DOCUSIGN, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in our 2020 Annual Report on Form 10-K. As discussed in the section titled "Note Regarding 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, those identified below and those discussed in the section titled "Risk Factors" under Part II, Item 1A in this Quarterly Report on Form 10-Q and in our 2020 Annual Report on Form 10-K. Our fiscal year endsJanuary 31 .
Executive Overview of Second Quarter Results
Overview
DocuSign accelerates the process of doing business for companies and simplifies life for their customers and employees. We accomplish this by transforming the foundational element of business: the agreement. We offer the world's #1 e-signature solution as the core part of our broader software suite for automating the agreement process, which we call theDocuSign Agreement Cloud. It is designed to allow companies of all sizes and across all industries to quickly and easily make nearly every agreement, approval process or transaction digital. It provides comprehensive functionality across e-signature and addresses the broader agreement process. As a result, nearly 750,000 customers and hundreds of millions of users worldwide utilizeDocuSign to create, upload and send documents for multiple parties to sign 25 -------------------------------------------------------------------------------- electronically. TheDocuSign Agreement Cloud allows users to complete approvals, agreements and transactions faster by building end-to-end processes.DocuSign eSignature integrates with popular business apps, and our functionality can also be embedded using our API. Finally, theDocuSign Agreement Cloud allows our customers to automate and streamline their business-critical workflows to save time and money, while staying secure and legally compliant. We offer access to our platform on a subscription basis with prices based on the functionality our customers require and the quantity of Envelopes provisioned. Similar to the physical envelopes historically used to mail paper documents, an Envelope is a digital container used to send one or more documents for signature or approval to one or more recipients. Our customers have the flexibility to put a large number of documents in an Envelope. For a number of use cases, such as buying a home, multiple Envelopes are used over the course of the process. To drive customer reach and adoption, we also offer for free certain limited-time or feature-constrained versions of our platform. We generate substantially all our revenue from sales of subscriptions, which accounted for 95% and 94% of our revenue in the three months endedJuly 31, 2020 and 2019. Sales of subscriptions accounted for 95% and 94% of our revenue in the six months endedJuly 31, 2020 and 2019. Our subscription fees include the use of our software suite and access to customer support. Subscriptions generally range from one to three years, and substantially all our multi-year customers pay in annual installments, one year in advance. We also generate revenue from professional and other non-subscription services, which consists primarily of fees associated with providing new customers deployment and integration services. Other revenue includes amounts derived from sales of on-premises solutions. Professional services and other revenue accounted for 5% and 6% of our revenue in the three months endedJuly 31, 2020 and 2019. It accounted for 5% and 6% of our revenue in the six months endedJuly 31, 2020 and 2019. We anticipate continuing to invest in customer success through our professional services offerings as we believe it plays an important role in accelerating our customers' deployment of our software suite, which helps to drive customer retention and expansion of the use of theDocuSign Agreement Cloud. We offer subscriptions to our software suite to enterprise businesses, commercial businesses and very small businesses ("VSBs"), which we define as companies with fewer than 10 employees and includes professionals, sole proprietorships and individuals. We sell to customers through multiple channels. Our go-to-market strategy relies on our direct sales force and partnerships to sell to enterprises and commercial businesses and our web-based self-service channel to sell to VSBs, which we believe is the most cost-effective way to reach our smallest customers. We offer more than 300 off-the-shelf, prebuilt integrations with the applications that many of our customers already use-including those offered by Google, Microsoft,NetSuite , Oracle, Salesforce, SAP, SAP SuccessFactors and Workday-so that they can create, sign, send and manage agreements from directly within these applications. We have a diverse customer base spanning various industries and countries with no significant customer concentration. No single customer accounted for more than 10% of total revenue in any of the periods presented. We focused initially on selling our e-signature solutions to commercial businesses and VSBs, and later expanded our focus to target enterprise customers. To demonstrate this growth over time, the number of our customers with greater than$300,000 in annual contract value (measured in billings) has increased from approximately 30 customers as ofJanuary 31, 2013 to 520 customers as ofJuly 31, 2020 . Each of our customer types has a different purchasing pattern. VSBs tend to become customers quickly with very little to no direct sales or customer support interaction and generate smaller average contract values, while commercial and enterprise customers typically involve longer sales cycles, larger contract values and greater expansion opportunities for us. COVID-19 Update The COVID-19 pandemic has spread across the world and is particularly prevalent in theU.S. , where we are headquartered and the majority of our workforce is located. The pandemic and the public health measures taken in response to it have adversely affected workforces, organizations, customers, economies, and financial markets globally, leading to an economic downturn and increased market volatility. We are continuing to monitor the actual and potential effects of the pandemic across our business. Because these effects are dependent on highly uncertain future developments - including the duration, spread and severity of the outbreak, the actions taken to contain the virus, and how quickly and to what extent normal economic and operating conditions can resume - they are extremely difficult to predict. While our revenue, billings and earnings are relatively predictable as a result of our subscription-based business model, the effects of the COVID-19 pandemic may not be fully reflected in our results of operations until future periods. Since mid-March, we have taken a number of precautionary measures to ensure the health and safety of our employees, partners and customers.DocuSign