ZUORA, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Form 10-Q and our Annual Report on Form 10-K for the fiscal year endedJanuary 31, 2021 filed with theSecurities and Exchange Commission (SEC) onMarch 31, 2021 (Annual Report). As discussed in the section titled "Special Note Regarding Forward-Looking Statements," the following discussion and analysis contains forward-looking statements that involve risks and uncertainties, including, but not limited to, risks and uncertainties related to the impact of the COVID-19 pandemic on our business, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those identified below and those discussed in the section titled "Risk Factors" under Part II, Item 1A in this Form 10-Q and in our Annual Report. Our fiscal year ends onJanuary 31 . OverviewZuora provides a cloud-based subscription management platform, architected specifically for dynamic, recurring business models. Our solution enables companies across multiple industries and geographies to launch, manage and scale a subscription business, automating the entire subscription quote-to-revenue process, including billing, collections and revenue recognition. WithZuora's solution, businesses can change pricing and packaging for products and services to grow and scale, efficiently comply with revenue recognition standards, analyze customer data to optimize their subscription offerings, and build meaningful relationships with their subscribers. Many of today's enterprise software systems manage their quote-to-revenue processes using software built for a product driven economy. These systems were not designed for the dynamic, ongoing nature of subscription services and are extremely difficult to configure. In traditional product-based businesses, order-to-revenue was a linear process-a customer orders a product, is billed for that product, payment is collected, and the revenue is recognized. These legacy product-based systems were not specifically designed to handle the complexities and ongoing customer events of recurring relationships, commonly found in a subscription business, and their impact on areas such as billing proration, revenue recognition, and reporting in real-time. Using product-based software to build a subscription business often results in inefficient processes with prolonged and complex manual downstream work, hard-coded customizations, and a proliferation of stock-keeping units (SKUs). However, new subscription business models are inherently dynamic, with multiple interactions and constantly-changing relationships and events. The capabilities to launch, price, and bill for products, facilitate and record cash receipts, process and recognize revenue, and analyze data to drive key decisions are mission critical and particularly complex for companies with subscription business models. As a result, as companies launch or grow a subscription business, they often conclude that legacy systems are inadequate. That's whereZuora comes in. Our vision is "The World Subscribed" -- the idea that one day every company will be a part of the Subscription Economy. Our focus has been on developing software that enables our customers to thrive as a subscription business. Our solution includes Zuora Central Platform, Zuora Billing, Zuora Revenue, Zuora Collect, and other software that support and expand upon these core products. Our software helps companies analyze data - including information such as which customers are delivering the most recurring revenue, or which segments are showing the highest churn, enabling customers to make informed decisions for their subscription business and quickly implement changes such as launching new services, updating pricing (usage, time, or outcome based), delivering new offerings, or making other changes to their customers' subscription experience. We also have a large subscription ecosystem of global partners and theSubscribed Strategy Group , that can assist our customers with additional strategies and services throughout the subscription journey. Companies in a variety of industries - technology, manufacturing, media and entertainment, telecommunications, and many others - are using our solution to scale and adapt to a world that is increasingly choosing subscription-based offerings. 20 -------------------------------------------------------------------------------- COVID-19 Pandemic Impact The COVID-19 pandemic has caused certain disruptions to our business operations-such as delays and lengthening of our customary sales cycles and postponed implementations, certain customers not purchasing or renewing our products or services, requests for extended payment terms and contract restructurings by certain customers more severely impacted by the pandemic, challenges in sales and customer success efforts due to travel restrictions, and shifting certain customer events to virtual-only experiences. During the nine months endedOctober 31, 2021 , we experienced fewer disruptions including customer loss, down-sells, customer requests for extended payment terms and other relief due to the COVID-19 pandemic as compared to the prior year. We believe that such COVID-related disruptions experienced thus far have not had a material impact on our overall financial results to date in fiscal 2022. However, because our financial results are driven by multiple factors, some of which are not quantifiable, it is not possible to determine the significance of the specific impact of the COVID-19 pandemic on our financial results in any given period. Because our products are generally offered as subscription-based licenses and a portion of that revenue is recognized over time, the effect of the pandemic may not be fully reflected in our operating results until future periods. The extent to which the COVID-19 pandemic impacts our business operations in future periods will depend on multiple uncertain factors, including the duration and severity of the pandemic, developments related to COVID-19 variants and vaccine efficacy, the pandemic's overall negative impact on the global economy generally and on our customers, which operate in numerous industries, and continued responses by governments and businesses to COVID-19. We are continuing to monitor the impact of the COVID-19 pandemic on our business operations and financial results. Last fiscal year, we implemented plans to manage our costs in certain areas such as travel, events, and marketing and reduced our pace of hiring while continuing to prioritize new headcount critical to operations, sales and customer support. During the nine months endedOctober 31, 2021 , we increased our pace of hiring and investments in our operations including sales, marketing and product technology. We currently intend to continue these investments, but to the extent any business disruption continues for an extended period, additional cost management actions may be considered. The uncertainty surrounding the COVID-19 pandemic, including developments related to COVID-19 variants and vaccine efficacy, and its impact on the global economy could also lead to a more significant adverse impact on our business operations and financial performance in the future. The COVID-19 pandemic and its impact on us and the economy may limit our ability to accurately forecast our future operating results, including our ability to predict revenue and expense levels, and plan for and model future operating results. Our competitors could experience similar or different impacts as a result of COVID-19, which could result in changes to our competitive landscape. While we have developed and continue to develop plans to help mitigate the negative impact of the pandemic on our business, these efforts may not be effective and any protracted economic downturn could significantly affect our business and operating results. We will continue to evaluate the nature and extent of the impact of the COVID-19 pandemic on our business. See Part II, Item 1A. Risk Factors of this Quarterly Report on Form 10-Q for further discussion of the possible impact of the COVID-19 pandemic on our business and financial results. Fiscal Third Quarter Business Highlights and Recent Developments: •We closed ten deals with ACV of$500,000 or more, including two deals with ACV of$1.0 million or more. •Our dollar-based retention rate improved to 110% compared to 99% as ofOctober 31, 2020 . •Customers