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, 2020 filed with theSecurities and Exchange Commission (SEC) onMarch 31, 2020 (Annual Report). As discussed in the section titled "Special Note Regarding Forward-Looking Statements," the following discussion and analysis contains forward-looking statements that involve risks and uncertainties, including, but not limited to, risks and uncertainties related to the impact of the COVID-19 pandemic on our business,as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those identified below and those discussed in the section titled "Risk Factors" under Part II, Item 1A in this Form 10-Q and in our Annual Report. Our fiscal year ends onJanuary 31 . OverviewZuora is a leading cloud-based subscription management platform. We provide software that enables companies across multiple industries and geographies to launch, manage or transform to a subscription business model. Architected specifically for dynamic, recurring subscription business models, our cloud-based software functions as an intelligent subscription management hub that automates and orchestrates the entire subscription order-to-revenue process, including billing and revenue recognition. Our solution enables businesses to easily change pricing and packaging for products and services to grow and scale, to efficiently comply with revenue recognition standards, and to build meaningful relationships with their subscribers. We believe we are in the early stages of a multi-decade global shift away from product-based business models, characterized by transactional one-time sales, towards recurring subscription-based business models. This trend, which we refer to as the "Subscription Economy," is visible everywhere you look. In media and entertainment, 20 -------------------------------------------------------------------------------- consumers are adopting video-on-demand services and digital music streaming services. Commuters are taking advantage of automobile subscription programs and subscription-based ride-sharing services. In the technology space, companies are opting for software-as-a-service (SaaS) applications over on-premise installations. In manufacturing, sensors and connectivity have allowed companies to bundle an array of digital services with their physical products. Digital subscriptions have had a positive effect on the newspaper and publishing industries, with readers increasingly subscribing to digital news and information sources. In addition, the retail space features a growing multitude of subscription services including clothing and accessories, cosmetics and personal care, meals and groceries, vitamins and prescriptions, pet care, and many more. Many of today's enterprise software systems that businesses use to manage their order-to-revenue processes were built for a product driven economy, and are extremely difficult to re-configure for the dynamic, ongoing nature of subscription services. In traditional business models, order-to-revenue was a linear process-a customer orders a product, is billed for that product, payment is collected, and the revenue is recognized. These legacy systems were not specifically designed to handle the complexities and ongoing customer events of recurring relationships and their impact on areas such as billing proration, revenue recognition, and reporting in real-time. Trying to use this software to build a subscription business frequently results in prolonged and complex manual downstream work, hard-coded customizations, a proliferation of stock-keeping units (SKUs), and inefficiency. These new subscription business models are inherently dynamic, with multiple interactions and constantly-changing relationships and events. The capabilities to launch, price, and bill for products, facilitate and record cash receipts, process and recognize revenue, and produce the data required to close their books and drive key decisions are mission critical and particularly complex for companies with subscription business models. As a result, as companies launch or grow a subscription business, they often conclude that legacy systems are inadequate. Our vision is simple. We call it "The World Subscribed," and it's the idea that one day every company will be a part of the Subscription Economy. Our mission is to enable all companies in the Subscription Economy to become successful. Our customers include companies of all sizes, ranging from small businesses to some of the world's largest enterprises. Customers pay for our platform under a subscription-based model, and this model allows us to benefit from the growth of our customers in the Subscription Economy. COVID-19 Pandemic Impact The COVID-19 pandemic has caused certain disruptions to our business operations-such as delays and lengthening of our customary sales cycles and postponed implementations, certain customers not purchasing or renewing our products or services, requests for extended payment terms and contract restructurings by certain customers more severely impacted by the pandemic, challenges in sales and customer success efforts due to travel restrictions, and shifting certain customer events to virtual-only experiences. While these disruptions have not had a material adverse impact on our revenues for the quarter endedJuly 31, 2020 , during the quarter we lost a small percentage of our customer base due to business failure and bankruptcy, and experienced an increased amount of customer down-sells, which were nearly three times higher quarter over quarter, driven by reduced transaction volume needs by certain customers. Because our products are offered as subscription-based licenses and a portion of that revenue is recognized over time, the effect of the pandemic may not be fully reflected in our operating results until future periods. The extent to which the COVID-19 pandemic impacts our business operations in future periods will depend on multiple uncertain factors, including the duration and severity of the pandemic, its overall negative impact on the global economy generally and on our customers, which operate in numerous industries, and continued responses by governments and businesses to COVID-19. We are continuing to monitor the impact of the COVID-19 pandemic on our business operations and financial results. As a prudent cost-saving measure and to preserve cash, we have implemented plans to manage our costs in certain areas such as travel, events, and marketing and have reduced our pace of hiring while continuing to prioritize new headcount critical to operations, sales and customer support. For example, for fiscal 2021, we are generally not increasing base salaries in order to preserve cash in light of the COVID-19 pandemic. During the quarter