DOMO, INC.
This discussion contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Statements containing words such as
"may," "believe," "could," "will," "seek," "depends," "anticipate," "expect,"
"intend," "plan," "project," "projections," "business outlook," "estimate," or
similar expressions constitute forward-looking statements. You should read these
statements carefully because they discuss future expectations, contain
projections of future results of operations or financial condition or state
other "forward-looking" information. These statements relate to our future
plans, objectives, expectations, intentions and financial performance and the
assumptions that underlie these statements. They include, but are not limited
to, statements about:
•our ability to attract new customers and retain and expand our relationships
with existing customers;
•our future financial performance, including our expectations regarding our
revenue, cost of revenue, gross profit, operating expenses, key metrics, ability
to generate cash flow and ability to achieve and maintain future profitability;
•the anticipated trends, market opportunity, growth rates and challenges in our
business and in the business intelligence software market;
•the efficacy of our sales and marketing efforts;
•our ability to compete successfully in competitive markets;
•our ability to respond to and capitalize on rapid technological changes;
•our expectations and management of future growth;
•our ability to enter new markets and manage our expansion efforts, particularly
internationally;
•our ability to develop new product features;
•our ability to attract and retain key employees and qualified technical and
sales personnel;
•our ability to effectively and efficiently protect our brand;
•our ability to timely scale and adapt our infrastructure;
•the effect of general economic and market conditions on our business;
•the impact of the coronavirus pandemic, including on the global economy, our
results of operations, enterprise software spending, and business continuity;
•our ability to protect our customers' data and proprietary information;
•our ability to maintain, protect, and enhance our intellectual property and not
infringe upon others' intellectual property; and
•our ability to comply with all governmental laws, regulations and other legal
obligations.
Our actual results may differ materially from those contained in or implied by
any forward-looking statements. Factors that could cause or contribute to these
differences include those discussed below and elsewhere in this report,
including those factors discussed in Part II, Item 1A (Risk Factors).
In light of the significant uncertainties and risks inherent in these
forward-looking statements, you should not regard these statements as a
representation or warranty by us or anyone else that we will achieve our
objectives or plans in any specified time frame, or at all, or as predictions of
future events. Moreover, neither we nor any other person assumes responsibility
for the accuracy and completeness of the forward-looking statements. We
undertake no obligation to publicly update any forward-looking statements,
whether as a result of new information, future events or otherwise, except as
required by law.
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--------------------------------------------------------------------------------Overview
We founded Domo in 2010 with the vision of digitally connecting everyone within the enterprise with real-time, rich, relevant data and then encouraging all employees to collaborate and act on that data. We realized that many organizations were unable to access the massive amounts of data that they were collecting in siloed cloud applications and on-premise databases. Furthermore, even for organizations that were capable of accessing their data, the process for doing so was time-consuming, costly, and often resulted in the data being out-of-date by the time it reached decision makers. The delivery format, including alert functionality, and devices were not adequate for the connected and real-time mobile workforce. Based on these observations, it was apparent that all organizations, regardless of size or industry, were failing to unlock the power of all of their people, data, and systems. To address these challenges, we provide a cloud-based platform that digitally connects everyone at an organization - from the CEO to frontline employees - with all the people, data, and systems in an organization, giving them access to real-time data and insights and allowing them to manage their business from their smartphones. We offer our platform to our customers as a subscription-based service. Subscription fees are based upon the chosen Domo package which includes tier-based platform capabilities as well as users. Business leaders, department heads and managers are the typical initial subscribers to our platform, deploying Domo to solve a business problem or to enable departmental access. Over time, as customers recognize the value of our platform, we increasingly engage with CIOs and other executives to facilitate broad enterprise adoption. A majority of our customers subscribe to our services through multi-year contracts. As ofJuly 31, 2020 , 60% of our customers were under multi-year contracts, compared to 55% of customers as ofJanuary 31, 2020 . The high percentage of multi-year contracts, among both new and existing customers, has enhanced the predictability of our subscription revenue. We typically invoice our customers annually in advance, but have recently seen an increase in semi-annual and quarterly billing terms. A majority of our annual recurring revenue is up for renewal during the fiscal year endingJanuary 31, 2021 . We had total revenue of$41.7 million and$51.1 million for the three months endedJuly 31, 2019 and 2020, respectively, reflecting a year-over-year increase of 23%. For the six months endedJuly 31, 2019 and 2020, we had total revenue of$82.5 million and$99.7 million , respectively, representing year-over-year growth of 21%. Our enterprise customers were a key driver of revenue growth, with revenue of$19.8 million and$26.1 million for the three months endedJuly 31, 2019 and 2020, respectively, or 32% year-over-year growth. For the six months endedJuly 31, 2019 and 2020, revenue from enterprise customers was$39.2 million and$49.9 million , respectively, or 27% year-over-year growth. For the six months endedJuly 31, 2019 and 2020, no single customer accounted for more than 10% of our total revenue, nor did any single organization when accounting for multiple subsidiaries or divisions which may have been invoiced separately. Revenue from customers with billing addresses inthe United States comprised 74% and 76% or our total revenue for the three months endedJuly 31, 2019 and 2020, respectively. We have incurred significant net losses since our