# DOMO, INC. (DOMO) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from DOMO, INC.'s 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1505952/000150595222000012/domo-20220131.htm
Accession: 0001505952-22-000012
Filing date: 2022-03-23
Report date: 2022-01-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/DOMO/
All MD&A years: /company/DOMO/mda/
Next year: /company/DOMO/mda/fy2023/ (FY 2023)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This discussion contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Statements containing words such as “may,” “believe,” “could,” "will,” “seek,” “depends,” “anticipate,” “expect,” “intend,” “plan,” “project,” “projections,” “business outlook,” “estimate,” or similar expressions constitute forward-looking statements. You should read these statements carefully because they discuss future expectations, contain projections of future results of operations or financial condition or state other “forward-looking” information. These statements relate to our future plans, objectives, expectations, intentions and financial performance and the assumptions that underlie these statements. They include, but are not limited to, statements about:

•our ability to attract new customers and retain and expand our relationships with existing customers;

•our future financial performance, including our expectations regarding our revenue, cost of revenue, gross profit, operating expenses, key metrics, ability to generate cash flow and ability to achieve and maintain future profitability;

•the anticipated trends, market opportunity, growth rates and challenges in our business and in the business intelligence software market;

•the efficacy of our sales and marketing efforts;

•our ability to compete successfully in competitive markets;

•our ability to respond to and capitalize on rapid technological changes;

•our expectations and management of future growth;

•our ability to enter new markets and manage our expansion efforts, particularly internationally;

•our ability to develop new product features;

•our ability to attract and retain key employees and qualified technical and sales personnel;

•our ability to effectively and efficiently protect our brand;

•our ability to timely scale and adapt our infrastructure;

•the effect of general economic and market conditions on our business;

•the impact of the coronavirus pandemic, including on the global economy, our results of operations, enterprise software spending, and business continuity;

•our ability to protect our customers' data and proprietary information;

•our ability to maintain, protect, and enhance our intellectual property and not infringe upon others’ intellectual property; and

•our ability to comply with all governmental laws, regulations and other legal obligations.

Our actual results may differ materially from those contained in or implied by any forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report, including those factors discussed in Part I, Item 1A (Risk Factors).

In light of the significant uncertainties and risks inherent in these forward-looking statements, you should not regard these statements as a representation or warranty by us or anyone else that we will achieve our objectives or plans in any specified time frame, or at all, or as predictions of future events. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation to publicly

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update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

You should read the following discussion and analysis of our financial condition and results of operations together with the consolidated financial statements and related notes that are included elsewhere in this Annual Report on Form 10-K. Our fiscal year ends on January 31. References to fiscal 2022, for example, refer to the fiscal year ended January 31, 2022.

Overview

We founded Domo in 2010 with the vision of digitally connecting everyone within the enterprise with real-time, rich, relevant data and then encouraging all employees to collaborate and act on that data. We realized that many organizations were unable to access the massive amounts of data that they were collecting in siloed cloud applications and on-premise databases. Furthermore, even for organizations that were capable of accessing their data, the process for doing so was time-consuming, costly, and often resulted in the data being out-of-date by the time it reached decision makers. The delivery format, including alert functionality, and devices were not adequate for the connected and real-time mobile workforce. Based on these observations, it was apparent that all organizations, regardless of size or industry, were failing to unlock the power of all of their people, data, and systems. To address these challenges, we provide a modern cloud-based business intelligence platform that digitally connects everyone at an organization – from the CEO to frontline employees – with all the people, data and systems in an organization, giving them access to real-time data and insights and allowing them to manage their business from their smartphones.

We offer our platform to our customers as a subscription-based service. Subscription fees are based upon the chosen Domo package which includes tier-based platform capabilities as well as users.  Business leaders, department heads and managers are the typical initial subscribers to our platform, deploying Domo to solve a business problem or to enable departmental access. Over time, as customers recognize the value of our platform, we increasingly engage with CIOs and other executives to facilitate broad enterprise adoption.

A majority of our customers subscribe to our services through multi-year contracts. As of January 31, 2022, 62% of our customers were under multi-year contracts on a dollar-weighted basis compared to 60% and 56% of customers as of January 31, 2021 and 2020, respectively. The high percentage revenue from multi-year contracts, among both new and existing customers, has enhanced the predictability of our subscription revenue. We typically invoice our customers annually in advance for subscriptions to our platform. A majority of our annual recurring revenue is up for renewal during the fiscal year ending January 31, 2023.

Remaining performance obligations (RPO) represents the remaining amount of revenue we expect to recognize from existing non-cancelable contracts, whether billed or unbilled. As of January 31, 2021 and 2022, total RPO was $282.3 million and $339.0 million, respectively, representing year-over-year growth of 20%. The amount of RPO expected to be recognized as revenue in the next twelve months was $178.2 million and $221.7 million as of January 31, 2021 and 2022, respectively, representing year-over-year growth of 24%.

Our business model focuses on obtaining new customers and maximizing the lifetime value of those customer relationships. We recognize subscription revenue ratably over the term of the subscription period. In general, customer acquisition costs and other upfront costs associated with new customers are higher in the first year than the aggregate revenue we recognize from those new customers in the first year. Over the lifetime of the customer relationship, we also incur sales and marketing costs to renew or increase usage per customer. However, these costs, as a percentage of revenue, are significantly less than those initially incurred to acquire the customer. As a result, the profitability of a customer to our business in any particular period depends in part upon how long a customer has been a subscriber and the degree to which it has expanded its usage of our platform.

Our platform addresses the diverse and evolving needs of employees. Historically, our sales and marketing efforts have been concentrated on initiatives, including digital marketing, which allowed us to quickly attract a large number of customers and establish our platform in a crowded market. These initial efforts were primarily targeted toward small and medium sized businesses, with smaller average annual contract values, or ACV, and lower renewal rates. Over time, the breadth of our platform's capabilities has attracted an increasing number of enterprise customers, and we have continued to expand our presence within those customers.

