GITLAB INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q. You should review the section titled "Special Note Regarding Forward-Looking Statements" above in this Quarterly Report on Form 10-Q for a discussion of forward-looking statements and important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled "Risk Factors" in this Quarterly Report on Form 10-Q. Our historical results are not necessarily indicative of the results that may be expected for any period in the future.
Overview
We believe in an innovative world powered by software. To realize this vision, we pioneered The One DevOps Platform, our fundamentally new approach to DevOps consisting of a single codebase and interface with a unified data model. The One DevOps Platform allows everyone to contribute to build better software rapidly, efficiently, and securely. Today, every industry, business, and function within a company is dependent on software. To remain competitive and survive, nearly all companies must digitally transform and become experts at building and delivering software.GitLab is The One DevOps Platform, a single application that brings together development, security, operations, IT, and business teams to deliver desired business outcomes. Having all teams on a single application with a single interface represents a step function change in how organizations plan, build, secure, and deliver software. The One DevOps Platform accelerates our customers' ability to create business value and innovate by reducing their software development cycle times from weeks to minutes. It removes the need for point tools and delivers enhanced operational efficiency by eliminating manual work, increasing productivity, and creating a culture of innovation and velocity. The One DevOps Platform also embeds security earlier into the development process, improving our customers' software security, quality, and overall compliance. The One DevOps Platform is available to any company, regardless of the size, scope, and complexity of their deployment. As a result, we have a large number of customers on paid trials or with single-digit users. For purposes of determining the number of our active customers, we look at our customers with more than$5,000 of Annual Recurring Revenue, or ARR, in a given period, who we refer to as our Base Customers. For purposes of determining our Base Customers, a single organization with separate subsidiaries, segments, or divisions that use The One DevOps Platform is considered a single customer for determining each organization's ARR. Our company exists today in large part thanks to the vast and growing community of open source contributors around the world. We actively work to grow open source community engagement by operating with intentional transparency. We make our strategy, direction, and product roadmap available to the wider community, where we encourage and solicit their feedback. By making information public, we make it easier to solicit contributions and collaboration from our users and customers. See the section entitled "-Key Business Metrics-Dollar-Based Net Retention Rate and ARR" below for additional information about how we define ARR. We make our plans available through our self-managed and software-as-a-service, or SaaS offerings. For our self-managed offering, the customer installs The One DevOps Platform in its own private or hybrid cloud environment. For our SaaS offering, the platform is managed byGitLab and hosted in the public cloud. 31
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Recent Developments
OnApril 4, 2022 , our majority owned subsidiary,Meltano Inc. closed its Series Seed-2 round of preferred stock financing, and subsequent to closing of the financing, we lost control over this subsidiary. EffectiveApril 4, 2022 , we account for this investment under the equity method. See "Note 11. Joint Venture and Deconsolidation of Majority Owned Subsidiary" to our condensed consolidated financial statements for additional details.
Impact of COVID-19
The COVID-19 pandemic has caused general business disruption worldwide. While we have experienced and may continue to experience a modest adverse impact on certain parts of our business, including a lengthening in the sales cycle for some prospective customers and delays in the delivery of professional services and trainings to customers, our results of operations, cash flows, and financial condition have not been adversely impacted to date. However, as certain customers or partners experience downturns or uncertainty in their own business operations or revenue resulting from the spread of COVID-19, they may continue to decrease or delay their spending, request pricing discounts, or seek renegotiations of their contracts, any of which may result in decreased revenue and cash receipts for us. In addition, we may experience customer losses, including due to bankruptcy or customers ceasing operations, which may result in an inability to collect accounts receivable from these customers. The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations, cash flows, and financial condition will depend on future developments that are highly uncertain and cannot be accurately predicted. The global impact of COVID-19 continues to rapidly evolve, and we will continue to monitor the situation and the effects on our business and operations closely. We do not yet know the full extent of potential impacts on our business or operations or on the global economy as a whole, particularly if the COVID-19 pandemic continues and persists for an extended period of time. See Part II, Item 1A, "Risk Factors" in this Quarterly Report on Form 10-Q. Given the uncertainty, we cannot reasonably estimate the impact on our future results of operations, cash flows, or financial condition.