inception, including net losses of$31.2 million and$17.9 million for the three months endedJuly 31, 2019 and 2020, respectively, and had an accumulated deficit of$1,080.5 million atJuly 31, 2020 . We expect to incur losses for the foreseeable future and may not be able to achieve or sustain profitability. Recent Developments A novel strain of coronavirus, COVID-19, emerged inChina inDecember 2019 and began to spread globally, including tothe United States , in early 2020. TheWorld Health Organization has declared COVID-19 to be a public health emergency of international concern. The full impact of the COVID-19 pandemic is inherently uncertain at the time of this report. The COVID-19 pandemic has resulted in travel restrictions and in some cases, prohibitions of non-essential activities, disruption and shutdown of businesses and greater uncertainty in global financial markets. We cannot reasonably predict the extent to which the COVID-19 pandemic will impact our business or operating results, which is highly dependent on inherently uncertain future developments, including the severity of COVID-19 and the actions taken by governments and private businesses in relation to COVID-19 containment. Because our platform is offered as a subscription-based service, the effect of the pandemic may not be fully reflected in our operating results until future periods, if at all. We have adopted several measures in response to the COVID-19 pandemic, including instructing employees to work from home, making adjustments to our expenses and cash flow to correlate with possible declines in billings and cash collections from customers, shifting certain of our customer events, such as Domopalooza, to online-only webcasts and restricting non-critical business travel by our employees. Historically, a significant portion of field sales and professional 28 -------------------------------------------------------------------------------- services were conducted in person. Currently, as a result of the work and travel restrictions related to the ongoing COVID-19 pandemic, substantially all of our sales and professional services activities are being conducted remotely. These changes are expected to remain in effect in the third quarter of fiscal 2021 and will likely extend into future quarters. The impact, if any, of these and any additional operational changes we may implement is uncertain, but changes we have implemented have not affected and are not expected to affect our ability to maintain operations, including financial reporting systems, internal control over financial reporting and disclosure controls and procedures. We have entered into contracts totaling$4.6 million during the current fiscal year of annual recurring revenue with government entities to facilitate their response to the COVID-19 pandemic. Once the pandemic has subsided, these contracts may be at a higher risk of not renewing if Domo has not expanded the usage of the product beyond the pandemic use case. Domo is and will continue to pursue additional usage and use cases beyond the initial use case. As of the date of this report, we do not yet know the full extent of the negative impact on our ability to attract, serve, retain or upsell customers. We serve customers in a wide variety of industries including travel and hospitality, sports and leisure, and retail which have been severely impacted by the COVID-19 pandemic. Furthermore, existing and potential customers may choose to reduce or delay technology spending in response to the COVID-19 pandemic. In addition, certain customers have pursued concessions such as lengthened payment terms or reduced contract length, which may materially and negatively impact our operating results, financial condition and prospects. See the section "Risk Factors" for further discussion of the possible impact of the COVID-19 pandemic on our business. Factors Affecting Performance Continue to Attract New Customers We believe that our ability to expand our customer base is an important indicator of market penetration, the growth of our business, and future business opportunities. We define a customer at the end of any particular quarter as an entity that generated revenue greater than$2,500 during that quarter. In situations where an organization has multiple subsidiaries or divisions, each entity that is invoiced at a separate billing address is treated as a separate customer. In cases where customers purchase through a reseller, each end customer is counted separately. As ofJuly 31, 2020 , we had over 1,800 customers. We focus our sales and marketing resources on obtaining customers with over$100 million in revenue. Our enterprise customers accounted for 48% and 51% of our revenue for the three months endedJuly 31, 2019 and 2020, respectively, and 48% and 50% for the six months endedJuly 31, 2019 and 2020, respectively. In order to accelerate customer growth, we intend to further develop our partner ecosystem by establishing agreements with more software resellers, systems integrators and implementation partners to provide broader customer and geographic coverage. We believe we are underpenetrated in the overall market and have significant opportunity to expand our customer base over time. Customer Upsell and Retention We employ a land and expand sales model, and our performance depends on our ability to retain customers and expand the number of users and use cases at existing customers over time. It currently takes multiple years for our customers to fully embrace the power of our platform. We believe that as customers deploy greater volumes and sources of data for multiple use cases, the unique features of our platform can address the needs of everyone within their organization. We are still in the early stages of expanding within many of our customers. We have invested in platform capabilities and online support resources that allow our customers to expand the use of our platform in a self-guided manner. Our professional services, customer support and customer success functions also support our sales force by helping customers to successfully deploy our platform and implement additional use cases. In addition, we believe our partner ecosystem will become increasingly important over time. We work closely with our customers to drive increased engagement with our platform by identifying new use cases through our customer success teams, as well as in-platform, self-guided experiences. We actively engage with our customers to assess whether they are satisfied and fully realizing the benefits of our platform. While these efforts often require a substantial commitment and upfront costs, we believe our investment in product, customer support, customer success and professional services will create opportunities to expand our customer relationships over time. Our ability to drive growth and generate incremental revenue depends heavily on our ability to retain our customers and increase their usage of our platform. With that objective in mind, we allocate our customer success and customer support resources to align with maximizing the retention and expansion of our subscription revenue. 