You should read the following discussion and analysis of our financial condition and results of operations together with the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements based upon current expectations 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 those discussed in the section titled "Risk Factors" and in other parts of this Annual Report on Form 10-K.
Overview
Our mission is to make video communications frictionless and secure.
Zoom enables users to connect to others, share ideas, make plans, and build toward a future limited only by their imagination. Our frictionless communications platform started with video as its foundation, and we have set the standard for innovation ever since. We connect people through our core unified communications offering, which frictionlessly brings together video, phone, chat, and webinars, and enables meaningful experiences across disparate devices and locations. Our Developer Platform enables customers, developers, and service providers to easily build apps and integrations on top of Zoom's industry-leading video communications platform, with opportunities for global discovery and distribution. Our virtual and hybrid event solutions allow users to seamlessly create and manage engaging events. We believe that face-to-face communications build greater empathy and trust. We strive to live up to the trust our customers place in us by delivering a communications solution while prioritizing their privacy and security. Our 24 co-located data centers worldwide and the public cloud enable us to provide both high-quality and high-definition, real-time video to our customers even in low-bandwidth environments. We generate revenue from the sale of subscriptions to our unified communications platform. Subscription revenue is driven primarily by the number of paid hosts as well as purchases of additional products, including Zoom Rooms, Zoom Webinars, Zoom Phone, Zoom Events, and Hardware-as-a-Service ("HaaS") for rooms and phones. A host is any user of our unified communications platformwho initiates a Zoom Meeting and invites one or more participants to join that meeting. We refer to hostswho subscribe to a paid Zoom Meeting plan as "paid hosts." We define a customer as a separate and distinct buying entity, which can be a single paid user or host or an organization of any size (including a distinct unit of an organization) that has multiple paid hosts. Our Basic offering is free and gives hosts access to Zoom Meetings with core features but with the limitation that meetings with more than two endpoints time-out at 40 minutes. Our paid offerings include our Pro, Business, Enterprise, Education, and Healthcare plans, which provide incremental features and functionality, such as different participant limits, administrative controls, and reporting. For Zoom Phone, plans include Zoom Phone Pro, which provides extension-to-extension calling or can be used with the Bring Your Own Carrier model wherein the customer connects Zoom Phone to an existing carrier. We also offerRegional Unlimited and Regional Metered calling plans in three specific markets (United States /Canada ,United Kingdom /Ireland , andAustralia /New Zealand ). In addition, we introduced the Global Select plan inAugust 2020 , which allows customers to select from local numbers and domestic calling in more than 45 countries and territories where Zoom has local public switched telephone network ("PSTN") coverage. In addition, the Zoom United plan launched inDecember 2020 provides a single license for customers to purchase Zoom Phone, Meetings and chat capabilities as a bundled offering. Our revenue was$4,099.9 million ,$2,651.4 million , and$622.7 million for the fiscal years endedJanuary 31, 2022 , 2021, and 2020, respectively, representing period-over-period growth rate of 55% and 326% for fiscal year 2022 and fiscal year 2021, respectively. We had net income of$1,375.6 million ,$672.3 million , and$25.3 million for the fiscal years endedJanuary 31, 2022 , 2021, and 2020, respectively. Net cash provided by operating activities was$1,605.3 million ,$1,471.2 million , and$151.9 million for the fiscal years endedJanuary 31, 2022 , 2021, and 2020, respectively. 44
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Impact of the COVID-19 Pandemic
InMarch 2020 , theWorld Health Organization declared COVID-19 a pandemic, affecting many countries around the world. Governments have instituted lockdown or other similar measures to slow infection rates. Many organizations have resorted to mandating employees to work from home, which has resulted in these organizations seeking out video communication solutions like ours to keep employees as productive as possible, even while working from home. Schools, colleges, and universities globally have also closed as a result of this pandemic. Many of these institutions are utilizing our platform to provide remote instruction to their students. To help teachers and students navigate this unprecedented situation, we have temporarily removed the 40-minute time limit for meetings with more than two endpoints from our free Basic accounts for more than 125,000 K-12 domains worldwide. While we have experienced a significant increase in paid hosts and revenue due to the pandemic, the aforementioned factors have also driven increased usage of our services and have required us to expand our network, data storage, and processing capacity, both in our own co-located data centers as well as through third-party cloud hosting, which has resulted, and is continuing to result, in an increase in our operating costs. Furthermore, a significant portion of the increase in usage of our platform is attributable to free Basic accounts and our removal of the time limit for school domains, which do not generate any revenue, but still require us to incur these additional operating costs to expand our capacity. Therefore, the recent increase in usage of our platform has adversely affected, and may continue to adversely affect, our gross margin. In addition, there is no assurance that we will experience an increase in paid hosts or that new or existing users will continue to utilize our service after the COVID-19 pandemic has tapered globally. Moreover, the tapering of the COVID-19 pandemic, particularly as vaccines become widely available and distributed, may result in a decline in paid hosts and users once individuals are no longer working or attending school from home.