From inception through January 31, 2022, we have invested $628.7 million in the development of our platform. As of January 31, 2022, we had 270 employees in our research and development organization. While we expect to continue to invest in research and development, we anticipate that these expenses will decrease as a percentage of revenue over time.

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For the years ended January 31, 2020, 2021 and 2022, we had total revenue of $173.4 million, $210.2 million and $258.0 million, respectively, representing year-over-year growth of 21% and 23% for the years ended January 31, 2021 and 2022, respectively. Our enterprise customers generated revenue of $93.3 million, $115.1 million, and $137.0 million for the years ended January 31, 2020, 2021 and 2022, respectively, or year-over-year growth of 23% and 19%, respectively. Our corporate customers generated revenue of $80.1 million, $95.1 million, and $121.0 million for the years ended January 31, 2020, 2021 and 2022, respectively, or year-over-year growth of 19% and 27%, respectively.

For the years ended January 31, 2020, 2021 and 2022, no single customer accounted for more than 10% of our total revenue, nor did any single organization when accounting for multiple subsidiaries or divisions which may have been invoiced separately. Revenue from customers with billing addresses in the United States comprised 75%, 76% and 77% of our total revenue for the years ended January 31, 2020, 2021 and 2022, respectively.

Our revenue growth rate may decline in future periods due to a number of reasons, which may include the maturation of our business, increase in overall revenue over time, slowing demand for our platform, increasing competition, a decrease in the growth of the markets in which we compete, or if we fail, for any reason, to continue to capitalize on growth opportunities, a decrease in our renewal rates, or a decline in upsells.

We have incurred significant net losses since our inception, including net losses of $125.7 million, $84.6 million and $102.1 million for the years ended January 31, 2020, 2021 and 2022, respectively, and had an accumulated deficit of $1,224.5 million at January 31, 2022. We have experienced improvements in net losses over the periods presented; however, we expect to incur losses for the foreseeable future and may not be able to achieve or sustain profitability.

COVID-19 Impact

A novel strain of coronavirus, COVID-19, emerged in China in December 2019 and began to spread globally, including to the United States. In March 2020, COVID-19 was characterized by the World Health Organization as a global pandemic. The full impact of the COVID-19 pandemic is inherently uncertain at the time of this report. The COVID-19 pandemic has resulted in travel restrictions and in some cases, prohibitions of non-essential activities, disruption and shutdown of businesses and greater uncertainty in global financial markets.

We cannot reasonably predict the extent to which the COVID-19 pandemic will impact our business or operating results, which is highly dependent on inherently uncertain future developments, including the duration and scope of the pandemic (including any potential future waves of the pandemic as well as new and emerging variants of COVID-19) as well as governmental, business and individual actions that have been and continue to be taken in response to the pandemic (including the availability, adoption and effectiveness of COVID-19 vaccines). Because our platform is offered as a subscription-based service, the effect of the pandemic may not be fully reflected in our operating results until future periods, if at all.

Before the COVID-19 pandemic, a significant portion of field sales and professional services were conducted in person. Currently, as a result of the ongoing COVID-19 pandemic, a significant portion of our sales and professional services activities are being conducted remotely. These changes will likely extend into future quarters. The impact, if any, of these and any additional operational changes we may implement is uncertain, but changes we have implemented have not affected and are not expected to affect our ability to maintain operations, including financial reporting systems, internal control over financial reporting and disclosure controls and procedures.

As of the date of this report, we do not yet know the full extent of the pandemic's impact on our ability to attract, serve, retain or upsell customers. We serve customers in a wide variety of industries including travel and hospitality, sports and leisure, and retail which have been severely impacted by the COVID-19 pandemic. Furthermore, existing and potential customers may choose to reduce or delay technology spending in response to the COVID-19 pandemic. In addition, certain customers have pursued concessions such as lengthened payment terms or reduced contract length, and these concessions may materially and negatively impact our operating results, financial condition and prospects. Additionally, if and to the extend work and travel restrictions related to COVID-19 are relaxed, we may begin shifting certain professional, sales and marketing activities from remote work to in-person or hybrid models, which could result in us incurring additional operating expenses associated with business travel, office space leases and other factors. See Item 1A “Risk Factors” in Part I of this Annual Report on Form 10-K for further discussion of the possible impact of the COVID-19 pandemic on our business.

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Factors Affecting Performance

Continue to Attract New Customers

We believe that our ability to expand our customer base is an important indicator of market penetration, the growth of our business, and future business opportunities. We define a customer at the end of any particular quarter as an entity that generated revenue greater than $2,500 during that quarter. In situations where an organization has multiple subsidiaries or divisions, each entity that is invoiced at a separate billing address is treated as a separate customer. In cases where customers purchase through a reseller, each end customer is counted separately. We define enterprise customers as companies with over $1 billion in revenue, and companies with less than $1 billion in revenue are corporate customers. In order to maintain comparability, companies who become customers with revenue below $1 billion and subsequently exceed that threshold are considered enterprise customers for all periods presented.

As of January 31, 2022, we had over 2,300 customers. We focus our sales and marketing resources on obtaining customers with over $100 million in revenue. For the years ended January 31, 2020, 2021 and 2022, our enterprise customers accounted for 54%, 55% and 53% of our revenue, respectively. In order to accelerate customer growth, we intend to further develop our partner ecosystem by establishing agreements with more software resellers, systems integrators and other partners to provide broader customer and geographic coverage. We believe we are underpenetrated in the overall market and have significant opportunity to expand our customer base over time.

Customer Upsell and Retention

We employ a land, expand, and retain sales model, and our performance depends on our ability to retain customers and expand the use of our platform at existing customers over time. It currently takes multiple years for our customers to fully embrace the power of our platform. We believe that as customers deploy greater volumes and sources of data for multiple use cases, the unique features of our platform can address the needs of everyone within their organization. We are still in the early stages of expanding within many of our customers.