29 -------------------------------------------------------------------------------- An important metric that we use to evaluate our performance in retaining customers is gross retention rate. We calculate our gross retention rate by taking the dollar amount of annual contract value (ACV) that renews in a given period divided by the ACV that was up for renewal in that same period. The ACV of multi-year contracts is also considered in the calculation based on the period in which the annual anniversary of the contract falls. Our gross retention rate for the twelve months endedJuly 31, 2020 was 88%. As we continue to enhance our product and develop methods to encourage wider and more strategic adoptions, including focusing our sales and marketing activities towards enterprise customers, we expect that customer retention will increase over the long term; however, in fiscal 2021 we anticipate our customer retention will be negatively impacted by the current COVID-19 pandemic. Our ability to successfully upsell and the impact of cancellations may vary from period to period. The extent of this variability depends on a number of factors including the size and timing of upsells and cancellations relative to the initial subscriptions. Sales and Marketing Efficiency We are focused on increasing the efficiency of our sales force and marketing activities by enhancing account targeting, messaging, field sales operations and sales training in order to reduce our sales and marketing expense as a percentage of revenue and accelerate the adoption of our platform. Our sales strategy depends on our ability to continue to attract top talent, to increase our pipeline of business, and to enhance sales productivity. We focus on productivity per quota-carrying sales representative and the time it takes our sales representatives to reach full productivity. We manage our pipeline by sales representative to ensure sufficient coverage of our sales targets. Our ability to manage our sales productivity and pipeline are important factors to the success of our business. We have shifted marketing spending from broad-based initiatives to targeted account-based marketing campaigns and user events that we believe will result in contracts with larger companies which we expect will result in more upsell ACV potential. Sales and marketing expense as a percentage of total revenue has improved from 71% for the three months endedJuly 31, 2019 to 54% for the three months endedJuly 31, 2020 .Leverage Research and Development Investments for Future Growth We plan to continue to make investments in areas of our business to continue to expand our platform functionality. This may include investing in machine learning algorithms, predictive analytics, and other artificial intelligence technologies to create alerts, detect anomalies, optimize queries, and suggest areas of interest to help people focus on what matters most. These investments may also include extending the functionality and effectiveness of our platform through improvements to the Domo Appstore and developer toolkits, which enable customers and partners to quickly build and deploy custom applications. The amount of new investments required to achieve our plans is expected to decrease as a percentage of revenue compared to historical years. Research and development expense as a percentage of total revenue has improved from 41% for the three months endedJuly 31, 2019 to 31% for the three months endedJuly 31, 2020 . Key Business Metric Billings Billings represent our total revenue plus the change in deferred revenue in a period. Billings reflect sales to new customers plus subscription renewals and upsells to existing customers, and represent amounts invoiced for subscription, support and professional services. We typically invoice customers in advance in annual installments for subscriptions to our platform, but have recently seen an increase in semi-annual and quarterly billing terms. Because we generate most of our revenue from customerswho are invoiced on an annual basis and have a wide range of annual contract values, we may experience variability due to typical enterprise buying patterns and timing of large initial contracts, renewals and upsells. The following table sets forth our billings for the three and six months endedJuly 31, 2019 and 2020: Six Months Ended July Three Months Ended July 31, 31, 2019 2020 2019 2020 Billings (in thousands)$ 38,794 $ 47,641 $ 79,859 $ 94,178 30
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Components of Results of Operations
Revenue
We offer subscriptions to our cloud-based platform. We derive our revenue
primarily from subscriptions and professional services. Subscription revenue
consists primarily of fees to provide our customers access to
our cloud-based platform, which includes online customer support resources at no
additional cost. Professional service fees include implementation services,
optimization services, and training.
Subscription revenue is a function of the number of customers, platform tier,
and number of users at each customer, and the price per user. Subscription
revenue is recognized ratably over the related contractual term beginning on the
date the platform is made available to the customer. Our new business
subscriptions typically have a term of one to three years, and we generally
invoice our customers in annual installments at the beginning of each year in
the subscription period. Amounts that have been invoiced are initially recorded
as deferred revenue and are recognized ratably over the subscription period.
Professional services and other revenue primarily consists of implementation
services sold with new subscriptions, as well as professional services sold
separately, including training and education. Professional services are
generally billed in advance and revenue from these arrangements is recognized as
the services are performed. Our professional services engagements typically span
from a few weeks to several months.
Cost of Revenue
Cost of subscription revenue consists primarily of third-party hosting services
and data center capacity; salaries, benefits, bonuses and stock-based
compensation, or employee-related costs, directly associated with cloud
infrastructure and customer support personnel; amortization expense associated
with capitalized software development costs; depreciation expense associated
with computer equipment and software; certain fees paid to various third parties
for the use of their technology and services; and allocated overhead. Allocated
overhead includes items such as information technology infrastructure, rent, and
certain employee benefit costs.
