PIVOTAL SOFTWARE, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K. The following discussion and analysis contains forward-looking statements that involve risks and uncertainties; our future 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 the section titled "Risk Factors" under Part II, Item 1A in this Quarterly Report on Form 10-Q and Part I, item 1A in our Annual Report on Form 10-K. Our fiscal year is the 52- or 53-week period ending on the Friday nearestJanuary 31 . Overview We provide a leading cloud-native platform that makes software development and IT operations a strategic advantage for our customers. Our cloud-native platform, Pivotal Cloud Foundry ("PCF"), accelerates and streamlines software development by reducing the complexity of building, deploying and operating new cloud-native applications and modernizing legacy applications. This enables our customers' development and IT operations teams to spend more time writing code, waste less time on mundane tasks and focus on activities that drive business value - building and deploying great software. PCF customers can accelerate their adoption of a modern software development process and their business success using our platform through our complementary strategic services,Pivotal Labs ("Labs"). Enterprises across industries have adopted our platform to build, deploy and operate software, including enterprises in the automotive and transportation, industrial and business services, financial services, healthcare and insurance, technology and media, consumer and communications and government sectors. Our offering, which includesPCF and Labs , enables organizations to build cloud-native software and compete in today's business environment. • PCF accelerates and streamlines software development by reducing the
complexity of building, deploying and operating modern applications.
PCF integrates an expansive set of critical, modern software
technologies delivered continuously to provide a turnkey cloud-native
platform. PCF combines leading open-source software with our robust
proprietary software to meet the exacting enterprise-grade requirements
of large organizations, including the ability to operate and manage
software across private and public cloud environments, such as Amazon
Web Services , Microsoft Azure, Google Cloud Platform, VMware vSphere
and OpenStack. PCF is sold on a subscription basis.
20--------------------------------------------------------------------------------
• Labs software development experts deliver strategic services that
transfer the expertise for enterprises to accelerate their cloud-native
transformation by implementing modern agile development practices. With
Labs, we help customers co-develop new applications and transform
existing ones while accelerating software development, streamlining IT
operations and ultimately driving self-sustaining business
transformation.
We generate a substantial and increasing portion of our revenue from the sale of
PCF subscriptions generated from sales of products to handle customers'
differing workloads and needs, including Pivotal Application Service ("PAS"),
Pivotal Container Service ("PKS") and products accessed in our Pivotal Services
Marketplace . We generate subscription revenue primarily from the sale of
time-based subscriptions. Subscriptions are offered typically for one- to
three-year terms, and we continue to recognize revenue from our subscriptions
ratably over the subscription term. We expect that over time subscription
revenue will become a larger percentage of our total revenue as customers
continue to adopt and expand their PCF subscriptions and as our systems
integrator ("SI") partner relationships ramp to directly deliver Labs-like
services to our customers.
We offer strategic services including Labs, implementation and other services.
Labs involves co-development and application transformation services. We offer
implementation services to enable our customers to configure, deploy, test,
launch and operate PCF. Part of our strategy to scale our subscription revenue
is to rely, in part, on SI partners to deliver co-development, application
transformation and implementation services to our customers. We intend to grow
our services revenue at a slower rate than our subscription revenue as customers
are enabled on our platform and increasingly use our partner ecosystem for their
services needs. Our strategic services are typically priced on a time and
materials basis with revenue recognized upon the delivery of the services.
We remain focused on attracting new subscription customers, retaining our
customers and expanding their usage of our platform, and leveraging strategic
services, delivered by us and our partners, to accelerate our customers' pace of
innovation and use of PCF. This focus has resulted in rapid growth of our
subscription revenue and significant total revenue growth in recent periods.
To realize this rapid growth, we have made and expect to continue to make
substantial investments across our business. Specifically, we have increased our
total employee base over time, and we intend to continue to invest in our
business to take advantage of our market opportunity and to expand our sales
capacity and further improve sales productivity to drive additional revenue and
grow our global customer base. Additionally, we continue to invest in the
development and expansion of our partner ecosystem to supplement our sales and
services resources and increase our reach in our target markets. We also expect
to continue to make significant investments in research and development to
expand our product and engineering teams to further develop our platform. We
expect to incur increased general and administrative expenses to support our
growth and operations.
