DOCUSIGN, INC. (DOCU) FY 2022 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this 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 I, Item 1A in this Annual Report on Form 10-K. Our fiscal year ends January 31.
Executive Overview of Fiscal 2022 Results
Overview
DocuSign offers the world’s leading electronic signature offering, enabling an agreement to be signed electronically on a wide variety of devices, from virtually anywhere in the world, securely. This is the foundation of the DocuSign Agreement Cloud, which allows organizations to do business faster with less risk, lower costs, while providing better experiences for customers and employees.
We offer the world’s #1 e-signature product as the core part of our broader software platform that automates and connects the agreement process, which we call the DocuSign 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 DocuSign eSignature and addresses the broader agreement process. As a result, over 1.1 million customers and more than a billion users worldwide utilize DocuSign to create, upload and send documents for multiple parties to sign electronically. The DocuSign Agreement Cloud allows users to complete approvals, agreements and transactions faster by building end-to-end processes. The DocuSign Agreement Cloud integrates with popular business apps, and our functionality can also be embedded using our APIs. Finally, the DocuSign 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.
We generate substantially all our revenue from sales of subscriptions, which accounted for 97%, 95% and 94% of our revenue in the years ended January 31, 2022, 2021 and 2020. Our subscription fees include the use of our software platform 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. We anticipate continuing to invest in customer success through our professional services offerings as we
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believe it plays an important role in accelerating our customers’ deployment of our software platform, which helps drive customer retention and expansion of the use of the DocuSign Agreement Cloud.
We offer subscriptions to our software platform to businesses at all scales, from global enterprise down to local very small businesses (“VSBs”) (including professionals, sole proprietorships, nonprofits 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 400 off-the-shelf, prebuilt integrations with the applications that many of our customers already use—including those offered by Google, Microsoft, Oracle, Salesforce, SAP, and Workday—so that they can create, sign, send and manage agreements from directly within these applications. We have a diverse customer base spanning across virtually all industries and around the world with no significant customer concentration. No single customer accounted for more than 10% of total revenue in any of the years presented.
We focused initially on selling our e-signature solutions to commercial businesses and VSBs and later expanded our focus to target enterprise customers. The number of our customers with greater than $300,000 in annual contract value (measured in billings) has increased from 599 customers as of January 31, 2021 to 852 customers as of January 31, 2022. 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
As the pandemic continued in 2022, the rate of vaccinations, emerging COVID-19 variants, and shifting governmental policies on vaccination mandates and other pandemic restrictions have had variable impacts on different regions of the world and areas of the economy. This has caused and may continue to cause new, existing and potential customers to experience rapidly changing conditions and disruptions to their businesses. While we experienced a significant increase in paying customers and revenue during the pandemic, we later experienced periods in which the urgency of customer demand slowed. It can be difficult to predict customer demand, especially as our customers’ priorities, resources and economic outlook change, along with other shifting market conditions. These shifts have occurred and may in the future occur more quickly than we anticipate. Additionally, due to our subscription-based business model, the full effects of these changes may not be fully reflected in our results of operations until future periods. If the COVID-19 pandemic continues to have a substantial impact on our employees’, partners’ or customers’ productivity or if the abatement of the pandemic results in decreased demand or a more challenging sales environment, our results of operations and overall financial performance may be harmed.
See Risk Factors for further discussion of the potential impact of the COVID-19 pandemic, including the impact to our business, financial condition and results of operations.
Financial Results for the Year Ended January 31, 2022
| (in thousands) | Year Ended January 31, 2022 | |
|---|---|---|
| Total revenue | $ | 2,107,213 |
| Total costs and expenses | 2,169,097 | |
| Total stock-based compensation expense | 408,542 | |
| Loss from operations | (61,884) | |
| Net loss | (69,976) | |
| Cash provided by operating activities | 506,467 | |
| Capital expenditures | (61,396) |
Cash, cash equivalents, restricted cash and investments were $898.4 million as of January 31, 2022.
