MEDALLIA, 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 as discussed in "Special Note Regarding Forward-Looking Statements" included in this Quarterly Report on Form 10-Q. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in "Risk Factors" under Part II, Item 1A in this Quarterly Report on Form 10-Q. OverviewMedallia, Inc. was founded in 2001 to help the world's largest companies understand and improve customer experiences at scale. In doing so, we created a new category of enterprise software, experience management. Our SaaS (software-as-a-service) platform, the Medallia Experience Cloud, is built on modern technology and open architecture, utilizing artificial intelligence (AI) and machine learning to analyze massive amounts of data. We capture experience data from the expanding signal fields emitted by customers and employees on their daily journeys so that our customers can understand, analyze, and act upon omni-channel experiences. We believe thatMedallia is the only platform that makes all other applications customer and employee aware. We utilize our proprietary in-memory analytics, dynamic organizational hierarchy management, and AI technology to analyze the structured and unstructured data at great scale with enterprise grade security and privacy deriving themes and predictive insights that drive action in live time. Using our technology, enterprises reduce churn, turn detractors into promoters and buyers, and create in-the-moment cross-sell and up-sell opportunities, providing high returns on investment. Our platform captures and analyzes over 7.5 billion experiences annually. Our products have high adoption rates and are used extensively from the front line to the C-Suite; over 35% of our customers have more than 1,000 employees using our platform. Our platform is deeply embedded in an enterprise's tech stack, with enterprises integratingMedallia with more than 25 other business applications. We believe this is significantly higher adoption than other experience management solutions available in the market. We offer our platform through a SaaS business model. We use a "land-and-expand" model, whereby once customers have deployed our platform, they often increase the number of end-users through expansion to additional business units and geographies, and they also purchase more modules. We focus our selling efforts on both business leaderswho are often making a strategic purchase of our platform with the potential for broad use throughout their enterprises, as well as functional leaders purchasing for their teams. We price our subscriptions based on the functionality and capacity needs of our customers. Subscription periods for our customers generally range from one to three years and we customarily invoice customers in advance in annual installments. InDecember 2019 a novel strain of Coronavirus disease (COVID-19) was reported and inMarch 2020 theWorld Health Organization (WHO ) characterized the COVID-19 as a pandemic. The COVID-19 pandemic has impacted our business, and its full impact is still uncertain and may continue to negatively affect our subscription bookings and results of operations in future periods. The extent to which the COVID-19 pandemic may impact our future financial condition or results of operations remains uncertain. Also, we may experience curtailed customer demand for our platform, reduced customer spending or contract duration or lengthened payment terms that could materially adversely impact our business, results of operations and overall financial performance in future periods. While our subscription revenue is relatively predictable, the effect of the COVID-19 pandemic, along with the seasonality we historically experience, may not be fully reflected in our results of operations and overall financial performance until future periods. 29 -------------------------------------------------------------------------------- The extent and continued impact of the COVID-19 pandemic on our operational and financial performance will depend on certain developments, including the duration, spread or resurgence of the outbreak; government responses to the pandemic; impact on our customers' and our sales cycles; impact on our customer, industry or employee events; extent of delays in hiring and onboarding new employees; how quickly and to what extent normal economic and operating activities can resume; speed of rollout of COVID-19 vaccines, lifting of restrictions on movement, and normalization of full-time return to work and social events; and effect on our partners and vendors, all of which are uncertain and difficult to predict. In response to the COVID-19 pandemic, we have temporarily closed most of our offices (including our headquarters), mandated our employees to work remotely, implemented travel restrictions for all non-essential business, and shifted certain of our customer, industry, analyst, investor, and employee events, including our Medallia Experience conference, to virtual-only, and we may similarly alter, postpone or cancel events in the future. These changes remained in effect in the first and second quarters of fiscal year 2022 and could extend into future quarters. The impact, if any, of these and any additional operational changes we may implement is uncertain but changes we have implemented have not affected and are not expected to affect our ability to maintain operations, including financial reporting systems, internal control over financial reporting and disclosure controls and procedures. See the section "Risk Factors" for further discussion of the impact and possible continued impact of the COVID-19 pandemic on our business. Pending Merger OnJuly 25, 2021 , we entered into the Merger Agreement with Parent and Merger Sub. The Merger Agreement provides for our acquisition by entities affiliated withThoma Bravo in an all cash transaction valued at$6.4 billion . Under the Merger Agreement, at the effective time of the Merger, each issued and outstanding share of our common stock (except for certain shares specified