ZOOM VIDEO COMMUNICATIONS, INC.
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
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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.
We provide a communications platform that delivers happiness and helps our users
express ideas and connect to others. We connect people through our unified
communications, developer, and events platform. Our platform is chosen by
enterprises around the globe because it is reliable; scalable; secure; easy to
deploy, use, and manage; provides an attractive return on investment; and
integrates with a vast ecosystem of applications and physical spaces. 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 22 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 communications
platform. Subscription revenue is driven primarily by the number of paid hosts
as well as purchases of additional products, including Zoom Rooms, Zoom Video
Webinars, Zoom Phone, Zoom Events, 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 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
offer Regional Unlimited and Regional Metered calling plans in three specific
markets (United States /Canada , United Kingdom /Ireland , and Australia /New
Zealand ). 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 45 countries and territories where Zoom has local public switched telephone
network ("PSTN") coverage. In addition, the Zoom United plan launched in
December 2020 provides a single license for customers to purchase Zoom Phone,
Meetings and chat capabilities as a bundled offering.
Our revenue was $1,021.5 million and $663.5 million for the three months ended
July 31, 2021 and 2020, respectively, representing a period-over-period growth
rate of 54%. We had net income of $317.1 million and $186.0 million for the
three months ended July 31, 2021 and 2020, respectively. Our revenue was
$1,977.7 million and $991.7 million for the six months ended July 31, 2021 and
2020, respectively, representing a period-over-period growth rate of 99%. We had
net income of $544.6 million and $213.1 million for the six months ended
July 31, 2021 and 2020, respectively. Net cash provided by operating activities
was $1,001.3 million and $660.3 million for the six months ended July 31, 2021
and 2020, respectively.
Recent Developments
On July 16, 2021 , we entered into an Agreement and Plan of Merger (the "Merger
Agreement") to acquire Five9, Inc. ("Five9"), a leading provider of the
intelligent cloud contact center. Under the terms of the Merger Agreement, each
issued and outstanding share of Five9 common stock will be converted into the
right to receive 0.5533 shares of our Class A common stock. The transaction,
which is anticipated to close in the first half of calendar year 2022, is
subject to approval by Five9 stockholders, the receipt of required regulatory
approvals, and other customary closing conditions.
Impact of the COVID-19 Pandemic
In March 2020 , the World 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
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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, 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
personnel who 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 enterprise 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,
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 subscribers who 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 in customers with more than 10 employees was
greater than 130% as of July 31, 2021 and 2020.
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 Video 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 in three new countries and territories thus far in fiscal
year 2022, bringing the total to 47. Third-party
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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. Zoom's E2EE
uses the same AES-256-GCM encryption that secures Zoom meetings by default, but
with Zoom's new E2EE, the meeting host generates encryption keys and uses public
key cryptography to distribute these keys to the other meeting participants.
In October 2020 , we introduced two additions to the Zoom platform: OnZoom and
Zoom Apps. OnZoom is an online event platform for Zoom users to create and host
free, paid, and fundraising events. OnZoom is currently offered as a public beta
for U.S. users to attend online events. Zoom Apps, which became generally
available in July 2021 , is a new type of in-product integration that lets users
bring their apps into Zoom Meetings to make their meetings more efficient and
engaging.
In July 2021 , we introduced Zoom Events. Zoom Events provides everything users
need to build, host, and manage a virtual or hybrid event. Its capabilities
include branded event hubs, multi-session events, chat-based attendee
networking, and customizable ticketing and registration.
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% and 31% of our total revenue for the three
months ended July 31, 2021 and 2020, respectively, and 33% and 29% of our total
revenue for the six months ended July 31, 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.
Key Business Metrics
We review 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 of
July 31, 2021 and 2020, we had approximately 504,900 and 370,200 customers,
respectively, with more than 10 employees. When disclosing the number of
customers, we round down to the nearest hundred.
Customers Contributing More Than $100,000 of Trailing 12 Months Revenue
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 20% and 17% of total revenue for the three months ended
July 31, 2021 and 2020, respectively, and 20% and 20% of total revenue for the
six months ended July 31, 2021 and 2020, respectively. As of July 31, 2021 and
2020, we had 2,278 and 988 customers, respectively, that contributed more than
$100,000 of trailing 12 months revenue, demonstrating our rapid penetration of
larger organizations, including enterprises. These customers are a subset of the
customers with more than 10 employees.
