ZUORA, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Form 10-K. 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, 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 I, Item 1A in this Form 10-K. Our fiscal year endsJanuary 31 . 44 -------------------------------------------------------------------------------- We have omitted discussion of fiscal 2020 results where it would be redundant to the discussion previously included in Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year endedJanuary 31, 2021 , filed with theSEC onMarch 31, 2021 . Overview Business SummaryZuora provides a cloud-based subscription management platform, built to help companies monetize new services and operate dynamic, recurring revenue business models. Our solution enables companies across multiple industries and geographies to launch, manage and scale a subscription business, automating the entire quote-to-revenue process, including quoting, 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 one-time transactions. These systems were not designed for the dynamic, ongoing nature of subscription, usage, or consumption-based pricing models, and can be extremely difficult to configure. In traditional product-based businesses, quote-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 of ongoing customer relationships and recurring revenue, commonly found in a subscription business, and their impact on areas such as billing proration, revenue recognition, reporting in real-time, and the lifetime value of the customer. Using legacy or homegrown 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, enterprise business models are inherently dynamic, with multiple interactions, flexible pricing, global complexities, and continuously-evolving 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 that operate at a global scale. As a result, as companies launch, grow, and scale their businesses, 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 providing the technology our customers need to thrive as a customer-centric, recurring revenue 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.
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--------------------------------------------------------------------------------COVID-19 Pandemic Impact
The COVID-19 pandemic has impacted worldwide economic activity and financial markets, and 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 fiscal year endedJanuary 31, 2022 , 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 fiscal year. We believe that such COVID-related disruptions experienced thus far have not had a material impact on our overall financial results for 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 COVID-19 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. In fiscal 2021, 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 fiscal 2022, we accelerated our pace of hiring and investments in our operations including sales, marketing and product technology. We currently intend to continue these investments, but should we experience any further business disruption 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 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 I, Item 1A. Risk Factors of this Annual Report on Form 10-K for further discussion of the possible impact of the COVID-19 pandemic on our business and financial results.
Fiscal 2022 Business Highlights
Our business highlights for the fourth quarter and full year fiscal 2022 include the following:
•During the fourth quarter, we closed eight deals that exceeded
•During the fourth quarter, subscription revenue represented 85% of total revenue and subscription gross margin was 77%, the highest levels in our history as a public company.
•Our subscription revenue was
•We improved our total gross margin to 60% for the year, compared to 57% last year, as we shifted more of our services work to our system integrator partners and improved our cost structure. •Net cash provided by operating activities was$18.7 million , and full fiscal year free cash flow was positive for the first time at$10.3 million , for fiscal 2022.
•Customer transaction volume processed through
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•We grew our business to 747 customers with ACV exceeding
•InMay 2021 , we acquired the intellectual property assets ofModernAIze, Inc. (dba Live Objects), a business process platform that uses AI to help companies understand, visualize and optimize complex business processes spanning across systems.
For a definition of ACV, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations-
Fiscal 2022 Financial Performance Summary
Our financial performance for fiscal 2022, compared to fiscal 2021, reflects the following:
•Subscription revenue was$287.7 million , an increase of$45.4 million , or 19%, and total revenue was$346.7 million , an increase of$41.3 million , or 14%. This growth reflects our acquisition of new customers as well as increased transaction volume and sales of new products to our existing customers. •Total cost of revenue increased to$140.1 million , or 40% of total revenue, compared to$130.8 million , or 43% of revenue, last year. We invested additional resources during the fiscal year to support the growth in the number of customers as well as the increased activity from existing customers.
•Loss from operations increased to
Key Operational and Financial MetricsWe 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:
January 31, 2022
2021
Customers with ACV equal to or greater than
110 % 100 %
Annual recurring revenue growth 20 % 12
%
Customers with Annual Contract Value Equal to or Greater than
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. The number of customers with ACV equal to or greater than$100,000 increased to 747 as ofJanuary 31, 2022 , as compared to 676 as ofJanuary 31, 2021 . We expect this metric will increase in fiscal year 2023. 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 ofJanuary 31, 2022 , as compared to 100% as ofJanuary 31, 2021 . While the dollar-based retention rate can fluctuate in any particular period, we expect it to increase slightly in fiscal 2023.