in the Merger Agreement) will be canceled and automatically converted into the right to receive cash in an amount equal to$34.00 per share, without interest. Completion of the Merger is subject to the satisfaction of certain terms and conditions set forth in the Merger Agreement, including (i) approval of the Merger Agreement by our stockholders; (ii) the absence of any law or order restraining, enjoining or otherwise prohibiting the Merger; and (3) the expiration or termination of the waiting period underthe United States Hart-Scott Rodino Antitrust Improvements Act of 1976, as amended, and clearance under the antitrust laws of certain non-United States jurisdictions. A special meeting of the Company's stockholders to consider and vote on the proposal to adopt the Merger Agreement will take place subsequent to the expiration of the "go-shop" period, which expires onSeptember 4, 2021 . The Merger is expected to close in calendar year 2021. Upon consummation of the Merger, our common stock will no longer be listed on any public market. Key Business Metrics We review a number of operating and financial metrics, including the following key metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans and make strategic decisions. Customers We measure and track the number of customers, and we believe the number of customers is useful information to investors, because our ability to attract new customers, grow our customer base and retain existing customers helps drive our success and is an important contributor to our revenue growth. We have successfully demonstrated a history of growing our customer base. We define the number of customers at the end of any particular period as the number of customers with active annual subscription agreements that run through the current or future period. In situations where a customer has multiple subsidiaries or divisions, each entity that is invoiced as a separate entity is treated as a separate customer. As ofJuly 31, 2021 and 2020, we had 1,340 and 839 enterprise customers, respectively. If we count as a single enterprise customer, all subsidiaries and divisions of a single parent, then as ofJuly 31, 2021 and 2020, we had 984 and 590 enterprise customers, respectively. We also serve a variety of small and mid-size businesses that prove our products applicability across all levels of the market. 30 -------------------------------------------------------------------------------- Our use of customer count may have certain limitations as an analytical tool and should not be considered in isolation or as a substitute for revenue or an analysis of our results as reported under GAAP. For example, other companies, including companies in our industry, may calculate number of customers differently, which could reduce its usefulness as a comparative measure. Subscription Billings Subscription billings on a trailing 12-month basis also help investors better understand our subscription sales activity for a particular period, which is not necessarily reflected in our subscription revenue given that we recognize subscription revenue ratably over the subscription term. We define subscription billings, a non-GAAP financial measure, as total subscription revenue plus the change in subscription deferred revenue and contract assets, excluding contract assets acquired. We measure subscription billings on a trailing 12-month basis because subscription billings vary from quarter to quarter due to invoice timing. Subscription billings in any particular period reflect amounts invoiced for subscriptions to access our platform. We typically invoice our customers annually in advance for subscriptions to our platform. The following table sets forth our subscription billings and growth rate, and provides a reconciliation of subscription revenue to subscription billings, for the periods presented:
Trailing Twelve Months Ended
2021 2020
(in thousands, except percentages)
Subscription revenue $ 424,214 $ 347,731
Increase in subscription deferred revenue 52,712 34,450
(Increase) in contract assets (4,885) (2,448)
Subscription billings $ 472,041 $ 379,733
Subscription billings growth rate 24% 20%
Our use of subscription billings has certain limitations as an analytical tool
and should not be considered in isolation or as a substitute for revenue or an
analysis of our results as reported under GAAP. Subscription billings are
recognized when invoiced, while the related subscription revenue is recognized
ratably over the subscription term. For the second quarter of fiscal year 2022,
our trailing 12-month subscription billings growth rate was 24%. There are a
wide variety of factors that influence this metric. For example, due to the
COVID-19 pandemic, we have modified subscription terms, flexible payment or
invoicing terms in exchange for extensions of existing contracts for certain
customers hardest hit by the pandemic. Therefore, fluctuations in billings
should not be taken as an indication of changes in future revenue. Also, other
companies, including companies in our industry, may not use subscription
billings, may calculate subscription billings differently, may have different
billing frequencies, or may use other financial measures to evaluate their
performance, all of which could reduce the usefulness of subscription billings
as a comparative measure.
Dollar-based Net Revenue Retention
We use a dollar-based net revenue retention rate to measure our ability to
retain and expand business generated from our existing customers. Our
dollar-based net revenue retention rate compares our subscription revenue from
the same set of customers across comparable periods, calculated on a trailing
twelve-month basis. We focus on a dollar-based net revenue retention rate
metric, and we believe it is useful information to investors, because it
captures the full impact on revenue of customers expanding, decreasing or ending
their subscriptions. Our dollar-based net revenue retention rate as of July 31,
2021 and 2020 was 112% and 117% respectively, on a trailing twelve-month basis.
