DOMO, INC.
This discussion contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Statements containing words such as
"may," "believe," "could," "will," "seek," "depends," "anticipate," "expect,"
"intend," "plan," "project," "projections," "business outlook," "estimate," or
similar expressions constitute forward-looking statements. You should read these
statements carefully because they discuss future expectations, contain
projections of future results of operations or financial condition or state
other "forward-looking" information. These statements relate to our future
plans, objectives, expectations, intentions and financial performance and the
assumptions that underlie these statements. They include, but are not limited
to, statements about:
•our ability to attract new customers and retain and expand our relationships
with existing customers;
•our future financial performance, including our expectations regarding our
revenue, cost of revenue, gross profit, operating expenses, key metrics, ability
to generate cash flow and ability to achieve and maintain future profitability;
•the anticipated trends, market opportunity, growth rates and challenges in our
business and in the business intelligence software market;
•the efficacy of our sales and marketing efforts;
•our ability to compete successfully in competitive markets;
•our ability to respond to and capitalize on rapid technological changes;
•our expectations and management of future growth;
•our ability to enter new markets and manage our expansion efforts, particularly
internationally;
•our ability to develop new product features;
•our ability to attract and retain key employees and qualified technical and
sales personnel;
•our ability to effectively and efficiently protect our brand;
•our ability to timely scale and adapt our infrastructure;
•the effect of general economic and market conditions on our business;
•the impact of the coronavirus pandemic, including on the global economy, our
results of operations, enterprise software spending, and business continuity;
•our ability to protect our customers' data and proprietary information;
•our ability to maintain, protect, and enhance our intellectual property and not
infringe upon others' intellectual property; and
•our ability to comply with all governmental laws, regulations and other legal
obligations.
Our actual results may differ materially from those contained in or implied by
any forward-looking statements. Factors that could cause or contribute to these
differences include those discussed below and elsewhere in this report,
including those factors discussed in Part II, Item 1A (Risk Factors).
In light of the significant uncertainties and risks inherent in these
forward-looking statements, you should not regard these statements as a
representation or warranty by us or anyone else that we will achieve our
objectives or plans in any specified time frame, or at all, or as predictions of
future events. Moreover, neither we nor any other person assumes responsibility
for the accuracy and completeness of the forward-looking statements. We
undertake no obligation to publicly update any forward-looking statements,
whether as a result of new information, future events or otherwise, except as
required by law.
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--------------------------------------------------------------------------------Overview
We founded Domo in 2010 with the vision of digitally connecting everyone within the enterprise with real-time, rich, relevant data and then encouraging all employees to collaborate and act on that data. We realized that many organizations were unable to access the massive amounts of data that they were collecting in siloed cloud applications and on-premise databases. Furthermore, even for organizations that were capable of accessing their data, the process for doing so was time-consuming, costly, and often resulted in the data being out-of-date by the time it reached decision makers. The delivery format, including alert functionality, and devices were not adequate for the connected and real-time mobile workforce. Based on these observations, it was apparent that all organizations, regardless of size or industry, were failing to unlock the power of all of their people, data, and systems. To address these challenges, we provide a modern cloud-based business intelligence platform that digitally connects everyone at an organization - from the CEO to frontline employees - with all the people, data, and systems in an organization, giving them access to real-time data and insights and allowing them to manage their business from their smartphones. We offer our platform to our customers as a subscription-based service. Subscription fees are based upon the chosen Domo package which includes tier-based platform capabilities as well as users. Business leaders, department heads and managers are the typical initial subscribers to our platform, deploying Domo to solve a business problem or to enable departmental access. Over time, as customers recognize the value of our platform, we increasingly engage with CIOs and other executives to facilitate broad enterprise adoption. A majority of our customers subscribe to our services through multi-year contracts. As ofJuly 31, 2021 , 60% of our customers were under multi-year contracts on a dollar-weighted basis, compared to 60% of customers as ofJanuary 31, 2021 . The high percentage of revenue from multi-year contracts, among both new and existing customers, has enhanced the predictability of our subscription revenue. We typically invoice our customers annually in advance for subscriptions to our platform, but in the first half of fiscal 2021 we saw an increase in requests for semi-annual and quarterly billing terms as a result of the COVID-19 pandemic. However, since that time we have seen an overall improvement in the portion of total billings that are annual in advance. A majority of our annual recurring revenue is up for renewal during the fiscal year endingJanuary 31, 2022 . Remaining performance obligations (RPO) represents the remaining amount of revenue we expect to recognize from existing non-cancelable contracts, whether billed or unbilled. As ofJuly 31, 2020 and 2021, total RPO was$232.1 million and$286.8 million , respectively, representing year-over-year growth of 24%. The amount of RPO expected to be recognized as revenue in the next twelve months was$148.6 million and$183.1 million as ofJuly 31, 2020 and 2021, respectively, representing year-over-year growth of 23%. We had total revenue of$51.1 million and$62.8 million for the three months endedJuly 31, 2020 and 2021, respectively, reflecting a year-over-year increase of 23%. For the six months endedJuly 31, 2020 and 2021, we had total revenue of$99.7 million and$122.9 million , respectively, representing year-over-year growth of 23%. Our enterprise customers generated revenue of$27.8 million and$33.2 million for the three months endedJuly 31, 2020 and 2021, respectively, or 19% year-over-year growth. For the six months endedJuly 31, 2020 