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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 of January 31, 2022, we had a total of over 1.1 million customers, including over 170,000 enterprise and commercial customers, compared to over 890,000 customers and over 120,000 enterprise and commercial customers as of January 31, 2021. 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 platform. 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 SMBs, which are companies with between 10 and 249 employees, in each case excluding any enterprise customers. We define VSBs as companies with fewer than 10 employees. 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 platform, 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 platform, 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.
Retaining and Expanding Contracts with Existing Enterprise 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 platform. Several of our largest enterprise customers have deployed our software platform 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 platform.
Increasing International Revenue
Our international revenue represented 23%, 20% and 18% of our total revenue in each of the years ended January 31, 2022, 2021, and 2020, respectively.
We started our international selling efforts in English-speaking common law countries, such as Canada, the UK and Australia, where we were able to leverage our core technologies due to similar approaches to e-signature in these jurisdictions and the U.S. We have since made significant investments to be able to offer our products in select civil law countries. For example, in Europe, we offer Standards-Based Signature (“SBS”) technology tailored for eIDAS. SBS supports signatures that involve digital certificates, including those specified in the EU’s eIDAS regulations for advanced and qualified electronic signatures. In addition, to follow longstanding tradition in Japan, 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 existing U.S.-based customers manage agreements across their international businesses. We have experienced increased demand across multiple regions 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 platform and underlying infrastructure and technology to meet the needs of our customers across industries. Our acquisitions, such as Seal Software and Liveoak Technologies, intend to bring additional functionality to our DocuSign Agreement Cloud offerings, as well as the continuous development of new features internally, are examples of our commitment to investing for ongoing growth.
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Components of Results of Operations
Revenue
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 platform 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 beginning on the date access to our software suite is provided. |
|---|---|
| Professional Services and Other Revenue | Professional services revenue includes fees associated with new 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.
Cost of Revenue
| Cost of Subscription Revenue | Cost of subscription revenue primarily consists of expenses related to hosting our software platform 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-party 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 and Other Revenue | Cost of professional services and other revenue consists primarily of 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 platform 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 and general and administrative expenses. As our revenues continue to increase, our operating expenses as a percentage of revenue may increase or decrease at different rates, driven by the timing of revenue recognition, the timing of hiring, our investments in growth and other factors.
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| Sales and Marketing Expense | Sales 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 sales and marketing expense to continue to increase in absolute dollars as we enhance our product offerings and implement marketing strategies. |
|---|---|
| Research and Development Expense | Research and development expense consists primarily of personnel costs. 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 expect research and development expense to increase in absolute dollars as we invest in the enhancement of our software platform. |
| General and Administrative Expense | General and administrative expense consists primarily of employee-related costs for those employees providing administrative services such as legal, human resources, information technology related to internal systems, accounting and finance. These expenses also include certain third-party consulting services, certain facilities costs, allocated overhead costs and impairment of operating lease right-of-use assets. We expect general and administrative expense to increase in absolute dollars to support the overall growth of our operations. |
Interest Expense and Loss on Extinguishment of Debt
Interest expense consists primarily of contractual interest expense, amortization of discount and amortization of debt issuance costs on our Notes. The loss on extinguishment of debt consists of the difference between the fair value and the net carrying value of our Notes at settlement.
Interest Income and Other Income, Net
Interest income and other income, net, consists primarily of interest earned on our cash, cash equivalents and investments, changes in fair value of our strategic investments and foreign currency transaction gains and losses.
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 our U.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 these U.S. and foreign deferred tax assets will be realized by way of expected future taxable income.