shifted to a remote workplace, requiring nearly all employees to work from home. We 26 -------------------------------------------------------------------------------- suspended all business travel other than for essential functions. We have cancelled or replaced planned events, such as our Momentum conferences, with virtual-only experiences. We have incurred expenses to support our employees working from home, including reimbursements for home office equipment and a stipend for other qualifying expenses, and may incur similar expenses in the future as remote operations continue. The impact of these and any other operational changes we may implement is uncertain, but as of the date of this filing they have not materially affected our ability to maintain operations. We have experienced a substantial increase in overall demand for our solutions, particularlyDocuSign eSignature, as the shift to remote, web-enabled business operations has caused more organizations to adopt or expand their use of digital agreements. This has resulted in a significant increase in customer spending across almost all industries and regions we serve, though we have experienced slower growth or declining spending in certain industries most impacted by the pandemic, such as travel and hospitality. As the pandemic continues, however, we may experience volatility in customer demand; increased customer churn; increases in late payment or non-payment by customers; delayed purchasing decisions; and increased pressure on pricing, discounts and payment terms, any of which could materially harm our business, results of operations and overall financial performance. See the section below titled "Risk Factors" for further discussion of the potential impact of the COVID-19 pandemic on our business, financial condition and results of operations. Financial Results: Six Months Ended Three Months Ended July 31, July 31, (in thousands) 2020 2019 2020 2019 Total revenue$ 342,209 $ 235,612 $ 639,226 $ 449,574 Total costs and expenses 400,844 300,334 739,714 556,733 Total stock-based compensation expense 68,767 55,792 122,318 98,063 Loss from operations (58,635) (64,722) (100,488) (107,159) Net loss (64,560) (68,632) (112,364) (114,354) Net cash provided by operating activities 118,134 26,405 177,278 72,060 Capital expenditures (18,362) (14,554) (44,751) (29,791)
Cash, cash equivalents and investments were
Key Factors Affecting Our Performance
We believe that our future performance will depend on many factors, including the following:
Growing Customer Base We are highly focused on continuing to acquire new customers to support our long-term growth. We have invested, and expect to continue to invest, heavily in our sales and marketing efforts to drive customer acquisition. As ofJuly 31, 2020 , we had a total of nearly 750,000 customers, including over 95,000 enterprise and commercial customers, compared to over 535,000 customers and over 60,000 enterprise and commercial customers as ofJuly 31, 2019 . We define a customer as a separate and distinct buying entity, such as a company, an educational or government institution, or a distinct business unit of a large company that has an active contract to access our software suite. We define enterprise customers as companies generally included in the Global 2000. We define commercial customers to include both mid-market companies, which includes companies outside the Global 2000 that have greater than 250 employees, and small-to-medium-sized businesses, which are companies with between 10 and 249 employees, in each case excluding any enterprise customers. We refer to total customers as all enterprises, commercial businesses and VSBs. We believe that our ability to increase the number of customers using our software suite, particularly the number of enterprise and commercial customers, is an indicator of our market penetration, the growth of our business and our potential future business opportunities. By increasing awareness of our software suite, further developing our sales and marketing expertise and continuing to build features tuned to different industry needs, we have expanded the diversity of our customer base to include organizations of all sizes across nearly every industry. 27 --------------------------------------------------------------------------------
Retaining and Expanding Contracts with Existing Enterprise and Commercial Customers
Many of our customers have increased spend with us as they have expanded their use of our offerings in both existing and new use cases across their front or back office operations. Our enterprise and commercial customers may start with just one use case and gradually implement additional use cases across their organization once they see the benefits of our software suite. Several of our largest enterprise customers have deployed our software suite for hundreds of use cases across their organizations. We believe there is significant expansion opportunity with our customers following their initial adoption of our software suite.
Increasing International Revenue
Our international revenue in the three months endedJuly 31, 2020 increased by 59% from the three months endedJuly 31, 2019 and represented 19% and 18% of our total revenue in the three months endedJuly 31, 2020 and 2019. Our international revenue in the six months endedJuly 31, 2020 increased by 53% from the six months endedJuly 31, 2019 and represented 19% and 18% of our total revenue in the six months endedJuly 31, 2020 and 2019. We started our international selling efforts in English-speaking common law countries, such asCanada , theUnited Kingdom andAustralia , where we were able to leverage our core technologies due to similar approaches to e-signature in these jurisdictions andthe United States ("U.S."). We have since made significant investments to be able to offer our solutions in select civil law countries. For example, inEurope , we have Standards-Based Signature technology tailored for electronic IDentification, Authentication and trust Services ("eIDAS"). Standards-Based Signatures support signatures that involve digital certificates, including those specified in theEuropean Union's ("EU") eIDAS regulations for advanced and qualified electronic signatures. In addition, to follow longstanding tradition inJapan , we enable signers to upload and apply their personal eHanko stamp to represent their signatures on an agreement. We plan to increase our international revenue by leveraging and continuing to expand the investments we have already made in our technology, direct sales force and strategic partnerships, as well as helping existingU.S. -based customers manage agreements across their international businesses. Additionally, we expect our strategic partnerships in key international markets, including our current relationships with SAP inEurope , to further grow.
