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, 2022 filed with theSecurities and Exchange Commission (SEC) onMarch 28, 2022 (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, 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, 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-cash and revenue recognition 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-cash and revenue recognition process 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-cash and revenue recognition 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
Our financial results for the fiscal quarter endedApril 30, 2022 have not been materially impacted by the COVID-19 pandemic. The extent to which the COVID-19 pandemic impacts our business operations, financial performance and liquidity 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. Because our products are generally offered as subscription-based licenses and a portion of that revenue is recognized over time, the effect of the COVID-19 pandemic may not be fully reflected in our results of operations until future periods. 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 First Quarter Business Highlights and Recent Developments:
•We closed six deals that exceeded
•Our dollar-based retention rate improved to 110% compared to 103% as of
•Customers with ACV exceeding
•Our ARR was
•Customer usage ofZuora solutions grew, with$20.6 billion in transaction volume throughZuora's billing platform during the three months endedApril 30, 2022 , an increase of 21% year-over-year. •OnMarch 24, 2022 , we issued$250.0 million of convertible senior unsecured notes toSilver Lake , one of the leading technology private equity investors. Under the terms of the agreement withSilver Lake , we will issue an additional$150.0 million of convertible senior unsecured notes toSilver Lake within 18 months of the initial issuance date. We have also issued warrants toSilver Lake in connection with the transaction.
Fiscal First Quarter Financial Performance Summary:
Our financial performance for the three months ended
•Subscription revenue was
•Gross profit was
•Loss from operations was
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
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 24 -------------------------------------------------------------------------------- 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 746 as ofApril 30, 2022 , as compared to 677 customers as ofApril 30, 2021 . We expect this metric to increase for the fiscal year.
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 increased to 110% as ofApril 30, 2022 , as compared to 103% as ofApril 30, 2021 . While the dollar-based retention rate can fluctuate in any particular quarter, we expect it to increase slightly over the remainder of this fiscal year.
Annual Recurring Revenue (ARR)
ARR represents the annualized recurring value at the time of initial booking or contract modification for all active subscription contracts at the end of a reporting period. ARR 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 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 was$326.3 million as ofApril 30, 2022 , compared to$271.8 million as ofApril 30, 2021 . Our ARR increased 20% year over year as ofApril 30, 2022 compared to an increase of 14% for the comparable period of the prior year. We expect our ARR growth rate to increase slightly over the remainder of the fiscal year. 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
25 -------------------------------------------------------------------------------- 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. 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. 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 26 -------------------------------------------------------------------------------- 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 we will realize as we scale our business.
Interest and Other Income, net
Interest and other income, net primarily consists of interest income from our investment holdings, amortization of discount and amortization of debt issuance costs on the 2029 Notes, interest expense associated with our Debt Agreement, gain or loss on the revaluation of the warrant liability, 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. 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 April 30, 2022 2021 Revenue: Subscription$ 78,500 $ 65,142 Professional services 14,699 15,187 Total revenue 93,199 80,329 Cost of revenue: Subscription 18,725 15,643 Professional services 17,510 17,078 Total cost of revenue 36,235 32,721 Gross profit 56,964 47,608 Operating expenses: Research and development 22,872 18,967 Sales and marketing 40,457 31,865 General and administrative 17,290 14,185 Total operating expenses 80,619 65,017 Loss from operations (23,655) (17,409) Interest and other income, net 795 121 Loss before income taxes (22,860) (17,288) Income tax provision 308 373 Net loss$ (23,168) $ (17,661) 27
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Three Months Ended April 30, 2022 2021 Revenue: Subscription 84 % 81 % Professional services 16 19 Total revenue 100 100 Cost of revenue: Subscription 20 19 Professional services 19 21 Total cost of revenue 39 41 Gross profit 61 59 Operating expenses: Research and development 25 24 Sales and marketing 43 40 General and administrative 19 18 Total operating expenses 87 81 Loss from operations (25) (22) Interest and other income, net 1 - Loss before income taxes (25) (22) Income tax provision - - Net loss (25) % (22) %
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 withU.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
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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. •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.