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Discussion of Results of Operations
The following table summarizes our historical consolidated statements of operations data:
| Year Ended January 31, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | 2022 | As % of Revenue | 2021 | As % of Revenue | |||||||||
| Revenue: | |||||||||||||
| Subscription | $ | 2,037,272 | 97 | % | $ | 1,381,397 | 95 | % | |||||
| Professional services and other | 69,941 | 3 | 71,650 | 5 | |||||||||
| Total revenue | 2,107,213 | 100 | 1,453,047 | 100 | |||||||||
| Cost of revenue: | |||||||||||||
| Subscription | 343,661 | 16 | 259,992 | 18 | |||||||||
| Professional services and other | 122,790 | 6 | 104,066 | 7 | |||||||||
| Total cost of revenue | 466,451 | 22 | 364,058 | 25 | |||||||||
| Gross profit | 1,640,762 | 78 | 1,088,989 | 75 | |||||||||
| Operating expenses: | |||||||||||||
| Sales and marketing | 1,076,527 | 51 | 798,625 | 55 | |||||||||
| Research and development | 393,362 | 19 | 271,522 | 19 | |||||||||
| General and administrative | 232,757 | 11 | 192,697 | 13 | |||||||||
| Total operating expenses | 1,702,646 | 81 | 1,262,844 | 87 | |||||||||
| Loss from operations | (61,884) | (3) | (173,855) | (12) | |||||||||
| Interest expense | (6,443) | — | (30,799) | (2) | |||||||||
| Loss on extinguishment of debt | — | — | (33,752) | (2) | |||||||||
| Interest income and other income, net | 1,413 | — | 8,914 | — | |||||||||
| Loss before provision for income taxes | (66,914) | (3) | (229,492) | (16) | |||||||||
| Provision for income taxes | 3,062 | — | 13,775 | 1 | |||||||||
| Net loss | $ | (69,976) | (3) | % | $ | (243,267) | (17) | % |
For a comparison of our results of operations for the fiscal years ended January 31, 2021 and 2020 see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the fiscal year ended January 31, 2021, filed with the SEC on March 31, 2021.
Revenue
| Year Ended January 31, | 2022 vs 2021 | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | 2022 | As % of Revenue | 2021 | As % of Revenue | ||||||||||||||||
| Revenue: | ||||||||||||||||||||
| Subscription | $ | 2,037,272 | 97 | % | $ | 1,381,397 | 95 | % | 47 | % | ||||||||||
| Professional services and other | 69,941 | 3 | 71,650 | 5 | (2) | % | ||||||||||||||
| Total revenue | $ | 2,107,213 | 100 | % | $ | 1,453,047 | 100 | % | 45 | % |
Subscription revenue increased $655.9 million, or 47%, in the year ended January 31, 2022. The increase was primarily due to the expansion of existing customers and the addition of new customers. This growth was mainly driven by an increase in sales to our mid-market and enterprise customers through our direct and indirect sales channels.
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.
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Cost of Revenue and Gross Margin
| Year Ended January 31, | 2022 vs 2021 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | 2022 | 2021 | ||||||||||
| Cost of revenue: | ||||||||||||
| Subscription | $ | 343,661 | $ | 259,992 | 32 | % | ||||||
| Professional services and other | 122,790 | 104,066 | 18 | % | ||||||||
| Total cost of revenue | $ | 466,451 | $ | 364,058 | 28 | % | ||||||
| Gross margin: | ||||||||||||
| Subscription | 83 | % | 81 | % | 2 | pts | ||||||
| Professional services and other | (76) | % | (45) | % | (31) | pts | ||||||
| Total gross margin | 78 | % | 75 | % | 3 | pts |
Cost of subscription revenue increased $83.7 million, or 32% in the year ended January 31, 2022, primarily driven by higher costs to support our growing customer base. Significant increases consisted of:
•$28.1 million in personnel costs and $10.4 million in stock-based compensation expense primarily due to higher headcount, and annual merit increases;
•$9.2 million in hosting costs, $6.5 million in authentication and processing fees and $5.7 million in third-party partner costs to support the growth in our revenue;
•$15.6 million in depreciation and amortization, which reflects the impact of higher data center costs and capitalized software assets as well as the full-year effect of amortization related to technology intangible assets from certain acquisitions; and
•$5.8 million due to higher information technology costs.
Cost of professional service and other revenue increased $18.7 million, or 18%, in the year ended January 31, 2022, due to the increases of $9.4 million in personnel costs and $5.5 million in stock-based compensation expense primarily due to higher headcount and annual salary increases.