endedJuly 31, 2020 , for retention purposes, we issued RSU grants to eligible non-executive employees that vest in full during the current fiscal year. See Note 16. Employee Stock Plans to the unaudited condensed consolidated financial statements contained herein for details. To the extent the business disruption continues for an extended period, additional cost management actions may be considered. The uncertainty surrounding the 21 -------------------------------------------------------------------------------- COVID-19 pandemic and its impact on the global economy could also lead to a more significant adverse impact on our business operations and financial performance in the future. The COVID-19 pandemic and its impact on us and the economy has significantly limited our ability to forecast our future operating results, including our ability to predict revenue and expense levels, and plan for and model future operating results. Our competitors could experience similar or different impacts as a result of COVID-19, which could result in changes to our competitive landscape. While we have developed and continue to develop plans to help mitigate the negative impact of the pandemic on our business, these efforts may not be effective and any protracted economic downturn could significantly affect our business and operating results. We will continue to evaluate the nature and extent of the impact of the COVID-19 pandemic to 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 Second Quarter Business Highlights and Recent Developments: •Launched Zuora Analytics, extending the company's suite of Order to Revenue applications, and announced major enhancements to Zuora Billing to enable subscription businesses to seamlessly monetize, orchestrate and analyze the success of the subscription experiences offered to customers. •Customers with ACV exceeding$100,000 totaled 645 as ofJuly 31, 2020 , an increase of 14% compared to last year. We expect this metric to increase on a long-term basis, although we may experience fluctuations as we continue working to improve our overall sales motion. •Customer transaction volume throughZuora's billing platform was$12.7 billion as ofJuly 31, 2020 , an increase of 26% compared to last year. •Announced two new board members:Sarah Bond , Corporate VP of Gaming Ecosystem at Microsoft Corporation, andOmar Abbosh , Corporate VP of Cross Industry Solutions at Microsoft and former Chief Executive Officer, Communications, Media & Technology, at Accenture plc. Fiscal Second Quarter Financial Performance Summary: Our financial performance for the three months endedJuly 31, 2020 compared to the three months endedJuly 31, 2019 reflects the following: •Subscription revenues were$58.3 million , an increase of$7.7 million , or 15%; and total revenues were$75.0 million , an increase of$5.3 million , or 8%. •Gross profit was$41.9 million , or 56% of total of revenue, compared to$36.0 million , or 52% of total revenue. •Loss from operations was$21.5 million , or 29% of total revenue, compared to a loss of$21.3 million , or 31% of total revenue. Key Operational and Financial Metrics We monitor the following key operational and financial metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans and make strategic decisions: Customers with Annual Contract Value (ACV) Equal to or Greater than$100,000 We believe our ability to enter into larger contracts is indicative of broader adoption of our solution by larger organizations. It also reflects our ability to expand our revenue footprint within our current customer base. We define ACV as the subscription revenue we would contractually expect to recognize from that customer over the next twelve months, assuming no increases or reductions in their subscriptions. We define the number of customers at the end of any particular period as the number of parties or organizations that have entered into a distinct subscription contract with us for which the term has not ended. Each party with which we have entered into a distinct subscription contract is considered a unique customer, and in some cases, there may be more than one 22 -------------------------------------------------------------------------------- customer within a single organization. We have increased the number of customers with ACV equal to or greater than$100,000 to 645 as ofJuly 31, 2020 , as compared to 566 customers as ofJuly 31, 2019 . 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 was 99% as ofJuly 31, 2020 , compared to 103% as ofApril 30, 2020 . The decrease to the rate was primarily a result of customer loss due to product fit issues and customer consolidation through acquisitions, as well as customer down-sells driven by reduced transaction volume needs by certain customers related to the COVID-19 pandemic. We expect the dollar-based retention rate to not change significantly in the near term. 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 transition a portion of our professional services implementations to
our strategic partners, including global system integrators (GSIs), and as a
result we expect our professional services revenue to decrease over time, and
may vary as a percentage of total revenue in the near term.
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
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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 implementation 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 GSI 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, our continued efforts to build platform support and
professional services teams, as well as the amortization expense associated with
capitalized internal-use software and acquired technology.
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 amortize these costs over a period of approximately two to 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 fluctuate as a percentage of total revenue.
Sales and marketing. Sales and marketing expense consists primarily of employee
compensation costs, including amortization of deferred commissions related to
for our sales personnel, allocated overhead, costs of general marketing and
promotional activities, and travel costs. Commission costs that are incremental
to obtaining a contract are amortized in sales and marketing expense over the
period of benefit, which is expected to be five years. While our sales and
marketing expense as a percentage of total revenue has decreased slightly in
recent periods, we expect to continue to make significant investments as we
expand our customer acquisition and retention efforts. Therefore, we expect that
sales and marketing expense will increase in absolute dollars but may vary as a
percentage of total revenue for the foreseeable future.
