SUMO LOGIC, INC. You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes and other financial information included elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the sections titled "Special Note Regarding Forward-Looking Statements" and "Risk Factors" for a discussion of forward-looking statements and important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. The last day of our fiscal year isJanuary 31 . Our fiscal quarters end onApril 30 ,July 31 ,October 31 , andJanuary 31 . Our fiscal years endedJanuary 31, 2023 and 2022 are referred to herein as fiscal 2023 and fiscal 2022, respectively. This section of our Annual Report on Form 10-K discusses our financial condition and results of operations and year-to-year comparisons for our fiscal years endedJanuary 31, 2023 and 2022, respectively. A discussion of our financial condition and results of operations and year-to-year comparisons for our fiscal years endedJanuary 31, 2022 and 2021 that is not included in this Annual Report on Form 10-K can be found in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the fiscal year endedJanuary 31, 2022 filed with theSEC onMarch 14, 2022 , and is incorporated by reference herein.
Overview
Sumo Logic empowers the people who power modern, digital businesses. Our mission is to be the leading software-as-a-service analytics platform for reliable and secure cloud-native applications. With our platform, we help our customers ensure application reliability, secure and protect against modern security threats, and gain insights into their cloud infrastructure. Our multi-tenant, cloud-native platform - which we refer to as our Continuous Intelligence Platform - provides powerful, real-time, machine data analytics and insights across observability and security solutions. We generate revenue through the sale of subscriptions to customers that enable them to access our cloud-native platform. We recognize subscription revenue ratably over the term of the subscription, which is generally one to two years, but can be three years or longer. We offer multi-tiered paid subscription packages for access to our platform, the pricing for which differs based on a variety of factors, including volume of data to be ingested, duration of data retention, and breadth of access to platform features and functionalities. Our subscription packages encourage customers to expand their adoption of our platform by providing them with the flexibility to ingest and analyze large volumes of data and the ability to access a broad suite of platform features and functionalities without incurring overage fees, as well as insights into their usage patterns. We also deliver basic customer support with each of our paid subscription packages, and customers have the ability to purchase subscriptions to our premium support service. We recognize revenue from premium support service ratably over the term of the subscription. Our go-to-market strategy consists of self-service adoption through our website, an inside sales team, a field sales team, and a partner channel. We offer free trials that enable potential customers to experience the benefits of our platform. Although we have seen successful conversion from our trial users to paid customers in prior years, we de-emphasized this sales motion in fiscal 2023 to shift our go-to-market strategy towards accounts acquired directly through our inside field sales team and partner channel, which generally have higher annualized recurring revenue. We leverage our user community to proactively identify trends, gather global insights, and create new use cases, thereby empowering us to deliver out-of-the-box value to our customers. We employ a land-and-expand business model centered around our platform offerings, which have a rapid time to value for our customers and are easily extensible to multiple use cases across a business. We utilize the analytical capabilities of our platform and our customer success team to understand how our customers use, and how they would benefit from expanding their use of our platform. This understanding helps us successfully upsell and cross sell to our existing customers. The power of our platform, and the benefits that it delivers to customers, has driven rapid growth in our revenue. For fiscal 2023 and 2022, our revenue was$300.7 million and$242.1 million , respectively, representing a year-over-year growth rate of 24%. For fiscal 2023 and 2022, our annualized recurring revenue, or ARR, was$301.6 million and$258.8 million , respectively, representing a year-over-year growth rate of 17%. We generated GAAP operating losses of$126.9 million and$121.3 million for fiscal 2023 and 2022, respectively. We define non-GAAP operating loss as loss from operations excluding stock-based compensation expense and related employer payroll taxes, amortization of acquired intangible assets, acquisition-related expenses, expenses related to a cooperation agreement, expenses related to aU.S. Department of Justice antitrust interlock inquiry, and transaction costs related to the Merger. We generated non-GAAP operating losses of$37.6 million and$48.2 million for fiscal 2023 and 2022, respectively. See "Key Factors Affecting Our Performance" for a definition of ARR. See "Non-GAAP Financial Measures" for the reconciliation of GAAP operating loss to non-GAAP operating loss. 44
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Pending Merger
OnFebruary 9, 2023 , we entered into the Merger Agreement with Parent and Merger Sub, pursuant to which Merger Sub will merge with and intoSumo Logic andSumo Logic will continue as the surviving corporation in the Merger, as a wholly owned subsidiary of Parent. Parent and Merger Sub are affiliates ofFrancisco Partners . Pursuant to the Merger Agreement, at the effective time of the Merger, each share of our common stock outstanding immediately prior to such effective time (except for certain shares specified in the Merger Agreement) will automatically be converted into the right to receive$12.05 in cash without interest thereon, subject to applicable withholding taxes. Completion of the Merger is subject to customary closing conditions set forth in the Merger Agreement, including, among other things the adoption of the Merger Agreement by the holders of a majority of the outstanding shares of our common stock, the expiration or early termination of the applicable waiting period under the HSR Act, and the receipt of other specified regulatory approvals, and the absence of an order or law preventing, materially restraining, or materially impairing the consummation of the Merger. We are subject to customary restrictions on our ability to solicit alternative acquisition proposals from third parties and to provide non-public information to, and participate in discussions and engage in negotiations with, third parties regarding alternative acquisition proposals, subject to customary exceptions. 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$52.0 million . The Merger is expected to close in the second calendar quarter of 2023. Upon consummation of the Merger, we will cease to be a publicly traded company and our common stock will be delisted from the Nasdaq Global Select Market.