Key Factors Affecting Our Performance
Acquiring New Customers
We are focused on continuing to grow the number of customers that use our platform. Our operating results and growth prospects will depend, in part, on our ability to attract new customers. While we believe there is a significant market opportunity that our platform addresses, it is difficult to predict customer adoption rates or the future growth rate and size of the market for our platform. We will need to continue to invest in sales and marketing in order to address this opportunity by hiring, developing, and retaining talented sales personnelwho are able to achieve desired productivity levels in a reasonable period of time.
Expansion of Zoom Across Existing Customers
We believe that there is a large opportunity for growth with many of our existing customers. Many customers have increased the size of their subscriptions as they have expanded their use of our platform across their operations. Some of our larger customers start with a deployment of Zoom Meetings with one team, location, or geography, before rolling out our platform throughout their organization. Several of our largest customers have deployed our platform globally to their entire workforce following smaller initial deployments. This expansion in the use of our platform also provides us with opportunities to market and sell additional products to our customers, such as Zoom Phone, Zoom HaaS, Zoom for Home, Zoom Rooms at each office location, Developer Platform solutions, Zoom Events, and Zoom Video Webinars. In order for us to address this opportunity to expand the use of our products with our existing customers, we will need to maintain the reliability of our platform and produce new features and functionality that are responsive to our customers' requirements for enterprise-grade solutions. We quantify our expansion across existing customers through our net dollar expansion rate. Our net dollar expansion rate includes the increase in user adoption within our customers, as our subscription revenue is primarily driven by the number of paid hosts within a customer and the purchase of additional products, and compares our subscription revenue from the same set of customers across comparable periods. We calculate net dollar expansion rate as of a period end by starting with the annual recurring revenue ("ARR") from all customers with more than 10 employees as of 12 months prior ("Prior Period ARR"). We define ARR as the annualized revenue run rate of subscription agreements from all customers at a point in time. We calculate ARR by taking the monthly recurring revenue ("MRR") and multiplying it by 12. MRR is defined as the recurring revenue run-rate of subscription agreements from all customers for the last month of the period, including revenue from monthly subscriberswho have not provided any indication that they intend to cancel their subscriptions. We then calculate the ARR from these customers as of the current period end ("Current Period ARR"), which includes any upsells, contraction, and attrition. We divide the Current Period ARR by the Prior Period ARR to arrive at the net dollar expansion rate. For the trailing 12-months calculation, we take an average of the net dollar expansion rate over the trailing 12 months. Our net dollar expansion rate may fluctuate as a result of a number of factors, including the level of penetration within our customer base, expansion of products and features, and our ability to retain our customers. Our trailing 12-month net dollar expansion rate for customers with more 45
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than 10 employees was 129% as ofJanuary 31, 2022 and greater than 130% as ofJanuary 31, 2021 and 2020. The trailing 12-month net dollar expansion rate for customers with more than 10 employees was under 130% as ofJanuary 31, 2022 as the denominator of this trailing 12-month metric reflects the significant growth in our customer base during the last two years. As our business has changed and evolved, we have expansively built out our direct sales team, resellers, and strategic partners. We expect that revenue from customers engaged through these channels, which we call Enterprise customers, will constitute an increasingly higher percentage of our revenue over time, and therefore we believe our performance with Enterprise customers is a more important factor affecting our business than our performance with existing customers with more than 10 employees. Beginning with the first quarter of fiscal year 2023, we will no longer present the trailing 12-month net dollar expansion rate for customers with more than 10 employees. However, we will still provide this metric through the end of fiscal year 2023 in the appendix to the investor deck that we will continue to post on our investor relations website each quarter at investors.zoom.us. Going forward, we will instead provide the trailing 12-month net dollar expansion rate for Enterprise customers.
Expansion of Zoom Across Existing Enterprise Customers
Our net dollar expansion rate for Enterprise customers is calculated the same way as discussed above by applying the ARR specifically from Enterprise customers. We define Enterprise customers as distinct business unitswho have been engaged by either our direct sales team, resellers, or strategic partners. We assess our performance with Enterprise customers by measuring our net dollar expansion rate. Our net dollar expansion rate for Enterprise customers measures our ability to increase revenue across our existing Enterprise customer base through expansion of users and products. Our trailing 12-month net dollar expansion rate for Enterprise customers was 130% as ofJanuary 31, 2022 , and greater than 130% as ofJanuary 31, 2021 and 2020, respectively.
Innovation and Expansion of Our Platform
We continue to invest resources to enhance the capabilities of our platform. For example, we have recently introduced a number of product enhancements, including new features for Zoom Phone, Zoom Meetings, and Zoom Webinars. We addressed new work-from-home realities with the introduction of Zoom for Home, a solution designed for the home office that combines Zoom software enhancements with compatible hardware. We also expanded our geographic footprint with Zoom Phone availability to more than 45 countries and territories during fiscal year 2022. Third-party developers are also a key component of our strategy for platform innovation to make it easier for customers and developers to extend our product portfolio with new functionalities. We believe that as more developers and other third parties use our platform to integrate major third-party applications, we will become the ubiquitous platform for communications. We will need to expend additional resources to continue introducing new products, features, and functionality, and supporting the efforts of third parties to enhance the value of our platform with their own applications. An end-to-end encryption ("E2EE") option is available to free and paid Zoom customers globallywho host meetings with up to 200 participants. Zoom's E2EE uses the same AES-256-GCM encryption that secures Zoom meetings by default, but with Zoom's E2EE, the meeting host generates encryption keys and uses public key cryptography to distribute these keys to the other meeting participants. InJuly 2021 , we introduced Zoom Events. Zoom Events provides businesses with a virtual event management solution and enables users to manage and host all types of internal and external virtual events. This includes the ability to create a "hub" where all of a business' events can be listed with corresponding information about each experience. It also enables event hosts to provide ticketing and registration for attendees, and the ability to track these activities.
