The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in our 2021 Annual Report on Form 10-K. As discussed in the section titled "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 Quarterly Report on Form 10-Q and in our 2021 Annual Report on Form 10-K. Our fiscal year endsJanuary 31 .
Executive overview of first quarter results
Overview
DocuSign accelerates the process of doing business for companies and simplifies life for their customers and employees. We accomplish this by transforming the foundational element of business: the agreement. We offer the world's #1 e-signature solution as the core part of our broader software suite for automating the agreement process, which we call theDocuSign Agreement Cloud. It is designed to allow companies of all sizes and across all industries to quickly and easily make nearly every agreement, approval process or transaction digital. It provides comprehensive functionality across e-signature and addresses the broader agreement process. As a result, over 980,000 customers and hundreds of millions of users worldwide utilizeDocuSign to create, upload and send documents for multiple parties to sign electronically. TheDocuSign Agreement Cloud allows users to complete approvals, agreements and transactions faster by building end-to-end processes.DocuSign eSignature integrates with popular business apps, and our functionality can also be embedded using our API. Finally, theDocuSign Agreement Cloud allows our customers to automate and streamline their business-critical workflows to save time and money, while staying secure and legally compliant. We generally offer access to our platform on a subscription basis with prices based on the functionality our customers require and the quantity of Envelopes provisioned. Similar to the physical envelopes historically used to mail paper documents, an Envelope is a digital container used to send one or more documents for signature or approval to one or more recipients. Our customers have the flexibility to put a large number of documents in an Envelope. For a number of use cases, such as buying a home, multiple Envelopes are used over the course of the process. To drive customer reach and adoption, we also offer for free certain limited-time or feature-constrained versions of our platform. 23 -------------------------------------------------------------------------------- We generate substantially all our revenue from sales of subscriptions, which accounted for 96% and 95% of our revenue in the three months endedApril 30, 2021 and 2020. Our subscription fees include the use of our software suite and access to customer support. Subscriptions generally range from one to three years, and substantially all our multi-year customers pay in annual installments, one year in advance. We also generate revenue from professional and other non-subscription services, which consists primarily of fees associated with providing new customers deployment and integration services. Other revenue includes amounts derived from sales of on-premises solutions. Professional services and other revenue accounted for the remainder of total revenue in the three months endedApril 30, 2021 and 2020. We anticipate continuing to invest in customer success through our professional services offerings as we believe it plays an important role in accelerating our customers' deployment of our software suite, which helps drive customer retention and expansion of the use of theDocuSign Agreement Cloud. We offer subscriptions to our software suite to enterprise businesses, commercial businesses and very small businesses ("VSBs"), which we define as companies with fewer than 10 employees and includes professionals, sole proprietorships and individuals. We sell to customers through multiple channels. Our go-to-market strategy relies on our direct sales force and partnerships to sell to enterprises and commercial businesses and our web-based self-service channel to sell to VSBs, which we believe is the most cost-effective way to reach our smallest customers. We offer more than 350 off-the-shelf, prebuilt integrations with the applications that many of our customers already use-including those offered by Google, Microsoft,NetSuite , Oracle, Salesforce, SAP, SAP SuccessFactors and Workday-so that they can create, sign, send and manage agreements from directly within these applications. We have a diverse customer base spanning various industries and countries with no significant customer concentration. No single customer accounted for more than 10% of total revenue in any of the periods presented. We focused initially on selling our e-signature solutions to commercial businesses and VSBs, and later expanded our focus to target enterprise customers. To demonstrate this growth over time, the number of our customers with greater than$300,000 in annual contract value (measured in billings) has increased from approximately 30 customers as ofJanuary 31, 2013 to 673 customers as ofApril 30, 2021 . Each of our customer types has a different purchasing pattern. VSBs tend to become customers quickly with very little to no direct sales or customer support interaction and generate smaller average contract values, while commercial and enterprise customers typically involve longer sales cycles, larger contract values and greater expansion opportunities for us. COVID-19 Update The COVID-19 pandemic has spread across