with ACV equal to or greater than$100,000 totaled 720 as ofOctober 31, 2021 , an increase of 10% compared to last year. •Our ARR Growth was 19% compared to 12% as ofOctober 31, 2020 . •Customer transaction volume throughZuora's billing platform was$18.8 billion as ofOctober 31, 2021 , an increase of 28% compared to last year. 21 -------------------------------------------------------------------------------- Fiscal Third Quarter Financial Performance Summary: Our financial performance for the three months endedOctober 31, 2021 compared to the three months endedOctober 31, 2020 reflects the following: •Subscription revenue was$73.8 million , an increase of$11.8 million , or 19%; and total revenue was$89.2 million , an increase of$12.0 million , or 16%. •Gross profit was$53.5 million , or 60% of total of revenue, compared to$44.0 million , or 57% of total revenue. •Loss from operations was$21.6 million , or 24% of total revenue, compared to a loss of$16.0 million , or 21% of total revenue. Key Operational and Financial Metrics We monitor the following key operational and financial metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans and make strategic decisions: Customers with Annual Contract Value (ACV) Equal to or Greater than$100,000 We believe our ability to enter into larger contracts is indicative of broader adoption of our solution by larger organizations. It also reflects our ability to expand our revenue footprint within our current customer base. We define ACV as the subscription revenue we would contractually expect to recognize from that customer over the next twelve months, assuming no increases or reductions in their subscriptions. We define the number of customers at the end of any particular period as the number of parties or organizations that have entered into a distinct subscription contract with us for which the term has not ended. Each party with which we have entered into a distinct subscription contract is considered a unique customer, and in some cases, there may be more than one customer within a single organization. We have increased the number of customers with ACV equal to or greater than$100,000 to 720 as ofOctober 31, 2021 , as compared to 653 customers as ofOctober 31, 2020 . We expect this metric to increase on a long-term basis, although it may fluctuate as we continue working to improve our overall sales motion. Dollar-Based Retention Rate We believe our dollar-based retention rate is a key measure of our ability to retain and expand revenue from our customer base over time. We calculate our dollar-based retention rate as of a period end by starting with the sum of the ACV from all customers as of twelve months prior to such period end, or prior period ACV. We then calculate the sum of the ACV from these same customers as of the current period end, or current period ACV. Current period ACV includes any upsells and also reflects contraction or attrition over the trailing twelve months, but excludes revenue from new customers added in the current period. We then divide the current period ACV by the prior period ACV to arrive at our dollar-based retention rate. Our dollar-based retention rate improved to 110% as ofOctober 31, 2021 , and while the dollar-based retention rate can fluctuate in any particular quarter, we expect it to remain relatively flat for the full current fiscal year. Our dollar-based retention rate was 99% as ofOctober 31, 2020 . Annual Recurring Revenue Growth (ARR Growth) We believe that our ARR Growth is a key measure as it is a leading indicator of subscription revenue growth from both new and existing customers. We calculate ARR Growth by dividing the annual recurring revenue (ARR) as of a period end by the ARR for the corresponding period end of the prior fiscal year. ARR represents the annualized recurring value of all active subscription contracts at the end of a reporting period and excludes the value of non-recurring revenue such as professional services revenue as well as contracts with new customers with a term of less than one year. ARR Growth is a performance metric and should be viewed independently of revenue and deferred revenue, and is not intended to be a substitute for, or combined with, any of these items. Our ARR Growth increased to 19% as ofOctober 31, 2021 and we expect our ARR Growth to remain relatively flat for the full current fiscal year. Our ARR Growth was 12% as ofOctober 31, 2020 . 22 -------------------------------------------------------------------------------- Components of Our Results of Operations
Revenue
Subscription revenue. Subscription revenue consists of fees for access to, and
use of, our products, as well as customer support. We generate subscription fees
pursuant to non-cancelable subscription agreements with terms that typically
range from one to three years. Subscription revenue is primarily based on fees
to access our services platform over the subscription term. We typically invoice
customers in advance in either annual or quarterly installments. Customers can
also elect to purchase additional volume blocks or products during the term of
the contract. We typically recognize subscription revenue ratably over the term
of the subscription period, beginning on the date that access to our platform is
provided, which is generally on or about the date the subscription agreement is
signed.
Professional services revenue. Professional services revenue consists of fees
for services related to helping our customers deploy, configure, and optimize
the use of our solutions. These services include system integration, data
migration, process enhancement, and training. Professional services projects
generally take three to twelve months to complete. Once the contract is signed,
we generally invoice for professional services on a time and materials basis,
although we occasionally engage in fixed-price service engagements and invoice
for those based upon agreed milestone payments. We recognize revenue as services
are performed for time and materials engagements and on a proportional
performance method as the services are performed for fixed fee engagements. We
expect to continue to transition a portion of our professional services
implementations to our strategic partners, including system integrators (SIs),
and as a result we expect our professional services revenue to decrease over
time as a percentage of total revenue.
Deferred Revenue
Deferred revenue consists of customer billings in advance of revenue being
recognized from our subscription and support services and professional services
arrangements. We primarily invoice our customers for subscription services
arrangements annually or quarterly in advance. Amounts anticipated to be
recognized within one year of the balance sheet date are recorded as deferred
revenue, current portion, and the remaining portion is recorded as deferred
revenue, net of current portion in our unaudited condensed consolidated balance
sheets.
Overhead Allocation and Employee Compensation Costs
We allocate shared costs, such as facilities costs (including rent, utilities,
and depreciation on capital expenditures related to facilities shared by
multiple departments), information technology costs, and certain administrative
personnel costs to all departments based on headcount and location. As such,
allocated shared costs are reflected in each cost of revenue and operating
expenses category.
Employee compensation costs consist of salaries, bonuses, commissions, benefits,
and stock-based compensation.
Cost of Revenue, Gross Profit and Gross Margin
Cost of subscription revenue. Cost of subscription revenue consists primarily of
costs related to hosting our platform and providing customer support. These
costs include data center costs and third-party hosting fees, employee
compensation costs associated with our cloud-based infrastructure and our
customer support organizations, amortization expense associated with capitalized
internal-use software and purchased technology, allocated overhead, software and
maintenance costs, and outside services associated with the delivery of our
subscription services. We intend to continue to invest in our platform
infrastructure, including third-party hosting capacity, and support
organizations. However, the level and timing of investment in these areas could
fluctuate and affect our cost of subscription revenue in the future.