Cost of professional services and other revenue consists primarily of
employee-related costs directly associated with these services, third-party
consultant fees, and allocated overhead.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist primarily of
employee-related costs directly associated with our sales and marketing staff
and commissions. Other sales and marketing costs include digital marketing
programs and promotional events to promote our brand, including Domopalooza, our
annual user conference, as well as tradeshows, advertising and allocated
overhead. Contract acquisition costs, including sales commissions, are deferred
and then amortized on a straight-line basis over the period of benefit, which we
have determined to be approximately four years for initial contracts. Contract
acquisition costs related to renewal contracts and professional services are
recorded as expense when incurred if the period of benefit is one year or less.
If the period of benefit is greater than one year, costs are deferred and then
amortized on a straight-line basis over the period of benefit, which the Company
has determined to be two years.
Research and Development. Research and development expenses consist primarily of
employee-related costs for the design and development of our platform,
contractor costs to supplement staff levels, third-party web services,
consulting services, and allocated overhead. Our cycle of frequent updates has
facilitated rapid innovation and the introduction of new product features
throughout our history. We capitalize certain software development costs that
are attributable to developing new features and adding incremental functionality
to our platform, and amortize such costs as costs of subscription revenue over
the estimated life of the new feature or incremental functionality, which is
generally three years.
General and Administrative. General and administrative expenses consist of
employee-related costs for executive, finance, legal, human resources,
recruiting and administrative personnel; professional fees for external legal,
accounting, recruiting and other consulting services; and allocated overhead
costs.
Other Expense, Net. Other expense, net consists primarily of interest expense
related to long-term debt and interest income earned on our cash, cash
equivalents and short-term investments. It also includes the effect of exchange
rates on foreign currency transaction gains and losses as well as foreign
currency gains and losses upon remeasurement of intercompany balances. The
transactional impacts of foreign currency are recorded as foreign currency
losses (gains) in the condensed consolidated statements of operations.
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Provision for Income Taxes. Provision for income taxes consists primarily of
income taxes related to foreign and state jurisdictions in which we conduct
business. Because of the uncertainty of the realization of the deferred tax
assets, we have a full valuation allowance for domestic net deferred tax assets,
including net operating loss carryforwards and tax credits related primarily to
research and development.
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Results of Operations
The following tables set forth selected condensed consolidated statements of
operations data and such data as a percentage of total revenue for each of the
periods indicated:
Six Months Ended
Three Months Ended July 31, July 31,
2019 2020 2019 2020
Revenue: (in thousands)
Subscription $
34,873
6,787 6,784 13,194 12,909 Total revenue 41,660 51,131 82,458 99,692 Cost of revenue: Subscription(1) 8,816 8,811 16,851 17,916 Professional services and other(1) 5,395 4,838 10,164 9,842 Total cost of revenue 14,211 13,649 27,015 27,758 Gross profit 27,449 37,482 55,443 71,934 Operating expenses: Sales and marketing(1) 29,501 27,384 65,450 56,480 Research and development(1) 17,046 15,917 34,145 33,370 General and administrative(1)(2)(3) 9,275 9,557 17,292 19,426 Total operating expenses 55,822 52,858 116,887 109,276 Loss from operations (28,373) (15,376) (61,444) (37,342) Other expense, net(1) (2,482) (2,417) (4,807) (5,141) Loss before income taxes (30,855) (17,793) (66,251) (42,483) Provision for income taxes 305 110 445 315 Net loss$ (31,160) $ (17,903) $ (66,696) $ (42,798) ________________
(1)Includes stock-based compensation expense as follows:
Six Months Ended July
Three Months Ended July 31, 31,
2019 2020 2019 2020
Cost of revenue: (in thousands)
Subscription $ 67 $ 147 $ 190 $ 373
Professional services and other 60 118 153 221
Sales and marketing 2,041 2,543 6,049 4,369
Research and development 1,294 2,002 3,359 3,879
General and administrative 1,182 2,323 2,420 4,720
Other expense, net 47 48 95 95
Total $ 4,691 $ 7,181 $ 12,266 $ 13,657
(2)Includes amortization of certain intangible assets of $20,000 and $20,000 for
the three months ended July 31, 2019 and 2020, respectively, and $40,000 and
$40,000 for the six months ended July 31, 2019 and 2020, respectively.
(3)Includes reversals of contingent tax-related accruals of $0 for the three
months ended July 31, 2019 and 2020 and $1.3 million and $0 for the six months
ended July 31, 2019 and 2020, respectively.
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Six Months Ended July
Three Months Ended July 31, 31,
2019 2020 2019 2020
Revenue:
Subscription 84 % 87 % 84 % 87 %
Professional services and other 16 13 16 13
Total revenue 100 100 100 100
Cost of revenue:
Subscription 21 17 20 18
Professional services and other 13 10 13 10
Total cost of revenue 34 27 33 28
Gross margin 66 73 67 72
Operating expenses:
Sales and marketing 71 54 79 57
Research and development 41 31 41 33
General and administrative 22 18 22 19
Total operating expenses 134 103 142 109
Loss from operations (68) (30) (75) (37)
Other expense, net (6) (5) (6) (5)
Loss before income taxes (74) (35) (81) (42)
Provision for income taxes 1 - 1 -
Net loss (75) % (35) % (82) % (42) %
Discussion of the Three Months Ended July 31, 2019 and 2020
Revenue
Three Months Ended July 31,
2019 2020 $ Change % Change
(in thousands)
Revenue:
Subscription $ 34,873 $ 44,347 $ 9,474 27 %
Professional services and other 6,787 6,784 (3) -
Total revenue $ 41,660 $ 51,131 $ 9,471 23
Percentage of revenue:
Subscription 84 % 87 %
Professional services and other 16 13
Total 100 % 100 %
Total revenue was $51.1 million for the three months ended July 31, 2020 ,
compared to $41.7 million for the three months ended July 31, 2019 , an increase
of $9.5 million , or 23%. Subscription revenue was $44.3 million , or 87% of total
revenue, for the three months ended July 31, 2020 , compared to $34.9 million , or
84% of total revenue, for the three months ended July 31, 2019 . The increase in
subscription revenue was primarily due to a $7.0 million increase from new
customers and a $2.5 million increase from existing customers. Our customer
count increased 4% from July 31, 2019 to July 31, 2020 .