We have invested in platform capabilities and online support resources that allow our customers to expand the use of our platform in a self-guided manner. Our professional services, customer support and customer success functions also support our sales force by helping customers to successfully deploy our platform and implement additional use cases. In addition, we believe our partner ecosystem will become increasingly important over time. We work closely with our customers to drive increased engagement with our platform by identifying new use cases through our customer success teams, as well as in-platform, self-guided experiences. We actively engage with our customers to assess whether they are satisfied and fully realizing the benefits of our platform. While these efforts often require a substantial commitment and upfront costs, we believe our investment in product, customer support, customer success and professional services will create opportunities to expand our customer relationships over time.

Our ability to drive growth and generate incremental revenue depends heavily on our ability to retain our customers and increase their usage of our platform. With that objective in mind, we allocate our customer success and customer support resources to align with maximizing the retention and expansion of our subscription revenue.

An important metric that we use to evaluate our performance in retaining customers is gross retention rate. We calculate our gross retention rate by taking the dollar amount of annual contract value (ACV) that renews in a given period divided by the ACV that was up for renewal in that same period. The ACV of multi-year contracts is also considered in the calculation based on the period in which the annual anniversary of the contract falls. Our gross retention rate was 87%, 88% and 90% for the 12 months ended January 31, 2020, 2021 and 2022, respectively.

Our subscription net revenue retention rate compares the subscription revenue in a given period from the cohort of customers that generated subscription revenue at the beginning of the same period in the prior fiscal year. The subscription net revenue retention rate is the quotient obtained by dividing the subscription revenue generated from that cohort in a period, by the subscription revenue generated from that same cohort in the corresponding prior year period.

The following table sets forth our subscription net revenue retention rate for each of the eight quarters in the period ended January 31, 2022:

[[GREPCENT_TABLE]]
[["","Q1 2021","","Q2 2021","","Q3 2021","","Q4 2021","","Q1 2022","","Q2 2022","","Q3 2022","","Q4 2022"],["All Customers","105","%","","106","%","","106","%","","106","%","","106","%","","107","%","","106","%","","105","%"]]
[[/GREPCENT_TABLE]]

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The primary metric that we use to monitor customer retention and growth is annual recurring revenue (ARR) net retention rate. ARR represents the total annualized contract value of active customer subscription contracts as of the measurement date. Our ARR net retention rate compares the ARR from a cohort of customers as of the measurement date to ARR from that same cohort as of the same period in the prior fiscal year. The cohort is established based on customers who had greater than $10,000 of ARR as of the end of the prior year period. ARR net retention rate is the quotient obtained by dividing the ARR of that cohort as of the measurement date by the ARR of that same cohort as of the corresponding prior year period.

The following table sets forth our ARR net retention rate for each of the eight quarters in the period ended January 31, 2022:

[[GREPCENT_TABLE]]
[["","Q1 2021","","Q2 2021","","Q3 2021","","Q4 2021","","Q1 2022","","Q2 2022","","Q3 2022","","Q4 2022"],["All Customers","101","%","","103","%","","105","%","","106","%","","109","%","","109","%","","108","%","","110","%"]]
[[/GREPCENT_TABLE]]

ARR net retention rate enables measurement of the progress of our business initiatives and is used by management to make operational decisions. We believe ARR net retention rate provides a more up-to-date view of customer retention and growth than subscription net revenue retention rate, which is a lagging indicator due to subscription revenue being recognized ratably over time. As such, we plan to only report our ARR net retention rate in future periods. ARR net retention rate is a performance metric and should be viewed independently of revenue and deferred revenue, and is not intended to be a substitute for, or combined with, any of these items.

As we continue to enhance our product and develop methods to encourage wider and more strategic adoptions, including focusing our sales and marketing activities towards enterprise customers, we expect that customer retention will increase over the long term. Our ability to successfully upsell and the impact of cancellations may vary from period to period. The extent of this variability depends on a number of factors including the size and timing of upsells and cancellations relative to the initial subscriptions.

Sales and Marketing Efficiency

We are focused on increasing the efficiency of our sales force and marketing activities by enhancing account targeting, messaging, field sales operations and sales training in order to accelerate the adoption of our platform. Our sales strategy depends on our ability to continue to attract top talent, to increase our pipeline of business, and to enhance sales productivity. We focus on productivity per quota-carrying sales representative and the time it takes our sales representatives to reach full productivity. During fiscal 2022 we have hired, and plan to continue hiring, more sales representatives, which may have an adverse impact on productivity in the near term.

We manage our pipeline by sales representative to ensure sufficient coverage of our sales targets. Our ability to manage our sales productivity and pipeline are important factors to the success of our business. We have shifted marketing spending from broad-based initiatives to targeted account-based marketing campaigns and user events that we believe will result in contracts with larger companies which we expect will result in more upsell ACV potential.

Sales and marketing expense as a percentage of total revenue was 74% and 56% for the years ended January 31, 2020 and 2021, respectively, compared to 56% for the year ended January 31, 2022.

Leverage Research and Development Investments for Future Growth

We plan to continue to make investments in areas of our business to continue to expand our platform functionality. This may include investing in machine learning algorithms, predictive analytics, and other artificial intelligence technologies to create alerts, detect anomalies, optimize queries, and suggest areas of interest to help people focus on what matters most. These investments may also include extending the functionality and effectiveness of our platform through improvements to the Domo Appstore and developer toolkits, which enable customers and partners to quickly build and deploy custom applications. The amount of new investments required to achieve our plans is expected to decrease as a percentage of revenue compared to historical years.

Research and development expense as a percentage of revenue was 40% and 32% for the years ended January 31, 2020 and 2021, respectively, compared to 31% for the year ended January 31, 2022.

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Key Business Metric

Billings

Billings represent our total revenue plus the change in deferred revenue in a period. Billings reflect sales to new customers plus subscription renewals and upsells to existing customers, and represent amounts invoiced for subscription, support and professional services. We typically invoice our customers annually in advance for subscriptions to our platform. Because we generate most of our revenue from customers who are invoiced on an annual basis and have a wide range of annual contract values, we may experience variability due to typical enterprise buying patterns and timing of large initial contracts, renewals and upsells.