Cost of professional services revenue. Cost of professional services revenue
consists primarily of costs related to the deployment of our platform. These
costs include employee compensation costs for our professional services team,
allocated overhead, travel costs, and costs of outside services associated with
supplementing our internal staff. We believe that investment in our system
integrator partner network will lead to total margin improvement, however costs
may fluctuate in the near term as we shift deployments to our partner network.
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Gross profit and gross margin. Our gross profit and gross margin may fluctuate
from period to period as our revenue fluctuates, and as a result of the timing
and amount of investments to expand hosting capacity, including through
third-party cloud providers, amortization expense associated with our
capitalized internal-use software and purchased technology, and our continued
efforts to build platform support and professional services teams.
Operating Expenses
Research and development. Research and development expense consists primarily of
employee compensation costs, allocated overhead, and travel costs. We capitalize
research and development costs associated with the development of internal-use
software and we generally amortize these costs over a period of three years into
cost of subscription revenue. All other research and development costs are
expensed as incurred. We believe that continued investment in our platform is
important for our growth, and as such, expect our research and development
expense to continue to increase in absolute dollars for the foreseeable future
but may increase or decrease as a percentage of total revenue.
Sales and marketing. Sales and marketing expense consists primarily of employee
compensation costs, including the amortization of deferred commissions related
to our sales personnel, allocated overhead, costs of general marketing and
promotional activities, and travel costs. Commission costs that are incremental
to obtaining a contract are amortized in sales and marketing expense over the
period of benefit, which is expected to be five years. We expect to continue to
make significant investments as we expand our customer acquisition and retention
efforts. Therefore, we expect that sales and marketing expense will increase in
absolute dollars but may vary as a percentage of total revenue for the
foreseeable future.
General and administrative. General and administrative expense consists
primarily of employee compensation costs, allocated overhead, and travel costs
for finance, accounting, legal, human resources, and recruiting personnel. In
addition, general and administrative expense includes non-personnel costs, such
as accounting fees, legal fees, charitable contributions and all other
supporting corporate expenses not allocated to other departments. We expect to
incur ongoing costs as a result of operating as a public company, including
costs related to compliance and reporting obligations of public companies, and
continued investment to support our growing operations. As a result, we expect
our general and administrative expense to continue to increase in absolute
dollars for the foreseeable future but may vary as a percentage of total revenue
in the near term. Over the long-term, we expect general and administrative
expense to decline as a percentage of total revenue as we realize efficiencies.
Interest and Other Income, net
Interest and other income, net primarily consists of interest income from our
short-term investments, interest expense associated with our Debt Agreement, and
foreign exchange gains and losses.
Income Tax Provision
Income tax provision consists primarily of income taxes related to foreign and
state jurisdictions in which we conduct business. We maintain a full valuation
allowance on our federal and state deferred tax assets as we have concluded that
it is more likely than not that the deferred assets will not be utilized.
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Results of Operations
The following tables set forth our unaudited condensed consolidated results of
operations for the periods presented in dollars and as a percentage of our total
revenue (in thousands):
Three Months Ended Nine Months Ended
October 31, October 31,
2021 2020 2021 2020
Revenue:
Subscription $ 73,775 $ 62,020 $ 210,415 $ 177,228
Professional services 15,455 15,226 45,631 48,905
Total revenue 89,230 77,246 256,046 226,133
Cost of revenue:
Subscription 17,279 15,611 50,190 43,627
Professional services 18,416 17,655 54,218 55,011
Total cost of revenue 35,695 33,266 104,408 98,638
Gross profit 53,535 43,980 151,638 127,495
Operating expenses:
Research and development 21,738 18,907 61,565 55,877
Sales and marketing 37,004 28,058 105,130 85,162
General and administrative 16,370 13,024 46,931 41,672
Total operating expenses 75,112 59,989 213,626 182,711
Loss from operations (21,577) (16,009) (61,988) (55,216)
Interest and other (expense) income, net (702) (352) (1,034) 1,962
Loss before income taxes (22,279) (16,361) (63,022) (53,254)
Income tax provision 610 412 1,221 1,129
Net loss $ (22,889) $ (16,773) $ (64,243) $ (54,383)
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Three Months Ended Nine Months Ended
October 31, October 31,
2021 2020 2021 2020
Revenue:
Subscription 83 % 80 % 82 % 78 %
Professional services 17 20 18 22
Total revenue 100 100 100 100
Cost of revenue:
Subscription 19 20 20 19
Professional services 21 23 21 24
Total cost of revenue 40 43 41 44
Gross profit 60 57 59 56
Operating expenses:
Research and development 24 24 24 25
Sales and marketing 41 36 41 38
General and administrative 18 17 18 18
Total operating expenses 84 78 83 81
Loss from operations (24) (21) (24) (24)
Interest and other (expense) income, net (1) - - 1
Loss before income taxes (25) (21) (25) (24)
Income tax provision 1 1 - -
Net loss (26) % (22) % (25) % (24) %
Note: Percentages in the table above may not sum due to rounding.
Non-GAAP Financial Measures
To supplement our unaudited condensed consolidated financial statements
presented in accordance with U.S. GAAP, we monitor and consider non-GAAP cost of
subscription revenue, non-GAAP cost of professional services revenue, non-GAAP
gross profit, non-GAAP subscription gross margin, non-GAAP professional services
gross margin, non-GAAP total gross margin, non-GAAP research and development
expense, non-GAAP sales and marketing expense, non-GAAP general and
administrative expense, non-GAAP (loss) income from operations, non-GAAP
operating margin, non-GAAP net loss, non-GAAP net loss per share, and free cash
flow. We use non-GAAP financial measures in conjunction with GAAP measures as
part of our overall assessment of our performance, including the preparation of
our annual operating budget and quarterly forecasts, to evaluate the
effectiveness of our business strategies and to communicate with our Board of
Directors concerning our financial performance. We believe these non-GAAP
measures provide investors consistency and comparability with our past financial
performance and facilitate period-to-period comparisons of our operating
results. We also believe these non-GAAP measures are useful in evaluating our
operating performance compared to that of other companies in our industry, as
they generally eliminate the effects of certain items that may vary for
different companies for reasons unrelated to overall operating performance.
Investors are cautioned that there are material limitations associated with the
use of non-GAAP financial measures as an analytical tool. The non-GAAP financial
measures we use may be different from non-GAAP financial measures used by other
companies, limiting their usefulness for comparison purposes. We compensate for
these limitations by providing specific information regarding the GAAP items
excluded from our non-GAAP financial measures. The presentation of these
non-GAAP financial measures is not intended to be considered in isolation or as
a substitute for, or superior to, financial information prepared and presented
in accordance with GAAP. Reconciliations of our non-GAAP financial measures to
the nearest respective GAAP measures are provided below.