We calculate our dollar-based net revenue retention rate by dividing (i)
subscription revenue in the trailing 12-month period from those customers who
were on our platform during the prior 12-month period by (ii) subscription
revenue from the same customers in the prior trailing 12-month period. For the
purposes of calculating
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our dollar-based net revenue retention rate, we count as customers all parent
companies of each billing entity enterprise. We believe that our ability to
retain customers and expand their use of our platform over time is an indicator
of the stability of our revenue base and the long-term value of our
relationships with customers. If our dollar-based net revenue retention rate for
a period exceeds 100%, this means that the subscription revenue retained during
the period, which includes up-sells and cross-sells, more than offset the
subscription revenue lost from customers that did not renew all or a portion of
their contracts with us during that period.
Our use of dollar-based net revenue retention rate may have certain limitations
as an analytical tool and should not be considered in isolation or as a
substitute for revenue or an analysis of our results as reported under GAAP. For
example, other companies, including companies in our industry, may calculate
dollar-based net revenue retention rate differently, which could reduce its
usefulness as a comparative measure.
Components of Results of Operations
Revenue
We generate revenue from sales of subscriptions and related professional
services. Professional services include managed services and implementation and
other services. For all periods presented, we have relied on sales of our
platform to large enterprises for a significant majority of our revenue.
Subscription revenue is recognized ratably over the related contractual term,
generally beginning on the date that our platform is made available to a
customer. In general, our agreements are non-cancellable and we primarily bill
in advance annually for our multi-year contracts. Amounts that have been billed
are initially recorded as deferred revenue until the revenue is recognized.
Subscription revenue as a percentage of total revenue may vary from period to
period.
Professional services revenue includes fees associated with managed services and
one-time implementation and other services. Managed services support our
customers by providing a range of ongoing services, including program design,
launch, enhancements, expansion and analytics. Managed services are typically
sold on a fixed-fee recurring basis. Managed services are a stand-ready
obligation to perform these services over the term of the arrangement and as a
result, revenue is recognized ratably over the term of the arrangement.
Implementation and other services are sold on a fixed-fee or time-and-materials
basis and consist primarily of initial design, integration and configuration
services. In addition, we provide advisory services that enable customers to
gain insightful business information through data analysis and our institute
training programs. Implementation and other services revenue are recognized as
services are performed.
As we continue to increase the number of partners that provide implementation
and advisory services, we generally expect professional services revenue to
decrease as a percentage of total revenue in the long term, although this
percentage may vary from period to period.
Cost of Revenue, Gross Profit and Gross Margin
Cost of Subscription Revenue
Cost of subscription revenue primarily consists of software, hardware and
hosting costs, personnel-related expenses including stock-based compensation
expense, travel expense and allocated overhead costs for our subscription
operations, third-party costs and security and customer support departments
including outside services.
Cost of Professional Services Revenue
Cost of professional services revenue primarily consists of personnel-related
expenses including stock-based compensation expense, travel expense and
allocated overhead costs associated with the delivery of
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managed services, implementation and other service offerings, facility costs,
sub-contractor costs and outside services.
We expect our cost of revenue will increase in absolute dollars in future
periods as we continue to invest in our business and may vary from period to
period as a percentage of revenue.
Gross Profit and Gross Margin
Gross profit is total revenue less cost of revenue. Gross margin is gross profit
expressed as a percentage of revenue. Our gross margin may vary from period to
period as our mix or cost of revenue fluctuates. Our gross margin on
subscription revenue is significantly higher than our gross margin on
professional services revenue, which is close to break-even. In addition, we may
experience changes in our professional services gross margin due to the timing
of delivery of implementation and other services. We expect our gross margin may
vary from period to period and increase modestly in the long term.
Operating Expenses
Research and Development
Research and development expenses primarily consists of personnel-related
expenses including stock-based compensation expense, travel expense and
allocated overhead costs, facility costs, software and hardware costs and
depreciation. Our research and development efforts focus on maintaining and
enhancing functionality of existing services and adding new products and
features. We believe that continued investment in our platform is important for
our growth. Although we expect our research and development expenses will
increase in absolute dollars in future periods and may vary from period to
period as a percentage of revenue in the near term, we expect that research and
development expenses will decline as a percentage of revenue in the long term.
Sales and Marketing
Sales and marketing expenses primarily consists of personnel-related expenses
including stock-based compensation expense, travel expense and allocated
overhead expenses and marketing and promotional activities expenses including
our annual Experience conference, advertising, facility and training costs.
Sales commissions earned by our sales force are considered incremental and
recoverable costs of obtaining a contract with a customer and are deferred and
amortized on a straight-line basis over the expected period of benefit. We
intend to continue to invest in sales and marketing to help drive the growth of
our business. During the short term we expect to see a decline in travel
expenses as well as certain of our marketing costs such as the Experience
conference due to the COVID-19 pandemic as we focus our marketing and sales
events on virtual platforms. However, we expect our sales and marketing expenses
will increase in future periods as we ramp up our sales efforts.
