$0.8 million in travel-related costs due to COVID-19 restrictions. General and Administrative Three Months Ended October 31, Nine Months Ended October 31, 2021 2020 $ Change % Change 2021 2020 $ Change % Change (dollars in thousands) (dollars in thousands) General and administrative$ 6,659 $ 4,044 $ 2,615 65 %$ 17,434 $ 10,905 $ 6,529 60 % Percentage of revenue 22 % 16 % 20 % 15 % Headcount (at period end) 57 48 57 48 General and administrative increased by$2.6 million , or 65%, during the three months endedOctober 31, 2021 compared to the three months endedOctober 31, 2020 . The increase in general and administrative expenses was primarily due to an increase of$1.2 million in personnel-related costs associated with increased headcount and an increase of$1.1 million in additional professional fees and other corporate expenses associated with being a publicly traded company. General and administrative increased by$6.5 million , or 60%, during the nine months endedOctober 31, 2021 compared to the nine months endedOctober 31, 2020 . The increase in general and administrative expenses was primarily due to an increase of$3.4 million in personnel-related costs associated with increased headcount and an increase of$2.3 million in additional professional fees and other corporate expenses associated with being a publicly traded company. Interest Expense Three Months Ended October 31, Nine Months Ended October 31, 2021 2020 $ Change % Change 2021 2020 $ Change % Change (dollars in thousands) (dollars in thousands) Interest expense $ (133 ) $ (746 )$ 613 (82 )%$ (630 ) $ (4,762 ) $ 4,132 (87 )% Interest expense decreased by$0.6 million , or 82%, during the three months endedOctober 31, 2021 compared to the three months endedOctober 31, 2020 . The decrease in interest expense was primarily due to the termination of our term loan inJanuary 2021 , which was replaced by our Credit Facility that bears interest at a lower rate and has a lower loan balance than our term loan. Interest expense decreased by$4.1 million , or 87%, during the nine months endedOctober 31, 2021 compared to the nine months endedOctober 31, 2020 . The decrease in interest expense was primarily due to the termination of our term loan inJanuary 2021 , which was replaced by our Credit Facility that bears interest at a lower rate and has a lower loan balance than our term loan. 35 -------------------------------------------------------------------------------- Other Income (Expense), Net Three Months Ended October 31, Nine Months Ended October 31, 2021 2020 $ Change % Change 2021 2020 $ Change % Change (dollars in thousands) (dollars in thousands) Other income (expense), net $ (51 ) $ (86 )$ 35 (41 )% $ (44 ) $ 221$ (265 ) (120 )%
The changes in other income (expense), net during the three and nine months
ended
Provision for Income Taxes
Three Months Ended October 31, Nine Months Ended October 31,
2021 2020 $ Change % Change 2021 2020 $ Change % Change
(dollars in thousands) (dollars in thousands)
Loss before
income taxes $ (15,675 ) $ (9,911 ) $ (5,764 ) 58 % $ (44,264 ) $ (29,617 ) $ (14,647 ) 49 %
Provision for
income taxes 249 237 $ 12 5 % 729 719 $ 10 1 %
Effective tax
rate (1.6 )% (2.4 )% (1.6 )% (2.4 )%
The provision for income taxes remained relatively flat during the three and
nine months ended October 31, 2021 compared to the three and nine months ended
October 31, 2020 .
Liquidity and Capital Resources
We have financed our operations through subscription revenue from customers accessing our platform and services revenue, and inJuly 2021 , we completed our IPO with net proceeds totaling$214.9 million . We also have a Credit Facility to obtain up to$40.0 million in debt financing. In the third quarter of fiscal 2022, we repaid in full the$25.0 million aggregate then outstanding principal balance under our Credit Facility. We have incurred losses and generated negative cash flows from operations for the last several years, including fiscal 2020 and 2021 and the nine months endedOctober 31, 2021 . As ofOctober 31, 2021 , we had an accumulated deficit of$328.7 million . As ofOctober 31, 2021 , we had$207.6 million in cash, cash equivalents and short-term investments. We believe our existing cash, cash equivalents and short-term investments, availability under the Credit Facility, which is described in Note 7 of our notes to the condensed consolidated financial statements, and cash provided by sales of subscriptions to our platform and sales of our services will be sufficient to meet our projected operating requirements and capital expenditures for at least the next 12 months. As a result of our revenue growth plans, both domestically and internationally, we expect that losses and negative cash flows from operations may continue in the future. Our future capital requirements will depend on many factors, including our subscription revenue growth rate, subscription renewals, billing timing and frequency, the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced platform features and functionality and the continued market adoption of our platform. We may in the future pursue acquisitions of businesses, technologies, assets and talent. 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 or generate cash flows necessary to expand our operations and invest in new technologies, our competitive position could weaken, and our business, financial condition and results of operations could be adversely affected. We typically invoice our subscription customers annually in advance. Therefore, a substantial source of our cash is from such prepayments, which are included on our condensed consolidated balance sheets as deferred revenue. Deferred revenue consists of billed fees for our subscriptions, prior to satisfying the criteria for revenue recognition, which are subsequently recognized as revenue in accordance with our revenue recognition policy. As ofOctober 31, 2021 , remaining performance obligations, including both deferred revenue and non-cancelable contracted amounts, were$124.3 million . We expect to recognize revenue of$76.7 million on these remaining performance obligations over the next 12 months, with the remaining balance recognized thereafter. 36 --------------------------------------------------------------------------------
Cash Flows
The following table shows a summary of our cash flows for the periods presented:
Nine Months Ended October 31,
2021 2020
(in thousands)
Net cash provided by (used in):
Operating activities $ (38,922 ) $ (32,609 )
Investing activities $ (47,625 ) $ (16,915 )
Financing activities $ 190,848 $ 79,427
Operating Activities
Cash used in operating activities for the nine months ended October 31, 2021 , of
$38.9 million primarily consisted of our net loss of $45.0 million , adjusted for
non-cash charges of $19.3 million and net cash outflows of $13.2 million from
changes in our operating assets and liabilities. Changes in operating assets and
liabilities primarily reflected a $13.6 million decrease in accounts receivable
related to timing of billings and collections and a $10.8 million decrease in
deferred revenue due to timing of billings. Additionally, there was an increase
of $11.6 million in deferred commission related to increased sales during the
period, and an increase of $5.9 million in prepaid expenses, offset by an
increase in accounts payable of $1.1 million and an increase of $0.8 million in
accrued compensation.