The following table sets forth our billings for the years ended January 31, 2020, 2021 and 2022:

[[GREPCENT_TABLE]]
[["","Year Ended January 31,"],["","2020","","2021","","2022"],["Billings (in thousands)","$","189,237","","","$","232,688","","","$","296,464"]]
[[/GREPCENT_TABLE]]

There is a disproportionate weighting toward annual billings in the fourth quarter, primarily as a result of large enterprise account buying patterns. Our fourth quarter has historically been our strongest quarter for new business and renewals. The year-on-year compounding effect of this seasonality in both billing patterns and overall new and renewal business causes the value of invoices that we generate in the fourth quarter for both new business and renewals to increase as a proportion of our total annual billings. The timing of renewal billings may vary due to our customers' requests to align end dates on multiple subscription contracts. The sequential quarterly changes in billings, accounts receivable, and deferred revenue during the fourth quarter of our fiscal year are not necessarily indicative of the billing activity that occurs for the following quarters.

Components of Results of Operations

Revenue

We offer subscriptions to our cloud-based platform. We derive our revenue primarily from subscriptions and professional services. Subscription revenue consists primarily of fees to provide our customers access to our cloud-based platform, which includes online customer support resources at no additional cost. Professional service fees include implementation services, optimization services, and training.

Subscription revenue is a function of the number of customers, platform tier, and number of users at each customer, and the price per user. Subscription revenue is recognized ratably over the related contractual term beginning on the date the platform is made available to the customer. Our new business subscriptions typically have a term of one to three years, and we generally invoice our customers in annual installments at the beginning of each year in the subscription period. Amounts that have been invoiced are initially recorded as deferred revenue and are recognized ratably over the subscription period.

Professional services and other revenue primarily consists of implementation services sold with new subscriptions, as well as professional services sold separately, including training and education. Professional services are generally billed in advance and revenue from these arrangements is recognized as the services are performed. Our professional services engagements typically span from a few weeks to several months.

Cost of Revenue

Cost of subscription revenue consists primarily of third-party hosting services and data center capacity; salaries, benefits, bonuses and stock-based compensation, or employee-related costs, directly associated with cloud infrastructure and customer support personnel; amortization expense associated with capitalized software development costs; depreciation expense associated with computer equipment and software; certain fees paid to various third parties for the use of their technology and services; and allocated overhead. Allocated overhead includes items such as information technology infrastructure, rent, and certain employee benefit costs.

Cost of professional services and other revenue consists primarily of employee-related costs directly associated with these services, third-party consultant fees, and allocated overhead.

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Operating Expenses

Sales and Marketing. Sales and marketing expenses consist primarily of employee-related costs directly associated with our sales and marketing staff and commissions. Other sales and marketing costs include digital marketing programs and promotional events to promote our brand, including Domopalooza, our annual user conference, as well as tradeshows, advertising and allocated overhead. Contract acquisition costs, including sales commissions, are deferred and then amortized on a straight-line basis over the period of benefit, which we have determined to be approximately four years for initial contracts. Contract acquisition costs related to renewal contracts and professional services are recorded as expense when incurred if the period of benefit is one year or less. If the period of benefit is greater than one year, costs are deferred and then amortized on a straight-line basis over the period of benefit, which we have determined to be two years.

Research and Development. Research and development expenses consist primarily of employee-related costs for the design and development of our platform, contractor costs to supplement staff levels, third-party web services, consulting services, and allocated overhead. Our cycle of frequent updates has facilitated rapid innovation and the introduction of new product features throughout our history. We capitalize certain software development costs that are attributable to developing new features and adding incremental functionality to our platform, and amortize such costs as costs of subscription revenue over the estimated life of the new feature or incremental functionality, which is generally three years.

General and Administrative. General and administrative expenses consist of employee-related costs for executive, finance, legal, human resources, recruiting and administrative personnel; professional fees for external legal, accounting, recruiting and other consulting services; and allocated overhead costs.

Other Expense, Net

Other expense, net consists primarily of interest expense related to long-term debt, It also includes the effect of exchange rates on foreign currency transaction gains and losses, foreign currency gains and losses upon remeasurement of intercompany balances, and sublease income. The transactional impacts of foreign currency are recorded as foreign currency losses (gains) in the consolidated statements of operations.

Provision for (Benefit from) Income Taxes

Provision for (benefit from) income taxes consists primarily of income taxes related to foreign and state jurisdictions in which we conduct business. Because of the uncertainty of the realization of the deferred tax assets, we have a full valuation allowance for domestic net deferred tax assets, including net operating loss carryforwards and tax credits related primarily to research and development.

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Results of Operations

The following tables set forth selected consolidated statements of operations data and such data as a percentage of total revenue for each of the periods indicated:

[[GREPCENT_TABLE]]
[["","Year Ended January 31,"],["","2020","","2021","","2022"],["","","","(in thousands)"],["Revenue:"],["Subscription","$","146,837","","","$","183,645","","","$","223,010"],["Professional services and other","26,558","","","26,535","","","34,951"],["Total revenue","173,395","","","210,180","","","257,961"],["Cost of revenue:"],["Subscription(1)","35,366","","","36,656","","","40,907"],["Professional services and other(1)","20,564","","","20,092","","","26,239"],["Total cost of revenue","55,930","","","56,748","","","67,146"],["Gross profit","117,465","","","153,432","","","190,815"],["Operating expenses:"],["Sales and marketing(1)","127,567","","","117,335","","","143,722"],["Research and development(1)","69,224","","","66,474","","","81,027"],["General and administrative(1)(2)(3)","35,941","","","42,708","","","54,536"],["Total operating expenses","232,732","","","226,517","","","279,285"],["Loss from operations","(115,267)","","","(73,085)","","","(88,470)"],["Other expense, net(1)","(9,635)","","","(11,140)","","","(14,102)"],["Loss before income taxes","(124,902)","","","(84,225)","","","(102,572)"],["Provision for (benefit from) income taxes","754","","","409","","","(461)"],["Net loss","$","(125,656)","","","$","(84,634)","","","$","(102,111)"]]
[[/GREPCENT_TABLE]]

