HASHICORP, 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 related notes included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such difference include, but are not limited to, those identified below and those discussed in the section titled "Risk Factors" included in Part I, Item IA of our Annual Report on Form 10-K filed with theSEC onMarch 25, 2022 and elsewhere in this Quarterly Report on Form 10-Q. You should carefully review the risks described in our Annual Report filed with theSEC onMarch 25, 2022 , in this Quarterly Report on Form 10-Q, and in other documents we file from time to time with theSEC . You should review the risk factors for a more complete understanding of the risks associated with an investment in our securities. We disclaim any obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. Our fiscal year end isJanuary 31 , and our fiscal quarters end onApril 30 ,July 31 ,October 31 , andJanuary 31 . Our fiscal year endedJanuary 31, 2022 is referred to as fiscal 2022, and our fiscal year endingJanuary 31, 2023 is referred to as fiscal 2023.
Overview
Our foundational technologies solve the core infrastructure challenges of cloud adoption by enabling an operating model that unlocks the full potential of modern public and private clouds. Our cloud operating model provides consistent workflows and a standardized approach to automating the critical processes involved in delivering applications in the cloud: infrastructure provisioning, security, networking, and application deployment. With our solutions, companies of all sizes and in all industries can accelerate their time to market, reduce their cost of operations, and improve their security and governance of complex infrastructure deployments. Organizations today are undergoing a digital transformation across every business function, driven by competition and ever-increasing consumer expectations. Underlying this digital transformation is a re-platforming of static on-premises infrastructure to dynamic and distributed cloud infrastructure. In this dynamic world, existing procedures are too inefficient to scale with distributed, multi-cloud infrastructure. Inconsistent, fragmented technologies and processes are time consuming and resource intensive to manage, exacerbated by inefficient, linear ticket-driven workflows that cannot facilitate scaled, real-time operations. This digital transformation demands a new cloud operating model for enterprise IT requiring automation to provision, secure, connect, and run infrastructure at scale and in real time. AtHashiCorp , we build industry-leading products that enable this cloud operating model and accelerate cloud adoption. Our primary commercial products are Terraform, Vault, Consul, and Nomad. Our products can be adopted individually and are also designed to work together as a stack in order to solve larger, more complex challenges. For instance, deploying Vault and Consul is the basis for a completeZero Trust security architecture with identity-driven controls, offering a full range of authentication, authorization, and access management for human users or machines, like servers or applications. We continue to innovate and deliver additional emerging products to supplement these core capabilities and provide adjacent solutions. Our Business Model Our primary products are based on a combination of our open-source and proprietary software. We are committed to an open-source model in which we maintain free open-source offerings while developing proprietary features for paid tiers of our software. These proprietary features include collaboration modules, governance and policy modules, enterprise use cases, and premium support and services. We provide our software under a licensing model that protects our intellectual property, grows our adoption, and supports our business. We generate revenue primarily from sales of subscriptions to our software. We offer an enterprise-ready, self-managed software offering that can be deployed in our customers' public cloud, private cloud, and on-premises environments. HashiCorp Cloud Platform ("HCP"), is our fully-managed cloud platform. These two core offerings can be leveraged independently or together, spanning the various public cloud, private cloud, and on-premises environments in which our customers operate. For our self-managed offerings, we offer various tiers that provide different levels of access to our proprietary products, modules, and support. Our licenses for self-managed deployments typically have terms of one to three years. We bill for 20
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one-year licenses upfront, and we primarily bill for multi-year term licenses annually in advance, with a multi-year payment schedule. The substantial majority of our revenue is recognized ratably over the subscription term. Each product is sold as a base module, with additional optional modules available that address needs like governance and policy, and a tiered pricing system that scales pricing with increased product usage. The unit of value for product usage varies by product, and generally scales with customer cloud adoption as workloads managed by our products move to cloud-based infrastructure. Customers of our fully-managed cloud platform, HCP, can either use our offering on a consumption-based model, or can purchase annual subscription contracts. Customers who are on consumption-based contracts are predominantly billed in advance for committed consumption, and revenue from them is recognized, based on actual consumption of resources. Customers with annual subscriptions are typically billed annually in advance for their subscriptions and we recognize revenue from such subscriptions ratably over the subscription term. Our pricing schedule lists the hourly rate when deploying HCP for our various products, and actual usage is metered and calculated on a per-hour basis for increased accuracy. We sell to organizations of all sizes across a broad range of industries, with a particular focus on enterprises that are managing and moving an increasing amount of business-critical processes, applications, and large volumes of data to the cloud. Ultimately, we believe all enterprises will need to transition to the cloud to reduce operational burden, improve scalability and elasticity, and increase agility. We plan to continue to invest in our direct sales force to grow our large enterprise base both domestically and internationally. Our sales and marketing strategy combines the best of customer self-service with our direct sales approach. Our open-source model allows developers and individuals focused on operations, IT, and security, or practitioners, to engage with and evaluate our software in a frictionless manner, which we believe has contributed to our software's popularity. This open-source leadership and the wider ecosystem around us, compels practitioners to adopt and implement our software in the enterprise. As organizations recognize the value of our products, our inside and field sales teams can nurture leads and develop direct relationships with key stakeholders across all segments. HCP has accelerated our self-service approach, as practitioners can now quickly deploy and experiment with our paid offering with a fully-managed cloud solution and no minimum commitments. As adoption grows, our marketing organization is focused on building our brand reputation and awareness, and engages with prospective customers through our user conferences, email marketing, digital advertising, and other public relations activities. This sales and marketing strategy allows us to not only acquire new customers, but also drive increased usage within existing customers. We operate an adopt, land, expand, and extend motion. Our open-source engagement and self-serve cloud motion help us identify and accelerate initial product adoption and use cases in an account. Our enterprise sales teams land these customers with subscription contracts for our software. Our expansion motion focuses on up-selling additional modules and increasing the footprint of usage of a given product, including across multiple buying centers within our customers' organizations. The multiple capabilities of our deep product portfolio allow us to extend by cross-selling additional integrated products to our customers. For example, a company may initially adopt an open-source use case of Terraform. After initial use of the open-source product, we frequently land their first paid use of Terraform to add enterprise functionality and support mission-critical cloud workloads. As customers grow their cloud presence to support additional cloud-based workloads, they frequently expand the amount of Terraform they consume. In addition to this increased Terraform usage, customers also frequently extend into additional products such as Vault or Consul. This combination of adopt, land, expand, and extend affords us considerable growth opportunities within our customer base, and we focus our go-to-market strategy on developing and cultivating long-term customer relationships. The increased use of our platform by our customers is evidenced by our high net dollar retention rate. As ofJuly 31, 2022 and 2021, our trailing four quarter average net dollar retention rate was 134% and 124%, respectively.
