Gitlab Inc. (GTLB) FY 2023 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 the related notes included elsewhere in this Annual Report. You should review the section titled “Special Note Regarding Forward-Looking Statements” above in this Annual Report for a discussion of forward-looking statements and important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” in this Annual Report. Our historical results are not necessarily indicative of the results that may be expected for any period in the future.
A discussion regarding our financial condition and results of operations for the year ended January 31, 2023 compared to the year ended January 31, 2022 is presented below. A discussion regarding our financial condition and results of operations for the year ended January 31, 2022 compared to the year ended January 31, 2021 can be found in “Management's Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended January 31, 2022, which was filed with the SEC on April 8, 2022.
Overview
In today’s world, software defines the speed of innovation. Every industry, business, and function within a company is dependent on software. To remain competitive and survive, nearly all companies must digitally transform and become experts at building, delivering, and securing software.
To meet these market needs, GitLab pioneered The DevSecOps Platform, a fundamentally new approach to software development and delivery. Our platform is uniquely built as a single application and interface with a unified data model, enabling all stakeholders in the software delivery lifecycle – from development teams to operations teams to security teams – to work together in a single tool with a single workflow. With GitLab, they can build better, more secure software faster.
GitLab is the solution to significant business transformation needs. Across every industry – and across companies of every size – technology leaders want to make developers more productive so they can deliver better products faster; they want to measure productivity, so they can increase operational efficiency; they want to secure the software supply chain, so they can reduce security and compliance risk; and, they want to accelerate cloud migration, so they can unlock digital transformation results. These technology leaders need a platform that enables a value stream-driven mindset – a mindset that shortens the time from idea to customer value – and establishes a powerful flywheel for data collection and aggregation. And they are looking for a platform approach that unifies the entire development experience, so that customers can be faster than their competition in moving from idea to customer value.
GitLab is designed to consolidate point solutions to cut costs and boost efficiency, and provides end-to-end visibility across the entire software development lifecycle, from planning to production to security.
We believe GitLab is the shortest path to unlocking business and technology transformation results. Our DevSecOps Platform accelerates our customers’ ability to create business value and innovate by reducing their software development cycle times from weeks to minutes. It removes the need for point tools and delivers enhanced operational efficiency by eliminating manual work, increasing productivity, and creating a culture of innovation and velocity. The DevSecOps Platform also embeds security earlier into the development process, improving our customers’ software security, quality, and overall compliance.
GitLab is available to any team, regardless of the size, scope, and complexity of their deployment. As a result, we have more than 30 million registered users and more than 50% of the Fortune 100 companies are GitLab customers. For purposes of determining the number of our active customers, we
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look at our customers with more than $5,000 of Annual Recurring Revenue, or ARR, in a given period, who we refer to as our Base Customers. For purposes of determining our Base Customers, a single organization with separate subsidiaries, segments, or divisions that use The DevSecOps Platform is considered a single customer for determining each organization’s ARR.
GitLab is the only DevSecOps platform built on an open-core business model. We enable any customer and contributor to add functionality to our platform. In 2022, nearly 800 people contributed more than 3,000 merge requests back to the core product, extending GitLab’s in-house R&D efforts and empowering our most passionate users to make improvements to the DevOps tool they use every day. Our open-core approach has enabled us to build trust with our customers, and to maintain our high velocity of innovation so that we can rapidly create the most comprehensive DevSecOps platform.
GitLab exists today in large part thanks to the vast and growing community of open source contributors around the world. We actively work to grow open source community engagement by operating with transparency. We make our strategy, direction, and product roadmap available to the wider community, where we encourage and solicit their feedback. By making non-sensitive information public, we create a deeper level of trust with our customers and we make it easier to solicit contributions and collaboration from our users and customers. See the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Business Metrics—Dollar-Based Net Retention Rate and ARR” below for additional information about how we define ARR.
We make our plans available through our self-managed and software-as-a-service, or SaaS offering. For our self-managed offering, the customer installs GitLab in their own on-premise or hybrid cloud environment. For our SaaS offering, the platform is managed by GitLab and hosted either in our public cloud or in our private cloud based on the customer’s preference. For more information regarding our customers, refer to the section titled “Business—Our Customers.”
Key Business Metrics
We monitor the following key metrics to help us evaluate our business, identify trends affecting our business, formulate business plans, and make strategic decisions.
Dollar-Based Net Retention Rate and ARR
We believe that our ability to retain and expand our revenue generated from our existing customers is an indicator of the long-term value of our customer relationships and our potential future business opportunities. Dollar-Based Net Retention Rate measures the percentage change in our ARR derived from our customer base at a point in time. Our calculation of ARR and by extension Dollar-Based Net Retention Rate, includes both self-managed and SaaS subscription revenue. We report Dollar-Based Net Retention Rate on a threshold basis of 130% each quarter, and provide a tighter threshold as of each fiscal year end.