International Expansion
Our platform addresses the communications needs of users worldwide, and we see international expansion as a major opportunity. Our revenue from the rest of world (APAC and EMEA) represented 33%, 31%, and 19% of our total revenue for the fiscal years endedJanuary 31, 2022 , 2021, and 2020, respectively. We plan to add local sales support in further select international markets over time. We use strategic partners and resellers to sell in certain international markets where we have limited or no direct sales presence. While we believe global demand for our platform will continue to increase as international market awareness of Zoom grows, our ability to conduct our operations internationally will require considerable management attention and resources, and is subject to the particular challenges of supporting a rapidly growing business in an environment of multiple languages, cultures, customs, legal and regulatory systems, alternative dispute systems, and commercial markets. 46
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Key Business Metrics
We have historically reviewed the following key business metrics to measure our performance, identify trends, formulate financial projections, and make strategic decisions.
Customers with More Than 10 Employees
Increasing awareness of our platform and its broad range of capabilities has enabled us to substantially expand our customer base, which includes organizations of all sizes across industries. We define a customer as a separate and distinct buying entity, which can be a single paid host or an organization of any size (including a distinct unit of an organization) that has multiple paid hosts. To better distinguish business customers from our broader customer base, we review the number of customers with more than 10 employees. As ofJanuary 31, 2022 , 2021, and 2020, we had approximately 509,800, 467,100, and 81,900 customers, respectively, with more than 10 employees. When disclosing the number of customers, we round down to the nearest hundred. As we approach our three-year anniversary as a public company, our business has evolved substantially and the metrics that management uses to evaluate the business have changed. Beginning with the first quarter of fiscal year 2023, we will no longer present the number of customers with more than 10 employees. However, we will still provide this metric through the end of fiscal year 2023 in the appendix to the investor deck that we will continue to post on our investor relations website each quarter at investors.zoom.us.
Customers Contributing More Than
We focus on growing the number of customers that contribute more than$100,000 of trailing 12 months revenue as it is a measure of our ability to scale with our customers and attract larger organizations to Zoom. Revenue from these customers represented 22%, 20%, and 33% of total revenue for the fiscal years endedJanuary 31, 2022 , 2021, and 2020, respectively. As ofJanuary 31, 2022 , 2021, and 2020, we had 2,725, 1,644, and 641 customers, respectively, that contributed more than$100,000 of trailing 12 months revenue, demonstrating our rapid penetration of larger organizations, including enterprises. These customers are a subset of the customers with more than 10 employees.
Number of Enterprise Customers
We believe that our ability to increase the number of Enterprise customers is an indicator of our potential future business opportunities, the growth of our business, and an indicator of our market penetration. Increasing awareness of our platform and capabilities, coupled with the mainstream adoption of our technology, has expanded the diversity of our customer base to include organizations of all sizes across all industries. Over time, we expect Enterprise customers to represent a larger share of our business. As ofJanuary 31, 2022 , 2021, and 2020, we had approximately 191,000, 141,100, and 54,600 Enterprise customers. Non-GAAP Financial Measures In addition to our results determined in accordance with GAAP, we believe that free cash flow ("FCF") and adjusted free cash flow ("Adjusted FCF"), non-GAAP financial measures, are useful in evaluating our liquidity.
Free Cash Flow and Adjusted Free Cash Flow
We define FCF as GAAP net cash provided by operating activities less purchases of property and equipment. We define Adjusted FCF as FCF plus litigation settlement payments, net. We add back litigation settlement payments, net because they are not part of our ongoing operating activities, and the consideration of measures that exclude such payments can assist in the comparison of cash generated from operations in different periods which may or may not include such payments and assist in the comparison with the results of other companies in the industry. We believe that FCF and Adjusted FCF are useful indicators of liquidity that provides information to management and investors about the amount of cash generated from our operations that, after investments in property and equipment, can be used for future growth. FCF and Adjusted FCF are presented for supplemental informational purposes only, have limitations as an analytical tool, and should not be considered in isolation or as a substitute for analysis of other GAAP financial measures, such as net cash provided by operating activities. It is important to note that other companies, including companies in our industry, may not use these metrics, may calculate these metrics differently, or may use other financial measures to evaluate their liquidity, all of which could reduce the usefulness of these non-GAAP metrics as a comparative measure. The following table presents a summary of our cash flows for the fiscal years presented and a reconciliation of FCF and Adjusted FCF to net cash provided by operating activities, the most directly comparable financial measure calculated in accordance with GAAP: 47
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Net cash provided by operating activities
Less: purchases of property and equipment (132,590) (79,972) (38,084) Free cash flow (non-GAAP)
$ 1,472,676 $ 1,391,205 $ 113,808 Add: Litigation settlement payments, net 85,000 - - Adjusted free cash flow (non-GAAP)$ 1,557,676 $ 1,391,205 $ 113,808 Net cash used in investing activities$ (2,859,097) $ (1,562,420) $ (499,468) Net cash provided by financing activities$ 34,068 $ 2,050,277
Components of Results of Operations
Revenue
We derive our revenue from subscription agreements with customers for access to our unified communications platform. Our customers generally do not have the ability to take possession of our software. We also provide services, which include professional services, consulting services, and online event hosting, which are generally considered distinct from the access to our unified communications platform.