the world includingthe United States , where we are headquartered and the majority of our workforce is located. The pandemic and the public health measures taken in response to it have adversely affected workforces, organizations, customers, economies, and financial markets globally, leading to an economic downturn and increased market volatility. We are continuing to monitor the actual and potential effects of the pandemic across our business. Because these effects are dependent on highly uncertain future developments - including the duration, spread and severity of the pandemic, the actions taken to contain the virus, the distribution of vaccines, and how quickly and to what extent normal economic and operating conditions can or will resume - they are extremely difficult to predict. While our revenue, billings and earnings are relatively predictable as a result of our subscription-based business model, the effects of the COVID-19 pandemic may not be fully reflected in our results of operations until future periods. SinceMarch 2020 , we have taken a number of precautionary measures to ensure the health and safety of our employees, partners and customers.DocuSign has shifted to a largely remote work environment, providing nearly all employees the opportunity to work from home until at leastOctober 4, 2021 . We have suspended all business travel other than for essential functions. We have cancelled or replaced planned events, such as our Momentum conferences, with virtual-only experiences. We have incurred expenses to support our employees working from home, including reimbursements for home office equipment and a stipend for other qualifying expenses, as well as expenses associated with planning and risk mitigation for potential and actual reopening of our offices, and may incur similar expenses in the future. The impact of these and any other operational changes we may implement is uncertain, but as of the date of this filing they have not materially affected our ability to maintain operations. We have experienced a substantial increase in overall demand for our products, particularlyDocuSign eSignature, as the shift to remote, digital business operations has caused more organizations to adopt or expand their use of digital agreements. This acceleration of the digital transformation of agreements has resulted in growth in our customer base and a significant increase in customer spending across almost all industries and regions we serve. 24 -------------------------------------------------------------------------------- We believe that businesses that have shifted to digital agreement processes will not return to manual ones. However, if our expectations are incorrect, and if demand for our products decreases as the COVID-19 pandemic lessens in severity and businesses resume in-person operations, our business could suffer. See the section below titled " Risk Factors " for further discussion of the potential impact of the COVID-19 pandemic, including the conclusion or tapering of the pandemic, on our business, financial condition and results of operations.
Financial results for the three months ended
Three Months Ended April 30,
(in thousands) 2021 2020
Total revenue $ 469,078 $ 297,017
Total costs and expenses 479,815 338,870
Total stock-based compensation expense 81,136 53,551
Loss from operations (10,737) (41,853)
Net loss (8,354) (47,804)
Net cash provided by operating activities 135,597
59,144
Purchases of property and equipment (12,596)
(26,389)
Cash, cash equivalents, restricted cash and investments were
Key factors affecting our performance
We believe that our future performance will depend on many factors, including the following:
Growing Customer Base We are highly focused on continuing to acquire new customers to support our long-term growth. We have invested, and expect to continue to invest, heavily in our sales and marketing efforts to drive customer acquisition. As ofApril 30, 2021 , we had a total of over 980,000 customers, including over 135,000 enterprise and commercial customers, compared to over 660,000 customers and over 85,000 enterprise and commercial customers as ofApril 30, 2020 . We define a customer as a separate and distinct buying entity, such as a company, an educational or government institution, or a distinct business unit of a large company that has an active contract to access our software suite. We define enterprise customers as companies generally included in the Global 2000. We define commercial customers to include both mid-market companies, which includes companies outside the Global 2000 that have greater than 250 employees, and small-to-medium-sized businesses, which are companies with between 10 and 249 employees, in each case excluding any enterprise customers. We refer to total customers as all enterprises, commercial businesses and VSBs. We believe that our ability to increase the number of customers using our software suite, particularly the number of enterprise and commercial customers, is an indicator of our market penetration, the growth of our business and our potential future business opportunities. By increasing awareness of our software suite, further developing our sales and marketing expertise and continuing to build features tuned to different industry needs, we have expanded the diversity of our customer base to include organizations of all sizes across nearly every industry.
