ZOOM VIDEO COMMUNICATIONS, INC. 24
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You should read the following discussion and analysis of our financial condition and results of operations together with the unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. 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 Quarterly Report on Form 10-Q. Overview
Our mission is to make video communications frictionless and secure.
Zoom enables people 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 phone,
chat, video, whiteboarding, 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. Our
Contact Center is an omnichannel contact center solution that is optimized for
video and integrated right into the Zoom client.
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 27
co-located data centers worldwide and the public cloud in conjunction with our
proprietary adaptive rate codec 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 Rooms, Webinars, Phone,
Events, Contact Center, and Hardware-as-a-Service ("HaaS") for rooms and phones.
A host is any user of our unified communications platform who initiates a Zoom
Meeting and invites one or more participants to join that meeting. We refer to
hosts who 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 Zoom One Basic offering is free
and gives hosts access to Zoom Meetings with core features but with the
limitation that meetings time-out at 40 minutes. Our core paid offerings are
available with our Zoom One bundles: Zoom One Pro, Business, Business Plus,
Enterprise, and Enterprise Plus. The Zoom One bundles are designed for different
business needs and are composed of Zoom Meetings, Zoom Phone, Zoom Chat, Zoom
Whiteboard as well as Zoom Webinars and Zoom Rooms for our Enterprise plans. We
also offer vertical-specific plans for Education and Healthcare, 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
offer Regional Unlimited and Regional Metered calling plans in four specific
markets (United States /Canada , United Kingdom /Ireland , Australia /New Zealand ,
and Japan ). In addition, we introduced the Global Select plan in August 2020 ,
which allows customers to select from local numbers and domestic calling in more
than 47 countries and territories where Zoom has local public switched telephone
network ("PSTN") coverage.
Our revenue was $1,101.9 million and $1,050.8 million for the three months ended
October 31, 2022 and 2021, respectively, representing period-over-period growth
of 4.9%. We had net income of $48.4 million and $340.4 million for the three
months ended October 31, 2022 and 2021, respectively. Our revenue was $3,275.2
million and $3,028.5 million for the nine months ended October 31, 2022 and
2021, respectively, representing period-over-period growth of 8.1%. We had net
income of $207.8 million and $885.0 million for the nine months ended
October 31, 2022 and 2021, respectively. Net cash provided by operating
activities was $1,078.7 million and $1,395.9 million for the nine months ended
October 31, 2022 and 2021, respectively.
Macroeconomic Conditions and Other Factors
Recent changes in macroeconomic conditions such as high inflation, recessionary environments, and fluctuations in foreign currency exchange rates, can cause uncertainty in our business. For the three and nine months endedOctober 31, 2022 , we experienced continued growth in total revenue and revenue from Enterprise customers. However, macroeconomic conditions, including inflation and continued uncertainty regarding the current and future political and economic environment, may impact the future demand for subscriptions to our unified communications platform. For example, for the three and nine months endedOctober 31, 2022 , we experienced unfavorable foreign currency impact as a result of the continued strengthening of theU.S. dollar compared to certain foreign jurisdictions where we do a significant amount of business, which resulted in a 25
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During the onset of the COVID-19 pandemic, many organizations 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. 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. As reported in prior periods we experienced significant revenue growth. This revenue growth has declined and we expect our revenue growth to generally decline as compared to prior periods. Many factors may contribute to declines in our growth rate, among other things, higher market penetration, increased competition, slowing demand for our platform from the tapering of the COVID-19 pandemic, a slower than anticipated capitalization on growth opportunities, and the maturation of our business. We continue to monitor the impacts of the COVID-19 pandemic on our business. The effects of the COVID-19 pandemic have been widespread, and while the COVID-19 pandemic has tapered, it continues to fluctuate in severity. Our recent declines in revenue growth are primarily attributable to the tapering of the COVID-19 pandemic along with other macroeconomic factors. At the same time, it is starting to become clear that some of the behavioral trends the COVID-19 pandemic fostered, including the shift to remote and hybrid work, may remain in place for an indeterminate amount of time. Given this, it is not possible for us to quantify how the tapering of the COVID-19 pandemic has impacted our current and future operations. In addition the global impacts of the Russian invasion ofUkraine , including various sanctions and export restrictions onRussia andBelarus bythe United States , theUnited Kingdom , theEuropean Union , and other governmental authorities remain highly uncertain. TheRussia -Ukraine war impacted our EMEA revenue for the three and nine months endedOctober 31, 2022 . Our customers inRussia ,Belarus , andUkraine represented less than 1% of our net assets and total consolidated revenue as of and for the three and nine months endedOctober 31, 2022 . If theRussia -Ukraine war continues or worsens, leading to additional sanctions, tightened export restrictions, and greater global economic disruptions and uncertainty, our business and results of operations could be materially impacted. We are continuously monitoring the impact of these circumstances on our business and financial results, as well as the overall global economy and geopolitical landscape. The implications of macroeconomic conditions on our business, results of operations and overall financial position, particularly in the long term, remain uncertain.