•Change in fair value of warrant liabilities. We exclude the change in fair
value of warrant liabilities, which is a non-cash gain or loss, as it can
fluctuate significantly with changes in
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 Change in Fair Stock-based Acquired Certain Value of Warrant GAAP Compensation Intangibles Litigation Liability Non-GAAP Cost of revenue: Cost of subscription revenue$ 18,725 $ (1,799) $ (554) $ - $ -$ 16,372 Cost of professional services revenue 17,510 (3,017) - - - 14,493 Gross profit 56,964 4,816 554 - - 62,334 Operating expenses: Research and development 22,872 (5,966) - - - 16,906 Sales and marketing 40,457 (7,456) - - - 33,001 General and administrative 17,290 (4,587) - (120) - 12,583 Loss from operations (23,655) 22,825 554 120 - (156) Net loss$ (23,168) $ 22,825 $ 554$ 120 $ (4,373) $ (4,042) Net loss per share, basic and diluted1$ (0.18) $ (0.03) Gross margin 61 % 67 % Subscription gross margin 76 % 79 % Professional services gross margin (19) % 1 % Operating margin (25) % - % 29
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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$ 15,643 $ (1,043) $ (423) -$ 14,177 Cost of professional services revenue 17,078 (2,001) - - 15,077 Gross profit 47,608 3,044 423 - 51,075 Operating expenses: Research and development 18,967 (4,529) - - 14,438 Sales and marketing 31,865 (4,080) - - 27,785 General and administrative 14,185 (2,144) - (809) 11,232 Loss from operations (17,409) 13,797 423 809 (2,380) Net loss$ (17,661) $ 13,797 $ 423$ 809 $ (2,632) Net loss per share, basic and diluted1$ (0.15) $ (0.02) Gross margin 59 % 64 % Subscription gross margin 76 % 78 % Professional services gross margin (12) % 1 % Operating margin (22) % (3) %
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(1) GAAP and Non-GAAP net loss per share are calculated based upon 128.5 million and 121.4 million weighted-average shares of common stock outstanding for the three months endedApril 30, 2022 and 2021, respectively. (2) 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 three months endedApril 30, 2021 were recast to conform to the updated methodology for comparison purposes.
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 April 30, 2022 2021 (in thousands) Net cash provided by operating activities$ 6,983 $ 10,251 Less: Purchases of property and equipment, net of insurance recoveries (3,263) (1,621) Free cash flow$ 3,720 $ 8,630 30
-------------------------------------------------------------------------------- Comparison of the Three Months EndedApril 30, 2022 and 2021 Revenue Three Months Ended April 30, 2022 2021 $ Change % Change (dollars in thousands) Revenue: Subscription$ 78,500 $ 65,142 $ 13,358 21 % Professional services 14,699 15,187 (488) (3) % Total revenue$ 93,199 $ 80,329 $ 12,870 16 % Percentage of revenue: Subscription 84 % 81 % Professional services 16 19 Total revenue 100 % 100 % Subscription revenue increased by$13.4 million , or 21%, for the three months endedApril 30, 2022 compared to the three months endedApril 30, 2021 . The increase was driven by growth in our customer base, with new customers contributing approximately$5.9 million of the increase in subscription revenue, and increased transaction volume and sales of additional products to our existing customers contributing 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 decreased by$0.5 million , or (3)%, for the three months endedApril 30, 2022 compared to the three months endedApril 30, 2021 as a result of transitioning services work to our system integration partners as we shift our sales mix towards recurring subscription revenue.