General and Administrative
General and administrative expenses primarily consist of personnel-related
expenses including stock-based compensation expense, travel expense and overhead
costs, and facility costs and outside services. General and administrative
expenses also include restructuring costs from subleasing of certain of our
office spaces. We expect to incur additional general and administrative expenses
due to the Merger in calendar year 2021, to support growth of the Company as
well as to support the transition back to being a private company. We expect
that general and administrative expenses will increase in absolute dollars in
future periods and vary from period to period as a percentage of revenue.
Other Income (Expense), net
Other income (expense), net consists primarily of interest expense, amortization
of the issuance costs on the convertible senior notes, and net foreign currency
exchange gains (losses). In addition, interest income includes interest on our
cash and marketable securities balances.
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Provision For Income Taxes
Provision for income taxes consists of U.S. federal and state income taxes and
income taxes on foreign jurisdictions in which we conduct business and foreign
withholding taxes. We maintain a full valuation allowance on our federal, state
and certain foreign deferred tax assets that we have determined are not
realizable on a more likely than not basis. For additional information regarding
our income taxes, see "Note 12: Income Taxes," included in this Quarterly Report
on Form 10-Q, in our notes to the unaudited condensed consolidated financial
statements.
Results of Operations
The following table sets forth our unaudited condensed consolidated statements
of operations data for the periods indicated (in thousands):
Three Months Ended July 31, Six Months Ended July 31,
2021 2020 2021 2020
Revenue:
Subscription $ 117,392 $ 92,831 $ 223,463 $ 181,823
Professional services 26,716 22,694 52,019 46,393
Total revenue 144,108 115,525 275,482 228,216
Cost of revenue:
Subscription(1) 27,592 19,130 51,748 36,474
Professional services(1) 26,931 22,042 50,473 44,261
Total cost of revenue 54,523 41,172 102,221 80,735
Gross profit 89,585 74,353 173,261 147,481
Operating expenses:
Research and development(1) 35,363 27,790 66,000 60,169
Sales and marketing(1) 80,150 51,942 153,130 103,957
General and administrative(1) 33,909 29,137 64,022 50,635
Total operating expenses 149,422 108,869 283,152 214,761
Loss from operations (59,837) (34,516) (109,891) (67,280)
Other income (expense), net (1,716) (448) (3,309) (273)
Loss before provision for income taxes (61,553) (34,964) (113,200) (67,553)
Provision for income taxes 937 234 1,711 174
Net loss $ (62,490) $ (35,198) $ (114,911) $ (67,727) (1) Includes stock-based compensation expense as follows (in thousands):
Three Months Ended July 31, Six Months Ended July 31,
2021 2020 2021 2020
Cost of subscription revenue $ 1,105 $ 946 $ 1,959 $ 1,855
Cost of professional services revenue 3,282 2,719 5,500 5,402
Research and development expense 5,944 4,746 10,374 16,219
Sales and marketing expense 11,945 8,745 21,526 18,081
General and administrative expense 7,421 7,478 13,939 14,881
Total stock-based compensation $ 29,697 $
24,634
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The following table sets forth our unaudited condensed consolidated statements
of operations data expressed as a percentage of total revenue for the periods
indicated:
Three Months Ended July 31, Six Months Ended July 31,
2021 2020 2021 2020
Revenue:
Subscription 81 % 80 % 81 % 80 %
Professional services 19 % 20 % 19 % 20 %
Total revenue 100 % 100 % 100 % 100 %
Cost of revenue:
Subscription 19 % 17 % 19 % 16 %
Professional services 19 % 19 % 18 % 19 %
Total cost of revenue 38 % 36 % 37 % 35 %
Gross profit 62 % 64 % 63 % 65 %
Operating expenses:
Research and development 25 % 24 % 24 % 26 %
Sales and marketing 56 % 45 % 56 % 46 %
General and administrative 24 % 25 % 23 % 22 %
Total operating expenses 104 % 94 % 103 % 94 %
Loss from operations (42) % (30) % (40) % (29) %
Other income (expense), net (1) % - % (1) % - %
Loss before provision for income taxes (43) % (30) % (41) % (30) %
Provision for income taxes 1 % - % 1 % - %
Net loss (43) % (30) % (42) % (30) %
Three and Six Months Ended July 31, 2021 and 2020
Revenue
Three Months Ended July 31, Six Months Ended July 31,
2021 2020 $ Change % Change 2021 2020 $ Change % Change
(in thousands, except percentages)
Subscription $ 117,392 $ 92,831 $ 24,561 26 % $ 223,463 $ 181,823 $ 41,640 23 %
Professional services 26,716 22,694 4,022 18 % 52,019 46,393 5,626 12 %
Total revenue $ 144,108 $ 115,525 $ 28,583 25 % $ 275,482 $ 228,216 $ 47,266 21 %
Total revenue was $144.1 million for the three months ended July 31, 2021
compared to $115.5 million for the three months ended July 31, 2020 , which is an
increase of $28.6 million , or 25%. Total revenue was $275.5 million for the six
months ended July 31, 2021 compared to $228.2 million for the six months ended
July 31, 2020 , which is an increase of $47.3 million or 21%.