and 2021, revenue from enterprise customers was$54.0 million and$65.7 million , respectively, or 22% year-over-year growth. For the six months endedJuly 31, 2020 and 2021, no single customer accounted for more than 10% of our total revenue, nor did any single organization when accounting for multiple subsidiaries or divisions which may have been invoiced separately. Revenue from customers with billing addresses inthe United States comprised 76% and 76% or our total revenue for the three months endedJuly 31, 2020 and 2021, respectively. Our revenue growth rate may decline in future periods due to a number of reasons, which may include the maturation of our business, increase in overall revenue over time, slowing demand for our platform, increasing competition, a decrease in the growth of the markets in which we compete, or if we fail, for any reason, to continue to capitalize on growth opportunities, a decrease in our renewal rates, or a decline in upsells. We have incurred significant net losses since our inception, including net losses of$17.9 million and$22.2 million for the three months endedJuly 31, 2020 and 2021, respectively, and had an accumulated deficit of$1,162.7 million atJuly 31, 2021 . We have experienced improvements in net losses over the periods presented; however, we expect to incur losses for the foreseeable future and may not be able to achieve or sustain profitability. 26 -------------------------------------------------------------------------------- COVID-19 Impact A novel strain of coronavirus, COVID-19, emerged inChina inDecember 2019 and began to spread globally, including tothe United States . InMarch 2020 , COVID-19 was characterized by theWorld Health Organization as a global pandemic. The full impact of the COVID-19 pandemic is inherently uncertain at the time of this report. The COVID-19 pandemic has resulted in travel restrictions and in some cases, prohibitions of non-essential activities, disruption and shutdown of businesses and greater uncertainty in global financial markets. We cannot reasonably predict the extent to which the COVID-19 pandemic will impact our business or operating results, which is highly dependent on inherently uncertain future developments, including the duration and scope of the pandemic (including any potential future waves of the pandemic) as well as governmental, business and individual actions that have been and continue to be taken in response to the pandemic (including the availability, adoption and effectiveness of COVID-19 vaccines). Because our platform is offered as a subscription-based service, the effect of the pandemic may not be fully reflected in our operating results until future periods, if at all. We have adopted several measures in response to the COVID-19 pandemic, including instructing employees to work from home, making adjustments to our expenses and cash flow to correlate with possible declines in billings and cash collections from customers, re-evaluating our office space needs, shifting certain of our customer events, such as Domopalooza, to online-only webcasts and restricting non-critical business travel by our employees. Historically, a significant portion of field sales and professional services were conducted in person. Currently, as a result of the work and travel restrictions related to the ongoing COVID-19 pandemic, a significant portion of our sales and professional services activities are being conducted remotely. These changes are expected to remain in effect in the third quarter of fiscal 2022 and will likely extend into future quarters. The impact, if any, of these and any additional operational changes we may implement is uncertain, but changes we have implemented have not affected and are not expected to affect our ability to maintain operations, including financial reporting systems, internal control over financial reporting and disclosure controls and procedures. During the six months endedJuly 31, 2020 , we entered into contracts totaling$4.5 million of annual recurring revenue with government entities to facilitate their response to the COVID-19 pandemic. During the six months endedJuly 31, 2021 , all of these entities have renewed their contracts in full or in part, and Domo has and will continue to pursue additional use cases beyond COVID-19. These contracts may be at a higher risk of not renewing if Domo has not continued to expand the usage of the product beyond the pandemic use case. As of the date of this report, we do not yet know the full extent of the negative impact on our ability to attract, serve, retain or upsell customers. We serve customers in a wide variety of industries including travel and hospitality, sports and leisure, and retail which have been severely impacted by the COVID-19 pandemic. Furthermore, existing and potential customers may choose to reduce or delay technology spending in response to the COVID-19 pandemic. In addition, certain customers have pursued concessions such as lengthened payment terms or reduced contract length, which may materially and negatively impact our operating results, financial condition and prospects. See Item 1A "Risk Factors" in Part II of this Quarterly Report on Form 10-Q for further discussion of the possible impact of the COVID-19 pandemic on our business. Factors Affecting Performance Continue to Attract New Customers We believe that our ability to expand our customer base is an important indicator of market penetration, the growth of our business, and future business opportunities. We define a customer at the end of any particular quarter as an entity that generated revenue greater than$2,500 during that quarter. In situations where an organization has multiple subsidiaries or divisions, each entity that is invoiced at a separate billing address is treated as a separate customer. In cases where customers purchase through a reseller, each end customer is counted separately. We define enterprise customers as companies with over$1 billion in revenue. In order to maintain comparability, companieswho become customers with revenue below$1 billion and subsequently exceed that threshold are considered enterprise customers for all periods presented. As ofJuly 31, 2021 , we had over 2,100 customers. We focus our sales and marketing resources on obtaining customers with over$100 million in revenue. Our enterprise customers accounted for 54% and 53% of our revenue for the three months endedJuly 31, 2020 and 2021, respectively, and 54% and 53% for the six months endedJuly 31, 2020 and 2021, respectively. In order to accelerate customer growth, we intend to further develop our partner ecosystem by establishing agreements with more software resellers, systems integrators and other partners to provide broader customer and geographic 27 -------------------------------------------------------------------------------- coverage. We believe we are underpenetrated in the overall market and have significant opportunity to expand our customer base over time. Customer Upsell and Retention We employ a land and expand sales model, and our performance