Factors Affecting Our Performance
We believe that the growth and future success of our business depends on a
number of key factors. While each of these factors presents significant
opportunities for our business, they also pose important challenges that we must
successfully address in order to sustain our growth and improve our results of
operations.
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Adoption of Our Products and Landing New Customers
We believe there is substantial opportunity to continue to grow our product adoption and our customer base. We intend to drive product adoption through our open-source distribution model and by continuing to cultivate our open-source community. We intend to drive paid customer growth by continuing to invest significantly in sales and marketing and to increase brand awareness. HCP has also improved our self-service model, and we expect HCP to continue to support our sales model and drive paid adoption. As ofJuly 31, 2022 , we served over 3,600 customers spanning organizations of a broad range of sizes and industries, compared to over 2,100 as ofJuly 31, 2021 .
We also intend to continue to grow our base of large enterprises around the world.
Our ability to attract new customers will depend on a number of factors, including the effectiveness and pricing of our products, development of new products and features, offerings of our competitors, engagement with the open-source community, and effectiveness of our marketing and community-building efforts. As ofJuly 31, 2022 , over 410 of the Forbes Global 2000 were our customers. We believe this demonstrates that our products have been adopted by many of the largest enterprises, and that there is substantial opportunity to further cultivate these large customers.
Expanding and Extending Within Existing Customer Base
Our large base of customers represents a significant opportunity for further sales growth. Our customers often expand the deployment of our products across larger teams and more broadly within the enterprise as they both do more with existing use cases and realize new use cases. At the same time, we often see customers extend to multiple products across our wider product portfolio as they realize the potential of integrating more of our products to better solve use cases. We intend to continue to invest in enhancing awareness of our brand and developing more products, features, and functionality, which we believe are important factors in achieving widespread adoption of our offerings. Our ability to increase sales to existing customers will depend on a number of factors, including our customers' satisfaction with our products, the technical capabilities and security of our products, our customers' progress on their cloud journey, competition, pricing, and overall changes in our customers' spending levels. Historically, we have experienced significant expansion after initial deployment of our products by our customers, with customers expanding usage as well as extending to additional products. We define ARR as the annualized value of all recurring subscription contracts with active entitlements as of the end of the applicable period, and in the case of our monthly, or consumption-based customers the annual value of their last month's spend. A further indication of the propensity of customer relationships to expand over time is our dollar-based net retention rate, which compares ARR from the same set of customers in one period relative to the prior year period. We define dollar-based net retention rate as the ARR at the end of a period for a base set of customers from which we generated ARR in the year prior to the date of calculation, divided by the ARR one year prior to the date of the calculation for that same set of customers. As ofJuly 31, 2022 and 2021, our trailing four quarter average net dollar retention rate was 134% and 124%, respectively. We believe this demonstrates the stickiness of our products, and our offerings as a whole.
Increasing Adoption of HashiCorp Cloud Platform
We believe HCP represents a significant growth opportunity for our business. Since launching HCP in fiscal 2021, usage and sales of HCP have grown rapidly and has allowed us to better address the needs of potential customers looking for a fully-managed offering. We believe that as organizations increasingly look for a fully-managed cloud infrastructure platform, they will continue to adopt HCP. We expect HCP to continue to grow and represent an increasing percentage of our total revenue over time. For the three months endedJuly 31, 2022 and 2021, HCP subscription revenue was$10.6 million and$3.7 million . For the six months endedJuly 31, 2022 and 2021, HCP subscription revenue was$19.5 million and$6.2 million .
Accelerating Technology Leadership and Product Expansion
Our success is dependent on our ability to sustain innovation and technology leadership in order to maintain our competitive advantage. We have built highly differentiated products that we believe have the ability to adapt and evolve with the support of our engineering expertise, our approach to innovation, our open-source community, and our ecosystem of partners.HashiCorp is a critical part of the daily operations of practitioners and our free products makeHashiCorp 22
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frictionless to adopt. We have proven initial success of our modular approach with multiple innovations and product launches, including the launch of HCP in fiscal 2021, and launch of Boundary and Waypoint inSeptember 2020 . We see continued adoption from our customers in our new products and innovations and, as ofJuly 31, 2022 , 46% of our customers with$100,000 or greater ARR were licensing more than one product. We intend to continue to invest in building additional products, features, and functionality to expand our products to new use cases. Our future success is dependent on our ability to successfully develop, market, and sell existing and new products to new and existing customers.
Expanding Internationally
We believe there is a significant opportunity to expand usage of our products outside ofthe United States as enterprises globally look to take advantage of cloud computing and look to adopt a cloud operating model across multiple clouds. For the three months endedJuly 31, 2022 and 2021, 27% and 29% of our revenue, respectively, was generated by customers outside ofthe United States . For the six months endedJuly 31, 2022 and 2021, 27% and 28% of our revenue, respectively, was generated by customers outside ofthe United States . In addition, we have made and plan to continue to make investments in geographic expansion inEurope , theMiddle East ,Africa , and theAsia-Pacific region .
Key Business Metrics
We review a number of operating and financial metrics, including the following
key metrics, to measure our performance, identify trends, formulate business
plans, and make strategic decisions. The calculation of the key metrics
discussed below may differ from other similarly titled metrics used by other
companies, securities analysts, or investors.
As of
July 31, 2022 January 31, 2022
(dollars in millions)
Total customers 3,612 2,715
Total customers with $100,000 or greater ARR 734 655
Subscription revenue from HCP (and its
predecessor cloud offerings) $ 19.5 (1) $ 18.5 (1)
RPOs $ 476.0 $ 428.8
Non-GAAP RPOs(2) $ 498.4 $ 452.2
(1)
Represents subscription revenue for the six months ended
(2)
Non-GAAP RPOs is a non-GAAP financial measure. For more information regarding our use of this measure and a reconciliation to the most directly comparable financial measure calculated in accordance with GAAP, see the subsection titled "Non-GAAP Remaining Performance Obligations" elsewhere in this section.
Total Customers
We define total customers as the number of customers we have at the end of each fiscal quarter. We define the number of customers we have at the end of each fiscal quarter as the number of accounts with a unique account identifier for which we have an active contract in the period indicated. Users of our free products are not included in total customers. A single organization with multiple divisions, segments, or subsidiaries is counted as a single customer. Our customer count may also fluctuate due to acquisitions, consolidations, spin-offs, and other market activity.
