Samsara Inc. (IOT) FY 2023 MD&A

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

Please read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes included under Part II, Item 8 of this Annual Report on Form 10-K. The following discussion and analysis contains forward-looking statements that involve risks and uncertainties. When reviewing the discussion below, you should keep in mind the substantial risks and uncertainties that could impact our business. In particular, we encourage you to review the risks and uncertainties described in “Part I, Item 1A. Risk Factors” or included elsewhere in this report. These risks and uncertainties could cause actual results to differ materially from those projected in forward-looking statements contained in this report or implied by past results and trends. Forward-looking statements are statements that attempt to forecast or anticipate future developments in our business, financial condition, or results of operations. See the section titled “Special Note Regarding Forward-Looking Statements” in this report. These statements, like all statements in this report, speak only as of their date (unless another date is indicated), and we undertake no obligation to update or revise these statements in light of future developments.

This section of our Annual Report on Form 10-K generally discusses our financial condition and results of operations for fiscal years 2023 and 2022, and year-to-year comparisons between fiscal years 2023 and 2022 in accordance with accounting principles generally accepted in the United States of America (“GAAP”). A discussion of our financial condition and results of operations and our liquidity and capital resources for fiscal year 2021, and year-to-year comparisons between fiscal years 2022 and 2021 can be found under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for the fiscal year ended January 29, 2022 included in Part II, Item 7 of our Annual Report on Form 10-K filed with the SEC on March 30, 2022, which information is incorporated herein by reference.

Overview

Samsara is on a mission to increase the safety, efficiency and sustainability of the operations that power the global economy.

To realize this vision, we pioneered the Connected Operations Cloud, which is a system of record that enables businesses that depend on physical operations to harness Internet of Things (“IoT”) data to develop actionable business insights and improve their operations.

Our Connected Operations Cloud consolidates data from our IoT devices and a growing ecosystem of connected assets and third-party systems, and makes it easy for organizations to access, analyze and act on data insights, using our cloud dashboard, custom alerts and reports, mobile apps and workflows. Our differentiated, purpose-built suite of solutions enables organizations to embrace and deploy a digital, cloud-connected strategy across their operations. With Samsara, customers have the ability to drive safer operations, increase business efficiency, and achieve their sustainability goals, all to improve the lives of their employees and the customers they serve.

We were founded in 2015 and have achieved significant growth since our inception. For our fiscal years ended January 28, 2023 and January 29, 2022, our revenue was $652.5 million and $428.3 million, respectively, representing year-over-year growth of 52%. Our net loss was $247.4 million and $355.0 million for the fiscal years ended January 28, 2023 and January 29, 2022, respectively. Our business model focuses on maximizing the lifetime value of our customer relationships and we continue to make significant investments in order to grow our customer base.

Our Business Model

In each of the past three fiscal years, we generated approximately 98% of our revenue from subscriptions to our Connected Operations Cloud, which today includes Applications for Video-Based Safety, Vehicle Telematics, Apps and Driver Workflows, Equipment Monitoring, and Site Visibility. A subscription to our Connected Operations Cloud includes IoT data collection, which usually comes from a Samsara IoT device, such as an internet gateway, camera or sensor, or at times from a third-party solution; cellular connectivity for our IoT devices; access to our cloud Applications, application programming interfaces, and the Samsara App Marketplace; customer support; and warranty coverage. We price our subscriptions on a per asset, per application basis. For example, one vehicle using two Applications (Video-Based Safety and Vehicle Telematics) would count as two subscriptions.

Our Connected Operations Cloud is designed to be a digital hub for our customers and a mission-critical part of their operations. Our criticality and integration into existing infrastructure is demonstrated by long contract lengths, which typically span three to five years. We recognize revenue from our subscriptions ratably over the term of the contract. We bill monthly, quarterly, annually, or in advance, depending on the specifics of each contract. The timing of large multi-year contracts can create some variability in billings between periods, though the impact to our annual or quarterly revenue is minimal, as we recognize revenue ratably over the term of our customer contracts.

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Our go-to-market strategy is focused on landing new customers and expanding their adoption of our Connected Operations Cloud. We primarily sell through a direct sales force, which focuses on landing and expanding large and mid-market customers with numerous physical assets. We also sell through resellers, which expands our reach and allows us to access certain customer channels more efficiently. Additionally, we offer self-service and low-touch inbound sales to attract a broad range of small customers onto our platform.

