ZUORA, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Form 10-Q and our Annual Report on Form 10-K for the fiscal year endedJanuary 31, 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 27 -------------------------------------------------------------------------------- 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, Zephr, 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.
COVID-19 Pandemic Impact
Our financial results for the first nine months of fiscal 2023 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 Third Quarter Business Highlights and Recent Developments:
•Customers with ACV exceeding$100,000 totaled 770 as ofOctober 31, 2022 , an increase of 7% compared to last year. We closed six deals that exceeded$500,000 in ACV.
•Our dollar-based retention rate decreased to 109% compared to 110% as of
•Our ARR was
•Customer usage ofZuora solutions grew, with$21.5 billion in transaction volume throughZuora's billing platform during the three months endedOctober 31, 2022 , an increase of 15% year-over-year and 17% on a constant currency basis. •Acquired Zephr, a leading subscription experience platform used by global digital publishing and media companies. Refer to Note 19. Zephr Acquisition for further information. 28 --------------------------------------------------------------------------------
•Committed to a workforce reduction plan designed to improve operational efficiencies and operating costs and better align our workforce with current business needs, priorities, and near term growth expectations, in light of macroeconomic uncertainties. Refer to Note 20. Subsequent Events.
Fiscal Third Quarter Financial Performance Summary:
Our financial performance for the three months ended
•Subscription revenue was
•On a constant currency basis, subscription revenue was
•Gross profit was
•Loss from operations was
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:
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 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 770 as ofOctober 31, 2022 , as compared to 720 customers as ofOctober 31, 2021 . We expect this metric to be relatively flat for the remainder of 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 decreased to 109% as ofOctober 31, 2022 , as compared to 110% as ofOctober 31, 2021 . While the dollar-based retention rate can fluctuate in any particular quarter, we expect it to decrease 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$350.7 million as ofOctober 31, 2022 , compared to$295.0 million as ofOctober 31, 2021 , representing an increase of 19% year-over-year. For the comparable prior year period 29 -------------------------------------------------------------------------------- endingOctober 31, 2021 , our ARR growth was also 19% year-over-year. We expect our ARR year-over-year growth rate to decrease 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 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
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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 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.
Other income and expenses
Other income and expenses primarily consists of gain or loss on the revaluation of the warrant liability, amortization of discount and amortization of debt issuance costs on the 2029 Notes, contractual interest on the 2029 Notes, interest expense associated with our Debt Agreement, interest income from our cash and cash equivalents and short-term investments, 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 Operations
The following tables set forth our unaudited condensed consolidated results of
operations for the periods presented in dollars and as a percentage of our total
revenue (in thousands):
Three Months Ended Nine Months Ended
October 31, October 31,
2022 2021 2022 2021
Revenue:
Subscription $ 86,567 $ 73,775 $ 248,878 $ 210,415
Professional services 14,505 15,455 44,168 45,631
Total revenue 101,072 89,230 293,046 256,046
Cost of revenue:
Subscription 21,727 17,279 60,024 50,190
Professional services 18,553 18,416 55,140 54,218
Total cost of revenue 40,280 35,695 115,164 104,408
Gross profit 60,792 53,535 177,882 151,638
Operating expenses:
Research and development 28,413 21,738 77,639 61,565
Sales and marketing 46,973 37,004 132,576 105,130
General and administrative 19,327 16,370 55,433 46,931
Total operating expenses 94,713 75,112 265,648 213,626
Loss from operations (33,921) (21,577) (87,766) (61,988)
Change in fair value of warrant liability 452 - 9,348 -
Interest expense (4,444) (39) (10,647) (111)
Interest and other income (expense), net 1,187 (663) 98 (923)
Loss before income taxes (36,726) (22,279) (88,967) (63,022)
Income tax provision 308 610 1,145 1,221
Net loss $ (37,034) $ (22,889) $ (90,112) $ (64,243)
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Three Months Ended Nine Months Ended
October 31, October 31,
2022 2021 2022 2021
Revenue:
Subscription 86 % 83 % 85 % 82 %
Professional services 14 17 15 18
Total revenue 100 100 100 100
Cost of revenue:
Subscription 21 19 20 20
Professional services 18 21 19 21
Total cost of revenue 40 40 39 41
Gross profit 60 60 61 59
Operating expenses:
Research and development 28 24 26 24
Sales and marketing 46 41 45 41
General and administrative 19 18 19 18
Total operating expenses 94 84 91 83
Loss from operations (34) (24) (30) (24)
Change in fair value of warrant liability - - 3 -
Interest expense (4) - (4) -
Interest and other income (expense), net 1 (1) - -
Loss before income taxes (36) (25) (30) (25)
Income tax provision - 1 - -
Net loss (37) % (26) % (31) % (25) %
Note: Percentages in the table above may not sum due to rounding.