Investing for Growth
We believe that our market opportunity is large, and we plan to invest to continue to support further growth. This includes expanding our sales headcount and increasing our marketing initiatives. We also plan to continue to invest in expanding the functionality of our software suite and underlying infrastructure and technology to meet the needs of our customers across industries. Our recent acquisitions ofSeal Software and Liveoak Technologies, intended to bring additional functionality to ourDocuSign Agreement Cloud and further expand our eNotary offerings, as well as the continuous development of new features internally, are examples of our commitment to investing for ongoing growth.
Components of Results of Operations
Revenue
We derive revenue primarily from the sale of subscriptions and, to a lesser extent, professional services.
Subscription Revenue. Subscription revenue consists of fees for the use of our
software suite and our technical infrastructure and access to customer support,
which includes phone or email support. We typically invoice customers in advance
on an annual basis. We recognize subscription revenue ratably over the term of
the contract subscription period beginning on the date access to our software
suite is provided.
Professional Services and Other Revenue. Professional services revenue includes
fees associated with new customers requesting deployment and integration
services. We price professional services on a time and materials basis and on a
fixed fee basis. We generally have standalone value for our professional
services and recognize revenue based on standalone selling price as services are
performed or upon completion of services for fixed fee contracts. Other revenue
includes amounts derived from sales of on-premises solutions.
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--------------------------------------------------------------------------------Overhead Allocation
We allocate shared overhead costs, such as facilities (including rent, utilities and depreciation on equipment shared by all departments), information technology, information security and recruiting costs to all departments based on headcount. As such, these allocated overhead costs are reflected in each cost of revenue and operating expense category.
Cost of Revenue
Cost of Subscription Revenue. Cost of subscription revenue primarily consists of expenses related to hosting our software suite and providing support. These expenses consist of employee-related costs, including salaries, bonuses, benefits, stock-based compensation and other related costs, as well as personnel costs for employees associated with our technical infrastructure, customer success and customer support. These expenses also consist of software and maintenance costs, third-party hosting fees, outside services associated with the delivery of our subscription services, amortization expense associated with capitalized internal-use software and acquired intangible assets, credit card processing fees and allocated overhead costs. Cost of Professional Services and Other Revenue. Cost of professional services and other revenue consists primarily of personnel costs for our professional services delivery team, travel-related costs and allocated overhead costs.
We expect our cost of revenue to continue to increase in absolute dollar amounts as we invest in our business.
Gross Profit and Gross Margin
Gross profit is total revenue less total cost of revenue. Gross margin is gross profit expressed as a percentage of total revenue. We expect that gross profit and gross margin will continue to be affected by various factors including our pricing, timing and amount of investment to maintain or expand our hosting capability, the growth of our software suite support and professional services team, stock-based compensation expenses, amortization of costs associated with capitalized internal use software and acquired intangible assets and allocated overhead costs. Operating Expenses
Our operating expenses consist of selling and marketing, research and development and general and administrative expenses.
Selling and Marketing Expense. Selling and marketing expense consists primarily of personnel costs, including sales commissions. These expenses also include expenditures related to advertising, marketing, promotional events and brand awareness activities, as well as allocated overhead costs. We expect selling and marketing expense to continue to increase in absolute dollars as we enhance our product offerings and implement marketing strategies. Research and Development Expense. Research and development expense consists primarily of personnel costs. These expenses also include non-personnel costs, such as subcontracting, consulting and professional fees for third-party development resources, as well as allocated overhead costs. Our research and development efforts focus on maintaining and enhancing existing functionality and adding new functionality. We expect research and development expense to increase in absolute dollars as we invest in the enhancement of our software suite. General and Administrative Expense. General and administrative expense consists primarily of employee-related costs for those employees providing administrative services such as legal, human resources, information technology related to internal systems, accounting and finance. These expenses also include certain third-party consulting services, certain facilities costs and allocated overhead costs. We expect general and administrative expense to increase in absolute dollars to support the overall growth of our operations.
Interest Expense
Interest expense consists primarily of contractual interest expense, amortization of discount and amortization of debt issuance costs on our Notes.
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--------------------------------------------------------------------------------Interest Income and Other Income, Net
Interest income and other income, net, consists primarily of interest earned on our cash, cash equivalents and investments, as well as foreign currency transaction gains and losses.