Our Customers

As of January 28, 2023, we had more than 19,000 customers representing over $5,000 in annual recurring revenue (“ARR”), or Core Customers, and approximately 95% of our ARR came from Core Customers, in part due to our increasing focus on this customer set. Our customer counts fluctuate from period to period, including due to customer mergers, acquisitions, consolidations, spin-offs, and other market activity. We have a very diverse customer base and no significant customer concentration, with no single customer accounting for more than 1% of our ARR as of January 28, 2023.

Our solution is used by businesses of varying sizes across a broad range of industries that depend on physical operations, including: transportation, wholesale and retail trade, construction, field services, logistics, utilities and energy, government, healthcare and education, manufacturing, food and beverage, and others. Our industry-agnostic approach and the horizontal applicability of our solution have enabled us to deploy our platform to a diverse set of industries.

We have extended our Applications over time to address the needs of our customers. We started with Applications for connected fleets, where we observed a large and underpenetrated market opportunity, and then expanded into connected equipment and connected sites, where we observed similar opportunities to improve operations around physical assets. As of January 28, 2023, over 70% of our Core Customers and 90% of our customers representing over $100,000 in ARR are using multiple Applications. Two of our Applications, Video-Based Safety and Vehicle Telematics, each represented more than $300 million of ARR as of January 28, 2023, demonstrating the flexibility of our solution and our ability to develop and grow new Applications.

Our key focus is multi-application adoption. Customers may land with large-scale, multi-application contracts, or land with one application within one division and expand their adoption over time. Regardless of how our customers land, we focus on expanding their usage of Connected Operations Cloud and encourage full-scale rollouts across their geographies and divisions.

While our Connected Operations Cloud is accessible to customers of all sizes and we have achieved rapid adoption over time, we are particularly focused on larger customers representing over $100,000 in ARR. As of January 28, 2023, approximately 48% of our ARR came from customers representing over $100,000 in ARR. These customers generally contribute higher revenue, land with multiple products, have higher retention rates, and demonstrate stronger unit economics. The number of our customers representing over $100,000 in ARR has increased over time from 806 as of January 29, 2022 to 1,237 customers as of January 28, 2023. Customers representing over $100,000 in ARR generally adopt more Applications than our overall customer base. For example, as of January 28, 2023, more than 90% of these customers use two or more Applications and more than 50% use three or more Applications.

Key Business Metrics

The following table shows a summary of our key business metrics as of the periods presented (dollars in thousands):

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ARR

We believe that ARR is a key indicator of the trajectory of our business performance, enables measurement of the progress of our business initiatives, and serves as an indicator of future growth. We define ARR as the annualized value of subscription contracts that have commenced revenue recognition as of the measurement date. ARR highlights trends that may be less visible from the face of our financial statements due to ratable revenue recognition. ARR does not have a standardized meaning and is not necessarily comparable to similarly titled measures presented by other companies. ARR should be viewed independently of revenue and is not intended to be combined with or to replace it. ARR is not a forecast and the active contracts at the date used in calculating ARR may or may not be extended or renewed. Our ARR has grown in each of the past three fiscal years, reflecting growth in new customers as well as expanded sales to existing customers.

Number of Customers Over $100,000 in ARR

We focus on customers representing over $100,000 in ARR, as this key business metric is indicative of our penetration within larger customers. The number of our customers over $100,000 in ARR has grown over time as we have focused our sales efforts on larger customers, invested in our partner ecosystem and released more Applications to address the needs of our larger customers.

Factors Affecting Our Performance

Acquiring New Customers

We believe that we have a substantial opportunity to continue to grow our customer base. We intend to drive new customer acquisition by continuing to invest significantly in sales and marketing to engage our prospective customers, increase brand awareness, and drive adoption of our Connected Operations Cloud. Our ability to attract new customers depends on a number of factors, including the effectiveness of our sales and marketing efforts, macroeconomic factors and their impact on our customers’ businesses, as well as the success of our efforts to expand internationally.

Expanding Within Our Existing Customer Base

We believe that there is a significant opportunity to expand sales to existing customers following their initial adoption of our Connected Operations Cloud. We expand within our customer base by selling more Applications and expanding existing Applications across geographies and divisions. Our ability to expand within our customer base will depend on a number of factors, including our customers’ satisfaction, pricing, competition, macroeconomic factors, and changes in our customers’ spending levels.