Total Customers with
We define ARR as the annualized value of all recurring subscription contracts with active entitlements as of the end of the applicable period, and in the case of our monthly, or consumption-based customers, the annual value of their last month's spend. Relationships with large enterprise customers lead to scale and operating leverage in our business model, as large enterprise customers present a greater opportunity for us to sell additional usage and modules because they have larger budgets, a wider range of potential use cases, and greater potential for expanding to other products in our offering. As such, we count the number of customers contributing$100,000 or greater ARR as a measure of our ability to scale with our customers and attract large enterprise customers to our product offerings. For each applicable financial reporting period, we calculate revenue from customers with$100,000 or greater ARR by aggregating the quarterly revenue attributable to such customers within such period. Customers with$100,000 or greater ARR represented 88% and 87% of revenue for the three months endedJuly 31, 2022 and 2021, respectively. Customers with$100,000 or greater ARR represented 88% and 87% of revenue for the six months endedJuly 31, 2022 and 2021, respectively. 23
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Quarterly Revenue from HCP
We believe that HCP represents an important growth opportunity for our business. As organizations continue their transition to the cloud, many will begin seeking fully-managed platforms and will begin to adopt HCP. We will continue to track the revenue generated by HCP (and its predecessor cloud offerings) as a way of measuring the adoption of our platform.
Non-GAAP Remaining Performance Obligations
Remaining performance obligations ("RPOs"), represent the amount of contracted
future revenue that has not yet been recognized, including both deferred revenue
and non-cancelable contracted amounts that will be invoiced and recognized as
revenue in future periods. RPOs exclude customer deposits, which are refundable
amounts that are expected to be recognized as revenue in future periods. As of
July 31, 2022 and January 31, 2022 , our RPOs were $476.0 million , and $428.8
million , respectively. As of July 31, 2022 , we expect to recognize approximately
64% of RPOs as revenue over the next 12 months, and the remainder thereafter.
The portion of RPOs that is expected to be recognized as revenue over the next
12 months represents an estimated minimum level of revenue for the applicable
period and is not necessarily indicative of future product revenue growth
because it does not account for revenue from customer renewals or new customer
contracts. Moreover, RPOs are influenced by a number of factors, including the
timing of renewals, average contract terms, seasonality, and dollar amounts of
customer contracts. Due to these factors, it is important to review RPOs in
conjunction with revenue and other financial metrics disclosed elsewhere herein.
For a further discussion of RPOs, see Note 3 to our unaudited condensed
consolidated financial statements included elsewhere in this Quarterly Report on
Form 10-Q.
We calculate non-GAAP RPOs as RPOs plus customer deposits, which are refundable
pre-paid amounts, based on the timing of when these customer deposits are
expected to be recognized as revenue in future periods. As of July 31, 2022 and
January 31, 2022 , non-GAAP RPOs were $498.4 million , and $452.2 million ,
respectively. As of July 31, 2022 , we expect to recognize 65% of our non-GAAP
RPOs as revenue over the next 12 months, and the remainder thereafter.
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We use non-GAAP RPOs in conjunction with RPOs as part of our overall assessment of our performance, to evaluate the effectiveness of our business strategies and to communicate with our board of directors concerning our business and financial performance. Our management believes that presenting non-GAAP RPOs is useful to investors because the portion of non-GAAP RPOs that is expected to be recognized as revenue over the next 12 months represents an estimated minimum level of revenue for the applicable period, including customer deposits that are expected to be recognized as revenue in future periods but are not included in GAAP RPOs. Our definitions of non-GAAP RPOs may differ from the definitions used by other companies and therefore comparability may be limited. In addition, other companies may not publish these or similar metrics. Non-GAAP RPOs should be considered in addition to, not as substitutes for, or in isolation from, RPOs prepared in accordance with GAAP. We compensate for the limitations in the use of non-GAAP RPOs by providing a reconciliation of non-GAAP RPOs to RPOs. We encourage investors and others to review our results of operations and financial information in its entirety, not to rely on any single financial measure, and to view non-GAAP RPOs with RPOs and revenue.
The following table presents a reconciliation of our non-GAAP RPOs to our GAAP RPOs for the periods presented (in thousands):
As of
July 31, 2022 January 31, 2022
GAAP RPOs
GAAP short-term RPOs $ 304,265 $ 268,911
GAAP long-term RPOs 171,780 159,923
Total GAAP RPOs $ 476,045 $ 428,834
Add:
Customer deposits
Customer deposits expected to be recognized
within the next 12 months $ 20,054 $ 20,324
Customer deposits expected to be recognized after the next 12 months 2,294 3,059 Total customer deposits$ 22,348 $ 23,383 Non-GAAP RPOs Non-GAAP short-term RPOs$ 324,319 $
289,235
Non-GAAP long-term RPOs 174,074 162,982 Total Non-GAAP RPOs$ 498,393 $ 452,217
Free Cash Flow and Free Cash Flow Margin
Free cash flow is a non-GAAP financial measure that we define as net cash
provided by (used in) operating activities less purchases of property and
equipment and capitalized internal-use software costs. Free cash flow margin is
calculated as free cash flow divided by total revenue. We believe that free cash
flow and free cash flow margin are useful indicators of liquidity that provide
information to management and investors about the amount of cash generated from
our core operations that, after the purchases of property and equipment, can be
used for strategic initiatives, including investing in our business and
selectively pursuing acquisitions and strategic investments. We further believe
that historical and future trends in free cash flow and free cash flow margin,
even if negative, provide useful information about the amount of net cash
provided by (used in) operating activities that is available (or not available)
to be used for strategic initiatives. For example, if free cash flow is
negative, we may need to access cash reserves or other sources of capital to
invest in strategic initiatives. One
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limitation of free cash flow and free cash flow margin is that they do not reflect our future contractual commitments. Additionally, free cash flow does not represent the total increase or decrease in our cash balance for a given period.
The following table presents our cash flow for the periods presented and a reconciliation of free cash flow and free cash flow margin to net cash provided by (used in) operating activities, the most directly comparable financial measure calculated in accordance with GAAP:
Six Months Ended July 31,
2022 2021
(in thousands)
GAAP net cash used in operating activities
(26,166 ) Add: purchases of property and equipment (72 ) (45 ) Add: capitalized internal-use software (3,516 ) (2,812 ) Free cash flow$ (74,457 ) $ (29,023 ) GAAP net cash used in operating activities as a percentage of revenue (33 ) % (18 ) % Free cash flow as a percentage of revenue (35 ) % (20 ) % Impact of COVID-19 The ongoing COVID-19 pandemic has caused business disruption worldwide. The extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations, cash flows, financial condition, or our customers will depend on many factors, including the duration and continued spread of COVID-19; public health measures; national, state, and local government responses; and the impact of the pandemic on the global economy, all of which remain uncertain. Beginning in 2020 and through the date of this Quarterly Report on Form 10-Q, we experienced, and may continue to experience, adverse impacts on certain parts of our business as a result of the pandemic and our responsive measures. In recent months we have re-opened our offices and slowly began to hold events and conferences in person. The pandemic was a contributing factor that also led to existing and potential customers accelerating transitions to the cloud. As a result, we believe the value of our offering has become increasingly relevant during the course of the pandemic, which may result in a positive impact on our business over the long term. The global impact of COVID-19 continues to rapidly evolve, and while the broader implications of the ongoing COVID-19 pandemic remain uncertain, we will continue to monitor the situation and the effects on our business and operations.