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--------------------------------------------------------------------------------Cost of Revenue, Gross Profit and Gross Margin
Three Months Ended July 31,
2019 2020 $ Change % Change
(in thousands)
Cost of revenue:
Subscription $ 8,816 $ 8,811 $ (5) - %
Professional services and other 5,395 4,838 (557) (10)
Total cost of revenue $ 14,211 $ 13,649 $ (562) (4)
Gross profit $ 27,449 $ 37,482 $ 10,033 37
Gross margin:
Subscription 75 % 80 %
Professional services and other 21 29
Total gross margin 66 73
Cost of professional services and other revenue was $4.8 million for the three
months ended July 31, 2020 , compared to $5.4 million for the three months ended
July 31, 2019 , a decrease of $0.6 million , or 10%. This decrease is due to lower
employee-related costs and decreased usage of outsourced services.
Subscription gross margin improved due to cost improvements from continued
proactive management and optimization of our third-party hosting services.
Services gross margin improved due to higher utilization of internal client
services resources and timing of projects with higher margins.
We expect the gross margin for professional services to fluctuate from period to
period due to changes in the proportion of services provided by third-party
consultants, seasonality as well as timing of projects with higher margins.
Operating Expenses
Three Months Ended July 31,
2019 2020 $ Change % Change
(in thousands)
Operating expenses:
Sales and marketing $ 29,501 $ 27,384 $ (2,117) (7) %
Research and development 17,046 15,917 (1,129) (7)
General and administrative 9,275 9,557 282 3
Total operating expenses $ 55,822 $ 52,858 $ (2,964) (5)
Percentage of revenue:
Sales and marketing 71 % 54 %
Research and development 41 31
General and administrative 22 18
Sales and marketing expenses were $27.4 million for the three months ended
July 31, 2020 , compared to $29.5 million for the three months ended July 31,
2019 , a decrease of $2.1 million , or 7%. The change was primarily due to a $1.9
million decrease in employee-related costs, attributable to lower headcount.
Sales and marketing expense as a percentage of total revenue decreased from 71%
in the three months ended July 31, 2019 to 54% in the three months ended
July 31, 2020 . We expect sales and marketing expense to continue to decline as a
percentage of total revenue in the long term as we gain efficiencies in our
sales and marketing organization.
Research and development expenses were $15.9 million for the three months ended
July 31, 2020 , compared to $17.0 million for the three months ended July 31,
2019 , a decrease of $1.1 million , or 7%. The change was primarily due to a $1.0
million decrease in employee-related costs, attributable to lower headcount.
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Research and development expense as a percentage of revenue decreased from 41%
in the three months ended July 31, 2019 to 31% in the three months ended
July 31, 2020 . We expect research and development expense to continue to decline
as a percentage of total revenue in the long term as we leverage our research
and development organization.
General and administrative expenses were $9.6 million for the three months ended
July 31, 2020 , compared to $9.3 million for the three months ended July 31,
2019 , an increase of $0.3 million , or 3%. Employee-related costs increased by
$0.8 million primarily due to stock-based compensation associated with RSU
grants. This was partially offset by a $0.3 million decline in travel costs due
to restrictions related to COVID-19.
General and administrative expenses as a percent of revenue decreased from 22%
in the three months ended July 31, 2019 to 18% in the three months ended
July 31, 2020 . In the long term, we expect general and administrative expense to
decline as a percentage of total revenue as we leverage our general and
administrative organization; however, we expect general and administrative
expense to increase in absolute dollars due to additional costs associated with
operating as a public company including incremental costs for accounting, legal,
compliance, insurance, and investor relations.
Other Expense, Net
Three Months Ended July 31,
2019 2020 $ Change % Change
(in thousands)
Other expense, net $ (2,482) $ (2,417) $ 65 3 %
Other expense, net decreased by $0.1 million , or 3%. In the short term, we
expect interest expense to increase due to the outstanding balance under the
credit facility and interest income to decrease over time in conjunction with
the expected use of cash to fund our operations. Other expense, net also
includes foreign currency gains and losses resulting from market changes in
foreign currency exchange rates related to certain balances denominated in a
foreign currency. We expect foreign currency gains and losses could become more
pronounced as we continue to expand our foreign operations.