Impact from Current Economic Conditions and COVID-19
Recent global events and the ongoing COVID-19 pandemic have adversely affected and are continuing to affect organizations, workforces, financial markets, and economies, leading to increased market volatility and economic uncertainties, which could adversely affect our business operations and financial results. These uncertain macroeconomic conditions have caused and may continue to affect how our customers, partners, and we operate our business such as a reduction in corporate spending, operating margins, expenses, and cashflows. We believe this has and may continue to negatively affect the growth of our business, cause delays in renewal decisions for some of our existing customers, cause customers to request concessions such as extended payment terms or better pricing, and affect contraction or churn rates for our customers. SinceMarch 2020 , we have continued to support many of our employees and contractors in working remotely, and have reduced business travel, all of which contribute to a business disruption in how we operate our business. We continue to evaluate our real estate needs including the need for our employees to return to the office for work. As we continue our assessment, we have exited and may continue to exit office leases, which could result in losses associated with our real estate. We believe the duration and extent of COVID-19 pandemic continues to be dependent on future developments that cannot be accurately predicted at this time, such as the duration and spread of the outbreak, the emergence of variants of the virus, the extent and effectiveness of containment actions, the effectiveness of vaccination efforts, and the ultimate societal and economic impact of the COVID-19 pandemic continues to remain unknown. However, we believe that the current macroeconomic environment and COVID-19 pandemic may continue to accelerate customer transformation into digital businesses, which we anticipate could generate additional opportunities for us in the future. While we are unable to accurately predict the full impact from these global events and the COVID-19 pandemic, we continue to closely monitor its effect on our business.
Key Factors Affecting Our Performance
New Customer Acquisition
Our business depends, in part, on our ability to add new customers. We believe the continued trend of digital transformation and increase in digital services and cloud applications across all organizations will continue to drive demand for our platform and broaden our customer base. Since our platform has offerings for organizations of all sizes and across industries, including organizations of all stages of cloud maturity, we believe these market changes present a significant opportunity for growth. As ofJanuary 31, 2023 , we had 2,417 customers worldwide, spanning organizations of a broad range of sizes and industries. However, we anticipate that continued economic uncertainty, including expectations that the macroeconomic environment may become more challenging in the future, may adversely affect our ability to add new customers in the future. We will continue to focus on new customer acquisition by investing in sales and marketing to build brand awareness, expanding our community, and driving adoption of our platform as we further capture the opportunity in our addressable market. 45
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We define a customer as a separate legal entity, such as a company or an educational or government institution, that is under a paid contract with us or with which we are negotiating a renewal contract at the end of a given period. Given our historical experience of customer renewals, if we are in active discussions for a renewal or upgrade, we continue to include customers with expired contracts in our customer count until the customer either renews its contract or negotiations terminate without renewal. In situations where an organization has multiple subsidiaries or divisions that separately contract with us, we typically treat only the parent entity as the customer instead of treating each subsidiary or division as a separate customer. However, we count each purchaser of our self-service offering as a unique customer, regardless of other subscriptions such organization may have.
Expanding within our Existing Customer Base
Our business depends, in part, on the degree to which our land-and-expand strategy is successful. Our customers often initially adopt our platform for a specific use case and subsequently increase their adoption as they realize the benefits and flexibility of our platform. We have been successful in expanding our existing customers' adoption of our platform as demonstrated by our dollar-based net retention rate, which we consider an indicator of our ability to retain and expand revenue from existing customers over time. Our dollar-based net retention rate as ofJanuary 31, 2023 and 2022, was 109% and 112%, respectively. Due to both the realignment of our sales force, which will likely result in a relatively higher focus on new customer acquisitions, and the current macroeconomic environment, which could result in increased customer churn, or reduced contract value with existing customers, we expect it will take several quarters before we start to see a sustained improvement in our dollar-based net retention rate. Our efficient land-and-expand model has helped us accelerate adoption within our largest customers, as evidenced by our customers with over$100,000 of ARR, which was 505 and 456 as ofJanuary 31, 2023 and 2022, respectively. In addition, we saw growth in customers with greater than$1 million of ARR, which was 53 and 44 as ofJanuary 31, 2023 and 2022, respectively. We define ARR as the annualized recurring revenue run-rate from all customers that are under contract with us at the end of the period or with which we are negotiating a renewal contract. Given our historical experience of customer renewals, if we are in active discussions for a renewal, we continue to include customers with expired contracts in our ARR until the customer either renews its contract or negotiations terminate without renewal. For certain customers whose revenue may fluctuate from month to month based upon their specific contractual arrangements, we calculate ARR using the annualized monthly recurring revenue, or MRR, run-rate (MRR multiplied by 12). This enables us to calculate our anticipated recurring revenue for all customers based on our packaging and licensing models, which we believe provides a more accurate view of our anticipated recurring revenue. Our dollar-based net retention rate is calculated as of a period end by starting with the ARR from all subscription customers as of 12 months prior to such period end, or Prior Period ARR. We then calculate the ARR from these same subscription customers as of the current period end, or Current Period ARR. Current Period ARR includes any expansion and is net of contraction or churn over the trailing 12 months but excludes ARR from new subscription customers in the current period. We then divide the Current Period ARR by the Prior Period ARR to arrive at our dollar-based net retention rate.
We intend to extend our leadership position by continuing to innovate, bringing new technologies to market, honing best practices, and driving thought leadership. Our success depends, in part, on our ability to sustain innovation and technology leadership in order to maintain a competitive advantage. We expect to continue to invest in research and development to increase our revenue and achieve long-term profitability, and we intend to continue extending the applicability of our platform as well as improving the value of our offerings for our customers. We believe that our platform is highly differentiated and has broad applicability to a wide variety of observability and security use cases, and we will continue to invest in developing and enhancing platform features and functionality to further extend the adoption of our platform. Additionally, we will continue to evaluate opportunities to acquire or invest in businesses, offerings, technologies, or talent that we believe could complement or expand our platform, enhance our technical capabilities, or otherwise offer growth opportunities. Once we complete acquisitions, we must successfully integrate and manage these acquisitions to realize their benefits.