________________

(1)Includes stock-based compensation expense as follows:

[[GREPCENT_TABLE]]
[["","Year Ended January 31,"],["","2020","","2021","","2022"],["","","","(in thousands)"],["Cost of revenue:"],["Subscription","$","507","","$","1,213","","$","2,819"],["Professional services and other","404","","843","","1,753"],["Sales and marketing","10,770","","10,936","","21,241"],["Research and development","6,339","","9,095","","15,853"],["General and administrative","5,637","","11,218","","18,155"],["Other expense, net","190","","444","","705"],["Total","$","23,847","","","$","33,749","","","$","60,526"]]
[[/GREPCENT_TABLE]]

(2)Includes amortization of certain intangible assets of $0.1 million, $0.1 million and $0.1 million for the years ended January 31, 2020, 2021 and 2022, respectively.

(3)Includes reversals of contingent tax-related accruals of $1.3 million for the year ended January 31, 2020

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[[GREPCENT_TABLE]]
[["","Year Ended January 31,"],["","2020","","2021","","2022"],["Revenue:"],["Subscription","85","%","","87","%","","86","%"],["Professional services and other","15","","","13","","","14"],["Total revenue","100","","","100","","","100"],["Cost of revenue:"],["Subscription","20","","","17","","","16"],["Professional services and other","12","","","10","","","10"],["Total cost of revenue","32","","","27","","","26"],["Gross margin","68","","","73","","","74"],["Operating expenses:"],["Sales and marketing","74","","","56","","","56"],["Research and development","40","","","32","","","31"],["General and administrative","20","","","20","","","21"],["Total operating expenses","134","","","108","","","108"],["Loss from operations","(66)","","","(35)","","","(34)"],["Other expense, net","(6)","","","(5)","","","(5)"],["Loss before income taxes","(72)","","","(40)","","","(39)"],["Provision for (benefit from) income taxes","\u2014","","","\u2014","","","\u2014"],["Net loss","(72)","%","","(40)","%","","(39)","%"]]
[[/GREPCENT_TABLE]]

Discussion of the Years Ended January 31, 2021 and 2022

Revenue

[[GREPCENT_TABLE]]
[["","Year Ended January 31,"],["","2021","","2022","","$ Change","","% Change"],["","","","(in thousands)"],["Revenue:"],["Subscription","$","183,645","","","$","223,010","","","$","39,365","","","21","%"],["Professional services and other","26,535","","","34,951","","","8,416","","","32"],["Total revenue","$","210,180","","","$","257,961","","","$","47,781","","","23"],["Percentage of revenue:"],["Subscription","87","%","","86","%"],["Professional services and other","13","","","14"],["Total","100","%","","100","%"]]
[[/GREPCENT_TABLE]]

The increase in subscription revenue was primarily due to a $25.9 million increase from new customers and a $13.5 million net increase from existing customers. Our customer count increased 14% from January 31, 2021 to January 31, 2022. For the purpose of this comparison, new customers are defined as those added since the end of the prior year quarter. Revenue from existing customers is presented net of churn. The increase in professional services and other revenue was primarily due to a higher volume of billable hours delivered.

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Cost of Revenue, Gross Profit and Gross Margin

[[GREPCENT_TABLE]]
[["","Year Ended January 31,"],["","2021","","2022","","$ Change","","% Change"],["","","","(in thousands)"],["Cost of revenue:"],["Subscription","$","36,656","","","$","40,907","","","$","4,251","","","12","%"],["Professional services and other","20,092","","","26,239","","","6,147","","","31"],["Total cost of revenue","$","56,748","","","$","67,146","","","$","10,398","","","18"],["Gross profit","$","153,432","","","$","190,815","","","$","37,383","","","24"],["Gross margin:"],["Subscription","80","%","","82","%"],["Professional services and other","24","","","25"],["Total gross margin","73","","","74"]]
[[/GREPCENT_TABLE]]

The increase in cost of subscription revenue was primarily due to a $4.3 million increase in employee-related costs attributable to higher headcount in our support organization and stock-based compensation, of which $1.6 million related to stock-based compensation.

The increase in cost of professional services and other revenue is primarily due to a $3.3 million increase in outsourced services resulting from a higher volume of services provided by third-party consultants related to implementation and a $2.9 million increase in employee-related costs attributable to higher headcount and stock-based compensation, of which $0.9 million related to stock-based compensation.

Subscription gross margin improved due to economies of scale driven by increased subscription revenue and cost improvements from continued proactive management and optimization of our third-party hosting services.

Services gross margin improved due to timing of projects with higher margins. We expect the gross margin for professional services and other to fluctuate from period to period due to changes in the proportion of services provided by third-party consultants, seasonality, as well as timing of projects with higher margins.

Operating Expenses

[[GREPCENT_TABLE]]
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The increase in sales and marketing expenses was primarily due to a $20.0 million increase in employee-related costs and allocated overhead, attributable to higher headcount and stock-based compensation, of which $10.3 million related to stock-based compensation. Commission expense increased by $3.1 million due to higher sales. Marketing expenses increased by $1.1 million primarily due to marketing events. Other increases included $0.8 million in software subscription, $0.7 million in contract labor, and $0.6 million in travel expenses. Sales and marketing expense as a percentage of total revenue remained flat in the year ended January 31, 2022 compared to the year ended January 31, 2021. We expect sales and

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marketing expense to increase in the near term as we continue to invest in the growth of our business. Over the long term, we expect sales and marketing expense to decrease as a percentage of revenue.