Maintain and extend contracts with existing businesses and commercial customers
Many of our customers have increased spend with us as they have expanded their use of our offerings in both existing and new use cases across their front or back office operations. Our enterprise and commercial customers may start with just one use case and gradually implement additional use cases across their organization once they see the benefits of our software suite. Several of our largest enterprise customers have deployed our software suite for hundreds of use cases across their organizations. We believe there is significant expansion opportunity with our customers following their initial adoption of our software suite.
Increase in international income
Our international sales represented 21% and 18% of our total sales during the three months ended
25 -------------------------------------------------------------------------------- We started our international selling efforts in English-speaking common law countries, such asCanada , theUnited Kingdom andAustralia , where we were able to leverage our core technologies due to similar approaches to e-signature in these jurisdictions andthe United States ("U.S."). We have since made significant investments to be able to offer our products in select civil law countries. For example, inEurope , we have Standards-Based Signature ("SBS") technology tailored for electronic IDentification, Authentication and trust Services ("eIDAS"). SBS supports signatures that involve digital certificates, including those specified in theEuropean Union's ("EU") eIDAS regulations for advanced and qualified electronic signatures. In addition, to follow longstanding tradition inJapan , we enable signers to upload and apply their personal eHanko stamp to represent their signatures on an agreement. We plan to increase our international revenue by leveraging and continuing to expand the investments we have already made in our technology, direct sales force and strategic partnerships, as well as helping existingU.S. -based customers manage agreements across their international businesses. We have experienced increased demand inLatin America and are expanding our sales and marketing resources to capitalize on the potential growth of these markets. Additionally, we expect to continue to develop and enhance our strategic partnerships in key international markets as we grow internationally.
Investing for growth
We believe that our market opportunity is large, and we plan to invest to continue to support further growth. This includes expanding our sales headcount and increasing our marketing initiatives. We also plan to continue to invest in expanding the functionality of our software suite and underlying infrastructure and technology to meet the needs of our customers across industries. Our acquisitions ofSeal Software and Liveoak Technologies, intended to bring additional functionality to ourDocuSign Agreement Cloud and further expand our eNotary offerings, as well as the continuous development of new features internally, are examples of our commitment to investing for ongoing growth.
Components of the results of operations
Returned
We derive revenue primarily from the sale of subscriptions and, to a lesser extent, professional services.
Subscription Revenue Subscription revenue consists of fees for the use of our software
suite and our technical infrastructure and access to customer support,
which includes phone or email support. We typically invoice customers
in advance on an annual basis. We recognize subscription revenue
ratably over the term of the contract
subscription period starting on
the date access to our software suite is provided. Professional Services and Professional services revenue includes fees associated with new Other Revenue customers requesting deployment and
integration services. We price
professional services on a time and materials basis and on a fixed fee
basis. We generally have standalone value for our professional
services and recognize revenue based on standalone selling price as
services are performed or upon completion of services for fixed fee
contracts. Other revenue includes amounts derived from sales of
on-premises solutions.
Overhead Allocation
We allocate shared overhead costs, such as facilities (including rent, utilities
and depreciation on equipment shared by all departments), information
technology, information security and recruiting costs to all departments based
on headcount. As such, these allocated overhead costs are reflected in each cost
of revenue and operating expense category.
26
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Cost of income
Cost of subscription revenues The cost of subscription revenues mainly includes expenses related to
hosting our software suite and providing
Support. These expenses consist
of employee-related costs, including salaries, bonuses, benefits,
stock-based compensation and other related costs, associated with our
technical infrastructure, customer success and customer support. These
expenses also consist of software and
maintenance costs, third parties
hosting fees, outside services associated with the delivery of our
subscription services, amortization expense associated with capitalized
internal-use software and acquired intangible assets, credit card
processing fees and allocated overhead costs.
Cost of Professional Services Cost of professional services and other revenue consists primarily of
and Other Revenue personnel costs for our professional services delivery team,
travel-related costs and allocated overhead costs.