Proposed Merger with VMware
On August 22, 2019 , Pivotal entered into the Merger Agreement with VMware and
Merger Sub. Refer to "Note 1 --- Overview and Basis of Presentation" for details
of the Merger Agreement.
Key Metrics
We regularly review the following key metrics to measure performance, identify
trends, formulate financial projections and to help us monitor our business.
While we believe that these metrics are useful in evaluating our business, other
companies may not use similar metrics or may not calculate similarly titled
metrics in a consistent manner.
November 1, 2019 February 1, 2019 November 2, 2018
Subscription customers 412 377 368
Dollar -based net expansion 135 % 149 % 150 %
Subscription Customers
We believe that the number of our subscription customers is an important
indicator of the growth of our business, our increased customer footprint and
the market acceptance of our platform. We define the number of subscription
customers as the organizations that have a subscription contract for our
software resulting in at least $50,000 of annual revenue in that period. While
we may enter into subscription agreements with multiple parties inside a larger
organization, we count a customer as an addition to our subscription customers
only if it represents a unique global ultimate parent. In the case of the U.S.
government, we count U.S. government departments and major agencies as unique
subscription customers. We view our total number of subscription customers as
reflective of the number of sources of revenue to us and our growth and
potential for future growth.
21
--------------------------------------------------------------------------------
We had 412, 377 and 368 subscription customers as of November 1, 2019 ,
February 1, 2019 , and November 2, 2018 , respectively. We expect growth in
subscription customers to continue as we deliver enhancements to our products
and remain focused on increasing our subscription customer count. Our total
number of subscription customers and the net additions in any period may
continue to fluctuate as a result of several factors, including the focus of our
sales force, customer satisfaction with the functionality, features, performance
or pricing of our offering, consolidation of our customer base and other
factors, a number of which are beyond our control.
Dollar-Based Net Expansion Rate
We believe that the dollar-based net expansion rate is an important measure of
our business because it is an indicator of our subscription customers' expanded
use of and demand for our platform and our ability to grow revenue and
profitability. Our dollar-based net expansion rate compares our subscription
revenue from a common group of customers across comparable periods. We calculate
our dollar-based net expansion rate for all periods on a trailing four-quarter
basis. To do so, we calculate our dollar-based net expansion rate as of each
quarter end by starting with the subscription revenue from customers as of the
prior year's same quarter (the "Prior Period Subscription Revenue"). We then
calculate subscription revenue from these same customers as of the current
quarter end (the "Current Period Subscription Revenue"). Finally, to assess net
expansion level for common groups of customers over time, we divide the
aggregate Current Period Subscription Revenue for the trailing four quarters by
the aggregate Prior Period Subscription Revenue for the trailing four quarters,
resulting in our dollar-based expansion rate.
We expect our dollar-based net expansion rate to remain a significant indicator
of our business momentum and results of operations as existing customers realize
the benefits of our software and expand their PCF subscriptions. Our
dollar-based net expansion rate has fluctuated and we expect it to continue to
fluctuate and trend downward over time as we scale our business and as a result
of several factors, including the size of the transactions, the timing and terms
of the deals and our customers' satisfaction with our offering. Our dollar-based
net expansion rate was approximately 135% for the three months ended November 1,
2019 , 149% for the three months ended February 1, 2019 and 150% for the three
months ended November 2, 2018 .
Components of Results of Operations
Revenue
Subscription
Subscription revenue is primarily derived from sales of PCF subscriptions. Our
customers subscribe to use our software platform for a variety of workloads,
such as applications, containers or other microservices. Subscriptions are
offered typically for one- to three-year terms, and we recognize revenue from
our subscriptions ratably over the subscriptions' term. We generally bill our
customers annually in advance, although for our multi-year contracts, some
customers pay the full contract amount in advance.
To a lesser extent, we generate revenue from certain historical software
products sold on a perpetual license basis. Perpetual license revenue
represented less than 1% of our total revenue for the both the three and nine
months ended November 1, 2019 and November 2, 2018 . We expect the percentage of
perpetual license revenue to continue to decline as a percentage of total
revenue. We generally recognize revenue from our perpetual licenses upon
delivery, assuming all the other revenue recognition criteria are satisfied.