International Expansion
We intend to continue to invest in our international operations to grow our business outside ofthe United States . We generated 22% and 18% of our revenue outsidethe United States during fiscal 2023 and 2022, respectively. We believe that global demand for observability and security analytics will continue to increase as international businesses undergo digital transformations and adopt cloud-based technologies. We currently have a sales presence throughoutAsia-Pacific -Japan , andEurope , with sales offices inSydney, Australia ,Tokyo, Japan , andLondon, United Kingdom , and we further increase our global reach with our international channel partners. International expansion over the long term represents a significant opportunity and we plan to continue to invest in growing our presence internationally, both through expanding our sales and marketing efforts and leveraging channel and other ecosystem partners. 46
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Acquisition of
OnJune 10, 2021 , we completed the acquisition of Sensu, a privately-held software company that is a leader in open source monitoring. The addition of Sensu is expected to accelerate our observability strategy by providing customers with an affordable and scalable end-to-end solution for infrastructure and application monitoring. The aggregate amount recorded as purchase consideration was$32.7 million , of which$8.6 million was paid or to be paid in cash, and$24.1 million was comprised of 1,123,697 shares of common stock. Additionally, 71,644 shares of common stock were issued and will be recorded as stock-based compensation over the requisite service period, and we assumed 33,267 options to purchase shares of common stock granted under Sensu's equity plan. See Note 5 to our consolidated financial statements.
Acquisition of DF Labs S.p.A.
OnMay 24, 2021 , we completed the acquisition of DFLabs, a privately-held Italian corporation and a leader in SOAR technology. The combination of our Cloud SIEM and DFLabs' solution will provide customers with comprehensive cloud-native security intelligence solutions. The aggregate amount recorded as purchase consideration was$41.7 million , of which$35.3 million was paid in cash, and$6.4 million was comprised of 334,815 shares of common stock. Additionally, 143,492 shares of common stock were issued and will be recorded as stock-based compensation over the requisite service period. See Note 5 to our consolidated financial statements.
Components of Results of Operations
Revenue
We generate subscription revenue through the sale of subscriptions to customers that enable them to access our cloud-native platform. Subscription terms are generally one to two years, but can be three years or longer, and a substantial majority of our contracts are non-cancelable. Subscription revenue is driven by sales of our multi-tiered paid subscriptions, the pricing for which differs based on a variety of factors, including volume of data expected to be ingested, duration of data retention, and breadth of access to our platform features and functionalities. We deliver basic customer support with each of our paid subscription packages, and customers have the ability to purchase subscriptions to our premium support service. Due to the ease of using our platform, professional services revenue from configuration, implementation, and training services constituted approximately 1% of our total revenue for fiscal 2023 and 2022. Cost of Revenue Cost of revenue includes all direct costs to deliver and support our platform, including personnel and related costs, third-party cloud infrastructure costs for hosting our cloud platform, amortization of internal-use software and acquired developed technology, as well as allocated facilities and IT costs. As new customers purchase access to our platform and our existing customer base expands their utilization of our platform, we will incur greater cloud infrastructure costs related to the increased volume of data being hosted. We will continue to invest additional resources in our platform infrastructure and customer support organizations to expand the capabilities of our platform features and ensure that our customers are realizing the full benefit of our platform. The level and timing of investment in these areas could affect our cost of revenue in the future.
Gross Profit and Gross Margin
Gross profit represents revenue less cost of revenue, and gross margin is gross
profit expressed as a percentage of revenue. Our gross margin may fluctuate from
period to period as our revenue fluctuates, and has been and will continue to be
affected by various factors, including the timing and amount of investments to
maintain or expand our cloud infrastructure, the continued growth of data being
hosted on our platform and customer support teams, increased compensation
expenses, as well as amortization of costs associated with capitalized
internal-use software and acquired intangible assets. We expect our gross profit
to increase and our gross margin to modestly increase over the near term due to
the continued growth in the use of our platform coupled with cost efficiencies
related to our cloud infrastructure, although our gross margins could fluctuate
from period to period depending on the interplay between the factors described
above.
Operating Expenses
Our operating expenses consist of research and development, sales and marketing,
and general and administrative expenses. Personnel and related expenses are the
most significant component of operating expenses and consist of salaries,
employee benefit costs, payroll taxes, bonuses, sales commissions,
travel-related expenses, and stock-based compensation expense, as well as the
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allocated portion of overhead costs for facilities and IT. Operating expenses also include cloud infrastructure fees and other services related to staging and development efforts for our platform.
Research and Development
Research and development expenses consist primarily of costs related to research, design, maintenance, and minor enhancements of our platform that are expensed as incurred. These costs consist primarily of personnel and related expenses, including allocated overhead costs, contractor and consulting fees related to the design, development, testing, and enhancement of our platform, and software, hardware, and cloud infrastructure fees for staging and development related to research and development activities necessary to support growth in our employee base and in the adoption of our platform. We expect that our research and development expenses will increase in dollar value as we continue to increase our investments in our platform. However, we anticipate research and development expenses will decrease as a percentage of our revenue over the long term, although they may fluctuate as a percentage of our revenue from period to period depending on the timing of expenses.