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 personnel who are able to achieve desired productivity levels in a reasonable period of time.
Expansion of Zoom Across Existing Enterprise 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 Phone, HaaS, Zoom for Home, Rooms at each office location, Developer Platform solutions, Events, Contact Center, and 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 Enterprise customers through our net dollar expansion rate. We define Enterprise customers as distinct business units who have been engaged by either our direct sales team, resellers, or strategic partners. Revenue from Enterprise customers represented 55.7% and 48.8% of total revenue for the three months endedOctober 31, 2022 and 2021, respectively, and 54.1% and 46.6% of total revenue for the nine months endedOctober 31, 2022 and 2021, respectively. Our net dollar expansion rate includes the increase in user adoption within our Enterprise 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 Enterprise customers across comparable periods. We 26
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calculate net dollar expansion rate as of a period end by starting with the
annual recurring revenue ("ARR") from all Enterprise customers 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
Enterprise customers for the last month of the period, including revenue from
monthly subscribers who have not provided any indication that they intend to
cancel their subscriptions. We then calculate the ARR from these Enterprise
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
Enterprise customers. Our trailing 12-month net dollar expansion rate for
Enterprise customers as of October 31, 2022 and 2021 was 117% and 139%
respectively.
Retention of Online Customers
In addition to Enterprise customers, we also have a significant number of
customers that subscribe to our services directly through our website ("Online
customers"). Online customers represent a diverse customer base, ranging from
individual consumers to small and medium size businesses. We continue to focus
on acquisition and retention of our online customer base through various
strategies to improve the features and functionalities of our products and
services. Revenue from Online customers represented 44.3% and 51.2% of total
revenue for the three months ended October 31, 2022 and 2021, respectively, and
45.9% and 53.4% of total revenue for the nine months ended October 31, 2022 and
2021, respectively. The ability to retain these Online customers will have an
impact on our future revenue. The online monthly average churn for our Online
customers was 3.1% and 3.7% per month for the three months ended October 31,
2022 and 2021, respectively, and 3.4% and 3.9% per month for the nine months
ended October 31, 2022 and 2021, respectively. We calculate our online average
monthly churn by starting with the Online customer MRR as of the beginning of
the applicable quarter ("Entry MRR"). We define Entry MRR as the recurring
revenue run-rate of subscription agreements from all Online customers, including
revenue from monthly subscribers that have not provided any indication that they
intend to cancel their subscriptions. We then determine the MRR related to
customers who canceled or downgraded their subscription during the applicable
quarter ("Applicable Quarter MRR Churn") and divide the Applicable Quarter MRR
Churn by the applicable quarter Entry MRR to arrive at the MRR churn rate for
Online Customers for the applicable quarter. We then divided that amount by
three to calculate the online average monthly churn.