Research and development expenses increased primarily due to a $13.5 million increase in employee-related costs, attributable to higher headcount and stock-based compensation, of which $7.4 million related to stock-based compensation. Contract labor increased by $1.5 million. These increases were partially offset by a $1.1 million increase in capitalized software development costs (resulting in decreased expense). Research and development expense as a percentage of revenue decreased from 32% in the year ended January 31, 2021 to 31% in the year ended January 31, 2022. In the near term, we expect research and development expense to increase, but expect that it will decline as a percentage of total revenue in the long term as we leverage our research and development organization.

General and administrative expenses increased primarily due to a $8.8 million increase in employee-related costs driven by stock-based compensation, which made up $6.9 million of the increase. Recruiting fees increased by $1.4 million and professional and legal expenses increased by $1.1 million. General and administrative expenses as a percent of revenue increased from 20% in the year ended January 31, 2021 to 21% in the year ended January 31, 2022. In the near term, we expect general and administrative expense to fluctuate from period to period, but expect that it will decline as a percentage of total revenue in the long term as we leverage previous investments in our general and administrative organization.

Other Expense, Net

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Other expense, net increased due to a $1.8 million increase in expense related to changes in foreign exchange rates and a higher balance of cash denominated in currencies other than the functional currency. Interest expense increased by $0.8 million. We expect foreign currency gains and losses could become more pronounced due to currency market volatility and as we continue to expand our foreign operations. We expect interest expense to increase modestly due to an increasing principal balance and anticipated higher market interest rates.

Income Taxes

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[[/GREPCENT_TABLE]]

Provision for income taxes decreased due to larger allowable deductions during the year ended January 31, 2022. In the long term, we expect income tax expense to increase in conjunction with growth in our international subsidiaries.

Discussion of the Years Ended January 31, 2020 and 2021

For a discussion of the year ended January 31, 2021 compared to the year ended January 31, 2020, please refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended January 31, 2021.

Liquidity and Capital Resources

As of January 31, 2022, we had $83.6 million of cash and cash equivalents, which were held for working capital purposes. Our cash and cash equivalents consist primarily of cash, money market funds, and certificates of deposit. We also have a $100 million credit facility, all of which had been drawn as of January 31, 2022.

Since inception, we have financed operations primarily from cash collected from customers for our subscriptions and services, periodic sales of convertible preferred stock, our initial public offering and to a lesser extent, debt financing. Our principal uses of cash have consisted of employee-related costs, marketing programs and events, payments related to hosting our cloud-based platform and purchases of short-term investments.

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We believe our existing cash and cash equivalents will be sufficient to meet our projected operating requirements for at least the next 12 months. Over the longer term, we plan to continue investing in, among other things, growth opportunities, product development, and sales and marketing. If available funds are insufficient to fund our future activities or execute on our strategy, we may raise additional capital through equity, equity-linked and debt financing, to the extent such funding sources are available. Alternatively, we may be required to reduce expenses to manage liquidity; however, any such reductions could adversely impact our business and competitive position. Our future capital requirements will depend on many factors, including our growth rate; the level of investments we make in product development, sales and marketing activities and other investments to support the growth of our business; the continuing market acceptance of our platform; and customer retention rates, and may increase materially from those currently planned. If we raise additional funds through the incurrence of indebtedness, such indebtedness likely would have rights that are senior to holders of our equity securities and could contain covenants that restrict operations in the same or similar manner as our credit facility. Any additional equity financing likely would be dilutive to existing stockholders. We cannot assure you that any additional financing will be available to us on acceptable terms, or at all.

Although we are not currently a party to any agreement or letter of intent with respect to potential investments in, or acquisitions of, complementary businesses, services or technologies, we may enter into these types of arrangements in the future, which could also require us to seek additional equity financing, incur indebtedness, or use cash resources. We have no present understandings, commitments or agreements to enter into any such acquisitions. We do not have any special purpose entities and we do not engage in off-balance sheet financing arrangements.

Credit Facility

In August 2020, we entered into an amendment to the credit facility which extended the maturity date for the outstanding loan from October 1, 2022 to April 1, 2025. Per the amendment, we are required to comply with a financial covenant requiring us to maintain a minimum balance of unrestricted cash and cash equivalents equal to $10.0 million until our six-month adjusted cash flow is greater than zero. The amendment also revised the maximum debt ratio financial covenant and included an amendment fee of $5.0 million, which accrues interest at a rate of 9.5% per year. The amendment fee, along with its accrued interest, is to be paid at the earlier of the payment date, maturity date, or the date the loan becomes payable.

The credit facility permits us to incur up to $100 million in term loan borrowings, all of which had been drawn as of January 31, 2022. The term loan maturity date is April 1, 2025 with a closing fee of $7.0 million, which is in addition to the $5.0 million amendment fee described above. Each term loan requires that we pay only interest until the maturity date. A portion of the interest that accrues on the outstanding principal of each term loan is payable in cash on a monthly basis, which portion accrues at a floating rate equal to the greater of (1) 7% and (2) three-month LIBOR plus 5.5% per year. In the event that LIBOR is unavailable, interest will accrue at a floating rate equal to the greater of (1) 7% and (2) the U.S. prime rate plus 2.75% per year. As of January 31, 2022, the interest rate was approximately 7%. In addition, a portion of the interest that accrues on the outstanding principal of each term loan is capitalized and added to the principal amount of the outstanding term loan on a monthly basis, which portion accrues at a fixed rate equal to 2.5% per year.

The credit facility contains customary conditions to borrowing, events of default and covenants, including covenants that restrict our ability to dispose of assets, make material changes to the nature, control or location of our business, merge with or acquire other entities, incur indebtedness or encumbrances, make distributions to holders of our capital stock, make investments or enter into transactions with affiliates. In addition, we are required to comply with a financial covenant based on the ratio of our outstanding indebtedness to our annualized recurring revenue. The maximum ratio is 0.600 on January 31, 2021 and April 30, 2021; 0.575 on July 31, 2021 and October 31, 2021; 0.550 on January 31, 2022 and April 30, 2022; 0.525 on July 31, 2022 and October 31, 2022; and 0.500 on January 31, 2023 through the maturity date.