Sales and Marketing
Sales and marketing expenses consist primarily of personnel and related expenses including allocated overhead costs and commissions, costs of general marketing and promotional activities, including free trials of our platform, fees for professional services related to marketing, and software and hardware to support growth in our employee base. Sales commissions earned by our sales force that are considered incremental costs of obtaining a subscription with a customer are deferred and amortized on a straight-line basis over the expected period of benefit, which we have determined to be five years. We expect that our sales and marketing expenses will increase in dollar value over the long term, though the dollar value of such expenses may fluctuate in the near term. We believe that sales and marketing expenses will continue to be our largest operating expense for the foreseeable future as we expand our sales and marketing efforts. We expect that our sales and marketing expenses will be relatively flat as a percentage of our revenue over the near term, but decrease over the long term, although they may fluctuate as a percentage of revenue from period to period depending on the timing of expenses.
General and Administrative
General and administrative expenses consist primarily of personnel and related expenses associated with our executive, finance, legal, human resources, information technology and security, and other administrative personnel. In addition, general and administrative expenses include non-personnel costs, such as fees for professional services such as external legal, accounting, and other consulting services, hardware and software costs, certain taxes other than income taxes, insurance, and overhead costs not allocated to other departments. We expect that our general and administrative expenses will increase in dollar value as our business grows. However, we expect that our general and administrative expenses will decrease as a percentage of our revenue as our revenue grows over the long term, although they may fluctuate as a percentage of revenue from period to period depending on the timing of expenses.
Interest and Other Income (Expense), Net
Interest and other income (expense), net primarily consists of interest earned from our cash, cash equivalents, and marketable securities, and foreign currency transaction gains (losses). Interest Expense
Interest expense primarily consists of interest incurred in connection with our previous borrowings under our revolving line of credit facility.
Provision (Benefit) for Income Taxes
Provision (benefit) for income taxes consists primarily of income taxes in
certain foreign jurisdictions in which we conduct business. We maintain a full
valuation allowance on our federal and state net deferred tax assets as we have
concluded that it is not more likely than not that the deferred tax assets will
be realized.
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Results of Operations
The following table sets forth our consolidated statements of operations data
for the periods indicated:
Year Ended January 31,
2023 2022
(in thousands)
Revenue $ 300,668 $ 242,125
Cost of revenue(1)(2)(3) 97,551 78,308
Gross profit 203,117 163,817
Operating expenses:
Research and development(1)(3) 104,949 94,652
Sales and marketing(1)(2)(3) 153,383 131,311
General and administrative(1)(3)(4)(5)(6) 71,649 59,129
Total operating expenses 329,981 285,092 Loss from operations (126,864) (121,275) Interest and other income (expense), net 5,031 10 Interest expense (173) (174) Loss before provision for income taxes (122,006) (121,439) Provision (benefit) for income taxes 2,809 1,926 Net loss$ (124,815) $ (123,365) ____________ (1)Includes stock-based compensation expense and related employer payroll taxes as follows: Year Ended January 31, 2023 2022 (in thousands) Cost of revenue$ 1,455 $ 854 Research and development(a) 28,700 24,363 Sales and marketing 18,230 16,397 General and administrative 16,038 14,279
Total stock-based compensation expense and related employer payroll taxes
$ 64,423 $ 55,893 (a)See Note 10 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for the capitalized stock-based compensation expense related to internal-use software development costs.
(2)Includes amortization of acquired intangible assets as follows:
Year Ended January 31,
2023 2022
(in thousands)
Cost of revenue $ 12,380 $ 11,753
Sales and marketing 600 383
Total amortization of acquired intangible assets $ 12,980 (3)Includes acquisition-related expenses as follows:
Year Ended January 31,
2023 2022
(in thousands)
Cost of revenue $ 325 $ 230
Research and development 721 777
Sales and marketing 378 278
General and administrative - 3,756
Total acquisition-related expenses $ 1,424 $ 5,041
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(4)Includes third-party advisory and professional services expenses associated with a cooperation agreement as follows:
Year Ended January 31,
2023 2022
(in thousands)
General and administrative $ 2,627 $ -
Total expenses related to a cooperation agreement $ 2,627 $ -
(5)Includes third-party advisory and professional services expenses associated
with a
Year Ended January 31,
2023 2022
(in thousands)
General and administrative $
350 $ -
Total expenses related to a
$ 350 $ -
(6)Includes professional services expenses associated with the Merger as
follows:
Year Ended January 31,
2023 2022
(in thousands)
General and administrative $ 7,500 $ -
Total transaction costs related to the Merger $ 7,500 $ -
The following table sets forth our consolidated statements of operations data expressed as a percentage of revenue:
Year Ended January 31,
2023 2022
Revenue 100 % 100 %
Cost of revenue 32 32
Gross profit 68 % 68 %
Operating expenses:
Research and development 35 39
Sales and marketing 51 54
General and administrative 24 24
Total operating expenses 110 % 118 %
Loss from operations (42) (50)
Interest and other income (expense), net 1 -
Interest expense - -
Loss before provision for income taxes (41) (50)
Provision (benefit) for income taxes 1 1 Net loss (42) % (51) % ____________
Note: Certain figures may not sum due to rounding.
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Comparison of Fiscal 2023 and Fiscal 2022
Revenue
Year Ended January 31,
2023 2022 Change % Change
(dollars in thousands)
Revenue $ 300,668 $ 242,125 $ 58,543 24 %
Revenue increased by
Cost of Revenue, Gross Profit, and Gross Margin
Year Ended January 31,
2023 2022 Change % Change
(dollars in thousands)
Cost of revenue $ 97,551 $ 78,308 $ 19,243 25 %
Gross profit 203,117 163,817 39,300 24 %
Gross margin 68 % 68 %
Cost of revenue increased by $19.2 million , or 25%, for fiscal 2023 compared to
fiscal 2022. The increase in cost of revenue was primarily due to an $18.8
million increase in third-party cloud infrastructure and personnel costs related
to providing access to and supporting our platform and a $0.6 million increase
in amortization of acquired developed technology as a result of our acquisitions
of Sensu and DFLabs in the second quarter of fiscal 2022. Gross profit increased
$39.3 million as a result of the growth in revenue, resulting in flat gross
margins compared to fiscal 2022.