We calculate ARR by taking the monthly recurring revenue, or MRR, and multiplying it by 12. MRR for each month is calculated by aggregating, for all customers during that month, monthly revenue from committed contractual amounts of subscriptions, including our self-managed and SaaS offerings but excluding professional services. We calculate Dollar-Based Net Retention Rate as of a period end by starting with our customers as of the 12 months prior to such period end, or the Prior Period ARR. We then calculate the ARR from these customers as of the current period end, or the Current Period ARR. The calculation of Current Period ARR includes any upsells, price adjustments, user growth within a customer, contraction, and attrition. We then divide the total Current Period ARR by the total Prior Period ARR to arrive at the Dollar-Based Net Retention Rate.
| As of January 31, | |||||
|---|---|---|---|---|---|
| 2023 | 2022 | 2021 | |||
| Dollar-Based Net Retention Rate | 130% | 152% | 145% |
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Customers with ARR of $100,000 or More
We believe that our ability to increase the number of $100,000 ARR customers is an indicator of our market penetration and strategic demand for The DevSecOps Platform. A single organization with separate subsidiaries, segments, or divisions that use The DevSecOps Platform is considered a single customer for determining each organization’s ARR. We do not count our reseller or distributor channel partners as customers. In cases where customers subscribe to The DevSecOps Platform through our channel partners, each end customer is counted separately.
| As of January 31, | |||||||
|---|---|---|---|---|---|---|---|
| 2023 | 2022 | 2021 | |||||
| $100,000 ARR customers | 697 | 492 | 283 |
Components of Our Results of Operations
Revenue
Subscription - self-managed and SaaS
Subscription - self-managed
Our self-managed subscriptions include support, maintenance, upgrades, and updates on a when-and-if-available basis. Revenue for self-managed subscriptions is recognized ratably over the contract period based on the stand-ready nature of subscription elements.
SaaS
Our SaaS subscriptions provide access to our latest managed version of our product hosted in a public or private cloud based on the customer’s preference. Revenue from our SaaS offerings is recognized ratably over the contract period when the performance obligation is satisfied.
The typical term of a subscription contract for self-managed or SaaS offering is one to three years.
License - self-managed and other
The license component of our self-managed subscriptions reflects the revenue recognized by providing customers with access to proprietary software features. License revenue is recognized up-front when the software license is made available to our customer.
Other revenue consists of professional services revenue which is derived from fixed fee and time and materials offerings, subject to customer acceptance. Given the Company’s limited history of providing professional services, uncertainty exists about customer acceptance and therefore, control is presumed to transfer upon confirmation from the customer, as defined in each professional services contract. Accordingly, revenue is recognized upon satisfaction of all requirements per the applicable contract. Revenue from professional services provided on a time and material basis is recognized over the periods services are delivered. Revenue from professional services accounted for 2%, 2% and 3% of our total revenue for the years ended January 31, 2023, 2022 and 2021, respectively.
Cost of Revenue
Subscription - self-managed and SaaS
Cost of revenue for self-managed and SaaS subscriptions consists primarily of allocated cloud-hosting costs paid to third-party service providers, personnel-related costs associated with our customer support personnel, including contractors, and allocated overhead. Personnel-related expenses consist of salaries, benefits, bonuses, and stock-based compensation. We expect our cost of revenue for self-managed and SaaS subscriptions to increase in absolute dollars as our self-managed and SaaS
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subscription revenue increases. As our SaaS offering makes up an increasing percentage of our total revenue, we expect to see increased associated cloud-related costs, such as hosting and managing costs, which may adversely impact our gross margins.
License - self-managed and other
Cost of self-managed license and other revenue consists primarily of contractor and personnel-related costs, including stock-based compensation expenses, associated with the professional services team and customer support team, and allocated overhead. We expect our cost of revenue for self-managed license and other to increase in absolute dollars as our self-managed and other revenue increases.
Operating Expenses
Our operating expenses consist of sales and marketing, research and development, and general and administrative expenses. Personnel-related expenses are the most significant component of operating expenses and consist of salaries, benefits, bonuses, stock-based compensation, and sales commissions. Operating expenses also include IT overhead costs.
Sales and Marketing
Sales and marketing expenses consist primarily of personnel-related expenses associated with our sales and marketing personnel, advertising, travel and entertainment related expenses, branding and marketing events, promotions, software subscriptions, and our allocated hosting expenses for our free tier. Sales and marketing expenses also include sales commissions paid to our sales force. Such costs incurred on acquisition of an initial contract are capitalized and amortized over an estimated period of benefit of three years, and any such expenses paid for the renewal of a subscription are capitalized and amortized over the contractual term of the renewal. However, costs for commissions that are incremental to obtain a self-managed license contract are expensed immediately.