The credit facility defines our annualized recurring revenue as four times our aggregate revenue for the immediately preceding quarter (net of recurring discounts and discounts for periods greater than one year) less the annual contract value of any customer contracts pursuant to which we were advised during such quarter would not be renewed at the end of the current term plus the annual contract value of existing customer contract increases during such quarter. This covenant is measured quarterly on a three-month trailing basis. Upon the occurrence of an event of default, such as non-compliance with covenants, any outstanding principal, interest and fees become due immediately. We were in compliance with the covenant terms of the credit facility at January 31, 2021 and January 31, 2022. The credit facility is secured by substantially all of our assets.

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Historical Cash Flow Trends

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[[/GREPCENT_TABLE]]

Operating Activities

Net cash used in operating activities is significantly influenced by the amount of cash we invest in our personnel, timing and amounts we use to fund marketing programs and events to expand our customer base, and the costs to provide our cloud-based platform and related outsourced professional services to our customers. These outflows are partially offset by the amount and timing of payments received from our customers.

Net cash used in operating activities during the year ended January 31, 2020 consisted of cash outflows of $274.5 million exceeding the $194.3 million of cash collected from customers. Significant components of cash outflows included $148.4 million for personnel costs and $57.7 million for marketing programs and events, third-party costs to provide our platform and outsourced professional services.

Net cash used in operating activities during the year ended January 31, 2021 consisted of cash outflows of $252.6 million exceeding the $236.7 million of cash collected from customers. Significant components of cash outflows included $141.2 million for personnel costs and $55.2 million for marketing programs and events, third-party costs to provide our platform and outsourced professional services.

Net cash provided by operating activities during the year ended January 31, 2022 consisted of cash collected from customers of $284.7 million exceeding the $284.3 million of cash outflows. Significant components of cash outflows included $171.0 million for personnel costs and $55.0 million for marketing programs and events, third-party costs to provide our platform and outsourced professional services.

Investing Activities

Our investing activities have consisted primarily of purchases of short-term investments and property and equipment purchases. Significant components of purchased property and equipment include capitalized development costs related to internal-use software and computer equipment and software for our data center.

Net cash used in investing activities during the year ended January 31, 2020 consisted primarily of $102.1 million of purchases of short-term investments, offset by $84.8 million from maturities of short-term investments. The remaining amount consisted primarily of $6.0 million of capitalized development costs related to internal-use software and $0.5 million of purchased property and equipment.

Net cash provided by investing activities during the year ended January 31, 2021 consisted primarily of $29.2 million of maturities of short-term investments, offset by $11.1 million of purchases of short-term investments. The remaining amount consisted primarily of $4.9 million of capitalized development costs related to internal-use software and $0.8 million of purchased property and equipment.

Net cash used in investing activities during the year ended January 31, 2022 consisted primarily of $6.0 million of capitalized development costs related to internal-use software and $0.5 million of purchased property and equipment.

Financing Activities

Our financing activities have consisted primarily of proceeds from our initial public offering, issuances of convertible preferred stock, proceeds from our credit facility and to a lesser extent, proceeds received from stock option exercises.

Net cash provided by financing activities for the year ended January 31, 2020 consisted primarily of $7.8 million of proceeds from our employee stock purchase plan and $1.6 million of proceeds received from stock option exercises, offset by $1.4 million used to repurchase shares for tax withholdings on release of restricted stock.

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Net cash provided by financing activities for the year ended January 31, 2021 consisted primarily of $8.1 million of proceeds received from stock option exercises and $6.7 million of proceeds from our employee stock purchase plan, offset by $1.8 million used to repurchase shares for tax withholdings on release of restricted stock.

Net cash used in financing activities for the year ended January 31, 2022 consisted primarily of $10.3 million used to repurchase shares for tax withholdings on release of restricted stock, offset by $5.6 million of proceeds received from stock option exercises and $4.1 million of proceeds from our employee stock purchase plan.

Contractual Obligations and Commitments

Contractual obligations are cash that we are obligated to pay as part of certain contracts that we have entered into during the normal course of business. Our primary commitment is related to obligations under our credit facility. For more information regarding our credit facility, see Note 11 "Credit Facility" to the consolidated financial statements in Item 8 of Part II. In addition, we have obligations under leases for office space. For more information regarding our lease obligations, see Note 8 "Leases" to the consolidated financial statements in Item 8 of Part II. We also have non-cancelable commitments related to our cloud infrastructure. As of January 31, 2022, we had contractual commitments of $34.7 million related to these services, $10.7 million of which is due in the next 12 months and the remaining balance due thereafter.

Critical Accounting Policies and Estimates

We prepare our consolidated financial statements in accordance with generally accepted accounting principles in the United States, or GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that are inherently uncertain and that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations would be affected. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. Critical accounting policies and estimates are those that we consider critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management's judgments and estimates.

Revenue Recognition

We derive revenue primarily from subscriptions to our cloud-based platform and professional services. Revenue is recognized when control of these services is transferred to customers in an amount that reflects the consideration to which we expect to be entitled to in exchange for those services, net of sales taxes.

For sales through channel partners, we consider the channel partner to be the end customer for the purposes of revenue recognition as our contractual relationships with channel partners do not depend on the sale of our services to their customers and payment from the channel partner is not contingent on receiving payment from their customers. Our contractual relationships with channel partners do not allow returns, rebates, or price concessions.

The price of subscriptions is generally fixed at contract inception and therefore, our contracts do not contain a significant amount of variable consideration.

Revenue recognition is determined through the following steps:

•Identification of the contract, or contracts, with a customer

•Identification of the performance obligations in the contract

•Determination of the transaction price

•Allocation of the transaction price to the performance obligations in the contract

•Recognition of revenue when, or as, performance obligations are satisfied

Subscription Revenue

Subscription revenue primarily consists of fees paid by customers to access our cloud-based platform, including support services. The majority of our subscription agreements have multi-year contractual terms and a smaller percentage have annual contractual terms. Revenue is recognized ratably over the related contractual term beginning on the date that the

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platform is made available to a customer. Access to the platform represents a series of distinct services as we continually provide access to and fulfill our obligation to the end customer over the subscription term. The series of distinct services represents a single performance obligation that is satisfied over time. We recognize revenue ratably because the customer receives and consumes the benefits of the platform throughout the contract period. Our contracts are generally non-cancelable.