Annual Recurring Revenue Growth (ARR Growth)
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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 20% as of January 31, 2022 and we expect it to increase slightly
over the next fiscal year. Our ARR Growth was 12% as of January 31, 2021 .
Components of Our Results of OperationsRevenue
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 transition a portion of our professional services implementations to our strategic partners, including system integrators, 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 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.
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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.
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 our cloud infrastructure, 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. While our sales and
marketing expense as a percentage of total revenue has decreased slightly in
recent periods, 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, asset impairments 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 due to
economies realized as we scale our business.
Interest and Other (Expense) Income, net
Interest and other (expense) income, net primarily consists of interest income from our investment holdings, interest expense associated with our Debt Agreement, and foreign exchange fluctuations.
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 OperationsThe following tables set forth our consolidated results of operations data for the periods presented in dollars and as a percentage of our total revenue:
Fiscal Year Ended January 31,
2022 2021
(in thousands)
Revenue:
Subscription $ 287,747 $ 242,340
Professional services 58,991 63,080
Total revenue 346,738 305,420
Cost of revenue:
Subscription 68,285 58,808
Professional services 71,821 71,962
Total cost of revenue 140,106 130,770
Gross profit 206,632 174,650
Operating expenses:
Research and development 83,219 76,795
Sales and marketing 143,366 116,914
General and administrative 76,223 54,803
Total operating expenses 302,808 248,512
Loss from operations (96,176) (73,862)
Interest and other (expense) income, net (1,822) 2,561
Loss before income taxes (97,998) (71,301)
Income tax provision 1,427 1,873
Net loss $ (99,425) $ (73,174)
Fiscal Year Ended January 31,
2022 2021
Revenue:
Subscription 83 % 79 %
Professional services 17 21
Total revenue 100 100
Cost of revenue:
Subscription 20 19
Professional services 21 24
Total cost of revenue 40 43
Gross profit 60 57
Operating expenses:
Research and development 24 25
Sales and marketing 41 38
General and administrative 22 18
Total operating expenses 87 81
Loss from operations (28) (24)
Interest and other (expense) income, net (1) 1
Loss before income taxes (28) (23)
Income tax provision - 1
Net loss (29) % (24) %
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Note: Percentages in the table above may not sum due to rounding.
Non-GAAP Financial Measures
To supplement our 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 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 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.
•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
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.
•Asset impairment. We exclude non-cash charges for impairment of assets,
including impairments related to internal-use software and office leases, 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.
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--------------------------------------------------------------------------------The following tables provide a reconciliation of our GAAP to Non-GAAP measures (in thousands, except percentages and per share data):
Fiscal Year Ended January 31, 20221
Amortization of
Stock-based Acquired Charitable Certain
GAAP Compensation Intangibles Contribution Litigation Asset Impairment Non-GAAP
Cost of revenue:
Cost of subscription
revenue $ 68,285 $ (5,875) $ (2,050) $ - $ - $ - $ 60,360
Cost of professional
services revenue 71,821 (10,274) - - - - 61,547
Gross profit 206,632 16,149 2,050 - - - 224,831
Operating expenses:
Research and development 83,219 (21,072) - - - - 62,147
Sales and marketing 143,366 (22,484) - - - - 120,882
General and administrative 76,223 (12,365) - (1,000) (176) (12,783) 49,899
Loss from operations (96,176) 72,070 2,050 1,000 176 12,783 (8,097)
