COUPA SOFTWARE INCORPORATED
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our condensed consolidated
financial statements and related notes appearing elsewhere in this Quarterly
Report on Form 10-Q. As discussed in the section titled "Note About
Forward-Looking Statements," the following discussion and analysis contains
forward-looking statements that involve risks and uncertainties, as well as
assumptions that, if they never materialize or prove incorrect, could cause our
results to differ materially from those expressed or implied by such
forward-looking statements. Factors that could cause or contribute to these
differences include, but are not limited to, impacts on our business and general
economic conditions due to the current COVID-19 pandemic, those identified
below, those discussed in "Note About Forward-Looking Statements" and those
discussed in the section titled "Risk Factors" under Part II, Item 1A in this
Quarterly Report on Form 10-Q.
Overview
We are a leading provider of Business Spend Management ("BSM") solutions. We
offer a comprehensive, cloud-based BSM platform that has connected our customers
with more than seven million suppliers globally. Our platform provides greater
visibility into and control over how companies spend money, optimize supply
chains, and manage liquidity. Using our platform, businesses are able to achieve
real, measurable value and savings that drive their profitability.
We refer to the process companies use to purchase goods and services as business
spend management and to the money that they manage with this process as spend
under management. Our BSM platform delivers a broad range of capabilities that
would typically require the purchase and use of multiple disparate point
applications. The core of our platform consists of procurement, invoicing,
expense management, and payment solutions that form the transactional engine for
managing a company's business spend. In addition, our platform offers
specialized modules targeted for power users, to help companies manage more
technical and strategic areas of BSM, including areas such as strategic
sourcing, contract management, contingent workforce, supplier risk management,
supply chain design and planning, treasury management, and spend analysis.
We also provide purchasing programs, such as Coupa Advantage, which offers
access to pre-negotiated discounts from various suppliers, and Source Together,
which connects community members to engage in group sourcing events, allowing
them to leverage pooled buying power to achieve better contracting terms and
capture greater savings. Moreover, through our Coupa Open Business Network,
suppliers of all sizes can list their goods and services, establish pricing, and
interact with buyers electronically, thus significantly reducing paper,
improving operating efficiencies, and reducing costs.
We offer access to our platform under a Software-as-a-Service business model. At
the time of initial deployment, our customers often make a set of common
functions available to the majority of their licensed employees, as well as
incremental modules for select employees and procurement specialists, whom we
refer to as power users. Therefore, we are typically able to capture a majority
of the expected annual recurring revenue opportunity at the inception of our
customer relationships, rather than targeting specific power users at the outset
of the customer relationship with the intention of expanding and capturing more
annual recurring revenue at later stages of the customer relationship. Customers
can rapidly implement our platform, with implementation periods typically
ranging from a few weeks to several months. Customers also benefit from software
updates that typically require little downtime.
We market and sell our solutions to a broad range of enterprises worldwide. We
have a diverse, multi-national customer base spanning various sizes and
industries and no significant customer concentration. No customer accounted for
more than 10% of our total revenues for the three months ended April 30, 2021
and 2020, respectively.
We market our platform primarily through a direct sales force and also benefit
from leads driven by our partner ecosystem. Our initial contract terms are
typically three years, although some customers commit for longer or shorter
periods. The large majority of our customers pay annually, one year in advance.
Our subscription fee includes access to our service, technical support and
management of the hosting infrastructure. We generally recognize revenues from
our subscription fees ratably over the contractual term of the arrangement. We
do not charge suppliers who are on our platform to transact with our customers.
We believe this approach helps attract more suppliers to our platform and
increases the value of our platform to customers.
We have continued to make significant expenditures and investments for long-term
growth, including investment in our platform and infrastructure to deliver new
functionality and modules to meet the evolving needs of our customers and to
take advantage of our market opportunity. We intend to continue to increase our
investment in sales and marketing, as we further expand our sales teams,
increase our marketing activities, and grow our international operations.
Internationally, we currently offer our platform in Europe , the Middle East and
Africa , Latin America and Asia-Pacific , including Japan . The combined revenues
from non-U.S. regions, as determined based on the billing address of our
customers, constituted 41% and 34% of our total revenues for each of the three
months ended April 30, 2021 and 2020, respectively. We believe there is further
opportunity to increase our international revenues in absolute dollars and as a
percentage of our total revenues. As a result, we are increasingly investing in
our international operations and we intend to expand our footprint in
international markets.
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Operating in international markets requires significant resources and management
attention and will subject us to regulatory, economic and political risks that
are different from those in the United States . While we are gaining additional
experience with international operations, our international expansion efforts
may not be successful in creating additional demand for our platform outside of
the United States or in effectively selling subscriptions to our platform in any
or all of the international markets we enter.
