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. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that are based upon current plans, expectations, and beliefs that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including, but not limited to, those set forth under the section titled "Risk Factors" in Item 1A of Part II of this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K. Our fiscal year endsJanuary 31 . Overview Slack is a new layer of the business technology stack where people can work together more effectively, connect all their other software tools and services, and find the information they need to do their best work. Slack has very general and broad applicability. It is not aimed at any one specific purpose, but at nearly anything that people do together at work. Slack is used to review job candidates, coordinate election coverage, diagnose network problems, negotiate budgets, plan marketing campaigns, approve menus, and organize disaster response teams, along with countless other tasks. Slack provides an easy way for users to share and aggregate information from other software, take action on notifications, and advance workflows in a multitude of third-party applications, over 2,500 of which are listed in the Slack App Directory. Developers have collectively created more than 935,000 third-party applications or custom integrations that were used in a typical week during the three months endedApril 30, 2021 . Further, Slack's platform capabilities extend beyond integrations with third-party applications and allow for easy integrations with an organization's internally-developed software. Proposed Transaction with Salesforce OnDecember 1, 2020 , we entered into the Merger Agreement. The Merger Agreement provides for the merger of Merger Sub I with and into Slack, with Slack continuing as the surviving corporation and as a wholly owned subsidiary of Salesforce, immediately followed by a second merger of the surviving corporation into either Merger Sub II or Salesforce, with either Merger Sub II or Salesforce continuing as the surviving company. Under the terms of the Merger Agreement, all of our issued and outstanding shares of Class A common stock and Class B common stock will be converted into the right to receive (a) 0.0776 shares of Salesforce common stock and (b)$26.79 in cash, without interest. The Mergers are intended to be treated as a single integrated transaction that will qualify as a "reorganization" within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended, or the Code. As a result of the Mergers, we will cease to be a publicly traded company. The Merger Agreement contains customary representations, warranties, and covenants. The consummation of the Mergers is conditioned on the receipt of the approval of our stockholders, as well as the satisfaction of other customary closing conditions, including domestic and foreign regulatory approvals and performance in all material respects by each party of its obligations under the Merger Agreement. Consummation of the Mergers is not subject to a financing condition. InMarch 2021 , our stockholders approved the proposal to adopt the Merger Agreement and approve the transactions contemplated thereby including the Mergers. The Mergers are anticipated to close in the second quarter of our fiscal year 2022 (the quarter endingJuly 31, 2021 ), subject to receipt of required regulatory approvals, and other customary closing conditions. We cannot predict with certainty, however, whether and when all of the required closing conditions will be satisfied or if the Mergers will close. The Merger Agreement contains certain customary termination rights for us and Salesforce, including if the First Merger is not consummated byAugust 1, 2021 , subject to two extensions of up to three months each in order to obtain required regulatory approvals. If the Merger Agreement is terminated under certain specified circumstances, including (i) a termination by us to enter into a superior proposal, (ii) a termination by Salesforce following a change or withdrawal of the Company's board of directors' recommendation of the Mergers to our stockholders, or (iii) a termination by Salesforce as a result of a material breach of our non-solicitation obligations under the Merger Agreement, then we will be obligated to pay to Salesforce a termination fee equal to$900.0 million in cash. As part of Salesforce after the completion of the Mergers, we expect our company will be positioned to scale and further our mission. Following the completion of the Mergers, Slack will become an operating unit of Salesforce and continue to be led by our Chief Executive Officer,Stewart Butterfield , driving forward a continued focus on our mission, customers, users, and community. See the section titled "Risk Factors-Risks Related to our Proposed Transaction with Salesforce" included under Part II, Item 1A of this Quarterly Report on Form 10-Q for more information regarding the risks associated with the Mergers. 