General and administrative. General and administrative expense consists
primarily of employee compensation costs, allocated overhead, and travel costs
for finance, accounting, legal, human resources, and recruiting personnel. In
addition, general and administrative expense includes non-personnel costs, such
as accounting fees, legal fees, charitable contributions and all other
supporting corporate expenses not allocated to other departments. We expect to
incur ongoing costs as a result of operating as a public company, including
costs related to compliance and reporting obligations of public companies, and
continued investment to support our growing operations. As a result, we expect
our general and administrative expense to continue to increase in absolute
dollars for the foreseeable future but may vary as a percentage of total revenue
in the near term. Over the long-term, we expect general and administrative
expense to decline as a percentage of total revenue as we realize efficiencies.
Interest and Other Income (Expense), net
Interest and other income (expense), net primarily consists of interest income
from our investment holdings, interest expense associated with our Debt
Agreement, and foreign exchange fluctuations.
Income Tax Provision
Income tax provision consists primarily of income taxes related to foreign and
state jurisdictions in which we conduct business. We maintain a full valuation
allowance on our federal and state deferred tax assets as we have concluded that
it is more likely than not that the deferred assets will not be utilized.
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Results of 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 Six Months Ended
July 31, July 31,
2020 2019 2020 2019
Revenue:
Subscription $ 58,312 $ 50,647 $ 115,208 $ 97,958
Professional services 16,677 19,086 33,679 35,884
Total revenue 74,989 69,733 148,887 133,842
Cost of revenue:
Subscription¹ 14,401 12,798 28,016 24,731
Professional services¹ 18,674 20,904 37,356 41,002
Total cost of revenue 33,075 33,702 65,372 65,733
Gross profit 41,914 36,031 83,515 68,109
Operating expenses:
Research and development¹ 19,427 18,744 36,970 35,759
Sales and marketing¹ 28,608 27,290 57,104 52,791
General and administrative¹ 15,383 11,324 28,648 21,769
Total operating expenses 63,418 57,358 122,722 110,319
Loss from operations (21,504) (21,327) (39,207) (42,210)
Interest and other income (expense), net 1,936 569 2,314 1,104
Loss before income taxes (19,568) (20,758) (36,893) (41,106)
Income tax provision 554 55 717 299
Net loss $ (20,122) $ (20,813) $ (37,610) $ (41,405) (1) Includes stock-based compensation expense as follows (in thousands):
Three Months Ended Six Months Ended
July 31, July 31,
2020 2019 2020 2019
Cost of subscription revenue $ 1,465 $ 811 $ 2,317 $ 1,304
Cost of professional services revenue 3,132 1,984 4,782 3,343
Research and development 5,945 4,484 9,487 7,674
Sales and marketing 4,848 2,491 7,853 4,343
General and administrative 2,886 1,846 4,721 2,911
Total stock-based compensation expense $ 18,276 $ 11,616 $ 29,160 $ 19,575
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Three Months Ended Six Months Ended
July 31, July 31,
2020 2019 2020 2019
Revenue:
Subscription 78 % 73 % 77 % 73 %
Professional services 22 27 23 27
Total revenue 100 100 100 100
Cost of revenue:
Subscription 19 18 19 18
Professional services 25 30 25 31
Total cost of revenue 44 48 44 49
Gross profit 56 52 56 51
Operating expenses:
Research and development 26 27 25 27
Sales and marketing 38 39 38 39
General and administrative 21 16 19 16
Total operating expenses 85 82 82 82
Loss from operations (29) (31) (26) (32)
Interest and other income (expense), net 3 1 2 1
Loss before income taxes (26) (30) (25) (31)
Income tax provision 1 - - -
Net loss (27) % (30) % (25) % (31) %
Comparison of the Three Months Ended July 31, 2020 and 2019
Revenue
Three Months Ended
July 31,
2020 2019 $ Change % Change
(dollars in thousands)
Revenue:
Subscription $ 58,312 $ 50,647 $ 7,665 15 %
Professional services 16,677 19,086 (2,409) (13) %
Total revenue $ 74,989 $ 69,733 $ 5,256 8 %
Percentage of revenue:
Subscription 78 % 73 %
Professional services 22 27
Total revenue 100 % 100 %
Subscription revenue increased by $7.7 million , or 15%, for the three months
ended July 31, 2020 compared to the three months ended July 31, 2019 . The
increase was primarily driven by new customers, which contributed approximately
$4.9 million of the increase in subscription revenue for the three months ended
July 31, 2020 compared to the prior year period, while sales of additional
products to our existing customers contributed the remainder. We calculate
subscription revenue from new customers during the quarter by adding the revenue
recognized from new customers acquired in the 12 months prior to the reporting
date.
Professional services revenue decreased by $2.4 million , or (13)%, for the three
months ended July 31, 2020 compared to the three months ended July 31, 2019 ,
partially driven by the shifting of the services work to our GSI partners.