Services
Services revenue is primarily derived from Labs, as well as implementation and
other professional services. To a decreasing extent over time, services revenue
also includes revenue from maintenance and support associated with the perpetual
licenses described above. Our services revenue may continue to fluctuate; any
services revenue growth is expected to be modest both in absolute dollars and
relative to subscription revenue.
Cost of Revenue
Subscription
Cost of subscription revenue consists primarily of personnel and related costs,
consisting of salaries, benefits, bonuses and stock-based compensation
("personnel costs") directly associated with our customer support and allocated
overhead costs. Additionally, cost of subscription revenue includes intangible
asset and other asset amortization expense and certain third-party expenses such
as cloud infrastructure costs and software and support fees. We expect our cost
of subscription revenue to increase in absolute dollar amounts as we invest in
our business.
22
--------------------------------------------------------------------------------Services
Cost of services revenue consists primarily of personnel costs directly associated with delivery of Labs, implementation and other professional services, costs of third-party contractors and allocated overhead costs. We expect our cost of services revenue to increase in absolute dollar amounts as we invest in our business. Operating Expenses Sales and Marketing Sales and marketing expenses consist primarily of personnel costs including commissions. Other sales and marketing costs include travel and entertainment, promotional events (such as ourSpringOne Platform Conference ) and allocated overhead costs. We expect our sales and marketing expenses will increase in absolute dollar amounts as we hire additional sales and marketing personnel to expand our customer footprint, deepen our relationships with existing customers, and build brand and product awareness. Research and Development Research and development expenses consist primarily of personnel costs, cloud infrastructure costs related to our research and development efforts and allocated overhead costs. We expect our research and development expenses will increase in absolute dollar amounts as we expand our research and development team to develop new products and product enhancements. General and Administrative General and administrative expenses consist primarily of personnel costs and allocated overhead costs for our administrative, legal, information technology, human resources, finance and accounting employees and executives. Our general and administrative expenses also include professional fees, audit fees, tax services and legal fees, as well as insurance and other corporate expenses. We expect our general and administrative expenses will increase in absolute dollar amounts as we scale our general and administrative function to support the growth of our business. We also anticipate that we will incur additional costs for employees and third-party consulting services as we continue to operate as a public company. Other Income (expense), Net Other income (expense), net consists of gains and losses from transactions denominated in a currency other than the functional currency, net interest earned on our cash and cash equivalents and other non-operating gains or losses. Provision for Income Taxes Provision for income taxes consists primarily of income taxes related to foreign jurisdictions in which we conduct business. We maintain a full valuation allowance on our federal, state and certain foreign deferred tax assets as we have concluded that it is more likely than not that those deferred assets will not be utilized. 23 --------------------------------------------------------------------------------
Results of Operations (dollars in thousands)
Three Months Ended Nine Months Ended
November 1, 2019 November 2, 2018 November 1, 2019 November 2, 2018
Revenue:
Subscription $ 139,758 $ 100,775 $ 403,604 $ 288,390
Services 58,521 67,368 173,386 199,896
Total revenue 198,279 168,143 576,990 488,286
Cost of revenue:
Subscription 9,649 7,813 27,313 24,047
Services 51,292 53,179 154,755 157,470
Total cost of revenue 60,941 60,992 182,068 181,517
Gross profit 137,338 107,151 394,922 306,769
Operating expenses:
Sales and marketing 83,198 70,620 247,458 210,308
Research and development 58,832 51,880 173,763 143,309
General and administrative 30,640 20,546 75,342 57,979
Total operating expenses 172,670 143,046 496,563 411,596
Loss from operations (35,332 ) (35,895 ) (101,641 ) (104,827 )
Other income, net 2,634 1,866 10,054 2,412
Loss before provision for income taxes (32,698 ) (34,029 ) (91,587 ) (102,415 )
Provision for income taxes 409 776 1,409 549
Net loss (33,107 ) (34,805 ) (92,996 ) (102,964 )
Less: Net loss (income) attributable
to non-controlling interest 4 (45 ) 41 (8 )
Net loss attributable to Pivotal
24
--------------------------------------------------------------------------------The following table sets forth our results of operations for each of the periods presented as a percentage of revenue:
Three Months Ended Nine Months Ended
November 1, 2019 November 2, 2018 November 1, 2019 November 2, 2018
Revenue:
Subscription 70 % 60 % 70 % 59 %
Services 30 40 30 41
Total revenue 100 100 100 100
Cost of revenue:
Subscription 5 5 5 5
Services 26 31 27 32
Total cost of revenue 31 36 32 37
Gross profit 69 64 68 63
Operating expenses: .