In late 2019, a novel strain of the coronavirus disease ("COVID-19") was
identified in China , and in March 2020 , the World Health Organization
characterized the COVID-19 outbreak as a pandemic. The COVID-19 pandemic has
resulted in authorities implementing numerous measures to try to contain and
mitigate the virus, including travel bans and restrictions, business shut-downs
and limitations, quarantines, and shelter-in-place and social distancing orders.
The extent to which the COVID-19 pandemic may impact our financial condition or
results of operations in future periods remains uncertain. The effect of the
COVID-19 pandemic may not be fully reflected in our results of operations and
overall financial performance until future periods. We may experience decreased
customer demand, reduced customer spend, customer bankruptcies and other
non-payment situations, shorter contract duration, longer sales cycles and
extended payment terms, any of which could materially adversely impact our
business, results of operations and overall financial performance in future
periods. The extent and continued impact of the COVID-19 pandemic on our
operational and financial performance will depend in part on future developments
and conditions, including the duration and spread of the outbreak; government
responses to the pandemic; the impact on our customers and our sales cycles;
extent of delays in hiring and onboarding new employees; and effect on our
partners, vendors and supply chains, all of which are uncertain and difficult to
predict. Additionally, due to concerns over the COVID-19 pandemic, we have
replaced our in-person, annual Inspire conferences and other in-person marketing
events with web-based alternatives. In the first quarter of fiscal 2021, we
closed our offices globally and required our employees to work remotely. These
changes remained in effect throughout the first quarter of fiscal 2022. Our
employees' health and safety is our top priority, and we will continue to
monitor local restrictions across the world, the administration of vaccines, and
the number of new cases, as we slowly move towards re-opening certain of our
offices. Our offices will re-open on a staggered, region-to-region basis in
accordance with local authority guidelines while ensuring that our return to
work is thoughtful, prudent, and handled with a safety-first approach. The
impact, if any, of these and any additional operational changes we may implement
is uncertain, but changes we have implemented to date have not materially
impaired and are not expected to materially impair our ability to maintain
operations, including financial reporting systems, internal control over
financial reporting and disclosure controls and procedures. See the section
"Risk Factors" for further discussion of the possible impact of the COVID-19
pandemic on our business.
Recent Business Developments
In February 2021 , we acquired all of the equity interest in Pana Industries,
Inc. ("Pana"), a corporate travel booking solution company. The purchase
consideration was approximately $48.5 million in cash (of which $7.1 million is
being held in escrow for fifteen months after the transaction closing date). In
addition, we issued 23,822 shares of unvested common stock with an approximate
fair value of $7.6 million to two of Pana's shareholders. These shares are
subject to service-based vesting conditions including continued employment with
us, and all these shares were unvested as of April 30, 2021 .
In March 2021 , we established a joint venture with Japan Cloud. This joint
venture is intended to enable Coupa to scale to support the growing number of
Japanese companies looking to gain greater efficiency and agility through
Business Spend Management. As of April 30, 2021 , the Company had a 51%
controlling ownership interest in the joint venture.
Our Business Model
Our business model focuses on maximizing the lifetime value of a customer
relationship, and we continue to make significant investments in order to grow
our customer base. Due to our subscription model, we recognize subscription
revenues ratably over the term of the subscription period. As a result, the
profitability of a customer to our business in any particular period depends in
part upon how long a customer has been a subscriber on our platform. In general,
the associated upfront costs with respect to new customers are higher in the
first year than the aggregate revenues we recognize from those new customers in
the first year. We believe that, over time, as our customer base grows and a
relatively higher percentage of our subscription revenues are attributable to
renewals versus new customers or upsells to existing customers, associated sales
and marketing expenses and other allocated upfront costs as a percentage of
revenues will decrease, subject to investments we plan to make in our business.
Over the lifetime of the customer relationship, we also incur sales and
marketing costs to manage the account, renew or upsell the customer to more
modules and more users. However, these costs are significantly less than the
costs initially incurred to acquire the customer. We calculate the lifetime
value of our customers and associated customer acquisition costs for a
particular year by comparing (i) gross profit from net new subscription revenues
for the year multiplied by the inverse of the estimated subscription renewal
rate to (ii) total sales and marketing expense incurred in the preceding year.
On this basis, we estimate that for each of fiscal 2021 and 2020, the calculated
lifetime value of our customers has exceeded six times the associated cost of
acquiring them.
