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The following discussion and analysis of our financial condition and results of operations together should be read in conjunction with our condensed consolidated financial statements and the related notes appearing elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year endedJanuary 31, 2021 , filed with theSEC onMarch 19, 2021 . You should review the sections titled "Special Note Regarding Forward-Looking Statements" above in this Quarterly Report on Form 10-Q for a discussion of forward-looking statements and important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Factors that could cause or contribute to such differences include, but are not limited to, impacts on our business and general economic conditions due to the current COVID-19 pandemic, those identified below, and those discussed in the section titled "Risk Factors" included in Part II, Item 1A below. The last day of our fiscal year isJanuary 31 . Our fiscal quarters end onApril 30 ,July 31 ,October 31 andJanuary 31 . OverviewPagerDuty is a digital operations management platform that empowers the right action, when seconds matter. Our platform, which includes our auto remediation software, is the best way to manage urgent, mission-critical work-and keep digital services always on. It sits at the center of a company's digital ecosystem ingesting signals and using machine learning and automation to automate real-time work, predict and avoid downtime. We enable teams to reduce outages, improve productivity and accelerate digital transformations. We collect data from virtually any software-enabled system or device and combine it with human response data, correlating and processing it to understand digital opportunities and issues that need to be addressed in real time. Using the world's broadest integrations, event management, automated remediation and diagnostics, and human driven runbook automation, we bring together the right people with the right information so they can resolve issues and act on opportunities in minutes and seconds, not hours, days or even weeks like legacy solutions. Since our founding in 2009, we have expanded our capabilities from a single product focused on on-call management for technical teams to one that serves many roles across the company, delivering a real-time source of truth to security, customer service, and executive stakeholders alike. We have grown from an on-call tool into a full digital operations management platform, spanning incident response, on-call management, business visibility, advanced analytics, and AI Ops capabilities across automation and event management to reduce the noise, interruptions and redundant tasks from our customer's lives. We have invested in developing the scalability, reliability, and security of our platform, allowing us to address the needs of even the largest and most demanding customers. We have spent years building deep product integrations to our platform, and our ecosystem now includes over 600 direct integrations to enable our customers to gather and correlate digital signals from virtually any software-enabled system or device. Those same integrations allow us to connect with popular collaboration tools and business applications, as well as all types of technology stacks to drive automation of work. Our platform is easy to adopt and scalable for businesses of all sizes. We generate revenue primarily from cloud-hosted subscription fees with the majority of our revenue from such arrangements. We also generate an immaterial amount of revenue from term license software subscription fees. We offer a three-tiered range of pricing plans aligned with our customers' needs and the sophistication of their digital operations. In addition, our Rundeck automation offering is available on a term license software subscription basis. We also offer a "freemium" plan for less than five users to introduce new users to the platform. We have a land-and-expand business model that leads to 27 -------------------------------------------------------------------------------- Table of Contents viral adoption of our products and subsequent expansion. Our online self-service model is the primary mechanism for landing new customers and enabling teams to get started without assistance. We complement our self-service model with high-velocity inside sales focused on small and medium businesses, a commercial team focused on mid-market customers, and a field sales team focused on enterprise customers. Our mid-market and enterprise customers account for the majority of our revenue today. These teams drive expansion to additional users, additional teams, and new use cases, as well as upsell premium functionality. COVID-19 Update InDecember 2019 , a novel coronavirus and the resulting disease ("COVID-19") was reported, and inJanuary 2020 , theWorld Health Organization characterized COVID-19 as a pandemic. The extent and continued impact of the COVID-19 pandemic on our business continues to depend on certain developments including the duration and spread of the pandemic; government responses to the pandemic; the widespread availability and distribution of vaccines; impact on our customers and our sales cycles; industry or employee events; and effect on our partners and vendors, all of which are uncertain and cannot be predicted. While our revenues, billings, and earnings are relatively predictable as a result of our subscription-based business model and the majority of our revenues are generated from annual subscriptions, the effect of the COVID-19 pandemic, along with the seasonality we historically experience, may not be fully reflected in our results of operations and overall financial performance until future periods, if at all. In addition, while the majority of our revenues are generated from annual subscriptions, we have seen, and may continue to see, greater variability in the demand of our product from small and medium business customers. While we see risks associated with more highly impacted companies and industries, we are also seeing new interest from other organizations, driven by rapidly changing work and business environments. As workforces have transitioned to working from home in a distributed model,PagerDuty has become an increasingly critical