Sales and marketing 42 42 43 43
Research and development 30 31 30 29
General and administrative 15 12 13 13
Total operating expenses 87 85 86 85
Loss from operations (18 ) (21 ) (18 ) (22 )
Other income, net 1 1 2 1
Loss before provision for income taxes (17 ) (20 ) (16 ) (21 )
Provision for income taxes - 1 0 0
Net loss (17 ) (21 ) (16 ) (21 )
Less: Net loss (income) attributable to
non-controlling interest 0 0 0 0
Net loss attributable to Pivotal (17 )% (21 )% (16 )% (21 )%
Comparison of the three and nine months ended November 1, 2019 and November 2,
2018
Revenue
Three Months Ended Nine Months Ended
November 1, 2019 November 2, 2018 November 1, 2019 November 2, 2018
Amount Amount $ Change % Change Amount Amount $ Change % Change
(dollars in thousands) (dollars in thousands)
Revenue:
Subscription $ 139,758 $ 100,775 $ 38,983 39% $ 403,604 $ 288,390 $ 115,214 40%
Services 58,521 67,368 (8,847 ) (13)% 173,386 199,896 (26,510 ) (13)%
Total revenue $ 198,279 $ 168,143 $ 30,136 18% $ 576,990 $ 488,286 $ 88,704 18%
Total revenue increased by $30.1 million , or 18%, to $198.3 million during the
three months ended November 1, 2019 , from $168.1 million during the three months
ended November 2, 2018 . Subscription revenue increased by $39.0 million , or 39%,
to $139.8 million during the three months ended November 1, 2019 from $100.8
million during the three months ended November 2, 2018 . The increase in
subscription revenue was primarily due to increased sales to existing customers
and the remaining increase was due to sales to new customers. Services revenue
decreased by $8.8 million , or 13%, to $58.5 million during the three months
ended November 1, 2019 from $67.4 million during the three months ended
November 2, 2018 . The decrease in services revenue was due to fewer customer
engagements within the current period and a decrease in revenue from maintenance
and support contracts. Revenue from maintenance and support contracts associated
with historical software products sold on a perpetual license basis represented
less than 5% of total revenue for both the three months ended November 1, 2019
and November 2, 2018 , and is generally expected to represent a decreasing amount
of revenue in future periods.
25
--------------------------------------------------------------------------------
Total revenue increased by $88.7 million , or 18%, to $577.0 million during the
nine months ended November 1, 2019 , from $488.3 million during the nine months
ended November 2, 2018 . Subscription revenue increased by $115.2 million , or
40%, to $403.6 million during the nine months ended November 1, 2019 from $288.4
million during the nine months ended November 2, 2018 . The increase in
subscription revenue was primarily due to increased sales to existing customers
and the remaining increase was due to sales to new customers. Services revenue
decreased by $26.5 million , or 13%, to $173.4 million during the nine months
ended November 1, 2019 from $199.9 million during the nine months ended
November 2, 2018 . The decrease in services revenue was due to fewer customer
engagements within the current period and a decrease in revenue from maintenance
and support contracts. Revenue from maintenance and support contracts associated
with historical software products sold on a perpetual license basis represented
less than 4% of total revenue for both the nine months ended November 1, 2019
and November 2, 2018 , and is generally expected to represent a decreasing amount
of revenue in future periods.