Research and Development
Year Ended January 31,
2023 2022 Change % Change
(dollars in thousands)
Research and development $ 104,949 $ 94,652 $ 10,297 11 %
Percentage of revenue 35 % 39 %
Research and development expenses increased by $10.3 million , or 11%, for fiscal
2023 compared to fiscal 2022. The increase in research and development expenses
was primarily driven by a $10.7 million increase in personnel and related
expenses directly associated with an increase in average headcount as we hire
and increase resources to develop and expand the functionality of our software
offerings, of which $4.3 million was related to stock-based compensation expense
and related employer payroll taxes. In addition, software, hardware, and cloud
infrastructure fees for staging and development increased $1.8 million ,
partially offset by a $1.4 million increase in capitalized internal-use
software.
Sales and Marketing
Year Ended January 31,
2023 2022 Change % Change
(dollars in thousands)
Sales and marketing $ 153,383 $ 131,311 $ 22,072 17 %
Percentage of revenue 51 % 54 %
Sales and marketing expenses increased by $22.1 million , or 17%, for fiscal 2023
compared to fiscal 2022. The increase in sales and marketing expenses was
primarily driven by a $16.0 million increase in personnel and related expenses
associated with an
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increase in average headcount as well as an increase in the average cost per head as we continue to invest in our go-to-market coverage, capacity, and expansions into new markets, of which$1.8 million was related to stock-based compensation expense and related employer payroll taxes. In addition, advertising and promotional costs, and third-party public relations and marketing services increased$3.3 million , software subscription costs increased$0.7 million as we continue to increase our efforts to execute our market expansion strategy, and amortization of referral fees and customer relationships increased$1.5 million . General and Administrative Year Ended January 31, 2023 2022 Change % Change (dollars in thousands) General and administrative$ 71,649 $ 59,129 $ 12,520 21 % Percentage of revenue 24 % 24 % General and administrative expenses increased by$12.5 million , or 21%, for fiscal 2023 compared to fiscal 2022. The increase in general and administrative expenses was primarily driven by a$7.8 million increase in personnel and related expenses associated with an increase in average headcount as we invested in personnel to support the growth of our business, reporting, and compliance requirements, a$7.5 million increase in third party fees incurred during the fourth quarter of fiscal 2023 related to the Merger, and a$2.6 million increase in third-party fees incurred during fiscal 2023 related to a cooperation agreement. These increases were partially offset by a$1.1 million decrease in professional service fees, a$1.2 million decrease in insurance related costs, and the absence of$3.8 million in acquisition-related expenses incurred during fiscal 2022.
Interest and Other Income (Expense), Net
Year Ended January 31,
2023 2022 Change % Change
(dollars in thousands)
Interest and other income (expense), net $ 5,031 $ 10 $ 5,021 N/M(a)
____________
(a) Not meaningful
Interest and other income (expense), net increased by $5.0 million for fiscal
2023 compared to fiscal 2022. The increase in interest and other income
(expense), net was primarily driven by an increase in interest income due to
higher yield on invested funds.
Interest Expense
Year Ended January 31,
2023 2022 Change % Change
(dollars in thousands)
Interest expense $ (173) $ (174) $ 1 (1) %
Interest expense consists of amortization of costs related to our line of credit facility. The change between fiscal 2023 and fiscal 2022 was immaterial.
Non-GAAP Financial Measures
In addition to our financial information presented in accordance with GAAP and
the key business metrics presented above, we believe the following non-GAAP
financial measures are useful to investors in evaluating our operating
performance. We use the following non-GAAP financial measures, collectively, to
evaluate our ongoing operations and for internal planning and forecasting
purposes, including the preparation of our annual operating budget and quarterly
forecasts, to evaluate the effectiveness of our business strategies, and to
communicate with our board of directors concerning our financial performance. We
believe that non-GAAP financial measures, when taken together with the
corresponding GAAP financial measures, may be helpful to investors because they
provide consistency and comparability with past financial performance and
meaningful supplemental information regarding our performance by excluding
certain items that may not be indicative of our business, results of operations,
or outlook. The non-GAAP financial measures are presented for supplemental
informational purposes only, have limitations as analytical tools, and should
not be
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considered in isolation or as a substitute for financial information presented in accordance with GAAP and may be different from similarly-titled non-GAAP financial measures used by other companies. In addition, other companies, including companies in our industry, may calculate similarly-titled non-GAAP financial measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measures as tools for comparison. 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, and not to rely on any single financial measure to evaluate our business.
Non-GAAP Gross Profit and Non-GAAP Gross Margin
We define non-GAAP gross profit and non-GAAP gross margin as gross profit and
gross margin, respectively, excluding stock-based compensation expense and
related employer payroll taxes, amortization of acquired intangible assets, and
acquisition-related expenses. The following table sets forth our non-GAAP gross
profit and non-GAAP gross margin for the periods indicated.