Gross profit and gross margin
Gross profit is total revenue less total cost of revenue. Gross margin is gross profit expressed as a percentage of total revenue. We expect that gross profit and gross margin will continue to be affected by various factors including our pricing, timing and amount of investment to maintain or expand our hosting capability, the growth of our software suite support and professional services team, stock-based compensation expenses, amortization of costs associated with capitalized internal use software and acquired intangible assets and allocated overhead costs. Operating Expenses
Our operating expenses consist of sales and marketing, research and development, general and administrative expenses.
Selling and Marketing Expense Selling and marketing expense consists primarily of personnel costs,
including sales commissions. These expenses also include expenditures
related to advertising, marketing, promotional events and brand
awareness activities, as well as allocated overhead costs. We expect
selling and marketing expense to continue to increase in absolute
dollars as we enhance our product offerings and implement marketing
strategies.
Research and Development Research and development expense consists primarily of personnel costs.
Expense These expenses also include non-personnel costs, such as
subcontracting, consulting and professional fees for third-party
development resources, as well as allocated overhead costs. Our
research and development efforts focus on maintaining and enhancing
existing functionality and adding new
Functionality. We are awaiting research
and development expense to increase in
absolute dollars as we invest in
the enhancement of our software suite.
General and Administrative General and administrative expense consists primarily of
Expense employee-related costs for those employees providing administrative
services such as legal, human resources,
related to information technology
to internal systems, accounting and finance. These expenses also
include certain third-party consulting services, certain facilities
costs and allocated overhead costs. We expect general and
administrative expense to increase in
absolute dollars to support the
overall growth of our operations. Interest Expense
Interest expense is primarily comprised of contractual interest expense, discount amortization and the amortization of debt issuance costs on our convertible senior notes (the “Notesâ€).
Interest income and other income, net
Interest and other income, net, consists primarily of interest earned on our cash, cash equivalents and investments, changes in the fair value of our strategic investments and gains and losses on foreign exchange transactions.
27 --------------------------------------------------------------------------------
Provision for income taxes
Our provision for income taxes consists primarily of income taxes in certain foreign jurisdictions where we conduct business, and tax benefits arising from deductions for stock-based compensation. We have a valuation allowance against ourU.S. consolidated group and certain foreign deferred tax assets. We expect to maintain this valuation allowance for the foreseeable future or until it becomes more likely than not that the benefit of theseU.S. and foreign deferred tax assets will be realized by way of expected future taxable income. 28 --------------------------------------------------------------------------------
Discussion of the results of operations
The following table summarizes our historical consolidated statements of
operations data:
Three Months Ended April 30,
As % of As % of
(in thousands) 2021 revenue 2020 revenue
Revenue:
Subscription $ 451,935 96 % $ 280,922 95 %
Professional services and other 17,143 4 16,095 5
Total revenue 469,078 100 297,017 100
Cost of revenue:
Subscription 78,071 17 52,010 18
Professional services and other 27,171 5 22,022 7
Total cost of revenue 105,242 22 74,032 25
Gross profit 363,836 78 222,985 75
Operating expenses:
Sales and marketing 239,119 51 171,793 58
Research and development 85,416 18 54,234 18
General and administrative 50,038 11 38,811 13
Total operating expenses 374,573 80 264,838 89
Loss from operations (10,737) (2) (41,853) (14)
Interest expense (1,672) - (7,560) (3)
Interest income and other income, net 6,037 1 3,742 2
Loss before provision for income taxes (6,372) (1) (45,671) (15)
Provision for income taxes 1,982 1 2,133 1
Net loss $ (8,354) (2) % $ (47,804) (16) %
The following discussion and analysis covers the three months ended.
Revenue
Three Months Ended
April 30, 2021 versus
(in thousands, except for percentages) 2021 2020 2020
Revenue:
Subscription $ 451,935 $ 280,922 61 %
Professional services and other 17,143 16,095 7 %
Total revenue $ 469,078 $ 297,017 58 %
Subscription revenue increased by $171.0 million , or 61%, in the three months
ended April 30, 2021 . Due to the COVID-19 pandemic, there has been a shift to
remote digital business operations that has led to an increase in demand for our
solutions. This resulted in a higher growth in our customer base and a
significant increase in customer spending across almost all industries and
regions we serve.