Net loss $ (99,425) $ 72,070 $ 2,050 $ 1,000 $ 176 $ 12,783 $ (11,346)
Net loss per share, basic
and diluted² $ (0.80) $ (0.09)
Gross margin 60 % 65 %
Subscription gross margin 76 % 79 %
Professional services gross
margin (22) % (4) %
Operating margin (28) % (2) %
Fiscal Year Ended
Amortization of
Stock-based Acquired Charitable Certain
GAAP Compensation Intangibles Contribution Litigation Non-GAAP
Cost of revenue:
Cost of subscription revenue $ 58,808 $ (4,849) $ (1,692) $ - $ - $ 52,267
Cost of professional
services revenue 71,962 (9,952) - - - 62,010
Gross profit 174,650 14,801 1,692 - - 191,143
Operating expenses:
Research and development 76,795 (19,562) - - - 57,233
Sales and marketing 116,914 (15,839) - - - 101,075
General and administrative 54,803 (9,081) - (1,000) (3,252) 41,470
Loss from operations (73,862) 59,283 1,692 1,000 3,252 (8,635)
Net loss $ (73,174) $ 59,283 $ 1,692 $ 1,000 $ 3,252 $ (7,947)
Net loss per share, basic
and diluted² $ (0.62) $ (0.07)
Gross margin 57 % 63 %
Subscription gross margin 76 % 78 %
Professional services gross
margin (14) % 2 %
Operating margin (24) % (3) %
_________________________________
(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. We believe that this change more closely aligns our reported financial measures with current industry practice. Our non-GAAP financial measures for the fiscal year endedJanuary 31, 2021 were recast to conform to the updated methodology for comparison purposes. 52 -------------------------------------------------------------------------------- (2) GAAP and Non-GAAP net loss per share are calculated based upon 124.2 million and 117.6 million basic and diluted weighted-average shares of common stock for the fiscal year endedJanuary 31, 2022 and 2021, 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. Fiscal Year Ended January 31, 2022 2021 (in thousands) Net cash provided by operating activities$ 18,686 $ 11,286 Less: Purchases of property and equipment, net of insurance recoveries (8,432) (12,156) Free cash flow$ 10,254 $ (870) Fiscal Years Ended January 31, 2022 and 2021 Revenue Fiscal Year Ended January 31, 2022 2021 $ Change % Change (dollars in thousands) Revenue: Subscription$ 287,747 $ 242,340 $ 45,407 19 % Professional services 58,991 63,080 (4,089) (6) % Total revenue$ 346,738 $ 305,420 $ 41,318 14 % Percentage of total revenue: Subscription 83 % 79 % Professional services 17 21 Total 100 % 100 % Subscription revenue increased by$45.4 million , or 19%, for fiscal 2022 compared to fiscal 2021. The increase was driven by growth in our customer base, including both new and existing customers. New customers contributed approximately$17.5 million of the increase in subscription revenue for fiscal 2022 compared to the prior year period, while increased transaction volume and sales of additional products to our existing customers contributed the remainder. We calculate subscription revenue from new customers for the fiscal year by adding the revenue recognized from new customers acquired in the 12 months prior to the reporting date. Professional services revenue decreased by$4.1 million , or 6%, for fiscal 2022 compared to fiscal 2021 as a result of shifting more services work to our system integrator partners as we improve our sales mix towards recurring subscription revenue. 53 --------------------------------------------------------------------------------
Cost of Revenue and Gross Margin
Fiscal Year Ended January 31,
2022 2021 $ Change % Change
(dollars in thousands)
Cost of revenue:
Subscription $ 68,285 $ 58,808 $ 9,477 16 %
Professional services 71,821 71,962 (141) - %
Total cost of revenue $ 140,106 $ 130,770 $ 9,336 7 %
Gross margin:
Subscription 76 % 76 %
Professional services (22) % (14) %
Total gross margin 60 % 57 %
Cost of subscription revenue increased by $9.5 million , or 16%, for fiscal 2022
compared to fiscal 2021. This was driven by increases of $3.5 million in data
center costs which was primarily related to third-party cloud hosting as we grow
our customer base and includes $2.9 million for costs to migrate our software
from our third-party hosted data center to a cloud hosting provider, $2.8
million in employee compensation costs, $1.1 million in amortization of
internal-use software costs, and $0.9 million in allocated overhead primarily
due to increased headcount.