Non-GAAP Financial Measures
To supplement our unaudited condensed consolidated financial statements
presented in accordance with U.S. GAAP, we monitor and consider non-GAAP
financial measures including: subscription revenue and total revenue that
exclude the impact of foreign currency exchange rate fluctuations (constant
currency basis); 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 income (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.
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--------------------------------------------------------------------------------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 contributions. We exclude expenses associated with charitable donations of our common stock. 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. 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
•Acquisition-related transactions. We exclude acquisition-related transactions (including integration-related charges) that are not related to our ongoing operations, including expenses we incurred and gains or losses recognized on contingent consideration related to our acquisition of Zephr. We do not consider these transactions reflective of our core business or ongoing operating performance.
•Workforce reduction. We exclude charges related to the workforce reduction plan
we approved in
The following tables provide a reconciliation of our GAAP to non-GAAP measures (in thousands, except percentages and per share data):
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Three Months Ended October 31, 2022
Amortization of Change in Fair
Stock-based Acquired Certain Value of Warrant Acquisition-related Workforce
GAAP Compensation Intangibles Litigation Liability Transactions Reduction Non-GAAP
Cost of revenue:
Cost of subscription revenue $ 21,727 $ (2,437) $ (586) $ - $ - $ - $ (147) $ 18,557
Cost of professional
services revenue 18,553 (3,479) - - - - (399) 14,675
Gross profit 60,792 5,916 586 - - - 546 67,840
Operating expenses:
Research and development 28,413 (7,536) - - - - (512) 20,365
Sales and marketing 46,973 (10,188) - - - - (2,390) 34,395
General and administrative 19,327 (5,367) - (16) - (1,268) (212) 12,464
(Loss) income from
operations (33,921) 29,007 586 16 - 1,268 3,660 616
Net loss $ (37,034) $ 29,007 $ 586 $ 16 $ (452) $ 1,268 $ 3,660 $ (2,949)
Net loss per share, basic
and diluted1 $ (0.28) $ (0.02)
Gross margin 60 % 67 %
Subscription gross margin 75 % 79 %
Professional services gross
margin (28) % (1) %
Operating margin (34) % 1 %
Three
Months Ended
Amortization of
Stock-based Acquired Certain
GAAP Compensation Intangibles Litigation Non-GAAPCost of revenue: Cost of subscription revenue$ 17,279 $ (1,580) $ (554) $ -$ 15,145 Cost of professional services revenue 18,416 (2,822) - - 15,594 Gross profit 53,535 4,402 554 - 58,491 Operating expenses: Research and development 21,738 (5,774) - - 15,964 Sales and marketing 37,004 (6,298) - - 30,706 General and administrative 16,370 (3,438) - 114 13,046 Loss from operations (21,577) 19,912 554 (114) (1,225) Net loss$ (22,889) $ 19,912 $ 554$ (114) $ (2,537) Net loss per share, basic and diluted1$ (0.18) $ (0.02) Gross margin 60 % 66 % Subscription gross margin 77 % 79 % Professional services gross margin (19) % (1) % Operating margin (24) % (1) %
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(1) GAAP and Non-GAAP net loss per share are calculated based upon 132.6 million and 125.1 million weighted-average shares of common stock outstanding for the three months endedOctober 31, 2022 and 2021, respectively. 35 --------------------------------------------------------------------------------
Nine Months Ended October 31, 2022
Amortization of Change in Fair
Stock-based Acquired Charitable Certain Value of Warrant Acquisition-related Workforce
GAAP Compensation Intangibles Contribution Litigation Liability Transactions Reduction Non-GAAP
Cost of revenue:
Cost of subscription revenue $ 60,024 $ (6,517) $ (1,512) $ - $ - $ - $ - $ (147) $ 51,848
Cost of professional services revenue 55,140 (10,186) - - - - - (399) 44,555 Gross profit 177,882 16,703 1,512 - - - - 546 196,643 Operating expenses: Research and development 77,639 (20,967) - - - - - (512) 56,160 Sales and marketing 132,576 (27,603) - - - - - (2,390) 102,583 General and administrative 55,433 (14,772) - (1,000) (246) - (1,612) (212) 37,591 (Loss) income from operations (87,766) 80,045 1,512 1,000 246 - 1,612 3,660 309 Net loss$ (90,112) $ 80,045 $ 1,512 $ 1,000$ 246 $ (9,348) $ 1,612$ 3,660 $ (11,385) Net loss per share, basic and diluted1$ (0.69) $ (0.09) Gross margin 61 % 67 % Subscription gross margin 76 % 79 % Professional services gross margin (25) % (1) % Operating margin (30) % - %