Factors Affecting Our Performance
Sustaining innovation and technology leadership
We believe we have built a highly differentiated platform that gives us an advantage over our competitors by empowering business, development, security, operations, and IT teams to collaborate in a single application across the entire DevOps lifecycle. Our technology leadership is an outcome of various factors, including our strong community, network of contributors, and continued enhancement of The One DevOps Platform by developing new features and expanding the functionality of existing features with speed and consistency. We have had a history of releasing enhancements to The One DevOps Platform on the 22nd of every month and, as ofApril 30, 2022 , had done so for the last 127 months. We intend to continue releasing new software at this cadence. We also intend to continue investing in research and development to further enhance The One DevOps Platform and sustain our innovation and technology leadership. We have a history of investing in our open source community and intend to continue to leverage our open source software to accelerate innovation. We also intend to continue to add headcount to our research and development team and support functions to extend the functionality and range of The One DevOps Platform by bringing new and improved products and services to our customers. We expect our research and development expenses to increase on an absolute basis in future periods. We foresee that such investment in research and development will contribute to our long-term growth, but will also negatively impact our short-term profitability. As engaged members of theGitLab open-source community, our contributors often serve as subject matter experts at market-leading developer events and The One DevOps Platform is presented on the cutting edge of innovation. We 32
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intend to continue to invest in building out this community to foster more contributions and collaboration in the space. Our open source community, in turn, accelerates our ability to innovate and provide a better platform to our customers. We intend to expend additional resources in the future to continue enhancing The One DevOps Platform and introducing new products, features and functionality. Acquiring New Customers Our future growth depends in large part on our ability to acquire new customers. This, in turn, relies on our ability to reach teams and organizations through our marketing and sales efforts. To this end, we are making significant investments in our sales and marketing efforts to expand our reach and differentiate The One DevOps Platform from competitive products and services. We believe that eventually the vast majority of organizations will switch to a DevOps platform and embrace a single application approach, creating a substantial opportunity to continue to grow our customer base. As a result, our Base Customers increased to 5,168 as ofApril 30, 2022 from 3,142 as ofApril 30, 2021 , an increase of 64%, our$100,000 ARR customers increased to 545 as ofApril 30, 2022 from 324 as ofApril 30, 2021 , an increase of 68%. See the section entitled "-Key Business Metrics-Dollar-Based Net Retention Rate and ARR" below for additional information about how we define ARR. Our operating results and growth prospects will depend in part on our ability to attract new customers. While we believe we have a significant market opportunity that The One DevOps Platform addresses, we will need to continue to invest in sales and marketing, research and development, and customer support to further grow our customer base, both domestically and internationally. We believe our estimated 30 million registered users, which includes users of our free platform, provides a base of potential new customers. We intend to continue to add headcount to our global sales and marketing team to acquire new customers and to increase sales to existing customers. While we cannot predict customer adoption rates and demand, the future growth rate and size of the market for DevOps platforms, or the introduction of competitive products and services, our business and operating results will be significantly affected by the degree and speed with which organizations adopt The One DevOps Platform.
Retaining and Expanding Our Existing Customers
We employ a "land and expand" business strategy that focuses on efficiently acquiring new customers and growing our relationships with existing customers over time. We believe that as our customers realize the benefits of a single application approach, they will increase the use of The One DevOps Platform, enhancing our ability to expand revenue generation within our existing customers over time. As a result of our approach, as ofApril 30, 2022 and 2021, our Dollar-Based Net Retention Rate were above 130%. See the section entitled "-Key Business Metrics-Dollar-Based Net Retention Rate and ARR" below for additional information about how we define Dollar-Based Net Retention Rate. We plan to continue investing in sales and marketing, with a focus on expansion of The One DevOps Platform with Base Customers. We believe that this expansion will provide us with substantial operating leverage because the costs to expand sales within existing customers are significantly less than the costs to acquire new customers. Our future revenue growth and our ability to achieve and maintain profitability is dependent upon our ability to continue landing new customers, expanding the adoption of The One DevOps Platform by additional users within their organizations, and upgrading customers to higher-cost tiers. Ultimately our ability to increase sales to existing customers will depend on several factors, including our customers' satisfaction with The One DevOps Platform, our pricing, competition, and overall changes in our customers' spending levels.