19 -------------------------------------------------------------------------------- The foregoing summary of the Merger Agreement and the transactions contemplated thereby does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the Merger Agreement, which is filed as Exhibit 2.1 of our Current Report on Form 8-K filed onDecember 1, 2020 and incorporated by reference herein. COVID-19 Update InMarch 2020 , theWorld Health Organization declared COVID-19 a global pandemic. This contagious disease outbreak, which has continued to spread, and the related public health measures, including orders to shelter-in-place, travel restrictions, and mandated business closures, have adversely affected workforces, organizations, customers, economies, and financial markets globally, leading to an economic downturn and increased market volatility. It has also disrupted the normal operations of many businesses, including ours. We have experienced volatility in customer demand and buying habits due to the COVID-19 pandemic, including an increase in net new Paid Customers, but also an increase in paid customer churn and a decrease in expansion within existing paid customers. We expect these paid customer churn and expansion trends to continue due to the ongoing effects of the COVID-19 pandemic. We define paid customer churn as paid customers reducing the number of users within their organizations or electing not to renew their paid subscriptions. The full extent of the impact of the COVID-19 pandemic on our operational and financial performance will continue to depend on certain developments, including the duration and spread of the outbreak, distribution and public acceptance of treatments and vaccines, the pace of reopening, impact on our customers and our sales cycles, impact on our business operations, impact on our customer, employee or industry events, all of which are uncertain and cannot be predicted. The COVID-19 pandemic and its adverse effects have been more prevalent in the locations where we, our customers, suppliers, and third-party business partners conduct business. This outbreak, as well as intensified measures undertaken to contain the spread of COVID-19, have decreased IT spending for many organizations, adversely affected demand for Slack including attrition rates, and inhibited the ability of our salespeople to travel to potential customers and of our customer success team to conduct in-person trainings and consulting work. Additionally, the COVID-19 pandemic has negatively impacted spending from certain new and existing customers, increased sales cycle times, negatively impacted collections of accounts receivable from certain customers, caused certain of our paid customers to file for bankruptcy protection or go out of business, and harmed our business, results of operations, and financial condition. We expect these negative impacts will continue due to the ongoing effects of the COVID-19 pandemic, although we cannot predict the duration or severity of such impacts. In addition, to prepare for potential surges in demand, we have incurred, and may continue to incur, additional costs and make additional investments in order to meet the demands of increased customer usage of Slack and additional product development efforts during this time may put additional pressure on our technical infrastructure. The broader implications of COVID-19 on our results of operations and overall financial performance remain uncertain. The COVID-19 pandemic has resulted in, and any prolonged economic slowdowns may continue to result in, paid customers on Slack requesting to renegotiate existing contracts on less advantageous terms to us than those currently in place, defaulting on payments due on existing contracts, not renewing at the end of the contract term, or choosing to renew with a smaller commitment than previous contracts. For example, in an effort to assist both new and existing paid customers facing challenges due to the economic impact of the COVID-19 pandemic, we have entered into, and expect to continue to enter into, more custom contracts and billing arrangements with new and existing paid customers, which may be less advantageous to us than our standard term contracts. These arrangements have included provisions such as the ability to defer payments, to pay in installments or over longer time periods, and other collection flexibility. We have also granted, and may in the future grant, billing concessions to existing paid customers. We do not expect these billing arrangements to have a significant impact on our future revenue, but they will negatively impact our future Calculated Billings and Free Cash Flow. The COVID-19 pandemic also presents challenges as our entire workforce is currently working remotely and shifting to assisting new and existing customerswho are also generally working remotely. All of our currently planned customer, employee, and industry events have been shifted to virtual-only experiences, and we may deem it advisable to similarly alter, postpone, or cancel entirely, additional customer, partner, employee, or industry events in the future. Furthermore, inJune 2020 , we announced that we would allow many of our employees to work remotely on a permanent basis. We have a limited history of having a remote workforce and the long-term impact on, and the resulting types of continuing investments for, our employee base is uncertain. In addition, we may incur increased workforce costs, including costs associated with implementing additional personnel and workplace safety protocols, the accrual of unused paid time off, and workplace or labor claims and disputes related to COVID-19. While we have developed and continue to develop plans to help mitigate the potential negative impact of the outbreak on our business, these efforts may not be effective and a protracted economic downturn will likely limit the effectiveness of our mitigation efforts. Due to our subscription-based business model, the effect of the COVID-19 pandemic may not be fully 20 -------------------------------------------------------------------------------- reflected in our results of operations until future periods, if at all. We are continuing to understand the long-term net effect and anticipated future magnitude of the above factors on our results for future periods and such forecasts are inherently uncertain. See Part II, Item 1A, "Risk Factors" for further discussion of the possible impact of the COVID-19 pandemic on our business, financial condition, and