Nine Months Ended
Amortization of
Stock-based Acquired Charitable Certain
GAAP Compensation Intangibles Contribution Litigation Non-GAAP
Cost of revenue:
Cost of subscription revenue $ 50,190 $ (4,157) $ (1,496) $ - $ - $ 44,537
Cost of professional services revenue 54,218 (7,487) - - - 46,731 Gross profit 151,638 11,644 1,496 - - 164,778 Operating expenses: Research and development 61,565 (15,546) - - - 46,019 Sales and marketing 105,130 (15,993) - - - 89,137 General and administrative 46,931 (8,595) - (1,000) (169) 37,167 Loss from operations (61,988) 51,778 1,496 1,000 169 (7,545) Net loss$ (64,243) $ 51,778 $ 1,496 $ 1,000$ 169 $ (9,800) Net loss per share, basic and diluted1$ (0.52) $ (0.08) Gross margin 59 % 64 % Subscription gross margin 76 % 79 % Professional services gross margin (19) % (2) % Operating margin (24) % (3) %
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(1) GAAP and Non-GAAP net loss per share are calculated based upon 130.5 million and 123.2 million weighted-average shares of common stock outstanding for the nine months endedOctober 31, 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 nine months endedOctober 31, 2021 were recast to conform to the updated methodology for comparison purposes. 36 --------------------------------------------------------------------------------
Free Cash Flow
We define free cash flow as net cash provided by operating activities, less cash used for purchases of property and equipment, net of insurance recoveries. Insurance recoveries include amounts paid to us for property and equipment that were damaged inJanuary 2020 at our corporate headquarters. We include the impact of net purchases of property and equipment in our free cash flow calculation because we consider these capital expenditures to be a necessary component of our ongoing operations. We consider free cash flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated by the business that can possibly be used for investing in our business and strengthening our balance sheet, but it is not intended to represent the residual cash flow available for discretionary expenditures. Three Months Ended Nine Months Ended October 31, October 31, 2022 2021 2022 2021 (in
thousands)
Net cash (used in) provided by operating activities$ (4,861) $ 692 $ (2,679) $ 8,320 Less: Purchases of property and equipment, net of insurance recoveries (2,387) (2,347) (8,471) (5,700) Free cash flow$ (7,248) $ (1,655) $ (11,150) $ 2,620 Net cash (used in) provided by investing activities$ (19,416) $ 7,017 $ (165,922) $ (1,843) Net cash provided by financing activities$ 575 $ 4,394 $ 239,003 $ 16,364 Constant Currency We provide subscription revenue and total revenue, including year-over-year growth rates, adjusted to remove the impact of foreign currency rate fluctuations, which we refer to as constant currency. We believe providing revenue on a constant currency basis helps our investors to better understand our underlying performance. We calculate constant currency in a given period by applying the average currency exchange rates in the comparable period of the prior year to the local currency revenue in the current period. Three Months Ended Nine Months Ended October 31, October 31, 2022 2021 % Change 2022 2021 % Change (dollars in thousands) (dollars in thousands) Subscription revenue (GAAP)$ 86,567 $ 73,775 17 %$ 248,878 $ 210,415 18 % Effects of foreign currency rate fluctuations 2,319 4,132 Subscription revenue on a constant currency basis (Non-GAAP)$ 88,886 20 %$ 253,010 20 % Total revenue (GAAP)$ 101,072 $ 89,230 13 %$ 293,046 $ 256,046 14 % Effects of foreign currency rate fluctuations 3,061 5,850 Total revenue on a constant currency basis (Non-GAAP)$ 104,133 17 %$ 298,896 17 % 37
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Comparison of the Three Months Ended October 31, 2022 and 2021
Revenue
Three Months Ended
October 31,
2022 2021 $ Change % Change
(dollars in thousands)
Revenue:
Subscription $ 86,567 $ 73,775 $ 12,792 17 %
Professional services 14,505 15,455 (950) (6) %
Total revenue $ 101,072 $ 89,230 $ 11,842 13 %
Percentage of revenue:
Subscription 86 % 83 %
Professional services 14 17
Total revenue 100 % 100 %
Subscription revenue increased by $12.8 million , or 17%, for the three months
ended October 31, 2022 compared to the three months ended October 31, 2021 . The
increase was driven by growth in our customer base, with new customers
contributing approximately $5.3 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 to $14.5 million for the three months
ended October 31, 2022 from $15.5 million for the three months ended October 31,
2021 , partially driven by the shifting of services work to our system
integration partners.