Provision for Income Taxes
Our provision for income taxes consists primarily of income taxes in certain foreign jurisdictions where we conduct business, and tax benefits arising from deductions for stock options. We have a valuation allowance against ourU.S. consolidated group and certain foreign deferred tax assets. We expect to maintain this valuation allowance for the foreseeable future or until it becomes more likely than not that the benefit of theseU.S. and foreign deferred tax assets will be realized by way of expected future taxable income. 30 --------------------------------------------------------------------------------
Discussion of Results of Operations
The following table summarizes our historical consolidated statements of
operations data:
Six Months Ended July
Three Months Ended July 31, 31,
(in thousands) 2020 2019 2020 2019
Revenue:
Subscription $ 323,643 $ 220,811 $ 604,565 $ 422,269
Professional services and other 18,566 14,801 34,661 27,305
Total revenue 342,209 235,612 639,226 449,574
Cost of revenue:
Subscription 64,730 39,472 116,740 72,591
Professional services and other 25,885 21,704 47,907 40,604
Total cost of revenue 90,615 61,176 164,647 113,195
Gross profit 251,594 174,436 474,579 336,379
Operating expenses:
Sales and marketing 194,992 150,886 366,785 280,822
Research and development 63,791 47,517 118,025 84,700
General and administrative 51,446 40,755 90,257 78,016
Total operating expenses 310,229 239,158 575,067 443,538
Loss from operations (58,635) (64,722) (100,488) (107,159)
Interest expense (7,684) (7,273) (15,244) (14,429)
Interest income and other income, net 2,601 4,531 6,343 9,748
Loss before provision for income taxes (63,718) (67,464) (109,389) (111,840)
Provision for income taxes 842 1,168 2,975 2,514
Net loss $ (64,560) $ (68,632) $ (112,364) $ (114,354)
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The following table sets forth the components of our consolidated statements of operations data as a percentage of revenue:
Six Months Ended July
Three Months Ended July 31, 31,
(in thousands) 2020 2019 2020 2019
Revenue:
Subscription 95 % 94 % 95 % 94 %
Professional services and other 5 6 5 6
Total revenue 100 100 100 100
Cost of revenue:
Subscription 19 17 18 16
Professional services and other 7 9 8 9
Total cost of revenue 26 26 26 25
Gross profit 74 74 74 75
Operating expenses:
Sales and marketing 57 64 57 62
Research and development 19 20 18 19
General and administrative 15 17 15 18
Total operating expenses 91 101 90 99
Loss from operations (17) (27) (16) (24)
Interest expense (2) (3) (2) (3)
Interest income and other income, net - 1 1 2
Loss before provision for income taxes (19) (29) (17) (25)
Provision for income taxes - - 1 -
Net loss (19) % (29) % (18) % (25) %
The following discussion and analysis is for the three and six months ended
Revenue
Three Months Ended July 31, Six Months Ended July 31,
(in thousands, except for 2020 versus
percentages) 2020 2019 2019 2020 2019 2020 versus 2019
Revenue:
Subscription $ 323,643 $ 220,811 47 % $ 604,565 $ 422,269 43 %
Professional services and other 18,566 14,801 25 % 34,661 27,305 27 %
Total revenue $ 342,209 $ 235,612 45 % $ 639,226 $ 449,574 42 %
Subscription Revenue
Subscription revenue increased by $102.8 million , or 47%, in the three months
ended July 31, 2020 , and increased $182.3 million , or 43%, in the six months
ended July 31, 2020 , primarily driven by strong customer growth.
We continue to invest in a variety of customer programs and initiatives, which,
along with expanded customer use cases, have helped increase our subscription
revenue over time. We expect subscription revenue to continue to increase as we
offer new functionality, attract new customers and fully realize the potential
of our acquisitions in our product offerings.
Professional Services and Other Revenue
Professional services and other revenue increased by$3.8 million , or 25%, in the three months endedJuly 31, 2020 , and increased by$7.4 million , or 27%, in the six months endedJuly 31, 2020 , primarily due to the addition of Seal and increased engagement of professional services to support our growing customer base. 32 --------------------------------------------------------------------------------
Cost of Revenue and Gross Margin
Three Months Ended July 31, Six Months Ended July 31,
(in thousands, except for
percentages) 2020 2019 2020 versus 2019 2020 2019 2020 versus 2019
Cost of revenue:
Subscription $ 64,730 $ 39,472 64 % $ 116,740 $ 72,591 61 %
Professional services and other 25,885 21,704 19 % 47,907 40,604 18 % Total cost of revenue$ 90,615 $ 61,176 48 %$ 164,647 $ 113,195 45 % Gross margin: Subscription 80 % 82 % (2) pts 81 % 83 % (2) pts Professional services and other (39) % (47) % 8 pts (38) % (49) % 11 pts Total gross margin 74 % 74 % - pts 74 % 75 % (1) pts
Cost of Subscription Revenue
Cost of subscription revenue increased$25.3 million , or 64%, in the three months endedJuly 31, 2020 , primarily due to: ?An increase of$11.2 million in operating costs to support our platform, that consisted primarily of an increase of$3.1 million in data center costs, an increase of$3.1 million in depreciation and amortization, and an increase of$1.9 million in partner reseller fees. The increase in depreciation and amortization reflects the higher existing technology intangible assets from the acquisition of Seal, as well as higher data center equipment and capitalized software assets; and ?Increases of$8.2 million in personnel costs and$1.9 million in stock-based compensation expense, primarily due to annual merit increases, annual grants and higher headcount, including the addition of Seal employees. Cost of subscription revenue increased$44.1 million , or 61%, in the six months endedJuly 31, 2020 , primarily due to: ?An increase of$21.6 million in operating costs, that consisted primarily of an increase of$7.9 million in partner reseller fees, an increase of$5.0 million in data center costs and an increase of$3.9 million in depreciation and amortization reflecting the higher existing technology intangible assets from the acquisition of Seal, as well as higher data center equipment and capitalized software assets; and ?An increase of$13.7 million in personnel costs and$3.5 million in stock-based compensation expense primarily due to annual merit increases, annual grants and higher headcount, including the addition of Seal employees.