Cost of professional services revenue was flat for fiscal 2022 compared to
fiscal 2021. This was due to decreases of $2.0 million in employee compensation
costs and $0.4 million in travel costs, offset by an increase of $2.4 million in
outside professional services costs.
Our gross margin for subscription services was flat at 76% in fiscal 2022 and fiscal 2021 as we stabilized our cost structure. We expect our subscription gross margin to be relatively consistent over the next fiscal year.
Our gross margin for professional services decreased to (22)% for fiscal 2022
compared to (14)% for fiscal 2021, primarily due to lower professional services
revenue as a result of shifting more services work to our system integrator
partners, and investment in training our partners as we develop our partner
ecosystem.
Operating Expenses
Research and Development
Fiscal Year Ended January 31,
2022 2021 $ Change % Change
(dollars in thousands)
Research and development $ 83,219 $ 76,795 $ 6,424 8 %
Percentage of total revenue 24 % 25 %
Research and development expense increased by $6.4 million , or 8%, for fiscal
2022 compared to fiscal 2021, primarily driven by increases of $4.9 million in
employee compensation costs and $1.0 million in allocated overhead primarily due
to increased headcount. Research and development expense was relatively
consistent at 24% and 25% of total revenue during fiscal 2022 and fiscal 2021,
respectively.
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Sales and Marketing
Fiscal Year Ended January 31,
2022 2021 $ Change % Change
(dollars in thousands)
Sales and marketing $ 143,366 $ 116,914 $ 26,452 23 %
Percentage of total revenue 41 % 38 %
Sales and marketing expense increased by $26.5 million , or 23%, for fiscal 2022
compared to fiscal 2021, primarily due to increases of $16.9 million in employee
compensation costs, $5.4 million in allocated overhead costs and $3.9 million in
amortization of deferred commissions. Sales and marketing expense increased to
41% of total revenue during fiscal 2022 compared to 38% during fiscal 2021
primarily driven by our strategy to increase in our go-to-market organization to
drive enterprise growth.
General and Administrative
Fiscal Year Ended January 31,
2022 2021 $ Change % Change
(dollars in thousands)
General and administrative $ 76,223 $ 54,803 $ 21,420 39 %
Percentage of total revenue 22 % 18 %
General and administrative expense increased by $21.4 million , or 39%, for
fiscal 2022 compared to fiscal 2021, primarily due to an impairment charge of
$12.8 million related to our office leases, and increases of $7.3 million in
employee compensation costs, $2.1 million in outside professional services
costs, and $2.1 million in allocated overhead costs, partially offset by a
decrease of $3.1 million in litigation expenses as our directors and officers
insurance began to cover certain shareholder litigation costs when we met our
policy deductible during fiscal 2022. General and administrative expense
increased to 22% of total revenue during fiscal 2022 compared to 18% during
fiscal 2021, primarily due to impairment charges related to our office leases.
Interest and Other (Expense) Income, net
Fiscal Year Ended January 31,
2022 2021 $ Change % Change
(in thousands)
Interest and other (expense) income, net
$ (4,383) (171) % Interest and other (expense) income, net decreased by$4.4 million for fiscal 2022 compared to fiscal 2021, primarily due to a$3.5 million decrease related to the revaluation of cash, accounts receivable and accounts payable recorded in a foreign currency and a$1.0 million decrease related to interest income on short-term investments. Income Tax Provision Fiscal Year Ended January 31, 2022 2021 $ Change % Change (in thousands) Income tax provision $ 1,427$ 1,873 $ (446) (24) % We are subject to federal and state income taxes inthe United States and taxes in foreign jurisdictions. For fiscal 2022 and fiscal 2021 we recorded a tax provision of$1.4 million and$1.9 million on losses before income taxes of$98.0 million and$71.3 million , respectively. The effective tax rate for fiscal 2022 and fiscal 2021 was (1.5)% and (2.6)%, respectively. The effective tax rates differ from the statutory rate primarily as a result of providing no benefit on pretax losses incurred inthe United States . For fiscal 2022 and fiscal 2021, 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 55 --------------------------------------------------------------------------------
deferred tax assets will not be realized. The decrease in tax expense resulted primarily from a decline in pre-tax earnings in our foreign jurisdictions.