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Three Months Ended
July 31,
2020 2019 $ Change % Change
(dollars in thousands)
Cost of revenue:
Subscription $ 14,401 $ 12,798 $ 1,603 13 %
Professional services 18,674 20,904 (2,230) (11) %
Total cost of revenue $ 33,075 $ 33,702 $ (627) (2) %
Gross margin:
Subscription 75 % 75 %
Professional services (12) (10)
Total gross margin 56 % 52 %
Cost of subscription revenue increased by $1.6 million , or 13%, for the three
months ended July 31, 2020 compared to the three months ended July 31, 2019 . The
increase in cost of subscription revenue was due to an increase of $0.8 million
in compensation costs and $0.7 million in data center costs primarily related to
third-party cloud hosting as we grow and transition our data center model to the
cloud.
Cost of professional services revenue decreased by $2.2 million , or (11)%, for
the three months ended July 31, 2020 compared to the three months ended July 31,
2019 . The decrease in cost of professional services revenue was primarily due to
a decrease of $1.3 million in outside professional services costs and $1.1
million in travel costs.
Our gross margin for subscription services was 75% for the three months ended
July 31, 2020 and 2019.
Our gross margin for professional services decreased to (12)% for the three
months ended July 31, 2020 compared to (10)% for the three months ended July 31,
2019 , primarily due to an increase in stock-based compensation expense.
Operating Expenses
Research and Development
Three Months Ended
July 31,
2020 2019 $ Change % Change
(dollars in thousands)
Research and development $ 19,427 $ 18,744 $ 683 4 %
Percentage of total revenue 26 % 27 %
Research and development expense increased by $0.7 million , or 4%, for the three
months ended July 31, 2020 compared to the three months ended July 31, 2019 due
to growth in our business, and was 26% and 27% of total revenue for the three
months ended July 31, 2020 and 2019, respectively.
Sales and Marketing
Three Months Ended
July 31,
2020 2019 $ Change % Change
(dollars in thousands)
Sales and marketing $ 28,608 $ 27,290 $ 1,318 5 %
Percentage of total revenue 38 % 39 %
Sales and marketing expense increased by
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compensation costs and $0.5 million in allocated overhead including facilities
expansions, partially offset by a decrease of $1.6 million in travel costs and
$1.3 million in marketing and event costs. Sales and marketing expense decreased
to 38% of total revenue during the three months ended July 31, 2020 from 39%
during the three months ended July 31, 2019 .
General and Administrative
Three Months Ended
July 31,
2020 2019 $ Change % Change
(dollars in thousands)
General and administrative $ 15,383 $ 11,324 $ 4,059 36 %
Percentage of total revenue 21 % 16 %
General and administrative expense increased by $4.1 million , or 36%, for the
three months ended July 31, 2020 compared to the three months ended July 31,
2019 , primarily due to an increase of $1.7 million in employee compensation
costs from increased headcount, $1.2 million in shareholder litigation expenses,
and $1.0 million in donations of our Class A common stock to a charitable
donor-advised fund. General and administrative expense increased to 21% of total
revenue during the three months ended July 31, 2020 , primarily reflecting the
impact of shareholder litigation expenses and stock donations during the period,
compared to 16% during the three months ended July 31, 2019 .
Interest and Other Income (Expense), Net
Three Months Ended
July 31,
2020 2019 $ Change % Change
(dollars in thousands)
Interest and other income (expense), net $ 1,936 $ 569 $ 1,367 240 %
Interest and other income (expense), net increased by $1.4 million for the three
months ended July 31, 2020 compared to the three months ended July 31, 2019 ,
primarily due to an increase of $1.9 million in net gains related to the
revaluation of cash, accounts receivable and payables recorded in a foreign
currency, partially offset by a decrease of $0.7 million in net accretion and
interest income recognized on our invested cash balances.
Income Tax Provision
Three Months Ended
July 31,
2020 2019 $ Change % Change
(dollars in thousands)
Income tax provision $ 554 $ 55 $ 499 907 %
We are subject to federal and state income taxes in the United States and taxes
in foreign jurisdictions. For the three months ended July 31, 2020 and 2019, we
recorded a tax provision of $0.6 million and $0.1 million , respectively, on
losses before income taxes of $19.6 million and $20.8 million , respectively. The
effective tax rates for the three months ended July 31, 2020 and 2019 were
(2.8)% and (0.3)%, respectively. The increase was due primarily to an increase
in foreign tax expense. The effective tax rate differs from the statutory rate
primarily as a result of providing no benefit on pretax losses incurred in the
United States . For the three months ended July 31, 2020 and 2019, 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 Six Months Ended July 31, 2020 and 2019
Revenue
Six Months Ended
July 31,
2020 2019 $ Change % Change
(dollars in thousands)
Revenue:
Subscription $ 115,208 $ 97,958 $ 17,250 18 %
Professional services 33,679 35,884 (2,205) (6) %
Total revenue $ 148,887 $ 133,842 $ 15,045 11 %
Percentage of revenue:
Subscription 77 % 73 %
Professional services 23 27
Total revenue 100 % 100 %
Subscription revenue increased by $17.3 million , or 18%, for the six months
ended July 31, 2020 compared to the six months ended July 31, 2019 . The increase
was primarily driven by new customers, which contributed approximately $10.6
million of the increase in subscription revenue while sales of additional
products to our existing customers contributed the remainder. We calculate
subscription revenue from new customers on a year-to-date basis by adding the
revenue recognized from new customers acquired in the 12 months prior to each
discrete quarter within the year-to-date period.