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 Phone, Meetings, Webinars, and Events and launched Zoom Contact Center, Zoom IQ for Sales, and Whiteboard. 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 deliver Zoom Phone calling plans in more than 47 countries and territories as ofOctober 31, 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 globally who host meetings with up to 200 participants as well as on Zoom Phone. Zoom's E2EE uses the same AES-256-GCM encryption that secures Zoom meetings by default, but with Zoom's E2EE, the meeting host, or originating caller in the case of Zoom Phone, as opposed to Zoom's servers, generates encryption keys and uses public key cryptography to distribute these keys to the other meeting participants or call recipient. InFebruary 2022 , we launched Zoom Contact Center, an omnichannel contact center solution that is optimized for video and is integrated right into the Zoom client. Currently, Zoom Contact Center is available in theU.S. andCanada , with plans to introduce international availability later in 2022. InApril 2022 , we released Zoom Whiteboard, a persistent whiteboard tool for team collaboration in and outside of meetings, and Zoom IQ for Sales, a conversation intelligence software for Zoom Meetings, which provides sales teams with meaningful and actionable insights from their customer interactions to improve seller performance and enhance customer experiences. InNovember 2022 , we launched the beta releases of Zoom Mail and Calendar product offerings, which include both client experiences (Zoom Mail Client, Zoom Calendar Client) and service components (Zoom Mail Service, Zoom Calendar Service). Zoom Mail Client and Zoom Calendar Client can be used with third-party email and calendaring services from Microsoft or
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Zoom-hosted offerings targeted at customers with up to 50 employees and
currently available in beta release in
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 30% and 33% of our total revenue for the three months endedOctober 31, 2022 and 2021, respectively, and 31% and 33% of our total revenue for the nine months endedOctober 31, 2022 and 2021, 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.
Key Business Metrics
We review the following key business metrics to measure our performance, identify trends, formulate financial projections, and make strategic decisions.
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 ofOctober 31, 2022 and 2021, we had approximately 209,300 and 183,700 Enterprise customers, respectively.
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 27% and 22% of total revenue for the three months endedOctober 31, 2022 and 2021, respectively, and 26% and 21% of total revenue for the nine months endedOctober 31, 2022 and 2021, respectively. As ofOctober 31, 2022 and 2021, we had 3,286 and 2,507 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 Enterprise customers.
Non-GAAP Financial Measures
In addition to our results determined in accordance with GAAP, we believe that free cash flow ("FCF") is a non-GAAP financial measures that is useful in evaluating our liquidity.
Free Cash Flow
We define FCF as GAAP net cash provided by operating activities less purchases
of property and equipment. We believe that FCF is a useful indicator 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 is presented for supplemental
informational purposes only and has 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 this metric, may calculate this metric differently, or may use other
financial measures to evaluate their liquidity, all of which could reduce the
usefulness of the non-GAAP metric as a comparative measure.
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The following table presents a summary of our cash flows for the periods
presented and a reconciliation of FCF to net cash provided by operating
activities, the most directly comparable financial measure calculated in
accordance with GAAP:
Nine Months Ended October 31,
2022 2021
(in thousands)
Net cash provided by operating activities $ 1,078,674 $ 1,395,870
Less: purchases of property and equipment (75,568) (111,816)
Free cash flow (non-GAAP) $ 1,003,106 $ 1,284,054
Net cash used in investing activities $ (60,613) $ (2,367,098)
Net cash (used in) provided by financing activities $ (948,687) $ 20,885 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. We expect, however, that our cost of revenue as a percentage of revenue will remain relatively flat for the rest of the current fiscal year. 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 both in absolute dollars and as a percentage of revenue for the rest of the current 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 both in absolute dollars and as a percentage of revenue for the rest of
the current 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; certain indirect taxes; litigation settlements, and allocated
overhead. We expect to increase the size of our general
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and administrative function to support the growth and complexity of our business. As a result, we expect our general and administrative expenses to increase both in absolute dollars and as a percentage of revenue for the rest of the current fiscal year.