Cost of Revenue
Cost of revenue primarily consists of costs related to hosting our unified communications platform and providing general operating support services to our customers. These costs are related to our co-located data centers, third-party cloud hosting, integrated third-party PSTN services, personnel-related expenses, amortization of capitalized software development and acquired intangible assets, royalty payments, and allocated overhead. We expect our cost of revenue to increase in absolute dollars for the foreseeable future, as we expand our data center capacity due to increased usage over time. However, the cost of revenue as a percentage of revenue may decrease over time as we scale our data centers to accommodate usage from our increased customer base and as the ratio of free to paid users varies. Operating Expenses Research and Development Research and development expenses primarily consist of personnel-related expenses directly associated with our research and development organization, depreciation of equipment used in research and development, and allocated overhead. Research and development costs are expensed as incurred. We plan to increase our investment in research and development for the foreseeable future, primarily by increasing research and development headcount, as we focus on further developing our platform, enhancing its use cases, and strengthening security and privacy. As a result, we expect our research and development expenses to increase in absolute dollars during the upcoming fiscal year. We expect, however, that our research and development expenses as a percentage of revenue will remain relatively flat during the upcoming fiscal year.
Sales and Marketing
Sales and marketing expenses primarily consist of personnel-related expenses directly associated with our sales and marketing organization. Other sales and marketing expenses include advertising and promotional events to promote our brand, such as awareness programs, digital programs, public relations, tradeshows, and our user conference, Zoomtopia, and allocated overhead. Sales and marketing expenses also include credit card processing fees related to sales and amortization of deferred contract acquisition costs. We plan to increase our investment in sales and marketing over the foreseeable future, primarily by increasing the headcount of our direct sales force and marketing investments in demand generation. As a result, we expect our sales and marketing expenses to increase in absolute dollars during the upcoming fiscal year. We expect, however, that our sales and marketing expenses as a percentage of revenue will remain relatively flat during the upcoming fiscal year.
General and Administrative
General and administrative expenses primarily consist of personnel-related expenses associated with our finance and legal organizations; professional fees for external legal, accounting, and other consulting services; expected credit losses; insurance; indirect taxes; litigation settlements, and allocated overhead. We expect to increase the size of our general and administrative function to support the growth and complexity of our business. As a result, we expect our general and 48
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administrative expenses to increase in absolute dollars during the upcoming fiscal year. We expect, however, that our general and administrative expenses as a percentage of revenue will remain relatively flat during the upcoming fiscal year.
Gains on Strategic Investments, Net
Gains on strategic investments, net consist primarily of remeasurement gains or losses on our equity investments.
Other (Expense) Income, Net
Other (expense) income, net consists primarily of interest income and net accretion on our marketable securities and effect of changes in foreign currency exchange rates.
(Benefit from) provision for Income Taxes
(Benefit from) provision for income taxes consists primarily of income taxes related to federal, state, and foreign jurisdictions where we conduct business.
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Results of Operations
The following tables set forth selected consolidated statements of operations data and such data as a percentage of revenue for each of the fiscal years indicated: Year Ended January 31, 2022 2021 2020 (in thousands) Revenue $
4,099,864
1,054,554 821,989 115,396 Gross profit 3,045,310 1,829,379 507,262 Operating expenses: Research and development (1) 362,990 164,080 67,079 Sales and marketing (1) 1,135,959 684,904 340,646 General and administrative (1) 482,770 320,547 86,841 Total operating expenses 1,981,719 1,169,531 494,566 Income from operations 1,063,591 659,848 12,696 Gains on strategic investments, net 43,761 2,538 - Other (expense) income, net (5,720) 15,648 13,666 Income before (benefit from) provision for income taxes 1,101,632 678,034 26,362 (Benefit from) provision for income taxes (274,007) 5,718 1,057 Net income $
1,375,639
(1) Includes stock-based compensation expense as follows: Cost of revenue$ 69,612 $ 34,960 $ 7,860 Research and development 113,000 50,161 11,645 Sales and marketing 229,297 146,377 41,465 General and administrative 65,378 44,320 12,139 Total stock-based compensation expense$ 477,287 $ 275,818 $ 73,109 Year Ended January 31, 2022 2021 2020 (as a percentage of revenue) Revenue 100 % 100 % 100 % Cost of revenue 26 31 19 Gross profit 74 69 81 Operating expenses: Research and development 8 6 11 Sales and marketing 27 26 55 General and administrative 12 12 13 Total operating expenses 47 44 79 Income from operations 27 25 2 Gains on strategic investments, net 1 - - Other (expense) income, net 0 1 2 Income before (benefit from) provision for income taxes 28 26 4 (Benefit from) provision for income taxes (6) 1 0 Net income 34 % 25 % 4 % 50