We continue to invest in a variety of customer programs and initiatives, which,
along with expanded customer use cases, have helped increase our subscription
revenue over time. We expect subscription revenue to continue to increase as we
offer new functionality, attract new customers and fully realize the potential
of our acquisitions in our product offerings. We continue to monitor the
COVID-19 pandemic in fiscal 2022 and its impact on the economy, the digital
transformation of business and demand for our solutions.
Professional services and other income edged up in the quarter ended
29 --------------------------------------------------------------------------------
Cost of revenues and gross margin
Three Months
Finished
April
30,
(in thousands, except for percentages) 2021 2020 2021 versus 2020 Cost of revenue: Subscription$ 78,071 $ 52,010 50 % Professional services and other 27,171 22,022 23 % Total cost of revenue$ 105,242 $ 74,032 42 % Gross margin: Subscription 83 % 81 % 2 pts Professional services and other (58) % (37) % (21) pts Total gross margin 78 % 75 % 3 pts Cost of subscription revenue increased$26.1 million , or 50%, in the three months endedApril 30, 2021 , primarily driven by higher costs to support our growing customer base and the impact of the Seal acquisition. Significant increases consisted of: ?$9.7 million in personnel costs and$2.2 million in stock-based compensation expense primarily due to higher headcount, including the addition of Seal employees, and annual merit increases; ?$6.2 million in operating costs to support our platform and the growth in our revenue, including increases in subscription reseller fees, hosting costs and authentication and processing fees; and ?$5.3 million in depreciation and amortization, which reflects the impact of higher data center and capitalized software assets as well as the higher existing technology intangible assets from the Seal acquisition.
Increased cost of professional services and other revenues
Sales and Marketing
Three Months Ended
April 30,
(in thousands, except for percentages) 2021 2020 2021 versus 2020
Sales and marketing $ 239,119 $ 171,793 39 %
Percentage of revenue 51 % 58 %
Sales and marketing expenses increased $67.3 million , or 39%, in the three
months ended April 30, 2021 , primarily driven by investments in workforce and
technology infrastructure to support the significant increase in demand due to
the acceleration of the digital transformation of agreements. Significant
increases consisted of:
?$40.8 million in personnel costs and $13.5 million in stock-based compensation
expense due to higher headcount, annual merit increases, the addition of Seal
employees to our workforce, higher commissions in line with higher sales and
higher taxes on employee stock transactions; and
?$10.9 million in marketing and advertising expense, primarily due to higher
spend on online advertising platforms to help capture the increased market
interest in our product offering as a result of the shift to COVID-19 remote
work environment.
Research and Development
Three Months Ended
April 30,
(in thousands, except for percentages) 2021 2020 2021 versus 2020
Research and development $ 85,416 $ 54,234 57 %
Percentage of revenue 18 % 18 %
Research and development expenses increased $31.2 million , or 57%, in the three
months ended April 30, 2021 , primarily due to investments in workforce and
technology infrastructure to support growth. Personnel costs increased by $19.2
million and stock-based compensation by $8.6 million due to higher headcount,
the addition of Seal and Liveoak employees to our workforce and annual merit
increases.
30
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General and Administrative
Three Months Ended
April 30,
(in thousands, except for percentages) 2021 2020 2021 versus 2020
General and administrative $ 50,038 $ 38,811 29 %
Percentage of revenue 11 % 13 %
General and administrative expenses increased $11.2 million or 29%, in the three
months ended April 30, 2021 , primarily due to investments in workforce and
technology infrastructure to support growth. Personnel costs increased by $6.3
million and stock-based compensation by $2.0 million due to higher headcount and
the impact of annual merit increases.