Cost of Revenue and Gross Margin
Three Months Ended April 30, 2022 2021 $ Change % Change (dollars in thousands) Cost of revenue: Subscription$ 18,725 $ 15,643 $ 3,082 20 % Professional services 17,510 17,078 432 3 % Total cost of revenue$ 36,235 $ 32,721 $ 3,514 11 % Gross margin: Subscription 76 % 76 % Professional services (19) (12) Total gross margin 61 % 59 % Cost of subscription revenue increased by$3.1 million , or 20%, for the three months endedApril 30, 2022 compared to the three months endedApril 30, 2021 . The increase in cost of subscription revenue was primarily due to increases of$2.2 million in employee compensation costs,$0.4 million in outside professional services costs and$0.3 million in allocated overhead costs. Cost of professional services revenue increased by$0.4 million , or 3%, for the three months endedApril 30, 2022 compared to the three months endedApril 30, 2021 . The increase in cost of professional services revenue was primarily due to an increase of$1.5 million in employee compensation costs driven by stock-based compensation expense, partially offset by a decrease of$1.2 million in outside professional services costs. 31 --------------------------------------------------------------------------------
Our gross margin for subscription services was flat at 76% for the three months
ended
Our gross margin for professional services decreased to (19)% for the three
months ended
Operating Expenses Research and Development Three Months Ended April 30, 2022 2021 $ Change % Change (dollars in thousands) Research and development$ 22,872 $ 18,967 $ 3,905 21 % Percentage of total revenue 25 % 24 % Research and development expense increased by$3.9 million , or 21%, for the three months endedApril 30, 2022 compared to the three months endedApril 30, 2021 primarily due to increases of$2.8 million in employee compensation costs and$1.5 million in outside professional services costs, partially offset by a$0.5 million increase in capitalization of internal-use software costs compared to prior year. Research and development expense remained relatively consistent at 25% of total revenue for the three months endedApril 30, 2022 and 24% for the three months endedApril 30, 2021 . Sales and Marketing Three Months Ended April 30, 2022 2021 $ Change % Change (dollars in thousands) Sales and marketing$ 40,457 $ 31,865 $ 8,592 27 % Percentage of total revenue 43 % 40 % Sales and marketing expense increased by$8.6 million , or 27%, for the three months endedApril 30, 2022 compared to the three months endedApril 30, 2021 , primarily due to increases of$6.2 million in payroll related costs driven by increased headcount and stock-based compensation expense,$0.7 million in amortization of deferred commissions,$0.7 million in allocated overhead costs, and$0.4 million in travel costs. Sales and marketing expense increased to 43% of total revenue during the three months endedApril 30, 2022 from 40% during the three months endedApril 30, 2021 , reflecting our strategy to invest in our go-to-market organization to drive enterprise growth.
General and Administrative
Three Months Ended April 30, 2022 2021 $ Change % Change (dollars in thousands)
General and administrative
22 % Percentage of total revenue 19 % 18 % General and administrative expense increased by$3.1 million , or 22%, for the three months endedApril 30, 2022 compared to the three months endedApril 30, 2021 , primarily due to increases of$3.4 million in employee compensation costs and$0.5 million in outside professional services costs, partially offset by a decrease of$0.7 million in legal expenses. General and administrative expense was relatively consistent at 19% of total revenue during the three months endedApril 30, 2022 and 18% for the three months endedApril 30, 2021 . 32 --------------------------------------------------------------------------------
Interest and other income, net
Three Months Ended April 30, 2022 2021 $ Change % Change (dollars in thousands) Interest and other income, net$ 795 $ 121 $
674 557 %
Interest and other income, net increased by$0.7 million for the three months endedApril 30, 2022 compared to the three months endedApril 30, 2021 , primarily due to the$4.4 million gain recognized on revaluation of the warrant liability, partially offset by$1.8 million of interest expense associated with the Initial Notes as well as the revaluation of cash, accounts receivable and accounts payable recorded in a foreign currency. Income Tax Provision Three Months Ended April 30, 2022 2021 $ Change % Change (dollars in thousands) Income tax provision$ 308 $ 373 $ (65) (17) % We are subject to federal and state income taxes inthe United States and taxes in foreign jurisdictions. For the three months endedApril 30, 2022 and 2021, we recorded a tax provision of$0.3 million and$0.4 million , respectively, on a loss before income taxes of$22.9 million and$17.3 million , respectively. The effective tax rate for the three months endedApril 30, 2022 and 2021 was (1.3)% and (2.2)%, respectively. The change in the effective tax rate was due primarily to an decrease 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 inthe United States . For the three months endedApril 30, 2022 and 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 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 ofApril 30, 2022 , we had cash and cash equivalents and short-term investments of$452.6 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, proceeds from our issuance of the Initial Notes and other financing arrangements. OnMarch 24, 2022 , we issued$250.0 million aggregate principal amount of convertible senior unsecured notes to fund the future growth and expansion of our business. Under the 2029 Notes, we expect to issue an additional$150.0 million in convertible senior unsecured notes within 18 months of the Initial Closing Date. Under our Debt Agreement, we repaid$1.1 million of principal on our term loan during the three months endedApril 30, 2022 , and have the ability borrow up to an additional$30.0 million in revolving loans untilOctober 2022 . See Note 9. Debt to our unaudited condensed consolidated financial statements included in this Form 10-Q for more information about our Debt Agreement and the 2029 Notes. 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 33 --------------------------------------------------------------------------------
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.
Cash Flows
The following table summarizes our cash flows for the periods indicated (in thousands): Three Months Ended April 30, 2022 2021 Net cash provided by operating activities$ 6,983 $
10,251
Net cash used in investing activities (3,887)
(5,616)
Net cash provided by financing activities 234,382
2,456
Effect of exchange rates on cash and cash equivalents (359)
(85)
Net increase in cash and cash equivalents$ 237,119 $ 7,006 Operating Activities Net cash provided by operating activities of$7.0 million for the three months endedApril 30, 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 the three months endedApril 30, 2022 decreased$3.3 million compared to the same period last year as a result of timing of cash collections from our customers.
Investing Activities
Net cash used in investing activities for the three months endedApril 30, 2022 was$3.9 million . We used$3.3 million to purchase property and equipment and to develop internal-use software as we continue to invest in and grow our business, and had net purchases of$0.6 million of short-term investments. Net cash used in investing activities for the three months endedApril 30, 2022 decreased$1.7 million compared to the three months endedApril 30, 2021 primarily due to$0.6 million net purchases of short-term investments in the three months endedApril 30, 2022 , compared to$4.0 million last year. This was partially offset by payments for property and equipment, net of insurance recoveries, which were$1.6 million higher compared to the same period last year primarily due to increased capitalization of internal-use software in the three months endedApril 30, 2022 . Financing Activities Net cash provided by financing activities for the three months endedApril 30, 2022 of$234.4 million was primarily due to$234.6 million in net proceeds from issuance of the Initial Notes and$0.9 million in proceeds from stock option exercises, partially offset by$1.1 million of debt principal payments related to our Debt Agreement. 34 -------------------------------------------------------------------------------- Net cash provided by financing activities for the three months endedApril 30, 2022 increased$231.9 million compared to the three months endedApril 30, 2021 primarily due to proceeds from issuance of the Initial Notes in the three months endedApril 30, 2022 , partially offset by$2.7 million less proceeds received from stock option exercises compared to last year.
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 9. Debt and Note 13. Commitments and Contingencies, respectively, of the Notes to our Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. As ofApril 30, 2022 , our contractual commitments totaled$416.0 million , with$26.8 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 ofApril 30, 2022 , 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.
Critical Accounting Policies and Estimates
Our unaudited condensed consolidated financial statements are prepared in accordance withU.S. GAAP. The preparation of these unaudited condensed 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. 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, 2022 , filed with theSEC onMarch 28, 2022 . Any significant changes to these policies during the three months endedApril 30, 2022 are described in Note 2. Summary of Significant Accounting Policies and Recent Accounting Pronouncements to our unaudited condensed consolidated financial statements provided herein.
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.
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