Key Components of Results of Operations
Revenue
We generate revenue primarily from subscriptions and, to a lesser extent, professional services and other revenue.
Subscription revenue. We generate revenue primarily from subscriptions which
include licenses of proprietary features, support and maintenance revenue, and
cloud-hosted services. Licenses for self-managed software consist of term
licenses and provide the customer with a right to use the software for a fixed
term commencing upon delivery to the customer. Support and maintenance revenue
(collectively referred to as Support Revenue in the condensed consolidated
statements of operations) are bundled with each license subscription for the
term of the license period. Support and maintenance are not sold on a
stand-alone basis. Cloud-hosted services are provided on a subscription basis
and give customers access to our cloud solutions, which include related customer
support.
Subscription revenue on self-managed software includes both upfront revenue
recognized when the license is delivered as well as revenue recognized ratably
over the contract period for support and maintenance. The substantial majority
of our revenue is recognized ratably over the subscription term. Revenue on
committed cloud-hosted services is recognized ratably when we satisfy the
performance obligation over the contract period, whereas revenue from
non-committed, pay-as-you-go cloud-hosted services are recognized when usage
occurs.
We generate subscription revenue from contracts with typical durations ranging
from one to three years. We typically invoice our customers annually in advance
and, to a lesser extent, multi-year in advance. Amounts that have been invoiced
and are nonrefundable are recorded in deferred revenue, or they are recorded in
revenue if the revenue recognition criteria
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have been met. Our current and non-current deferred revenue represents contracts that are invoiced annually in advance or multi-year in advance. Customer payments that are contractually refundable are recorded as customer deposits.
Professional services and other revenue. Professional services and other revenue consists of revenue from professional services, training services, which are predominantly sold on a fixed-fee basis and any other services provided to our customers. Revenue for professional services, training services and other is recognized as these services are delivered. Professional services are services utilized by some of our self-managed customers to accelerate the deployment of our products. Support and maintenance revenue and cloud-hosted services make up the majority of our revenue and are typically recognized ratably over the terms of our subscription contracts. Therefore, a substantial portion of the revenue that we report in each period is attributable to the recognition of deferred revenue relating to agreements that we entered into during previous periods. Consequently, increases or decreases in new sales or renewals in any one period may not be immediately reflected as revenue for that period. Any downturn in sales, however, may negatively affect our revenue in future periods. Accordingly, the effect of downturns in sales and market acceptance of our products, and potential changes in our rate of renewals, may not be fully reflected in our results of operations until future periods.
Cost of Revenue
Cost of Subscription Revenue. Cost of subscription revenue primarily includes personnel-related costs, such as salaries, bonuses and benefits, and stock-based compensation for employees associated with customer support and maintenance, third-party cloud infrastructure costs, amortization of internal-use software, and allocated overhead. We expect our cost of subscription revenue to increase as our subscription revenue increases. Cost of Professional Services and other. Cost of professional services and other revenue primarily includes personnel-related costs, such as salaries, bonuses and benefits, and stock-based compensation for employees associated with our professional services and other, costs of third-party contractors, and allocated overhead. We expect our cost of professional services and other revenue to increase as our professional services and other revenue increases.
Gross Profit and Margin
Gross profit is revenue less cost of revenue.
Gross margin is gross profit expressed as a percentage of revenue. Our gross margin has been, and will continue to be affected by, a number of factors, including the average sales price of our subscriptions and professional services and other, changes in our revenue mix, the timing and extent of our investments in our global customer support personnel, hosting-related costs, and the amortization of internal-use software. We expect our gross margin to fluctuate over time depending on the factors described above. We expect our revenue from cloud-hosted services to increase as a percentage of total revenue, which we expect to lead to an increase in associated hosting and managing costs, which, in turn, would be expected to adversely impact our gross margin.
Operating Expenses
Our operating expenses consist of research and development, sales and marketing,
and general and administrative expenses. Personnel costs, which consist of
salaries, bonuses, benefits, stock-based compensation and, with regard to sales
and marketing expenses, sales commissions, are the most significant component of
our operating expenses. We also incur other non-personnel costs such as software
and subscription services and an allocation of our general overhead costs for
facilities, IT, and depreciation expenses.
Sales and Marketing. Sales and marketing expenses consist primarily of
personnel-related costs, such as salaries, sales commissions that are recognized
as expenses over the period of benefit, bonuses, benefits, stock-based
compensation, costs related to marketing programs, travel-related costs,
software and subscription services, and allocated overhead. Marketing programs
consist of advertising, events, corporate communications, brand-building, and
developer-community activities. We expect our sales and marketing expenses will
increase over time and continue to be our largest operating expense for the
foreseeable future as we expand our sales force, increase our marketing efforts,
and expand into new markets. While we expect our sales and marketing expenses to
decrease as a percentage of revenue over the long term due to business growth,
our sales and marketing expenses may fluctuate as a percentage of revenue from
period to period due to the timing and extent of these expenses.
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Research and Development. Research and development expenses consist primarily of personnel-related costs, such as salaries, bonuses, benefits, and stock-based compensation, net of capitalized amounts, contractor and professional services fees, software and subscription services dedicated for use by our research and development organization and allocated overhead. We continue to focus our research and development efforts on the addition of new features and products and enhancing the functionality and ease of use of our existing products. We expect our research and development expenses will continue to increase as our business grows and we continue to invest in our offering. While we expect our research and development expenses to decrease as a percentage of revenue over the long term due to this business growth, our research and development expenses may fluctuate as a percentage of revenue from period to period due to the timing and extent of these expenses. General and Administrative. General and administrative expenses for administrative functions including finance, legal, and human resources, consist primarily of personnel-related costs, such as salaries, bonuses, benefits, and stock-based compensation, as well as software and subscription services, and legal and other professional fees. We incur additional general and administrative 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 investor relations and professional services. We expect that our general and administrative expenses will increase as our business grows. However, we expect our general and administrative expenses to decrease as a percentage of revenue over the long term due to this business growth, our general and administrative expenses may fluctuate as a percentage of revenue from period to period due to the timing and extent of these expenses.
Interest Income
Interest income consists primarily of interest earned on our cash equivalents.
Other Income (Expenses), Net
Other income (expenses), net consists primarily of interest expense, and foreign exchange gains and losses.