Professional services revenue decreased by
Six Months Ended
July 31,
2020 2019 $ Change % Change
(dollars in thousands)
Cost of revenue:
Subscription $ 28,016 $ 24,731 $ 3,285 13 %
Professional services 37,356 41,002 (3,646) (9) %
Total cost of revenue $ 65,372 $ 65,733 $ (361) (1) %
Gross margin:
Subscription 76 % 75 %
Professional services (11) (14)
Total gross margin 56 % 51 %
Cost of subscription revenue increased by $3.3 million , or 13%, for the six
months ended July 31, 2020 compared to the six months ended July 31, 2019 . The
increase in cost of subscription revenue was primarily driven by an increase of
$1.9 million in data center costs primarily related to third-party cloud hosting
as we grow and transition our data center model to the cloud, $1.3 million in
employee compensation costs related to increased headcount, and $0.8 million in
allocated overhead including facilities expansions.
Cost of professional services revenue decreased by $3.6 million , or (9)%, for
the six months ended July 31, 2020 compared to the six months ended July 31,
2019 . The decrease in cost of professional services revenue was driven by a
decrease of $2.2 million in outside professional services costs, $1.8 million in
travel costs, and $0.6 million in event costs, partially offset by an increase
of $0.7 million in allocated overhead including facilities expansions.
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Our gross margin for subscription services increased to 76% for the six months
ended July 31, 2020 from 75% for the six months ended July 31, 2019 ,
Our gross margin for professional services increased to (11)% for the six months
ended July 31, 2020 compared to (14)% for the six months ended July 31, 2019 ,
primarily due to increased utilization.
Operating Expenses
Research and Development
Six Months Ended
July 31,
2020 2019 $ Change % Change
(dollars in thousands)
Research and development $ 36,970 $ 35,759 $ 1,211 3 %
Percentage of total revenue 25 % 27 %
Research and development expense increased by $1.2 million , or 3%, for the six
months ended July 31, 2020 compared to the six months ended July 31, 2019 , due
to growth in our business, and was 25% and 27% of total revenue during the six
months ended July 31, 2020 and 2019, respectively.
Sales and Marketing
Six Months Ended
July 31,
2020 2019 $ Change % Change
(dollars in thousands)
Sales and marketing $ 57,104 $ 52,791 $ 4,313 8 %
Percentage of total revenue 38 % 39 %
Sales and marketing expense increased by $4.3 million , or 8%, for the six months
ended July 31, 2020 compared to the six months ended July 31, 2019 , primarily
due to an increase of $6.3 million in employee compensation costs related to
increased headcount and $1.3 million in allocated overhead including facilities
expansions, partially offset by a decrease of $2.5 million in travel costs and
$1.3 million in marketing and event costs. Sales and marketing expense decreased
to 38% of total revenue during the six months ended July 31, 2020 from 39%
during the six months ended July 31, 2019 .
General and Administrative
Six Months Ended
July 31,
2020 2019 $ Change % Change
(dollars in thousands)
General and administrative $ 28,648 $ 21,769 $ 6,879 32 %
Percentage of total revenue 19 % 16 %
General and administrative expense increased by $6.9 million , or 32%, for the
six months ended July 31, 2020 compared to the six months ended July 31, 2019 ,
primarily due to an increase of $2.7 million in employee compensation costs
related to increased headcount, $1.2 million in shareholder litigation expenses,
$1.0 million in donations of our Class A common stock to a charitable
donor-advised fund, $1.0 million in allocated overhead including facilities
expansions, and $0.9 million in outside professional services. General and
administrative expense was 19% of total revenue during the six months ended July
31, 2020 , primarily reflecting the impact of shareholder litigation expenses and
stock donations during the period, compared to 16% during the six months ended
July 31, 2019 .
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Six Months Ended
July 31,
2020 2019 $ Change % Change
(dollars in thousands)
Interest and other income (expense), net $ 2,314 $ 1,104 $ 1,210 110 %
Interest and other income (expense), net increased by $1.2 million for the six
months ended July 31, 2020 compared to the six months ended July 31, 2019 ,
primarily due to an increase of $2.1 million in net gains related to the
revaluation of cash, accounts receivable and payables recorded in a foreign
currency, partially offset by a decrease of $1.1 million in net accretion and
interest income recognized on our invested cash balances.