We expect sales and marketing expenses to increase in absolute dollars as we continue to make strategic investments in our sales and marketing organization to drive additional revenue, further penetrate the market, and expand our global customer base, but to decrease as a percentage of our total revenue over time, although our sales and marketing expenses may fluctuate as a percentage of our total revenue from period-to-period depending on the timing of these expenses.
Research and Development
Research and development expenses consist primarily of personnel-related expenses, including contractors, as well as third-party cloud infrastructure expenses to support our internal development efforts, allocated overhead associated with developing new features or enhancing existing features, and software and subscription services. Costs related to research and development are expensed as incurred.
We expect research and development expenses to increase in absolute dollars as we continue to increase investments in our existing products and services. However, we anticipate research and development expenses to decrease as a percentage of our total revenue over time, although our research and development expenses may fluctuate as a percentage of our total revenue from period-to-period depending on the timing of these expenses.
General and Administrative
General and administrative expenses consist primarily of personnel-related expenses for our executives, finance, legal, and human resources. General and administrative expenses also include external legal, accounting, and director and officer insurance, as well as other consulting and professional services fees, software and subscription services, other corporate expenses, and any contract termination fees.
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We have incurred and expect to incur additional expenses as a result of operating as a public company, including costs to comply with the rules and regulations applicable to companies listed on a national securities exchange, costs related to compliance and reporting obligations, costs related to Sarbanes-Oxley compliance, costs related to Environmental, Social, and Governance (ESG) compliance and increased expenses for insurance, investor relations, and related professional services. We expect that our general and administrative expenses will increase in absolute dollars as our business grows but will decrease as a percentage of our total revenue over time, although our general and administrative expenses may fluctuate as a percentage of our total revenue from period-to-period depending on the timing of these expenses.
Interest Income, and Other Income (Expense), Net
Interest income consists primarily of interest earned on our cash equivalents and short-term investments.
Other income (expense), net consists primarily of the gain from the deconsolidation of Meltano Inc., as well as foreign currency transaction gains and losses.
Loss from Equity Method Investment, Net of Tax
Loss from equity method investment, net of tax consists of our share of losses from the results of operations of Meltano Inc., following its deconsolidation, net of tax.
Provision for (Benefit from) Income Taxes
Provision for (benefit from) income taxes consists primarily of income taxes in the foreign and state jurisdictions in which we conduct business. We maintain a full valuation allowance against our deferred tax assets in certain jurisdictions because we have concluded that it is not more likely than not that the deferred tax assets will be realized.
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Results of Operations
The following table sets forth our results of operations for the periods presented (in thousands):
| Fiscal Year Ended January 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | 2021 | ||||||||||||
| Revenue: | ||||||||||||||
| Subscription—self-managed and SaaS | $ | 369,349 | $ | 226,163 | $ | 132,763 | ||||||||
| License—self-managed and other | 54,987 | 26,490 | 19,413 | |||||||||||
| Total revenue | 424,336 | 252,653 | 152,176 | |||||||||||
| Cost of revenue:(1) | ||||||||||||||
| Subscription—self-managed and SaaS | 40,841 | 23,668 | 14,453 | |||||||||||
| License—self-managed and other | 10,839 | 6,317 | 4,010 | |||||||||||
| Total cost of revenue | 51,680 | 29,985 | 18,463 | |||||||||||
| Gross profit | 372,656 | 222,668 | 133,713 | |||||||||||
| Operating expenses: | ||||||||||||||
| Sales and marketing(1) | 309,992 | 190,754 | 154,086 | |||||||||||
| Research and development(1) | 156,143 | 97,217 | 106,643 | |||||||||||
| General and administrative(1) | 117,932 | 63,654 | 86,868 | |||||||||||
| Total operating expenses | 584,067 | 351,625 | 347,597 | |||||||||||
| Loss from operations | (211,411) | (128,957) | (213,884) | |||||||||||
| Interest income | 14,496 | 736 | 1,070 | |||||||||||
| Other income (expense), net(2) | 21,585 | (30,850) | 23,452 | |||||||||||
| Loss before income taxes and loss from equity method investment | (175,330) | (159,071) | (189,362) | |||||||||||
| Loss from equity method investment, net of tax | (2,468) | — | — | |||||||||||
| Provision for (benefit from) income taxes | 2,898 | (1,511) | 2,832 | |||||||||||
| Net loss | $ | (180,696) | $ | (157,560) | $ | (192,194) | ||||||||
| Net loss attributable to noncontrolling interest(3) | (8,385) | (2,422) | — | |||||||||||
| Net loss attributable to GitLab | $ | (172,311) | $ | (155,138) | $ | (192,194) |
(1)Includes stock-based compensation expense as follows:
| Fiscal Year Ended January 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | 2021 | ||||||||||||
| (in thousands) | ||||||||||||||
| Cost of revenue | $ | 5,078 | $ | 1,300 | $ | 1,185 | ||||||||
| Research and development | 36,325 | 8,305 | 31,519 | |||||||||||
| Sales and marketing | 48,001 | 10,550 | 21,504 | |||||||||||
| General and administrative | 33,163 | 9,854 | 57,638 | |||||||||||
| Total stock-based compensation expense | $ | 122,567 | $ | 30,009 | $ | 111,846 |
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(2)Includes $17.8 million gain for the year ended January 31, 2023 from the deconsolidation of Meltano Inc. in April 2022. See “Note 11. Joint Venture and Equity Method Investment” to our consolidated financial statements for additional details.