Year Ended January 31,
2023 2022
(dollars in thousands)
Gross profit $ 203,117 $ 163,817
Add: Stock-based compensation expense and related employer payroll taxes 1,455 854
Add: Amortization of acquired intangible assets 12,380 11,753
Add: Acquisition-related expenses 325 230
Non-GAAP gross profit $
217,277
Gross margin 68 % 68 % Non-GAAP gross margin 72 % 73 %
Non-GAAP Operating Loss and Non-GAAP Operating Margin
We define non-GAAP operating loss and non-GAAP operating margin as loss from operations and operating margin, respectively, excluding stock-based compensation expense and related employer payroll taxes, amortization of acquired intangible assets, acquisition-related expenses, expenses related to a cooperation agreement, expenses related to aU.S. Department of Justice antitrust interlock inquiry, and transaction costs related to the Merger. The following table sets forth our non-GAAP operating loss and non-GAAP operating margin for the periods indicated. Year Ended January 31, 2023 2022 (dollars in thousands) Loss from operations$ (126,864) $ (121,275) Add: Stock-based compensation expense and related employer payroll taxes 64,423 55,893 Add: Amortization of acquired intangible assets 12,980 12,136 Add: Acquisition-related expenses 1,424 5,041 Add: Expenses related to a cooperation agreement 2,627 -
Add: Expenses related to a
350 -
Add: Transaction costs related to the Merger 7,500 -
Non-GAAP operating loss $
(37,560)
Operating margin (42) % (50) %
Non-GAAP operating margin (12) % (20) %
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Non-GAAP Net Loss
We define non-GAAP net loss as loss from operations, excluding stock-based compensation expense and related employer payroll taxes, amortization of acquired intangible assets, acquisition-related expenses, expenses related to a cooperation agreement, expenses related to aU.S. Department of Justice antitrust interlock inquiry, and transaction costs related to the Merger. The following table sets forth our non-GAAP net loss for the periods indicated. Year EndedJanuary 31, 2023 2022 (dollars in thousands) Net loss $
(124,815)
64,423 55,893
Add: Amortization of acquired intangible assets 12,980 12,136
Add: Acquisition-related expenses 1,424 5,041
Add: Expenses related to a cooperation agreement 2,627 -
Add: Expenses related to a
350 -
Add: Transaction costs related to the Merger 7,500 -
Non-GAAP net loss $ (35,511) $ (50,295)
Free Cash Flow
We define free cash flow as cash used in operating activities less purchases of
property and equipment and capitalized internal-use software costs. We believe
free cash flow is a useful indicator of liquidity that provides our management,
board of directors, and investors with information about our future ability to
generate or use cash to enhance the strength of our balance sheet and further
invest in our business and pursue potential strategic initiatives. The following
table sets forth our free cash flow for the periods indicated.
Year Ended January 31,
2023 2022
(dollars in thousands)
Cash used in operating activities $ (27,358) $ (30,491)
Less: Purchases of property and equipment (386)
(2,258)
Less: Capitalized internal-use software costs (1,630)
(182)
Free cash flow$ (29,374) $
(32,931)
Cash provided by (used in) investing activities
$ 18,695 $
30,210
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through subscription revenue from customers accessing our cloud-native platform and the net proceeds of issuances of equity securities. We have incurred losses and generated negative cash flows from operations, as reflected in our accumulated deficit of$646.0 million as ofJanuary 31, 2023 . As ofJanuary 31, 2023 , we had$76.5 million in cash and cash equivalents and$266.9 million in marketable securities. We believe our existing cash and cash equivalents, marketable securities, and cash provided by sales of access to our platform will be sufficient to meet our projected operating requirements for at least the next 12 months, despite the ongoing COVID-19 pandemic, continued supply chain disruptions, and uncertainty in the changing market and macroeconomic conditions, including inflation and rising interest rates, which may have an impact on our available cash due to customer requests for extended payment terms or better pricing. As a result of our revenue growth plans, we expect that losses and negative cash flows from operations may continue in the near term. Our future capital requirements will depend on many factors, including our subscription growth rate, subscription renewals, billing timing and frequency, pricing changes, the timing and extent of spending to support development 54
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efforts, the expansion of sales and marketing activities, the introduction of new and enhanced platform features and functionality, the continued market adoption of our platform, the impact of the COVID-19 pandemic, and the impact of the current macroeconomic conditions on our business and results of operations, and the business of our customers. We may in the future pursue acquisitions of businesses, technologies, assets, and talent. InFebruary 2021 , we entered into an Amended and Restated Loan and Security Agreement withSilicon Valley Bank , or the SVB Agreement, which provides for a revolving line of credit. The SVB Agreement amends and restates the Loan and Security Agreement dated as ofJanuary 31, 2016 . Under the SVB Agreement, we can borrow up to$50 million . Interest on any drawdown accrues at the prime rate minus a spread rate ranging from 0.25% to 0.75%, as determined by our adjusted quick ratio, subject to either a 3.00% or 2.50% floor depending on the adjusted quick ratio. The SVB Agreement is secured by substantially all of our assets and includes restrictive covenants, in each case subject to certain exceptions, that limit our ability to, among other things: incur debt, grant liens, make acquisitions, undergo a change in control, make investments, make certain dividends or distributions, repurchase or redeem stock, dispose of or transfer assets, and enter into transactions with affiliates. Pursuant to the SVB Agreement, we are also required to maintain a minimum adjusted quick ratio of 1.25 to 1.00. The SVB Agreement also contains customary events of default, upon whichSilicon Valley Bank may declare all or a portion of our outstanding obligations payable to be immediately due and payable. As ofJanuary 31, 2023 , we did not have any debt outstanding. We typically invoice our subscription customers annually in advance, and in certain cases, we invoice upfront for multi-year contracts. Therefore, a substantial source of our cash is from such prepayments, which are included on our consolidated balance sheets as deferred revenue. Deferred revenue consists of billed fees for our subscriptions and to a lesser extent, premium support services, prior to satisfying the criteria for revenue recognition, which are subsequently recognized as revenue in accordance with our revenue recognition policy. As ofJanuary 31, 2023 , future estimated revenue related to performance obligations from non-cancelable contracts that were unsatisfied or partially unsatisfied was$351.5 million , of which we expect to recognize approximately 96% as revenue over the next 24 months, with the remaining balance recognized thereafter. As ofJanuary 31, 2023 , we had deferred revenue of$152.1 million , of which$150.5 million was recorded as a current liability and is expected to be recognized as revenue within the next 12 months, subject to applicable revenue recognition criteria.