Cost of Professional Services and Other Revenue
Cost of professional services and other revenue increased$4.2 million , or 19%, in the three months endedJuly 31, 2020 , and$7.3 million , or 18%, in the six months endedJuly 31, 2020 , primarily due to an increase in personnel costs driven by higher headcount, annual merit increases and the addition of Seal employees to our workforce. Sales and Marketing Three Months Ended July 31, Six Months Ended July 31, (in thousands, except for percentages) 2020 2019 2020 versus 2019 2020 2019 2020 versus 2019 Sales and marketing$ 194,992 $ 150,886 29 %$ 366,785 $ 280,822 31 % Percentage of revenue 57 % 64 % 57 % 62 % Sales and marketing expenses increased$44.1 million , or 29%, in the three months endedJuly 31, 2020 , primarily due to: ?An increase of$33.7 million in personnel costs due to higher headcount, annual merit increases, the addition of Seal employees to our workforce and higher commissions in line with higher sales; ?An increase of$6.4 million in stock-based compensation expense due to higher headcount and annual merit grants; ?An increase of$4.8 million in allocated overhead due to higher technology costs; and ?An increase of$4.5 million in marketing and advertising costs to support higher spend on online advertising platforms to capture the increase in demand; partially offset by ?A decrease of$5.8 million in travel expenses due to travel restrictions resulting from the COVID-19 pandemic. 33 -------------------------------------------------------------------------------- Sales and marketing expenses increased$86.0 million , or 31%, in the six months endedJuly 31, 2020 , primarily due to: ?An increase of$60.8 million in personnel costs due to higher headcount, annual merit increases, the addition of Seal employees to our workforce and higher commissions in line with higher sales; ?An increase of$12.9 million in stock-based compensation expense due to higher headcount and annual merit grants; ?An increase of$9.3 million in marketing and advertising expense, primarily due to higher spend on online advertising platforms to capture the increase in demand; and ?An increase of$8.5 million in allocated overhead due to higher technology and facility costs; partially offset by ?A decrease of$9.0 million in travel expenses due to travel restrictions resulting from the COVID-19 pandemic. Research and Development Three Months Ended July 31, Six Months Ended July 31, (in thousands, except for percentages) 2020 2019 2020 versus 2019 2020 2019 2020 versus 2019 Research and development$ 63,791 $ 47,517 34 %$ 118,025 $ 84,700 39 % Percentage of revenue 19 % 20 % 18 % 19 % Research and development expenses increased$16.3 million , or 34%, in the three months endedJuly 31, 2020 , primarily due to increases of$13.0 million in personnel costs and$2.8 million in stock-based compensation. Research and development expenses increased$33.3 million , or 39%, in the six months endedJuly 31, 2020 , primarily due to increases of$24.6 million in personnel costs and$7.4 million in stock-based compensation expense. The increases in both periods were primarily driven by higher headcount, annual merit increase and grants and the addition of Seal employees to our workforce. General and Administrative Three Months Ended July 31, Six Months Ended July 31, (in thousands, except for 2020 versus percentages) 2020 2019 2019 2020 2019 2020 versus 2019 General and administrative$ 51,446 $ 40,755 26 %$ 90,257 $ 78,016 16 % Percentage of revenue 15 % 17 % 15 % 18 % General and administrative expenses increased$10.7 million , or 26%, in the three months endedJuly 31, 2020 , primarily due to increases of$5.5 million in personnel costs and$1.5 million in stock-based compensation. General and administrative expenses increased$12.2 million , or 16%, in the six months endedJuly 31, 2020 , primarily due to an increase of$8.5 million in personnel costs. The increases in both periods were primarily driven by higher headcount, annual merit increases and grants and the addition of Seal employees to our workforce. 34 --------------------------------------------------------------------------------
Interest Expense
Three Months Ended July 31, Six Months Ended July 31,
(in thousands, except for 2020 versus
percentages) 2020 2019 2019 2020 2019 2020 versus 2019
Interest expense $ 7,684 7,273 6 % $ 15,244 $ 14,429 6 %
Percentage of revenue 2 % 3 % 2 % 3 %
Interest expense remained relatively flat in the three and six months ended
Interest Income and Other Income, Net
Three Months Ended July 31, Six Months Ended July 31,
(in thousands, except for 2020 versus
percentages) 2020 2019 2019 2020 2019 2020 versus 2019
Interest income $ 1,825 $ 3,940 (54) % $ 5,206 $ 7,618 (32) %
Foreign currency gain (loss) 1,425 (837) NM 880 (1,261) NM
Other (649) 1,428 NM 257 3,391 (92) %
Interest income and other
income, net $ 2,601 $ 4,531 (43) % $ 6,343 $ 9,748 (35) %
Percentage of revenue - % 1 % 1 % 2 %
Interest income and other income, net, decreased by $1.9 million and $3.4
million , in the three and six months ended July 31, 2020 , primarily due to lower
interest income and amortization on our marketable securities, partially offset
by gains on the revaluation of our foreign currency denominated monetary assets
and liabilities.