Sales and Marketing
| Year Ended January 31, | 2022 vs 2021 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | 2022 | 2021 | ||||||||||
| Sales and marketing | $ | 1,076,527 | $ | 798,625 | 35 | % | ||||||
| Percentage of revenue | 51 | % | 55 | % |
Sales and marketing expenses increased $277.9 million, or 35%, in the year ended January 31, 2022, primarily driven by investments in workforce and technology support to accommodate the demand for our products and increased interest in digital transformation of agreements. Significant increases consisted of:
•$151.8 million in personnel costs and $55.7 million in stock-based compensation expense due to higher headcount, annual salary increases, higher commissions in line with higher sales and higher payroll taxes;
•$42.4 million in marketing and advertising expense, primarily due to a $36.1 million increase in spending on online advertising platforms to help capture the continued market interest in our product offering;
•$18.9 million due to higher information technology costs; and
•$7.6 million in consulting fees to support our sales and marketing initiatives.
Research and Development
| Year Ended January 31, | 2022 vs 2021 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | 2022 | 2021 | ||||||||||
| Research and development | $ | 393,362 | $ | 271,522 | 45 | % | ||||||
| Percentage of revenue | 19 | % | 19 | % |
Research and development expenses increased $121.8 million, or 45%, in the year ended January 31, 2022, primarily due to investments in workforce and technology support to accommodate growth. Personnel costs, stock-based
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compensation expense and information technology costs increased by $64.3 million, $42.6 million and $10.5 million during the year ended January 31, 2022 due to higher headcount and annual salary increases.
General and Administrative
| Year Ended January 31, | 2022 vs 2021 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | 2022 | 2021 | ||||||||||
| General and administrative | $ | 232,757 | $ | 192,697 | 21 | % | ||||||
| Percentage of revenue | 11 | % | 13 | % |
General and administrative expenses increased $40.1 million, or 21%, in the year ended January 31, 2022, primarily due to investments in workforce and technology support to accommodate the operations and growth in our business. Personnel costs and stock-based compensation expense increased $16.1 million and $7.5 million during the year ended January 31, 2022 due to higher headcount and the impact of annual salary increases. The expense for the year ended January 31, 2022 also includes a $5.1 million impairment of operating lease right-of-use assets.
Other Income and (Expense)
| Year Ended January 31, | 2022 vs 2021 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | 2022 | 2021 | ||||||||||
| Interest expense | $ | (6,443) | $ | (30,799) | (79) | % | ||||||
| Percentage of revenue | — | % | (2) | % | ||||||||
| Loss on extinguishment of debt | — | $ | (33,752) | (100) | % | |||||||
| Percentage of revenue | — | % | (2) | % | ||||||||
| Interest income and other income, net | $ | 1,413 | $ | 8,914 | (84) | % | ||||||
| Percentage of revenue | — | % | — | % |
Interest expense decreased $24.4 million during the year ended January 31, 2022, primarily due to lower amortization expense under ASU 2020-06 effective February 1, 2021. Further details of the ASU 2020-06 adoption are described in Note 1 to the Consolidated Financial Statements.
During the year ended January 31, 2021, we incurred a loss of $33.8 million upon extinguishment of a portion of our 2023 Notes issued in September 2018. During the year ended January 31, 2022, we continued to settle principal of the 2023 Notes. No losses were incurred as a result of the ASU 2020-06 adoption. See further details in Note 8 to the Consolidated Financial Statements.
Interest income and other income, net included $4.8 million adjustments to fair value of certain strategic investments resulting from observable price changes that occurred during the quarter ended April 30, 2021.
Provision for Income Taxes
| Year Ended January 31, | 2022 vs 2021 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands, except for percentages) | 2022 | 2021 | ||||||||||
| Provision for income taxes | $ | 3,062 | $ | 13,775 | (78) | % | ||||||
| Percentage of revenue | — | % | 1 | % |
Provision for income taxes decreased by $10.7 million in the year ended January 31, 2022, primarily due to the impact of non-recurring intercompany tax-related transactions related to historical acquisitions, including an intercompany IP transfer of $12.9 million in the year ended January 31, 2021.
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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 of January 31, 2022, we had $802.8 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 financing.
In September 2018, we issued and sold $575.0 million in aggregate principal amount of 0.5% Convertible Senior Notes due 2023, of which $537.9 million has been settled as of January 31, 2022. In January 2021, we issued and sold $690.0 million in aggregate principal amount of 0% Convertible Senior Notes due 2024.