Merger Agreement
OnFebruary 9, 2023 , 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$52.0 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, subject to certain exceptions set forth in the Merger Agreement. 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.
Cash Flows
The following table shows a summary of our cash flows for the periods presented:
Year Ended January 31,
2023 2022
(in thousands)
Net cash provided by (used in):
Operating activities $ (27,358) $ (30,491)
Investing activities 6,271 (323,265)
Financing activities 18,695 30,210
Operating Activities
Our largest source of operating cash is cash collections from sales of subscriptions to our customers. Our primary uses of cash from operating activities are for personnel and related expenses, marketing expenses, and third-party cloud infrastructure and software costs. In the last several years, we have generated negative cash flows from operating activities and have supplemented working capital requirements through net proceeds from equity financings up to fiscal 2021.
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Cash used in operating activities for fiscal 2023 of$27.4 million consisted of our net loss of$124.8 million , adjusted for non-cash charges of$103.4 million and net cash outflows of$6.0 million provided by changes in our operating assets and liabilities. Non-cash charges primarily consisted of stock-based compensation of$63.5 million , amortization of deferred sales commissions of$20.2 million , depreciation and amortization of$15.6 million , and non-cash operating lease costs of$4.0 million . Net cash outflows from changes in our operating assets and liabilities were primarily the result of a$20.8 million increase in deferred sales commissions due to commissions paid on new bookings, a$9.0 million increase in accounts receivable due to new billings being greater than collections during the period, and a$4.4 million decrease in lease liabilities due to monthly rental payments for our operating leases. Net cash outflows were partially offset by a$14.9 million increase in deferred revenue resulting from increased billings for subscriptions, a$11.8 million increase in accounts payable and accrued expenses due to timing of payments to vendors, a$1.0 million increase in other noncurrent liabilities for deferred taxes, and a$0.6 million decrease in prepaid expenses and other assets related to the timing of payments to vendors and amortization of prior amounts paid. Cash used in operating activities for fiscal 2022 of$30.5 million consisted of our net loss of$123.4 million , adjusted for non-cash charges of$91.9 million and net cash inflows of$1.0 million provided by changes in our operating assets and liabilities. Non-cash charges primarily consisted of stock-based compensation of$54.1 million , amortization of deferred sales commissions of$15.8 million , and depreciation and amortization of$14.2 million . Net cash inflows from changes in our operating assets and liabilities were primarily the result of a$29.5 million increase in deferred revenue resulting from increased billings for subscriptions, and a$4.4 million increase in accounts payable and accrued expenses due to timing of payments to vendors. Net cash inflows were partially offset by cash outflows resulting from a$25.0 million increase in deferred sales commissions due to commissions paid on new bookings, a$4.5 million decrease in lease liabilities due to monthly rental payments for our operating leases, and a$4.2 million increase in accounts receivable due to new billings being greater than collections during the period.
Investing Activities
Cash provided by investing activities for fiscal 2023 of$6.3 million consisted of$273.6 million of maturities and sales of marketable securities partially offset by$265.3 million of purchases of marketable securities and$2.0 million in purchases of property and equipment primarily related to purchases of computer hardware as well as an increase of capitalized internal-use software development costs. Cash used in investing activities for fiscal 2022 of$323.3 million consisted of purchases of marketable securities of$424.7 million , cash paid for acquisitions, net of cash and restricted cash acquired of$40.3 million , and$2.3 million in purchases of property and equipment primarily related to leasehold improvements and purchases of furniture for our expanded office space and computers for new employees, partially offset by$144.2 million of maturities and sales of marketable securities.
Financing Activities
Cash provided by financing activities for fiscal 2023 of$18.7 million primarily consisted of proceeds from common stock option exercises of$14.6 million and proceeds from employee stock purchase plan of$4.6 million , partially offset by$0.5 million of cash paid for holdback consideration in connection with acquisitions. Cash provided by financing activities for fiscal 2022 of$30.2 million primarily consisted of proceeds from common stock option exercises of$22.3 million and proceeds from employee stock purchase plan of$8.0 million .
Contractual Obligations and Commitments
The Company enters into contracts that are enforceable and legally binding and that specify all significant terms, including fixed or minimum services to be used, fixed, minimum, or variable price provisions, and the approximate timing of the actions under the contracts. The Company's material contractual obligations include the following:
The Company has committed to spend
The Company has lease arrangements associated with its corporate facilities. Refer to Note 6 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for more information.
As of
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Critical Accounting Policies and Estimates
We prepared our consolidated financial statements and the related notes thereto, included elsewhere in this Annual Report on Form 10-K, in accordance with GAAP. In preparation of these consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, as of the date of the financial statements, and the reported amounts of income and expenses during the reporting period. These estimates are based on information available as of the date of the financial statements and may involve subjective or significant judgment by management; therefore, actual results could differ from the estimates made by management. We refer to accounting estimates of this type as critical accounting policies and estimates, which are disclosed below.