Provision for Income Taxes
Three Months Ended July 31, Six Months Ended July 31,
(in thousands, except for 2020 versus
percentages) 2020 2019 2019 2020 2019 2020 versus 2019
Provision for income taxes $ 842 $ 1,168 (28) % $ 2,975 $ 2,514 18 %
Percentage of revenue - % - % 1 % - %
Provision for income taxes decreased by $0.3 million in the three months ended
July 31, 2020 and increased by $0.5 million in the six months ended July 31,
2020 . The provision consisted primarily of foreign tax expenses resulting from
foreign earnings in certain foreign jurisdictions, partially offset by excess
benefits from stock option settlements.
35
--------------------------------------------------------------------------------Liquidity and Capital Resources
Our principal sources of liquidity were cash, cash equivalents and investments as well as cash generated from operations. As ofJuly 31, 2020 , we had$674.0 million in cash and cash equivalents and short-term investments. We also had$66.3 million in long-term investments that provide additional capital resources. Since inception we have financed our operations primarily through equity financings and payments by our customers for use of our product offerings and related services. In addition, inSeptember 2018 we issued and sold$575.0 million in aggregate principal amount of 0.5% Convertible Senior Notes due 2023, which are further described in Note 9 of our condensed consolidated financial statements. We believe our existing cash, cash equivalents and marketable securities will be sufficient to meet our working capital and capital expenditures needs over at least the next 12 months. While we have generated losses from operations in the past as reflected in our accumulated deficit of$1.2 billion as ofJuly 31, 2020 , we generated positive cash flows from operations of$177.3 million in the six months endedJuly 31, 2020 . We expect to continue to incur operating losses for the foreseeable future due to the investments we intend to make and may require additional capital resources to execute strategic initiatives to grow our business. We typically invoice our customers annually in advance. Therefore, a substantial source of our cash is from such invoices, which are included on our consolidated balance sheets in contract liabilities until revenue is recognized or in accounts receivable until cash is collected. Accordingly, collections from our customers have a material impact on our cash flows from operating activities. Our accounts receivable decreased by$25.2 million , excluding the impact from acquisitions, in the six months endedJuly 31, 2020 , and$35.9 million in the six months endedJuly 31, 2019 , which resulted in a$10.7 million decrease in cash provided by operating activities year over year. Contract liabilities consist of the unearned portion of billed fees for our subscriptions, which is subsequently recognized as revenue in accordance with our revenue recognition policy. As ofJuly 31, 2020 , we had contract liabilities of$635.9 million , compared to$519.0 million as ofJanuary 31, 2020 . The increase in contract liabilities resulted in net cash provided by operating activities of$107.5 million , excluding the impact from acquisitions, in the six months endedJuly 31, 2020 and a year over year increase of$85.8 million in net cash provided by operating activities when compared to the$21.7 million increase in contract liabilities in the six months endedJuly 31, 2019 . Therefore, our growth in billings to existing and new customers has a material net beneficial impact on our cash flows from operating activities. Our future capital requirements will depend on many factors including our growth rate, customer retention and expansion, tax withholding obligations related to settlement of our RSUs, the timing and extent of spending to support our efforts to develop our software suite, the expansion of sales and marketing activities and the continuing market acceptance of our software suite. We may in the future enter into arrangements to acquire or invest in complementary businesses, 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.
Cash Flows
The following table summarizes our cash flows for the periods indicated:
Six Months Ended July 31,
(in thousands) 2020 2019 Change
Net cash provided by (used in):
Operating activities $ 177,278 $ 72,060 $ 105,218
Investing activities 90,373 (331,728) 422,101
Financing activities (107,232) (32,967) (74,265)
Effect of foreign exchange on cash and cash
equivalents 2,640 (1,120) 3,760
Net change in cash, cash equivalents and
restricted cash $ 163,059 $ (293,755) $ 456,814 Cash Flows from Operating Activities
Net cash provided by operating activities increased by$105.2 million . This change was primarily due to increases of$50.6 million in net cash provided by operating assets and liabilities and$52.6 million in non-cash expenses. The increase in non-cash expenses was primarily due to increase of$24.3 million in stock-based compensation expense driven by higher headcount as well as higher stock price and$26.8 million non-cash amortization expenses. 36 -------------------------------------------------------------------------------- Net cash provided by changes in operating assets and liabilities increased by$50.6 million primarily due to increases of$85.7 million in cash provided from changes in contract liabilities and$20.4 million in cash provided from changes in accrued compensation. These increases were offset by a$44.0 million increase in cash used in deferred contract acquisition and fulfillment costs and a$10.7 million decrease in cash provided from changes in accounts receivable.