Provision for Income Taxes
Three Months Ended July 31,
2019 2020 $ Change % Change
(in thousands)
Provision for income taxes $ 305 $ 110 $ (195) (64) %
Provision for income taxes decreased by $0.2 million . In the long term, we
expect income tax expense to increase in conjunction with growth in our
international subsidiaries.
Discussion of the Six Months Ended July 31, 2019 and 2020
Revenue
Six Months Ended July 31,
2019 2020 $ Change % Change
(in thousands)
Revenue:
Subscription $ 69,264 $ 86,783 $ 17,519 25 %
Professional services and other 13,194 12,909 (285) (2)
Total revenue $ 82,458 $ 99,692 $ 17,234 21
Percentage of revenue:
Subscription 84 % 87 %
Professional services and other 16 13
Total 100 % 100 %
Total revenue was $99.7 million for the six months ended July 31, 2020 , compared
to $82.5 million for the six months ended July 31, 2019 , an increase of $17.2
million , or 21%. Subscription revenue was $86.8 million , or 87% of total
revenue,
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for the six months ended July 31, 2020 , compared to $69.3 million , or 84% of
total revenue, for the six months ended July 31, 2019 . The increase in
subscription revenue was primarily due to a $12.9 million increase from new
customers and a $4.6 million increase from existing customers. Our customer
count increased 4% from July 31, 2019 to July 31, 2020 .
Professional services and other revenue was $12.9 million , or 13% of total
revenue, for the six months ended July 31, 2020 , compared to $13.2 million , or
16% of total revenue, for the six months ended July 31, 2019 . This decrease is
due to lower training revenue.
Cost of Revenue, Gross Profit and Gross Margin
Six Months Ended July 31,
2019 2020 $ Change % Change
(in thousands)
Cost of revenue:
Subscription $ 16,851 $ 17,916 $ 1,065 6 %
Professional services and other 10,164 9,842 (322) (3)
Total cost of revenue $ 27,015 $ 27,758 $ 743 3
Gross profit $ 55,443 $ 71,934 $ 16,491 30
Gross margin:
Subscription 76 % 79 %
Professional services and other 23 24
Total gross margin 67 72
Cost of subscription revenue was $17.9 million for the six months ended July 31,
2020 , compared to $16.9 million for the six months ended July 31, 2019 , an
increase of $1.1 million , or 6%. The increase in cost of subscription revenue
was primarily due to higher third-party hosting services caused by increased
customer usage.
Cost of professional services and other revenue was $9.8 million for the six
months ended July 31, 2020 , compared to $10.2 million for the six months ended
July 31, 2019 , a decrease of $0.3 million , or 3%. This decrease is primarily due
to lower employee-related costs and decreased usage of outsourced services.
Subscription gross margin improved due to cost improvements from continued
proactive management and optimization of our third-party hosting services.
Services gross margin improved due to higher utilization of internal client
services resources.
Operating Expenses
Six Months Ended July 31,
2019 2020 $ Change % Change
(in thousands)
Operating expenses:
Sales and marketing $ 65,450 $ 56,480 $ (8,970) (14) %
Research and development 34,145 33,370 (775) (2)
General and administrative 17,292 19,426
2,134 12
Total operating expenses $ 116,887 $ 109,276 $ (7,611) (7)
Percentage of revenue:
Sales and marketing 79 % 57 %
Research and development 41 33
General and administrative 22 19
Sales and marketing expenses were $56.5 million for the six months ended July
31, 2020 , compared to $65.5 million for the six months ended July 31, 2019 , a
decrease of $9.0 million , or 14%. The change was primarily due to a $4.0 million
decrease in employee-related costs due to lower headcount. Marketing expenses
decreased by $3.5 million due to lower
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marketing event activity as a result of restrictions related to COVID-19.
Travel-related costs decreased by $2.1 million , also due to COVID-19
restrictions. Commission expense increased by $1.5 million due to higher sales
and contract labor decreased by $0.7 million due to reduced usage of marketing
contractors.
Sales and marketing expense as a percentage of total revenue decreased from 79%
in the six months ended July 31, 2019 to 57% in the six months ended July 31,
2020 .
Research and development expenses were $33.4 million for the six months ended
July 31, 2020 , compared to $34.1 million for the six months ended July 31, 2019 ,
a decrease of $0.8 million , or 2%. Employee-related costs decreased by $0.8
million due to lower headcount.
Research and development expense as a percentage of revenue decreased from 41%
in the six months ended July 31, 2019 to 33% in the six months ended July 31,
2020 .
General and administrative expenses were $19.4 million for the six months ended
July 31, 2020 , compared to $17.3 million for the six months ended July 31, 2019 ,
an increase of $2.1 million , or 12%. Employee-related costs increased by $3.4
million primarily due to stock-based compensation associated with RSU grants.
Travel-related expenses decreased by $0.5 million due to restrictions related to
COVID-19. Recruiting fees decreased by $0.5 million .
General and administrative expenses as a percent of revenue decreased from 22%
in the six months ended July 31, 2019 to 19% in the six months ended July 31,
2020 .
Other Income (Expense), Net
Six Months Ended July 31,
2019 2020 $ Change % Change
(in thousands)
Other expense, net $ (4,807) $ (5,141) $ (334) 7 %
Other expense, net increased by $0.3 million , or 7%. This is due to decreased
interest income of $1.5 million , offset by the impact of foreign currencies,
which decreased expense by $0.7 million . Interest expense related to the credit
facility decreased by $0.3 million .