Revenue Recognition
We recognize revenue from contracts with customers using the five-step method described in Note 2 in our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. We generate revenue through the sale of subscriptions and support services to customers that enable them to access our cloud-native platform. Our subscription arrangements with customers do not provide the customer with the right to take possession of our cloud-native platform at any time and as a result are accounted for as service arrangements. Revenue is recognized when control of these services is transferred to customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those services. Subscription terms are generally one to two years, but can be three years or longer, and the substantial majority of our contracts are non-cancelable. Revenue is recognized ratably over the subscription generally beginning on the date that our platform is made available to a customer. We typically bill for subscriptions annually in advance for subscriptions with terms of one year or more. We allocate revenue to each performance obligation based on its relative standalone selling price. We generally determine standalone selling prices based on a range of actual prices charged to customers. In general, we satisfy the majority of our performance obligations over time as we transfer the promised services to our customers. We review the contract terms and conditions to evaluate the timing and amount of revenue recognition, the related contract balances, and our remaining performance obligations. These evaluations require judgment that could affect the timing and amount of revenue recognized.
Deferred Sales Commissions
Deferred contract costs include sales commissions which are considered incremental and recoverable costs of obtaining a contract with a customer. Sales commissions for initial contracts are deferred and then amortized on a straight-line basis over a period of benefit, determined to be five years. The period of benefit is estimated by considering factors such as the expected life of our subscription contracts, historical customer attrition rates, technological life of our platform, the impact of competition in our industry, as well as other factors. Amounts anticipated to be recognized within 12 months of the balance sheet date are recorded as deferred sales commissions, current, with the remaining portion recorded as deferred sales commissions, noncurrent, on the consolidated balance sheets. Amortization of deferred contract costs is recorded as sales and marketing expense in the consolidated statements of operations included elsewhere in this Annual Report on Form 10-K.
Stock-Based Compensation
We measure and recognize compensation expense for all stock-based payment awards granted to employees, directors, and non-employees based on the estimated fair values on the date of the grant. The fair value of options granted and purchase rights granted under the Employee Stock Purchase Plan, or ESPP, is estimated on the grant date using the Black-Scholes option pricing model. The fair value of restricted stock units, or RSUs, is estimated on the date of grant based on the fair value of our underlying common stock. Prior to our IPO, the fair value of our common stock for financial reporting purposes was determined considering objective and subjective factors, including valuations from third-party valuation experts, and required judgment to determine the fair value of common stock for financial reporting purposes as of the date of each equity grant or modification.
These assumptions are estimated as follows:
Fair Value. Prior to our IPO, the fair value of common stock underlying the
stock options had historically been determined by our Board of Directors, with
input from our management. Our Board of Directors previously determined the fair
value of the common stock at the time of grant by considering a number of
objective and subjective factors. Subsequent to our IPO, the fair value of the
underlying common stock is determined by the closing price, on the date of
grant, of our common stock, as reported by the Nasdaq Global Select Market.
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Expected Term. The expected term represents the period that our stock-based awards are expected to be outstanding. The expected term assumptions were based on the vesting terms, exercise terms, and contractual lives of these awards. For non-employee awards, the expected term would equal the contractual term. Volatility. Since we do not have a trading history of our common stock, the expected volatility is based on a calculation using the historical stock information of companies deemed comparable to us, over a period equal to the expected term. We intend to apply this process using the same or similar public companies until a sufficient amount of historical information regarding the volatility of our own share price becomes available, or unless circumstances change such that the identified companies are no longer similar to us, in which case, more suitable companies whose share prices are publicly available would be used in the calculation.
Risk-Free Rate. The risk-free rate is based on the
Dividend Yield. We have not and do not expect to pay cash dividends on our common stock.
We recognize stock-based compensation expense for service-based stock-based awards and our ESPP purchase rights on a straight-line basis over the service period, net of actual forfeitures. We also have certain options and RSUs that have performance-based vesting conditions; stock-based compensation expense for such awards is recognized using an accelerated attribution method from the time the vesting condition is probable through the time the vesting condition has been achieved. Prior to our IPO, we recognized stock-based compensation expense for RSUs on an accelerated attribution method as the RSUs were subject to service-based and performance-based vesting conditions, which included a liquidity event condition, and in certain cases, the achievement of certain other performance metrics. None of the RSUs would vest unless the liquidity event condition was satisfied. Upon the completion of the IPO, the liquidity event condition was considered probable and we recognized cumulative stock-based compensation expense using the accelerated attribution method related to RSUs that had vested as of the IPO. The remaining unrecognized stock-based compensation expense related to the RSUs will be recognized over the remaining requisite service period. All service-based RSUs granted after the IPO, under our 2020 Equity Incentive Plan, will not be subject to a liquidity event condition and will be recognized on a straight-line basis over the service period. We adopted ASU No. 2018-07 effectiveFebruary 1, 2020 , which aligns the accounting for employee and non-employee awards except for inputs to the option pricing model and the attribution of cost. Assumptions used in valuing non-employee stock options are generally consistent with those used for employee stock options with the exception that the expected term is over the contractual life, or 10 years for non-employee stock options. The adoption of this standard did not have a material impact on our consolidated financial statements. As ofFebruary 1, 2020 , the awards issued to non-employees are no longer subject to periodic adjustments as such awards vest at the end of each reporting period. We will continue to use judgment in evaluating the assumptions related to our stock-based compensation on a prospective basis. As we continue to accumulate additional data related to our common stock, we may have refinements to our estimates, which could materially impact our future stock-based compensation expense. Business Combinations We allocate the fair value of purchase consideration to the tangible and intangible assets acquired, and liabilities assumed based on their estimated fair values at the acquisition date. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing certain intangible assets include, but are not limited to, reproduction costs, expected long-term market growth, future expected operating expenses, cost build-up to support obligations, and appropriate discount rates. Management's estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. During the measurement period, which may be up to one year from the acquisition date, if new information is obtained about facts and circumstances that existed as of the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded in the consolidated statement of operations.
Recent Accounting Pronouncements
See Note 2 to our consolidated financial statements included elsewhere in this
Annual Report on Form 10-K, for more information about the impact of certain
recent accounting pronouncements on our consolidated financial statements.
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