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Key Metrics
We review the following key metrics to evaluate our business, measure our
performance, identify trends affecting our business, formulate business plans
and make strategic decisions:
As of April 30,
2021 2020
Cumulative spend under management (in billions) $ 2,581.8 $ 1,785.9
Remaining performance obligations (in millions) $ 972.9 $ 701.8
Deferred revenue (in millions) $ 343.5 $ 244.5
Trailing twelve months calculated billings (in millions) $ 688.4 $ 495.7
Customers with annualized subscription revenue above $100,000 1,133 855
Cumulative Spend Under Management
Cumulative spend under management represents the aggregate dollar value of
transactions through our core platform for all of our customers collectively
since we launched our core platform. We define our core platform for purposes of
this metric as our procurement, invoicing and expense management modules. We
calculate this metric by aggregating the actual transaction data for purchase
orders, invoices and expenses from customers using our core platform. Cumulative
spend under management does not include spending data or transactions associated
with modules from acquired companies. We regularly review our process for
calculating this metric and periodically make adjustments to improve its
accuracy. We believe that any such adjustments are immaterial unless otherwise
stated.
The cumulative spend under management metric presented above does not directly
correlate to our revenue or results of operations because we do not generally
charge our customers based on actual usage of our core platform. However, we
believe the cumulative spend under management metric does illustrate the
adoption, scale and value of our platform, which we believe enhances our ability
to maintain existing customers and attract new customers.
Remaining Performance Obligations and Deferred Revenue
Remaining performance obligations represent the amount of consideration
allocated to unsatisfied performance obligations related to non-cancelable
contracts, which include both the deferred revenue balance and amounts that will
be invoiced and recognized as revenue in future periods. In calculating the
remaining performance obligation amount, we elected to apply the two expedients
under the revenue standard to exclude remaining performance obligations amounts
related to contracts that are twelve months or less and contracts where revenue
is being recognized under the as-invoiced method.
We generally execute multiple year subscription contracts for our platform and
invoice an initial amount at contract signing followed by subsequent annual
invoices. At any point in the contract term, there might be amounts that are not
due for billing yet. These amounts are not recorded in our condensed
consolidated financial statements, and are considered to be part of the
remaining performance obligations amount.
The remaining performance obligations amount is intended to provide visibility
into future revenue streams. We expect remaining performance obligations to
fluctuate up or down from period to period for several possible reasons,
including amounts, timing, and duration of customer contracts (including changes
that we may see to customer contracts as a result of the COVID-19 pandemic), as
well as the timing of billing cycles for each order.
Our deferred revenue consists of amounts that have been invoiced but not yet
recognized as revenues as of the end of a reporting period. The majority of our
deferred revenue balance consists of subscription revenues that are recognized
ratably over the related contractual period.
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Trailing Twelve Months Calculated Billings
Trailing twelve months calculated billings represents total revenues recognized
during the period of consecutive twelve months ended April 30, 2021 and
April 30, 2020 plus the change in deferred revenue for each of those same
periods. Trailing twelve month calculated billings is comprised of subscription
contracts with existing customers (including renewal contracts and add-on
contracts), subscription contracts with new customers, and contracts for
professional services, training and other revenues.
The trailing twelve months calculated billings is intended to provide
information about our subscription revenue growth over time, and can typically
be seen as an early indicator of trends in revenue growth. While trailing twelve
months calculated billings can increase as our revenues grow, it may fluctuate
up or down from period to period for several reasons, including amounts, timing,
and duration of customer contracts, as well as the timing of billing cycles for
each order.
Customers with Annualized Subscription Revenue Above $100,000
We define customers with annualized subscription revenue above $100,000 as the
total number of customers that contributed subscription revenues in excess of
$25,000 during the relevant fiscal quarter, which corresponds to $100,000 on an
annualized basis. For purposes of this metric, we generally define a customer as
a separate and distinct entity (such as a company or an educational or
government institution), a distinct business unit of a large corporation or a
partner organization, in each case that has a distinctive active contract with
us to access our services. Most of the subscription revenue we recognize each
quarter is attributable to customers that accounted for more than $25,000 of
that revenue during the quarter, and our sales and marketing strategy focuses
heavily on the acquisition of customers that have the potential to contribute at
least $100,000 in subscription revenues annually. Accordingly, we believe that
this metric is a useful tool to aid investors in understanding a key factor that
drives changes in our subscription revenues from period to period and in
assessing trends in our growth, penetration of our core customer market, and our
overall performance. Because the dollar threshold is tied to the actual revenue
recognized during a particular quarter, customers that we acquired midway
through or at the end of the quarter may not yet be included in this count, even
if they have placed orders representing more than $100,000 in annual
subscription revenue.
Components of Results of Operations
Revenues
We primarily offer subscriptions to our cloud-based BSM platform, including
procurement, invoicing and expense management and pay. We derive our revenues
primarily from subscription fees, professional services fees and other.
Subscription revenues consist primarily of fees to provide our customers access
to our cloud-based platform, which includes routine customer support at no
additional cost. Term-based licenses are sold as bundled arrangements that
include the rights to a term license and post-contract customer support ("PCS").
Accordingly, we allocate the transaction price to each performance obligation.