Income Tax Provision
Six Months Ended
July 31,
2020 2019 $ Change % Change
(dollars in thousands)
Income tax provision $ 717 $ 299 $ 418 140 %
We are subject to federal and state income taxes in the United States and taxes
in foreign jurisdictions. For the six months ended July 31, 2020 and 2019, we
recorded a tax provision of $0.7 million and $0.3 million , respectively, on
losses before income taxes of $36.9 million and $41.1 million , respectively. The
effective tax rates for the six months ended July 31, 2020 and 2019 were (1.9)%
and (0.7)%, respectively. The increase was due primarily to an increase in
foreign tax expense. 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 six months ended July 31, 2020 and 2019, 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 Resources
As of July 31, 2020 , we had cash and cash equivalents and short-term investments
of $179.2 million . Since inception, we have financed our operations primarily
through the net proceeds we received through public and private sales of our
equity securities, payments received from customers for subscription and
professional services, and borrowings from our Debt Agreement.
We believe our existing cash and cash equivalents and short-term investment
balances, funds available under our Debt Agreement, and cash provided by
subscriptions to our platform and related professional services will be
sufficient to meet our working capital and capital expenditure needs for at
least the next 12 months. We have taken into account the ongoing COVID-19
pandemic effects, including customer requests for extended payment terms and
contract restructuring, in our assessment of the sufficiency of our liquidity
and capital resources. We will continue to monitor our financial position as any
pandemic-related challenges develop over time. Our future capital requirements
will depend on many factors, including the rate of our revenue growth, the
timing and extent of spending on research and development efforts and other
business initiatives, the expansion of sales and marketing activities, the
introduction of new and enhanced product offerings, and the continuing market
adoption of our platform. We may in the future enter into arrangements to
acquire or invest in complementary businesses, services, and technologies,
including intellectual property rights. We may elect to or may be required to
seek additional equity or debt financing. Sales of additional equity could
result in dilution to our stockholders. In the event that additional financing
is required from outside sources, we may not be able to raise it on terms
acceptable to us or at all. If we are unable to raise additional capital or
generate cash flows necessary to expand our operations and invest in new
technologies, it could reduce our ability to compete successfully and harm our
results of operations.
Debt Agreement
See Note 9. Debt to our unaudited condensed consolidated financial statements
included in this Form 10-Q for more information about our Debt Agreement.
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Cash Flows
The following table summarizes our cash flows for the periods indicated (in
thousands):
Six Months Ended
July 31,
2020 2019
Net cash provided by (used in) operating activities $ 6,791 $ (11,108)
Net cash provided by (used in) investing activities 47,640 (13,419)
Net cash provided by financing activities 9,983 11,329
Effect of exchange rates on cash and cash equivalents (89) (275)
Net increase (decrease) in cash and cash equivalents
Operating Activities Our largest source of operating cash is cash collections from our customers for subscription and professional services. Our primary uses of cash from operating activities are for employee-related expenditures, marketing expenses, third-party consulting expenses, facilities costs, and third-party hosting costs. For the six months endedJuly 31, 2020 , net cash provided by operating activities was$6.8 million , which consisted of a net loss of$37.6 million adjusted for non-cash charges of$48.9 million and net cash outflows from changes in our operating assets and liabilities of$4.5 million . Non-cash charges, which primarily consisted of stock-based compensation; depreciation, amortization and accretion of property and equipment, purchased intangible assets and lease liabilities; amortization of deferred commissions; and reduction in carrying amount of ROU assets, increased compared to the same period last year primarily as a result of growth in our business operations. Net cash outflows from changes in operating assets and liabilities decreased$0.6 million compared to last year primarily due to timing of cash receipts, accruals and payments, as well as a larger reduction in our deferred revenue balance compared to last year. For the six months endedJuly 31, 2019 , net cash used in operating activities was$11.1 million , which consisted of a net loss of$41.4 million adjusted for non-cash charges of$35.4 million and net cash outflows of$5.1 million from changes in our operating assets and liabilities. Non-cash charges, which primarily consisted of stock-based compensation; depreciation, amortization and accretion of property and equipment, purchased intangible assets and lease liabilities; amortization of deferred commissions; and reduction in carrying amount of ROU assets, increased compared to the same period in fiscal 2019 primarily as a result of growth in our business operations. Net cash outflows from changes in operating assets and liabilities were$5.1 million for the six months endedJuly 31, 2019 compared to net cash inflows of$5.0 million for the same period in fiscal 2019, and was primarily driven by the timing of cash receipts, accruals and payments. Investing Activities Net cash provided by investing activities for the six months endedJuly 31, 2020 of$47.6 million was primarily due to net cash received on purchases, sales and maturities of investments of$57.3 million , partially offset by$9.7 million in purchases of property and equipment, net of insurance recoveries for damaged property and equipment. Net cash used in investing activities for the six months endedJuly 31, 2019 of$13.4 million was primarily due to$9.2 million used by us to purchase additional short-term investments, and$4.2 million in purchases of property and equipment and capitalized internal-use software. Financing Activities Cash provided by financing activities for the six months endedJuly 31, 2020 of$10.0 million was primarily due to$8.0 million in proceeds from stock option exercises and$4.2 million in proceeds from issuance of common stock under the ESPP, partially offset by$2.2 million of debt principal payments. Cash provided by financing activities for the six months endedJuly 31, 2019 of$11.3 million was primarily due to$7.0 million of stock option exercise proceeds and$5.1 million in proceeds from issuance of common stock under the ESPP, partially offset by$0.7 million of debt principal payments. 32 -------------------------------------------------------------------------------- Off-Balance Sheet Arrangements As ofJuly 31, 2020 , we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Obligations and Other Commitments Our principal commitments consist of obligations under our operating leases for office space and our Debt Agreement. The following table summarizes our contractual obligations as ofJuly 31, 2020 (in thousands): More than 5 Total Less than 1 year 1-3 years 3-5 years years