Non-GAAP Financial Measure
In addition to our results determined in accordance with GAAP, we believe that
free cash flow ("FCF"), a non-GAAP financial measure, is useful in evaluating
our liquidity.
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Free Cash Flow
We define FCF as GAAP net cash provided by operating activities less purchases
of property and equipment. We believe that FCF is a useful indicator of
liquidity that provides information to management and investors about the amount
of cash generated from our operations that, after investments in property and
equipment, can be used for future growth. FCF is presented for supplemental
informational purposes only, has limitations as an analytical tool, and should
not be considered in isolation or as a substitute for analysis of other GAAP
financial measures, such as net cash provided by operating activities. It is
important to note that other companies, including companies in our industry, may
not use this metric, may calculate this metric differently, or may use other
financial measures to evaluate their liquidity, all of which could reduce the
usefulness of this non-GAAP metric as a comparative measure.
The following table presents a summary of our cash flows for the periods
presented and a reconciliation of FCF to net cash provided by operating
activities, the most directly comparable financial measure calculated in
accordance with GAAP:
Six Months Ended July 31,
2021 2020
(in thousands)
Net cash provided by operating activities
Less: purchases of property and equipment (92,049)
(35,253)
Free cash flow (non-GAAP)$ 909,265 $
625,058
Net cash used in investing activities
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 stemming from the COVID-19 pandemic.
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 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
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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; 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 administrative expenses to increase both in absolute
dollars and as a percentage of revenue for the rest of the current fiscal year.
Gains on Strategic Investments
Gains on strategic investments consist of remeasurement gains or losses on our
equity investments.
Interest Income and Other, Net
Interest income and other, net consists primarily of interest income and net
accretion 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 July 31, Six Months Ended July 31,
2021 2020 2021 2020
(in thousands)
Revenue $ 1,021,495 $ 663,520 $ 1,977,732 $ 991,687
Cost of revenue (1) 261,256 192,271 526,250 295,978
Gross profit 760,239 471,249 1,451,482 695,709
Operating expenses:
Research and development (1) 82,311 42,734 147,486 69,123
Sales and marketing (1) 271,179 159,173 516,846 280,729
General and administrative (1) 112,146 81,238 266,235 134,368
Total operating expenses 465,636 283,145 930,567 484,220
Income from operations 294,603 188,104 520,915 211,489
Gains on strategic investments 32,076 - 32,076 2,538
Interest income and other, net (2,795) 2,081 (176) 5,333
Income before provision for income
taxes 323,884 190,185 552,815 219,360
Provision for income taxes 6,800 4,196 8,200 6,296
Net income $ 317,084 $ 185,989 $ 544,615 $ 213,064
(1) Includes stock-based compensation
expense as follows:
Cost of revenue $ 14,778 $ 7,727 $ 28,844 $ 10,976
Research and development 22,917 10,010 43,736 15,234
Sales and marketing 50,856 32,398 102,668 49,521
General and administrative 13,591 6,720 25,863 9,901
Total stock-based compensation expense
$ 201,111 $ 85,632 Three Months Ended July 31, Six Months Ended July 31, 2021 2020 2021 2020 (as a percentage of revenue) Revenue 100 % 100 % 100 % 100 % Cost of revenue 26 29 27 30 Gross profit 74 71 73 70 Operating expenses: Research and development 8 7 7 7 Sales and marketing 26 24 26 28 General and administrative 11 12 14 14 Total operating expenses 45 43 47 49 Income from operations 29 28 26 21 Gains on strategic investments 3 - 2 0 Interest income and other, net 0 1 0 1 Income before provision for income taxes 32 29 28 22 Provision for income taxes 1 1 0 1 Net income 31 % 28 % 28 % 21 % 30