Provision for (Benefit from) Income Taxes
Provision for (benefit from) income taxes consists primarily of income taxes in certain foreign jurisdictions in which we conduct business, as well as state income taxes inthe United States . We have recorded deferred tax assets and we provide a full valuation allowance on ourU.S. deferred tax assets, which includes net operating loss carryforwards and tax credits. We expect to maintain this full valuation allowance on ourU.S. deferred tax assets for the foreseeable future as it is more likely than not that some or all of those deferred tax assets may not be realized based on our history of losses. 28
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Results of Operations
The following tables summarize our consolidated statements of operations data
for the periods presented (in thousands, except percentages). The
period-to-period comparison of results is not necessarily indicative of results
for future periods.
Three Months Ended July 31 ,
Six Months Ended
2022 2021 2022 2021
Revenue:
License $ 15,338 $ 11,798 $ 25,682 $ 21,958
Support 84,257 58,158 163,465 110,888
Cloud-hosted services 10,637 3,762 19,469 6,342
Total subscription revenue 110,232 73,718 208,616 139,188
Professional services and other 3,631 1,395 6,144 2,837
Total revenue 113,863 75,113 214,760 142,025
Cost of revenue:
Cost of license 360 45 753 130
Cost of support 12,272 8,242 23,110 16,684
Cost of cloud-hosted services 5,699 2,626 10,529 5,197
Total cost of subscription
revenue(1) 18,331 10,913 34,392 22,011
Cost of professional services and
other(1) 3,209 2,006 6,537 3,584
Total cost of revenue(1) 21,540 12,919 40,929 25,595
Gross profit 92,323 62,194 173,831 116,430
Operating expenses:
Sales and marketing(1) 87,674 49,993 167,926 88,869
Research and development(1) 47,885 24,914 95,060 43,048
General and administrative(1) 35,383 12,386 67,906 25,028
Total operating expenses 170,942 87,293 330,892 156,945
Loss from operations (78,619 ) (25,099 ) (157,061 ) (40,515 )
Interest income 3,926 46 4,542 199
Other income (expenses), net 66 (51 ) (40 ) (110 )
Loss before income taxes (74,627 ) (25,104 ) (152,559 ) (40,426 )
Provision for (benefit from) income
taxes 137 (203 ) 422 61
Net loss $ (74,764 ) $ (24,901 ) $ (152,981 ) $ (40,487 )
(1)Includes stock-based compensation expense as follows:
Three Months Ended July 31, Six Months Ended July 31,
2022 2021 2022 2021
(in thousands)
Cost of revenue:
Cost of support $ 2,221 $ 79 $ 4,180 $ 185
Cost of cloud-hosted services 686 2 1,326 5
Total cost of subscription revenue 2,907 81 5,506 190
Cost of professional services and
other 652 12 1,380 24
Total cost of revenue 3,559 93 6,886 214
Sales and marketing 14,421 531 28,814 1,223
Research and development 10,507 413 25,245 836
General and administrative 13,916 461 27,717 951
Total stock-based compensation
expense, net of amounts capitalized $ 42,403 $ 1,498 $ 88,662 $ 3,224
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The following table sets forth our consolidated statements of operations data expressed as a percentage of revenue for the periods indicated:
Three Months Ended July 31, Six Months Ended July 31,
2022 2021 2022 2021
Revenue:
License 13 % 16 % 12 % 15 %
Support 75 77 76 79
Cloud-hosted services 9 5 9 4
Total subscription revenue 97 98 97 98
Professional services and other 3 2 3 2
Total revenue 100 100 100 100
Cost of revenue:
Cost of license - - - -
Cost of support 11 12 11 11
Cost of cloud-hosted services 5 3 5 4
Total cost of subscription revenue 16 15 16 15
Cost of professional services and other 3 2 3 3
Total cost of revenue 19 17 19 18
Gross profit 81 83 81 82
Operating expenses:
Sales and marketing 77 67 78 63
Research and development 42 33 44 30
General and administrative 31 16 32 18
Total operating expenses 150 116 154 111
Loss from operations (69 ) (33 ) (73 ) (29 )
Interest income 3 - 2 1
Other income (expenses), net - - - -
Loss before income taxes (66 ) (33 ) (71 ) (28 )
Provision for (benefit from) income taxes - - - 1
Net loss (66 ) % (33 ) % (71 ) % (29 ) %
Comparison of Three Months Ended
Revenue
Three Months Ended July 31, Change
2022 2021 $ %
(in thousands, except percentages)
Revenue:
License $ 15,338 $ 11,798 $ 3,540 30
Support 84,257 58,158 26,099 45
Cloud-hosted services 10,637 3,762 6,875 183
Total subscription revenue 110,232 73,718 36,514 50
Professional services and other 3,631 1,395 2,236 160
Total revenue $ 113,863 $ 75,113 $ 38,750 52
Subscription revenue increased by $36.5 million , or 50%, for the three months
ended July 31, 2022 compared to the same period of the prior year. This increase
is attributable to the addition of new customers, which contributed $13.5
million for the three months ended July 31, 2022 , as we increased our customer
base by 72% from July 31, 2021 to July 31, 2022 . The remaining $23.0 million of
this increase in revenue is attributable to expanded product adoption among
existing customers, as reflected by our average net dollar retention rate of
134% for the trailing four quarters ended July 31, 2022 .
Professional services and other revenue increased by $2.2 million , or 160% for
the three months ended July 31, 2022 compared to the same period of the prior
year. This increase is mainly attributable to $1.5 million of revenue recognized
from a resale contract commitment. The remaining increase was primarily due to
increased delivery of professional services and the completion of certain
professional services projects.
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Cost of Revenue and Gross Margin
Three Months Ended July 31, Change
2022 2021 $ %
(in thousands, except percentages)
Cost of revenue:
Cost of license $ 360 $ 45 $ 315 700
Cost of support 12,272 8,242 4,030 49
Cost of cloud-hosted services 5,699 2,626 3,073 117
Total cost of subscription
revenue 18,331 10,913 7,418 68
Cost of professional services
and other 3,209 2,006 1,203 60
Total cost of revenue $ 21,540 $ 12,919 $ 8,621 67
Three Months Ended July 31,
2022 2021
Gross margin
License 98 % 100 %
Support 85 % 86 %
Cloud-hosted services 46 % 30 %
Total subscription margin 83 % 85 %
Professional services and other 12 % (44 ) %
Total gross margin 81 % 83 %
Cost of subscription revenue increased by $7.4 million , or 68%, for the three
months ended July 31, 2022 compared to the same period of the prior year. The
increase in cost of subscription revenue was driven by an increase in
employee-related expenses of $5.8 million due to increases in headcount in our
customer support organization. These employee-related expenses include a $2.8
million increase related to stock-based compensation expense. The increase in
stock-based compensation expense is primarily related to RSUs subject to
service-based and performance-based vesting conditions, which conditions were
satisfied in connection with our IPO, and related to the ESPP which commenced in
the fourth quarter of fiscal 2022. The increase in cost of subscription revenue
was also attributable to a $0.3 million increase in spending on software and
external services, a $1.1 million in cloud hosting fees, and a $0.4 million
increase in amortization of internal-use software. We launched cloud-hosted
versions of our products during fiscal 2020 and 2021. As cloud becomes a larger
portion of our revenue, our gross margin profile will change because we have a
lower gross margin on cloud-hosted services due to headcount related to our
cloud offering operations and cloud hosting fees.