results of operations. Key Business Metrics We review the following key business metrics to measure our performance, identify trends, formulate financial projections, and make strategic decisions. We are not aware of any uniform standards for calculating these key metrics, which may hinder comparability with other companieswho may calculate similarly-titled metrics in a different way. We define an organization as a separate entity, such as a company, educational or government institution, or distinct business unit of a company, that is on a subscription plan, whether free or paid. Once an organization has three or more users on a paid subscription plan, we count them as a Paid Customer, and when disclosing the number of Paid Customers, we round down to the nearest thousand. Paid Customers We believe that the growth in our Paid Customer base reflects our value proposition and positions us for future growth as our Paid Customers often expand their adoption over time and Paid Customers increase awareness of Slack, which leads to organic adoption by new organizations. Our Paid Customers base has expanded through increasing awareness of Slack, further developing our go-to-market strategy, continuing to build features tuned to different industry needs, and increasing usage of Slack Connect. Our Paid Customer base includes organizations of all sizes across a wide range of industries. As ofApril 30, 2021 and 2020, we had approximately 169,000 and 122,000 Paid Customers, respectively. Paid Customers >$100,000 We focus on growing the number of Paid Customers >$100,000 as a measure of our ability to scale with organizations on Slack and attract larger organizations to Slack. We believe that our ability to increase the number of Paid Customers >$100,000 is a key indicator for important components of the growth of our business, including our success in expanding the number of users within a Paid Customer, providing the functionality required by large organizations and developing our direct sales force. We define Paid Customers >$100,000 as those organizations on a paid subscription plan that had more than$100,000 in annual recurring revenue, or ARR, as of a period end. ARR is based on monthly recurring revenue, or MRR, for the most recent month at period end, multiplied by twelve. For Paid Customers that have a type of subscription agreement where billing is reconciled on a monthly or quarterly basis based on usage, MRR is calculated by multiplying the monthly subscription price, inclusive of discounts, by the number of active subscriptions as of the month end. For Paid Customers that have a type of subscription agreement where billing is fixed and independent of usage, MRR is calculated by multiplying the monthly subscription price, inclusive of discounts, by the number of purchased subscriptions. As ofApril 30, 2021 , we had 1,285 Paid Customers >$100,000 ,who contributed approximately 51% of revenue for the three months then ended. As ofApril 30, 2020 , we had 963 Paid Customers >$100,000 ,who contributed approximately 49% of revenue for the three months then ended. Net Dollar Retention Rate We disclose Net Dollar Retention Rate as a supplemental measure of our organic revenue growth. We believe Net Dollar Retention Rate is an important metric that provides insight into the long-term value of our subscription agreements and our ability to retain, and grow revenue from, our Paid Customers. We calculate Net Dollar Retention Rate as of a period end by starting with the MRR from all Paid Customers as of twelve months prior to such period end, or Prior Period MRR. We then calculate the MRR from these same Paid Customers as of the current period end, or Current Period MRR. Current Period MRR includes expansion within Paid Customers and is net of contraction or attrition over the trailing twelve months, but excludes revenue from new Paid Customers in the current period, including those organizations that were only on Free subscription plans in the prior period and converted to paid subscription plans during the current period. We then divide the total Current Period MRR by the total Prior Period MRR to arrive at our Net Dollar Retention Rate. As ofApril 30, 2021 and 2020, our Net Dollar Retention Rate was 122% and 132%, respectively. Our Net Dollar Retention Rate has declined year over year as our base of revenue has grown and our penetration within existing, long-term Paid Customers has increased. Our Net Dollar Retention Rate will fluctuate in future periods due to a number of factors, including 21 -------------------------------------------------------------------------------- the growing level of our revenue base, the level of penetration within our Paid Customer base, expansion of products and features, and our ability to retain our Paid Customers. Non-GAAP Financial Measures In addition to our results determined in accordance withU.S. generally accepted accounting principles, or GAAP, we believe the below non-GAAP measures are useful in evaluating our operating performance. We use the below non-GAAP financial information, collectively, to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that non-GAAP financial information, when taken collectively, 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 related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures. Three Months Ended April 30, 2021 2020 (In thousands) Calculated Billings$ 278,523 $ 206,009 Free Cash Flow$ 62,705 $ 3,683 Calculated Billings Calculated Billings consists of our revenue plus the change in our deferred revenue in a given period. The Calculated Billings metric is intended to reflect sales to new paid customers plus renewals and additional sales to existing paid customers. Our management uses Calculated Billings to measure