Subscription revenue accounted for 81% of total revenue for each of the three
and six months ended July 31, 2021 and 80% of total revenue for each of the
three and six months ended July 31, 2020 , respectively. Subscription revenue
increased by $24.6 million , or 26%, for the three months ended July 31, 2021
compared to the three months ended July 31, 2020 . Subscription revenue increased
by $41.6 million , or 23%, for the six months ended July 31, 2021 compared to the
six months ended July 31, 2020 . We increased subscription revenue due to
cross-selling to our existing customers and expansions as reflected in our
dollar-based net revenue retention rate of 112% for the six months ended July
31, 2021 .
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Professional services revenue increased by $4.0 million , or 18%, for the three
months ended July 31, 2021 compared to the three months ended July 31, 2020 .
Professional services increased by $5.6 million , or 12% for the six months ended
July 31, 2021 compared to the six months ended July 31, 2020 . The increases were
driven by higher managed and implementation services.
Cost of Revenue, Gross Profit and Gross Margin
Three Months Ended July 31, Six Months Ended July 31,
2021 2020 $ Change % Change 2021 2020 $ Change % Change
(in thousands, except percentages)
Cost of revenue:
Subscription $ 27,592 $ 19,130 $ 8,462 44 % $ 51,748 $ 36,474 $ 15,274 42 %
Professional services 26,931 22,042 4,889 22 % 50,473 44,261 6,212 14 %
Total cost of revenue $ 54,523 $ 41,172 $ 13,351 32 % $ 102,221 $ 80,735 $ 21,486 27 %
Gross profit $ 89,585 $ 74,353 $ 15,232 20 % $ 173,261 $ 147,481 $ 25,780 17 %
Gross margin:
Subscription 76 % 79 % 77 % 80 %
Professional services (1) % 3 % 3 % 5 %
Total gross margin 62 % 64 % 63 % 65 %
Total cost of revenue was $54.5 million for the three months ended July 31,
2021 , an increase of $13.4 million , or 32% compared to the three months ended
July 31, 2020 . Total cost of revenue was $102.2 million for the six months ended
July 31, 2021 , an increase of $21.5 million , or 27% compared to the six months
ended July 31, 2020 .
Cost of subscription revenue increased by $8.5 million , or 44%, for the three
months ended July 31, 2021 compared to the three months ended July 31, 2020 . The
increase was primarily due to an increase in hosting, software and hardware,
including amortization of acquired intangibles, of $6.2 million and higher
personnel-related expenses of $2.0 million . Cost of subscription revenue
increased by $15.3 million , or 42%, for the six months ended July 31, 2021
compared to the six months ended July 31, 2020 . This increase was primarily due
to an $11.4 million increase in hosting, software and hardware, including
amortization of acquired intangible assets, and a higher personnel-related
expenses of $3.3 million .
Cost of professional services revenue increased by $4.9 million , or 22%, for the
three months ended July 31, 2021 compared to the three months ended July 31,
2020 primarily due to an increase of $3.8 million in personnel-related expenses
and an increase of $0.6 million in outside services and other. Cost of
professional services revenue increased by $6.2 million , or 14%, for the six
months ended July 31, 2021 compared to the six months ended July 31, 2020
primarily due to increases in personnel-related expenses of $5.3 million .
Gross margin decreased during the three and six months ended July 31, 2021 as
compared to the three and six months ended July 31, 2020 due to higher hosting,
software and hardware, including amortization of acquired intangibles.
Research and Development
Three Months Ended July 31, Six Months Ended July 31,
2021 2020 $ Change % Change 2021 2020 $ Change % Change
(in thousands, except percentages)
Research and development $ 35,363 $ 27,790 $ 7,573 27 % $ 66,000 $ 60,169 $ 5,831 10 %
Percentage of revenue 25 % 24 % 24 % 26 %
Research and development expenses increased by
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personnel-related expenses of $6.3 million and an increase of $1.6 million in
outside services and other. Research and development expenses increased by $5.8
million or 10%, for the six months ended July 31, 2021 compared to the six
months ended July 31, 2020 . The increase was primarily due to higher
personnel-related expenses of $3.2 million and an increase of $3.3 million in
outside services and other.