(Losses) gains on Strategic Investments, Net
(Losses) gains on strategic investments, net consist primarily of remeasurement gains or losses on our equity investments.
Other Expense, Net
Other expense, net consists primarily of interest income and net amortization of discount/premium on our marketable securities and effect of changes in foreign currency exchange rates. Provision for Income Taxes
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 condensed consolidated statements of
operations data and such data as a percentage of revenue for each of the periods
indicated:
Three Months Ended October 31, Nine Months Ended October 31,
2022 2021 2022 2021
(in thousands)
Revenue $ 1,101,899 $ 1,050,756 $ 3,275,157 $ 3,028,488
Cost of revenue (1) 270,665 270,957 806,097 797,207
Gross profit 831,234 779,799 2,469,060 2,231,281
Operating expenses:
Research and development (1) 195,946 98,508 512,801 245,994
Sales and marketing (1) 427,747 293,698 1,191,004 810,544
General and administrative (1) 141,033 96,736 389,939 362,971
Total operating expenses 764,726 488,942 2,093,744 1,419,509
Income from operations 66,508 290,857 375,316 811,772
(Losses) gains on strategic
investments, net (6,898) 122,421 (78,014) 154,497
Other expense, net (4,861) (2,995) (8,482) (3,171)
Income before provision for income
taxes 54,749 410,283 288,820 963,098
Provision for income taxes 6,396 69,900 81,059 78,100
Net income $ 48,353 $
340,383
(1) Includes stock-based compensation expense as follows: Cost of revenue $ 41,449 $
17,206
83,202 27,879 208,654 71,615
Sales and marketing 125,144 54,220 329,100 156,888
General and administrative 53,020 15,496 120,163 41,359
Total stock-based compensation expense $ 302,815 $ 114,801 $ 767,693 $ 315,912
Three Months Ended October 31, Nine Months Ended October 31,
2022 2021 2022 2021
(as a percentage of revenue)
Revenue 100.0 % 100.0 % 100.0 % 100.0 %
Cost of revenue 24.6 25.8 24.6 26.3
Gross profit 75.4 74.2 75.4 73.7
Operating expenses:
Research and development 17.8 9.4 15.7 8.1
Sales and marketing 38.8 28.0 36.4 26.8
General and administrative 12.8 9.1 11.8 12.0
Total operating expenses 69.4 46.5 63.9 46.9
Income from operations 6.0 27.7 11.5 26.8
(Losses) gains on strategic
investments, net (0.6) 11.7 (2.4) 5.1
Other expense, net (0.4) (0.4) (0.3) (0.1)
Income before provision for income
taxes 5.0 39.0 8.8 31.8
Provision for income taxes 0.6 6.7 2.5 2.6
Net income 4.4 % 32.3 % 6.3 % 29.2 %
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Comparison of the Three Months Ended
Revenue
Three Months Ended October 31,
2022 2021 % Change
(in thousands)
Revenue $ 1,101,899 $ 1,050,756 4.9 %
Revenue for the three months ended October 31, 2022 increased by $51.1 million ,
or 4.9%, compared to the three months ended October 31, 2021 . The increase in
revenue was due to a 20% increase in revenue from subscription services provided
to Enterprise customers, of which 74% and 26% were from existing and new
customers, respectively. This increase was partially offset by a 9% decline in
revenue from subscription services provided to Online customers.