Investments in Innovation and Future Growth

Our performance is driven by continuous innovation on our Connected Operations Cloud and our ability to scale our headcount to grow our business. We continuously invest in adding new data types to our Connected Operations Cloud and innovate with this growing data asset to introduce new Applications over time. Our performance is also impacted by our ability to scale our headcount across our business to support our growth. We have increased our headcount from 1,616 employees as of the last business day of the fiscal year ended January 29, 2022 to 2,266 employees as of the last business day of the fiscal year ended January 28, 2023. We remain committed to investing in our sales capacity and our research and development organization, and to driving revenue growth globally.

Macroeconomic Trends

Unfavorable conditions in the economy, both in the United States and abroad, may negatively affect the growth of our business and our results of operations. For example, our business and results of operations could be affected by global macroeconomic trends and events such as inflationary pressure, interest rate increases and declines in consumer confidence, widespread disruptions of supply chains and freight and shipping channels, increased prices for many goods and services (including fluctuating fuel costs), labor shortages, delayed or reduced spending on information technology products, and significant volatility and disruption of financial markets, as well as other conditions arising from international conflicts, such as the ongoing conflict between Russia and Ukraine and geopolitical tensions involving China, and the COVID-19 pandemic, including the emergence of new variant strains. We are continuously monitoring these global events and other macroeconomic developments and how they may impact us directly or indirectly as a result of the effects on our customers and suppliers.

Refer to the section titled “Risk Factors” for further discussion of the impacts of macroeconomic trends on our business.

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Components of Results of Operations

Revenue

We provide access to our Connected Operations Cloud through subscription arrangements, whereby the customer is charged a per-subscription fee for access for a specified term. Subscription agreements contain multiple service elements for one or more of our cloud-based Applications via mobile app(s) or a website that enable data collection and provide access to the cellular network, IoT devices (which we also refer to as connected devices) and support services delivered over the term of the arrangement. Our subscription contracts are typically for a three-to-five-year term and are generally non-cancelable and non-refundable, subject to limited exceptions under our standard terms of service. Our Connected Operations Cloud and IoT devices are highly interdependent and interrelated, and represent a combined performance obligation within the context of the contract.

In each of our past two fiscal years, we generated approximately 98% of our revenue from subscriptions to our Connected Operations Cloud. The small remaining portion of our revenue not generated from subscriptions to our Connected Operations Cloud comes from the sale of replacement IoT devices, including gateways, sensors and cameras, as well as related shipping and handling fees, and professional services.

Allocation of Overhead Costs

Overhead costs that are not substantially dedicated to use by a specific functional group are allocated based on headcount. Such costs include costs associated with office facilities, depreciation of property and equipment, and other expenses, such as corporate software, subscription services, and insurance.

Cost of Revenue

Cost of revenue consists primarily of the amortization of IoT device costs associated with subscription agreements, cellular-related costs, third-party cloud infrastructure expenses, customer support costs, warranty charges, and operational costs consisting of employee-related costs, including salaries, employee benefits and stock-based compensation, amortization of internal-use software development costs, expenses related to shipping and handling, packaging, fulfillment, warehousing, write-downs of excess and obsolete inventory, and allocated overhead costs.

As our customers expand and increase the use of our Connected Operations Cloud driven by additional IoT devices and Applications, we expect our cost of revenue as a percentage of revenue to remain relatively flat from year to year and may also vary from quarter to quarter as a percentage of our revenue due to the timing and extent of these expenses. We intend to continue to invest additional resources in our Connected Operations Cloud and customer support and operations personnel as we grow our business. The level and timing of investment in these areas will affect our cost of revenue in the future.

Operating Expenses

Research and Development

Research and development expenses consist primarily of employee-related costs, including salaries, employee benefits and stock-based compensation, depreciation and other expenses related to prototyping IoT devices, product initiatives, software subscriptions, hosting used in research and development, and allocated overhead costs. We continue to focus our research and development efforts on adding new features and products and enhancing the utility of our Connected Operations Cloud. We capitalize the portion of our internal-use software development costs that meets the criteria for capitalization.

We expect our research and development expenses to generally increase in absolute dollars for the foreseeable future as we continue to invest in research and development efforts to enhance our Connected Operations Cloud. While we expect our research and development expenses to decrease as a percentage of our revenue over the long term, our research and development expenses may fluctuate as a percentage of our revenue from period to period due to the timing and extent of these expenses.