depends on our ability to retain customers and expand the use of our platform at existing customers over time. It currently takes multiple years for our customers to fully embrace the power of our platform. We believe that as customers deploy greater volumes and sources of data for multiple use cases, the unique features of our platform can address the needs of everyone within their organization. We are still in the early stages of expanding within many of our customers. We have invested in platform capabilities and online support resources that allow our customers to expand the use of our platform in a self-guided manner. Our professional services, customer support and customer success functions also support our sales force by helping customers to successfully deploy our platform and implement additional use cases. In addition, we believe our partner ecosystem will become increasingly important over time. We work closely with our customers to drive increased engagement with our platform by identifying new use cases through our customer success teams, as well as in-platform, self-guided experiences. We actively engage with our customers to assess whether they are satisfied and fully realizing the benefits of our platform. While these efforts often require a substantial commitment and upfront costs, we believe our investment in product, customer support, customer success and professional services will create opportunities to expand our customer relationships over time. Our ability to drive growth and generate incremental revenue depends heavily on our ability to retain our customers and increase their usage of our platform. With that objective in mind, we allocate our customer success and customer support resources to align with maximizing the retention and expansion of our subscription revenue. An important metric that we use to evaluate our performance in retaining customers is gross retention rate. We calculate our gross retention rate by taking the dollar amount of annual contract value (ACV) that renews in a given period divided by the ACV that was up for renewal in that same period. The ACV of multi-year contracts is also considered in the calculation based on the period in which the annual anniversary of the contract falls. Our gross retention rate for the twelve months endedJuly 31, 2021 was 90%. As we continue to enhance our product and develop methods to encourage wider and more strategic adoptions, including focusing our sales and marketing activities towards enterprise customers, we expect that customer retention will increase over the long term; however, in fiscal 2022 we anticipate our retention rate for customers in industries that have been particularly impacted by the current COVID-19 pandemic may be lower than other customers. Our ability to successfully upsell and the impact of cancellations may vary from period to period. The extent of this variability depends on a number of factors including the size and timing of upsells and cancellations relative to the initial subscriptions. Sales and Marketing Efficiency We are focused on increasing the efficiency of our sales force and marketing activities by enhancing account targeting, messaging, field sales operations and sales training in order to reduce our sales and marketing expense as a percentage of revenue and accelerate the adoption of our platform. Our sales strategy depends on our ability to continue to attract top talent, to increase our pipeline of business, and to enhance sales productivity. We focus on productivity per quota-carrying sales representative and the time it takes our sales representatives to reach full productivity. During fiscal 2022 we have hired and plan to hire more sales representatives, which may have an adverse impact on productivity in the near term. We manage our pipeline by sales representative to ensure sufficient coverage of our sales targets. Our ability to manage our sales productivity and pipeline are important factors to the success of our business. We have shifted marketing spending from broad-based initiatives to targeted account-based marketing campaigns and user events that we believe will result in contracts with larger companies which we expect will result in more upsell ACV potential. Sales and marketing expense as a percentage of total revenue has improved from 54% for the three months endedJuly 31, 2020 to 53% for the three months endedJuly 31, 2021 .Leverage Research and Development Investments for Future Growth We plan to continue to make investments in areas of our business to continue to expand our platform functionality. This may include investing in machine learning algorithms, predictive analytics, and other artificial intelligence technologies to create alerts, detect anomalies, optimize queries, and suggest areas of interest to help people focus on what matters most. 28 -------------------------------------------------------------------------------- These investments may also include extending the functionality and effectiveness of our platform through improvements to the Domo Appstore and developer toolkits, which enable customers and partners to quickly build and deploy custom applications. The amount of new investments required to achieve our plans is expected to decrease as a percentage of revenue compared to historical years. Research and development expense as a percentage of total revenue was 31% for the three months endedJuly 31, 2020 and 31% for the three months endedJuly 31, 2021 . Key Business Metric Billings Billings represent our total revenue plus the change in deferred revenue in a period. Billings reflect sales to new customers plus subscription renewals and upsells to existing customers, and represent amounts invoiced for subscription, support and professional services. We typically invoice our customers annually in advance for subscriptions to our platform, but in the first half of fiscal 2021 we saw an increase in requests for semi-annual and quarterly billing terms as a result of the COVID-19 pandemic. However, since that time, we have seen an overall improvement in the portion of total billings that are annual in advance. Because we generate most of our revenue from customerswho are invoiced on an annual basis and have a wide range of annual contract values, we may experience variability due to typical enterprise buying patterns and timing of large initial contracts, renewals and upsells. The following table sets forth our billings for the three and six months endedJuly 31, 2020 and 2021: Three Months Ended July 31, Six Months Ended July 31, 2020 2021 2020 2021 Billings (in thousands)$ 47,641 $
60,006
Components of Results of Operations
Revenue
We offer subscriptions to our cloud-based platform. We derive our revenue
primarily from subscriptions and professional services. Subscription revenue
consists primarily of fees to provide our customers access to
our cloud-based platform, which includes online customer support resources at no
additional cost. Professional service fees include implementation services,
optimization services, and training.