The revenues related to the amount allocated to PCS are included in subscription
revenue, which are recognized ratably over the contract term beginning on the
license delivery date. Professional services fees and other include deployment
services, optimization services, training, and revenues allocated to license
component for the sales of term-based licenses. Subscription revenues are a
function of renewal rates, the number of customers, the number of users at each
customer, the number of modules subscribed to by each customer, and the price of
our modules.
Generally, subscription fees are recognized ratably as revenues over the
contract term beginning on the date the application is made available to the
customer. Our new business subscriptions typically have a term of three years,
although some customers commit for longer or shorter periods. We generally
invoice our customers in annual installments at the beginning of each year in
the subscription period. Amounts that have been invoiced are initially recorded
as deferred revenue and are recognized ratably over the subscription period.
Amounts that will be invoiced and recognized as revenue in future periods are
reflected as remaining performance obligations within the notes to our condensed
consolidated financial statements.
Professional services revenues and other consist primarily of fees associated
with the implementation and configuration of our subscription service and
revenues allocated to the license component for sales of term-based licenses.
Professional services are generally sold on a time-and-materials or fixed-fee
basis. Revenue for both time-and-material and fixed-fee arrangements are
recognized over-time as the services are performed. We have the ability to
reasonably measure progress towards completion of the professional services
arrangements. For fixed-fee arrangements, we recognize revenue on the basis of
performed hours relative to the total estimated hours to complete satisfaction
of the professional service arrangement. For the license component from the
sales of term-based licenses, we recognize revenues at the start of the license
term when delivery is complete.
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Our professional services engagements typically span from a few weeks to several
months. For this reason, our professional services revenues may fluctuate
significantly from period to period. The terms of our typical professional
services arrangements provide that our customers pay us within 30 days from the
invoice date. Fixed-fee services arrangements are generally invoiced in advance.
We have made significant investments in our professional services business that
are designed to ensure customer success and adoption of our platform. We are
continuing to invest in expanding our professional services partner ecosystem to
further support our customers. As the professional services practices of our
partner firms continue to develop, we expect them to increasingly contract
directly with our subscription customers and we incentivize our sales force to
further this objective.
Cost of Revenues
Subscription
Cost of subscription consists primarily of expenses related to hosting our
service and providing customer support. Significant expenses are comprised of
data center capacity costs; personnel and related costs directly associated with
our cloud infrastructure and customer support, including salaries, benefits,
bonuses and stock-based compensation; allocated overhead; and amortization of
acquired developed technology and capitalized software development costs.
Professional Services and Other Cost of Revenues
Cost of professional services and other cost of revenues consist primarily of
personnel and related costs directly associated with our professional services
and training departments, including salaries, benefits, bonuses and stock-based
compensation; the costs of contracted third-party vendors; amortization of
acquired developed technology; and allocated overhead. These costs are generally
expensed in the period incurred.
Professional services associated with the implementation and configuration of
our subscription platform are performed directly by our services team, as well
as by contracted third-party vendors. In cases in which third-party vendors
invoice us for services performed for our customers, those fees are accrued over
the requisite service period.
Operating Expenses
Research and Development
Research and development expenses consist primarily of personnel costs of our
development team, including salaries, benefits, bonuses, stock-based
compensation expense and allocated overhead costs. Our cycle of frequent updates
has facilitated rapid innovation and the introduction of new modules throughout
our history. We have aggressively invested, and intend to continue to invest, in
developing technology to support our growth. We capitalize certain software
development costs that are attributable to developing new modules and features
and adding incremental functionality to our platform, and we amortize such costs
as costs of subscription revenues over the estimated life of the new application
or incremental functionality, which is typically either two or three years.
Sales and Marketing
Sales and marketing expenses consist primarily of personnel and related costs
directly associated with our sales and marketing staff, including salaries,
benefits, bonuses, commissions and stock-based compensation. Commissions earned
by our sales force that are considered incremental costs for obtaining a
non-cancelable subscription contract are deferred and amortized over a period of
benefit that we have determined to be five years. For commissions earned from
the sale of term-based license contracts, we allocate the costs of commission in
proportion to the allocation of the transaction price of license and PCS
performance obligations. Commissions associated with the license component are
expensed at the time the related revenue is recognized. Commissions allocated to
PCS are deferred and then amortized over five years. Other sales and marketing
costs include promotional events to promote our brand, including our Inspire
conferences, web advertising, events, allocated overhead and amortization of
customer relationships and trademark.
General and Administrative
General and administrative expenses consist of personnel costs and related
expenses for executive, finance, legal, human resources, recruiting, and
administrative personnel, including salaries, benefits, bonuses and stock-based
compensation expense; professional fees for external legal, accounting,
recruiting and other consulting services and allocated overhead costs. During
fiscal 2021, general and administrative expenses included a benefit of $12.5
million related to the reversal of the Yapta contingent consideration payable.
Refer to the Company's consolidated financial statements for the year ended
January 31, 2021 for details of the contingent consideration payable.