(3)Our results of operations include our variable interest entity, JiHu. The ownership interest of other investors is recorded as a noncontrolling interest. See “Note 11. Joint Venture and Equity Method Investment” to our consolidated financial statements for additional details.
The following table sets forth the components of our consolidated statements of operations as a percentage of total revenue for each of the periods presented:
| Fiscal Year Ended January 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | 2021 | ||||||||||
| (as a percentage of total revenue) | ||||||||||||
| Revenue | 100 | % | 100 | % | 100 | % | ||||||
| Cost of revenue | 12 | 12 | 12 | |||||||||
| Gross profit | 88 | 88 | 88 | |||||||||
| Operating expenses: | ||||||||||||
| Sales and marketing | 73 | 76 | 101 | |||||||||
| Research and development | 37 | 38 | 70 | |||||||||
| General and administrative | 28 | 25 | 57 | |||||||||
| Total operating expenses | 138 | 139 | 228 | |||||||||
| Loss from operations | (50) | (51) | (141) | |||||||||
| Interest income | 3 | — | 1 | |||||||||
| Other income (expense), net | 5 | (12) | 15 | |||||||||
| Loss before income taxes and loss from equity method investment | (41) | (63) | (124) | |||||||||
| Loss from equity method investment, net of tax | (1) | — | — | |||||||||
| Provision for (benefit from) income taxes | 1 | (1) | (2) | |||||||||
| Net loss | (43) | % | (62) | % | (126) | % | ||||||
| Net loss attributable to noncontrolling interest | (2) | % | (1) | % | — | % | ||||||
| Net loss attributable to GitLab | (41) | % | (61) | % | (126) | % |
Comparison of the Fiscal Year Ended January 31, 2023 and 2022
Revenue
| Fiscal Year Ended January 31, | Change | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | $ | % | |||||||||||||||||||
| (in thousands, except percentages) | ||||||||||||||||||||||
| Subscription—self-managed and SaaS | $ | 369,349 | $ | 226,163 | $ | 143,186 | 63 | % | ||||||||||||||
| License—self-managed and other | 54,987 | 26,490 | 28,497 | 108 | ||||||||||||||||||
| Total revenue | $ | 424,336 | $ | 252,653 | $ | 171,683 | 68 | % |
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Revenue increased $171.7 million, or 68%, to $424.3 million for fiscal 2023 from $252.7 million for fiscal 2022. The increase was primarily due to the ongoing demand for The DevSecOps Platform, including adding new customers, the expansion within our existing paid customers, and an increase in our number of customers with $100,000 or greater in ARR. As of January 31, 2023 and 2022, our expansion is reflected by our Dollar-Based Net Retention Rate being above 130% and above 152%, respectively. We had 697 customers with ARR over $100,000 as of January 31, 2023, increasing from 492 customers with ARR over $100,000 as of January 31, 2022.
Revenue attributed to our variable interest entity, JiHu, was $4.7 million and $1.2 million for fiscal 2023 and 2022, respectively. See “Note 11. Joint Venture and Equity Method Investment” to our consolidated financial statements for additional details.
Cost of Revenue, Gross Profit, and Gross Margin
| Fiscal Year Ended January 31, | Change | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | $ | % | |||||||||||||||||
| (in thousands, except percentages) | ||||||||||||||||||||
| Cost of revenue | $ | 51,680 | $ | 29,985 | $ | 21,695 | 72 | % | ||||||||||||
| Gross profit | 372,656 | 222,668 | 149,988 | 67 | ||||||||||||||||
| Gross margin | 88 | % | 88 | % |
Cost of revenue increased by $21.7 million, to $51.7 million for fiscal 2023 from $30.0 million for fiscal 2022, primarily due to an increase of $8.1 million in personnel-related expenses, driven by an increase in our average customer support and professional services headcount and an increase of $3.8 million in stock-based compensation expenses (as discussed in the section titled “Stock-Based Compensation Expense” below). The remaining change was primarily attributable to an increase of $7.3 million in third-party hosting costs for increased usage of our paid SaaS offering, $1.7 million in consulting expense, $1.5 million in amortization of intangible assets, and $0.9 million in credit card fees related to our self-serve online web store. Gross margin remained at 88% for fiscal 2023 compared to fiscal 2022.