Sales and Marketing

Sales and marketing expenses consist primarily of employee-related costs directly associated with our sales and marketing activities, including salaries, employee benefits and stock-based compensation, and sales commissions. Sales and marketing expenses also include expenditures related to advertising, media, marketing, promotional costs, free trial expenses, brand awareness activities, business development, corporate partnerships, travel, conferences and events, professional services, and allocated overhead costs.

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We plan to continue to invest in sales and marketing to grow our customer base and increase our brand awareness. As a result, we expect our sales and marketing expenses to increase in absolute dollars for the foreseeable future. While we expect our sales and marketing expenses to decrease as a percentage of our revenue over the long term, our sales and marketing expenses may fluctuate as a percentage of our revenue from period to period due to the timing and extent of these expenses.

General and Administrative

General and administrative expenses consist of employee-related costs for executive, finance, legal, human resources, IT, and facilities personnel, including salaries, employee benefits and stock-based compensation, professional fees for external legal, accounting, recruiting and other consulting services, bad debt, allocated overhead costs, and unallocated lease costs associated with unused office facilities.

We expect our general and administrative expenses to continue to increase in absolute dollars for the foreseeable future to support our growth as well as due to additional costs associated with legal, accounting, compliance, insurance, investor relations, and other areas associated with being a public company. While we expect our general and administrative expenses to decrease as a percentage of our revenue over the long term, our general and administrative expenses may fluctuate as a percentage of our revenue from period to period due to the timing and extent of these expenses.

Lease Modification, Impairment, and Related Charges

Lease modification, impairment, and related charges consist of impairment charges related to the sublease and abandonment of facilities, as well as the derecognition of operating lease liabilities and right-of-use (“ROU”) assets in connection with a lease modification and related accelerated depreciation expense.

We may incur additional lease modification, impairment, and related charges in subsequent periods.

Interest Income and Other Income (Expense), Net

Interest income and other income (expense), net consists primarily of income earned on our money market funds included in cash and cash equivalents, restricted cash, and our short-term and long-term investments, including amortization of premiums and accretion of discounts related to our marketable debt securities, net of associated fees. We also have foreign currency remeasurement gains and losses and foreign currency transaction gains and losses. As we have expanded our global operations, our exposure to fluctuations in foreign currencies has increased, and we expect this to continue.

Provision for Income Taxes

Provision for income taxes consists primarily of income taxes in certain foreign jurisdictions in which we conduct business. We maintain a full valuation allowance against our U.S. deferred tax assets because we have concluded that it is more likely than not that the deferred tax assets will not be realized.

Results of Operations

Comparison of the Fiscal Years Ended January 28, 2023 and January 29, 2022

Revenue

Our total revenue is summarized as follows (in thousands, except percentages):

Revenue increased by $224.2 million, or 52%, for the fiscal year ended January 28, 2023 compared to the fiscal year ended January 29, 2022, primarily due to an increase in customer count and increased purchases by existing customers of our subscription offerings, including subscriptions to additional applications.

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Cost of Revenue, Gross Profit, and Gross Margin

Our cost of revenue, gross profit, and gross margin are summarized as follows (in thousands, except percentages):

Cost of revenue increased by $58.2 million, or 47%, for the fiscal year ended January 28, 2023 compared to the fiscal year ended January 29, 2022, primarily due to $27.6 million of increased amortization of deferred IoT device costs, $16.9 million of increased direct labor costs, of which $2.8 million was an increase in stock-based compensation expense, $9.1 million of increased infrastructure costs associated with our product offerings, and $2.8 million of increased warranty costs, partially offset by $1.2 million of reduced freight costs. The increases in amortization of deferred IoT device costs and infrastructure costs were driven by increased sales volume year-over-year.

Our gross margin increased to 72% for the fiscal year ended January 28, 2023 compared to 71% for the fiscal year ended January 29, 2022, mainly due to operational efficiencies in infrastructure costs.