Subscription revenue is a function of the number of customers, platform tier,
and number of users at each customer, and the price per user. Subscription
revenue is recognized ratably over the related contractual term beginning on the
date the platform is made available to the customer. Our new business
subscriptions typically have a term of one to three years, and 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.
Professional services and other revenue primarily consists of implementation
services sold with new subscriptions, as well as professional services sold
separately, including training and education. Professional services are
generally billed in advance and revenue from these arrangements is recognized as
the services are performed. Our professional services engagements typically span
from a few weeks to several months.
Cost of Revenue
Cost of subscription revenue consists primarily of third-party hosting services
and data center capacity; salaries, benefits, bonuses and stock-based
compensation, or employee-related costs, directly associated with cloud
infrastructure and customer support personnel; amortization expense associated
with capitalized software development costs; depreciation expense associated
with computer equipment and software; certain fees paid to various third parties
for the use of their technology and services; and allocated overhead. Allocated
overhead includes items such as information technology infrastructure, rent, and
certain employee benefit costs.
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Cost of professional services and other revenue consists primarily of
employee-related costs directly associated with these services, third-party
consultant fees, and allocated overhead.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist primarily of
employee-related costs directly associated with our sales and marketing staff
and commissions. Other sales and marketing costs include digital marketing
programs and promotional events to promote our brand, including Domopalooza, our
annual user conference, as well as tradeshows, advertising and allocated
overhead. Contract acquisition costs, including sales commissions, are deferred
and then amortized on a straight-line basis over the period of benefit, which we
have determined to be approximately four years for initial contracts. Contract
acquisition costs related to renewal contracts and professional services are
recorded as expense when incurred if the period of benefit is one year or less.
If the period of benefit is greater than one year, costs are deferred and then
amortized on a straight-line basis over the period of benefit, which the Company
has determined to be two years.
Research and Development. Research and development expenses consist primarily of
employee-related costs for the design and development of our platform,
contractor costs to supplement staff levels, third-party web services,
consulting services, and allocated overhead. Our cycle of frequent updates has
facilitated rapid innovation and the introduction of new product features
throughout our history. We capitalize certain software development costs that
are attributable to developing new features and adding incremental functionality
to our platform, and amortize such costs as costs of subscription revenue over
the estimated life of the new feature or incremental functionality, which is
generally three years.
General and Administrative. General and administrative expenses consist of
employee-related costs for executive, finance, legal, human resources,
recruiting and administrative personnel; professional fees for external legal,
accounting, recruiting and other consulting services; and allocated overhead
costs.
Other Expense, Net. Other expense, net consists primarily of interest expense
related to long-term debt. It also includes the effect of exchange rates on
foreign currency transaction gains and losses, foreign currency gains and losses
upon remeasurement of intercompany balances, sublease income, and interest
income earned on our cash, cash equivalents and short-term investments. The
transactional impacts of foreign currency are recorded as foreign currency
losses (gains) in the condensed consolidated statements of operations.
Provision for (Benefit from) Income Taxes. Provision for (benefit from) income
taxes consists primarily of income taxes related to foreign and state
jurisdictions in which we conduct business. Because of the uncertainty of the
realization of the deferred tax assets, we have a full valuation allowance for
domestic net deferred tax assets, including net operating loss carryforwards and
tax credits related primarily to research and development.