Cost of revenue attributed to our variable interest entity, JiHu, was $1.7 million and $0.9 million fiscal 2023 and 2022, respectively. See “Note 11. Joint Venture and Equity Method Investment” to our consolidated financial statements for additional details.
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Sales and Marketing
| Fiscal Year Ended January 31, | Change | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | $ | % | ||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||
| Sales and marketing expenses | $ | 309,992 | $ | 190,754 | $ | 119,238 | 63 | % |
Sales and marketing expenses increased by $119.2 million, to $310.0 million for fiscal 2023 from $190.8 million for fiscal 2022, primarily due to an increase of $94.9 million in personnel-related expenses, driven by an increase in our average sales and marketing headcount, and an increase of $37.5 million in stock-based compensation expenses (as discussed in the section titled “Stock-Based Compensation Expense” below). The remaining change was mainly due to an increase of $7.8 million in marketing events and brand-related expenses, an increase of $3.8 million in software and consulting expenses, and an increase of $3.2 million in hosting expenses. The purpose of our investment activities was to increase the effectiveness of our sales motions, increase our sales capacity, generate demand for our products and acquire more customers.
Sales and marketing expenses attributed to our variable interest entity, JiHu, were $7.7 million and $3.2 million for fiscal 2023 and 2022, respectively. See “Note 11. Joint Venture and Equity Method Investment” to our consolidated financial statements for additional details.
Research and Development
| Fiscal Year Ended January 31, | Change | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | $ | % | ||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||
| Research and development expenses | $ | 156,143 | $ | 97,217 | $ | 58,926 | 61 | % |
Research and development expenses increased by $58.9 million, to $156.1 million for fiscal 2023 from $97.2 million for fiscal 2022, primarily due to an increase of $52.6 million in personnel-related expenses, driven by an increase in our average research and development headcount and an increase of $28.0 million in stock-based compensation expenses (as discussed in the section titled “Stock-Based Compensation Expense” below). The remaining change was mainly due to an increase of $2.7 million in hosting expenses.
Research and development expenses attributed to our variable interest entity, JiHu, was $6.8 million and $2.3 million for fiscal 2023 and 2022, respectively. See “Note 11. Joint Venture and Equity Method Investment” to our consolidated financial statements for additional details.
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General and Administrative
| Fiscal Year Ended January 31, | Change | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | $ | % | ||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||
| General and administrative expenses | $ | 117,932 | $ | 63,654 | $ | 54,278 | 85 | % |
General and administrative expenses increased by $54.3 million, to $117.9 million for fiscal 2023 from $63.7 million for fiscal 2022, primarily due to an increase of $43.0 million in personnel-related expenses, mainly attributable to an increase in our average general and administrative headcount and an increase of $23.3 million in stock-based compensation expenses (as discussed in the section titled “Stock-Based Compensation Expense” below). The remaining change was primarily driven by an increase of $6.1 million in consulting and software expenses to support our growth.
General and administrative expenses attributed to our variable interest entity, JiHu, was $10.5 million and $3.6 million for fiscal 2023 and 2022, respectively. See “Note 11. Joint Venture and Equity Method Investment” to our consolidated financial statements for additional details.
Stock-Based Compensation Expense
| Fiscal Year Ended January 31, | Change | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | $ | % | |||||||||||||||||||
| (in thousands, except percentages) | ||||||||||||||||||||||
| Cost of revenue | $ | 5,078 | $ | 1,300 | $ | 3,778 | 291 | % | ||||||||||||||
| Research and development | 36,325 | 8,305 | 28,020 | 337 | ||||||||||||||||||
| Sales and marketing | 48,001 | 10,550 | 37,451 | 355 | ||||||||||||||||||
| General and administrative | 33,163 | 9,854 | 23,309 | 237 | ||||||||||||||||||
| Total stock-based compensation expense | $ | 122,567 | $ | 30,009 | $ | 92,558 | 308 | % |
Stock-based compensation expense increased by $92.6 million, to $122.6 million for fiscal 2023 from $30.0 million for fiscal 2022, primarily due to a $60.9 million expense from restricted stock units, or RSUs, we started granting since December 2021 and $20.5 million expense from our 2021 Employee Stock Purchase Plan, or ESPP, introduced in November 2021. Stock-based compensation expense for fiscal 2023 also includes $7.8 million attributable to our variable interest entity, JiHu. See “Note 11. Joint Venture and Equity Method Investment” to our consolidated financial statements for additional details.