Cash Flows from Investing Activities
Net cash provided by investing activities was$90.4 million , as compared to$331.7 million net cash used in investing activity in prior year. This change was primarily due to cash inflows of$318.7 million from net maturities and sales of marketable securities versus$286.4 million from net purchases of marketable securities in prior year, offset by cash outflows of$180.4 million paid for acquisitions, net of cash acquired.
Cash Flows from Financing Activities
Net cash used in financing activities increased by
Contractual Obligations and Commitments Our principal contractual obligations and commitments consist of obligations under the Notes (including principal and coupon interest), operating leases, as well as noncancelable contractual commitments that primarily relate to cloud infrastructure support and sales and marketing activities. Refer to Note 9 for more information on the Notes and Note 10 and Note 11 for our lease and other commitments.
As of
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.
Critical Accounting Policies and Estimates
We prepare our financial statements in accordance withU.S. generally accepted accounting principles ("GAAP"). Preparing these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. The current COVID-19 pandemic has caused uncertainty and disruption in the global economy and financial markets. We are not aware of any specific event or circumstance that would require us to update our estimates, judgments or revise the carrying value of our assets or liabilities. These estimates may change, as new events occur and additional information is obtained. Our actual results could differ from these estimates. The critical accounting estimates, assumptions and judgments that we believe to have the most significant impact on our consolidated financial statements are revenue recognition, deferred contract acquisition costs, stock-based compensation, business combinations and valuation of goodwill and other acquired intangible assets and income taxes.
There have been no material changes to our critical accounting policies and estimates as described in our 2020 Annual Report on Form 10-K.
Recent Accounting Pronouncements
Refer to Note 1 to our consolidated financial statements included elsewhere in
this Quarterly Report on Form 10-Q for recently issued accounting pronouncements
not yet adopted as of the date of this report.
37
--------------------------------------------------------------------------------Non-GAAP Financial Measures and Other Key Metrics
To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, we use certain non-GAAP financial measures, as described below, to understand and evaluate our core operating performance. These non-GAAP financial measures, which may be different than similarly titled measures used by other companies, are presented to enhance investors' overall understanding of our financial performance and should not be considered a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. We believe that these non-GAAP financial measures provide useful information about our financial performance, enhance the overall understanding of our past performance and future prospects, and allow for greater transparency with respect to important metrics used by our management for financial and operational decision-making. We present these non-GAAP measures to assist investors in seeing our financial performance using a management view, and because we believe that these measures provide an additional tool for investors to use in comparing our core financial performance over multiple periods with other companies in our industry. Non-GAAP gross profit, non-GAAP gross margin, non-GAAP income from operations, non-GAAP operating margin, non-GAAP net income and non-GAAP net income per share: We define these non-GAAP financial measures as the respective GAAP measures, excluding expenses related to stock-based compensation, employer payroll tax on employee stock transactions, amortization of acquisition-related intangibles, amortization of debt discount and issuance costs from our convertible senior notes issued inSeptember 2018 , acquisition-related expenses and, as applicable, other special items. The amount of employer payroll tax-related items on employee stock transactions is dependent on our stock price and other factors that are beyond our control and that do not correlate to the operation of the business. When evaluating the performance of our business and making operating plans, we do not consider these items (for example, when considering the impact of equity award grants, we place a greater emphasis on overall stockholder dilution rather than the accounting charges associated with such grants). We believe it is useful to exclude these expenses in order to better understand the long-term performance of our core business and to facilitate comparison of our results to those of peer companies and over multiple periods. Free cash flows: We define free cash flow as net cash provided by operating activities less purchases of property and equipment. We believe free cash flow is an important liquidity measure of the cash that is available (if any), after purchases of property and equipment, for operational expenses, investment