Cost of Revenue
Three Months Ended Nine Months Ended
November 1, 2019 November 2, 2018 November 1, 2019 November 2, 2018
Amount Amount $ Change % Change Amount Amount $ Change % Change
(dollars in thousands) (dollars in thousands)
Cost of
revenue:
Subscription $ 9,649 $ 7,813 $ 1,836 23% $ 27,313 $ 24,047 $ 3,266 14%
Services 51,292 53,179 (1,887 ) (4)% 154,755 157,470 (2,715 ) (2)%
Total cost
of revenue $ 60,941 $ 60,992 $ (51 ) -%$ 182,068 $ 181,517 $ 551 -% Gross margin: Subscription 93 % 92 % 93 % 92 % Services 12 % 21 % 11 % 21 % Total gross margin 69 % 64 % 68 % 63 % Total cost of revenue decreased slightly during the three months endedNovember 1, 2019 from the three months endedNovember 2, 2018 . Cost of subscription revenue increased by$1.8 million , or 23%, to$9.6 million during the three months endedNovember 1, 2019 from$7.8 million during the three months endedNovember 2, 2018 . The increase in cost of subscription was primarily due to an increase in personnel and third-party labor costs of$1.9 million . Growth in cost of subscription revenue was lower relative to the growth in our subscription revenue as we continue to realize economies of scale. Cost of services revenue decreased by$1.9 million , or 4%, to$51.3 million during the three months endedNovember 1, 2019 from$53.2 million during the three months endedNovember 2, 2018 . The decrease in costs of services expense was primarily due to a decrease in personnel and related costs of$3.0 million driven by less services revenue, offset by an increase in third-party partner spend. Total cost of revenue increased by$0.6 million , or 0%, to$182.1 million during the nine months endedNovember 1, 2019 from$181.5 million during the nine months endedNovember 2, 2018 . Cost of subscription revenue increased by$3.3 million , or 14%, to$27.3 million during the nine months endedNovember 1, 2019 from$24.0 million during the nine months endedNovember 2, 2018 . The increase in cost of subscription was driven by higher support personnel and related costs of$4.5 million , due to the growth of our subscription revenue, offset by a reduction in intangible asset amortization of$1.1 million . The cost of services revenue decreased by$2.7 million , or 2%, to$154.8 million during the nine months endedNovember 1, 2019 from$157.5 million during the nine months endedNovember 2, 2018 . The decrease in cost of services expense was primarily due to a decrease of$3.3 million in personnel and related costs driven by less services revenue, offset by an increase in third-party partner spend. Subscription gross margin increased to 93% during the three months endedNovember 1, 2019 from 92% during the three months endedNovember 2, 2018 due to economies of scale as our subscription revenue increased. Subscription gross margin increased to 93% during the nine months endedNovember 1, 2019 from 92% during the nine months endedNovember 2, 2018 due to economies of scale as our subscription revenue increased. Services gross margin decreased to 12% during the three months endedNovember 1, 2019 from 21% during the three months endedNovember 2, 2018 driven by fewer customer engagements and decline in higher margin maintenance revenues that support legacy perpetual licenses. 26 -------------------------------------------------------------------------------- Services gross margin decreased to 11% during the nine months endedNovember 1, 2019 from 21% during the nine months endedNovember 2, 2018 driven by fewer customer engagements and decline in higher margin maintenance revenues that support legacy perpetual licenses. Operating Expenses Sales and Marketing Three Months Ended Nine Months Ended November 1, 2019 November 2, 2018 November 1, 2019 November 2, 2018 Amount Amount $ Change % Change Amount Amount $ Change % Change (dollars in thousands) (dollars in thousands) Sales and marketing $ 83,198$ 70,620 $ 12,578 18%$ 247,458 $ 210,308 $ 37,150 18% Percentage of revenue 42 % 42 % 43 % 43 %
Research and Development
Three Months Ended Nine Months Ended
November 1, 2019 November 2, 2018 November 1, 2019 November 2, 2018
Amount Amount $ Change % Change Amount Amount $ Change % Change
(dollars in thousands) (dollars in thousands)
Research and
development $ 58,832 $ 51,880 $ 6,952 13% $ 173,763 $ 143,309 $ 30,454 21%
Percentage
of revenue 30 % 31 % 30 % 29 %
General and Administrative
Three Months Ended Nine Months Ended
November 1, 2019 November 2, 2018 November 1, 2019 November 2, 2018
Amount Amount $ Change % Change Amount Amount $ Change % Change
(dollars in thousands) (dollars in thousands)
General and
administrative $ 30,640 $ 20,546 $ 10,094 49% $ 75,342 $ 57,979 $ 17,363 30%
Percentage of
revenue 15 % 12 % 13 % 13 %
Sales and marketing expense increased by $12.6 million , or 18%, to $83.2 million
during the three months ended November 1, 2019 from $70.6 million during the
three months ended November 2, 2018 . The increase in sales and marketing expense
was primarily due to an increase in headcount in our sales and marketing teams
of $6.3 million , an increase in sales commission expense of $1.8 million and an
increase in expenses of $4.0 million related to our SpringOne Platform
Conference .