Cost of Revenue
Three Months Ended October 31,
2022 2021 % Change
(in thousands)
Cost of revenue $ 270,665 $ 270,957 (0.1) %
Gross profit 831,234 779,799 6.6 %
Gross margin 75.4 % 74.2 %
Cost of revenue for the three months ended October 31, 2022 decreased by
$0.3 million , or 0.1%, compared to the three months ended October 31, 2021 . The
decrease was primarily due to a decrease of $48.0 million in costs mainly driven
by the net impact of the transition from third-party cloud hosting to internal
data centers and cloud optimization offset by an increase of $35.9 million in
personnel-related expenses, which includes an increase of $24.2 million in
stock-based compensation expense, mainly driven by additional headcount and
expanded equity programs, and an increase of $6.6 million related to
subscription to software-based services.
Gross margin increased to 75.4% for the three months ended October 31, 2022 from
74.2% for the three months ended October 31, 2021 . The increase in gross margin
was mainly due to increased efficiencies as we expanded our internal data center
capacity.
Operating Expenses
Research and Development
Three Months Ended October 31,
2022 2021 % Change
(in thousands)
Research and development $ 195,946 $ 98,508 98.9 %
Research and development expense for the three months ended October 31, 2022
increased by $97.4 million , or 98.9%, compared to the three months ended
October 31, 2021 . The increase was primarily due to higher personnel-related
expenses of $92.8 million , which includes a $55.3 million increase in
stock-based compensation expense, mainly driven by additional headcount and
expanded equity programs.
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Sales and Marketing
Three Months Ended October 31,
2022 2021 % Change
(in thousands)
Sales and marketing $ 427,747 $ 293,698 45.6 %
Sales and marketing expense for the three months ended October 31, 2022
increased by $134.0 million , or 45.6%, compared to the three months ended
October 31, 2021 . The increase in sales and marketing expense was primarily due
to higher personnel-related expenses of $107.6 million , mainly driven by
additional headcount and expanded equity programs, which includes a
$70.9 million increase in stock-based compensation expense and a $20.8 million
increase in amortization of deferred contract acquisition costs driven by our
increase in revenue. The remaining increase was primarily due to an increase of
$15.6 million in marketing and sales event-related costs, mainly due to an
increase in social media programs and international marketing.
General and Administrative
Three Months Ended October 31,
2022 2021 % Change
(in thousands)
General and administrative $ 141,033 $ 96,736 45.8 %
General and administrative expense for the three months ended October 31, 2022
increased by $44.3 million , or 45.8%, compared to the three months ended
October 31, 2021 . The increase in general and administrative expense was
primarily due to an increase of $47.8 million in personnel-related expenses,
which includes a $37.5 million increase in stock-based compensation expense,
mainly driven by additional headcount and expanded equity programs.
(Losses) Gains on Strategic Investments, Net
Three Months Ended October 31,
2022 2021 % Change
(in thousands)
(Losses) gains on strategic investments, net
$ 122,421 (105.6) % Losses on strategic investments, net recognized during the three months endedOctober 31, 2022 was mainly driven by$7.5 million unrealized losses recognized on our publicly traded equity securities, while gains on strategic investments, net, of$122.4 million recognized during the three months endedOctober 31, 2021 was driven by unrealized gains recognized on our publicly traded equity securities. Other Expense, Net Three Months Ended October 31, 2022 2021 % Change (in thousands) Other expense, net$ (4,861) $ (2,995) 62.3 % Other expense, net for the three months endedOctober 31, 2022 increased by$1.9 million , or 62.3%, compared to the three months endedOctober 31, 2021 . The increase was primarily due to a loss of$16.4 million related to changes in foreign currency exchange rates, partially offset by$7.6 million net accretion on our investments in marketable securities and$6.9 million interest income earned from our investments in marketable securities. 33
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Provision for Income Taxes
Three Months Ended October 31,
2022 2021 % Change
(in thousands)
Provision for income taxes $ 6,396 $ 69,900 (90.8) %
Provision for income taxes for the three months ended October 31, 2022 decreased
by $63.5 million , or 90.8%, compared to the three months ended October 31, 2021 .
The change was due primarily to the foreign-derived intangible income deduction
for the three months ended October 31, 2022 .