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Results of Operations
The following tables set forth selected condensed consolidated statements of
operations data and such data as a percentage of total revenue for each of the
periods indicated:
Three Months Ended July 31, Six Months Ended July 31,
2020 2021 2020 2021
Revenue: (in thousands)
Subscription $ 44,347
6,784 8,159 12,909 16,109
Total revenue 51,131 62,825 99,692 122,887
Cost of revenue:
Subscription(1) 8,811 10,019 17,916 19,076
Professional services and other(1) 4,838 6,299 9,842 12,400
Total cost of revenue 13,649 16,318 27,758 31,476
Gross profit 37,482 46,507 71,934 91,411
Operating expenses:
Sales and marketing(1) 27,384 33,378 56,480 66,832
Research and development(1) 15,917 19,341 33,370 35,527
General and administrative(1)(2) 9,557 12,384 19,426 22,602
Total operating expenses 52,858 65,103 109,276 124,961
Loss from operations (15,376) (18,596) (37,342) (33,550)
Other expense, net(1) (2,417) (3,505) (5,141) (6,767)
Loss before income taxes (17,793) (22,101) (42,483) (40,317)
Provision for income taxes 110 139 315 27
Net loss $ (17,903) $ (22,240) $ (42,798) $ (40,344)
________________(1)Includes stock-based compensation expense as follows:
Three Months Ended July 31, Six Months Ended July 31,
2020 2021 2020 2021
Cost of revenue: (in thousands)
Subscription $ 147 $ 549 $ 373 $ 968
Professional services and other 118 271 221 605
Sales and marketing 2,543 4,747 4,369 8,474
Research and development 2,002 2,751 3,879 5,240
General and administrative 2,323 4,137 4,720 7,053
Other expense, net 48 171 95 348
Total $ 7,181 $ 12,626 $ 13,657 $ 22,688
(2)Includes amortization of certain intangible assets of $20,000 and $20,000 for
the three months ended July 31, 2020 and 2021, respectively, and $40,000 and
$40,000 for the six months ended July 31, 2020 and 2021, respectively.
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Three Months Ended July 31, Six Months Ended July 31,
2020 2021 2020 2021
Revenue:
Subscription 87 % 87 % 87 % 87 %
Professional services and other 13 13 13 13
Total revenue 100 100 100 100
Cost of revenue:
Subscription 17 16 18 16
Professional services and other 10 10 10 10
Total cost of revenue 27 26 28 26
Gross margin 73 74 72 74
Operating expenses:
Sales and marketing 54 53 57 54
Research and development 31 31 33 29
General and administrative 18 20 19 18
Total operating expenses 103 104 109 101
Loss from operations (30) (30) (37) (27)
Other expense, net (5) (6) (5) (6)
Loss before income taxes (35) (36) (42) (33)
Provision for income taxes - - - -
Net loss (35) % (36) % (42) % (33) %
Discussion of the Three Months Ended July 31, 2020 and 2021
Revenue
Three Months Ended July 31,
2020 2021 $ Change % Change
(in thousands)
Revenue:
Subscription $ 44,347 $ 54,666 $ 10,319 23 %
Professional services and other 6,784 8,159 1,375 20
Total revenue $ 51,131 $ 62,825 $ 11,694 23
Percentage of revenue:
Subscription 87 % 87 %
Professional services and other 13 13
Total 100 % 100 %
The increase in subscription revenue was primarily due to a $6.7 million
increase from new customers and a $3.6 million increase from existing customers.
Our customer count increased 13% from July 31, 2020 to July 31, 2021 . The
increase in professional services and other revenue was due to a higher volume
of billable hours delivered. We anticipate that as we continue to close new
business and retain our customers that subscription revenue will increase as a
percent of total revenue.
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--------------------------------------------------------------------------------Cost of Revenue, Gross Profit and Gross Margin
Three Months Ended July 31,
2020 2021 $ Change % Change
(in thousands)
Cost of revenue:
Subscription $ 8,811 $ 10,019 $ 1,208 14 %
Professional services and other 4,838 6,299 1,461 30
Total cost of revenue $ 13,649 $ 16,318 $ 2,669 20
Gross profit $ 37,482 $ 46,507 $ 9,025 24
Gross margin:
Subscription 80 % 82 %
Professional services and other 29 23
Total gross margin 73 74
The increase in subscription cost of revenue was primarily due to
employee-related costs, attributable to higher headcount.
The increase in professional services and other cost of revenue was primarily
due to a $0.8 million increase in outsourced services resulting from a higher
volume of services provided by third-party consultants related to implementation
and a $0.6 million increase in employee-related costs.
Subscription gross margin improved due to cost improvements from continued
proactive management and optimization of our third-party hosting services. We
expect subscription gross margin to improve as we continue to effectively manage
our data center operations and third-party hosting services.
Services gross margin declined due to the timing of projects with higher
margins. We expect the gross margin for professional services to fluctuate from
period to period due to changes in the proportion of services provided by
third-party consultants, seasonality, as well as timing of projects with higher
margins.