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Interest Income, and Other Income (Expense), Net
| Fiscal Year Ended January 31, | Change | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | $ | % | ||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||
| Interest income | $ | 14,496 | $ | 736 | $ | 13,760 | 1870 | % | |||||||||||
| Gain from deconsolidation of Meltano Inc. | $ | 17,798 | $ | — | $ | 17,798 | 100 | % | |||||||||||
| Foreign exchange gains (losses), net | 4,364 | (29,140) | 33,504 | (115) | |||||||||||||||
| Other expense, net | (577) | (1,710) | 1,133 | (66) | |||||||||||||||
| Total other income (expense), net | $ | 21,585 | $ | (30,850) | $ | 52,435 | (170) | % |
For fiscal 2023 compared to fiscal 2022, interest income increased primarily due to income earned from our cash equivalents and short-term investments as a result of investing the proceeds from our initial public offering, or IPO, into marketable securities in fiscal 2023 as well as higher interest rates during fiscal 2023 compared to fiscal 2022.
The change in other income (expense), net is primarily due to the recognized gain of $17.8 million on the fair valuation of our retained interest in Meltano Inc., our formerly controlled subsidiary. The remaining change in other income (expense), net is mainly due to strengthening of the U.S dollar.
Loss from Equity Method Investment, Net of Tax
| Fiscal Year Ended January 31, | Change | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | $ | % | ||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||
| Loss from equity method investment, net of tax | $ | (2,468) | $ | — | $ | (2,468) | 100 | % |
Loss from equity method investment, net of tax consists of our share of losses from the results of operations of Meltano Inc., net of tax. Effective April 4, 2022, due to a loss of control over Meltano Inc., we account for Meltano investment under the equity method.
Provision for (Benefit from) Income Taxes
| Fiscal Year Ended January 31, | Change | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | $ | % | ||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||
| Provision for (benefit from) income taxes | $ | 2,898 | $ | (1,511) | $ | 4,409 | (292) | % | |||||||||||
| Effective tax rate | (1.7) | % | 0.9 | % | (2.6)% |
Our effective tax rate decreased by approximately 2.6% in the fiscal year ended January 31, 2023 as compared to the fiscal year ended January 31, 2022. The lower effective tax rate was primarily due to an increase in current tax liability from operations and the establishment in the year ended January 31, 2023
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of a deferred tax liability relating to the deconsolidation of a majority-owned entity, Meltano Inc., and simultaneous establishment of our equity method investment.
Our effective tax rate for fiscal 2023 was lower than the U.S. federal statutory tax rate of 21%, primarily due to an increase in valuation allowance associated with the net operating losses generated during the year.
Under the provisions of Accounting Standard Codification (“ASC”) 740, Income Taxes, the determination of our ability to recognize our deferred tax assets requires an assessment of both negative and positive evidence when determining our ability to recognize deferred tax assets. We determined that it was not more likely than not that we could recognize certain deferred tax assets. The evidence we evaluated included operating results during the most recent three-year period and future projections, with more weight given to historical results than expectations of future profitability, which are inherently uncertain. Certain entities’ net losses in recent periods represented sufficient negative evidence to require a valuation allowance against its net deferred tax assets. This valuation allowance will be evaluated periodically and could be reversed partially or totally if business results have sufficiently improved to support realization of deferred tax assets.
We have not recorded a provision for deferred U.S. tax expense that could result from the remittance of foreign undistributed earnings since we intend to reinvest the earnings of the foreign subsidiaries indefinitely. Our share of the undistributed earnings of foreign corporations not included in our consolidated federal income tax returns that could be subject to additional U.S. income tax if remitted is immaterial. As of January 31, 2023, the amount of unrecognized U.S federal deferred income tax liability for undistributed earnings is immaterial.
As of January 31, 2023, the statutes for our U.S. federal 2018 through 2022 tax years were open and the results from such tax years remained subject to potential examination in one or more jurisdictions. In addition, in the United States, any net operating losses or credits that were generated in prior years but not yet fully utilized in a year that is closed under the statute of limitations may also be subject to examination. We are currently under examination in the Netherlands for the 2015 and 2016 tax years. We are currently unable to estimate the financial outcome of this examination due to its preliminary status. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. We continue to monitor the progress of ongoing discussions with tax authorities and the effect, if any, of the expected expiration of the statute of limitations in various taxing jurisdictions.
As of January 31, 2023, unrecognized tax benefits were $7.5 million, of which $0.5 million would affect the effective tax rate if recognized. We anticipate an immaterial amount of unrecognized tax benefits to reverse in the next 12 months. We are unable to reasonably estimate the timing of the long-term payments or the amount by which the liability will increase or decrease.
It is our policy to classify accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes. For fiscal 2023 and 2022, we recognized an insignificant amount of interest and penalties related to unrecognized tax benefits. Accrued interest and penalties were $0.2 million and $0.1 million as of January 31, 2023 and January 31, 2022, respectively.