Liquidity and Capital ResourcesLiquidity 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 ofJanuary 31, 2022 , we had cash and cash equivalents and short-term investments of$215.4 million that was primarily invested in deposit accounts, money market funds, corporate debt securities, supranational securities, commercial paper, andU.S. and foreign 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, borrowings under our Debt Agreement and other financing arrangements. OnMarch 24, 2022 (Initial Closing Date), we issued$250.0 million aggregate principal amount of convertible senior unsecured notes due in 2029 (2029 Notes) as described in Note 18. Subsequent Events to fund the future growth and expansion of our business. We will also issue an additional$150.0 million in senior unsecured notes within 18 months of the Initial Closing Date. In fiscal 2022, under our Debt Agreement, we repaid$4.4 million of principal on our term loan and have the ability borrow up to an additional$30.0 million in revolving loans untilOctober 2022 . In the short term, we believe our existing cash and cash equivalents, marketable securities, and cash flow from operations (in periods in which we generate cash flow from operations) will be sufficient for at least the next 12 months to meet our requirements and plans for cash, including meeting our working capital requirements and capital expenditure requirements. In the long term, our ability to support our requirements and plans for cash, including meeting our working capital and capital expenditure requirements, will depend on many factors, including our revenue growth rate, the timing and the amount of cash received from customers, the expansion of sales and marketing activities, the timing and extent of spending to support research and development efforts, the cost to develop and support our offering, the introduction of new products and services, the continuing adoption of our products by customers, any acquisitions or investments that we make in complementary businesses, products, and technologies, and our ability to obtain equity or debt financing. 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 and 2029 Notes
See Note 9. Debt to our consolidated financial statements included in this Form 10-K for more information about our Debt Agreement. See Note 18. Subsequent Events for information about our 2029 Notes.
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--------------------------------------------------------------------------------Cash Flows
The following table summarizes our cash flows for the periods indicated:
Fiscal Year Ended
2022 2021
(in thousands)
Net cash provided by operating activities $ 18,686 $ 11,286
Net cash (used in) provided by investing activities (20,099) 12,872
Net cash provided by financing activities 21,483 14,981
Effect of exchange rates on cash and cash equivalents (673) 696
Net increase in cash and cash equivalents $ 19,397 $ 39,835
Operating Activities
Net cash provided by operating activities of $18.7 million in fiscal 2022 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 fiscal 2022 increased
Investing Activities
Net cash used in investing activities for fiscal 2022 was$20.1 million . We used$10.3 million to purchase short-term investments, net of maturities, and used$8.4 million , net of insurance recoveries, to purchase property and equipment and to develop internal-use software as we continue to invest our business. We also paid$1.3 million in cash during fiscal 2022 to acquire certain intellectual property assets. Net cash used in investing activities for fiscal 2022 increased$33.0 million compared to last fiscal year primarily due the timing of purchases, sales, and maturities of short-term investments, which resulted in$35.3 million of net cash used between the comparative periods. Additionally, we paid$1.3 million in cash to acquire certain intellectual property assets, compared to no intangible asset purchases in the prior year. These cash uses were partially offset by a decrease in property and equipment purchases, net of insurance recoveries, of$3.7 million as we recognized leasehold improvements related to our new corporate headquarters last year.
Financing Activities
Net cash provided by financing activities for fiscal 2022 of$21.5 million was primarily due to$18.5 million in proceeds from stock option exercises and$7.4 million of proceeds from issuance of common stock under the ESPP, partially offset by$4.4 million in debt principal payments.