Partnerships, Alliances, Channels, and Integrations
We believe that our further growth depends in part on our ability to build and
maintain successful partnerships, alliances, channels and integrations. We are
continuously investing in developing a strong ecosystem and partner network,
comprised of cloud and technology partners, re-sellers, and system integrators,
as a way to expand our go-to-market strategy. We plan to continue investing in
and developing these relationships to broaden our distribution footprint and
drive greater awareness of our
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brand and The One DevOps Platform. We believe that these partnerships will extend our sales reach and provide product and technology integrations that will accelerate implementation of The One DevOps Platform domestically and internationally, although investing in these relationships can be time consuming and costly. While expending resources in developing these partnerships and alliances may adversely impact our short-term profitability, we believe these investments will lead to longer term growth for the business as a whole.
Continuing to Scale our Business
We plan to continue investing in our business so that we can capitalize on our market opportunity. We believe that these investments will contribute to our long-term growth, although they may adversely affect our operating results in the near term. Furthermore, we expect our general and administrative expenses to increase in absolute amount for the foreseeable future given the additional expenses for accounting, compliance, and investor relations as a public company. While we expect these investments will contribute to our long-term growth, they may adversely affect our profitability in the near term, until such time as we are able to sufficiently grow our number of customers and increase the value of ARR with existing customers. We plan to balance these investments in future growth with a continued focus on managing our operating results.
Key Business Metrics
We monitor the following key metrics to help us evaluate our business, identify trends affecting our business, formulate business plans, and make strategic decisions.
Dollar-Based Net Retention Rate and ARR
We believe that our ability to retain and expand our revenue generated from our
existing customers is an indicator of the long-term value of our customer
relationships and our potential future business opportunities. Dollar-Based Net
Retention Rate measures the percentage change in our ARR derived from our
customer base at a point in time. Our calculation of ARR and by extension
Dollar-Based Net Retention Rate, includes both self-managed and SaaS license
revenue. We report Dollar-Based Net Retention Rate on a threshold basis of 130%
each quarter, and provide a tighter threshold as of each fiscal year end.
We calculate ARR by taking the monthly recurring revenue, or MRR, and
multiplying it by 12. MRR for each month is calculated by aggregating, for all
customers during that month, monthly revenue from committed contractual amounts
of subscriptions, including our self-managed and SaaS offerings but excluding
professional services. We calculate Dollar-Based Net Retention Rate as of a
period end by starting with our customers as of the 12 months prior to such
period end, or the Prior Period ARR. We then calculate the ARR from these
customers as of the current period end, or the Current Period ARR. The
calculation of Current Period ARR includes any upsells, price adjustments, user
growth within a customer, contraction, and attrition. We then divide the total
Current Period ARR by the total Prior Period ARR to arrive at the Dollar-Based
Net Retention Rate.
As of April 30,
2022 2021
Dollar-Based Net Retention Rate > 130% >130%
Customers with ARR of
We believe that our ability to increase the number of$100,000 ARR customers is an indicator of our market penetration and strategic demand for The One DevOps Platform. A single organization with separate subsidiaries, segments, or divisions that use The One DevOps Platform is considered a single customer for determining each organization's ARR. We do not count our reseller or distributor channel 34
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partners as customers. In cases where customers subscribe to The One DevOps
Platform through our channel partners, each end customer is counted separately.
As of April 30,
2022 2021
$100,000 ARR customers 545 324
Components of Our Results of Operations
Revenue
Subscription - self-managed and SaaS
Our self-managed and SaaS subscriptions consist of support, maintenance, upgrades and updates on a when-and-if-available basis. Revenue for support and maintenance is recognized ratably over the contract period based on the stand-ready nature of these subscription elements.
Our SaaS subscriptions provide access to our latest managed version of our product hosted in a public cloud. Revenue from our SaaS offering is recognized ratably over the contract period when the performance obligation is satisfied. The typical term of a subscription contract for self-managed or SaaS offering is one to three years.
License - self-managed and other
The license component of our self-managed subscriptions reflects the revenue recognized by providing customers with access to proprietary software features. License revenue is recognized up front when the software license is made available to our customer. Other revenue consists of professional services revenue which is primarily derived from fixed fee offerings which are subject to customer acceptance. Given our limited history of providing professional services, uncertainty exists about customer acceptance and therefore, control is presumed to transfer upon confirmation from the customer, as defined in each professional services contract. Accordingly, revenue is recognized upon satisfaction of all requirements per the applicable contract. Revenue from professional services provided on a time and material basis is recognized over the periods services are delivered. Revenue from professional services accounted for 2% and 3% of our total revenue for the three months endedApril 30, 2022 and 2021, respectively.