We exclude the following items from one or more of our non-GAAP financial
measures:
•Stock-based compensation expense. We exclude stock-based compensation expense,
which is a non-cash expense, because we believe that excluding this item
provides meaningful supplemental information
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regarding operational performance. In particular, stock-based compensation
expense is not comparable across companies given it is calculated using a
variety of valuation methodologies and subjective assumptions.
•Amortization of acquired intangible assets. We exclude amortization of acquired
intangible assets, which is a non-cash expense, because we do not believe it has
a direct correlation to the operation of our business.
•Internal-use software. We exclude non-cash charges for impairments of
internal-use software from certain of our non-GAAP financial measures.
Impairment charges can vary significantly in terms of amount and timing and we
do not consider these charges indicative of our current or past operating
performance. Moreover, we believe that excluding the effects of these charges
allows investors to make more meaningful comparisons between our operating
results and those of other companies. Beginning in the second quarter of fiscal
year 2022, we no longer exclude non-cash adjustments for capitalization and
amortization of internal-use software from our non-GAAP financial measures. We
believe that this change more closely aligns our reported financial measures
with current industry practice.
•Charitable donations. We exclude expenses associated with charitable donations
of our common stock from certain of our non-GAAP financial measures. We believe
that excluding these non-cash expenses allows investors to make more meaningful
comparisons between our operating results and those of other companies.
•Certain litigation. We exclude non-recurring charges and benefits, net of
currently expected insurance recoveries, including litigation expenses and
settlements, related to litigation matters that are outside of the ordinary
course of our business. We believe these charges and benefits do not have a
direct correlation to the operations of our business and may vary in size
depending on the timing and results of such litigation and related settlements.
We began excluding these non-recurring charges and benefits from our non-GAAP
financial measures in the second quarter of fiscal 2021 as litigation expenses
significantly increased, specifically relating to our ongoing securities class
actions and derivative litigation.
The following tables provide a reconciliation of our GAAP to Non-GAAP measures
(in thousands, except percentages and per share data):
Three Months Ended
Amortization of
Stock-based Acquired Certain
GAAP Compensation Intangibles Litigation Non-GAAP
Cost of revenue:
Cost of subscription revenue $ 17,279 $ (1,580) $ (554) $ - $ 15,145
Cost of professional services revenue 18,416 (2,822) - - 15,594 Gross profit 53,535 4,402 554 - 58,491 Operating expenses: Research and development 21,738 (5,774) - - 15,964 Sales and marketing 37,004 (6,298) - - 30,706 General and administrative 16,370 (3,438) - 114 13,046 Loss from operations (21,577) 19,912 554 (114) (1,225) Net loss$ (22,889) $ 19,912 $ 554$ (114) $ (2,537) Net loss per share, basic and diluted²$ (0.18) $ (0.02) Gross margin 60 % 66 % Subscription gross margin 77 % 79 % Professional services gross margin (19) % (1) % Operating margin (24) % (1) % 27
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Three
Months Ended
Amortization of
Stock-based Acquired Certain
GAAP Compensation Intangibles Litigation Non-GAAP
Cost of revenue:
Cost of subscription revenue $ 15,611 $ (1,224) $ (423) $ - $ 13,964
Cost of professional services revenue 17,655 (2,508) - - 15,147 Gross profit 43,980 3,732 423 - 48,135 Operating expenses: Research and development 18,907 (4,914) - - 13,993 Sales and marketing 28,058 (3,868) - - 24,190 General and administrative 13,024 (2,259) - (967) 9,798 (Loss) income from operations (16,009) 14,773 423 967 154 Net loss$ (16,773) $ 14,773 $ 423$ 967 $ (610) Net loss per share, basic and diluted²$ (0.14) $ (0.01) Gross margin 57 % 62 % Subscription gross margin 75 % 77 % Professional services gross margin (16) % 1 % Operating margin (21) % - %
_________________________________
(1) Beginning with the second quarter endedJuly 31, 2021 , we no longer exclude non-cash adjustments for capitalization and amortization of internal-use software from our non-GAAP financial measures. Our non-GAAP financial measures for the three months endedOctober 31, 2020 were recast to conform to the updated methodology for comparison purposes. For the three months endedOctober 31, 2021 and 2020, we did not have any non-cash charges for impairments of internal-use software. (2) GAAP and Non-GAAP net loss per share are calculated based upon 125,141 and 118,460 basic and diluted weighted-average shares of common stock for the three months endedOctober 31, 2021 and 2020, respectively.