and monitor our sales growth because we generally bill our paid customers at the time of sale, but may recognize a portion of the related revenue ratably over time. For subscriptions, we typically invoice our paid customers at the beginning of the term, in annual or monthly installments and, from time to time, in multi-year installments. Only amounts invoiced to a paid customer in a given period are included in Calculated Billings. While we believe that Calculated Billings provides valuable insight into the cash that will be generated from sales of our subscriptions, this metric may vary from period-to-period for a number of reasons, and therefore has a number of limitations as a quarter-over-quarter or year-over-year comparative measure. These reasons include, but are not limited to, the following: (i) a variety of contractual terms could result in some periods having a higher proportion of annual subscriptions than other periods, (ii) as we focus on sales to large organizations, the lengthening of our sales cycle, and the variability in the timing of the execution of these larger transactions, (iii) fluctuations in payment terms affecting the billings recognized in a particular period, and (iv) seasonality in our billings, with a greater proportion of our billings occurring in our fourth quarter, following typical enterprise software buying patterns. Because of these and other limitations, you should consider Calculated Billings along with revenue and our other GAAP financial results. The following table presents a reconciliation of revenue, the most directly comparable financial measure calculated in accordance with GAAP, to Calculated Billings, for each of the periods presented: Three Months Ended April 30, 2021 2020 (In thousands) Revenue$ 273,357 $ 201,650 Add: Total deferred revenue, end of period 515,771 381,073 Less: Total deferred revenue, beginning of period (510,605) (376,714) Calculated Billings$ 278,523 $ 206,009 Free Cash Flow Free Cash Flow is a non-GAAP financial measure that we calculate as net cash provided by operating activities less purchases of property and equipment. We believe that Free Cash Flow is a useful indicator of liquidity that provides 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, making strategic acquisitions, and strengthening our balance sheet. Free Cash Flow has limitations as an analytical tool, and it should not be 22 -------------------------------------------------------------------------------- considered in isolation or as a substitute for analysis of other GAAP financial measures, such as net cash provided by operating activities. Some of the limitations of Free Cash Flow are that this metric does not reflect our future contractual commitments and may be calculated differently by other companies in our industry, limiting its usefulness as a comparative measure. We expect our Free Cash Flow to fluctuate in future periods as we invest in our business to support our plans for growth. These activities, along with certain increased operating expenses as described below, may result in a decrease in Free Cash Flow as a percentage of revenue in future periods. The following table summarizes our cash flows for the periods presented and provides a reconciliation of net cash from operating activities, the most directly comparable financial measure calculated in accordance with GAAP, to Free Cash Flow, for each of the periods presented: Three Months Ended April 30, 2021 2020 (In thousands) Net cash provided by operating activities$ 62,755 $ 8,729 Purchases of property and equipment (50) (5,046) Free Cash Flow$ 62,705 $ 3,683 Net cash provided by (used in) investing activities$ 190,198 $ (35,464) Net cash provided by (used in) financing activities$ (1,661) $ 755,961 Key Components of Results of Operations Revenue We generate substantially all of our revenue through sales of subscriptions of Slack to organizations. We recognize subscription revenue on a straight-line basis over the term of the contract subscription period beginning on the date access to Slack is granted, provided all other revenue recognition criteria have been met. Our subscriptions are generally non-cancellable and typically do not contain general rights of return. We maintain a fair billing policy, under which certain organizations on a paid subscription plan are entitled to credit if they have not used the entirety of the contracted number of users for which they have paid during the contractual term of the arrangement. These credits, accounted for as a part of deferred revenue, may be carried over to offset future billings and are not refundable for cash. On occasion, we also provide professional services to organizations on Slack. Professional services revenue has not been material to date. Overhead Allocation and Employee Compensation Costs We allocate shared costs, such as facilities (including lease, utilities, and depreciation on equipment shared by all departments) and information technology, or IT, costs to all departments based on headcount. As such, allocated shared costs are reflected in cost of revenue and each operating expense category. Employee compensation costs, or personnel costs, include salaries, bonuses, benefits, and stock-based compensation for cost of revenue and each operating expense category and also includes sales commissions for sales and marketing. Cost of Revenue Cost of revenue consists primarily of expenses related to hosting Slack and providing ongoing customer support for paid customers. These expenses include employee compensation (including stock-based compensation) and other employee-related expenses for customer experience, professional services, and technical operations staff, payments to outside service providers, third-party hosting