Sales and Marketing
Three Months Ended July 31, Six Months Ended July 31,
2021 2020 $ Change % Change 2021 2020 $ Change % Change
(in thousands, except percentages)Sales and marketing$ 80,150 $ 51,942 $ 28,208 54 %$ 153,130 $ 103,957 $ 49,173 47 % Percentage of revenue 56 % 45 % 56 % 46 % Sales and marketing expenses increased by$28.2 million , or 54%, for the three months endedJuly 31, 2021 compared to the three months endedJuly 31, 2020 . The increase was primarily due to higher personnel-related expenses of$22.1million as we expanded our quota bearing sales force along with non-quota bearing sales support positions, an increase of$2.2 million in software and outside consulting services and an increase of$2.0 million in marketing costs. Sales and marketing expenses increased by$49.2 million , or 47%, for the six months endedJuly 31, 2021 compared to the six months endedJuly 31, 2020 . The increase was primarily due to higher personnel-related expenses of$35.1 million , as we continue to expand our quota bearing sales force along with non-quota bearing sales support positions, an increase in marketing costs of$7.5 million from higher advertising and sponsorship expenses, and an increase of$4.1 million in software and other consulting costs. General and Administrative Three Months Ended July 31, Six Months Ended July 31, 2021 2020 $ Change % Change 2021 2020 $ Change % Change (in thousands, except percentages)
General and administrative$ 33,909 $ 29,137 $ 4,772 16 %$ 64,022 $ 50,635 $ 13,387 26 % Percentage of revenue 24 % 25 % 23 % 22 % General and administrative expenses increased by$4.8 million , or 16%, for the three months endedJuly 31, 2021 compared to the three months endedJuly 31, 2020 . The increase was primarily due to transaction expenses associated with the pendingThoma Bravo acquisition of$9.3 million , partially offset by a decrease in restructuring and other expenses of$4.7 million . General and administrative expenses increased by$13.4 million , or 26%, for the six months endedJuly 31, 2021 compared to the six months endedJuly 31, 2020 . The increase was primarily due to transaction expenses associated with the pendingThoma Bravo acquisition of$9.3 million , as well as a payment of$5.4 million related to the acceleration of certain stock options in conjunction with the acquisition of Decibel. 37 --------------------------------------------------------------------------------
Other Income (Expense), net and Provision for Income Taxes
Three Months Ended July 31, Six Months Ended July 31,
2021 2020 $ Change % Change 2021 2020 $ Change % Change
(in thousands, except percentages)
Interest expense and
other $ (1,863) $ (626) $ (1,237) 198 % $ (3,617) $ (1,324) $ (2,293) 173 %
Interest income 147 178 (31) (17) % 308 1,051 (743) (71) %
Other income (expense),
net $ (1,716) $ (448) $ (1,268) 283 % $ (3,309) $ (273) $ (3,036) 1112 %
Provision for income
taxes $ 937 $ 234 $ 703 300 % $ 1,711 $ 174 $ 1,537 883 %
Interest expense and other increased during the three and six months ended
July 31, 2021 compared to the three and six months ended July 31, 2020 primarily
due to an increase in interest expense related to our convertible senior notes
and finance leases.
Interest income decreased during the three and six months ended July 31, 2021
compared to the three and six months ended July 31, 2020 primarily due to lower
interest rates on our cash, cash equivalent and marketable securities balances.
Income tax expense increased by $0.7 million during the three months ended July
31, 2021 compared to the three months ended July 31, 2020 . This was primarily
attributed to excess tax benefits from stock-based compensation deductions in
the United Kingdom and the tax benefit realized acquisition of Voci during the
compartive three months ended July 31, 2020 . During the six months ended July
31, 2021 , income tax expense increased by $1.5 million compared to the six
months ended July 31, 2020 , primarily due to excess tax benefits from
stock-based compensation deductions in the United Kingdom and the tax benefit
realized from the acquisition of Voci during the comparative six months ended
July 31, 2020 .