In January 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 for five years until January 11, 2026 to optimize our capital structure and strengthen our balance sheet. There were no outstanding borrowings under the credit facility as of January 31, 2022.
Further details of these transactions are described in Note 8 to the Consolidated Financial Statements, included in Part II, Item 8 of this Annual Report on Form 10-K.
We were in compliance with all debt covenants at January 31, 2022.
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 generated positive cash flows from operations in the recent years, we have generated losses from operations in the past as reflected in our accumulated deficit of $1.4 billion as of January 31, 2022. We expect to continue to incur operating losses for 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 and 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 increased by $117.4 million in the year ended January 31, 2022, compared to an increase of $73.9 million, excluding the impact from acquisitions, in the year ended January 31, 2021, which resulted in a $43.5 million decrease 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 $250.5 million in the year ended January 31, 2022, compared to an increase of $267.8 million, excluding the impact from acquisitions, in the year ended January 31, 2021. The year over year decrease resulted in a $17.3 million increase in cash provided by operating activities.
Our future capital requirements will depend on many factors including our growth rate, customer retention and expansion, inflation, tax withholding obligations related to settlement of our RSUs, the timing and extent of spending to support our efforts to develop our software platform, the expansion of sales and marketing activities and the continuing market acceptance of our software platform. 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.
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Cash Flows
The following table summarizes our cash flows for the periods indicated:
| Year Ended January 31, | ||||||
|---|---|---|---|---|---|---|
| (in thousands) | 2022 | 2021 | ||||
| Net cash provided by (used in): | ||||||
| Operating activities | $ | 506,467 | $ | 296,954 | ||
| Investing activities | (162,909) | 81,229 | ||||
| Financing activities | (394,621) | (58,976) | ||||
| Effect of foreign exchange on cash, cash equivalents and restricted cash | (5,594) | 5,646 | ||||
| Net change in cash, cash equivalents and restricted cash | $ | (56,657) | $ | 324,853 |
Cash Flows from Operating Activities
Cash provided by operating activities was $506.5 million and $297.0 million for the years ended January 31, 2022, and 2021. The year-over-year improvement of $209.5 million was primarily the result of increased sales and the related cash collections, partially offset by higher operating costs to support growth and increased headcount.
Cash Flows from Investing Activities
For the year ended January 31, 2022, cash used in investing activities of $162.9 million was primarily driven by $93.4 million net purchases of marketable securities, $61.4 million purchases of property and equipment as we continued to invest in data center build outs to support our growing operations and capitalized software development projects. In addition, we used $6.4 million to pay for acquisitions.
For the year ended January 31, 2021, cash provided by investing activities of $81.2 million was primarily driven by $352.5 million net maturities and sales of marketable securities, of which $180.4 million was used to fund acquisitions. We also paid $82.4 million for the purchases of property and equipment as we continued to invest in data center build outs to support our growing operations, capitalized software development projects, and completed several office build outs.
Cash Flows from Financing Activities
For the year ended January 31, 2022, cash used in financing activities of $394.6 million was primarily driven by $316.7 million payments for tax withholding on share settlements, net of proceeds associated with equity plans. We also used $77.9 million for repayments of our 2023 Notes.
For the year ended January 31, 2021, cash used in financing activities of $59.0 million was primarily driven by $318.3 million payments for tax withholding on share settlements, net of proceeds associated with equity plans. This was partially offset by $261.8 million of net proceeds from the issuance of our 2024 Notes, described in Note 8 to the Consolidated Financial Statements.
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 8, Note 9 and Note 10 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for more information.
We do not have any special purpose entities and we do not engage in off-balance sheet financing arrangements.
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Critical Accounting Policies and Estimates
We prepare our financial statements in accordance with 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, business combinations, valuation of acquired intangible assets in business combinations and income taxes.