in our business and to make acquisitions. Free cash flow is useful to investors as a liquidity measure because it measures our ability to generate or use cash in excess of our capital investments in property and equipment. Once our business needs and obligations are met, cash can be used to maintain a strong balance sheet and invest in future growth. Billings: We define billings as total revenues plus the change in our contract liabilities and refund liability less contract assets and unbilled accounts receivable in a given period. Billings reflects sales to new customers plus subscription renewals and additional sales to existing customers. Only amounts invoiced to a customer in a given period are included in billings. We believe billings is a key metric to measure our periodic performance. Given that most of our customers pay in annual installments one year in advance, but we typically recognize a majority of the related revenue ratably over time, we use billings to measure and monitor our ability to provide our business with the working capital generated by upfront payments from our customers. 38 --------------------------------------------------------------------------------
Reconciliation of gross profit and gross margin:
Six Months Ended July
Three Months Ended July 31, 31,
(in thousands) 2020 2019 2020 2019
GAAP gross profit $ 251,594 $ 174,436 $ 474,579 $ 336,379
Add: Stock-based compensation 10,239 7,936 18,228 13,658
Add: Amortization of acquisition-related
intangibles 3,132 1,381 4,480 3,008
Add: Employer payroll tax on employee stock
transactions 1,738 541 2,774 1,193
Non-GAAP gross profit $ 266,703 $ 184,294 $ 500,061 $ 354,238
GAAP gross margin 74 % 74 % 74 % 75 %
Non-GAAP adjustments 4 % 4 % 4 % 4 %
Non-GAAP gross margin 78 % 78 % 78 % 79 %
GAAP subscription gross profit $ 258,913 $ 181,339 $ 487,825 $ 349,678
Add: Stock-based compensation 5,014 3,115 8,878 5,397
Add: Amortization of acquisition-related
intangibles 3,132 1,381 4,480 3,008
Add: Employer payroll tax on employee stock
transactions 926 211 1,461 432
Non-GAAP subscription gross profit $ 267,985 $ 186,046 $ 502,644 $ 358,515
GAAP subscription gross margin 80 % 82 % 81 % 83 %
Non-GAAP adjustments 3 % 2 % 2 % 2 %
Non-GAAP subscription gross margin 83 % 84 % 83 % 85 %
GAAP professional services and other gross loss
5,225 4,821 9,350 8,261
Add: Employer payroll tax on employee stock
transactions 812 330 1,313 761
Non-GAAP professional services and other gross
loss $ (1,282) $ (1,752) $ (2,583) $ (4,277)
GAAP professional services and other gross
margin (39) % (47) % (38) % (49) %
Non-GAAP adjustments 32 % 35 % 31 % 33 %
Non-GAAP professional services and other gross
margin (7) % (12) % (7) % (16) %
Reconciliation of income (loss) from operations and operating margin:
Six Months Ended July
Three Months Ended July 31, 31,
(in thousands) 2020 2019 2020 2019
GAAP loss from operations $ (58,635) $ (64,722) $ (100,488) $ (107,159)
Add: Stock-based compensation 68,767 55,792 122,318 98,063
Add: Amortization of acquisition-related
intangibles 7,416 4,420 11,675 9,153
Add: Acquisition-related expenses 6,932 - 7,626 -
Add: Employer payroll tax on employee stock
transactions $ 9,259 $ 3,864 15,807 9,619
Non-GAAP income from operations $ 33,739 $ (646) $ 56,938 $ 9,676
GAAP operating margin (17) % (27) % (16) % (24) %
Non-GAAP adjustments 27 % 27 % 25 % 26 %
Non-GAAP operating margin 10 % - % 9 % 2 %
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Reconciliation of net income (loss):
Six Months Ended July
Three Months Ended July 31, 31,
(in thousands, except per share data) 2020 2019 2020 2019
GAAP net loss $ (64,560) $ (68,632) $ (112,364) $ (114,354)
Add: Stock-based compensation 68,767 55,792 122,318 98,063
Add: Amortization of acquisition-related
intangibles 7,416 4,420 11,675 9,153
Add: Acquisition-related expenses 6,932 - 7,626 -
Add: Employer payroll tax on employee stock
transactions 9,259 3,864 15,807 9,619
Add: Amortization of debt discount and issuance
costs $ 6,942 $ 6,548 13,784 13,002
Non-GAAP net income $ 34,756 $ 1,992 $ 58,846 $ 15,483 Computation of free cash flow:
Six Months Ended July
Three Months Ended July 31, 31,
(in thousands) 2020 2019 2020 2019
Net cash provided by operating activities
(44,751) (29,791)
Non-GAAP free cash flow $ 99,772 $ 11,851 $ 132,527 $ 42,269
Net cash provided by (used in) investing
activities $ (79,295) $
(18,237)
Computation of billings:
Six Months Ended
Three Months Ended July 31, July 31,
(in thousands) 2020 2019 2020 2019
Revenue $ 342,209 $ 235,612 $ 639,226 $ 449,574
Add: Contract liabilities and refund
liability, end of period 638,790 412,953 638,790 412,953
Less: Contract liabilities and refund
liability, beginning of period (568,544) (395,254) (522,201) (390,887)
Add: Contract assets and unbilled accounts
receivable, beginning of period 16,390 16,810 15,082 13,436
Less: Contract assets and unbilled
accounts receivable, end of period (20,395) (17,757) (20,395) (17,757)
Add: Contract assets and unbilled accounts
receivable by acquisitions 6,589 - 6,589 -
Less: Contract liabilities and refund
liability contributed by acquisitions (9,344) - (9,344) -
Non-GAAP billings $ 405,695 $ 252,364 $ 747,747 $ 467,319
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