On a constant currency basis, subscription revenue was $88.9 million and
increased 20%, and total revenue was $104.1 million and increased 17%, for the
three months ended October 31, 2022 compared to the three months ended October
31, 2021 .
Cost of Revenue and Gross Margin
Three Months Ended
October 31,
2022 2021 $ Change % Change
(dollars in thousands)
Cost of revenue:
Subscription $ 21,727 $ 17,279 $ 4,448 26 %
Professional services 18,553 18,416 137 1 %
Total cost of revenue $ 40,280 $ 35,695 $ 4,585 13 %
Gross margin:
Subscription 75 % 77 %
Professional services (28) (19)
Total gross margin 60 % 60 %
Cost of subscription revenue increased by $4.4 million , or 26%, for the three
months ended October 31, 2022 compared to the three months ended October 31,
2021 . The increase in cost of subscription revenue was primarily due to
increases of $2.5 million in employee compensation costs driven by increased
headcount and stock-based compensation expense, $0.8 million in allocated
expenses, and $0.6 million in amortization of internal-use software costs.
Cost of professional services revenue increased by $0.1 million , or 1%, for the
three months ended October 31, 2022 compared to the three months ended October
31, 2021 . The increase in cost of professional services
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revenue was primarily due to an increase of $1.5 million in employee
compensation costs and charges of $0.4 million associated with the workforce
reduction plan, which were partially offset by a decrease of $1.7 million in
outside professional services costs.
Our gross margin for subscription services decreased to 75% for the three months
ended October 31, 2022 compared to 77% for the three months ended October 31,
2021 . This was primarily driven by increased compensation related expenses. We
expect our subscription gross margin to be relatively consistent for the
remainder of the fiscal year.
Our gross margin for professional services decreased to (28)% for the three
months ended
Operating Expenses
Research and Development
Three Months Ended
October 31,
2022 2021 $ Change % Change
(dollars in thousands)
Research and development $ 28,413 $ 21,738 $ 6,675 31 %
Percentage of total revenue 28 % 24 %
Research and development expense increased by $6.7 million , or 31%, for the
three months ended October 31, 2022 compared to the three months ended October
31, 2021 , primarily due to increases of $4.4 million in employee compensation
costs driven by increased headcount and stock-based compensation expense, $0.8
million in outside professional services costs, and charges of $0.5 million
associated with the workforce reduction plan. Research and development expense
increased to 28% of total revenue for the three months ended October 31, 2022
from 24% during the three months ended October 31, 2021 , primarily due to
additional employee compensation expense.
Sales and Marketing
Three Months Ended
October 31,
2022 2021 $ Change % Change
(dollars in thousands)
Sales and marketing $ 46,973 $ 37,004 $ 9,969 27 %
Percentage of total revenue 46 % 41 %
Sales and marketing expense increased by $10.0 million , or 27%, for the three
months ended October 31, 2022 compared to the three months ended October 31,
2021 , primarily due to increases of $7.0 million in employee compensation costs
driven by increased headcount and stock-based compensation expense and $0.8
million in amortization of deferred commissions, and charges of $2.4 million
associated with the workforce reduction plan. Sales and marketing expense
increased to 46% of total revenue during the three months ended October 31, 2022
from 41% during the three months ended October 31, 2021 , as a result of higher
employee compensation costs and the charges incurred this quarter associated
with the workforce reduction plan.