Operating Expenses
Three Months Ended July 31,
2020 2021 $ Change % Change
(in thousands)
Operating expenses:
Sales and marketing $ 27,384 $ 33,378 $ 5,994 22 %
Research and development 15,917 19,341 3,424 22
General and administrative 9,557 12,384 2,827 30
Total operating expenses $ 52,858 $ 65,103 $ 12,245 23
Percentage of revenue:
Sales and marketing 54 % 53 %
Research and development 31 31
General and administrative 18 20
Sales and marketing expenses increased primarily due to an increase of $4.7
million in employee-related costs, driven by stock-based compensation. Other
increases included $0.4 million in travel costs, $0.3 million in commission
expense, and $0.3 million in rent expense. We expect sales and marketing expense
to continue to decline as a percentage of total revenue in the long term;
however, in the near term the pace of the decline may slow as we invest in our
sales organization.
Research and development expenses increased primarily due to a $3.1 million
increase in employee-related costs, attributable to higher headcount and
stock-based compensation, and a $0.5 million increase in contract labor. We
expect
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research and development expense to decline as a percentage of total revenue in
the long term as we leverage our research and development organization.
General and administrative expenses increased primarily due to employee-related
costs increasing by $2.5 million , driven by stock-based compensation. Recruiting
fees increased by $0.4 million . In the long term, we expect general and
administrative expense to decline as a percentage of total revenue as we
leverage previous investments in our general and administrative organization.
Other Expense, Net
Three Months Ended July 31,
2020 2021 $ Change % Change
(in thousands)
Other expense, net $ (2,417) $ (3,505) $ (1,088) (45) %
Other expense, net increased primarily due to a $0.7 million increase in expense
related to changes in foreign exchange rates and a higher balance of cash
denominated in currencies other than the functional currency, combined with a
$0.3 million increase in interest expense. We expect foreign currency gains and
losses could become more pronounced due to currency market volatility and as we
continue to expand our foreign operations.
Provision for Income Taxes
Three Months Ended July 31,
2020 2021 $ Change % Change
(in thousands)
Provision for income taxes $ 110 $ 139 $ 29 26 %
The increase in the provision for income taxes was due to higher taxable income
in foreign jurisdictions. In the long term, we expect income tax expense to
increase in conjunction with growth in our international subsidiaries.
Discussion of the Six Months Ended July 31, 2020 and 2021
Revenue
Six Months Ended July 31,
2020 2021 $ Change % Change
(in thousands)
Revenue:
Subscription $ 86,783 $ 106,778 $ 19,995 23 %
Professional services and other 12,909 16,109 3,200 25
Total revenue $ 99,692 $ 122,887 $ 23,195 23
Percentage of revenue:
Subscription 87 % 87 %
Professional services and other 13 13
Total 100 % 100 %
The increase in subscription revenue was primarily due to a $12.4 million
increase from new customers and a $7.6 million increase from existing customers.
Our customer count increased 13% from July 31, 2020 to July 31, 2021 . The
increase in professional services and other revenue was due to a higher volume
of billable hours delivered.
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--------------------------------------------------------------------------------Cost of Revenue, Gross Profit and Gross Margin
Six Months Ended July 31,
2020 2021 $ Change % Change
(in thousands)
Cost of revenue:
Subscription $ 17,916 $ 19,076 $ 1,160 6 %
Professional services and other 9,842 12,400 2,558 26
Total cost of revenue $ 27,758 $ 31,476 $ 3,718 13
Gross profit $ 71,934 $ 91,411 $ 19,477 27
Gross margin:
Subscription 79 % 82 %
Professional services and other 24 23
Total gross margin 72 74
The increase in cost of subscription revenue was primarily due a $1.7 million
increase in employee-related costs attributable to higher headcount in our
support organization, of which $0.6 million related to stock-based compensation.
This was partially offset by a $0.6 million decrease in expense related to
third-party hosting services. Cost of professional services and other revenue
increased primarily due to a $1.7 million increase in outsourced services
resulting from a higher volume of services provided by third-party consultants
related to implementation and a $0.8 million increase in employee-related costs,
attributable to higher headcount.
Subscription gross margin improved due to cost improvements from continued
proactive management and optimization of our third-party hosting services.
Services gross margin declined due to timing of projects with higher margins.
Operating Expenses
Six Months Ended July 31,
2020 2021 $ Change % Change
(in thousands)
Operating expenses:
Sales and marketing $ 56,480 $ 66,832 $ 10,352 18 %
Research and development 33,370 35,527 2,157 6
General and administrative 19,426 22,602
3,176 16
Total operating expenses $ 109,276 $ 124,961 $ 15,685 14
Percentage of revenue:
Sales and marketing 57 % 54 %
Research and development 33 29
General and administrative 19 18
Sales and marketing expenses increased primarily due to a $6.7 million increase
in employee-related costs driven by stock-based compensation and higher
headcount. Marketing expenses increased by $1.7 million due to an increase in
expenses related to events, influencer marketing, and brand awareness.