Sales and marketing expense increased by $37.2 million , or 18%, to $247.5
million during the nine months ended November 1, 2019 from $210.3 million during
the nine months ended November 2, 2018 . The increase in sales and marketing
expense was primarily due to an increase in headcount and related costs in our
sales and marketing teams of $30.4 million , an increase in commission spend of
$2.6 million and an increase in spend related to the timing of our conference
activity of $2.9 million .
Research and development expense increased by $7.0 million , or 13%, to $58.8
million during the three months ended November 1, 2019 from $51.9 million during
the three months ended November 2, 2018 . The increase in research and
development expense was primarily due to an increase in personnel costs of $7.5
million , particularly around our product investments in cloud and PKS, offset by
savings in infrastructure and other costs.
Research and development expense increased by $30.5 million , or 21%, to $173.8
million during the nine months ended November 1, 2019 from $143.3 million during
the nine months ended November 2, 2018 . The increase in research and development
expense was primarily due to an increase of $31.7 million in headcount related
spend and allocated overhead.
27
--------------------------------------------------------------------------------
General and administrative expense increased by $10.1 million , or 49%, to $30.6
million during the three months ended November 1, 2019 from $20.5 million during
the three months ended November 2, 2018 . The increase in general and
administrative expense was primarily due to $6.9 million of professional fees
associated with the Merger, and the remainder was primarily attributable to
increased headcount to support the growth of the business.
General and administrative expense increased by $17.4 million , or 30%, to $75.3
million during the nine months ended November 1, 2019 from $58.0 million during
the nine months ended November 2, 2018 . The increase in general and
administrative expense was primarily due to $6.9 million of professional fees
associated with the Merger, and the remaining amount was driven by increases in
headcount and other expenses.
Non-Operating Expenses
Other Income, Net
Three Months Ended Nine Months Ended
November 1, 2019 November 2, 2018 November 1, 2019 November 2, 2018
Amount Amount $ Change % Change Amount Amount $ Change % Change
(dollars in thousands) (dollars in thousands)Other income, net$ 2,634 $ 1,866$ 768 41% $ 10,054 $ 2,412$ 7,642 317% Other income, net increased by$0.8 million to$2.6 million for the three months endedNovember 1, 2019 from$1.9 million for the three months endedNovember 2, 2018 . Other income, net generated for both the three months endedNovember 1, 2019 andNovember 2, 2018 was primarily due to interest earned on money market investments of$3.6 million and$2.6 million , respectively, offset by foreign currency losses in our international operations. Other income, net increased by$7.6 million to$10.1 million for the nine months endedNovember 1, 2019 from$2.4 million for the nine months endedNovember 2, 2018 . Other income, net generated for both the nine months endedNovember 1, 2019 andNovember 2, 2018 resulted from interest earned on money market investments of$11.9 million and$5.1 million , respectively. In addition, we had gains on sales of investments of$1.1 million and$3.2 million , respectively, offset by foreign currency losses in our international operations. Income Taxes Provision for (benefit from) Income Taxes Three Months Ended Nine Months Ended November 1, 2019 November 2, 2018 November 1, 2019 November 2, 2018 Amount Amount $ Change % Change Amount Amount $ Change % Change (dollars in thousands) (dollars in thousands)
Provision for income taxes$ 409 $ 776$ (367 ) (47)%$ 1,409 $ 549$ 860 (157)% As a result of the stock issued in our IPO, we are no longer included in theDell consolidatedU.S. federal return and will file a separateU.S. federal return on a go-forward basis. The federal deferred tax assets and liabilities previously calculated on a separate return basis have been adjusted to reflect only the actual carryforward items which Pivotal will have on its separate federal tax return. There was no impact on our provision for income taxes due to a corresponding reduction in the related valuation allowance. Our provision for income taxes for the three months endedNovember 1, 2019 was$0.4 million . Our provision for income taxes for the three months endedNovember 2, 2018 was$0.8 million . Our quarterly provision is primarily driven by foreign taxes due in profitable jurisdictions and fluctuates due to variability in our services profitability in total and among the tax jurisdictions in which we operate. Our provision for income taxes for the nine months endedNovember 1, 2019 was$1.4 million . Our provision for income taxes for the nine months endedNovember 2, 2018 was$0.5 million . Our provision is primarily driven by foreign taxes due in profitable jurisdictions and fluctuates due to variability in our services profitability in total and among the tax jurisdictions in which we operate and other adjustments. 