Revenue Recognition
We recognize revenue from contracts with customers using the five-step method described in Note 1 to the consolidated financial statements. At contract inception we evaluate whether two or more contracts should be combined and accounted for as a single contract and whether the combined or single contract includes more than one performance obligation. We combine contracts entered into at or near the same time with the same customer if we determine that the contracts are negotiated as a package with a single commercial objective; the amount of consideration to be paid in one contract depends on the price or performance of the other contract; or the services promised in the contracts are a single performance obligation.
Our performance obligations consist of (i) subscription services, (ii) professional and other services, (iii) on-premises solutions and (iv) maintenance and support for our on-premises solutions. In general, we satisfy the majority of our performance obligations over time as we transfer the promised services to our customers. For some of our services, such as delivery of on-premises solutions, we satisfy our performance obligations at a point in time. We apply significant judgment in identifying and evaluating any terms and conditions in contracts which may impact revenue recognition.
Period of Benefit of Deferred Contract Acquisition Costs
Contract acquisition costs are amortized on a straight-line basis over their period of benefit. To determine the period of benefit, we evaluate the type of costs incurred, the nature of the related benefit, and the specific facts and circumstances of our arrangements. The period of benefit for commissions paid for the acquisition of the initial subscription contract is determined by considering our customer life and the technological life of our software platform and related significant features. The period of benefit for commissions on renewal subscription contracts is determined by considering the average contractual term for our renewal contracts. Periodically, we evaluate these factors and review whether events or changes in circumstances have occurred that could impact the period of benefit. Any future changes in circumstances around our customer life and average contractual terms of renewal contracts may materially change the periods of benefit and therefore the amortization amounts recognized in our consolidated statement of operations and comprehensive loss.
Stock-based Compensation
We issue stock-based awards to employees, including RSUs, purchase rights granted under our ESPP and stock options. We measure the fair value of these awards at the grant date and recognize such fair value as expense over the service period.
The fair value of RSUs is determined by the fair value of our underlying common stock, the fair value of stock options and ESPP purchase rights are determined by the Black-Scholes option pricing model and the fair value of RSUs granted with a market condition is determined by a lattice model simulation analysis.
For RSUs with a performance condition, we assess the probability that such performance conditions will be met or achieved every reporting period.
Judgment is required to estimate the expected life of the stock awards, the volatility of the underlying common stock, forfeiture rates and probability of achievement of performance conditions. Our assumptions may differ from those used in prior periods. Changes to the estimates we make from time to time may have a significant impact on our stock-based compensation expense and could materially impact our results of operations.
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We recognize compensation expense net of forfeitures that are estimated at the time of grant based on historical experience and our expectations regarding future pre-vesting termination behavior of employees and revise in subsequent periods if actual forfeitures differ from those estimates. To the extent our actual forfeiture rate is different from our estimate, stock-based compensation expense is adjusted accordingly.
Valuation of Acquired Intangible Assets in Business Combinations
At the acquisition date, we determine the fair value of such assets and liabilities, we make significant estimates and assumptions, especially with respect to acquired intangible assets. Key assumptions include, but are not limited to:
•future cash flows from our revenue streams net of customer attrition;
•the acquired company's existing customer relationships;
•royalty rates; and
•discount rates.
These estimates and assumptions are subjective. Our ability to realize the future cash flows used in our fair value calculations may be affected by changes in our financial condition, financial performance or business strategies.
Although we believe the assumptions and estimates we have made in the past have been reasonable and appropriate, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. During the measurement period of up to one year, from the acquisition date, based on new information obtained that relates to the facts and circumstances that existed as of the acquisition date, we record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. We record adjustments identified, if any, subsequent to the end of the measurement period in our consolidated statement of operations.
Income Taxes
We use the asset and liability method of accounting for income taxes. Under this method, income tax expense is recognized for the amount of taxes payable or refundable for the current year. In addition, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities, and for operating losses and tax credit carryforwards. Management must make assumptions, judgments and estimates to determine our current provision for income taxes and our deferred tax assets and liabilities.
We record a valuation allowance to reduce our deferred tax assets to the net amount that we believe is more likely than not to be realized. Accordingly, the need to establish such allowance is assessed periodically by considering matters such as future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and results of recent operations. The evaluation of recoverability of the deferred tax assets requires that we weigh all positive and negative evidence to reach a conclusion that it is more likely than not that all or some portion of the deferred tax assets will not be realized. The weight given to the evidence is commensurate with the extent to which it can be objectively verified.