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General and Administrative
Three Months Ended
October 31,
2022 2021 $ Change % Change
(dollars in thousands)
General and administrative $ 19,327 $ 16,370 $ 2,957 18 %
Percentage of total revenue 19 % 18 %
General and administrative expense increased by $3.0 million , or 18%, for the
three months ended October 31, 2022 compared to the three months ended October
31, 2021 , primarily due to increases of $3.1 million in acquisition-related
costs and $2.2 million in employee compensation costs driven by increased
stock-based compensation expense, partially offset by a $1.8 million gain on the
revaluation of the contingent consideration from the Zephr acquisition, and a
decrease of $0.6 million in outside professional services costs. General and
administrative expense increased to 19% of total revenue during the three months
ended October 31, 2022 from 18% of total revenue during the three months ended
October 31, 2021 .
Other income and expenses
Three Months Ended
October 31,
2022 2021 $ Change % Change
(dollars in thousands)
Change in fair value of warrant liability $ 452 $ - $ 452 N/A
Interest expense $ (4,444) $ (39) $ (4,405) 11295 %
Interest and other income (expense), net $ 1,187 $ (663) $ 1,850 279 %
During the three months ended October 31, 2022 we recognized a $0.5 million gain
on revaluation of the liability-classified Warrants issued in connection with
the 2029 Notes. Interest expense increased $4.4 million due to the issuance of
the the Initial Notes on March 24, 2022 . Interest and other income (expense),
net increased $1.9 million due to increased investment balances and higher
interest rates, partially offset by expense resulting from the revaluation of
cash, accounts receivable, and accounts payable recorded in a foreign currency.
Income Tax Provision
Three Months Ended
October 31,
2022 2021 $ Change % Change
(dollars in thousands)
Income tax provision $ 308 $ 610 $ (302) (50) %
We are subject to federal and state income taxes in the United States and taxes
in foreign jurisdictions. For the three months ended October 31, 2022 and 2021,
we recorded a tax provision of $0.3 million and $0.6 million , respectively, on a
loss before income taxes of $36.7 million and $22.3 million , respectively. The
effective tax rate for the three months ended October 31, 2022 and 2021 was
(0.8)% and (2.7)%, respectively. The change in the effective tax rate was due
primarily to a 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 in the United States . For the three months ended October 31,
2022 and 2021, we maintained a full valuation allowance on our U.S. federal and
state net deferred tax assets as it was more likely than not that those deferred
tax assets will not be realized.
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Comparison of the Nine Months Ended October 31, 2022 and 2021
Revenue
Nine Months Ended
October 31,
2022 2021 $ Change % Change
(dollars in thousands)
Revenue:
Subscription $ 248,878 $ 210,415 $ 38,463 18 %
Professional services 44,168 45,631 (1,463) (3) %
Total revenue $ 293,046 $ 256,046 $ 37,000 14 %
Percentage of revenue:
Subscription 85 % 82 %
Professional services 15 18
Total revenue 100 % 100 %
Subscription revenue increased by $38.5 million , or 18%, for the nine months
ended October 31, 2022 compared to the nine months ended October 31, 2021 . The
increase was driven by growth in our customer base, with new customers
contributing approximately $16.6 million of the increase in subscription revenue
for the nine months ended October 31, 2022 compared to the nine months ended
October 31, 2021 , and increased transaction volume and sales of additional
products to our existing customers contributing the remainder. We calculate
subscription revenue from new customers on a year-to-date basis by adding the
revenue recognized from new customers acquired in the 12 months prior to each
discrete quarter within the year-to-date period.
Professional services revenue decreased by
On a constant currency basis, subscription revenue was$253.0 million and increased 20%, and total revenue was$298.9 million and increased 17%, for the nine months endedOctober 31, 2022 compared to the nine months endedOctober 31, 2021 .
Cost of Revenue and Gross Margin
Nine Months Ended
October 31,
2022 2021 $ Change % Change
(dollars in thousands)
Cost of revenue:
Subscription $ 60,024 $ 50,190 $ 9,834 20 %
Professional services 55,140 54,218 922 2 %
Total cost of revenue $ 115,164 $ 104,408 $ 10,756 10 %
Gross margin:
Subscription 76 % 76 %
Professional services (25) (19)
Total gross margin 61 % 59 %
Cost of subscription revenue increased by $9.8 million , or 20%, for the nine
months ended October 31, 2022 compared to the nine months ended October 31,
2021 . The increase in cost of subscription revenue was primarily driven by
increases of $7.0 million in employee compensation costs driven by increased
headcount and stock-based compensation expense, $1.1 million in outside
professional services costs, $0.9 million in allocated expenses, and $0.8
million in amortization of internal-use software costs.