Cost of professional services and other revenue increased by $1.2 million , or
60%, for the three months ended July 31, 2022 compared to the same period of the
prior year. The increase in cost of professional services and other revenue was
driven by a $1.1 million increase in employee-related expenses due to higher
headcount and a $0.7 million increase in stock-based compensation expense. Our
professional services and other are generally priced at a low margin which,
combined with allocated overhead, has resulted in a negative margin in the past.
Our professional services and other gross margin was positive for the three
months ended July 31, 2022 and negative for the three months ended July 31,
2021 . This change is a reflective of the Company's initiative to improve
efficiency of allocating external and internal resources.
Gross margin was 81% and 83% for the three months ended July 31, 2022 and 2021,
primarily due to the slight decrease in our subscription margin offset by an
increase in the negative margin from professional services and other.
Operating Expenses
Sales and Marketing
Three Months Ended July 31, Change
2022 2021 $ %
(in thousands, except percentages)
Sales and marketing $ 87,674 $ 49,993 $ 37,681 75
Sales and marketing expenses increased by $37.7 million , or 75%, for the three
months ended July 31, 2022 compared to the same period of the prior year. The
increase was primarily driven by a $16.9 million increase in employee-related
costs due to a 46% increase in headcount in our sales and marketing organization
from July 31, 2021 to July 31, 2022 and included a $13.9 million increase in
stock-based compensation expense. The increase in employee-related costs
includes a $5.3 million net increase in amortization of deferred contract
acquisition costs driven by our increase in revenue. Company events and
marketing expenses increased $2.8 million , driven primarily by increases in
advertising, sponsorships and internal and external conference costs. Software
and subscription expenses and travel and entertainment increased by $1.1
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million, and
Research and Development
Three Months Ended July 31, Change
2022 2021 $ %
(in thousands, except percentages)
Research and development $ 47,885 $ 24,914 $ 22,971 92
Research and development expenses increased by $23.0 million , or 92% for the
three months ended July 31, 2022 compared to the same period of the prior year,
as we continued to develop and enhance the functionality of our existing
products and release new products. This increase was primarily driven by a $9.7
million increase in employee-related costs due to a 49% increase in research and
development headcount from July 31, 2021 to July 31, 2022 , and a $10.1 million
increase in stock-based compensation expense net of amounts capitalized to
internal-use software. The remainder of the increase was attributable to
increased software and subscription expenses of $2.1 million , increased
depreciation and amortization expenses of $0.6 million , and increased spending
on company events, professional services and travel and entertainment of $0.7
million .
General and Administrative
Three Months Ended July 31, Change
2022 2021 $ %
(in thousands, except percentages)
General and administrative $ 35,383 $ 12,386 $ 22,997 186
General and administrative expenses increased by $23.0 million , or 186%, for the
three months ended July 31, 2022 compared to the same period of the prior year.
The increase was primarily driven by a $7.0 million increase in employee-related
costs due to a 117% increase in general and administrative headcount from July
31, 2021 to July 31, 2022 , and a $13.5 million increase in stock-based
compensation expense. The remainder of the increase was attributable to $2.1
million increase of insurance costs increase, due to the insurance cost
associated with being a public company.
Interest Income
Three Months Ended July 31, Change
2022 2021 $ %
(in thousands, except percentages)
Interest income $ 3,926 $ 46 $ 3,880 8,435
Interest income, increased by $3.9 million , for the three months ended July 31,
2022 compared to the same period of the prior year. The increase was primarily
due to increases in the yields resulting from the Federal Reserve's interest
rate increases.
Other Income (Expenses), Net
Three Months Ended July 31, Change
2022 2021 $ %
(in thousands, except percentages)
Other income (expenses), net
(229 )
Other income (expenses), net changed by$0.1 million , for the three months endedJuly 31, 2022 compared to the same period of the prior year. The change from other expenses to other income was primarily driven by the changes in foreign currencies as the Company has subsidiaries worldwide.
Provision for (Benefit from) Income Taxes
Three Months Ended July 31, Change
2022 2021 $ %
(in thousands, except percentages)
Provision for (benefit from)
income taxes $ 137 $ (203 ) $ 340 (167 )
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Provision for income taxes increased by$0.3 million , or 167%, for the three months endedJuly 31, 2022 compared to the same period of the prior year, primarily due to change in effective tax rate. We determine our income tax provision for interim periods using an estimate of our annual effective tax rate adjusted for discrete items occurring during the periods presented. The primary difference between our effective tax rate and the federal statutory rate is unrealized federal and state tax benefits due to the full valuation allowance we have established in these jurisdictions. The provision for income taxes recorded in the three months endedJuly 31, 2022 and 2021 consists primarily of income taxes in foreign jurisdictions in which the Company conducts business. The Company is subject to income tax inthe United States and various foreign countries. Due to the history of net operating losses, the Company is subject toUnited States federal, state, and local examinations by tax authorities for all years since incorporation.
Comparison of Six Months Ended
Revenue
Six Months Ended July 31, Change
2022 2021 $ %
(in thousands, except percentages)
Revenue:
License $ 25,682 $ 21,958 $ 3,724 17
Support 163,465 110,888 52,577 47
Cloud-hosted services 19,469 6,342 13,127 207
Total subscription revenue 208,616 139,188 69,428 50
Professional services and other 6,144 2,837 3,307 117
Total revenue $ 214,760 $ 142,025 $ 72,735 51
Subscription revenue increased by $69.4 million , or 50%, for the six months
ended July 31, 2022 compared to the same period of the prior year. This increase
is attributable to the addition of new customers, which contributed $25.9
million for the six months ended July 31, 2022 , as we increased our customer
base by 72% from July 31, 2021 , to July 31, 2022 . The remaining $43.5 million of
this increase in revenue is attributable to expanded product adoption among
existing customers, as reflected by our average net dollar retention rate of
134% for the trailing four quarters ended July 31, 2022 .
Professional services revenue increased by $3.3 million , or 117%, for the six
months ended July 31, 2022 compared to the same period of the prior year. This
increase is mainly attributable to $1.5 million of revenue recognized from a
resale contract commitment. The remaining increase was primarily due to
increased delivery of professional services and the completion of certain
professional services projects.