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--------------------------------------------------------------------------------Interest Expense Interest expense consists primarily of interest expense associated with our outstanding convertible senior notes.
Interest Income and Other, Net Interest income and other, net consists primarily of interest income earned on our investments in marketable securities and cash and cash equivalents, and gain or loss on conversion of convertible senior notes, in addition to the effects of exchange rates on our foreign currency-denominated asset and liability balances, which are recorded as foreign currency gains (losses) in the condensed consolidated statements of operations. Provision for (Benefit from) Income Taxes Provision for income taxes consists primarily of income taxes related to foreign and state jurisdictions in which we conduct business. Benefit from income taxes is primarily related to the reversal of aU.S. deferred tax liability as a result of current year intangible amortization and convertible note original issue discount amortization and excess tax benefits related to stock-based compensation, partially offset by income taxes related to foreign and state jurisdictions in which we conduct business. We maintain a full valuation allowance on net deferred tax assets of ourU.S. entities as we have concluded that it is not more likely than not that the deferred assets will be utilized. Results of Operations The following tables set forth selected condensed consolidated statements of operations data and such data as a percentage of total revenues for each of the periods indicated: Three Months Ended April 30, 2021 2020 (in thousands, except percentages) Revenues: Subscription$ 140,104 84 %$ 105,735 89 % Professional services and other 26,825 16 13,479 11 Total revenues 166,929 100 119,214 100 Cost of revenues: Subscription 51,025 31 29,002 24 Professional services and other 28,702 17 13,836 12 Total cost of revenues 79,727 48 42,838 36 Gross profit 87,202 52 76,376 64 Operating expenses: Research and development 43,837 26 26,719 22 Sales and marketing 77,843 47 46,139 39 General and administrative 39,377 24 9,144 8 Total operating expenses 161,057 96 82,002 69 Loss from operations (73,855) (44) (5,626) (5) Interest expense (29,103) (17) (12,289) (10) Interest income and other, net 535 - 3,328 3
Loss before provision for (benefit from) income taxes (102,423)
(61) (14,587) (12) Provision for (benefit from) income taxes (2,066) (1) 229 - Net loss$ (100,357) (60) %$ (14,816) (12) % 35
-------------------------------------------------------------------------------- Three Months EndedApril 30, 2021 andApril 30, 2020 Revenues Three Months Ended April 30, 2021 2020 % Change (in thousands) Subscription$ 140,104 $ 105,735 33 % Professional services and other 26,825 13,479 99 % Total revenues$ 166,929 $ 119,214 40 % Total revenues were$166.9 million for the three months endedApril 30, 2021 compared to$119.2 million for the three months endedApril 30, 2020 , an increase of$47.7 million , or 40%. Subscription revenues were$140.1 million , or 84% of total revenues, for the three months endedApril 30, 2021 , compared to$105.7 million , or 89% of total revenues, for the three months endedApril 30, 2020 . This increase in absolute dollars was predominantly driven by the increase in the number of customers with annualized subscription revenue above$100,000 , which was 1,133 as ofApril 30, 2021 , compared to 855 as ofApril 30, 2020 . Professional services and other revenues were$26.8 million for the three months endedApril 30, 2021 compared to$13.5 million for the three months endedApril 30, 2020 . The increase of$13.3 million , or 99%, was primarily due to increases in implementation services and sales of term-based licenses, to a similar extent, as a result of our expanded customer base. We will continue to monitor the COVID-19 pandemic carefully and its impact on our customers and customer acquisitions. Cost of Revenues Three Months Ended April 30, 2021 2020 % Change (in thousands) Subscription$ 51,025 $ 29,002 76 %
Professional services and other 28,702 13,836 107 % Total cost of revenues
$ 79,727 $ 42,838 86 % Cost of subscription was$51.0 million for the three months endedApril 30, 2021 compared to$29.0 million for the three months endedApril 30, 2020 , an increase of$22.0 million , or 76%. The increase in cost of subscription was primarily due to an increase of$7.3 million in amortization of developed technology assets related to acquisitions, an increase of$6.6 million in hosting fees to accommodate increased customer spend, an increase of$4.8 million in employee compensation costs related to higher headcount, including stock-based compensation costs, and an increase of$3.3 million in other costs driven by our overall growth. Cost of professional services and other was$28.7 million for the three months endedApril 30, 2021 compared to$13.8 million for the three months endedApril 30, 2020 , an increase of$14.9 million , or 107%. The increase in cost of professional services was primarily due to an increase of$8.6 million in employee compensation costs related to higher headcount, including stock-based compensation costs, and an increase of$6.3 million in amortization of developed technology assets related to acquisitions.
We will continue to monitor the COVID-19 pandemic carefully and its impact on our cost profile in providing hosting solutions and services to our customers.