Research and Development

Research and development expense is summarized as follows (in thousands, except percentages):

Research and development expense decreased by $17.7 million, or 9%, for the fiscal year ended January 28, 2023 compared to the fiscal year ended January 29, 2022, primarily due to a $23.2 million decrease in employee-related costs, which included a $35.5 million decrease in stock-based compensation expense, partially offset by a $12.4 million increase in salaries and benefits driven primarily by increased headcount to support our research and development organization. The decrease in stock-based compensation expense was primarily attributable to higher expenses for restricted stock units (“RSUs”) and related employer taxes in the fiscal year ended January 29, 2022 due to the vesting of RSUs upon satisfaction of the performance condition in connection with our IPO in December 2021. Our decrease in research and development expense was also driven by a $4.7 million decrease in expense associated with product initiatives. These decreases in research and development expense were partially offset by a $4.0 million increase in third-party cloud infrastructure costs to support research and development activities, a $3.2 million increase in allocated overhead costs primarily due to software subscriptions and allocated rent, a $1.9 million increase in expenses relating to professional services, and a $1.3 million increase in travel-related expenses.

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Sales and Marketing

Sales and marketing expense is summarized as follows (in thousands, except percentages):

Sales and marketing expense increased by $78.9 million, or 27%, for the fiscal year ended January 28, 2023 compared to the fiscal year ended January 29, 2022, primarily due to an $51.8 million increase in employee-related costs, which included a $52.4 million increase in salaries and benefits and related employer taxes primarily driven by an increase in headcount to support our sales organization and a $5.7 million increase in sales commissions, partially offset by a $6.4 million decrease in stock-based compensation expense. The decrease in stock-based compensation expense was primarily attributable to higher expenses for RSUs and related employer taxes in the fiscal year ended January 29, 2022 due to the vesting of RSUs upon satisfaction of the performance condition in connection with our IPO. Our increase in sales and marketing expense was also driven by a $10.6 million increase in travel-related expenses and expenses relating to our customer visits, conferences, and events, a $7.1 million increase in allocated overhead costs primarily due to allocated rent and software subscriptions, a $4.7 million increase in expenses relating to professional services, and a $1.3 million increase in expenses relating to lead generation initiatives.

General and Administrative

General and administrative expense is summarized as follows (in thousands, except percentages):

General and administrative expense increased by $10.9 million, or 7%, for the fiscal year ended January 28, 2023 compared to the fiscal year ended January 29, 2022, primarily due to a $6.7 million increase in expenses attributable to increased insurance expenses and other corporate expenses to support the normal course of operating as a public company, a $5.7 million increase in expenses relating to legal fees and professional services, and a $2.3 million increase in employee-related costs, which included a $14.8 million increase in salaries and benefits and related employer taxes primarily driven by an increase in headcount to support the growth of our finance, accounting, human resources, IT, and legal functions, partially offset by a $12.4 million decrease in stock-based compensation expense. The decrease in stock-based compensation expense was primarily attributable to higher expenses for RSUs and related employer taxes in the fiscal year ended January 29, 2022 due to the vesting of RSUs upon satisfaction of the performance condition in connection with our IPO. Our increase in general and administrative expense was also driven by a $1.7 million increase in audit fees. These increases in general and administrative expense were partially offset by a $4.4 million decrease in allocated overhead costs primarily due to allocated rent and a $1.7 million decrease in recruiting fees.

Lease Modification, Impairment, and Related Charges

Lease modification, impairment, and related charges are summarized as follows (in thousands, except percentages):

Lease modification, impairment, and related charges decreased by $0.5 million, or 31%, for the fiscal year ended January 28, 2023 compared to the fiscal year ended January 29, 2022.

In the first quarter of fiscal year 2023, we executed a sublease for certain office space which resulted in a $1.1 million impairment to the related ROU asset which we recognized in lease modification, impairment, and related charges for the fiscal year ended January 28, 2023.

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In the third quarter of fiscal year 2022, we determined that we no longer had the right to control the use of a certain office location and accordingly accounted for a lease modification for such facility, and also impaired and ceased using other leased office spaces. As a result of our leasing activities, we recognized $1.5 million in lease modification, impairment, and related charges for the fiscal year ended January 29, 2022.

Interest Income and Other Income (Expense), Net

Interest income and other income (expense), net, are summarized as follows (in thousands, except percentages):

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*Not meaningful

Interest income and other income (expense), net, increased by $15.6 million for the fiscal year ended January 28, 2023 compared to the fiscal year ended January 29, 2022. The increase was primarily due to net accretion of discounts and interest income earned on our managed portfolio of marketable debt securities and due to higher interest-bearing cash balances in the fiscal year ended January 28, 2023.