In recognizing tax benefits from uncertain tax positions, we assess whether it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. As we expand internationally, we will face increased complexity in determining the appropriate tax jurisdictions for revenue and expense items, and as a result, we may record unrecognized tax benefits in the future. At that time, we would make adjustments to these potential future reserves when facts and circumstances change, such as the closing of a tax audit or the refinement of an estimate. Our estimate of the potential outcome of any uncertain tax position is subject to management's assessment of relevant risks, facts and circumstances existing at that time. To the extent that the final tax outcome of these matters would be different to the amounts we may potentially record in the future, such differences will affect the provision for income taxes in the period in which such determination is made and could have a material impact on our financial condition and operating results.
Loss Contingencies
We evaluate contingent liabilities, including threatened or pending litigation, and make provisions for such liabilities when it is both probable that a loss has been incurred and its amount can be reasonably estimated. Because of uncertainties related to these legal matters, we base our estimates and accrue the liabilities, if any, on the information available at the time of our assessment. Developments in these matters could affect the amount of liability we accrue. As additional information becomes available, we may revise our estimates. Any revisions in the estimates of potential liabilities could have a material impact on our operating results and financial position. Further, until the final resolution of
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any such matter, there may be a loss exposure in excess of the liability recognized and such amount could be significant.
Recent Accounting Pronouncements
Refer to Note 1 in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K 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 Metrics
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. However, these non-GAAP measures are not intended to be considered in isolation from, a substitute for, or superior to our GAAP results.
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, loss on extinguishment of debt, fair value adjustments to strategic investments, impairment of operating lease right-of-use assets, tax impact related to an intercompany IP transfer 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 profit (loss) and gross margin:
| Year Ended January 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | 2022 | 2021 | 2020 | |||||||
| GAAP gross profit | $ | 1,640,762 | $ | 1,088,989 | $ | 730,737 | ||||
| Add: Stock-based compensation | 58,499 | 42,658 | 28,585 | |||||||
| Add: Amortization of acquisition-related intangibles | 11,670 | 11,052 | 5,704 | |||||||
| Add: Employer payroll tax on employee stock transactions | 7,524 | 5,904 | 2,577 | |||||||
| Non-GAAP gross profit | $ | 1,718,455 | $ | 1,148,603 | $ | 767,603 | ||||
| GAAP gross margin | 78 | % | 75 | % | 75 | % | ||||
| Non-GAAP adjustments | 4 | % | 4 | % | 4 | % | ||||
| Non-GAAP gross margin | 82 | % | 79 | % | 79 | % | ||||
| GAAP subscription gross profit | $ | 1,693,611 | $ | 1,121,405 | $ | 754,532 | ||||
| Add: Stock-based compensation | 31,152 | 20,793 | 12,882 | |||||||
| Add: Amortization of acquisition-related intangibles | 11,670 | 11,052 | 5,704 | |||||||
| Add: Employer payroll tax on employee stock transactions | 3,703 | 2,862 | 1,054 | |||||||
| Non-GAAP subscription gross profit | $ | 1,740,136 | $ | 1,156,112 | $ | 774,172 | ||||
| GAAP subscription gross margin | 83 | % | 81 | % | 82 | % | ||||
| Non-GAAP adjustments | 2 | % | 3 | % | 2 | % | ||||
| Non-GAAP subscription gross margin | 85 | % | 84 | % | 84 | % | ||||
| GAAP professional services and other gross loss | $ | (52,849) | $ | (32,416) | $ | (23,795) | ||||
| Add: Stock-based compensation | 27,347 | 21,865 | 15,703 | |||||||