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Comparison of Fiscal Years Ended
Revenue Year Ended January 31, 2022 2021 $ Change % Change (in thousands, except percentages) Revenue$ 4,099,864 $ 2,651,368 $ 1,448,496 55 % Revenue for the fiscal year endedJanuary 31, 2022 increased by$1,448.5 million , or 55%, compared to the fiscal year endedJanuary 31, 2021 . Due to the COVID-19 pandemic, there was an expansion in usage of our services, and many organizations around the world continued utilizing our platform to support their operations remotely. As a result, the increase in revenue was primarily due to subscription services provided to existing customers, which accounted for approximately 70% of the increase, and to subscription services provided to new customers, which accounted for approximately 30% of the increase. Cost of Revenue Year Ended January 31, 2022 2021 $ Change % Change (in thousands, except percentages) Cost of revenue$ 1,054,554 $ 821,989 $ 232,565 28 % Gross profit 3,045,310 1,829,379 1,215,931 66 % Gross margin 74 % 69 % Cost of revenue for the fiscal year endedJanuary 31, 2022 increased by$232.6 million , or 28%, compared to the fiscal year endedJanuary 31, 2021 . In response to the COVID-19 pandemic, we have temporarily removed the 40-minute time limit for meetings with more than two endpoints from our free Basic accounts for more than 125,000 K-12 school domains worldwide. We also experienced a significant increase in usage from paid users as more companies utilized our platform to allow their employees to work remotely. This increase in usage resulted in an increase of$83.5 million in costs related to third-party cloud hosting, our co-located data centers, and integrated third-party PSTN services to support the increase in customers and expanded use of our unified communications platform by existing customers. The remaining increase was primarily due to an increase of$99.0 million in personnel-related expenses mainly driven by additional headcount, which includes a$34.7 million increase in stock-based compensation expense; an increase of$26.6 million related to subscription to software-based services; an increase of$9.3 million in allocated overhead expenses; and an increase of$8.6 million in professional services mainly for customer support. Gross margin increased to 74% for the fiscal year endedJanuary 31, 2022 from 69% for the fiscal year endedJanuary 31, 2021 . The increase in gross margin was mainly due to increased efficiencies as we expanded our data center capacity to accommodate the increased usage as well as lower rates from third-party cloud hosting providers. Operating Expenses
Research and Development
Year Ended January 31, 2022 2021 $ Change % Change (in thousands, except percentages)
Research and development
Research and development expense for the fiscal year endedJanuary 31, 2022 increased by$198.9 million , or 121%, compared to the fiscal year endedJanuary 31, 2021 . The increase was primarily due to higher personnel-related expenses of$182.1 million mainly driven by additional headcount, which includes a$62.8 million increase in stock-based compensation expense. The remainder of the increase was primarily attributable to an increase of$11.6 million in allocated overhead expenses, and an increase of$6.8 million related to subscription to software-based services. 51
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Table of Contents Sales and Marketing Year Ended January 31, 2022 2021 $ Change % Change (in thousands, except percentages) Sales and marketing$ 1,135,959 $ 684,904 $ 451,055 66 % Sales and marketing expense for the fiscal year endedJanuary 31, 2022 increased by$451.1 million , or 66%, compared to the fiscal year endedJanuary 31, 2021 . The increase in sales and marketing expense was primarily due to higher personnel-related expenses of$308.2 million , mainly driven by additional headcount in our sales force to support the increased demand, which includes an increase of$82.9 million in stock-based compensation expense; and an increase of$73.0 million in amortization of deferred contract acquisition costs driven by our increase in revenue. The remaining increase was primarily due to an increase of$104.4 million in marketing and sales event-related costs mainly due to an increase in digital advertising programs, an increase of$19.1 million in credit card processing fees as a result of increased online payments, an increase of$17.1 million in allocated overhead expenses, and an increase of$8.4 million related to subscription to software-based services. General and Administrative Year Ended January 31, 2022 2021 $ Change % Change (in thousands, except percentages) General and administrative$ 482,770 $ 320,547 $ 162,223 51 % General and administrative expense for the fiscal year endedJanuary 31, 2022 increased by$162.2 million , or 51%, compared to the fiscal year endedJanuary 31, 2021 . The increase in general and administrative expense was primarily due to an increase of$72.2 million in personnel-related expenses mainly driven by additional headcount, which includes a$21.1 million increase in stock-based compensation expense; an increase of$66.9 million in litigation settlement expense, net of amounts estimated to be covered by insurance; an increase of$44.1 million related to professional services composed primarily of legal and other consulting fees; and an increase of$28.8 million related to subscription to software-based services. This is partially offset by a decrease of$31.8 million related to a contingent liability for sales and other indirect taxes, and a decrease of$23.3 million due to charitable donations related mainly to shares transferred to a donor advised fund in the fiscal year endedJanuary 31, 2021 .