Nine Months Ended
Amortization of
Stock-based Acquired Charitable Certain
GAAP Compensation Intangibles Contribution Litigation Non-GAAP
Cost of revenue:
Cost of subscription revenue $ 50,190 $ (4,157) $ (1,496) $ - $ - $ 44,537
Cost of professional services
revenue 54,218 (7,487) - - - 46,731
Gross profit 151,638 11,644 1,496 - - 164,778
Operating expenses:
Research and development 61,565 (15,546) - - - 46,019
Sales and marketing 105,130 (15,993) - - - 89,137
General and administrative 46,931 (8,595) - (1,000) (169) 37,167
Loss from operations (61,988) 51,778 1,496 1,000 169 (7,545)
Net loss $ (64,243) $ 51,778 $ 1,496 $ 1,000 $ 169 $ (9,800)
Net loss per share, basic and
diluted² $ (0.52) $ (0.08)
Gross margin 59 % 64 %
Subscription gross margin 76 % 79 %
Professional services gross
margin (19) % (2) %
Operating margin (24) % (3) %
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Nine Months Ended
Amortization of
Stock-based Acquired Charitable Certain
GAAP Compensation Intangibles Contribution Litigation Non-GAAP
Cost of revenue:
Cost of subscription revenue $ 43,627 $ (3,541) $ (1,269) $ - $ - $ 38,817
Cost of professional services
revenue 55,011 (7,290) - - - 47,721
Gross profit 127,495 10,831 1,269 - - 139,595
Operating expenses:
Research and development 55,877 (14,401) - - - 41,476
Sales and marketing 85,162 (11,721) - - - 73,441
General and administrative 41,672 (6,980) - (1,000) (2,202) 31,490
Loss from operations (55,216) 43,933 1,269 1,000 2,202 (6,812)
Net loss $ (54,383) $ 43,933 $ 1,269 $ 1,000 $ 2,202 $ (5,979)
Net loss per share, basic and
diluted² $ (0.47) $ (0.05)
Gross margin 56 % 62 %
Subscription gross margin 75 % 78 %
Professional services gross
margin (12) % 2 %
Operating margin (24) % (3) %
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(1) Beginning with the second quarter endedJuly 31, 2021 , we no longer exclude non-cash adjustments for capitalization and amortization of internal-use software from our non-GAAP financial measures. Our non-GAAP financial measures for the nine months endedOctober 31, 2020 were recast to conform to the updated methodology for comparison purposes. For the nine months endedOctober 31, 2021 and 2020, we did not have any non-cash charges for impairments of internal-use software. (2) GAAP and Non-GAAP net loss per share are calculated based upon 123,230 and 116,824 basic and diluted weighted-average shares of common stock for the nine months endedOctober 31, 2021 and 2020, respectively. Free Cash Flow We define free cash flow as net cash provided by operating activities, less cash used for purchases of property and equipment, net of insurance recoveries. Insurance recoveries include amounts paid to us for property and equipment that were damaged inJanuary 2020 at our corporate headquarters. We include the impact of net purchases of property and equipment in our free cash flow calculation because we consider these capital expenditures to be a necessary component of our ongoing operations. We consider free cash flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated by the business that can possibly be used for investing in our business and strengthening our balance sheet, but it is not intended to represent the residual cash flow available for discretionary expenditures. Three Months Ended Nine Months Ended October 31, October 31, 2021 2020 2021 2020 (in
thousands)
Net cash provided by operating activities
$ 8,320 $ 8,151 Less: Purchases of property and equipment, net of insurance recoveries (2,347) (1,386) (5,700) (11,086) Free cash flow$ (1,655) $ (26) $ 2,620 $ (2,935) 29
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Comparison of the Three Months Ended October 31, 2021 and 2020
Revenue
Three Months Ended
October 31,
2021 2020 $ Change % Change
(dollars in thousands)
Revenue:
Subscription $ 73,775 $ 62,020 $ 11,755 19 %
Professional services 15,455 15,226 229 2 %
Total revenue $ 89,230 $ 77,246 $ 11,984 16 %
Percentage of revenue:
Subscription 83 % 80 %
Professional services 17 20
Total revenue 100 % 100 %
Subscription revenue increased by $11.8 million , or 19%, for the three months
ended October 31, 2021 compared to the three months ended October 31, 2020 . The
increase was driven by growth in our customer base, including both new and
existing customers, and is partially offset by $1.5 million of revenue
recognized in the three months ended October 31, 2020 related to a contract
resolution with a customer that will not be recurring in future periods. New
customers contributed approximately $4.1 million of the increase in subscription
revenue during the three months ended October 31, 2021 , while increased
transaction volume and sales of additional products to our existing customers
contributed the remainder. We calculate subscription revenue from new customers
during the quarter by adding the revenue recognized from new customers acquired
in the 12 months prior to the reporting date.
Professional services revenue increased by $0.2 million , or 2%, for the three
months ended October 31, 2021 compared to the three months ended October 31,
2020 .
Cost of Revenue and Gross Margin
Three Months Ended
October 31,
2021 2020 $ Change % Change
(dollars in thousands)
Cost of revenue:
Subscription $ 17,279 $ 15,611 $ 1,668 11 %
Professional services 18,416 17,655 761 4 %
Total cost of revenue $ 35,695 $ 33,266 $ 2,429 7 %
Gross margin:
Subscription 77 % 75 %
Professional services (19) (16)
Total gross margin 60 % 57 %
Cost of subscription revenue increased by $1.7 million , or 11%, for the three
months ended October 31, 2021 compared to the three months ended October 31,
2020 . The increase in cost of subscription revenue was primarily driven by
increases of $0.8 million in employee compensation costs and $0.3 million in
allocated overhead costs.
Cost of professional services revenue increased by $0.8 million , or 4%, for the
three months ended October 31, 2021 compared to the three months ended October
31, 2020 . Cost of professional services revenue includes an increase of $1.0
million in outside professional services costs, partially offset by a decrease
of $0.4 million in employee compensation costs.
30
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Our gross margin for subscription increased to 77% for the three months ended
October 31, 2021 compared to 75% for the three months ended October 31, 2020 due
to improved cost efficiencies as we scale our business. We expect our
subscription gross margin to be relatively consistent for the remainder of the
fiscal year.
Our gross margin for professional services decreased to (19)% for the three
months ended October 31, 2021 compared to (16)% for the three months ended
October 31, 2020 , primarily due to increased consulting costs related to
training our system integration partners as we develop our partner ecosystem.
Operating Expenses
Research and Development
Three Months Ended
October 31,
2021 2020 $ Change % Change
(dollars in thousands)
Research and development $ 21,738 $ 18,907 $ 2,831 15 %
Percentage of total revenue 24 % 24 %
Research and development expense increased by $2.8 million , or 15%, for the
three months ended October 31, 2021 compared to the three months ended October
31, 2020 primarily due to increases of $2.4 million in employee compensation
costs and $0.5 million in outside professional services costs, which were
partially offset by $0.5 million increased capitalization of internal-use
software costs compared to prior year. Research and development expense was 24%
of total revenue for the three months ended October 31, 2021 and 2020.
Sales and Marketing
Three Months Ended
October 31,
2021 2020 $ Change % Change
(dollars in thousands)
Sales and marketing $ 37,004 $ 28,058 $ 8,946 32 %
Percentage of total revenue 41 % 36 %
Sales and marketing expense increased by $8.9 million , or 32%, for the three
months ended October 31, 2021 compared to the three months ended October 31,
2020 , primarily due to increases of $5.9 million in payroll related costs from
increased headcount, $1.4 million in allocated overhead costs and $1.0 million
in amortization of deferred commissions. Sales and marketing expense increased
to 41% of total revenue during the three months ended October 31, 2021 from 36%
during the three months ended October 31, 2020 primarily driven by our strategy
to invest in our go-to-market organization to drive enterprise growth.