costs, payment processing fees, and amortization expense associated with internally-developed and purchased technology. We expect our cost of revenue to continue to increase in absolute dollar amounts as we grow our business and revenue. Operating Expenses Research and Development. Research and development expenses consist primarily of personnel costs and allocated overhead. Our research and development efforts focus on maintaining and enhancing existing functionality of, and adding new functionality to, Slack. We plan to increase the dollar amount of our investment in research and development for the foreseeable future as we focus on developing new features and enhancements. We expect, however, that our research and development expenses will decrease as a percentage of our revenue over time as our revenue grows, although the percentage may fluctuate from period to period depending on fluctuations in the timing and extent of our research and development expenses. 23 -------------------------------------------------------------------------------- Sales and Marketing. Sales and marketing expenses consist primarily of personnel costs, expenses associated with our marketing and business development programs, including Frontiers, our annual user conference, Spec, our annual developer conference, and other events, sponsorships, and Slack conferences. Sales and marketing expenses also include allocated third-party hosting costs as well as customer experience and technical operations employee overhead costs for users of our free version of Slack. Sales commissions that are directly related to acquiring sales contracts, as well as associated payroll taxes, are deferred upon execution of a non-cancellable contract with an organization, and subsequently amortized to sales and marketing expense over the estimated period of benefit, typically four years. We plan to increase the dollar amount of our investment in sales and marketing for the foreseeable future, primarily for increased headcount for our direct sales organization and investment in brand and product marketing efforts. We expect to continue to incur sales and marketing expenses to the extent that we continue to see a high-growth market opportunity to support the growth of our business. If the growth in our business lessens over time, we plan to decrease the rate of growth in our sales and marketing expenses. We expect, however, that our sales and marketing expenses will decrease as a percentage of our revenue over time as our revenue grows, although the percentage may fluctuate from period to period depending on fluctuations in the timing and extent of our sales and marketing expenses. General and Administrative. General and administrative expenses consist primarily of personnel costs for our finance and accounting, legal, human resources, and other administrative teams as well as for certain executives and professional fees, including audit, legal, and recruiting services. We expect that our general and administrative expenses will decrease as a percentage of our revenues over time, although the percentage may fluctuate from period to period depending on fluctuations in our revenue and the timing and extent of our general and administrative expenses. Interest Expense After our issuance of 0.50% convertible senior notes due 2025, or the Notes, in an aggregate principal amount of$862.5 million inApril 2020 , interest expense consists primarily of contractual interest expense and amortization of the discount and debt issuance costs on our Notes. Interest Income and Other Income, Net Interest income and other income, net consists primarily of interest income earned on our cash, cash equivalents, and marketable securities, change in fair value of our strategic investments and gains or losses on foreign currency exchange. Provision for Income Taxes Provision for income taxes consists primarily ofU.S. federal, state income taxes, and income taxes in certain foreign jurisdictions in which we conduct business. Since inception, we have incurred operating losses and, accordingly, have not recorded a provision for income taxes for any of the periods presented other than provisions for foreign income tax. Results of Operations
The following tables set forth our results of operations for the periods presented in dollars and as a percentage of our revenue:
Three Months Ended
2021 2020 (In thousands) Revenue$ 273,357 $ 201,650 Cost of revenue(1) 39,237 25,602 Gross profit 234,120 176,048 Operating expenses: Research and development(1) 103,602 91,225 Sales and marketing(1) 123,947 110,320 General and administrative(1) 61,848 50,654 Total operating expenses 289,397 252,199 Loss from operations (55,277) (76,151) Interest expense (12,029) (2,842) Interest income and other income, net 40,426 4,708 Loss before income taxes (26,880) (74,285) Provision for income taxes 1,065 142 Net loss (27,945) (74,427) Net income attributable to noncontrolling interest(2) - 784 Net loss attributable to Slack $
(27,945)
_______________
(1)Includes stock-based compensation as follows:
Three Months Ended April 30, 2021 2020 (In thousands) Cost of revenue $ 2,551$ 2,354 Research and development 28,809 27,419 Sales and marketing 13,939 14,075 General and administrative 13,718 9,863 Total stock-based compensation$ 59,017 $ 53,711 (2)Our condensed consolidated financial statements include our majority-owned subsidiary,Slack Fund . The ownership interest of minority investors inSlack Fund was recorded as a noncontrolling interest. InMarch 2021 , we purchased all the outstanding interest inSlack Fund from the minority investors. Three Months Ended April 30, 2021 2020 Revenue 100 % 100 % Cost of revenue 14 13 Gross profit 86 87 Operating expenses: Research and development 38 45 Sales and marketing 45 55 General and administrative 23 25 Total operating expenses 106 125 Loss from operations (20) (38) Interest expense (4) (1) Interest income and other income, net 14 2 Loss before income taxes (10) (37) Provision for income taxes - - Net loss (10) (37) Net income attributable to noncontrolling interest - - Net loss attributable to Slack (10) % (37) % 24 --------------------------------------------------------------------------------