Cost of Revenue
Subscription - self-managed and SaaS
Cost of revenue for self-managed and SaaS subscriptions consists primarily of allocated cloud-hosting costs paid to third-party service providers, personnel-related costs, including stock-based compensation expenses, associated with our customer support personnel, including contractors, and allocated overhead. We expect our cost of revenue for self-managed and SaaS subscriptions to increase in absolute dollars as our self-managed and SaaS subscription revenue increases. As our SaaS offering makes up an increasing percentage of our total revenue, we expect to see increased associated cloud-related costs, such as hosting and managing costs, which may adversely impact our gross margins.
License - self-managed and other
Cost of self-managed license sales includes personnel-related expenses, including stock-based compensation expenses. Other costs of sales include professional services, personnel-related costs associated with our customer support personnel, including contractors, and allocated overhead.
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Operating Expenses
Our operating expenses consist of sales and marketing, research and development and general and administrative expenses. Personnel-related expenses are the most significant component of operating expenses and consist of salaries, benefits, bonuses, stock-based compensation, and sales commissions. Operating expenses also include IT overhead costs.
Sales and Marketing
Sales and marketing expenses consist primarily of personnel-related expenses associated with our sales and marketing personnel, advertising, travel and entertainment related expenses, including a portion of the costs for our gathering of staff and leaders at one site we call "Contribute" once a year, branding and marketing events, promotions, subscription services and our hosting expenses for our free tier. Sales and marketing expenses also include sales commissions paid to our sales force and referral fees paid to independent third parties that are incremental to obtain a subscription contract. Such costs are capitalized and amortized over an estimated period of benefit of three years, and any such expenses paid for the renewal of a subscription are capitalized and amortized over the contractual term of the renewal. We expect sales and marketing expenses to increase in absolute dollars as we continue to make significant investments in our sales and marketing organization to drive additional revenue, further penetrate the market, and expand our global customer base, but to decrease as a percentage of our total revenue over time, although our sales and marketing expenses may fluctuate as a percentage of our total revenue from period-to-period depending on the timing of these expenses.
Research and Development
Research and development expenses consist primarily of personnel-related expenses associated with our research and development personnel, including internal hosting, contractors and allocated overhead associated with developing new features or enhancing existing features as well as a portion of the costs for our gathering of staff and leaders at one site we call "Contribute" once a year. Costs related to research and development are expensed as incurred. We expect research and development expenses to increase in absolute dollars as we continue to increase investments in our existing products and services. However, we anticipate research and development expenses to decrease as a percentage of our total revenue over time, although our research and development expenses may fluctuate as a percentage of our total revenue from period-to-period depending on the timing of these expenses.
General and Administrative
General and administrative expenses consist primarily of personnel-related
expenses for our executives, finance, legal, and human resources. General and
administrative expenses also include external legal, accounting, director and
officer insurance, a portion of the costs for our gathering of staff and leaders
at one site we call "Contribute" once a year, other consulting, and professional
services fees, software and subscription services, and other corporate expenses.
We expect to incur additional expenses as a result of operating as a public
company, including costs to comply with the rules and regulations applicable to
companies listed on a national securities exchange, costs related to compliance
and reporting obligations, and increased expenses for insurance, investor
relations, and professional services. We expect that our general and
administrative expenses will increase in absolute dollars as our business grows
but will decrease as a percentage of our total revenue over time, although our
general and administrative expenses may fluctuate as a percentage of our total
revenue from period-to-period depending on the timing of these expenses.
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Interest Income, and Other Income (Expense), Net
Interest income consists primarily of interest earned on our cash equivalents and short-term investments.
Other income (expense), net consists primarily of the gain from the deconsolidation of a subsidiary, as well as foreign currency transaction gains and losses.