Cost of Revenue and Gross Margin
Six Months Ended July 31, Change
2022 2021 $ %
(in thousands, except percentages)
Cost of revenue:
Cost of license $ 753 $ 130 $ 623 479
Cost of support 23,110 16,684 6,426 39
Cost of cloud-hosted services 10,529 5,197 5,332 103
Total cost of subscription revenue 34,392 22,011 12,381 56
Cost of professional services and other 6,537 3,584 2,953 82
Total cost of revenue $ 40,929 $ 25,595 $ 15,334 60
Six Months Ended July 31,
2022 2021
Gross margin
License 97 % 99 %
Support 86 % 85 %
Cloud-hosted services 46 % 18 %
Total subscription margin 84 % 84 %Professional services and other (6 ) % (26 ) % Total gross margin
81 % 82 %
Cost of subscription revenue increased by $12.4 million , or 56%, for the six
months ended July 31, 2022 compared to the same period of the prior year. The
increase in cost of subscription revenue was driven by an increase in
employee-related expenses of $9.6 million due to increases in headcount in our
customer support organization. These
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employee-related expenses include a$5.3 million increase related to stock-based compensation expense. The increase in stock-based compensation expense is primarily related to RSUs subject to service-based and performance-based vesting conditions, which conditions were satisfied in connection with our IPO, and related to the ESPP which commenced in the fourth quarter of fiscal 2022. The increase in cost of subscription revenue was also attributable to a$0.9 million increase in spending on software and external services, a$1.3 million increase in cloud hosting fees, and a$0.6 million increase in amortization of internal-use software. We launched cloud-hosted versions of our products during fiscal 2020 and 2021. As cloud becomes a larger portion of our revenue, our gross margin profile will change because we have a lower gross margin on cloud-hosted services due to headcount related to our cloud offering operations and cloud hosting fees. Cost of professional services and other increased by$3.0 million , or 82%, for the six months endedJuly 31, 2022 compared to the same period of the prior year. The increase in cost of professional services and other was driven by a$2.7 million increase in employee-related expenses due to higher headcount and a$1.4 million increase in stock-based compensation expense. The increases were also attributed to a$0.2 million increase in partner costs due to higher partner service hours. Our professional services and other gross margin has been negative, but are trending towards positive, as seen in our results for the three months endedJuly 31, 2022 . Our professional services and other are generally priced at a low margin as compared to total subscription margin which, combined with allocated overhead, has resulted in a negative margin.
Gross margin was 81% and 82% for the six months ended
Operating Expenses
Sales and Marketing
Six Months Ended July 31, Change
2022 2021 $ %
(in thousands, except percentages)
Sales and marketing $ 167,926 $ 88,869 $ 79,057 89
Sales and marketing expenses increased by $79.1 million , or 89%, for the six
months ended July 31, 2022 compared to the same period of the prior year. The
increase was primarily driven by a $37.3 million increase in employee-related
costs due to a 46% increase in headcount in our sales and marketing organization
from July 31, 2021 to July 31, 2022 and a $27.6 million increase in stock-based
compensation expense. The increase in employee-related costs also includes a
$8.8 million net increase in amortization of deferred contract acquisition costs
driven by our increase in revenue. Company events and marketing expenses
increased $6.7 million , driven primarily by increases in advertising,
sponsorships and internal and external conference costs. Allocated expenses for
facilities and IT, software and subscription expenses, travel and entertainment,
and professional services increased by $2.3 million , $2.2 million , $2.4 million ,
and $0.4 million , respectively, driven by increased headcount and revenue
growth.
Research and Development
Six Months Ended July 31, Change
2022 2021 $ %
(in thousands, except percentages)
Research and development $ 95,060 $ 43,048 $ 52,012 121
Research and development expenses increased by $52.0 million , or 121% for the
six months ended July 31, 2022 compared to the same period of the prior year, as
we continued to develop and enhance the functionality of our existing products
and release new products. This increase was primarily driven by a $22.4 million
increase in employee-related costs due to a 49% increase in research and
development headcount from July 31, 2021 to July 31, 2022 , and a $24.4 million
increase in stock-based compensation expense net of amounts capitalized to
internal-use software. The remainder of the increase was attributable to
increased software and subscription expenses of $3.8 million , increased
depreciation and amortization expenses of $1.0 million , and increased spending
on company events, professional services, and travel and entertainment of $1.0
million total.
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General and Administrative
Six Months Ended July 31, Change
2022 2021 $ %
(in thousands, except percentages)
General and administrative $ 67,906 $ 25,028 $ 42,878 171
General and administrative expenses increased by $42.9 million , or 171%, for the
six months ended July 31, 2022 compared to the same period of the prior year.
The increase was primarily driven by a $13.3 million increase in
employee-related costs due to a 117% increase in general and administrative
headcount from July 31, 2021 to July 31, 2022 , and a $26.8 million increase in
stock-based compensation expense. Insurance costs increased by $3.9 million , due
to the insurance cost associated with being a public company. The increases are
offset by a $1.0 million decrease in spending on annual all-hands employee
summit as this in-person event was cancelled for fiscal year 2023 due to
COVID-19.
Interest Income
Six Months Ended July 31, Change
2022 2021 $ %
(in thousands, except percentages)
Interest income $ 4,542 $ 199 $ 4,343 2,182
Interest income increased by $4.3 million , for the six months ended July 31,
2022 compared to the same period of the prior year. The increase was primarily
due to increases in the yields resulting from the Federal Reserve's interest
rate increases.
Other Income (Expenses), Net
Six Months Ended July 31, Change
2022 2021 $ %
(in thousands, except percentages)
Other income (expenses), net
(64 )
Other income (expenses), net change by$0.1 million , for the three months endedJuly 31, 2022 compared to the same period of the prior year. The change was primarily driven by the changes in foreign currencies as the Company has subsidiaries worldwide. Provision for Income Taxes Six Months Ended July 31, Change 2022 2021 $ % (in thousands, except percentages) Provision for (benefit from) income taxes $ 422 $ 61$ 361 592 Provision for income taxes increased by$0.4 million , for the six months endedJuly 31, 2022 compared to the same period of the prior year, primarily due to change in effective tax rate. We determine our income tax provision for interim periods using an estimate of our annual effective tax rate adjusted for discrete items occurring during the periods presented. The primary difference between our effective tax rate and the federal statutory rate is unrealized federal and state tax benefits due to the full valuation allowance we have established in these jurisdictions. The provision for income taxes recorded in the six months endedJuly 31, 2022 and 2021 consists primarily of income taxes in foreign jurisdictions in which the Company conducts business. The Company is subject to income tax inthe United States and various foreign countries. Due to the history of net operating losses, the Company is subject toUnited States federal, state, and local examinations by tax authorities for all years since incorporation.