Liquidity and Capital Resources
As of July 31, 2021 and January 31, 2021 , we had cash, cash equivalents and
current marketable securities of $507.6 million and $682.4 million ,
respectively. On March 12, 2021 , we acquired Decibel, a leader in digital
experience analytics for approximately $162.3 million in cash, including a
payment of $5.4 million related to the acceleration of certain stock options in
conjunction with the acquisition of Decibel. We experience seasonality related
to our operating cash flows. Our quarterly operating cash flows are generally
positive in the first and fourth quarters and are generally negative in the
second and third quarters. The seasonality is primarily attributable to higher
billings in the fourth quarter of each year. We primarily bill in advance
annually for our multi-year contracts, resulting in higher cash collections of
trade and other receivables in the first and fourth quarters of each year. This
seasonality has not impacted, nor do we expect it to impact in the future, our
ability to fund our near-term working capital, finance lease payments or capital
expenditure requirements. While we may experience delays in collections which we
attribute to the COVID-19 pandemic, we believe that our existing cash, cash
equivalents and marketable securities and trade and other receivables will be
sufficient to support working capital, finance lease payments and capital
expenditure requirements for at least the next 12 months. Our long-term capital
expenditure requirements will depend on many factors including our growth rate,
the timing and extent of spending to support development efforts, the expansion
of sales and marketing activities, the introduction of new and enhanced products
and services offerings, and the continuing market acceptance of our products, as
well as the timing of the closing of the proposed Merger and the duration and
extent of the COVID-19 pandemic and its effect on our business. Since inception,
we have financed operations primarily through subscription payments by customers
for use of our platform, equity and debt financings, finance lease arrangements
and loans for equipment.
From time to time, we may seek additional equity or debt financing to fund
capital expenditures, strategic initiatives or investments and our ongoing
operations. In the event that we decide, or are required, to seek additional
financing from outside sources, we may not be able to raise it on terms
acceptable to us or at all. If we are unable to
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raise additional capital when desired, our business, financial condition and
results of operations could be adversely affected.
Merger Agreement
On July 25, 2021 , we entered into the Merger Agreement. We have agreed to
various representations, warranties, covenants and agreements, including, among
others, agreements to conduct our business in the ordinary course during the
period between the execution of the Merger Agreement and the effective time of
the Merger. If the Merger Agreement is terminated in certain circumstances,
including by us in order to enter into a superior proposal or by Parent because
the Board withdraws its recommendation in favor of the Merger, we would be
required to pay Parent a termination fee of up to $191.1 million . In addition,
without the consent of Parent, we may not take, authorize, agree or commit to do
certain actions outside of the ordinary course of business, including incurring
material capital expenditures above specified thresholds, or issuing additional
debt facilities. We do not believe that the restrictions in the Merger Agreement
will prevent us from meeting our debt obligations, ongoing costs of operations,
working capital needs or capital expenditure requirements.
Convertible Senior Notes
In September 2020 , we issued $575.0 million aggregate principal amount of
convertible senior notes. The net proceeds from this offering were approximately
$558.2 million , after deducting the Initial Purchasers' discounts and
commissions and issuance costs.
Capped Call Transactions
In connection with the offering of the Notes, we entered into privately
negotiated capped call transactions with respect to our common stock at a cost
of approximately $61.9 million . We expect that the capped call transactions will
be terminated upon effectiveness of the Merger.
Wells Fargo Bank Credit Facility
On September 4, 2020 we entered into the Wells Fargo Bank Credit Facility (Wells
Fargo Credit Facility) to provide for a revolving line of credit of up to $50.0
million with the right (subject to certain conditions) to add incremental
revolving commitments of up to $50.0 million in the aggregate. The revolving
line of credit provides a sublimit of up to $40.0 million to be available for
the issuance of letters of credit. The outstanding balance, if any, is due at
the maturity date in September 2023 . Loans bear interest, at our option, at an
annual rate based on LIBOR or a base rate. Loans based on LIBOR shall bear
interest at a rate of LIBOR plus 1.75%. Loans based on the base rate shall bear
interest at a rate of the base rate plus 0.75%. We are required to pay a
commitment fee equal to 0.25% per annum on the undrawn portion available under
the revolving line of credit. As of July 31, 2021 , no amounts were outstanding
on this credit facility.
Silicon Valley Bank Credit Facility
On September 4, 2020 we paid all outstanding amounts owing under the Silicon
Valley Bank revolving line of credit and terminated the credit facility. We
continue to have unsecured letters of credit issued by Silicon Valley Bank in
the face amount of $4.9 million outstanding as of July 31, 2021 .
Cash Flow Hedging
We conduct business on a global basis in multiple foreign currencies, which
subjects us to foreign currency fluctuations resulting from customer contracts
and operating expenses denominated in foreign currencies. To protect our margin,
we have instituted a cash flow hedging program to help mitigate the variability
in cash flows due to certain foreign currency fluctuations. For revenues, we
enter into foreign currency forward contracts to sell foreign currencies to
hedge the non-U.S. dollar denominated revenue related to year two and year three
of our multi-year
39
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customer contracts. For expenses, we enter into foreign currency forward
contracts to purchase foreign currencies to hedge a percentage of certain
non-U.S. dollar denominated operating expenses over the next 12 months.