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Cost of professional services revenue increased by $0.9 million , or 2%, for the
nine months ended October 31, 2022 compared to the nine months ended October 31,
2021 . The increase in cost of professional services revenue was primarily driven
by an increase of $4.7 million in employee compensation costs, partially offset
by a decrease of $4.1 million in outside professional services costs.
Our gross margin for subscription services remained constant at 76% for the nine
months ended
Our gross margin for professional services decreased to (25)% for the nine
months ended
Operating Expenses
Research and Development
Nine Months Ended
October 31,
2022 2021 $ Change % Change
(dollars in thousands)
Research and development $ 77,639 $ 61,565 $ 16,074 26 %
Percentage of total revenue 26 % 24 %
Research and development expense increased by $16.1 million , or 26%, for the
nine months ended October 31, 2022 compared to the nine months ended October 31,
2021 . The increase in research and development expense was primarily driven by
increases of $12.0 million in employee compensation costs driven by increased
headcount and stock-based compensation expense and $3.5 million in outside
professional services costs, and charges of $0.5 million associated with the
workforce reduction plan. Research and development expense increased to 26% from
24% of total revenue during the nine months ended October 31, 2022 compared to
nine months ended October 31, 2021 , primarily due to additional employee
compensation expense.
Sales and Marketing
Nine Months Ended
October 31,
2022 2021 $ Change % Change
(dollars in thousands)
Sales and marketing $ 132,576 $ 105,130 $ 27,446 26 %
Percentage of total revenue 45 % 41 %
Sales and marketing expense increased by $27.4 million , or 26%, for the nine
months ended October 31, 2022 compared to the nine months ended October 31,
2021 , primarily due to increases of $20.4 million in employee compensation costs
driven by increased headcount and stock-based compensation expense, $2.3 million
in amortization of deferred commissions, and $1.5 million in travel costs, and
charges of $2.4 million associated with the workforce reduction plan. Sales and
marketing expense increased to 45% of total revenue during the nine months ended
October 31, 2022 from 41% during the nine months ended October 31, 2021 , as a
result of higher employee compensation costs and the charges incurred this
quarter associated with the workforce reduction plan.
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General and Administrative
Nine Months Ended
October 31,
2022 2021 $ Change % Change
(dollars in thousands)
General and administrative $ 55,433 $ 46,931 $ 8,502 18 %
Percentage of total revenue 19 % 18 %
General and administrative expense increased by $8.5 million , or 18%, for the
nine months ended October 31, 2022 compared to the nine months ended October 31,
2021 , primarily due to an $8.1 million increase in employee compensation costs
driven by increased stock-based compensation expense, and a $3.1 million
increase in acquisition-related costs, partially offset by a $1.8 million gain
on the revaluation of the contingent consideration from the Zephr acquisition
and a $0.9 million decrease in outside professional service costs. General and
administrative expense increased slightly to 19% of total revenue during the
nine months ended October 31, 2022 compared to 18% during the nine months ended
October 31, 2021 .
Other income and expenses
Nine Months Ended
October 31,
2022 2021 $ Change % Change
(dollars in thousands)
Change in fair value of warrant liability $ 9,348 $ - $ 9,348 N/A
Interest expense $ (10,647) $ (111) $ (10,536) 9492 %
Interest and other income (expense), net $ 98 $ (923) $ 1,021 111 %
During the nine months ended October 31, 2022 we recognized an $9.3 million gain
on revaluation of the liability-classified Warrants issued in connection with
the 2029 Notes. Interest expense increased $10.5 million due to the issuance of
the the Initial Notes on March 24, 2022 . Interest and other income (expense),
net increased $1.0 million due to increased investment balances and higher
interest rates, partially offset by expense resulting from the revaluation of
cash, accounts receivable, and payables recorded in a foreign currency.