Gains on Strategic Investments, Net
Year Ended January 31, 2022 2021 $ Change % Change (in thousands, except percentages)
Gains on strategic investments, net
Gains on strategic investments, net recognized during the fiscal year endedJanuary 31, 2022 was driven by$49.9 million unrealized gains recognized on our privately held equity securities, partially offset by$6.2 million unrealized losses recognized on our publicly traded equity securities. Other (Expense) Income, Net Year Ended January 31, 2022 2021 $ Change % Change (in thousands, except percentages) Other (expense) income, net$ (5,720) $ 15,648 $ (21,368) (137) % Other (expense) income, net for the fiscal year endedJanuary 31, 2022 decreased by$21.4 million , or 137%, compared to the fiscal year endedJanuary 31, 2021 . The decrease was primarily attributable to a decrease of$19.2 million related to changes in foreign currency exchange rates. 52
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(Benefit from) Provision for Income Taxes
Year Ended January 31, 2022 2021 $ Change % Change (in thousands,
except percentages)
(Benefit from) provision for income taxes
Benefit from income taxes for the fiscal year endedJanuary 31, 2022 was$274.0 million , compared to a provision for income taxes of$5.7 million the fiscal year endedJanuary 31, 2021 . The change in income taxes was primarily due to the valuation allowance release on theU.S. federal and state deferred tax assets. See Note 10 "Income Taxes" to our consolidated financial statements included in Part II, Item 8 of this Form 10-K for more details on the valuation allowance release.
For a discussion of the fiscal year ended
Liquidity and Capital Resources
As of
We have financed our operations primarily through income from operations and sales of equity securities. Cash from operations could also be affected by various risks and uncertainties, including, but not limited to, the effects of the COVID-19 pandemic, including timing of cash collections from our customers and other risks detailed in the section titled "Risk Factors." However, based on our current business plan and revenue prospects, we believe our existing cash, cash equivalents, and marketable securities, together with net cash provided by operations, will be sufficient to meet our needs for at least the next 12 months and allow us to capitalize on growth opportunities. We believe we will meet longer-term expected future cash requirements and obligations through a combination of cash flows from operating activities and available cash balances. Our future capital requirements will depend on many factors, including our revenue growth rate, subscription renewal activity, billing frequency, the timing and extent of spending to support further sales and marketing and research and development efforts, as well as expenses associated with our international expansion, and the timing and extent of additional capital expenditures to invest in existing and new office spaces as well as data center infrastructure. We may, in the future, enter into arrangements to acquire or invest in complementary businesses, services, and technologies, including intellectual property rights. We may choose or be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, results of operations, and financial condition would be materially and adversely affected.
Our material cash requirements from known contractual and other obligations primarily relate to our leases for office space and equipment, as well as non-cancelable purchase obligations. Expected timing of those payments are as follows:
Payments Due by Period Less Than 1 - 3 3 - 5 More Than Total 1 Year Years Years 5 Years (in thousands) Operating lease obligations$ 117,763 $ 24,490 $
47,787
- - Total contractual obligations$ 504,357 $ 251,672 $
207,199
The contractual commitment amounts in the table above are associated with agreements that are enforceable and legally binding. Obligations under contracts that we can cancel without a significant penalty are not included in the table above. See the "Future minimum lease payments" table in Note 7 and "Non-cancelable Purchase Obligations" in Note 8 to our consolidated financial statements included in Part II, Item 8 of this Form 10-K for more details. 53
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Cash Flows
The following table summarizes our cash flows for the periods presented:
Year Ended January 31, 2022 2021 2020 (in thousands)
Net cash provided by operating activities
$ 151,892 Net cash used in investing activities$ (2,859,097) $ (1,562,420) $ (499,468) Net cash provided by financing activities$ 34,068 $ 2,050,277 $ 615,690 Operating Activities Our largest source of operating cash is cash collections from our customers for subscriptions to our platform. Our primary uses of cash from operating activities are for employee-related expenditures, costs related to hosting our platform, and marketing expenses. Net cash provided by operating activities is impacted by our net income adjusted for certain non-cash items, such as stock-based compensation expense, depreciation and amortization expenses, as well as the effect of changes in operating assets and liabilities. Net cash provided by operating activities was$1,605.3 million for the fiscal year endedJanuary 31, 2022 , compared to$1,471.2 million for the fiscal year endedJanuary 31, 2021 . The increase in operating cash flow was due to an increase in net income of$703.3 million , offset by the negative impact from changes in operating assets and liabilities of$506.3 million , and a decrease in non-cash adjustments of$62.9 million , which is primarily a result of the income tax benefit from release of valuation allowance and higher gains from strategic investments, offset by higher stock-based compensation expense, higher deferred contract acquisition cost amortization due to an increase in capitalized commissions as we continue to grow and expand our customer base, and higher provision for accounts receivable allowances due to higher accounts receivable balances. Investing Activities Net cash used in investing activities of$2,859.1 million for the fiscal year endedJanuary 31, 2022 was primarily due to net purchases of marketable securities of$2,404.8 million , purchases of strategic investments of$305.1 million , purchases of property and equipment of$132.6 million , purchases of intangible assets of$13.0 million , and cash paid for acquisition, net of cash acquired, of$3.5 million . Net cash used in investing activities of$1,562.4 million for the fiscal year endedJanuary 31, 2021 was primarily due to net purchases of marketable securities of$1,438.8 million , purchases of property and equipment of$80.0 million , cash paid for acquisition, net of cash acquired, of$26.5 million , purchases of strategic investments of$13.0 million , and purchases of intangible assets of$5.8 million . Financing Activities Net cash provided by financing activities of$34.1 million for the fiscal year endedJanuary 31, 2022 was due to proceeds from issuance of common stock pursuant to our employee stock purchase plan ("ESPP") of$59.3 million and proceeds from the exercise of stock options of$14.4 million , offset by proceeds from international employee stock sales remitted to employees and tax authorities of$40.0 million . Net cash provided by financing activities of$2,050.3 million for the fiscal year endedJanuary 31, 2021 was due to proceeds from our follow-on offering, net of underwriting discounts and commissions and other offering costs, of$1,979.2 million , proceeds from issuance of common stock pursuant to our ESPP of$38.4 million , proceeds from the exercise of stock options of$28.6 million , and proceeds from international employee stock sales to be remitted to employees and tax authorities of$4.1 million . For a discussion of the fiscal year endedJanuary 31, 2020 , please refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year endedJanuary 31, 2021 .