Cash Flows
The following table shows a summary of our cash flows for the periods presented
(in thousands):
Six Months Ended July 31,
2021 2020
Net cash (used in) provided by operating activities $ (16,791) $ 3,691
Net cash used in investing activities (173,979) (94,769)
Net cash provided by financing activities 19,371 90,043
Effect of exchange rate changes on cash and cash
equivalents 122 (49)
Net decrease in cash and cash equivalents $
(171,277)
Operating Activities Our largest source of operating cash is cash collections from our customers for subscriptions and professional services fees. Our primary uses of cash from operating activities are for personnel-related expenses, facilities costs and rent, marketing expenses and hosting fees. We typically experience relatively higher billings in the fourth quarter compared to other quarters and experience higher collections of trade and other receivables in the first and fourth quarter of the year, which results in a decrease in trade and other receivables. Cash used in operating activities for the six months endedJuly 31, 2021 of$16.8 million primarily related to our net loss of$114.9 million , adjusted for non-cash charges of$104.8 million and net cash outflows of$6.6 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of stock-based compensation, depreciation and amortization of property and equipment and intangible assets, non-cash lease expenses, amortization of convertible debt issuance costs and amortization of deferred commissions. The primary drivers of the changes in our operating assets and liabilities related to a$39.0 million decrease in deferred revenue, a$28.1 million increase in deferred commissions and a$9.4 million increase in prepaid expenses and other current assets and other noncurrent assets, partially offset by a$58.8 million decrease in trade and other receivables, and a$11.1 million increase in accounts payable, accrued expenses, lease liabilities, and other current and noncurrent liabilities. Cash provided by operating activities for the six months endedJuly 31, 2020 of$3.7 million primarily related to our net loss of$67.7 million , adjusted for non-cash charges of$97.4 million and net cash outflows of$26.0 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of stock-based compensation, depreciation and amortization of property and equipment and intangible assets and amortization of our deferred commissions. The primary drivers of the changes in our operating assets and liabilities related to a$63.3 million decrease in accounts receivable, partially offset by a$57.8 million decrease in deferred revenue, a$20.0 million increase in deferred commissions, a$10.3 million decrease in accounts payable, accrued expenses, lease liabilities and non-current liabilities and a$1.2 million increase in prepaid expense and other assets. Investing Activities Cash used in investing activities for the six months endedJuly 31, 2021 of$174.0 million was due to acquisitions, net of cash acquired of CheckMarket and Decibel for$163.8 million , which includes a payment of$5.4 million related to the acceleration of certain stock options in conjunction with the acquisition of Decibel, the purchases of property, equipment and other of$12.8 million , partially offset by net maturities and proceeds from sale of marketable securities of$2.6 million . Cash used in investing activities for the six months endedJuly 31, 2020 of$94.8 million was due to acquisitions, net of cash acquired of LivingLens and Voci for$80.4 million , the purchases of property, equipment and other of$9.8 million , and net purchases of marketable securities of$4.6 million . 40
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Financing Activities Cash provided by financing activities for the six months endedJuly 31, 2021 of$19.4 million consisted of$14.8 million in proceeds from the exercise of stock options and$8.0 million in proceeds from the Employee Stock Purchase Plan, partially offset by repayments on finance lease obligations of$3.2 million . Cash provided by financing activities for the six months endedJuly 31, 2020 of$90.0 million consisted of$43.0 million in proceeds from drawing down our revolving line of credit,$41.0 million in proceeds from the exercise of stock options and$10.3 million proceeds from the Employee Stock Purchase Plan, partially offset by repayments on capital lease obligations of$2.1 million and repayments of debt assumed on acquisitions of$2.1 million . Off-Balance Sheet Arrangements We did not have during the periods presented, and we do not currently have, any off-balance sheet financing arrangements or any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities, that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes, except for the letters of credit described in "Note 9: Debt" of our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. Critical Accounting Policies We prepare our unaudited condensed consolidated financial statements in accordance with GAAP. Preparing our unaudited condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses as well as related disclosures. Because these estimates and judgments may change from period to period, actual results could differ materially, which may negatively affect our financial condition or results of operations. We base our estimates and judgments on historical experience and various other assumptions that we consider reasonable, and we evaluate these estimates and judgments on an ongoing basis. There have been no material changes to these policies and estimates for the three and six months endedJuly 31, 2021 from those disclosed in Item 7 of our Form 10-K for the year endedJanuary 31, 2021 . Recent Accounting Pronouncements See "Note 1: Description of Business and Summary of Significant Accounting Policies" of our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for more information regarding recently issued accounting pronouncements.
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