Liquidity and Capital Resources
Since inception, we have financed operations primarily through proceeds received from issuances of equity securities, preferred stock and payments received from our customers.
As of January 31, 2023 and January 31, 2022, our principal source of liquidity was cash, cash equivalents, and short-term investments aggregating to $936.7 million and $934.7 million, respectively, which were held for working capital and strategic investment purposes. As of January 31, 2023, cash and cash equivalents consist of cash in banks, money markets funds, agency securities, and treasuries, while short-term investments mainly consist of treasuries, corporate debt securities, and commercial paper.
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We believe that our existing cash, cash equivalents, and short-term investments will be sufficient to support working capital and capital expenditure requirements for at least the next 12 months. Our future capital requirements will depend on many factors, including our revenue growth rate, the timing and the amount of cash received from customers, the expansion of sales and marketing activities, the timing and extent of spending to support research and development efforts, the price at which we are able to procure third-party cloud infrastructure, expenses associated with our international expansion, the introduction of platform enhancements, and the continuing market adoption of The DevSecOps Platform. In the future, we may enter into arrangements to acquire or invest in complementary businesses, products, and technologies. We may be required to seek additional equity or debt financing. In the event that we require additional financing, we may not be able to raise such financing on terms acceptable to us or at all. If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in continued innovation, we may not be able to compete successfully, which would harm our business, operating results, and financial condition.
The following table shows a summary of our cash flows for the periods presented:
| Fiscal Year Ended January 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | 2021 | ||||||||||||
| (in thousands) | ||||||||||||||
| Net cash used in operating activities | $ | (77,408) | $ | (49,814) | $ | (73,580) | ||||||||
| Net cash used in investing activities | $ | (605,686) | $ | (53,895) | $ | (842) | ||||||||
| Net cash provided by financing activities | $ | 97,482 | $ | 701,185 | $ | 12,945 |
Operating Activities
Our largest source of operating cash is payments received from our customers. Our primary uses of cash from operating activities are for personnel-related expenses, sales and marketing expenses, third-party cloud infrastructure expenses, and overhead expenses. We have generated negative cash flows from operating activities and have supplemented working capital through net proceeds from the issuance of equity securities.
Cash used in operating activities during fiscal 2023 was $77.4 million, primarily consisting of our net loss of $180.7 million, adjusted for non-cash items of $148.1 million (mainly attributable to stock-based compensation expense of $122.6 million), and net cash outflows of $44.9 million used by changes in our operating assets and liabilities. The main drivers of the changes in operating assets and liabilities were the decrease in accrued compensation and related expenses of $11.7 million, the increase in deferred contract acquisition costs of $48.6 million, and the increase in accounts receivable of $54.2 million, partially offset by the increase in deferred revenue of $73.0 million.
Cash used in operating activities during fiscal 2022 was $49.8 million, primarily consisting of our net loss of $157.6 million, adjusted for non-cash items of $85.2 million (including amortization of deferred contract acquisition costs of $33.4 million, stock-based compensation of $30.0 million, and unrealized foreign exchange loss of $20.4 million) and net cash inflows of $22.6 million provided by changes in our operating assets and liabilities. The main drivers of the changes in operating assets and liabilities were the increase in deferred revenue of $79.1 million and the increase in accrued compensation and related expenses of $19.8 million, partially offset by the increase in deferred contract acquisition costs of $42.6 million and the increase in accounts receivable of $38.2 million.
Investing Activities
Cash used in investing activities during fiscal 2023 was $605.7 million, primarily consisting of $590.0 million in purchases of short-term investments, net of proceeds from maturities, $9.6 million cash outflow
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as a result of a deconsolidation of an erstwhile subsidiary, and $6.1 million in purchases of property and equipment.
Cash used in investing activities during fiscal 2022 was $53.9 million, primarily consisting of purchases of short-term investments, net of maturities of $50.0 million and purchases of property and equipment of $3.5 million.
Financing Activities
Cash provided by financing activities during fiscal 2023 was $97.5 million, primarily attributable to $61.7 million of contributions received from noncontrolling interests, $24.5 million of proceeds from the issuance of common stock upon stock options exercises, and $14.4 million of proceeds from the issuance of common stock under our ESPP, offset by the partial settlement of acquisition related contingent consideration of $3.1 million.
Cash provided by financing activities during fiscal 2022 was $701.2 million, primarily attributable to $654.6 million in proceeds from our IPO, net of underwriting discounts, $26.5 million of contributions received from noncontrolling interests and $25.4 million of proceeds from issuance of common stock upon stock options exercises.
Contractual Obligations and Commitments
For more information regarding our contractual obligations, refer to “Note 14. Commitments and Contingencies” to our consolidated financial statements.