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Gross Profit
Three Months Ended
April 30,
2021 2020 % Change
(in thousands)
Gross profit $ 87,202 $ 76,376 14 %
Gross profit was $87.2 million for the three months ended April 30, 2021 ,
compared to $76.4 million for the three months ended April 30, 2020 , an increase
of $10.8 million , or 14%. The increase in gross profit was primarily due to the
acquisition of new customers with annualized subscription revenue above
$100,000 . Gross margin was 52% for the three months ended April 30, 2021 ,
compared to 64% for the three months ended April 30, 2020 . The decrease in gross
margin was primarily due to the increase in amortization of developed technology
assets related to acquisitions.
Operating Expenses
Research and Development
Three Months Ended
April 30,
2021 2020 % Change
(in thousands)
Research and development $ 43,837 $ 26,719 64 %
Research and development expenses were $43.8 million for the three months ended
April 30, 2021 compared to $26.7 million for the three months ended April 30,
2020 , an increase of $17.1 million , or 64%. The increase was primarily due to an
increase of $14.3 million in employee compensation costs related to higher
headcount, including stock-based compensation costs, an increase of $1.3 million
in costs associated with the development of our platform and other costs for
research and development activities, and a $1.5 million increase in other costs
driven by our overall growth.
Sales and Marketing
Three Months Ended
April 30,
2021 2020 % Change
(in thousands)
Sales and marketing $ 77,843 $ 46,139 69 %
Sales and marketing expenses were $77.8 million for the three months ended April
30, 2021 compared to $46.1 million for the three months ended April 30, 2020 , an
increase of $31.7 million , or 69%. The increase was primarily due to an increase
of $17.4 million in employee compensation costs related to higher headcount,
including stock-based compensation costs, an increase of $11.1 million in
amortization of customer relationships related to acquisitions, an increase of
$1.3 million in marketing costs, and an increase of $3.1 million in other costs
driven by our overall growth. This was partially offset by a reduction in travel
costs of $1.2 million due to current travel restrictions associated with the
COVID-19 pandemic. In response to the COVID-19 pandemic, through the first
quarter of fiscal 2022, we have replaced our in-person marketing events with
web-based marketing and remote events.
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General and Administrative
Three Months Ended
April 30,
2021 2020 % Change
(in thousands)
General and administrative $ 39,377 $ 9,144 331 %
General and administrative expenses were $39.4 million for the three months
ended April 30, 2021 compared to $9.1 million for the three months ended April
30, 2020 , an increase of $30.2 million , or 331%. The increase was primarily due
to an increase of $18.2 million in employee compensation costs related to higher
headcount, including stock-based compensation costs, a non-recurring prior
period benefit of $12.5 million arising from the reversal of the Yapta
contingent consideration liability that did not recur during the three months
ended April 30, 2021 , and from an increase of $2.2 million in other costs driven
by our overall growth. This was partially offset by a decrease in allowances for
doubtful accounts and credit losses of $2.7 million .
Interest Expense
Three Months Ended
April 30,
2021 2020 % Change
(in thousands)
Interest expense $ 29,103 $ 12,289 137 %
Interest expense was $29.1 million for the three months ended April 30, 2021
compared to $12.3 million for the three months ended April 30, 2020 . The $16.8
million increase in interest expense was primarily due to amortization of the
debt discount and issuance costs on the 2026 Notes issued in the second quarter
of fiscal 2021.
Interest Income and Other, Net
Three Months Ended
April 30,
2021 2020 % Change
(in thousands)
Interest income and other, net $ 535 $ 3,328 (84) %
Interest income and other, net was $535,000 for the three months ended April 30,
2021 compared to $3.3 million for the three months ended April 30, 2020 . The
$2.8 million decrease in interest income and other, net was primarily due a
decrease of $2.3 million in income earned from our investments in marketable
securities and money market funds primarily as a result of a lower market yield,
a decrease of $2.7 million in gains from early conversions on the 2023 Notes,
partially offset by a favorable impact of $2.2 million related to foreign
currency exchange.