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Table of Contents Comparison of the Three Months EndedJuly 31, 2021 and 2020 Revenue Three Months Ended July 31, 2021 2020 % Change (in thousands) Revenue$ 1,021,495 $ 663,520 54 % Revenue for the three months endedJuly 31, 2021 increased by$358.0 million , or 54%, compared to the three months endedJuly 31, 2020 . The increase in revenue was due to a combination of subscription services provided to new customers, which accounted for approximately 74% of the increase, and subscription services provided to existing customers, which accounted for approximately 26% of the increase. Cost of Revenue Three Months Ended July 31, 2021 2020 % Change (in thousands) Cost of revenue$ 261,256 $ 192,271 36 % Gross profit 760,239 471,249 61 % Gross margin 74 % 71 % Cost of revenue for the three months endedJuly 31, 2021 increased by$69.0 million , or 36%, compared to the three months endedJuly 31, 2020 . 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 continued to experience an 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$33.0 million in costs related to third-party cloud hosting and our co-located data centers to support the increase in customers and expanded use of our communications platform by existing and new customers. The remaining increase was primarily due to an increase of$25.1 million in personnel-related expenses, which includes an increase of$7.1 million in stock-based compensation expense, mainly driven by additional headcount, and an increase of$6.6 million related to subscription to software-based services. Gross margin increased to 74% for the three months endedJuly 31, 2021 from 71% for the three months endedJuly 31, 2020 . The increase in gross margin was mainly due to increased efficiencies as we expanded our data center capacity to accommodate the increased usage as well as lower rates from third-party cloud hosting providers. Operating Expenses Research and Development Three Months Ended July 31, 2021 2020 % Change (in thousands) Research and development$ 82,311 $ 42,734 93 % Research and development expense for the three months endedJuly 31, 2021 increased by$39.6 million , or 93%, compared to the three months endedJuly 31, 2020 . The increase was primarily due to higher personnel-related expenses of$40.1 million , which includes a$12.9 million increase in stock-based compensation expense, mainly driven by additional headcount. 31 --------------------------------------------------------------------------------
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Sales and Marketing
Three Months Ended July 31,
2021 2020 % Change
(in thousands)
Sales and marketing $ 271,179 $ 159,173 70 %
Sales and marketing expense for the three months ended July 31, 2021 increased
by $112.0 million , or 70%, compared to the three months ended July 31, 2020 . The
increase in sales and marketing expense was primarily due to higher
personnel-related expenses of $73.1 million , mainly driven by additional
headcount in our sales force to support increased demand, which includes a
$18.5 million increase in stock-based compensation expense and a $17.1 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
$26.5 million in marketing and sales event-related costs, mainly due to an
increase in digital programs, and an increase of $3.4 million in credit card
processing fees as a result of increased online payments.
General and Administrative
Three Months Ended July 31,
2021 2020 % Change
(in thousands)
General and administrative $ 112,146 $ 81,238 38 %
General and administrative expense for the three months ended July 31, 2021
increased by $30.9 million , or 38%, compared to the three months ended July 31,
2020 . The increase in general and administrative expense was primarily due to an
increase of $20.6 million in professional services consisting primarily of legal
and other professional service fees; an increase of $20.2 million in
personnel-related expenses, which includes a $6.9 million increase in
stock-based compensation expense, mainly driven by additional headcount; an
increase of $9.1 million related to subscription to software-based services; and
an increase of $8.6 million in expenses related to mergers and strategic
investments; partially offset by a decrease of $23.1 million in charitable
donation related mainly to shares transferred to a donor advised fund.
Gains on Strategic Investments
Three Months Ended July 31,
2021 2020 % Change
(in thousands)
Gains on strategic investments $ 32,076 $ - 100 %
Gains on strategic investments of
Three Months Ended July 31,
2021 2020 % Change
(in thousands)
Interest income and other, net $ (2,795) $ 2,081 (234) %
Interest income and other, net for the three months endedJuly 31, 2021 decreased by$4.9 million , or 234%, compared to the three months endedJuly 31, 2020 . The decrease was primarily attributable to a loss of$4.4 million related to changes in foreign currency exchange rates. 32 --------------------------------------------------------------------------------
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Provision for Income Taxes
Three Months Ended July 31,
2021 2020 % Change
(in thousands)
Provision for income taxes $ 6,800 $ 4,196 62 %
Provision for income taxes for the three months ended July 31, 2021 increased by
$2.6 million , or 62%, compared to the three months ended July 31, 2020 . The
change was primarily due to increases in global income and decreases in
stock-based compensation deductions for tax purposes. Our calculation of income
tax expense is dependent in part on forecasts of full-year results.