Critical Accounting Estimates
We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. In doing so, we have to make estimates and assumptions. Our critical accounting estimates are those estimates that involve a significant level of uncertainty at the time the estimate was made, and changes in them have had or are reasonably likely to have a material effect on our financial condition or results of operations. Accordingly, actual results could differ materially from our estimates. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We believe our judgments and estimates associated with the determination of standalone selling price for each performance obligation in revenue recognition and the accounting for stock-based compensation, which we discuss further below, could have a material impact on our consolidated financial statements.
See “Note 2. Basis of Presentation and Summary of Significant Accounting Policies” to our consolidated financial statements for a summary of significant accounting policies and the effect on our financial statements.
Revenue Recognition
For contracts that contain multiple performance obligations, we allocate the transaction price for each contract to each performance obligation based on the relative standalone selling price or SSP for each performance obligation. We use judgment in determining SSP for our products and services. To determine SSP, we maximize the use of observable standalone sales and observable data, where available. In instances where performance obligations do not have observable standalone sales, we utilize available information that may include other observable inputs or use the expected cost-plus margin approach to estimate the price we would charge if the products and services were sold separately.
Self-managed subscriptions include both (i) a right to use the underlying software and (ii) a right to receive post-contract customer support during the subscription term. Post-contract customer support comprises maintenance services (including updates and upgrades to the software on a when and if available basis) and support services. We have concluded that the right to use the software, which is recognized upon delivery of the license, and the right to receive technical support and software fixes and
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updates, which is recognized ratably over the term of the arrangement, are two distinct performance obligations. Since neither of these performance obligations are sold on a standalone basis, we estimate the stand-alone selling price for each performance obligation using a model based on the “expected cost plus margin” approach and update the model on an annual basis or when facts and circumstances change. This model uses observable data points to develop the main inputs and assumptions which include the estimated historical costs to develop the paid features in the software license and the estimated future costs to provide post-contract customer support. Based on this model, we determined the SSP allocation for each of our paid tiers across various subscription tenures. Accordingly, we have allocated up to 23% of the entire transaction price to the right to use the underlying software (License revenue - Self managed) and allocated the remaining value of the transaction to the right to receive post-contract customer support (Subscription revenue - Self managed) during the period covered by these consolidated financial statements.
Stock-Based Compensation
The Company has granted equity classified stock-based awards to team members, members of our board of directors, and non-employee advisors. The cost of stock-based awards granted to team members is measured at the grant date, based on the fair value of the award. The following awards involve a greater degree of judgment and complexity:
The Company has elected to use the Black-Scholes option pricing model to determine the fair value of stock options and ESPP. The Black-Scholes option-pricing model requires the input of highly subjective assumptions, including the fair value of the underlying common stock, the expected term of the option, the expected volatility of the price of our common stock, risk-free interest rates, and the expected dividend yield of our common stock. The assumptions used in our option-pricing model represent management’s best estimates. These estimates involve inherent uncertainties and the application of management’s judgment. For stock options and ESPP the expense is recognized on a straight-line basis.
In fiscal 2023, the board of directors of JiHu approved an employee stock option plan (“JiHu ESOP”) for its employees. The fair value of restricted stock awards (“RSAs”) and stock option awards is measured on the date of grant using the Binomial lattice model which includes the following highly subjective assumptions: value per share, risk-free rate, volatility, dividend yield, employee exit rate and early exercise multiple. The compensation costs related to these awards are recognized on a graded attribution method as the grants include a performance condition.
The Company granted restricted stock units (“RSUs”) settleable for 3 million shares of our Class B common stock to Mr. Sijbrandij, our founder and CEO. The RSUs involve a greater degree of judgment and complexity as they contain a service condition and a performance condition based on the achievement of eight separate stock price hurdles/tranches ranging from $95 to $500 per share. The fair value of the RSUs was determined utilizing a Monte Carlo valuation model. Any portion of these RSUs may only be earned upon a corporate transaction or after a liquidity event and only to the extent Mr. Sijbrandij continues to lead the company as our CEO. We will recognize total stock-based compensation expense over the derived service period of each tranche using the accelerated attribution method, regardless of whether the stock price hurdles are achieved.
Our performance stock units (“PSUs”), issued to the senior members of the management team are subject to a revenue performance condition and service conditions. The number of PSUs that will ultimately vest will depend on the revenue achieved by us in fiscal 2025 relative to the defined target. The fair value of PSUs is measured at the market price of our Class A common stock on the date of grant and compensation costs related to these awards are recognized on a graded-vesting method over the requisite service period. The estimate of awards expected to vest is reassessed by management at each reporting period.
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Recently Issued Accounting Pronouncements
See “Note 2. Basis of Presentation and Summary of Significant Accounting Policies” to our consolidated financial statements included elsewhere in this Annual Report for more information regarding recently issued accounting pronouncements.
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