28 -------------------------------------------------------------------------------- Non-GAAP Financial Measures In addition to our results determined in accordance with GAAP, we believe the following non-GAAP information is useful in evaluating our operating results. We use the following non-GAAP financial information, collectively, to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that non-GAAP financial information may be helpful to investors because it provides consistency and comparability with past financial performance, and assists in comparisons with other companies, some of which use similar non-GAAP financial information to supplement their GAAP results. The non-GAAP financial information is presented for supplemental informational purposes only and should not be considered a substitute for financial information presented in accordance with GAAP, and may be different from similarly titled non-GAAP measures used by other companies. A reconciliation is provided below for each non-GAAP financial measure to the most directly comparable financial measure stated in accordance with GAAP. Investors are encouraged to review the GAAP financial measures together with such reconciliations. Non-GAAP Gross Profit and Non-GAAP Gross Margin We define non-GAAP gross profit and non-GAAP gross margin as GAAP gross profit and GAAP gross margin, adjusted for stock-based compensation expense and amortization of acquired intangibles. Three Months Ended
Nine Months Ended
November 1, 2019 November 2, 2018
(dollars in thousands) (dollars in thousands)
Gross profit $ 137,338 $ 107,151 $ 394,922 $ 306,769
Add:
Stock-based compensation expense
included in cost of revenue 6,270 4,652 17,589 11,768
Amortization of acquired
intangibles included in cost of
revenue 22 340 142 1,204
Non-GAAP gross profit $ 143,630 $ 112,143 $ 412,653 $ 319,741
Gross margin 69 % 64 % 68 % 63 %
Non-GAAP gross margin 72 % 67 % 72 % 65 %
Non-GAAP Operating Loss We define non-GAAP operating loss and non-GAAP operating margin as GAAP operating profit and GAAP operating margin, adjusted for stock-based compensation expense and amortization of acquired intangibles.
Three Months Ended Nine Months Ended
November 1, 2019 November 2, 2018 November 1, 2019 November 2, 2018
(dollars in thousands) (dollars in thousands)
Operating loss $ (35,332 ) $ (35,895 ) $ (101,641 ) $ (104,827 )
Add:
Stock-based compensation expense 26,164 19,428 73,561 49,233
Amortization of acquired intangibles 1,485 1,632 4,184 5,077
Acquisition related expenses 7,127 - 7,127 -
Non-GAAP operating loss $ (556 ) $ (14,835 ) $ (16,769 ) $ (50,517 )
29-------------------------------------------------------------------------------- Liquidity and Capital Resources Overview To date, our principal sources of liquidity have been the net proceeds we received through the sale of our common stock in our IPO, private sales of equity securities, payments received from customers using our platform and services and borrowings under our line of credit. Following the completion of our IPO, we received aggregate proceeds of$544.4 million , net of underwriters' discounts and commissions and offering costs paid. As ofNovember 1, 2019 , we had cash and cash equivalents totaling$821.9 million , which we intend to use for working capital, operating expenses, and capital expenditures. We may also use a portion of this to acquire complementary businesses, products, services, or technologies. Our cash equivalents are comprised primarily of money market funds. We believe that our existing cash, cash equivalents, and investments will be sufficient to satisfy our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. Our future capital requirements will depend on many factors, including our rate of revenue growth, billing terms of our subscription contracts, timing of collection of accounts receivable, the rate of expansion of our workforce, the timing and extent of our expansion into new markets, the timing of introductions of new functionality and enhancements to our platform and the continuing market acceptance of our platform, as well as general economic and market conditions. We may need to raise additional capital or incur indebtedness to continue to fund our operations in the future or to fund our needs for other strategic initiatives, such as acquisitions. We also foresee entering into lease and other related facilities obligations to support any future growth in our headcount. OnOctober 22, 2019 , we terminated our credit agreement and related security agreement. As part of the termination, we accelerated the associated unamortized debt costs, which resulted in$0.3 million of expense in the period. Prior to that date, we maintained a credit agreement and a related security agreement that provided for a senior secured revolving credit