Comparison of the Nine Months Ended
Revenue
Nine Months Ended October 31,
2022 2021 % Change
(in thousands)
Revenue $ 3,275,157 $ 3,028,488 8.1 %
Revenue for the nine months ended October 31, 2022 increased by $246.7 million ,
or 8.1%, compared to the nine months ended October 31, 2021 . The increase in
revenue was due to a 26% increase in revenue from subscription services provided
to Enterprise customers, of which 84% and 16% were from existing and new
customers, respectively. This increase was partially offset by a 7% decline in
revenue from subscription services provided to Online customers.
Cost of Revenue
Nine Months Ended October 31,
2022 2021 % Change
(in thousands)
Cost of revenue $ 806,097 $ 797,207 1.1 %
Gross profit $ 2,469,060 $ 2,231,281 10.7 %
Gross margin 75.4 % 73.7 %
Cost of revenue for the nine months ended October 31, 2022 increased by
$8.9 million , or 1.1%, compared to the nine months ended October 31, 2021 . The
increase was primarily due to an increase of $98.6 million in personnel-related
expenses, which includes an increase of $63.7 million in stock-based
compensation expense, mainly driven by additional headcount and expanded equity
programs, an increase of $25.0 million related to subscription to software-based
services and an increase in allocated overhead of $5.8 million , partially offset
by a decrease of $125.8 million in costs mainly driven by the net impact of the
transition from third-party cloud hosting to internal data centers and cloud
optimization.
Gross margin increased to 75.4% for the nine months ended October 31, 2022 from
73.7% for the nine months ended October 31, 2021 . The increase in gross margin
was mainly due to increased efficiencies as we expanded our internal data center
capacity.
Operating Expenses
Research and Development
Nine Months Ended October 31,
2022 2021 % Change
(in thousands)
Research and development $ 512,801 $ 245,994 108.5 %
Research and development expense for the nine months ended
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Sales and Marketing
Nine Months Ended October 31,
2022 2021 % Change
(in thousands)
Sales and marketing $ 1,191,004 $ 810,544 46.9 %
Sales and marketing expense for the nine months ended October 31, 2022 increased
by $380.5 million , or 46.9%, compared to the nine months ended October 31, 2021 .
The increase in sales and marketing expense was primarily due to higher
personnel-related expenses of $285.7 million , mainly driven by additional
headcount and expanded equity programs, which includes a $172.2 million increase
in stock-based compensation expense and a $60.9 million increase in amortization
of deferred contract acquisition costs. The remaining increase was primarily due
to an increase of $68.6 million in marketing and sales event-related costs,
mainly due to an increase in digital and social media programs, and an increase
in allocated overhead of $9.7 million .
General and Administrative
Nine Months Ended October 31,
2022 2021 % Change
(in thousands)
General and administrative $ 389,939 $ 362,971 7.4 %
General and administrative expense for the nine months ended October 31, 2022
increased by $27.0 million , or 7.4%, compared to the nine months ended
October 31, 2021 . The increase in general and administrative expense was
primarily due to an increase of $113.6 million in personnel-related expenses,
which includes a $78.8 million increase in stock-based compensation expense,
mainly driven by additional headcount and expanded equity programs offset by a
decrease of $71.1 million in prior year litigation settlement expense, net of
amounts estimated to be covered by insurance, and a decrease of $9.2 million
related to the settlement of a contingent liability for sales and other indirect
tax in the current period.