Other Income and Expense
Three Months Ended
April 30,
(in thousands, except for percentages) 2021 2020 2021 versus 2020
Interest expense $ 1,672 $ 7,560 (78) %
Percentage of revenue - % (3) %
Interest income $ 1,126 3,381 (67) %
Foreign currency gain (loss) 266 (545) NM
Fair value adjustments to strategic investments 5,119 - 100 %
Other (474) 906 NM
Interest income and other income, net $ 6,037 3,742 61 %
Percentage of revenue 1 % 2 %
Interest expense decreased by $5.9 million in the three months ended April 30,
2021 primarily due to lower amortization expense under ASU 2020-06 effective
February 1, 2021 .
Interest income and other income, net, for the three months ended April 30, 2021
included $5.1 million adjustments to fair value of certain strategic investments
resulting from observable price changes that occurred during the quarter.
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Liquidity and capital resources
Our principal sources of liquidity were cash, cash equivalents and investments as well as cash generated from operations. As ofApril 30, 2021 , we had$780.6 million in cash and cash equivalents and short-term investments. We also had$94.9 million in long-term investments that provide additional capital resources. We finance our operations primarily through payments by our customers for use of our product offerings and related services and through debt financings.
In
InJanuary 2021 we entered into a$500.0 million credit facility, which may be increased by an additional$250.0 million subject to customary terms and conditions. The credit facility is available untilJanuary 11, 2026 to optimize our capital structure and strengthen our balance sheet. There were no outstanding borrowings under the credit facility as ofApril 30, 2021 .
Further details on these transactions are described in Note 7 to the condensed consolidated financial statements, included in Part I, Item 1 of this Form 10-Q.
We were in compliance with all debt covenants at
We believe our existing cash, cash equivalents and marketable securities will be sufficient to meet our working capital and capital expenditures needs over at least the next 12 months. While we have generated positive cash flows from operations in recent years, we have generated losses from operations in the past as reflected in our accumulated deficit of$1.4 billion as ofApril 30, 2021 . We may not achieve profitability in the foreseeable future due to the investments we intend to make and may require additional capital resources to execute strategic initiatives to grow our business. We typically invoice our customers annually in advance. Therefore, a substantial source of our cash is from such invoices, which are included on our consolidated balance sheets in contract liabilities until revenue is recognized or in accounts receivable until cash is collected. Accordingly, collections from our customers have a material impact on our cash flows from operating activities. Our accounts receivable decreased by$73.2 million in the three months endedApril 30, 2021 , compared to a decrease of$17.2 million in the three months endedApril 30, 2020 , which resulted in a$56.0 million increase in cash provided by operating activities year over year. Contract liabilities consist of the unearned portion of billed fees for our subscriptions, which is subsequently recognized as revenue in accordance with our revenue recognition policy. Our contract liabilities increased by$51.6 million in the three months endedApril 30, 2021 , compared to an increase of$44.6 million in the three months endedApril 30, 2020 . The year over year increase contributed an additional$7.1 million to cash provided by operating activities. Our future capital requirements will depend on many factors including our growth rate, customer retention and expansion, tax withholding obligations related to settlement of our RSUs, the timing and extent of spending to support our efforts to develop our software suite, the expansion of sales and marketing activities and the continuing market acceptance of our software suite. We may in the future enter into arrangements to acquire or invest in complementary businesses, technologies and intellectual property rights. We may be required to seek additional equity or debt financing. 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 when desired, our business, operating results and financial condition would be adversely affected. 32 --------------------------------------------------------------------------------
Cash flow
The following table summarizes our cash flows for the periods indicated:
Three Months Ended April 30,
(in thousands) 2021 2020
Net cash provided by (used in):
Operating activities $ 135,597 $ 59,144
Investing activities (70,506) 169,668
Financing activities (112,954) (25,498)
Effect of foreign exchange on cash, cash equivalents and restricted cash
779 (2,280)
Net change in cash, cash equivalents and restricted cash
Cash flow from operating activities
Cash provided by operating activities was$135.6 million and$59.1 million for the three months endedApril 30, 2021 and 2020. The improvement of$76.5 million , as compared to prior year, was primarily the result of increased sales and the related cash collections, partially offset by higher operating costs from increased headcount and to support growth.