Provision for Income Taxes

Provision for income taxes is summarized as follows (in thousands, except percentages):

The provision for income taxes increased by $2.4 million, or 206%, for the fiscal year ended January 28, 2023 compared to the fiscal year ended January 29, 2022, primarily driven by the expansion of our international operations.

Non-GAAP Financial Measures

To supplement our consolidated financial statements prepared in accordance with GAAP, we review the following non-GAAP financial measures to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans, and make strategic decisions (in thousands, except percentages):

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Limitations and Reconciliations of Non-GAAP Financial Measures

Non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as substitutes for financial information presented under GAAP. There are a number of limitations related to the use of non-GAAP financial measures versus comparable financial measures determined under GAAP. For example, other companies in our industry may calculate these non-GAAP financial measures differently or may use other measures to evaluate their performance. In addition, adjusted free cash flow does not reflect our future contractual commitments or the total increase or decrease of our cash balance for a given period. All of these limitations could reduce the usefulness of these non-GAAP financial measures as analytical tools. Investors are encouraged to review the related GAAP financial measures and the reconciliations of these non-GAAP financial measures to their most directly comparable GAAP financial measures and to not rely on any single financial measure to evaluate our business.

Non-GAAP Gross Profit and Non-GAAP Gross Margin

We define non-GAAP gross profit as gross profit plus stock-based compensation expense-related charges, including employer taxes on employee equity transactions, included in cost of revenue. Non-GAAP gross margin is defined as non-GAAP gross profit as a percentage of total revenue. We use non-GAAP gross profit and non-GAAP gross margin in conjunction with traditional GAAP measures to evaluate our financial performance. We believe that non-GAAP gross profit and non-GAAP gross margin provide our management and investors consistency and comparability with our past financial performance and facilitate period-to-period comparisons of operations. The following table presents a reconciliation of our non-GAAP gross profit to our GAAP gross profit for the periods presented (in thousands, except percentages):

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(1)Stock-based compensation expense-related charges included approximately $0.3 million and $0.3 million of employer taxes on employee equity transactions for the fiscal years ended January 28, 2023 and January 29, 2022, respectively.

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Non-GAAP Loss from Operations and Non-GAAP Operating Margin

We define non-GAAP loss from operations, or non-GAAP operating loss, as loss from operations plus stock-based compensation expense-related charges, including employer taxes on employee equity transactions, lease modification, impairment, and related charges, and restructuring and related charges. Non-GAAP operating margin is defined as non-GAAP operating loss as a percentage of total revenue. We use non-GAAP loss from operations and non-GAAP operating margin in conjunction with traditional GAAP measures to evaluate our financial performance. We believe that non-GAAP loss from operations and non-GAAP operating margin provide our management and investors consistency and comparability with our past financial performance and facilitate period-to-period comparisons of operations. The following table presents a reconciliation of our non-GAAP loss from operations to our GAAP loss from operations for the periods presented (in thousands, except percentages):

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(1)Stock-based compensation expense-related charges included approximately $4.0 million and $9.5 million of employer taxes on employee equity transactions for the fiscal years ended January 28, 2023 and January 29, 2022, respectively.

Non-GAAP Net Loss

We define non-GAAP net loss as net loss excluding stock-based compensation expense-related charges, including employer taxes on employee equity transactions, lease modification, impairment, and related charges, and restructuring and related charges. We use non-GAAP net loss in conjunction with traditional GAAP measures to evaluate our financial performance. We believe that non-GAAP net loss provides our management and investors consistency and comparability with our past financial performance and facilitates period-to-period comparisons of operations. The following table presents a reconciliation of our non-GAAP net loss to our GAAP net loss for the periods presented (in thousands, except percentages):

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Adjusted Free Cash Flow and Adjusted Free Cash Flow Margin

We define adjusted free cash flow as net cash used in operating activities reduced by cash used for purchases of property and equipment, plus non-recurring capital expenditures associated with the build-out of our corporate office facilities in San Francisco, California, net of tenant allowances. Adjusted free cash flow margin is calculated as adjusted free cash flow as a percentage of total revenue. We believe that adjusted free cash flow and adjusted free cash flow margin, even if negative, are useful in evaluating liquidity and provide information to management and investors about our ability to fund future operating needs and strategic initiatives. The following table presents a reconciliation of adjusted free cash flow to net cash used in operating activities for the periods presented (in thousands, except percentages):

Liquidity and Capital Resources

Liquidity is a measure of our ability to access sufficient cash flows to meet the short-term and long-term cash requirements of our business operations.