Provision for Income Taxes Provision for income taxes consists primarily of income taxes in certain foreign and state jurisdictions in which we conduct business. We maintain a full valuation allowance in some jurisdictions against our deferred tax assets because we have concluded that it is not more likely than not that the deferred tax assets will be realized. Results of Operations
The following table sets forth our results of operations for the periods presented (in thousands):
Three Months Ended
2022 2021
Revenue:
Subscription-self-managed and SaaS$ 76,923 $ 44,908 License-self-managed and other 10,484 5,022 Total revenue 87,407 49,930 Cost of revenue:(1) Subscription-self-managed and SaaS 7,933 4,949 License-self-managed and other 1,915 1,476 Total cost of revenue 9,848 6,425 Gross profit 77,559 43,505 Operating expenses: Sales and marketing(1) 66,710 38,854 Research and development(1) 31,830 21,340 General and administrative(1) 21,892 9,339 Total operating expenses 120,432 69,533 Loss from operations (42,873) (26,028) Interest income 526 54 Other income (expense), net(2) 18,448 (1,052) Loss before income taxes and loss from equity method investment (23,899) (27,026) Loss from equity method investment, net of tax 203 - Provision for income taxes 2,511 1,256 Net loss$ (26,613) $ (28,282) Net loss attributable to noncontrolling interest(3) (514) (345) Net loss attributable to GitLab$ (26,099) $ (27,937) 37
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(1)Includes stock-based compensation expense as follows:
Three Months Ended April 30,
2022 2021
(in thousands)
Cost of revenue $ 790 $ 152
Research and development 5,036 965
Sales and marketing 7,051 1,439
General and administrative 4,594 875
Total stock-based compensation expense $ 17,471 (2)Includes$17.8 million gain from a deconsolidation of a majority owned subsidiary. See "Note 11. Joint Venture and Deconsolidation of Majority Owned Subsidiary" to our condensed consolidated financial statements for additional details. (3)Our results of operations include our variable interest entity, JiHu. The ownership interest of other investors is recorded as a noncontrolling interest. See "Note 11. Joint Venture and Deconsolidation of Majority Owned Subsidiary" to our condensed consolidated financial statements for additional details. The following table sets forth the components of our condensed consolidated statements of operations as a percentage of total revenue for each of the periods presented: Three Months Ended April 30, 2022 2021 (as a percentage of total revenue) Revenue 100 % 100 % Cost of revenue 11 13 Gross profit 89 87 Operating expenses: Sales and marketing 76 78 Research and development 36 43 General and administrative 25 19 Total operating expenses 138 139 Loss from operations (49) (52) Interest income 1 - Other income (expense), net 21 (2) Loss before income taxes (27) (54) Loss from equity method investment, net of tax - - Provision for income taxes 3 3 Net loss (30) % (57) % Net loss attributable to noncontrolling interest (1) % (1) % Net loss attributable to GitLab (30) % (56) % 38
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Comparison of the Three Months Ended
Revenue
Three Months Ended April 30, Change
2022 2021 $ %
(in thousands, except percentages)
Subscription-self-managed and SaaS $ 76,923 $ 44,908 $ 32,015 71 %
License-self-managed and other 10,484 5,022 5,462 109
Total revenue $ 87,407 $ 49,930 $ 37,477 75
Revenue increased $37.5 million , or 75%, to $87.4 million for the three months
ended April 30, 2022 from $49.9 million for the three months ended April 30,
2021 , primarily due to the ongoing demand for The One DevOps Platform, including
adding new customers, the expansion within our existing paid customers, and an
increase in our number of customers with $100,000 or greater in ARR. As of
April 30, 2022 and 2021, our expansion is reflected by our Dollar-Based Net
Retention Rate being above 130%. We had 545 $100,000 ARR customers as of
April 30, 2022 , increasing from 324 as of April 30, 2021 .
Revenue for the three months ended April 30, 2022 and 2021 include $1.1 million
and zero, respectively, attributable to our variable interest entity, JiHu. See
"Note 11. Joint Venture and Deconsolidation of Majority Owned Subsidiary" to our
condensed consolidated financial statements for additional details.