Income Tax Provision
Nine Months Ended
October 31,
2022 2021 $ Change % Change
(dollars in thousands)
Income tax provision $ 1,145 $ 1,221 $ (76) (6) %
We are subject to federal and state income taxes in the United States and taxes
in foreign jurisdictions. For the nine months ended October 31, 2022 and 2021,
we recorded a tax provision of $1.1 million and $1.2 million , respectively, on
losses before income taxes of $89.0 million and $63.0 million , respectively. The
effective tax rates for the nine months ended October 31, 2022 and 2021 were
(1.3)% and (1.9)%, respectively. The change was due primarily to a decrease in
foreign tax expenses. The effective tax rate differs from the statutory rate
primarily as a result of no benefit on pretax losses incurred in the United
States . For the nine months ended October 31, 2022 and 2021, we maintained a
full valuation allowance on our U.S. federal and state net deferred tax assets
as it was more likely than not that those deferred tax assets will not be
realized.
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 of
43
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commercial paper, and
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. We had no borrowings under our Debt Agreement as ofOctober 31, 2022 , and have the ability borrow up to$30.0 million in revolving loans untilOctober 2025 under the agreement. See Note 9. Debt to our unaudited condensed consolidated financial statements included in this Form 10-Q for more information about the 2029 Notes and our Debt Agreement. 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, and servicing our debt. 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.
Cash Flows
The following table summarizes our cash flows for the periods indicated (in
thousands):
Nine Months Ended
October 31,
2022 2021
Net cash (used in) provided by operating activities
(165,922) (1,843)
Net cash provided by financing activities 239,003
16,364
Effect of exchange rates on cash and cash equivalents (1,648) (386) Net increase in cash and cash equivalents
$ 68,754 $ 22,455 Operating Activities Net cash used in operating activities of$2.7 million for the nine months endedOctober 31, 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, payments to vendors for products and services related to our ongoing business operations, interest income received on our short-term investments, and interest paid on the Initial Notes. 44 -------------------------------------------------------------------------------- Net cash used in operating activities for the nine months endedOctober 31, 2022 increased$11.0 million compared to the same period last year, primarily due to$5.1 million of interest paid on our our Initial Notes and the timing of accrued employee liabilities. Investing Activities Net cash used in investing activities for the nine months endedOctober 31, 2022 was$165.9 million . We used$8.5 million to purchase property and equipment and to develop internal-use software as we continue to invest in and grow our business; purchased$116.5 million of short-term investments, net of maturities, as we invested a portion of the proceeds from issuance of the Initial Notes; and used$41.0 million for the acquisition of Zephr, net of cash acquired. Net cash used in investing activities for the nine months endedOctober 31, 2022 increased$164.1 million compared to the nine months endedOctober 31, 2021 , primarily due to$116.5 million net purchases of short-term investments in the nine months endedOctober 31, 2022 , compared to$5.2 million net cash provided by short-term investments last year, and$41.0 million net cash used to acquire Zephr in the nine months endedOctober 31, 2022 , compared to no cash used for acquisitions in the nine months endedOctober 31, 2021 . Payments for property and equipment, net of insurance recoveries, were$2.8 million higher compared to the same period last year, primarily due to increased capitalization of internal-use software in the nine months endedOctober 31, 2022 . The additional cash used in the nine months endedOctober 31, 2022 was partially offset by no cash used for asset acquisitions in the nine months endedOctober 31, 2022 compared to$1.3 million used to acquire certain intellectual property assets in the nine months endedOctober 31, 2021 .
Financing Activities
Net cash provided by financing activities for the nine months endedOctober 31, 2022 of$239.0 million was primarily due to$233.9 million in net proceeds from issuance of the Initial Notes,$4.5 million of proceeds from issuance of common stock under the ESPP, and$2.1 million in proceeds from stock option exercises, partially offset by$1.5 million of debt principal payments related to our Debt Agreement. Net cash provided by financing activities for the nine months endedOctober 31, 2022 increased$222.6 million compared to the nine months endedOctober 31, 2021 , primarily due to proceeds from issuance of the Initial Notes, partially offset by$13.6 million less proceeds received from stock option exercises compared to the same period 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, 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 ofOctober 31, 2022 , our contractual commitments totaled$392.2 million , with$39.9 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 ofOctober 31, 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. 45 -------------------------------------------------------------------------------- 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 nine months endedOctober 31, 2022 are described in Note 2. Summary of Significant Accounting Policies and Recent Accounting Pronouncements to our unaudited condensed consolidated financial statements provided herein.
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