Comparison of the Three Months Ended
Three Months Ended April 30, 2021 2020 $ Change % Change (In thousands) Revenue$ 273,357 $ 201,650 $ 71,707 36 % Cost of revenue 39,237 25,602 13,635 53 Gross profit$ 234,120 $ 176,048 $ 58,072 33 Revenue increased$71.7 million , or 36%, for the three months endedApril 30, 2021 compared to the three months endedApril 30, 2020 . The increase in revenue was primarily due to expansion within our existing Paid Customers, as reflected by our Net Dollar Retention Rate of 122% as ofApril 30, 2021 , and the addition of new Paid Customers, as our number of Paid Customers grew from 122,000 as ofApril 30, 2020 to 169,000 as ofApril 30, 2021 . Cost of revenue increased$13.6 million , or 53%, for the three months endedApril 30, 2021 compared to the three months endedApril 30, 2020 . The increase was primarily due to an$8.2 million increase in third-party hosting fees as the number of organizations on and, users of, Slack in general increased, a$3.4 million increase in personnel and related costs due to additional headcount to support the growth in organizations on Slack, and a$1.3 million increase in credit card payment processing fees as the volume of sales transactions increased. Operating Expenses Three Months Ended April 30, 2021 2020 $ Change % Change (In thousands) Operating expenses: Research and development$ 103,602 $ 91,225 $ 12,377 14 % Sales and marketing 123,947 110,320 13,627 12 General and administrative 61,848 50,654 11,194 22 Total operating expenses$ 289,397 $ 252,199 $ 37,198 15 Research and Development Research and development expenses increased$12.4 million , or 14%, for the three months endedApril 30, 2021 compared to the three months endedApril 30, 2020 . The increase was primarily due to a$10.2 million increase in personnel costs related to increased headcount, a$1.5 million increase stock-based compensation and related employer payroll taxes, and a$1.4 million increase in facility- and IT-related overhead costs to support our headcount growth. Sales and Marketing Sales and marketing expenses increased$13.6 million , or 12%, for the three months endedApril 30, 2021 compared to the three months endedApril 30, 2020 . The increase was primarily due to a$16.4 million increase in personnel costs, which include customer experience and infrastructure employee costs for users of our free version, a$5.6 million increase in third-party hosting costs for users on a Free subscription plan of Slack, primarily due to continuing growth in our user base, and a$0.7 million increase in facility- and IT-related overhead costs to support our headcount growth. These increases were partially offset by a$6.2 million decrease in marketing expenses due to less spending on brand and advertising, and a$3.0 million decrease in travel costs due to COVID-19 travel restrictions. General and Administrative General and administrative expenses increased$11.2 million , or 22%, for the three months endedApril 30, 2021 compared to the three months endedApril 30, 2020 . The increase was primarily due to a$6.7 million increase in legal fees including$3.0 million transaction expenses associated with the proposed Mergers with Salesforce, a$4.0 million increase in stock-based compensation and related employer payroll taxes, and a$1.8 million increase in personnel costs related to increases in our administrative, finance and accounting, legal, IT, and human resources headcount. These increases were partially offset by a$1.0 million decrease in corporate expenses mainly related to charitable contributions and corporate events. 25 -------------------------------------------------------------------------------- Interest Expense Interest expense increased by$9.2 million for the three months endedApril 30, 2021 compared to the three months endedApril 30, 2020 due to the amortization of debt discount and issuance costs for the convertible senior note issued inApril 2020 . Interest Income and Other Income, Net Interest income and other income, net was$40.4 million for the three months endedApril 30, 2021 , an increase of$35.7 million from the three months endedApril 30, 2020 . The increase was primarily driven by a net increase in realized and unrealized gains from our strategic investments of$38.3 million , partially offset by a decrease of interest income of$2.7 million due primarily to a decrease in interest rates. Provision for Income Taxes The provision for income taxes was$1.1 million for the three months endedApril 30, 2021 , an increase of$0.9 million from the three months endedApril 30, 2020 , primarily related to increase in tax from operations in foreign jurisdictions. Liquidity and Capital Resources As ofApril 30, 2021 , our principal sources of liquidity were cash, cash equivalents, and restricted cash of$1.4 billion and marketable securities of$308.5 million . Cash and cash equivalents are comprised of bank deposits and money market funds. Restricted cash consists of cash deposited with financial institutions as collateral for our obligations under the facility leases inSan Francisco, California andDenver, Colorado . As ofApril 30, 2021 , our restricted cash totaled$38.5 million . Marketable securities are comprised of certificates of deposit,U.S. agency securities,U.S. government securities, and corporate bonds. As ofApril 30, 2021 , 94% of