General and Administrative
Three Months Ended
October 31,
2021 2020 $ Change % Change
(dollars in thousands)
General and administrative $ 16,370 $ 13,024 $ 3,346 26 %
Percentage of total revenue 18 % 17 %
General and administrative expense increased by $3.3 million , or 26%, for the
three months ended October 31, 2021 compared to the three months ended October
31, 2020 , primarily due to increases of $2.8 million in employee compensation
costs, $0.9 million in outside professional services costs, and $0.6 million in
allocated overhead costs, partially offset by a decrease of $1.1 million in
litigation expenses as our directors and officers insurance began to cover
certain shareholder litigation costs last fiscal quarter when we met our policy
deductible. General and administrative expense increased to 18% of total revenue
during the three months ended October 31, 2021 from 17% during the three months
ended October 31, 2020 .
31
--------------------------------------------------------------------------------Interest and other (expense) income, net
Three Months Ended
October 31,
2021 2020 $ Change % Change
(dollars in thousands)
Interest and other (expense) income, net $ (702) $ (352) $ (350) 99 %
Interest and other (expense) income, net decreased by $0.4 million for the three
months ended October 31, 2021 compared to the three months ended October 31,
2020 , primarily due to a $0.2 million net impact from revaluation of cash,
accounts receivable and accounts payable recorded in a foreign currency.
Income Tax Provision
Three Months Ended
October 31,
2021 2020 $ Change % Change
(dollars in thousands)
Income tax provision $ 610 $ 412 $ 198 48 %
We are subject to federal and state income taxes in the United States and taxes
in foreign jurisdictions. For the three months ended October 31, 2021 and 2020,
we recorded a tax provision of $0.6 million and $0.4 million , respectively, on a
loss before income taxes of $22.3 million and $16.4 million , respectively. The
effective tax rates for the three months ended October 31, 2021 and 2020 were
(2.7)% and (2.5)%, respectively. The change in the effective tax rate was due
primarily to an increase in foreign tax expense. The effective tax rate differs
from the statutory rate primarily as a result of providing no benefit on pretax
losses incurred in the United States . For the three months ended October 31,
2021 and 2020, we maintained a full valuation allowance on our U.S. federal and
state net deferred tax assets as it was more likely than not that those deferred
tax assets will not be realized.
Comparison of the Nine Months Ended October 31, 2021 and 2020
Revenue
Nine Months Ended
October 31,
2021 2020 $ Change % Change
(dollars in thousands)
Revenue:
Subscription $ 210,415 $ 177,228 $ 33,187 19 %
Professional services 45,631 48,905 (3,274) (7) %
Total revenue $ 256,046 $ 226,133 $ 29,913 13 %
Percentage of revenue:
Subscription 82 % 78 %
Professional services 18 22
Total revenue 100 % 100 %
Subscription revenue increased by $33.2 million , or 19%, for the nine months
ended October 31, 2021 compared to the nine months ended October 31, 2020 . The
increase was driven by growth in our customer base, including both new and
existing customers. New customers contributed approximately $14.0 million of the
increase in subscription revenue, while sales of additional products to our
existing customers contributed the remainder. We calculate subscription revenue
from new customers on a year-to-date basis by adding the revenue recognized from
new customers acquired in the 12 months prior to each discrete quarter within
the year-to-date period.
Professional services revenue decreased by
32
--------------------------------------------------------------------------------Cost of Revenue and Gross Margin
Nine Months Ended
October 31,
2021 2020 $ Change % Change
(dollars in thousands)
Cost of revenue:
Subscription $ 50,190 $ 43,627 $ 6,563 15 %
Professional services 54,218 55,011 (793) (1) %
Total cost of revenue $ 104,408 $ 98,638 $ 5,770 6 %
Gross margin:
Subscription 76 % 75 %
Professional services (19) (12)
Total gross margin 59 % 56 %
Cost of subscription revenue increased by $6.6 million , or 15%, for the nine
months ended October 31, 2021 compared to the nine months ended October 31,
2020 . The increase in cost of subscription revenue was primarily driven by
increases of $2.5 million in data center costs which primarily related to
third-party cloud hosting and includes $1.6 million for costs to migrate our
software from our third-party hosted data center to a cloud hosting provider,
$1.7 million in employee compensation costs, $1.1 million in amortization of
internal-use software costs, and $0.5 million in allocated overhead costs.
Cost of professional services revenue decreased by $0.8 million , or 1%, for the
nine months ended October 31, 2021 compared to the nine months ended October 31,
2020 . The decrease in cost of professional services revenue was primarily driven
by decreases of $1.4 million in employee compensation costs and $0.4 million in
travel costs, partially offset by an increase of $1.6 million in outside
professional services costs.
Our gross margin for subscription services increased to 76% for the nine months
ended October 31, 2021 compared to 75% for the nine months ended October 31,
2020 due to improved cost efficiencies as we scale our business. We expect our
subscription gross margin to be relatively consistent for the remainder of the
fiscal year.
Our gross margin for professional services decreased to (19)% for the nine
months ended October 31, 2021 compared to (12)% for the nine months ended
October 31, 2020 , primarily due to investment in training our partners as we
develop our partner ecosystem and one-time employee-related benefits.
Operating Expenses
Research and Development
Nine Months Ended
October 31,
2021 2020 $ Change % Change
(dollars in thousands)
Research and development $ 61,565 $ 55,877 $ 5,688 10 %
Percentage of total revenue 24 % 25 %
Research and development expense increased by $5.7 million , or 10%, for the nine
months ended October 31, 2021 compared to the nine months ended October 31,
2020 . The increase in research and development expense was primarily driven by
$3.5 million increased employee compensation costs, $0.8 million increased
outside professional services costs, $0.6 million increased allocated overhead
costs, and a $0.5 million reduction in capitalization of internal-use software
costs. Research and development expense was relatively consistent at 24% and 25%
of total revenue during the nine months ended October 31, 2021 and 2020,
respectively.
33
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Sales and Marketing
Nine Months Ended
October 31,
2021 2020 $ Change % Change
(dollars in thousands)
Sales and marketing $ 105,130 $ 85,162 $ 19,968 23 %
Percentage of total revenue 41 % 38 %
Sales and marketing expense increased by $20.0 million , or 23%, for the nine
months ended October 31, 2021 compared to the nine months ended October 31,
2020 , primarily due to increases of $11.4 million in employee compensation
costs, $3.6 million in allocated overhead, $3.4 million in amortization of
deferred commissions, and $1.2 million in outside professional services costs.