Liquidity and Capital Resources
Prior toDecember 2021 , we financed our operations principally through private placements of our equity securities, as well as payments received from customers using our products and services. InDecember 2021 , we completed our IPO, which resulted in proceeds of$1.2 billion , after deducting underwriting discounts and commissions of$69.4 million and offering expenses of$6.0 million . 35
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As ofJuly 31, 2022 , we had cash and cash equivalents of$1.3 billion and restricted cash of$1.8 million . Our cash and cash equivalents primarily consist of cash on hand and highly liquid investments in money market funds. Our restricted cash constitutes cash on deposit with financial institutions in support of letters of credit in favor of landlords for non-cancelable operating lease agreements. We have generated significant operating losses from our operations as reflected in our accumulated deficit of$659.1 million as ofJuly 31, 2022 , and negative cash flows from operations for the six months endedJuly 31, 2021 . We expect to continue to incur operating losses and generate negative cash flows from operations for the foreseeable future due to the investments we intend to make as described above, and as a result we may require additional capital resources to execute strategic initiatives to grow our business. OnNovember 23, 2020 , we entered into a loan and security agreement withHSBC Ventures USA Inc , (the "Loan Agreement"). The Loan Agreement provided us a revolving line of credit, which expiredNovember 23, 2023 . Under the Loan Agreement, we were able to borrow up to$50.0 million . Interest on any drawdown under the revolving line of credit would accrue at the adjusted LIBOR plus 3.00%. We would also incur a commitment fee of 0.30% for any unused portion of the credit facility. OnJuly 28, 2022 , we terminated the Loan Agreement in accordance with the terms of the agreement and had no balance outstanding upon termination. We believe that our existing cash and cash equivalents will be sufficient to fund our operating and capital needs for at least the next 12 months. Our assessment of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties. Our actual results could vary as a result of, and our future capital requirements, both near-term and long-term, will depend on many factors, including our growth rate, the timing and extent of spending to support our research and development efforts, the expansion of sales and marketing and international operating activities, the timing of new introductions of solutions or features, and the continuing market acceptance of our services. We may in the future enter into arrangements to acquire or invest in complementary businesses, services and technologies, including intellectual property rights. We have based this estimate on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, or if we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, operating results and financial condition would be adversely affected.
The following table summarizes our cash flows for the periods presented:
Six Months Ended July 31,
2022 2021
(in thousands)
Net cash used in operating activities $ (70,869 ) $ (26,166 )
Net cash used in investing activities $ (3,588 ) $ (2,857 )
Net cash provided by financing activities $ 10,465 $ 2,338
Operating Activities
We typically invoice our customers annually in advance and to a lesser extent,
multi-year in advance. Therefore, a substantial source of our cash is from such
prepayments, which are included on our consolidated balance sheets in deferred
revenue and customer deposits. We generally experience seasonality in terms of
when we enter into agreements with our customers, particularly in our fourth
fiscal quarter due to increased buying patterns of our enterprise customers.
Given the seasonality in our business as discussed above, the operating cash
flow benefit from increased collections from our customers generally occurs in
the subsequent one to two quarters after billing. We expect seasonality, timing
of billings, and collections from our customers to have a material impact on our
cash flow from operating activities from period to period. Our primary uses of
cash from operating activities are for personnel-related expenses, software and
subscription expenses, sales and marketing expenses, third-party cloud
infrastructure costs, and overhead expenses.
Net cash used in operating activities during the six months ended July 31, 2022
was $70.9 million , which resulted from a net loss of $153.0 million , adjusted
for non-cash charges of $92.0 million and net cash outflow of $9.9 million from
changes in operating assets and liabilities. Non-cash charges primarily
consisted of $88.7 million for stock-based compensation expense, $1.9 million
for depreciation and amortization expense, and $1.4 million for non-cash
operating lease costs. The net cash outflow from changes in operating assets and
liabilities was primarily the result of a $19.7 million increase in deferred
contract acquisition costs as our sales commission payments increased due to
addition of new customers and expansion of our existing customer subscriptions,
a $3.0 million decrease in accounts payable due to the payment of costs related
to our initial public offering and timing of payments to vendors, a $2.0 million
decrease in accrued compensation
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and benefits primarily due to payment of accrued payroll taxes and accrued sales commissions, and decrease in accrued employee stock participation plan contributions due to the purchase made inJune 2022 , a$1.2 million increase in prepaid expenses and other assets, a$1.0 million decrease in customer deposits from advance invoicing in accordance with our subscription contracts, and a$1.7 million decrease in accrued expenses and other liabilities. The cash outflow was partially offset by a$15.2 million decrease in accounts receivable due to timing of billings and collections from our customers, and a$3.5 million increase in deferred revenue due to increased billings. Net cash used in operating activities during the six months endedJuly 31, 2021 was$26.2 million , which resulted from a net loss of$40.5 million , adjusted for non-cash charges of$5.3 million and net cash inflow of$9.0 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of$3.2 million for stock-based compensation expense,$0.9 million for depreciation and amortization expense, and$1.1 million for non-cash operating lease costs. The net cash inflow from changes in operating assets and liabilities was primarily the result of a$19.0 million decrease in accounts receivable due to timing of collections from our customers and a$15.1 million increase in accrued compensation and benefits primarily due to accrued sales commissions and accrued payroll taxes. The cash inflow was partially offset by a$16.2 million increase in deferred contract acquisition costs as our sales commission payments increased due to addition of new customers and expansion of our existing customer subscriptions, a$3.0 million increase in prepaid expenses and other assets, a$0.9 million decrease in accrued expenses and other liabilities, a$1.2 million decrease in deferred revenue and a$3.8 million decrease in customer deposits from timing of invoicing in accordance with our subscription contracts. Investing Activities Net cash used in investing activities during the six months endedJuly 31, 2022 of$3.5 million was primarily comprised of capitalized internal-use software for our cloud platform. Net cash used in investing activities during the six months endedJuly 31, 2021 of$2.9 million resulted primarily from$0.1 million in purchases of property and equipment and$2.8 million in capital expenditures for our cloud platform.
Financing Activity
Net cash provided by financing activities of$10.5 million during the six months endedJuly 31, 2022 was due to$8.5 million proceeds from stocks purchased by employees under the employee stock purchase plan, and$2.2 million net proceeds from the exercise of stock options, offset by$0.2 million outflow for payment of tax related to net share settlement. Net cash provided by financing activities of$2.3 million during the six months endedJuly 31, 2021 was due to$2.3 million net proceeds from the exercise of stock options.
Critical Accounting Policies and Estimates
Critical accounting policies and estimates are those accounting policies and estimates that are both most important to the portrayal of our net assets and results of operations and require the most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. These estimates are developed based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Critical accounting estimates are accounting estimates where the nature of the estimates is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and the impact of the estimates on financial condition or operating performance is material.
There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in our Management's Discussion and Analysis of Financial Condition and Results of Operations, included in our fiscal 2022 Form 10-K.
Recent Accounting Pronouncements
See Note 2, Summary of Significant Accounting Policies, in our Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for a discussion of recent accounting pronouncements.
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