Provision for Income Taxes
Six Months Ended July 31,
2019 2020 $ Change % Change
(in thousands)
Provision for income taxes $ 445 $ 315 $ (130) (29) %
Provision for income taxes decreased $0.1 million due to refunds received in the
six months ended July 31, 2020 .
Liquidity and Capital Resources
As of July 31, 2020 , we had $78.5 million of cash and cash equivalents and $4.9
million of short-term investments, which were held for working capital purposes.
Our cash, cash equivalents, and short-term investments consist primarily of
cash, money market funds, certificates of deposit, reverse repurchase
agreements, commercial paper, U.S. treasury securities, asset-backed securities,
and corporate debt securities. We also have a $100 million credit facility, all
of which had been drawn as of July 31, 2020 .
Since inception, we have financed operations primarily through the periodic sale
of convertible preferred stock, cash collected from customers for our
subscriptions and services, our IPO and to a lesser extent, debt financing. Our
principal uses of cash have consisted of employee-related costs, marketing
programs and events, payments related to hosting our cloud-based platform and
purchases of short-term investments.
We believe our existing cash and cash equivalents, together with our short-term
investments, will be sufficient to meet our projected operating requirements for
at least the next 12 months. We may need to raise additional funds to invest in
growth opportunities, product development, sales and marketing, and other
purposes. Our future capital requirements will depend on many factors, including
our growth rate; the level of investments we make in product development, sales
and
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marketing activities and other investments to support the growth of our
business; the continuing market acceptance of our platform; and customer
retention rates, and may increase materially from those currently planned. We
may seek to raise additional funds through equity or debt financings. If we
raise additional funds through the incurrence of indebtedness, such indebtedness
likely would have rights that are senior to holders of our equity securities and
could contain covenants that restrict operations in the same or similar manner
as our credit facility. Any additional equity financing likely would be dilutive
to existing stockholders. We cannot assure you that any additional financing
will be available to us on acceptable terms, or at all.
Although we are not currently a party to any agreement or letter of intent with
respect to potential investments in, or acquisitions of, complementary
businesses, services or technologies, we may enter into these types of
arrangements in the future, which could also require us to seek additional
equity financing, incur indebtedness, or use cash resources. We have no present
understandings, commitments or agreements to enter into any such acquisitions.
Credit Facility
The credit facility permits us to incur up to $100 million in term loan
borrowings, all of which had been drawn as of July 31, 2020 . The term loan
maturity date is October 1, 2022 with a closing fee of $7.0 million . Each term
loan requires that we pay only interest until the maturity date. A portion of
the interest that accrues on the outstanding principal of each term loan is
payable in cash on a monthly basis, which portion accrues at a floating rate
equal to the greater of (1) 7% and (2) three-month LIBOR plus 5.5% per year. As
of July 31, 2020 , the interest rate was approximately 7.0%. In addition, a
portion of the interest that accrues on the outstanding principal of each term
loan is capitalized and added to the principal amount of the outstanding term
loan on a monthly basis, which portion accrues at a fixed rate equal to 2.5% per
year.
The credit facility contains customary conditions to borrowing, events of
default and covenants, including covenants that restrict our ability to dispose
of assets, make material changes to the nature, control or location of our
business, merge with or acquire other entities, incur indebtedness or
encumbrances, make distributions to holders of our capital stock, make
investments or enter into transactions with affiliates. In addition, we are
required to comply with a financial covenant based on the ratio of our
outstanding indebtedness to our annualized recurring revenue. The maximum ratio
is 0.75 on January 31, 2020 and April 30, 2020 ; 0.70 on July 31, 2020 and
October 31, 2020 ; 0.65 on January 31, 2021 and April 30, 2021 ; and 0.60 on July
31, 2021 through the maturity date.
The credit facility defines our annualized recurring revenue as four times our
aggregate revenue for the immediately preceding quarter (net of recurring
discounts and discounts for periods greater than one year) less the annual
contract value of any customer contracts pursuant to which we were advised
during such quarter would not be renewed at the end of the current term plus the
annual contract value of existing customer contract increases during such
quarter. This covenant is measured quarterly on a three-month trailing basis.
Upon the occurrence of an event of default, such as non-compliance with
covenants, any outstanding principal, interest and fees become due immediately.
We were in compliance with the covenant terms of the credit facility at
January 31, 2020 and July 31, 2020 . The credit facility is secured by
substantially all of our assets.
In August 2020 , we entered into an amendment to the credit facility which
extended the maturity date for the outstanding loan to April 1, 2025 . The
amendment also added a minimum cash requirement of $10.0 million , revised the
maximum debt ratio financial covenant, and included an amendment fee of $5.0
million . The amendment fee, along with its accrued interest, is to be
capitalized and paid at the earlier of the payment date, maturity date, or the
date the loan becomes payable.