| Add: Employer payroll tax on employee stock transactions | 3,821 | 3,042 | 1,523 | |||||||
| Non-GAAP professional services and other gross loss | $ | (21,681) | $ | (7,509) | $ | (6,569) | ||||
| GAAP professional services and other gross margin | (76) | % | (45) | % | (43) | % | ||||
| Non-GAAP adjustments | 45 | % | 35 | % | 31 | % | ||||
| Non-GAAP professional services and other gross margin | (31) | % | (10) | % | (12) | % |
Reconciliation of income (loss) from operations and operating margin:
| Year Ended January 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | 2022 | 2021 | 2020 | |||||||
| GAAP loss from operations | $ | (61,884) | $ | (173,855) | $ | (193,509) | ||||
| Add: Stock-based compensation | 408,542 | 286,877 | 206,404 | |||||||
| Add: Amortization of acquisition-related intangibles | 24,770 | 25,618 | 17,717 | |||||||
| Add: Employer payroll tax on employee stock transactions | 42,192 | 34,042 | 16,720 | |||||||
| Add: Acquisition-related expenses | 387 | 7,962 | — | |||||||
| Add: Impairment of operating lease right-of-use assets | 5,099 | — | — | |||||||
| Non-GAAP income from operations | $ | 419,106 | $ | 180,644 | $ | 47,332 | ||||
| GAAP operating margin | (3) | % | (12) | % | (20) | % | ||||
| Non-GAAP adjustments | 23 | % | 24 | % | 25 | % | ||||
| Non-GAAP operating margin | 20 | % | 12 | % | 5 | % |
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Reconciliation of net income (loss):
| Year Ended January 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands, except per share data) | 2022 | 2021 | 2020 | |||||||
| GAAP net loss | $ | (69,976) | $ | (243,267) | $ | (208,359) | ||||
| Add: Stock-based compensation | 408,542 | 286,877 | 206,404 | |||||||
| Add: Amortization of acquisition-related intangibles | 24,770 | 25,618 | 17,717 | |||||||
| Add: Employer payroll tax on employee stock transactions | 42,192 | 34,042 | 16,720 | |||||||
| Add: Acquisition-related expenses | 387 | 7,962 | — | |||||||
| Add: Amortization of debt discount and issuance costs | 5,098 | 28,001 | 26,389 | |||||||
| Add: Loss on extinguishment of debt | — | 33,752 | — | |||||||
| Add: Tax expense related to intercompany IP transfer(1) | — | 9,294 | — | |||||||
| Add: Impairment of operating lease right-of-use assets | 5,099 | — | — | |||||||
| Less: Fair value adjustments to strategic investments | (5,270) | — | — | |||||||
| Non-GAAP net income | $ | 410,842 | $ | 182,279 | $ | 58,871 |
(1)Represents net change in tax liabilities related to an intercompany IP transfer
Computation of free cash flow:
| Year Ended January 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | 2022 | 2021 | 2020 | |||||||
| Net cash provided by operating activities | $ | 506,467 | $ | 296,954 | $ | 115,696 | ||||
| Less: Purchases of property and equipment | (61,396) | (82,395) | (72,046) | |||||||
| Non-GAAP free cash flow | $ | 445,071 | $ | 214,559 | $ | 43,650 | ||||
| Net cash (used in) provided by investing activities | $ | (162,909) | $ | 81,229 | $ | (321,489) | ||||
| Net cash (used in) provided by financing activities | $ | (394,621) | $ | (58,976) | $ | (70,455) |
Computation of billings:
| Year Ended January 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | 2022 | 2021 | 2020 | |||||||
| Revenue | $ | 2,107,213 | $ | 1,453,047 | $ | 973,971 | ||||
| Add: Contract liabilities and refund liability, end of period | 1,049,106 | 800,940 | 522,201 | |||||||
| Less: Contract liabilities and refund liability, beginning of period | (800,940) | (522,201) | (390,887) | |||||||
| Add: Contract assets and unbilled accounts receivable, beginning of period | 21,021 | 15,082 | 13,436 | |||||||
| Less: Contract assets and unbilled accounts receivable, end of period | (18,273) | (21,021) | (15,082) | |||||||
| Add: Contract assets and unbilled accounts receivable contributed by acquisitions | — | 6,589 | — | |||||||
| Less: Contract liabilities and refund liability contributed by acquisitions | — | (9,344) | — | |||||||
| Non-GAAP billings | $ | 2,358,127 | $ | 1,723,092 | $ | 1,103,639 |
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