Since our founding, we have financed our operations primarily through the sale of equity securities and payments received from our customers. In December 2021, we completed our IPO, which resulted in aggregate net proceeds of $846.7 million, including proceeds from the underwriters’ exercise of their option to purchase additional shares of our Class A common stock in January 2022 and net of underwriting discounts and commissions. We have generated significant operating losses from our operations, as reflected in our accumulated deficit of $1,168.4 million as of January 28, 2023. We expect to continue to incur operating losses and generate negative cash flows from operations for the foreseeable future due to the investments we intend to make in our business, and as a result, we may require additional capital resources to execute on our strategic initiatives to grow our business. We believe that our existing cash, cash equivalents, and short-term and long-term investments will be sufficient to support working capital and capital expenditure requirements for at least the next 12 months.

As of January 28, 2023, our principal sources of liquidity were cash, cash equivalents, and short-term and long-term investments of $803.0 million. Cash and cash equivalents consisted of cash on deposit with banks as well as highly liquid investments with an original maturity of 90 days or less, when purchased. Our investments primarily consisted of U.S. government and agency securities, corporate notes and bonds, commercial paper, and money market funds.

Our future capital requirements will depend on many factors, including, but not limited to, our growth, our ability to attract and retain customers, the continued market acceptance of our solution, the timing and extent of spending to support our efforts to develop our Connected Operations Cloud, the expansion of sales and marketing activities, and the impact of macroeconomic conditions on our and our customers’ and partners’ businesses. Further, we may in the future enter into arrangements to acquire or invest in businesses, products, services, and technologies. We may be required to seek additional equity or debt financing. In the event that additional financing is required, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, financial condition, and results of operations could be adversely affected.

Cash Flows

The following table shows a summary of our cash flows for the periods presented (in thousands):

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Operating Activities

Our largest source of operating cash is payments received from our customers. Our primary uses of cash from operating activities are for employee-related expenses, sales and marketing expenses, inventory and connected device costs, third-party cloud and cellular infrastructure expenses, and overhead expenses. We have generated negative cash flows from operations in each of the past two fiscal years, and have supplemented working capital through net proceeds from the sale of equity securities.

Cash used in operating activities mainly consists of our net loss adjusted for certain non-cash items, including stock-based compensation, non-cash operating lease costs, depreciation and amortization of property and equipment, lease modification, impairment, and related charges, and changes in operating assets and liabilities during each period.

Cash used in operating activities was $103.0 million for the fiscal year ended January 28, 2023. This consisted of a net loss of $247.4 million, adjusted for non-cash charges of $192.4 million, and changes in our operating assets and liabilities of $48.0 million. The non-cash charges were primarily comprised of stock-based compensation expense of $177.5 million, depreciation and amortization of $11.8 million, bad debt expense of $6.6 million, and lease modification, impairment, and related charges of $1.1 million, partially offset by net accretion of discounts on marketable debt securities of $4.4 million.

Cash used in operating activities was $171.5 million for the fiscal year ended January 29, 2022. This consisted of a net loss of $355.0 million, adjusted for non-cash charges of $247.3 million, and changes in our operating assets and liabilities of $63.7 million. The non-cash charges were primarily comprised of stock-based compensation expense of $228.7 million, depreciation and amortization of $10.4 million, bad debt expense of $7.4 million, and lease modification, impairment, and related charges of $1.5 million.

Investing Activities

Cash used in investing activities was $631.8 million for the fiscal year ended January 28, 2023, which primarily consisted of $685.6 million of purchases of investments and $33.2 million of capital expenditures for additional office facilities, partially offset by $86.6 million of proceeds from maturities of investments.

Cash used in investing activities was $20.0 million for the fiscal year ended January 29, 2022, which primarily consisted of capital expenditures for additional office facilities.

Financing Activities

Cash provided by financing activities was $14.2 million for the fiscal year ended January 28, 2023, which primarily consisted of $18.0 million of proceeds from employee stock purchase plan purchases and exercises of stock options, partially offset by $2.5 million in payments of offering costs and $1.3 million in payments of principal on finance leases.

Cash provided by financing activities was $701.6 million for the fiscal year ended January 29, 2022, which primarily consisted of $846.7 million of net proceeds from the IPO and $1.4 million of proceeds from exercises of stock options, partially offset by $141.7 million of tax payments related to the net share settlement of equity awards and $4.1 million in payments of offering costs.