Comparison of the Six Months Ended July 31, 2021 and 2020
Revenue
Six Months Ended July 31,
2021 2020 % Change
(in thousands)
Revenue $ 1,977,732 $ 991,687 99 %
Revenue for the six months ended July 31, 2021 increased by $986.0 million , or
99%, compared to the six months ended July 31, 2020 . The increase in revenue was
due to a combination of subscription services provided to existing customers,
which accounted for approximately 51% of the increase, and subscription services
provided to new customers, which accounted for approximately 49% of the
increase.
Cost of Revenue
Six Months Ended July 31,
2021 2020 % Change
(in thousands)
Cost of revenue $ 526,250 $ 295,978 78 %
Gross profit 1,451,482 695,709 109 %
Gross margin 73 % 70 %
Cost of revenue for the six months ended July 31, 2021 increased by
$230.3 million , or 78%, compared to the six months ended July 31, 2020 . 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 continued
to experience an 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 $153.7 million in costs related to third-party cloud
hosting and our co-located data centers to support the increase in customers and
expanded use of our communications platform by existing and new customers. The
remaining increase was primarily due to an increase of $49.7 million in
personnel-related expenses, which includes an increase of $17.9 million in
stock-based compensation expense, mainly driven by additional headcount; an
increase of $10.7 million related to subscription to software-based services;
and an increase of $8.5 million in professional services, mainly for customer
support.
Gross margin increased to 73% for the six months ended July 31, 2021 from 70%
for the six months ended July 31, 2020 . 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.
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Operating Expenses
Research and Development
Six Months Ended July 31,
2021 2020 % Change
(in thousands)
Research and development $ 147,486 $ 69,123 113 %
Research and development expense for the six months ended July 31, 2021
increased by $78.4 million , or 113%, compared to the six months ended July 31,
2020 . The increase was primarily due to higher personnel-related expenses of
$76.2 million , which includes a $28.5 million increase in stock-based
compensation expense, mainly driven by additional headcount.
Sales and Marketing
Six Months Ended July 31,
2021 2020 % Change
(in thousands)
Sales and marketing $ 516,846 $ 280,729 84 %
Sales and marketing expense for the six months ended July 31, 2021 increased by
$236.1 million , or 84%, compared to the six months ended July 31, 2020 . The
increase in sales and marketing expense was primarily due to higher
personnel-related expenses of $164.8 million , mainly driven by additional
headcount in our sales force to support increased demand, which includes a
$53.1 million increase in stock-based compensation expense and a $38.6 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
$31.6 million in marketing and sales event-related costs, mainly due to an
increase in digital and social media programs and an increase of $17.3 million
in credit card processing fees as a result of increased online payments.
General and Administrative
Six Months Ended July 31,
2021 2020 % Change
(in thousands)
General and administrative $ 266,235 $ 134,368 98 %
General and administrative expense for the six months ended July 31, 2021
increased by $131.9 million , or 98%, compared to the six months ended July 31,
2020 . The increase in general and administrative expense was primarily due to an
increase of $66.9 million in litigation settlement expense, net of amounts
estimated to be covered by insurance; an increase of $42.8 million in
personnel-related expenses, which includes a $16.0 million increase in
stock-based compensation expense, mainly driven by additional headcount; an
increase of $35.3 million in professional services consisting primarily of legal
and other professional service fees; an increase of $18.2 million related to
subscription to software-based services; and an increase of $7.9 million in
expenses related to mergers and strategic investments; partially offset by a
decrease of $25.3 million in charitable donation related mainly to shares
transferred to a donor advised fund and a decrease of $10.3 million related to a
contingent liability for sales and other indirect tax.