Cash flow from investing activities
For the three months ended
For the three months endedApril 30, 2020 , cash provided by investing activities of$169.7 million was primarily driven by$199.1 million from maturities and sales of marketable securities, partially offset by$26.4 million purchases of property and equipment.
Cash flow from financing activities
For the three months endedApril 30, 2021 , cash used in financing activities of$113.0 million was primarily driven by$76.3 million in net payments related to our equity plans, as compared to$25.5 million in the prior year for similar activities. We also used$36.7 million for repayments of our 2023 Notes.
Obligations and commitments
Our principal contractual obligations and commitments consist of obligations under the Notes (including principal and coupon interest), operating leases, as well as noncancelable contractual commitments that primarily relate to cloud infrastructure support and sales and marketing activities. Refer to Note 7 and Note 8 to the Condensed Consolidated Financial Statements, included in
Part I, point 1 of this 10-Q form, for our leases and other commitments.
We do not have a special purpose entity and we do not enter into off-balance sheet financing agreements.
Critical accounting conventions and estimates
We prepare our financial statements in accordance withU.S. generally accepted accounting principles ("GAAP"). Preparing these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates. The critical accounting estimates, assumptions and judgments that we believe to have the most significant impact on our consolidated financial statements are revenue recognition, deferred contract acquisition costs, stock-based compensation, valuation of acquired intangible assets in business combinations and income taxes.
There have been no material changes to our accounting policies and critical estimates as described in our 2021 Annual Report on Form 10-K.
33 --------------------------------------------------------------------------------
Recent accounting positions
Refer to Note 1 to our consolidated financial statements included elsewhere in
this Quarterly Report on Form 10-Q for recently issued accounting pronouncements
not yet adopted as of the date of this report.
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Non-GAAP financial measures and other key indicators
To supplement our consolidated financial statements, which are prepared and
presented in accordance with GAAP, we use certain non-GAAP financial measures,
as described below, to understand and evaluate our core operating performance.
These non-GAAP financial measures, which may be different than similarly titled
measures used by other companies, are presented to enhance investors' overall
understanding of our financial performance and should not be considered a
substitute for, or superior to, the financial information prepared and presented
in accordance with GAAP.
We believe that these non-GAAP financial measures provide useful information
about our financial performance, enhance the overall understanding of our past
performance and future prospects, and allow for greater transparency with
respect to important metrics used by our management for financial and
operational decision-making. We present these non-GAAP measures to assist
investors in seeing our financial performance using a management view, and
because we believe that these measures provide an additional tool for investors
to use in comparing our core financial performance over multiple periods with
other companies in our industry.
Non-GAAP gross profit, non-GAAP gross margin, non-GAAP income from operations,
non-GAAP operating margin and non-GAAP net income: We define these non-GAAP
financial measures as the respective GAAP measures, excluding expenses related
to stock-based compensation, employer payroll tax on employee stock
transactions, amortization of acquisition-related intangibles, amortization of
debt discount and issuance costs, acquisition-related expenses, fair value
adjustments to strategic investments and, as applicable, other special items.
The amount of employer payroll tax-related items on employee stock transactions
is dependent on our stock price and other factors that are beyond our control
and do not correlate to the operation of the business. When evaluating the
performance of our business and making operating plans, we do not consider these
items (for example, when considering the impact of equity award grants, we place
a greater emphasis on overall stockholder dilution rather than the accounting
charges associated with such grants). We believe it is useful to exclude these
expenses in order to better understand the long-term performance of our core
business and to facilitate comparison of our results to those of peer companies
and over multiple periods.
Free cash flow: We define free cash flow as net cash provided by operating
activities less purchases of property and equipment. We believe free cash flow
is an important liquidity measure of the cash that is available (if any), after
purchases of property and equipment, for operational expenses, investment in our
business and to make acquisitions. Free cash flow is useful to investors as a
liquidity measure because it measures our ability to generate or use cash in
excess of our capital investments in property and equipment. Once our business
needs and obligations are met, cash can be used to maintain a strong balance
sheet and invest in future growth.