Stock Repurchase Program
InFebruary 2022 , our board of directors authorized a stock repurchase program of up to$1.0 billion of our Class A common, which expires inFebruary 2024 . Repurchases of our Class A common stock may be effected from time to time, either on the open market (including pre-set trading plans), in privately negotiated transactions, and other transactions in accordance with applicable securities laws. 54
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The timing and the amount of any repurchased Class A common stock will be determined by our management based on its evaluation of market conditions and other factors, and the repurchase program will be funded using our working capital. The program may be modified, suspended or discontinued at any time.
As of
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements as defined in Item
303(a)(4)(ii) of Regulation S-K promulgated by the
Critical Accounting Estimates
Critical accounting estimates are those accounting estimates that 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. We believe that of our significant accounting policies, which are described in Note 1 "Summary of Business and Significant Accounting Policies" to our consolidated financial statements, the following critical estimates involve a greater degree of judgment and complexity.
Revenue Recognition
We derive our revenue primarily from subscription agreements with customers for access to our unified communications platform and services. We also provide other services, which include professional services, consulting services, and online event hosting, which were immaterial to our consolidated financial statements. Revenue is recognized when a customer obtains control of promised services. The amount of revenue recognized reflects the consideration that we expect to receive in exchange for these services. We apply judgment during the identification of a contract to determine the customer's ability and intent to pay, which is based on a variety of factors, including the customer's historical payment experience or, in the case of a new customer, credit and financial information pertaining to the customer. The transaction price is determined based on the consideration to which we expect to be entitled in exchange for transferring services to the customer. Variable consideration is included in the transaction price if, in our judgment, it is probable that a significant future reversal of cumulative revenue recognized under the contract will not occur.
Cost to Obtain a Contract
We primarily capitalize sales commissions and associated payroll taxes paid to internal sales personnel that are incremental costs from the acquisition of customer contracts. These costs are recorded as deferred contract acquisition costs in the consolidated balance sheets. We determine whether costs should be deferred based on our sales compensation plans and if the commissions are incremental and would not have occurred absent the customer contract. Sales commissions paid upon the initial acquisition of a customer contract are amortized over an estimated period of benefit of three years, which is typically greater than the contractual terms of the customer contracts. Significant judgment is required in arriving at this estimated period of benefit. We determine the period of benefit for commissions paid for the acquisition of the initial customer contract by taking into consideration the initial estimated customer life and the technological life of our unified communications platform and related significant features. We do not pay sales commissions upon contract renewal. Amortization is recognized on a straight-line basis commensurate with the pattern of revenue recognition.
Allowance for Credit Losses
The allowance for credit losses is based on management's estimate for expected credit losses for outstanding accounts receivable. We determine expected credit losses based on historical write-off experience, an analysis of the aging of outstanding receivables, customer payment patterns, the establishment of specific reserves for customers in an adverse financial condition, and adjust based upon our expectations of changes in macroeconomic conditions that may impact the collectibility of outstanding receivables, including noncurrent accounts receivable. We also consider current market conditions and reasonable 55
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and supportable forecasts of future economic conditions to inform adjustments to historical loss data. We reassess the adequacy of the allowance for credit losses each reporting period.
Business Combinations and Valuation of
We account for our business combinations using the acquisition method of accounting, which requires, among other things, allocation of the fair value of purchase consideration to the tangible and intangible assets acquired and liabilities assumed at their estimated fair values on the acquisition date. The excess of the fair value of purchase consideration over the values of these identifiable assets and liabilities is recorded as goodwill. When determining the fair value of assets acquired and liabilities assumed, we make estimates and assumptions, especially with respect to intangible assets. Our 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, not to exceed one year from the date of acquisition, we may record adjustments to the assets acquired and liabilities assumed, with a corresponding offset to goodwill if new information is obtained related to facts and circumstances that existed as of the acquisition date. After the measurement period, any subsequent adjustments are reflected in the consolidated statements of operations. Acquisition costs, such as legal and consulting fees, are expensed as incurred.Goodwill amounts are not amortized, but rather tested for impairment at least annually, in the fourth quarter of each fiscal year, or more often if circumstances indicate that the carrying value may not be recoverable. As ofJanuary 31, 2022 , no impairment of goodwill has been identified. Intangible assets consist of acquired identifiable intangible assets resulting from business combinations, as well as other intangible assets purchased outside of a business combination. Finite-lived intangible assets are initially recorded at fair value and are amortized on a straight-line basis over their estimated useful lives. We routinely evaluate the estimated remaining useful lives of our finite-lived intangible assets and whether events or changes in circumstances warrant a revision to the remaining period of amortization. Indefinite-lived intangible assets are recorded at fair value and are not amortized. We review the useful lives of indefinite-lived intangible assets each reporting period to determine whether events and circumstances continue to support the indefinite useful life classification. If we determine that the life of an intangible asset is no longer indefinite, that asset would be tested for impairment and amortized prospectively over its estimated remaining useful life. We have not recorded any impairment charges during the fiscal years presented.