Operating lease obligations¹
4,584 3,968 - -
$ 92,785 $ 16,042 $ 28,897 $ 14,812 $ 33,034 _________________________________
(1) We lease our facilities under long-term operating leases which expire on varying dates throughJune 2030 . The lease agreements often contain provisions which require us to pay taxes, insurance, and maintenance costs. (2) Debt principal and interest includes amounts owed under our Debt Agreement, including principal, interest and a$0.2 million facility fee on the term loan. Interest payments were calculated using the applicable rate as ofJuly 31, 2020 . See Note 9. Debt of the notes to our unaudited condensed consolidated financial statements included in this Form 10-Q for more information. 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 ofJuly 31, 2020 , 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 consolidated balance sheets, consolidated statements of operations and comprehensive loss, or consolidated statements of cash flows. As ofJuly 31, 2020 , we had accrued liabilities related to uncertain tax positions, which are reflected in our unaudited condensed consolidated balance sheets. These accrued liabilities are not reflected in the table above since it is unclear when these liabilities will be repaid. Critical Accounting Policies and Estimates We prepare our unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted inthe United States (GAAP). In the preparation of these unaudited condensed consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations would be affected. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We refer to accounting estimates of this type as critical accounting policies and estimates. Our significant accounting policies are discussed in Note 2. Summary of Significant Accounting Policies and Recent Accounting Pronouncements in our Annual Report on Form 10-K for the fiscal year endedJanuary 31, 2020 , filed with theSEC onMarch 31, 2020 . Any significant changes to these policies during the six months endedJuly 31, 2020 are described in Note 2. Summary of Significant Accounting Policies and Recent Accounting Pronouncements to our condensed consolidated financial statements provided herein. 33 -------------------------------------------------------------------------------- Non-GAAP Financial Measures To supplement our condensed consolidated financial statements presented in accordance withU.S. GAAP, we monitor and consider non-GAAP loss from operations and free cash flow. We believe our non-GAAP measures are useful in evaluating our operating performance. 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 our non-GAAP financial measures provide investors consistency and comparability with our past financial performance and facilitate period-to-period comparisons of our operating results. We also believe our non-GAAP financial 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. Non-GAAP Loss from Operations We define non-GAAP loss from operations as GAAP operating loss adjusted to exclude stock-based compensation expense, amortization of acquired intangibles, capitalization and amortization of internal-use software, charitable donations, and certain litigation. We exclude the following items from non-GAAP loss from operations: •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. We exclude these amortization expenses because we do not believe these expenses have a direct correlation to the operation of our business. •Internal-use software. We exclude non-cash adjustments for capitalization and the subsequent amortization of internal-use software, including any impairment charges, from certain of our non-GAAP measures. We capitalize certain costs incurred for the development of computer software for internal use and then amortize those costs over the estimated useful life. Capitalization and amortization of software development costs can vary significantly depending on the timing of products reaching technological feasibility and being made generally available. Moreover, because of the variety of approaches taken and the subjective assumptions made by other companies in this area, we believe that excluding the effects of capitalized software costs allows investors to make more meaningful comparisons between our operating results and those of other companies. •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-recurring and 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, including litigation expenses and settlements, related to litigation matters that are outside of the ordinary course of our business or that are not representative of those that we historically have incurred. We believe these charges and benefits do not have a direct correlation to the operations of our business and may vary in size depending on the timing and results of such litigation and related settlements. We began excluding litigation that is outside of the 34 -------------------------------------------------------------------------------- ordinary course of our business from our non-GAAP financial measures in the second quarter of fiscal 2021 as expenses relating to this type of litigation significantly increased during the period, specifically expenses relating to our ongoing securities class actions and derivative litigation. Three Months Ended Six Months Ended July 31, July 31, 2020 2019 2020 2019 GAAP loss from operations$ (21,504) $ (21,327) $ (39,207) $ (42,210) Add / (Subtract): Stock-based compensation expense 18,276 11,616 29,160 19,575 Amortization of acquired intangibles 423 427 846 930 Internal-use software (990) (776) (2,269) (847) Charitable donations 1,000 - 1,000 - Certain litigation 1,235 - 1,235 - Non-GAAP loss from operations$ (1,560) $ (10,060)
Free Cash Flow
We define free cash flow as net cash provided by (used in) operating activities,
less cash used for purchases of property and equipment, net of insurance
recoveries. Insurance recoveries include amounts paid to us for damaged property
and equipment 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 Six Months Ended
July 31, July 31,
2020 2019 2020 2019
Net cash provided by (used in) operating
activities $ 3,840 $ (8,946) $ 6,791 $ (11,108)
Less:
Purchases of property and equipment, net of
insurance recoveries (4,580) (2,566) (9,700) (4,242)
Free cash flow $ (740) $ (11,512) $ (2,909) $ (15,350)
Beginning in the second quarter of fiscal 2021, we removed growth efficiency
index (GEI) from our non-GAAP financial measures as we no longer use this metric
in evaluating our business.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to certain market risks in the ordinary course of our business.