all cash and cash equivalents are held inthe United States . Since our inception, we have financed our operations primarily through proceeds from the issuance of our convertible preferred stock, convertible senior notes, common stock, and cash generated from the sale of our subscriptions. We have generated significant losses from operations and negative cash flows from operating activities in the past as reflected in our accumulated deficit of$1.6 billion as ofApril 30, 2021 . We expect to continue to incur operating losses for the foreseeable future due to the investments that we intend to make in our business and, as a result, we may require additional capital resources to grow our business. InApril 2020 , we completed our private offering of the Notes and received aggregate proceeds of$862.5 million , before deducting issuance costs of$21.2 million . In connection with the Notes, we entered into privately negotiated capped call transactions with certain counterparties, or the Capped Calls, with respect to our Class A common stock. We used an aggregate amount of$105.6 million of the net proceeds from the sale of the Notes to purchase the Capped Calls. InMay 2019 , we entered into a$215.0 million revolving credit and guaranty agreement with a syndicate of financial institutions. The revolving credit facility has an accordion option, which, if exercised, would allow us to increase the aggregate commitments by up to the greater of$200.0 million and 100% of the consolidated adjusted EBITDA of us and our subsidiaries, plus an unlimited amount subject to satisfaction of certain leverage ratio based compliance tests after giving effect to the exercise, in each case subject to obtaining additional lender commitments and satisfying certain conditions. Pursuant to the terms of the revolving credit facility, we may issue letters of credit under the revolving credit facility, which reduce the total amount available for borrowing under such facility. As ofApril 30, 2021 , we had no amounts or letters of credit issued and outstanding under the revolving credit facility. Our total available borrowing capacity under the revolving credit facility was$215.0 million as ofApril 30, 2021 . We believe that current cash, cash equivalents, marketable securities, and available borrowing capacity under the revolving credit facility will be sufficient to fund our operations for at least the next 12 months. Our future capital requirements, however, will depend on many factors, including our subscription growth rate, our Net Dollar Retention Rate, the timing and extent of spending to support our research and development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced products and features, particularly for large organizations and for networks between organizations and the continuing market adoption of Slack. We may in the future enter into arrangements to acquire or invest in complementary businesses, services, and technologies, including intellectual property rights. In the event that additional financing is required from outside sources, we may seek to raise additional funds at any time through equity, equity-linked arrangements, and debt. If we are unable to raise additional capital when desired and at reasonable rates, our business, results of operations, and financial condition would be adversely affected. See the section titled "Risk Factors-Risks Related to Our Business-Our failure to raise additional capital or generate cash flows necessary to expand our operations and invest in new technologies and customer acquisition efforts in the future could reduce our ability to compete successfully and harm our results of operations." OnDecember 1, 2020 we entered into the Merger Agreement with Salesforce. We have agreed to various covenants and 26 -------------------------------------------------------------------------------- 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 Mergers. Outside of certain limited exceptions, we may not take, authorize, commit, resolve, or agree to do certain actions without Salesforce's consent, including: •acquiring businesses and disposing of significant assets; •incurring expenditures above specified thresholds; •issuing additional debt facilities; and •repurchasing shares of our outstanding common stock. We do not believe these restrictions will prevent us from meeting our ongoing costs of operations, working capital needs, or capital expenditure requirements. Cash Flows The following table summarizes our cash flows for the periods indicated: Three Months Ended April 30, 2021 2020 (In thousands) Net cash provided by operating activities$ 62,755 $ 8,729 Net cash provided by (used in) investing activities 190,198 (35,464) Net cash provided by (used in) financing activities (1,661) 755,961
Net increase in cash, cash equivalents and restricted cash
Cash Provided by Operating Activities Our largest source of operating cash is cash collections from organizations on a paid subscription plan. Our primary uses of cash from operating activities are for employee-related expenditures, sales and marketing expenses, and third-party hosting costs. Historically, we have generated negative cash flows from operating activities and have supplemented working capital requirements through net proceeds from the private sale of equity securities. During the three months endedApril 30, 2021 , operating activities provided$62.8 million in cash. The primary factors affecting our operating cash flows during this period were our net loss of$27.9 million impacted by$54.5 million non-cash charges and$36.2 million of cash provided from changes in our operating assets and liabilities. The non-cash charges primarily consisted of$59.0 million in stock-based compensation,$10.8 million of amortization