Billings: We define billings as total revenues plus the change in our contract
liabilities and refund liability less contract assets and unbilled accounts
receivable in a given period. Billings reflects sales to new customers plus
subscription renewals and additional sales to existing customers. Only amounts
invoiced to a customer in a given period are included in billings. We believe
billings is a key metric to measure our periodic performance. Given that most of
our customers pay in annual installments one year in advance, but we typically
recognize a majority of the related revenue ratably over time, we use billings
to measure and monitor our ability to provide our business with the working
capital generated by upfront payments from our customers.
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Reconciliation of gross margin and gross margin:
Three Months Ended
April 30,
(in thousands) 2021 2020
GAAP gross profit $ 363,836 $ 222,985
Add: Stock-based compensation 11,553 7,989
Add: Amortization of acquisition-related intangibles 3,171 1,348
Add: Employer payroll tax on employee stock transactions 2,774 1,036
Non-GAAP gross profit $ 381,334 $ 233,358
GAAP gross margin 78 % 75 %
Non-GAAP adjustments 3 % 4 %
Non-GAAP gross margin 81 % 79 %
GAAP subscription gross profit $ 373,864 $ 228,912
Add: Stock-based compensation 6,018 3,864
Add: Amortization of acquisition-related intangibles 3,171 1,348
Add: Employer payroll tax on employee stock transactions 1,442 535
Non-GAAP subscription gross profit $ 384,495 $ 234,659
GAAP subscription gross margin 83 % 81 %
Non-GAAP adjustments 2 % 3 %
Non-GAAP subscription gross margin 85 % 84 %
GAAP professional services and other gross loss $ (10,028) $ (5,927)
Add: Stock-based compensation 5,535 4,125
Add: Employer payroll tax on employee stock transactions 1,332 501
Non-GAAP professional services and other gross loss $ (3,161) $ (1,301)
GAAP professional services and other gross margin (58) % (37) %
Non-GAAP adjustments 40 % 29 %
Non-GAAP professional services and other gross margin (18) % (8) %
Reconciliation of operating profit and operating margin:
Three Months Ended
April 30,
(in thousands) 2021 2020
GAAP loss from operations $ (10,737) $ (41,853)
Add: Stock-based compensation 81,136 53,551
Add: Amortization of acquisition-related intangibles 6,529 4,259
Add: Employer payroll tax on employee stock transactions 16,283 6,548
Add: Acquisition-related expenses - 694
Non-GAAP income from operations $ 93,211 $ 23,199
GAAP operating margin (2) % (14) %
Non-GAAP adjustments 22 % 22 %
Non-GAAP operating margin 20 % 8 %
36
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Reconciliation of net income (loss):
Three Months Ended
April 30,
(in thousands) 2021 2020
GAAP net loss $ (8,354) $ (47,804)
Add: Stock-based compensation 81,136 53,551
Add: Amortization of acquisition-related intangibles 6,529 4,259
Add: Employer payroll tax on employee stock transactions 16,283 6,548
Add: Acquisition-related expenses - 694
Add: Amortization of debt discount and issuance costs 1,319 6,842
Less: Fair value adjustments to strategic investments (5,119) -
Non-GAAP net income $ 91,794 $ 24,090
Calculation of free cash flow:
Three Months Ended
April 30,
(in thousands) 2021 2020
Net cash provided by operating activities $ 135,597 $ 59,144
Less: Purchases of property and equipment (12,596) (26,389)
Non-GAAP free cash flow $ 123,001 $ 32,755
Net cash (used in) provided by investing activities $ (70,506) $ 169,668
Net cash used in financing activities $
(112,954)
Computation of billings:
Three Months Ended
April 30,
(in thousands) 2021 2020
Revenue $ 469,078 $ 297,017
Add: Contract liabilities and refund liability, end of period 857,969 568,544
Less: Contractual liability and reimbursement liability, start of period
(800,940) (522,201)
Add: Contractual assets and unbilled receivables, start of period
21,021 15,082 Less: Contract assets and unbilled accounts receivable, end of period (19,737) (16,390) Non-GAAP billings$ 527,391 $ 342,052 37
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