Sales and marketing expense increased to 41% of total revenue during the nine
months ended October 31, 2021 from 38% during the nine months ended October 31,
2020 primarily driven by our strategy to invest in our go-to-market organization
to drive enterprise growth.
General and Administrative
Nine Months Ended
October 31,
2021 2020 $ Change % Change
(dollars in thousands)
General and administrative
13 % Percentage of total revenue 18 % 18 % General and administrative expense increased by$5.3 million , or 13%, for the nine months endedOctober 31, 2021 compared to the nine months endedOctober 31, 2020 , primarily due to increases of$4.3 million in employee compensation costs,$1.4 million in outside professional services costs, and$1.2 million in allocated overhead costs, partially offset by a decrease of$2.0 million in litigation expenses as our directors and officers insurance began to cover certain shareholder litigation costs last fiscal quarter when we met our policy deductible. General and administrative expense was flat at 18% of total revenue during the nine months endedOctober 31, 2021 and 2020. Interest and other (expense) income, net Nine Months Ended October 31, 2021 2020 $ Change % Change (dollars in thousands) Interest and other (expense) income, net$ (1,034) $ 1,962 $ (2,996) (153) % Interest and other (expense) income, net decreased by$3.0 million for the nine months endedOctober 31, 2021 compared to the nine months endedOctober 31, 2020 , primarily due to a$2.2 million decrease related to the revaluation of cash, accounts receivable and accounts payable recorded in a foreign currency, and a$0.8 million decrease related to interest income on short-term investments. Income Tax Provision Nine Months Ended October 31, 2021 2020 $ Change % Change (dollars in thousands) Income tax provision$ 1,221 $ 1,129 $ 92 8 % We are subject to federal and state income taxes inthe United States and taxes in foreign jurisdictions. For the nine months endedOctober 31, 2021 and 2020, we recorded a tax provision of$1.2 million and$1.1 million , respectively, on losses before income taxes of$63.0 million and$53.3 million , respectively. The effective tax rates for the nine months endedOctober 31, 2021 and 2020 were (1.9)% and (2.1)%, respectively. The change in the 34 -------------------------------------------------------------------------------- effective tax rate was due primarily to an increase in pre-tax losses. The effective tax rate differs from the statutory rate primarily as a result of no benefit on pretax losses incurred inthe United States . For the nine months endedOctober 31, 2021 and 2020, we maintained a full valuation allowance on ourU.S. federal and state net deferred tax assets as it was more likely than not that those deferred tax assets will not be realized. Liquidity and Capital Resources Liquidity is a measure of our ability to access sufficient cash flows to meet the short-term and long-term cash requirements of our business operations. As ofOctober 31, 2021 , we had cash and cash equivalents and short-term investments of$203.3 million that was primarily invested in deposit accounts, money market funds, corporate debt securities, supranational securities, commercial paper, andU.S. government securities. We do not enter into investments for trading or speculative purposes. We finance our operations primarily through sales to our customers, which are generally billed in advance on an annual or quarterly basis. Customers with annual or multi-year contracts are generally only billed one annual period in advance. We also finance our operations through proceeds from the issuance of stock under our employee stock plans and borrowings under our Debt Agreement. In the nine months endedOctober 31, 2021 , we repaid$3.3 million of principal on our term loan and have the ability borrow up to an additional$30.0 million in revolving loans under our Debt Agreement untilOctober 2022 . We believe our existing cash and cash equivalents, short-term investments, cash provided by operating activities, and funds available under our Debt Agreement will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months. Our future capital requirements will depend on many factors, including revenue growth and costs incurred to support revenue growth, the timing and extent of spending on research and development efforts and other business initiatives, the expansion of sales and marketing activities, the introduction of new and enhanced product offerings, and the continuing market adoption of our products. We continually evaluate our capital needs and may decide to raise additional capital to fund the growth of our business for general corporate purposes through public or private equity offerings or through additional debt financing. We also may in the future make investments in or acquire businesses or technologies that could require us to seek additional equity or debt financing. To facilitate acquisitions or investments, we may seek additional equity or debt financing, which may not be available on terms favorable to us or at all. Sales of additional equity could result in dilution to our stockholders. We expect proceeds from the exercise of stock options in future years to be impacted by the increased mix of restricted stock units versus stock options granted to employees and to vary based on our share price. The uncertainty created by the changing markets and economic conditions related to the COVID-19 pandemic may impact our customers' ability to pay us on a timely basis, which could negatively impact our cash flows. Debt Agreement See Note 9. Debt to our unaudited condensed consolidated financial statements included in this Form 10-Q for more information about our Debt Agreement. 35 -------------------------------------------------------------------------------- Cash Flows The following table summarizes our cash flows for the periods indicated (in thousands): Nine Months Ended October 31, 2021 2020 Net cash provided by operating activities$ 8,320 $
8,151
Net cash (used in) provided by investing activities (1,843) 31,947 Net cash provided by financing activities
16,364 9,745
Effect of exchange rates on cash and cash equivalents (386) (71) Net increase in cash and cash equivalents
$ 22,455 $
49,772
Operating Activities Net cash provided by operating activities of$8.3 million for the nine months endedOctober 31, 2021 was comprised primarily of customer collections for our subscription and professional services, cash payments for our personnel, sales and marketing efforts and infrastructure-related costs, and payments to vendors for products and services related to our ongoing business operations. Net cash provided by operating activities for the nine months endedOctober 31, 2021 was flat compared to the same period last year as growth in our customer collections was partially offset by increased office lease payments and employee-related costs related to growing our business. Investing Activities Net cash used in investing activities for the nine months endedOctober 31, 2021 was$1.8 million . We had proceeds of$5.2 million from net maturities of short-term investments and used$5.7 million to purchase property and equipment, net of insurance recoveries, and to develop internal-use software as we continue to invest in and grow our business. We also paid$1.3 million in cash during the nine months endedOctober 31, 2021 related to the acquisition of certain intellectual property assets. Net cash used in investing activities for the nine months endedOctober 31, 2021 decreased$33.8 million compared to cash provided by investing activities in the nine months endedOctober 31, 2020 primarily due to the timing of purchases, sales and maturities of short-term investments, which resulted in$37.8 million of net cash used between the comparative periods. Additionally, we paid$1.3 million in cash related to the acquisition of certain intellectual property assets, compared to no intangible asset purchases in the prior year. These cash uses were partially offset by lower payments for property and equipment, net of insurance recoveries, of$5.4 million as we recognized leasehold improvements related to our new corporate headquarters last year. Financing Activities Net cash provided by financing activities for the nine months endedOctober 31, 2021 of$16.4 million was primarily due to$15.7 million of proceeds from stock option exercises and$4.0 million of proceeds from issuance of common stock under the ESPP, partially offset by$3.3 million of debt principal payments. Net cash provided by financing activities for the nine months endedOctober 31, 2021 increased$6.6 million compared to the nine months endedOctober 31, 2020 primarily due to increased proceeds from stock option exercises in the current fiscal year. Off-Balance Sheet Arrangements As ofOctober 31, 2021 , we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. 36 -------------------------------------------------------------------------------- Obligations and Other Commitments Our principal commitments consist of obligations under our operating leases for office space, our Debt Agreement, and a contractual obligation for cloud computing services. The following table summarizes our significant contractual obligations as ofOctober 31, 2021 (in thousands): More than 5 Total Less than 1 year 1-3 years 3-5 years years