of debt discount and issuance costs,$10.3 million of non-cash operating lease expenses,$7.5 million of depreciation and amortization, and$5.1 million of amortization of deferred contract acquisition costs, partially offset by a$39.9 million net gain as a result of the change in fair value of our strategic investments. The cash provided from changes in our operating assets and liabilities was primarily due to a$95.6 million decrease in accounts receivable, reflecting an increase in collections, a$5.2 million increase in deferred revenue due to additional billings with new and existing Paid Customers, and a$2.0 million increase in accounts payable due to the timing of payments. These amounts were partially offset by a$51.6 million decrease in accrued compensation and benefits mainly due to the payment of our corporate bonus to employees,$8.3 million of operating lease payments, a$4.1 million increase in prepaid expenses and other assets, and a$2.6 million decrease in other liabilities. During the three months endedApril 30, 2020 , operating activities provided$8.7 million in cash. The primary factors affecting our operating cash flows during this period were our net loss of$74.4 million , impacted by$73.8 million non-cash charges and$9.4 million of cash provided from changes in our operating assets and liabilities. The non-cash charges primarily consisted of$53.7 million in stock-based compensation,$8.7 million of non-cash operating lease expenses,$6.7 million of depreciation and amortization,$3.1 million of amortization of deferred contract acquisition costs, and$2.4 million of amortization of debt discount and issuance cost, partially offset by a$1.6 million gain as a result of the change in fair value of our strategic investments. The cash provided from changes in our operating assets and liabilities was primarily due to a a$39.5 million decrease in accounts receivable, reflecting an increase in collections and seasonal decrease in billings and a$4.4 million increase in deferred revenue due to additional billings with new and existing paid customers. These amounts were partially offset by a$13.3 million decrease in accrued compensation and benefits mainly due to the payment of our corporate bonus to employees,$8.7 million of operating lease payments,$6.6 million increase in prepaid expenses and other assets, a$3.7 million decrease in accounts payable due to the timing of payments, and a$2.1 million decrease in accrued expenses and other liabilities. 27 -------------------------------------------------------------------------------- Cash Provided by (Used in) Investing Activities Net cash provided by investing activities during the three months endedApril 30, 2021 was$190.2 million , which was primarily driven by maturities and sales of marketable securities of$196.2 million , partially offset by purchase of strategic investments of$6.0 million . Net cash used in investing activities during the three months endedApril 30, 2020 was$35.5 million , which was primarily driven by cash used to purchase marketable securities of$100.3 million , property and equipment of$5.0 million , and strategic investments of$4.0 million , partially offset by sales and maturities of marketable securities of$73.9 million . Cash Provided by (Used in) Financing Activities Net cash used in financing activities for the three months endedApril 30, 2021 was$1.7 million , primarily driven by purchase of noncontrolling interest of$22.6 million , partially offset by proceeds from employee purchases of common stock under the employee stock purchase plan of$20.5 million and exercise of stock options of$1.3 million Net cash provided by financing activities for the three months endedApril 30, 2020 was$756.0 million , primarily driven by proceeds from the issuance of the Notes of$842.0 million , net of issuance costs, proceeds from employee purchases of common stock under the employee stock purchase plan of$16.6 million and exercise of stock options of$2.9 million , partially offset by a payment for Capped Calls related to the Notes of$105.6 million . Contractual Obligations and Commitments Our principal contractual commitments primarily consist of obligations under the Notes (including principal and coupon interest), operating leases for office space, and datacenter operations. For additional information of the Notes, operating lease obligations, and hosting commitments, refer to Note 6, Note 5, and Note 7 of the notes to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. There has been no material change in our other contractual obligations primarily related to IT operations, sales and marketing activities, and acquisition related obligations in the ordinary course of business since our fiscal year endedJanuary 31, 2021 . See our Annual Report on Form 10-K filed with theSEC onMarch 19, 2021 for additional information regarding our contractual obligations and commitments. Off-Balance Sheet Arrangements
As of
Critical Accounting Policies and Estimates Critical accounting policies and estimates are those accounting policies and estimates that are both the 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 are 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. Our significant accounting policies are discussed in "Notes to Consolidated Financial Statements - Note 1. Description of Business and Summary of Significant Accounting Policies" in our Annual Report on Form 10-K filed with theSEC onMarch 19, 2021 . There have been no material changes to our critical accounting policies and estimates during the three months endedApril 30, 2021 . Recent Accounting Pronouncements
See Note 1 of the notes to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for more information.
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