Net cash provided by financing activities for fiscal 2022 increased
Obligations and Other Commitments
Our material cash requirements from known contractual and other obligations consist of obligations under our operating leases for office space, the 2029 Notes, our Debt Agreement, and a contractual commitment to one of our vendors for cloud computing services. For more information, please refer to Note 12. Leases, Note 18. Subsequent Events, Note 9. Debt and Note 13. Commitments and Contingencies, respectively, of the Notes to our Consolidated Financial Statements included in this Annual Report on Form 10-K. As ofJanuary 31, 2022 , our contractual commitments totaled$129.3 million , with$26.4 million committed within the next twelve months. 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 ofJanuary 31, 2022 , no demands had been made upon us to provide 57 -------------------------------------------------------------------------------- indemnification under such agreements and there were no claims that we are aware of that could have a material effect on our consolidated balance sheets, consolidated statements of comprehensive loss, or consolidated statements of cash flows. Critical Accounting Estimates Our consolidated financial statements are prepared in accordance withU.S. GAAP. The preparation of these consolidated financial statements requires management 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. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other factors that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates. We believe that of our significant accounting policies, which are described in Note 2. Summary of Significant Accounting Policies in of our consolidated financial statements contained herein, the following accounting policy includes estimates and assumptions with a greater degree of judgment and complexity.
Revenue Recognition Policy
Our revenue recognition policy follows guidance from Topic 606, Revenue from Contracts with Customers, and is described in Note 2. Summary of Significant Accounting Policies to the consolidated financial statements contained herein. We derive our revenue primarily from subscription fees and professional services fees. Determining whether products and services are distinct performance obligations that should be accounted for separately or combined as one unit of accounting may require significant judgment. Our cloud-based software subscriptions are distinct as such services are often sold separately. In addition, our subscription services contracts can include multi-year agreements that include a fixed annual platform fee and a volume block usage fee that may vary based on permitted volume usage each year. To the extent that permitted volume usage each year is the same, we concluded that there is one multi-year stand-ready performance obligation. To the extent that permitted volume usage each year varies, we concluded that each year represents a distinct stand-ready performance obligations and we allocate the transaction price to the performance obligations on a relative standalone-selling price basis and revenue is recognized ratably over each year. In determining whether professional services are distinct, we consider the following factors for each professional services agreement: availability of the services from other vendors, the nature of the professional services, the timing of when the professional services contract was signed in comparison to the cloud-based software, start date and the contractual dependence of the cloud-based software on the customer's satisfaction with the professional services work. To date, we have concluded that all of the professional services included in contracts with multiple performance obligations are distinct. The determination of standalone selling price (SSP) for each distinct performance obligation requires judgment. We establish SSP for both our subscription services and professional services elements primarily by considering the actual sales prices of the element when sold on a stand-alone basis or when sold together with other elements. Our actual sales prices for subscription services and professional services for stand-alone sales do not typically vary from our prices for each element when sold together with other elements. When we are unable to rely on actual observable SSPs, we determine SSP based on inputs such as actual sales prices when sold together with other promised subscriptions or services and our overarching pricing objectives and strategies.
Recent Accounting Pronouncements-Adopted in Fiscal 2022
See "Summary of Significant Accounting Policies and Recent Accounting
Pronouncements" in Note 2. Summary of Significant Accounting Policies and Recent
Accounting Pronouncements of our accompanying consolidated financial statements
for more information.
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--------------------------------------------------------------------------------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. InAugust 2020 , the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity, which simplifies the accounting for convertible instruments by removing certain separation models required under currentU.S. GAAP, including the beneficial conversion feature and cash conversion models. This ASU also simplifies the diluted earnings per share calculation in certain areas. The standard is effective for interim and annual periods beginning afterDecember 15, 2021 , and can be applied utilizing either a modified or full retrospective transition method. The Company is currently evaluating the effect the standard will have on its consolidated financial statements. 59
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