Operating lease obligations¹
2,838 - - -
Other contractual obligations³ 67,582 18,282 49,300 - -
$ 141,703 $ 35,204 $ 68,823 $ 12,577 $ 25,099 _________________________________
(1) Consists of future non-cancelable minimum rental payments under operating leases for our offices, which expire on varying dates throughJune 2030 . (2) Debt principal and interest includes amounts owed under our Debt Agreement, including principal, interest and a$0.2 million facility fee on the term loan. Interest payments were calculated using the applicable rate as ofOctober 31, 2021 . See Note 9. Debt of the notes to our unaudited condensed consolidated financial statements included in this Form 10-Q for more information. (3) Represents a contractual obligation to make purchases primarily related to cloud computing services from one of our vendors bySeptember 30, 2024 . In the ordinary course of business, we enter into agreements of varying scope and terms pursuant to which we agree to indemnify customers, vendors, lessors, business partners, and other parties with respect to certain matters, including, but not limited to, losses arising out of the breach of such agreements, services to be provided by us, or from data breaches or intellectual property infringement claims made by third parties. In addition, we have entered into indemnification agreements with our directors and certain officers and employees that will require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers, or employees. As ofOctober 31, 2021 , no demands had been made upon us to provide indemnification under such agreements and there were no claims that we are aware of that could have a material effect on our unaudited condensed consolidated balance sheets, unaudited condensed consolidated statements of comprehensive loss, or unaudited condensed consolidated statements of cash flows. As ofOctober 31, 2021 , we had accrued liabilities related to uncertain tax positions, which are reflected in our unaudited condensed consolidated balance sheets. These accrued liabilities are not reflected in the table above since it is unclear when they will be repaid. Critical Accounting Policies and Estimates We prepare our unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted inthe United States (GAAP). In the preparation of these unaudited condensed consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the applicable periods. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations would be affected. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We refer to accounting estimates of this type as critical accounting policies and estimates. Our significant accounting policies are discussed in Note 2. Summary of Significant Accounting Policies and Recent Accounting Pronouncements in our Annual Report on Form 10-K for the fiscal year endedJanuary 31, 2021 , filed with theSEC onMarch 31, 2021 . Any significant changes to these policies during the nine months endedOctober 31, 2021 are described in Note 2. Summary of Significant Accounting Policies and Recent Accounting Pronouncements to our unaudited condensed consolidated financial statements provided herein. 37 -------------------------------------------------------------------------------- Recent Accounting Pronouncements - Not Yet Adopted InOctober 2021 , the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The standard requires an acquirer in a business combination to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASC 606, Revenue from Contracts with Customers, as if it had originated the contracts. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning afterDecember 15, 2022 . Early adoption is permitted. We do not expect the adoption of this standard to have a significant impact on our consolidated financial statements. Item 3. Quantitative and Qualitative Disclosures About Market Risk We are exposed to certain market risks in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in foreign currency exchange rates and interest rates. Foreign Currency Exchange Risk Our sales contracts are denominated predominantly inU.S. Dollars, Euros (EUR), and British Pounds (GBP). A portion of our operating expenses are incurred outsidethe United States and denominated in foreign currencies and are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the EUR, Chinese Yuan (CNY), and GBP. Additionally, fluctuations in foreign currency exchange rates may cause us to recognize transaction gains and losses in our unaudited condensed consolidated statement of comprehensive loss. The effect of a hypothetical 10% change in foreign currency exchange rates applicable to our business would not have a material impact on our historical unaudited condensed consolidated financial statements for the nine months endedOctober 31, 2021 . Given the impact of foreign currency exchange rates has not been material to our historical operating results, we have not entered into derivative or hedging transactions, but we may do so in the future if our exposure to foreign currency should become more significant. As our international operations grow, we will continue to reassess our approach to manage our risk relating to fluctuations in currency rates. Interest Rate Risk We had cash and cash equivalents and short-term investments of$203.3 million as ofOctober 31, 2021 . Our cash and cash equivalents and short-term investments are held for working capital purposes. We do not make investments for trading or speculative purposes. Additionally, under our Debt Agreement, we pay interest on any outstanding balances based on a variable market rate. A significant change in these market rates may adversely affect our operating results. Our cash equivalents and short-term investments are subject to market risk due to changes in interest rates. Fixed rate securities may have their market value adversely affected due to a rise in interest rates. Due in part to these factors, our future investment income may fall short of our expectations due to changes in interest rates or we may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates. However, because we classify our short-term investments as "available for sale," no gains or losses are recognized due to changes in interest rates unless such securities are sold prior to maturity or decreases in fair value are determined to be other-than-temporary. As ofOctober 31, 2021 , a hypothetical 10% relative change in interest rates would not have had a material impact on the value of our cash equivalents and short-term investments or interest owed on our outstanding debt. Fluctuations in the value of our cash equivalents and short-term investments caused by a change in interest rates (gains or losses on the carrying value) are recorded in accumulated other comprehensive income in our condensed consolidated balance sheets, and are realized only if we sell the underlying securities prior to maturity. In addition, a hypothetical 10% relative change in interest rates would not have had a material impact on our operating results for the nine months endedOctober 31, 2021 . 38
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