Commission expense increased by $1.4 million due to higher sales. Other
increases included travel-related costs and software subscriptions.
Research and development expenses increased due to employee-related costs
increasing by $2.2 million driven by stock-based compensation and higher
headcount.
General and administrative expenses increased primarily due to employee-related
costs increasing by $3.0 million driven by stock-based compensation.
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--------------------------------------------------------------------------------Other Income (Expense), Net
Six Months Ended July 31,
2020 2021 $ Change % Change
(in thousands)
Other expense, net $ (5,141) $ (6,767) $(1,626) 32 %
Other expense, net increased primarily due to a$0.8 million increase in expense related to changes in foreign exchange rates and a higher balance of cash denominated in currencies other than the functional currency, combined with a$0.5 million increase in interest expense. Interest income decreased by$0.3 million due to a lower investment balance. Provision for Income Taxes Six Months Ended July 31, 2020 2021 $ Change % Change (in thousands) Provision for income taxes $ 315$ 27 $ (288) (91) % Provision for income taxes decreased due to refunds received and return to provision adjustments in the six months endedJuly 31, 2021 . Liquidity and Capital Resources As ofJuly 31, 2021 , we had$86.4 million of cash and cash equivalents, which were held for working capital purposes. Our cash and cash equivalents consist primarily of cash, money market funds, and certificates of deposit. We also have a$100 million credit facility, all of which had been drawn as ofJuly 31, 2021 . Since inception, we have financed operations primarily from cash collected from customers for our subscriptions and services, periodic sales of convertible preferred stock, our IPO and to a lesser extent, debt financing. Our principal uses of cash have consisted of employee-related costs, marketing programs and events, payments related to hosting our cloud-based platform and purchases of short-term investments. We believe our existing cash and cash equivalents will be sufficient to meet our projected operating requirements for at least the next 12 months. We may need to raise additional funds to invest in growth opportunities, product development, sales and marketing, and other purposes. Our future capital requirements will depend on many factors, including our growth rate; the level of investments we make in product development, sales and marketing activities and other investments to support the growth of our business; the continuing market acceptance of our platform; and customer retention rates, and may increase materially from those currently planned. We may seek to raise additional funds through equity or debt financings. If we raise additional funds through the incurrence of indebtedness, such indebtedness likely would have rights that are senior to holders of our equity securities and could contain covenants that restrict operations in the same or similar manner as our credit facility. Any additional equity financing likely would be dilutive to existing stockholders. We cannot assure you that any additional financing will be available to us on acceptable terms, or at all. Although we are not currently a party to any agreement or letter of intent with respect to potential investments in, or acquisitions of, complementary businesses, services or technologies, we may enter into these types of arrangements in the future, which could also require us to seek additional equity financing, incur indebtedness, or use cash resources. We have no present understandings, commitments or agreements to enter into any such acquisitions. We do not have any special purpose entities and we do not engage in off-balance sheet financing arrangements. Credit Facility InAugust 2020 , we entered into an amendment to the credit facility which extended the maturity date for the outstanding loan fromOctober 1, 2022 toApril 1, 2025 . Per the amendment, we are required to comply with a financial covenant requiring us to maintain a minimum balance of unrestricted cash and cash equivalents equal to$10.0 million until our six-month adjusted cash flow is greater than zero. The amendment also revised the maximum debt ratio financial covenant and included an amendment fee of$5.0 million , which accrues interest at a rate of 9.5% per year. The amendment fee, along with its accrued interest, is to be paid at the earlier of the payment date, maturity date, or the date the loan becomes payable. 36 -------------------------------------------------------------------------------- The credit facility permits us to incur up to$100 million in term loan borrowings, all of which had been drawn as ofJuly 31, 2021 . The term loan maturity date isApril 1, 2025 with a closing fee of$7.0 million , which is in addition to the$5.0 million amendment fee described above. Each term loan requires that we pay only interest until the maturity date. A portion of the interest that accrues on the outstanding principal of each term loan is payable in cash on a monthly basis, which portion accrues at a floating rate equal to the greater of (1) 7% and (2) three-month LIBOR plus 5.5% per year. In the event that LIBOR is unavailable, interest will accrue at a floating rate equal to the greater of (1) 7% and (2) theU.S. prime rate plus 2.75% per year. As ofJuly 31, 2021 , the interest rate was approximately 7.0%. In addition, a portion of the interest that accrues on the outstanding principal of each term loan is capitalized and added to the principal amount of the outstanding term loan on a monthly basis, which portion accrues at a fixed rate equal to 2.5% per year. The credit facility contains customary conditions to borrowing, events of default and covenants, including covenants that restrict our ability to dispose of assets, make material changes to the nature, control or location of our business, merge with or acquire other entities, incur indebtedness or encumbrances, make distributions to holders of our capital stock, make investments or enter into transactions with affiliates. In addition, we are