Contractual Obligations and Commitments

Our estimated future obligations consist of leases and non-cancelable purchase commitments as of January 28, 2023. For additional discussion on our leases and other commitments, refer to Notes 7, “Leases,” and 9, “Commitments and Contingencies,” to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Critical Accounting Policies and Estimates

Our consolidated financial statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K are prepared in accordance with GAAP.

We believe that the following accounting policies involve a high degree of judgment and complexity. These are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of our operations. See Note 2 to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K for a description of our other significant accounting policies. The preparation of our consolidated financial statements in conformity with GAAP requires us to make estimates and judgments that affect the amounts reported in those financial statements and accompanying notes. Although we believe that the estimates we use are reasonable, due to the inherent uncertainty involved in making those estimates, actual results reported in future periods could differ from those estimates. The critical accounting estimates, assumptions and judgments that we believe have the most significant impact on our consolidated financial statements are described below.

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Revenue Recognition

Revenue is recognized when promised goods or services are transferred to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services.

We determine revenue recognition through the following steps:

1.identification of the contract, or contracts, with a customer;

2.identification of the performance obligations in the contract;

3.determination of the transaction price;

4.allocation of the transaction price to the performance obligations in the contract; and

5.recognition of revenue when, or as, we satisfy a performance obligation.

We offer subscriptions to access our Connected Operations Cloud. Customers subscribe to one or more Applications on our Connected Operations Cloud which includes data that is primarily provided by various proprietary connected device access points, including telematic sensors, gateways, and cameras. Our Connected Operations Cloud and the related connected device access points are highly interdependent and interrelated, and represent a combined performance obligation, which is recognized over the related subscription period.

Determining whether the subscriptions to our Connected Operations Cloud and the connected device access points are considered distinct performance obligations that should be accounted for separately or as a combined performance obligation requires significant judgment. We determined that the subscription and connected device access points fulfill a single promise to the customer because the Connected Operations Cloud and connected devices are interdependent and interrelated to maintaining the intended utility of the subscription over the contractual term. In reaching this conclusion, we considered the context of the contract and the nature of our promise to provide the customer with actionable real-time business insights to manage their operations. Specifically, our connected devices, including the embedded proprietary firmware, are updated continuously by our Connected Operations Cloud using artificial intelligence and machine learning models to improve the capture, aggregation, and enrichment of data by the connected devices. Additionally, our Connected Operations Cloud then utilizes this data to deliver actionable real-time business insights that are promised to our customers throughout the term of their subscription to Applications on the Connected Operations Cloud. As a result of the highly interdependent and interrelated nature of the integrated service provided, these arrangements are accounted for as a combined performance obligation to the customer.

The combined performance obligation is satisfied over time, as we continually provide access to and fulfill our obligation to the customer over the subscription term. Accordingly, the fixed consideration related to the combined performance obligation is recognized on a straight-line basis over the contract term, beginning on the date that access to the Connected Operations Cloud or specified application and connected device is provided.

Our subscription contracts generally are non-cancelable and non-refundable, subject to limited exceptions under our standard terms of service, transfer title to the connected device to the customer upon shipment, provide access to the platform for a contractual term of three to five years, and are invoiced monthly, quarterly, annually, or in advance.

Connected Device Costs

We capitalize connected device costs associated with subscription contracts as contract fulfillment costs where the connected device is not distinct from other undelivered obligations in the customer contract. These costs are directly related to customer contracts and are expected to be recoverable and enhance the resources used to satisfy the undelivered performance obligations in those contracts. These contract fulfillment costs are amortized over a period of benefit of five years. Determining the period of benefit requires judgment for which we take into consideration the expected life of the connected device, the connected device’s warranty period, past experience with customers, the duration of our relationships with our customers, and other available information.

JOBS Act Accounting Election

Section 107 of the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) permits an emerging growth company to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies.

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Based on the aggregate worldwide market value of our voting and non-voting common equity securities held by non-affiliates on the last business day of our second fiscal quarter ended July 30, 2022, we ceased to be an emerging growth company as of January 28, 2023. Accordingly, we are required to comply with the new or revised accounting pronouncements as of the effective dates applicable to public companies that are not emerging growth companies.

Recent Accounting Pronouncements

For information on recently issued accounting pronouncements, see Note 2 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.