Cash used in operating activities for the nine months ended October 31, 2020 , of
$32.6 million primarily consisted of our net loss of $30.3 million , adjusted for
non-cash charges of $12.5 million and net cash outflows of $14.7 million from
changes in our operating assets and liabilities. Changes in operating assets and
liabilities primarily reflected a $12.1 million decrease in accounts receivable
related to timing of billings and collections and a $15.6 million decrease in
deferred revenue due to timing of billings. Additionally, there was a $1.3
million decrease in accrued compensation and benefits related to timing of
accruals paid and a $8.4 million increase in deferred commissions related to
increased sales during the period.
Investing Activities
Cash used in investing activities for the nine months endedOctober 31, 2021 , of$47.6 million consisted of purchases of short-term investments net of maturities and sales of$46.8 million and purchases of property and equipment of$0.8 million . Cash used in investing activities for the nine months endedOctober 31, 2020 , of$16.9 million consisted of purchases of short-term investments of$14.1 million and cash paid for purchases of property and equipment of$2.8 million .
Financing Activities
Cash provided by financing activities for the nine months endedOctober 31, 2021 , of$190.8 million primarily consisted of proceeds from the completion of our IPO of$214.9 million , net of underwriters' discounts and commissions, and proceeds from stock option exercises of$5.9 million offset by the payment of deferred offering costs of$4.9 million and payment of debt of$25.0 million .
Cash provided by financing activities for the nine months ended
Contractual Obligations and Commitments
We negotiated a noncancelable arrangement with a cloud hosting service provider inJuly 2021 . Under the arrangement, we committed to spend an aggregate of at least$10.0 million betweenAugust 2021 andJuly 2024 , with a minimum amount of approximately$3.0 million in each of the first two years and$4.0 million in the third year on services with this vendor. Except for the cloud hosting arrangement and the repayment of debt of$25.0 million in the three months endedOctober 31, 2021 , there were no material changes outside of the ordinary course of business in our commitments and contractual obligations for the nine months endedOctober 31, 2021 , from the commitments and contractual obligations disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations, set forth in our Final Prospectus.
Indemnification Agreements
We enter into standard indemnification arrangements in the ordinary course of
business. Pursuant to these arrangements, we indemnify, hold harmless and agree
to reimburse the indemnified parties for losses suffered or incurred by the
indemnified party, in connection with any trade secret, copyright, patent or
other intellectual property infringement claims brought by any third party
against such indemnified party with respect to licensed technology. The term of
these indemnification agreements is generally
37
--------------------------------------------------------------------------------
perpetual any time after the execution of the agreement. The maximum potential
amount of future payments we could be required to make under these agreements is
not determinable because it involves claims that may be made against us in the
future that have not yet been made. To date, we have not incurred costs to
defend lawsuits or settle claims related to these indemnification agreements.
We have entered into indemnification agreements with our directors and officers
that may require us to indemnify our directors and officers against liabilities
that may arise by reason of their status or service as directors or officers,
other than liabilities arising from willful misconduct of the individual. No
liability associated with such indemnification arrangements have been recorded
as of October 31, 2021 .
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q are prepared in accordance withU.S. generally accepted accounting principles (GAAP). The preparation of condensed consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from the estimates made by management. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations, and cash flows will be affected.
There have been no significant changes to our critical accounting policies and estimates as compared to those described in "Management's Discussion and Analysis of Financial Condition and Results of Operations" set forth in our Final Prospectus.
Recent Accounting Pronouncements
See Note 2 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for a discussion of recent accounting pronouncements.
JOBS Act Accounting Election
We are an "emerging growth company," as defined in the JOBS Act. The JOBS Act provides that an "emerging growth company" can take advantage of an extended transition period for complying with new or revised accounting standards. This provision allows an "emerging growth company" to delay the adoption of some accounting standards until those standards would otherwise apply to private companies. We have elected to use the extended transition period under the JOBS Act until the earlier of the date we (i) are no longer an "emerging growth company" or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any
off-balance sheet financing arrangements or any relationships with
unconsolidated entities or financial partnerships, including entities sometimes
referred to as structured finance or special purpose entities, that were
established for the purpose of facilitating off-balance sheet arrangements or
other contractually narrow or limited purposes.
38--------------------------------------------------------------------------------
© Edgar Online, source