Gains on Strategic Investments
Six Months Ended July 31,
2021 2020 % Change
(in thousands)
Gains on strategic investments $ 32,076 $ 2,538 1,164 %
Gains on strategic investments of$32.1 million recognized during the six months endedJuly 31, 2021 was driven by unrealized gains recognized on our publicly traded equity securities, while we had gains on strategic investments of$2.5 million recognized during the six months endedJuly 31, 2020 . 34 -------------------------------------------------------------------------------- Table of Contents Interest Income and Other, Net Six Months Ended July 31, 2021 2020 % Change (in thousands) Interest income and other, net$ (176) $ 5,333
(103) %
Interest income and other, net for the six months endedJuly 31, 2021 decreased by$5.5 million , or 103%, compared to the six months endedJuly 31, 2020 . The decrease was primarily attributable to a loss of$5.6 million related to changes in foreign currency exchange rates. Provision for Income Taxes Six Months Ended July 31, 2021 2020 % Change (in thousands) Provision for income taxes$ 8,200 $ 6,296
30 %
Provision for income taxes for the six months endedJuly 31, 2021 increased by$1.9 million , or 30%, compared to the six months endedJuly 31, 2020 . The change was primarily due to increases in global income and decreases in stock-based compensation deductions for tax purposes. Our calculation of income tax expense is dependent in part on forecasts of full-year results. Liquidity and Capital Resources As ofJuly 31, 2021 , our principal sources of liquidity were cash, cash equivalents, and marketable securities of$5.1 billion , which were held for working capital purposes and for investment in growth opportunities. Our marketable securities generally consist of high-grade commercial paper, corporate bonds, agency bonds, corporate and other debt securities,U.S. government agency securities, and treasury bills. 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. 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. 35 -------------------------------------------------------------------------------- Table of Contents Cash Flows The following table summarizes our cash flows for the periods presented: Six Months Ended July 31, 2021 2020 (in thousands) Net cash provided by operating activities$ 1,001,314 $ 660,311 Net cash used in investing activities$ (1,364,182) $ (235,561) Net cash provided by financing activities$ 65,104 $ 272,642 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 affected by our net income adjusted for certain non-cash items, such as stock-based compensation expense and depreciation and amortization expenses, as well as the effect of changes in operating assets and liabilities. Net cash provided by operating activities was$1,001.3 million for the six months endedJuly 31, 2021 , compared to$660.3 million for the six months endedJuly 31, 2020 . The increase in operating cash flow was due to an increase in net income of$331.6 million and an increase in non-cash adjustments of$126.7 million , which is primarily a result of higher stock-based compensation expense and higher deferred contract acquisition cost amortization due to an increase in capitalized commissions as we continue to grow and expand our customer base, offset by the negative impact from changes in operating assets and liabilities of$117.3 million . Investing Activities Net cash used in investing activities of$1,364.2 million for the six months endedJuly 31, 2021 was due to net purchases of marketable securities of$1,183.1 million , purchases of property and equipment of$92.0 million , purchases of strategic investments of$86.9 million , and cash paid for acquisition, net of cash acquired, of$2.1 million . Net cash used in investing activities of$235.6 million for the six months endedJuly 31, 2020 was primarily due to net purchases of marketable securities of$160.6 million , purchases of property and equipment of$35.3 million , cash paid for acquisition, net of cash acquired, of$26.5 million , and purchases of strategic investments of$13.0 million . Financing Activities Net cash provided by financing activities of$65.1 million for the six months endedJuly 31, 2021 was primarily due to proceeds from issuance of common stock under our ESPP of$37.8 million , proceeds from employee equity transactions to be remitted to employees and tax authorities, net, of$18.9 million , and proceeds from the exercise of stock options of$8.0 million . Net cash provided by financing activities of$272.6 million for the six months endedJuly 31, 2020 was due to proceeds from employee equity transactions to be remitted to employees and tax authorities, net, of$234.5 million , proceeds from issuance of common stock under our ESPP of$20.8 million , and proceeds from the exercise of stock options of$17.4 million . Commitments and Contractual Obligations There have been no material changes to our contractual obligations and commitments 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, 2021 , filed with theSEC onMarch 18, 2021 . 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 theSEC under the Securities Act. Critical Accounting Policies and Estimates Critical accounting policies and estimates are those accounting policies and estimates that are both most important to the portrayal of our net assets and results of operations and require the most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. These estimates are developed 36
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Table of Contents 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 is 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 policies and estimates as compared to the critical accounting policies and 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 endedJanuary 31, 2021 , filed with theSEC onMarch 18, 2021 .
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