Cost of Revenue, Gross Profit, and Gross Margin
Three Months Ended April 30, Change
2022 2021 $ %
(in thousands, except percentages)
Cost of revenue $ 9,848 $ 6,425 $ 3,423 53 %
Gross profit 77,559 43,505 34,054 78
Gross margin 89 % 87 %
Cost of revenue increased by $3.4 million , to $9.8 million for the three months
ended April 30, 2022 from $6.4 million for the three months ended April 30,
2021 , primarily due to an increase of $1.6 million in personnel-related
expenses, driven by an increase in our average customer support and professional
services headcount and an increase of $0.6 million in stock-based compensation
expense. The remaining change was primarily attributable to an increase in
third-party hosting costs of $1.2 million and an increase in amortization of
intangible assets of $0.5 million . Gross margin improved by 2% to 89% for the
three months ended April 30, 2022 from 87% for the three months ended April 30,
2021 .
Cost of revenue for the three months ended
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Sales and Marketing
Three Months Ended April 30, Change
2022 2021 $ %
(in thousands, except percentages)
Sales and marketing expenses $ 66,710 $ 38,854 $ 27,856 72 %
Sales and marketing expenses increased by $27.9 million , to $66.7 million for
the three months ended April 30, 2022 from $38.9 million for the three months
ended April 30, 2021 , primarily due to an increase of $19.6 million in
personnel-related expenses, driven by an increase in our average sales and
marketing headcount and an increase of $5.6 million in stock-based compensation
expenses. The remaining change was mainly due to an increase of $3.1 million in
marketing expenses, an increase of $1.8 million in hosting expenses, and an
increase of $1.1 million in software and consulting expenses as a result of our
investment activities to increase the effectiveness of our sales motions,
increase our sales capacity and acquire more customers.
Sales and marketing expenses for the three months ended April 30, 2022 and 2021
include $1.4 million and $0.1 million , respectively, attributable to our
variable interest entity, JiHu. See "Note 11. Joint Venture and Deconsolidation
of Majority Owned Subsidiary" to our condensed consolidated financial statements
for additional details.
Research and Development
Three Months Ended April 30, Change
2022 2021 $ %
(in thousands, except percentages)
Research and development expenses $ 31,830 $ 21,340 $ 10,490 49 %
Research and development expenses increased by $10.5 million , to $31.8 million
for the three months ended April 30, 2022 from $21.3 million for the three
months ended April 30, 2021 , primarily due to an increase of $10.4 million in
personnel-related expenses, driven by an increase in our average research and
development headcount and an increase of $4.1 million in stock-based
compensation expenses.
Research and development expenses for the three months ended April 30, 2022 and
2021 include $0.9 million and $0.3 million , respectively, attributable to our
variable interest entity, JiHu. See "Note 11. Joint Venture and Deconsolidation
of Majority Owned Subsidiary" to our condensed consolidated financial statements
for additional details.
General and Administrative
Three Months Ended April 30, Change
2022 2021 $ %
(in thousands, except percentages)
General and administrative expenses $ 21,892 $ 9,339 $ 12,553 134 %
General and administrative expenses increased by $12.6 million , to $21.9 million
for the three months ended April 30, 2022 from $9.3 million for the three months
ended April 30, 2021 , primarily due to an increase of $9.7 million in
personnel-related expenses, mainly attributable to an increase in our average
general and administrative headcount and an increase of $3.7 million in
stock-based compensation
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expenses. The remaining change was primarily driven by an increase of
General and administrative expenses for the three months endedApril 30, 2022 and 2021 include$0.8 million and$0.6 million , respectively, attributable to our variable interest entity, JiHu. See "Note 11. Joint Venture and Deconsolidation of Majority Owned Subsidiary" to our condensed consolidated financial statements for additional details.
Interest Income, and Other Income (Expense), Net
Three Months Ended April 30, Change
2022 2021 $ %
(in thousands, except percentages)
Interest income $ 526 $ 54 $ 472 874 %
Gain from deconsolidation of Meltano
Inc. $ 17,798 $ - $ 17,798 100 %
Foreign exchange gains (losses), net 860 (1,051) 1,911 (182)
Other expense, net (210) (1) (209) 20,900
Total other income (expense), net $ 18,448 $ (1,052) $ 19,500 (1,854)
For the three months ended
The change in other income (expense), net is primarily due to the recognized gain on the deconsolidation and the revaluation of our interest in Meltano of$17.8 million . The remaining change in other income (expense), net is mainly due to currency exchange gains and losses recorded by our subsidiaries whose functional currency is not theU.S. dollar.