Market risk represents the risk of loss that may impact our financial position
due to adverse changes in financial market prices and rates. Our market risk
exposure is primarily a result of fluctuations in foreign currency exchange
rates and interest rates.
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Foreign Currency Exchange Risk
The functional currencies of our foreign subsidiaries are the respective local
currencies. Our sales are typically denominated in the local currency of the
country in which the customer resides. The majority of our sales are made in the
United States and those sales are denominated in U.S. dollars. Therefore, the
portion of our revenue that is subject to significant foreign currency risk is
limited. Our operating expenses are denominated in the currencies of the
countries in which our operations are located, which are primarily in the United
States , Europe , China , India , Japan , and Australia . Our results of operations
and cash flows are, therefore, subject to fluctuations due to changes in foreign
currency exchange rates and may be adversely affected in the future due to
changes in foreign exchange rates. Volatile market conditions arising from the
COVID-19 pandemic may result in significant changes in exchange rates, and, in
particular, a weakening of foreign currencies relative to the U.S. dollar may
negatively affect our revenue and net income (loss) as expressed in U.S.
dollars. To date, we have not entered into any hedging arrangements with respect
to foreign currency risk or other derivative financial instruments. For the six
months ended July 31, 2020 , a hypothetical 10% change in foreign currency
exchange rates applicable to our business would not have had a material impact
on our accompanying unaudited condensed consolidated financial statements.
Interest Rate Risk
We had cash and cash equivalents and short-term investments of $179.2 million as
of July 31, 2020 . Our cash and cash equivalents and short-term investments are
held for working capital purposes. We do not make investments for trading or
speculative purposes.
Our cash equivalents and short-term investments are subject to market risk due
to changes in interest rates. Fixed rate securities may have their market value
adversely affected due to a rise in interest rates. Due in part to these
factors, our future investment income may fall short of our expectations due to
changes in interest rates or we may suffer losses in principal if we are forced
to sell securities that decline in market value due to changes in interest
rates. However, because we classify our short-term investments as "available for
sale," no realized gains or losses are recognized due to changes in interest
rates unless such securities are sold prior to maturity or decreases in fair
value are determined to be other-than-temporary.
Under our Debt Agreement, we pay interest on any outstanding balances based on a
variable market rate. A significant change in these market rates may adversely
affect our operating results.
As of July 31, 2020 , a hypothetical 10% relative change in interest rates would
not have had a material impact on the value of our cash equivalents and
short-term investments. Fluctuations in the value of our cash equivalents and
short-term investments caused by a change in interest rates (gains or losses on
the carrying value) are recorded in accumulated other comprehensive loss, and
are realized only if we sell the underlying securities prior to maturity. In
addition, a hypothetical 10% relative change in interest rates would not have
had a material impact on our operating results for the six months ended July 31,
2020 .
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of our disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
Act) as of July 31, 2020 . Based on such evaluation, our Chief Executive Officer
and Chief Financial Officer have concluded that as of July 31, 2020 , our
disclosure controls and procedures were effective to provide reasonable
assurance that information required to be disclosed in the reports we file and
submit under the Exchange Act is recorded, processed, summarized and reported as
and when required, and that such information is accumulated and communicated to
our management, including our Chief Executive Officer and Chief Financial
Officer, to allow timely decisions regarding its required disclosure.
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Changes in Internal Control Over Financial Reporting
We continue to monitor the design and operating effectiveness of our internal
controls for any effect resulting from the COVID-19 pandemic in order to
minimize any potential impacts. There was no change in our internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) that occurred during the period covered by this Quarterly Report
on Form 10-Q that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial
Officer, does not expect that our disclosure controls and procedures or our
internal control over financial reporting will prevent or detect all errors and
all fraud. A control system, no matter how well designed and operated, can
provide only reasonable, not absolute, assurance that the objectives of the
control system are met. Further, the design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within our company have been
detected. Accordingly, our disclosure controls and procedures provide reasonable
assurance of achieving their objectives.
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