required to comply with a financial covenant based on the ratio of our outstanding indebtedness to our annualized recurring revenue. The maximum ratio is 0.600 onJanuary 31, 2021 andApril 30, 2021 ; 0.575 onJuly 31, 2021 andOctober 31, 2021 ; 0.550 onJanuary 31, 2022 andApril 30, 2022 ; 0.525 onJuly 31, 2022 andOctober 31, 2022 ; and 0.500 onJanuary 31, 2023 through the maturity date. The credit facility defines our annualized recurring revenue as four times our aggregate revenue for the immediately preceding quarter (net of recurring discounts and discounts for periods greater than one year) less the annual contract value of any customer contracts pursuant to which we were advised during such quarter would not be renewed at the end of the current term plus the annual contract value of existing customer contract increases during such quarter. This covenant is measured quarterly on a three-month trailing basis. Upon the occurrence of an event of default, such as non-compliance with covenants, any outstanding principal, interest and fees become due immediately. We were in compliance with the covenant terms of the credit facility atJanuary 31, 2021 andJuly 31, 2021 . The credit facility is secured by substantially all of our assets. Historical Cash Flow Trends Six Months Ended July 31, 2020 2021 (in thousands) Net cash used in operating activities$ (17,704) $ (559) Net cash provided by (used in) investing activities 9,892 (3,418) Net cash provided by (used in) financing activities 5,185 (282) Operating Activities Net cash used in operating activities is significantly influenced by the amount of cash we invest in our personnel, timing and amounts we use to fund marketing programs and events to expand our customer base, and the costs to provide our cloud-based platform and related outsourced professional services to our customers. These outflows are partially offset by the amount and timing of payments received from our customers. Net cash used in operating activities during the six months endedJuly 31, 2020 consisted of cash outflows of$127.0 million exceeding the$109.3 million of cash collected from customers. Significant components of cash outflows included$75.7 million for personnel costs and$26.1 million for marketing programs and events, third-party costs to provide our platform and outsourced professional services. Net cash used in operating activities during the six months endedJuly 31, 2021 consisted of cash outflows of$137.5 million exceeding the$136.9 million of cash collected from customers. Significant components of cash outflows included$88.0 million for personnel costs and$23.8 million for marketing programs and events, third-party costs to provide our platform and outsourced professional services. Investing Activities Our investing activities have consisted primarily of purchases and proceeds from maturities of short-term investments and property and equipment purchases. Significant components of purchased property and equipment include capitalized development costs related to internal-use software and computer equipment and software for our data center. 37 -------------------------------------------------------------------------------- Net cash provided by investing activities during the six months endedJuly 31, 2020 consisted primarily of$24.3 million from maturities of short-term investments, offset by$11.1 million of purchases of short-term investments. The remaining amount consisted of$2.7 million of capitalized development costs related to internal-use software and$0.5 million of purchased property and equipment. Net cash used in investing activities during the six months endedJuly 31, 2021 consisted primarily of of$3.1 million of capitalized development costs related to internal-use software and$0.3 million of purchased property and equipment. Financing Activities Our financing activities have consisted primarily of proceeds from our IPO, issuances of convertible preferred stock, proceeds from our credit facility and to a lesser extent, proceeds received from stock option exercises. Net cash provided by financing activities for the six months endedJuly 31, 2020 consisted primarily of$3.6 million of proceeds from shares issued in connection with our employee stock purchase plan and$2.1 million of proceeds received from stock option exercises, offset by$0.5 million used to repurchase shares for tax withholdings on release of restricted stock. Net cash used in financing activities for the six months endedJuly 31, 2021 consisted primarily of$7.6 million used to repurchase shares for tax withholdings on release of restricted stock, offset by$4.1 million of proceeds from shares issued in connection with our employee stock purchase plan and$3.2 million of proceeds received from stock option exercises. Contractual Obligations and Commitments Our principal commitments consist of long-term debt, obligations under operating leases for office space, and non-cancelable contracts for cloud infrastructure services. There have been no material changes in our contractual obligations and commitments, as disclosed in our Annual Report on Form 10-K. Critical Accounting Policies and Estimates We prepare our condensed consolidated financial statements in accordance with generally accepted accounting principles inthe United States , or GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations would be affected. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. Critical accounting policies and estimates are those that we consider critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management's judgments and estimates. There have been no material changes to our critical accounting policies and estimates as previously disclosed in our Annual Report on Form 10-K. See "Note 2-Summary of Significant Accounting Policies" of our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for more information regarding the Company's significant accounting policies. Recent Accounting Pronouncements See "Note 2-Summary of Significant Accounting Policies" of our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for more information regarding recent accounting pronouncements. 38
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