Professional Services and Other Revenue

Professional services revenue consists of implementation services sold with new subscriptions as well as professional services sold separately. Other revenue includes training and education. Professional services arrangements are billed in advance, and revenue from these arrangements is recognized as the services are provided, generally based on hours incurred. Training and education revenue is also recognized as the services are provided.

Contracts with Multiple Performance Obligations

Most of our contracts with new customers contain multiple performance obligations, generally consisting of subscriptions and professional services. For these contracts, individual performance obligations are accounted for separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. Standalone selling prices are determined based on historical standalone selling prices, taking into consideration overall pricing objectives, market conditions and other factors, including contract value, customer demographics and the number and types of users within the contract.

Contract Acquisition Costs

Contract acquisition costs, net are stated at cost net of accumulated amortization and primarily consist of deferred sales commissions, which are considered incremental and recoverable costs of obtaining a contract with a customer. Contract acquisition costs for initial contracts are deferred and then amortized on a straight-line basis over the period of benefit, which we have determined to be approximately four years. The period of benefit is determined by taking into consideration contractual terms, expected customer life, changes in our technology and other factors. Contract acquisition costs for renewal contracts are not commensurate with contract acquisition costs for initial contracts and are recorded as expense when incurred if the period of benefit is one year or less. If the period of benefit is greater than one year, costs are deferred and then amortized on a straight-line basis over the period of benefit. Contract acquisition costs related to professional services and other performance obligations with a period of benefit of one year or less are recorded as expense when incurred. Amortization of contract acquisition costs is included in sales and marketing expenses in the accompanying consolidated statements of operations.

Capitalized Internal-Use Software Costs

We capitalize certain costs related to development of our platform incurred during the application development stage. Costs related to preliminary project activities and post-implementation activities are expensed as incurred. Maintenance and training costs are also expensed as incurred. Capitalized costs are included in property and equipment.

Capitalized internal-use software is amortized mostly as subscription cost of revenue, with a smaller portion related to operations amortized as research and development within operating expenses. All capitalized internal-use software is amortized on a straight-line basis over its estimated useful life, which is generally three years. Management evaluates the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.

Goodwill and Intangible Assets

Goodwill represents the excess of the purchase price in a business combination over the fair value of net tangible and intangible assets acquired. Goodwill and indefinite-lived intangible assets are not amortized, but rather tested for impairment at least annually on November 1 or more often if and when circumstances indicate that the carrying value may not be recoverable. Finite-lived intangible assets are amortized over their useful lives.

Goodwill is tested for impairment based on reporting units. We periodically reevaluate our business and have determined that it continues to operate in one segment, which is also considered the sole reporting unit. Therefore, goodwill is tested for impairment at the consolidated level.

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We review our long-lived assets, including property and equipment and finite-lived intangible assets, for impairment whenever an event or change in facts and circumstances indicates that their carrying amounts may not be recoverable. Recoverability of these assets is measured by comparing the carrying amount to the estimated undiscounted future cash flows expected to be generated. If the carrying amount exceeds the undiscounted cash flows, the assets are determined to be impaired and an impairment charge is recognized as the amount by which the carrying amount exceeds fair value.

Stock-Based Compensation

We have granted stock-based awards, consisting of stock options and restricted stock units, to our employees, certain consultants and certain members of our board of directors. We record stock-based compensation based on the grant date fair value of the awards, which include stock options and restricted stock units, and recognize the fair value of those awards as expense using the straight-line method over the requisite service period of the award. For restricted stock units that contain performance conditions, we recognize expense using the accelerated attribution method if it is probable the performance conditions will be met. We estimate the grant date fair value of stock options using the Black-Scholes option-pricing model.

Stock-based compensation expense related to purchase rights issued under the 2018 Employee Stock Purchase Plan, or ESPP, is based on the Black-Scholes option-pricing model fair value of the estimated number of awards as of the beginning of the offering period. Stock-based compensation expense is recognized using the straight-line method over the offering period.

The determination of the grant date fair value of stock-based awards is affected by the estimated fair value of our common stock as well as other assumptions and judgments, which are estimated as follows:

•Fair Value Per Share of Common Stock. Because there was no public market for our common stock prior to the IPO, the board of directors determined the common stock fair value at the grant date by considering numerous objective and subjective factors, including contemporaneous valuations of our common stock, actual operating and financial performance, market conditions, and performance of comparable publicly traded companies, business developments, the likelihood of achieving a liquidity event, and transactions involving preferred and common stock, among other factors. Subsequent to the IPO, we determine the fair value of common stock as of each grant date using the market closing price of our Class B common stock on the date of grant.

•Expected Term. The expected term is determined using the simplified method, which is calculated as the midpoint of the option’s contractual term and vesting period. We use this method due to limited stock option exercise history. For the ESPP, the expected term is the beginning of the offering period to the end of each purchase period.

•Expected Volatility. Since a public market for our common stock did not exist prior to the IPO and, therefore, we do not have a sufficient trading history of our common stock, expected volatility is estimated based on a weighted average of the volatility of similar publicly held companies and the Company's common stock over a period equivalent to the expected term of the awards.

•Risk-free Interest Rate. The risk-free interest rate is determined using U.S. Treasury rates with a similar term as the expected term of the option.

•Expected Dividend Yield. We have never declared or paid any cash dividends and do not presently plan to pay cash dividends in the foreseeable future. Consequently, we use an expected dividend yield of zero.

Recent Accounting Pronouncements

See Note 2 "Summary of Significant Accounting Policies" to the consolidated financial statements in Item 8 of Part II for more information regarding recent accounting pronouncements.

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