Provision For (Benefit from) Income Taxes
Three Months Ended
April 30,
2021 2020 % Change
(in thousands)
Provision for (benefit from) income taxes
NM The benefit from income taxes was$2.1 million for the three months endedApril 30, 2021 compared to a tax provision of$229,000 for the three months endedApril 30, 2020 . The benefit from income taxes for the three months endedApril 30, 2021 was primarily related to the reversal of aU.S. deferred tax liability and excess tax benefits related to stock-based compensation. We maintain a full valuation allowance on net deferred tax assets of ourU.S. entities as we have concluded that it is unlikely that these deferred income tax assets will be utilized. 38 -------------------------------------------------------------------------------- Liquidity and Capital Resources Our principal sources of liquidity are cash, cash equivalents, marketable securities, and cash generated from operations. As ofApril 30, 2021 , we had cash and cash equivalents of$362.5 million , and marketable securities of$237.8 million . We had outstanding 2023 Notes, 2025 Notes and 2026 Notes with principal amounts of$5.9 million ,$805.0 million and$1,380.0 million , respectively, as ofApril 30, 2021 . As ofApril 30, 2021 , the remaining 2023 Notes with a principal amount of$5.9 million and 2025 Notes with a principal amount of$805.0 million are convertible at the option of the holders. We have the ability to settle the Convertible Notes in cash, shares of our common stock, or a combination of cash and shares of our common stock at our own election. As ofApril 30, 2021 , there were no unsettled conversion requests related to the 2023 Notes and 2025 Notes. FromMay 1, 2021 to the date of this filing, we received conversion requests for an immaterial principal amount of the 2023 Notes and have not received additional conversion requests on the 2025 Notes. The 2026 Notes were not convertible as ofApril 30, 2021 . It is our current intent to settle conversions of the remaining 2023 Notes, 2025 Notes and 2026 Notes through combination settlement, which involves repayment of the principal portion in cash and any excess of the conversion value over the principal amount in shares of our common stock. In conjunction with the issuance of the Convertible Notes, we entered into capped call transactions that reduce our exposure to additional cash payments above principal balances in the event of a cash conversion of the Convertible Notes. We may owe additional cash to the noteholders upon early conversion if our stock price exceeds$63.821 per share for the 2023 Notes,$295.55 for the 2025 Notes, or$503.42 for the 2026 Notes. Although our incremental exposure to the additional cash payment above the principal amount of the Convertible Notes is reduced by the capped calls, conversion of the Convertible Notes by noteholders may cause dilution to the ownership interests of existing stockholders. We did not exercise the capped calls for the converted 2023 Notes and 2025 Notes. As ofApril 30, 2021 , all the capped calls for the 2023 Notes, 2025 Notes and 2026 Notes remained outstanding. Our cash equivalents are comprised primarily of bank deposits and money market funds. Cash from operations could be affected by various risks and uncertainties, including, but not limited to, the effects of the COVID-19 pandemic and other risks detailed in Part II, Item 1A titled "Risk Factors." However, we believe our existing cash and cash equivalents and marketable securities will be sufficient to meet our projected operating requirements for at least the next 12 months from the filing date of these financial statements. Our future capital requirements will depend on many factors, including our pace of growth, subscription renewal activity, the timing and extent of spend to support development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced services offerings and the continuing market acceptance of our services. We continually assess potential acquisitions and expect to continue to pursue acquisitions of or investments in complementary businesses, services and technologies and intellectual property rights. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us, or at all. If we are unable to raise additional capital when desired, our business, operating results and financial condition would be adversely affected. Operating Activities Cash provided by operating activities for the three months endedApril 30, 2021 was$32.1 million , compared to$15.4 million for the three months endedApril 30, 2020 . The increase was primarily driven by cash collections from customers. Investing Activities Cash used in investing activities for the three months endedApril 30, 2021 of$5.5 million was primarily related to cash used in the acquisition of Pana of$45.1 million ,$2.8 million for the purchases of property and equipment, and$2.5 million for other investments, partially offset by$44.9 million of net cash receipts from purchases, maturities and sales of short-term marketable securities. Financing Activities Cash provided by financing activities for the three months endedApril 30, 2021 of$12.5 million was primarily due to approximately$12.7 million of proceeds from the issuance of common stock under the ESPP and exercise of stock options, investment from redeemable non-controlling interests of$2.2 million , partially offset by$2.4 million for repayments of the 2023 Notes. 39 -------------------------------------------------------------------------------- Off-Balance Sheet Arrangements ThroughApril 30, 2021 , we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Commitments and Contractual Obligations Our principal commitments and contractual obligations consist of our Convertible Notes, obligations under operating leases for office facilities and contractual purchase obligations for hosting services and web development services that support our business operations. The following table summarizes our non-cancelable contractual obligations as ofApril 30, 2021 : Payments Due by Period Less Than 1 More Than 5 Total Year 1-3 Years 3-5 Years Years (in thousands) Convertible senior notes (1)$ 2,190,874 $ -
6,204 12,387 11,353 2,588
Operating lease obligations 46,986 14,599 23,687 7,034 1,666
Purchase obligations 35,588 21,237 13,351 1,000 -
Total contractual obligations $ 2,305,980 $ 42,040 (1)The conversion period for the 2023 Notes and 2025 Notes was open as ofApril 30, 2021 , and as such, the net carrying value of the 2023 Notes and 2025 Notes are included within current liabilities on our condensed consolidated balance sheet. The principal balances of$5.9 million and$805.0 million of the 2023 Notes and 2025 Notes, respectively, were reflected in the payment period in the table above based on the contractual maturity assuming no conversion or repurchase. (2)Represents estimated aggregate interest obligations for our outstanding Convertible Notes that are payable in cash. Critical Accounting Policies and Estimates Our management's discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues generated and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates disclosed in our Annual Report on Form 10-K for the year endedJanuary 31, 2021 . Recent Accounting Pronouncements Refer to Note 2, "Significant Accounting Policies" in the notes to our condensed consolidated financial statements for analysis of recent accounting pronouncements that are applicable to our business. NonGAAP Financial Measures In addition to our results determined in accordance withU.S. generally accepted accounting principles, or GAAP, we believe the following nonGAAP measures are useful in evaluating our operating performance: •Non-GAAP operating income; •Non-GAAP net income; and •Adjusted free cash flows.