facility in an aggregate principal amount not to exceed$100.0 million (the "Revolving Facility").We had no amounts outstanding under the Revolving Facility when we terminated the Revolving Facility. Cash Flows Nine Months Ended November 1, 2019 November 2, 2018 (in thousands) Net cash provided by (used in): Operating activities $ 5,039$ (13,348 ) Investing activities $ (5,293 ) $ (3,695 ) Financing activities$ 120,639 $ 607,803 Operating Activities During the nine months endedNovember 1, 2019 , cash provided by operating activities was$5.0 million primarily due to our net loss of$93.0 million , adjusted for non-cash charges of$109.4 million and net cash outflows of$11.4 million provided by changes in our operating assets and liabilities. Non-cash charges primarily consisted of stock-based compensation and depreciation and amortization of property and equipment, intangible assets and right of use lease assets. The primary drivers of the changes in operating assets and liabilities related to a$151.2 million decrease in accounts receivable driven by collections, offset by a$129.8 million decrease in deferred revenue, a decrease of$23.0 million in operating lease liabilities and a decrease of$9.4 million in accrued expenses. During the nine months endedNovember 2, 2018 , cash provided by operating activities was$13.3 million primarily due to our net loss of$103.0 million , adjusted for non-cash charges of$63.5 million and net cash inflows of$26.1 million provided by changes in our operating assets and liabilities. Non-cash charges primarily consisted of stock-based compensation and depreciation and amortization of property and equipment and intangible assets. The primary drivers of the changes in operating assets and liabilities related to a$43.9 million decrease in accounts receivable offset by a$10.2 million decrease in deferred revenue and a decrease of$16.2 million in accrued expenses. 30
--------------------------------------------------------------------------------
Investing Activities For the nine months endedNovember 1, 2019 , cash used in investing activities was$5.3 million , compared to cash used in investing activities of$3.7 million for the nine months endedNovember 2, 2018 . Our investing activities for the nine months endedNovember 1, 2019 and for the nine months endedNovember 2, 2018 were attributable to the purchases of property, plant and equipment partially offset by the sale of certain investments within both periods. Financing Activities Cash provided by financing activities during the nine months endedNovember 1, 2019 of$120.6 million was attributable to proceeds from the exercise of stock options and proceeds from other employee stock plans of$94.1 million , and cash received fromDell relating to our tax sharing agreement of$26.5 million . Cash provided by financing activities during the nine months endedNovember 2, 2018 of$607.8 million was primarily attributable to proceeds from the completion of our IPO of$544.7 million , net of underwriters' discounts and commissions, and issuance costs. Additionally, we received$41.3 million in cash fromDell primarily representing the final federal tax sharing payments for fiscal 2018 and we received proceeds from the exercise of stock options of$41.9 million . These inflows were partially offset by repayments of the Revolving Facility of$20.0 million which is net of additional borrowings. Commitments and Contractual Obligations During the nine months endedNovember 1, 2019 , there have been no material changes outside the ordinary course of business to our contractual obligations and commitments from those disclosed in our Prospectus. See "Note 15-Commitments and Contingencies," in our notes to unaudited condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. Off-Balance Sheet Arrangements As ofNovember 1, 2019 , we were not subject to any obligations pursuant to any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K, 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, that have or are reasonably likely to have a material effect on our financial condition, results of operations or liquidity. Critical Accounting Policies and Estimates Our condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles inthe United States , orU.S. GAAP. The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs, and expenses and related disclosures. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these judgments and estimates under different assumptions or conditions and any such differences may be material. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management's judgments and estimates. Notwithstanding the addition of the policy disclosed in "Note 2-Summary of Significant Accounting Policies" for leases, there have been no material changes to our critical accounting policies and significant judgments and estimates as compared to the critical accounting policies and significant judgments and estimates disclosed in our Annual Report on Form 10-K.
© Edgar Online, source