Provision for Income Taxes
Three Months Ended April 30, Change
2022 2021 $ %
(in thousands, except percentages)
Provision for income taxes $ 2,511 $ 1,256 $ 1,255 100 %
Effective tax rate (10.5)% (4.6)% (5.9)%
Our effective tax rate changed by approximately 5.9% during the three months
ended April 30, 2022 as compared to the same period last year. The higher
effective tax rate was primarily due to the tax expense recognized during the
three months ended April 30, 2022 related to a deferred tax liability recognized
on deconsolidation of a majority-owned entity, Meltano, and simultaneous
establishment of our equity method investment.
Our effective tax rate for the three months ended April 30, 2022 was lower than
the U.S. federal statutory tax rate of 21% primarily due to the change in
valuation allowance associated with the net operating losses generated during
the year.
Our provision for income taxes is based on our worldwide estimated annualized
effective tax rate, except for jurisdictions for which a loss is expected for
the year and no benefit can be realized for those losses, jurisdictions for
which forecasted pre-tax income or loss cannot be estimated, and the tax effect
of
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discrete items occurring during the period. The tax expense for jurisdictions for which a forecast cannot be estimated is based on actual taxes and tax reserves for the quarter.
Under the provisions of ASC 740, Income Taxes, the determination of our ability to recognize our deferred tax asset requires an assessment of both negative and positive evidence when determining our ability to recognize deferred tax assets. We determined that it was not more likely than not that we could recognize certain deferred tax assets. Evidence we evaluated included operating results during the most recent three-year period and future projections, with more weight given to historical results than expectations of future profitability, which are inherently uncertain. Certain entities' net losses in recent periods represented sufficient negative evidence to require a valuation allowance against its net deferred tax assets. This valuation allowance will be evaluated periodically and could be reversed partially or totally if business results have sufficiently improved to support realization of deferred tax assets. As ofApril 30, 2022 , unrecognized tax benefits were$5.5 million , of which$0.7 million would affect the effective tax rate if recognized. We are unable to reasonably estimate the timing of the long-term payments or the amount by which the liability will increase or decrease. It is our policy to classify accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes. For the three months endedApril 30, 2022 and 2021, we recognized an insignificant amount of interest and penalties related to unrecognized tax benefits. Accrued interest and penalties were$0.1 million and$0.1 million as ofApril 30, 2022 andJanuary 31, 2022 , respectively. AtApril 30, 2022 , the statutes for ourU.S. federal 2017 through 2021 tax years were open and subject to potential examination in one or more jurisdictions. In addition, in theU.S. , any net operating losses or credits that were generated in prior years but not yet fully utilized in a year that is closed under the statute of limitations may also be subject to examination. We are currently under examination inthe Netherlands for tax years 2015 and 2016. We are currently unable to estimate the financial outcome of this examination due to its preliminary status. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. We continue to monitor the progress of ongoing discussions with tax authorities and the effect, if any, of the expected expiration of the statute of limitations in various taxing jurisdictions.
Liquidity and Capital Resources
Since inception, we have financed operations primarily through proceeds received from issuances of equity securities and payments received from our customers.
As ofApril 30, 2022 andJanuary 31, 2022 , our principal source of liquidity was cash, cash equivalents, and short-term investments of$934.8 million and$934.7 million , respectively, which were held for working capital purposes. As ofApril 30, 2022 , cash and cash equivalents consist of cash in banks, commercial paper, and money market funds, while short-term investments consist of treasuries, corporate debt securities and commercial paper. We believe that our existing cash, cash equivalents, and short-term investments will be sufficient to support working capital and capital expenditure requirements for at least the next 12 months. Our future capital requirements will depend on many factors, including our revenue growth rate, the timing and the amount of cash received from customers, the expansion of sales and marketing activities, the timing and extent of spending to support research and development efforts, the price at which we are able to procure third-party cloud infrastructure, expenses associated with our international expansion, the introduction of platform enhancements, and the continuing market adoption of The One DevOps Platform. In the future, we may enter into arrangements to acquire or invest in complementary businesses, products, and technologies. We may be required to seek additional equity or debt financing. In the event that we require additional financing, we may not be able to raise such financing on terms acceptable to us or at all. If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in continued innovation, we may not be able to compete successfully, which would harm our business, operating results, and financial condition. 42
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The following table shows a summary of our cash flows for the periods presented:
Three Months Ended April 30,
2022 2021
(in thousands)
Net cash used in operating activities $ (28,156) $ (21,521)
Net cash used in investing activities $ (8,824) $ -
Net cash provided by financing activities $ 43,723 $ 11,030
Operating Activities
Our largest source of operating cash is payments received from our customers.