Employee Stock Purchase Plan Valuation
We account for stock-based compensation expense related to our ESPP purchase rights based on the estimated grant date fair value, which is calculated using the Black-Scholes option pricing model and the aggregate number of shares of our common stock expected to be purchased under each offering. The assumptions used to determine the fair value of the ESPP purchase rights, including the expected term of the awards, the expected volatility of the price of our common stock, risk-free interest rates, and the expected dividend yield of our common stock, represent management's best estimates. These estimates involve inherent uncertainties and the application of management's judgment. The related stock-based compensation expense is recognized on a straight-line basis over the term of each ESPP offering period, which is generally two years. We account for modifications to employee contributions as they occur.
Our use of the Black-Scholes option-pricing model requires the input of subjective assumptions. If factors change and different assumptions are used, our stock-based compensation expense could be materially different for the current period and in the future.
These assumptions and estimates used in the Black-Scholes option-pricing model are as follows:
•Risk-Free Interest Rate. The risk-free interest rate for the expected term of the awards was based on theU.S. Treasury yield curve in effect at the time of the grant.
•Expected Term. The expected term of the ESPP represents the period of time that purchase rights are expected to be outstanding.
•Expected Volatility. For the ESPP purchase rights granted during the fiscal year endedJanuary 31, 2021 , as we have a limited trading history for our common stock, the expected volatility was estimated by taking the average historic price volatility for industry peers, consisting of several public companies in our industry which are either similar in size, stage of life cycle, or financial leverage, over a period equivalent to the expected term of the awards. For the ESPP purchase rights granted during the fiscal year endedJanuary 31, 2022 , expected volatility was determined using a combination of the implied volatility of publicly traded options in our stock and historical volatility of our stock price.
•Expected Dividend Yield. We have never declared or paid any cash dividends and do not presently plan to pay cash dividends in the foreseeable future. As a result, an expected dividend yield of zero percent was used.
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Strategic Investments
Accounting for strategic investments in privately held debt and equity securities in which we do not have a controlling interest or significant influence requires us to make significant estimates and assumptions.
Valuations of privately held securities are inherently complex and require judgment due to the lack of readily available market data. Privately held debt and equity securities are valued using significant unobservable inputs or data in an inactive market. The valuation requires our judgment due to the absence of market prices and inherent lack of liquidity. The carrying values of our privately held equity securities are adjusted if there are observable price changes in a same or similar security from the same issuer or if there are identified events or changes in circumstances that may indicate impairment, as discussed below. In determining the estimated fair value of our strategic investments in privately held companies, we utilize the most recent data available, as adjusted to reflect the specific rights and preferences of those securities we hold. We assess our privately held debt and equity securities strategic investment portfolio quarterly for indicators for impairment. Our impairment analysis encompasses a qualitative assessment evaluates key factors including but not limited to the investee's financial metrics, market acceptance of the product or technology, and the rate at which the investee is using its cash. If the investment is considered to be impaired, we record the investment at fair value by recognizing an impairment through the consolidated statement of operations and establishing a new carrying value for the investment. The privately held debt and equity securities we hold, and their rights and preferences relative to those of other securities within the capital structure, may impact the magnitude by which our investment value moves in relation to movement of the total enterprise value of the company. As a result, our investment value in a specific company may move by more or less than any change in the value of that overall company. An immediate decrease of ten percent in enterprise value of our largest privately held equity securities held as ofJanuary 31, 2022 would not have had a material impact on the value of our investment portfolio.
Income Taxes
We use the asset and liability method of accounting for income taxes. Under this method, income tax expense is recognized based on the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in our consolidated financial statements or tax returns. We make assumptions, judgments and estimates to determine the current income tax provision (benefit), deferred tax asset and liabilities and valuation allowance recorded against a deferred tax asset. The assumptions, judgments and estimates relative to the current income tax provision (benefit) take into account current tax laws, their interpretation and possible results of foreign and domestic tax audits. Changes in tax law, their interpretation and resolution of tax audits could significantly impact the income taxes provided in our consolidated financial statements. Assumptions, judgments and estimates relative to the amount of deferred income taxes take into account future taxable income. Any of the assumptions, judgments and estimates mentioned above could cause the actual income tax obligations to differ from our estimates.
Critical accounting estimates and the related assumptions are evaluated periodically as conditions warrant, and changes to such estimates are recorded as new information or changed conditions require.
Recent Accounting Pronouncements
See "Summary of Business and Significant Accounting Policies" in Note 1 to our consolidated financial statements included in Part II, Item 8 of this Form 10-K.
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