Historical Cash Flow Trends
Six Months Ended July 31,
2019 2020
(in thousands)
Net cash used in operating activities $ (45,422) $ (17,704)
Net cash (used in) provided by investing activities (38,621) 9,892
Net cash provided by financing activities 4,937 5,185
Operating Activities
Net cash used in operating activities is significantly influenced by the amount
of cash we invest in our personnel, timing and amounts we use to fund marketing
programs and events to expand our customer base, and the costs to provide our
cloud-
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based platform and related outsourced professional services to our customers.
These outflows are partially offset by the amount and timing of payments
received from our customers.
Net cash used in operating activities during the six months ended July 31, 2019
consisted of cash outflows of $144.4 million exceeding the $99.0 million of cash
collected from customers. Significant components of cash outflows included $75.3
million for personnel costs and $32.2 million for marketing programs and events,
third-party costs to provide our platform and outsourced professional services.
Net cash used in operating activities during the six months ended July 31, 2020
consisted of cash outflows of $127.0 million exceeding the $109.3 million of
cash collected from customers. Significant components of cash outflows included
$75.7 million for personnel costs and $26.1 million for marketing programs and
events, third-party costs to provide our platform and outsourced professional
services.
Investing Activities
Our investing activities have consisted primarily of purchases of short-term
investments and property and equipment purchases. Significant components of
purchased property and equipment include capitalized development costs related
to internal-use software and computer equipment and software for our data
center.
Net cash used in investing activities during the six months ended July 31, 2019
consisted primarily of $78.9 million of purchases of short-term investments,
offset by $43.5 million from maturities of short-term investments. The remaining
amount consisted of $2.9 million of capitalized development costs related to
internal-use software and $0.3 million of purchased property and equipment..
Net cash provided by investing activities during the six months ended July 31,
2020 consisted primarily of $24.3 million from maturities of short-term
investments, offset by $11.1 million of purchases of short-term investments. The
remaining amount consisted of $2.7 million of capitalized development costs
related to internal-use software and $0.5 million of purchased property and
equipment.
Financing Activities
Our financing activities have consisted primarily of proceeds from our IPO,
issuances of convertible preferred stock, proceeds from our credit facility and
to a lesser extent, proceeds received from stock option exercises.
Net cash provided by financing activities for the six months ended July 31, 2019
consisted primarily of $4.5 million of proceeds from shares issued in connection
with our employee stock purchase plan and $1.4 million of proceeds received from
stock option exercises, offset by $1.0 million used to repurchase shares for tax
withholdings on release of restricted stock.
Net cash provided by financing activities for the six months ended July 31, 2020
consisted primarily of $3.6 million of proceeds from shares issued in connection
with our employee stock purchase plan and $2.1 million of proceeds received from
stock option exercises, offset by $0.5 million used to repurchase shares for tax
withholdings on release of restricted stock.
Contractual Obligations and Commitments
Our principal commitments consist of long-term debt, obligations under operating
leases for office space, and non-cancelable contracts for cloud infrastructure
services. There have been no material changes in our contractual obligations and
commitments, as disclosed in our Annual Report on Form 10-K.
Off-Balance Sheet Arrangements
As of July 31, 2020 , we did not have any relationships with unconsolidated
entities or financial partnerships, such as entities often referred to as
structured finance or variable interest entities, which would have been
established for the purpose of facilitating off balance sheet arrangements or
other contractually narrow or limited purposes.
Critical Accounting Policies and Estimates
We prepare our condensed consolidated financial statements in accordance with
generally accepted accounting principles in the United States or GAAP. The
preparation of these condensed consolidated financial statements requires us to
make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenue, costs and expenses, and related disclosures. To the extent
that there are material differences between these estimates and actual results,
our financial condition or results of operations would be affected. We base our
estimates on past experience and other assumptions that we
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believe are reasonable under the circumstances, and we evaluate these estimates
on an ongoing basis. Critical accounting policies and estimates are those that
we consider critical to understanding our historical and future performance, as
these policies relate to the more significant areas involving management's
judgments and estimates.
There have been no material changes to our critical accounting policies and
estimates as previously disclosed in our Annual Report on Form 10-K with the
exception of our policy regarding leases. See "Note 2-Summary of Significant
Accounting Policies" of our condensed consolidated financial statements included
elsewhere in this Quarterly Report on Form 10-Q for more information regarding
our adoption of ASU No. 2016-02, Leases (Topic 842) as well as the Company's
other significant accounting policies.
JOBS Act Accounting Election
We are an emerging growth company, as defined in the Jumpstart Our Business
Startups Act of 2012, or the JOBS Act. Under the JOBS Act, emerging growth
companies can delay adopting new or revised accounting standards issued
subsequent to the enactment of the JOBS Act until such time as those standards
apply to private companies. We have elected to use this extended transition
period for complying with new or revised accounting standards that have
different effective dates for public and private companies until the earlier of
the date we (1) are no longer an emerging growth company or (2) affirmatively
and irrevocably opt out of the extended transition period provided in the
JOBS Act. As a result, our financial statements may not be comparable to
companies that comply with new or revised accounting pronouncements as of public
company effective dates.
Recent Accounting Pronouncements
See "Note 2-Summary of Significant Accounting Policies" of our condensed
consolidated financial statements included elsewhere in this Quarterly Report on
Form 10-Q for more information regarding recently issued accounting
pronouncements.
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