Our primary uses of cash from operating activities are for personnel-related
expenses, sales and marketing expenses, third-party cloud infrastructure
expenses, and overhead expenses. We have generated negative cash flows from
operating activities and have supplemented working capital through net proceeds
from the sale of equity securities.
Cash used in operating activities during the three months ended April 30, 2022
was $28.2 million , primarily consisting of our net loss of $26.6 million ,
adjusted for non-cash items of $11.4 million , and net cash outflows of $12.9
million used by changes in our operating assets and liabilities. The main
drivers of the changes in operating assets and liabilities were the decrease in
accrued compensation and related expenses of $20.6 million and the increase in
deferred contract acquisition costs of $10.2 million , partially offset by the
decrease in accounts receivable of $8.7 million and the increase in deferred
revenue of $6.7 million .
Cash used in operating activities during the three months ended April 30, 2021
was $21.5 million , primarily consisting of our net loss of $28.3 million ,
adjusted for non-cash items of $11.2 million , and net cash outflows of $4.5
million used by changes in our operating assets and liabilities. The main
drivers of the changes in operating assets and liabilities were the decrease in
accrued compensation and related expenses of $5.8 million and the increase in
costs deferred related to contract acquisition of $4.9 million , partially offset
by the increase in deferred revenue of $6.1 million .
Investing Activities
Cash used in investing activities during the three months endedApril 30, 2022 was$8.8 million , primarily consisting of$9.6 million cash outflow as a result of a deconsolidation of a subsidiary, as well as purchases of property and equipment of$1.9 million , partially offset by maturities of short-term investments, net of purchases of$2.7 million .
We did not have any cash used or provided by investing activities during the
three months ended
Financing Activities
Cash provided by financing activities during the three months endedApril 30, 2022 was$43.7 million , primarily attributable to$35.5 million of contributions received from noncontrolling interests,$5.3 million of proceeds from issuance of common stock upon stock options exercises, and$2.9 million of proceeds from short-term borrowings from a potential investor in JiHu. Cash provided by financing activities during the three months endedApril 30, 2021 was$11.0 million , primarily attributable to$7.5 million of contributions received from noncontrolling interests and$4.1 million of proceeds from issuance of common stock upon stock options exercises. 43
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Contractual Obligations and Commitments
Our contractual commitments relate mainly to third-party hosting infrastructure agreements and subscription arrangements used in the ordinary course of business. There have been no material changes to the contractual obligations with a term of 12 months or longer since the filing of our Annual Report on Form 10-K for the fiscal year endedJanuary 31, 2022 , except for a non-cancelable 3-year hosting infrastructure arrangement of$7.4 million .
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements have been prepared in conformity withU.S. generally accepted accounting principles, or GAAP. The preparation of the condensed consolidated financial statements in conformity withU.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. We base these estimates on historical and anticipated results, trends, and various other assumptions that it believes are reasonable under the circumstances, including assumptions as to future events. Actual results could differ from those estimates. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, operating results, and cash flows will be affected. There have been no material changes to our critical accounting policies and estimates as compared to those described in the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations" set forth in our Annual Report on Form 10-K for the fiscal year endedJanuary 31, 2022 , which was filed with theSEC onApril 8, 2022 .
Recently Issued Accounting Pronouncements
See "Note 2. Basis of Presentation and Summary of Significant Accounting Policies" to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for more information regarding recently issued accounting pronouncements.
JOBS Act Accounting Election
We are an emerging growth company, as defined in the Jumpstart Our Business
Startups Act, or JOBS Act. The JOBS Act provides that an emerging growth company
can take advantage of an extended transition period for complying with new or
revised accounting standards. This provision allows an emerging growth company
to delay the adoption of some accounting standards until those standards would
otherwise apply to private companies. We have elected to use this extended
transition period until the earlier of the date we (i) are no longer an emerging
growth company or (ii) affirmatively and irrevocably opt out of the extended
transition period provided in the JOBS Act. As a result, our financial
statements may not be comparable to companies that comply with new or revised
accounting pronouncements as of public company effective dates.
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