(Losses) Gains on Strategic Investments, Net
Nine Months Ended October 31,
2022 2021 % Change
(in thousands)
(Losses) gains on strategic investments, net
$ 154,497 (150.5) % Losses on strategic investments, net recognized during the nine months endedOctober 31, 2022 was mainly driven by$76.4 million unrealized losses recognized on our publicly traded equity securities, while gains on strategic investments, net, of$154.5 million recognized during the nine months endedOctober 31, 2021 was driven by unrealized gains recognized on our publicly traded equity securities. Other Expense, Net Nine Months Ended October 31, 2022 2021 % Change (in thousands) Other expense, net$ (8,482) $ (3,171) 167.5 % Other expense, net for the nine months endedOctober 31, 2022 increased by$5.3 million , or 167.5%, compared to the nine months endedOctober 31, 2021 . The increase was primarily attributable to a loss of$29.2 million related to changes in foreign currency exchange rates, partially offset by$14.1 million net accretion on our investments in marketable securities and$9.8 million interest income earned from our investments in marketable securities. 35
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Provision for Income Taxes
Nine Months Ended October 31,
2022 2021 % Change
(in thousands)
Provision for income taxes $ 81,059 $ 78,100 3.8 %
Provision for income taxes for the nine months ended October 31, 2022 increased
by $3.0 million , or 3.8%, compared to the nine months ended October 31, 2021 .
The change was due primarily to tax shortfalls on stock-based compensation and
other compensation-related permanent differences as of October 31, 2022 compared
to tax windfalls on stock-based compensation and the full valuation allowance on
the U.S. deferred tax assets as of October 31, 2021 , which was released in the
fourth quarter of fiscal year 2022.
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. There have been no material changes to our material cash requirements from known contractual and other obligations from those disclosed in our Management's Discussion and Analysis of Financial Condition and Results of Operations, included in our Annual Report on Form 10-K for the year endedJanuary 31, 2022 , filed with theSEC onMarch 7, 2022 .
Cash Flows
The following table summarizes our cash flows for the periods presented:
Nine Months Ended October 31,
2022 2021
(in thousands)
Net cash provided by operating activities $ 1,078,674 $ 1,395,870
Net cash used in investing activities $ (60,613) $ (2,367,098)
Net cash (used in) provided by financing activities $ (948,687) $ 20,885
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.
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Net cash provided by operating activities was$1,078.7 million for the nine months endedOctober 31, 2022 , compared to$1,395.9 million for the nine months endedOctober 31, 2021 . The decrease in operating cash flow was due to a decrease in net income of$677.2 million and the negative impact from changes in operating assets and liabilities of$452.2 million , offset by an increase in non-cash adjustments of$812.2 million , which is primarily a result of higher stock-based compensation expense, higher losses on strategic investments, net, and higher deferred contract acquisition cost amortization due to an increase in capitalized commissions as we continue to grow and expand our customer base.
Investing Activities
Net cash used in investing activities of$60.6 million for the nine months endedOctober 31, 2022 was primarily due to net maturities of marketable securities of$210.8 million , offset by the cash paid for acquisition, net of cash acquired, of$120.6 million , purchases of strategic investments of$65.1 million , purchases of property and equipment of$75.6 million and purchases of intangible assets of$10.6 million . Net cash used in investing activities of$2,367.1 million for the nine months endedOctober 31, 2021 was primarily due to net purchases of marketable securities of$2,117.2 million , purchases of strategic investments of$126.3 million , and purchases of property and equipment of$111.8 million , and purchases of intangible assets of$9.6 million .
Financing Activities
Net cash used in financing activities of$948.7 million for the nine months endedOctober 31, 2022 was primarily due to cash paid for repurchases of common stock of$990.8 million offset by proceeds from issuance of common stock under our ESPP of$34.6 million . Net cash provided by financing activities of$20.9 million for the nine months endedOctober 31, 2021 was primarily due to proceeds from issuance of common stock under our ESPP of$37.8 million and proceeds from the exercise of stock options of$11.0 million , offset by proceeds from employee equity transactions remitted to employees and tax authorities, net, of$28.3 million .
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.
There have been no material changes to our critical accounting estimates as
compared to the critical accounting estimates described in our Management's
Discussion and Analysis of Financial Condition and Results of Operations,
included in our Annual Report on Form 10-K for the year ended
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