We regularly review and consider these measures when we evaluate our business and for internal planning and forecasting purposes.
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The following tables provide a reconciliation of loss from operations to
nonGAAP operating income, from net loss to non-GAAP net income, and from net
cash provided by operating activities to adjusted free cash flows (in
thousands):
Three Months Ended
April 30,
2021 2020
Loss from operations $ (73,855) $ (5,626)
Stock-based compensation 47,292 24,197
Amortization of acquired intangible assets 33,540 8,866
Change in fair value of contingent consideration payable - (12,500) Non-GAAP operating income$ 6,977 $ 14,937 Three Months Ended April 30, 2021 2020 Net loss$ (100,357) $ (14,816) Stock-based compensation 47,292 24,197 Amortization of acquired intangible assets 33,540
8,866
Change in fair value of contingent consideration payable -
(12,500)
Amortization of debt discount and issuance costs 27,390
11,950
Loss (gain) on conversion of convertible senior notes 129
(2,571)
Income tax effects and adjustments (2,977) (666) Non-GAAP net income$ 5,017 $ 14,460 Three Months Ended April 30, 2021 2020 Net cash provided by operating activities$ 32,082 $ 15,408 Less: purchases of property and equipment (2,754) (3,599) Add: repayments of convertible senior notes attributable to debt 516 discount 10,604 Adjusted free cash flows$ 29,844 $ 22,413 We define non-GAAP operating income as loss from operations before stock-based compensation, amortization of acquired intangible assets and the change in fair value of contingent consideration related to an acquisition. We define non-GAAP net income as net loss before stock-based compensation, amortization of acquired intangible assets, the change in fair value of contingent consideration related to an acquisition, amortization of debt discount and issuance costs, gain or loss on conversion of convertible senior notes, and related tax effects, including non-recurring income tax adjustments. We define adjusted free cash flows as net cash provided by operating activities, less purchases of property and equipment, plus repayments of convertible senior notes attributable to debt discount. We believe non-GAAP operating income and non-GAAP net income provide investors and other users of our financial information consistency and comparability with our past financial performance and facilitate period to period comparisons of operations. We believe non-GAAP operating income and non-GAAP net income are also useful in evaluating our operating performance compared to that of other companies in our industry, as these metrics generally eliminate the effects of certain items that may vary between companies for reasons unrelated to overall operating performance. We believe adjusted free cash flows provides useful information to investors because it is an indicator of our capital strength and liquidity, and we also use it to measure performance of our business operations. We exclude repayment of convertible senior notes attributable to debt discount in calculating this measure in part because our use of cash to satisfy this obligation (relating to the Convertible Notes) was discretionary, and we have the ability to satisfy similar obligations in the near future through shares of our common stock, or a combination of cash and shares of our common stock, at our election. However, you should bear in mind that this measure does not reflect any reduction for cash settlements of our debt obligations, nor does it represent our residual cash flow available for discretionary expenditures. Due to these and other limitations, you should not consider this non-GAAP measure in isolation or as a substitute for analysis of other GAAP financial measures, such as net cash provided by operating activities. 41 -------------------------------------------------------------------------------- We use non-GAAP operating income, non-GAAP net income and adjusted free cash flows in conjunction with traditional GAAP measures as part of our overall assessment of our performance and liquidity, including the preparation of our annual operating budget and quarterly forecasts, to evaluate the effectiveness of our business strategies and to communicate with our board of directors concerning our financial performance and liquidity. Our definitions may differ from the definitions used by other companies and therefore comparability may be limited. In addition, other companies may not publish these or similar metrics. Thus, our non-GAAP operating income, non-GAAP net income and adjusted free cash flows should be considered in addition to, not as substitutes for, or in isolation from, measures prepared in accordance with GAAP. We compensate for these limitations by providing investors and other users of our financial information a reconciliation of nonGAAP operating income to loss from operations, non-GAAP net income to net loss, and adjusted free cash flows to net cash provided by operating activities. We encourage investors and others to review our financial information in its entirety, not to rely on any single financial measure and to view nonGAAP operating income, non-GAAP net income, and adjusted free cash flows in conjunction with loss from operations, net loss, and the condensed consolidated statements of cash flows. 42
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