service. The majority of our employees continue to work remotely in order to minimize the spread of COVID-19 among our employee base and comply with local regulations withinthe United States and internationally. As we continue to monitor the local regulations related to COVID-19, we have begun to release travel restrictions on business-related travel, allowing certain employees to travel on a voluntary basis. We have also extended our paid time off and sick leave benefits for employees directly impacted by COVID-19 or caring for children or a member of their household impacted by COVID-19. In addition, we have provided allowances to our employees to cover expenses related to transitioning to a work from home environment. We also continue to offer local employee assistance programs to employees if needed. These changes remain in effect and could extend into future quarters. The impact, if any, of these and any additional operational changes we may implement to facilitate remote work 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. Since 2020, we have shifted to virtual-only events and experiences, including shifting Summit, our global customer conference series. We have typically relied on marketing and promotional events such as Summit and other in-person conferences, events, and meetings to facilitate customer sign-ups and generate leads for potential customers, and we cannot predict whether virtual marketing events and phone or virtual sales interactions will be as successful as in-person events and meetings or for how long, nor the extent to which the COVID-19 pandemic may continue to constrain our marketing, promotional, and sales activities. OnMarch 27, 2020 , the former President ofthe United States signed the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") which includes several significant provisions for corporations, including modifications to the limitation on business interest expense and the usage of net operating losses, and a payment deferral of employer payroll taxes. We elected to defer the payment of employer payroll taxes in the nine months endedOctober 31, 2020 . We are no longer deferring the payment of our employer payroll taxes. We have begun to pay the amounts deferred and will continue these payments during the fiscal years endingJanuary 31, 2022 and 2023. 28
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Table of Contents Refer to Section 1A, “Risk Factors†for a more in-depth discussion of the possible impact of the COVID-19 pandemic on our business.
29 -------------------------------------------------------------------------------- Table of Contents Key Business Metrics We review the following key business metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans, and make strategic decisions. While these numbers are based on what we believe to be a reasonable representation of our customer base for the applicable period of measurement, we rely on a third party to validate legal entities, which uses the best available data at period end, and therefore is subject to change as new information becomes available. In addition, we are continually seeking to improve our methodology, which may result in future changes to our key metrics. Our key metrics include the results of Rundeck, to the extent applicable, beginning on the acquisition date ofOctober 1, 2020 . Number of Customers We believe that the number of customers using our platform, particularly those that have subscription agreements for more than$100,000 in annual recurring revenue ("ARR"), are indicators of our market penetration, particularly within enterprise accounts, the growth of our business, and our potential future business opportunities. We define ARR as the annualized recurring value of all active contracts at the end of a reporting period. We define a customer as a separate legal entity, such as a company or an educational or government institution, that has an active subscription with us or one of our partners to access our platform. In situations where an organization has multiple subsidiaries or divisions, we treat the parent entity as the customer instead of treating each subsidiary or division as a separate customer. Increasing awareness of our platform and its broad range of capabilities, coupled with the fact that the world is always on and powered by increasingly complex technology, has expanded the diversity of our customer base to include organizations of all sizes across virtually all industries. Over time, enterprise and mid-market customers have constituted a greater share of our revenue. As of October 31, 2021 2020 Customers 14,486 13,725 Customers greater than$100,000 in ARR 543401 Dollar -based Net Retention Rate We use dollar-based net retention rate to evaluate the long-term value of our customer relationships, since this metric reflects our ability to retain and expand the ARR from our existing customers. Our dollar-based net retention rate compares our ARR from the same set of customers across comparable periods. We calculate dollar-based net retention rate as of a period end by starting with the ARR from the cohort of all customers as of 12 months prior to such period end, or Prior Period ARR. We then calculate the ARR from these same customers as of the current period end, or Current Period ARR. Current Period ARR includes any expansion and is net of downgrades or churn over the last 12 months but excludes ARR from new customers in the current period. We then divide the total Current Period ARR by the total Prior Period ARR to arrive at the dollar-based net retention rate. The calculation of dollar-based net retention rate includes the Current Period ARR of Rundeck customers to the extent that they werePagerDuty customers as of 12 months prior to period end. Last 12
Ended months
2021 2020
Dollar-based net retention rate for all customers 124 % 119 %
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Components of Results of Operations
Revenue
We generate revenue primarily from cloud-hosted software subscription fees with
the majority of our revenue from such arrangements. We also generate an
immaterial amount of revenue from term license software subscription fees. Our
subscriptions are typically one year in duration but can range from monthly to
multi-year. Subscription revenue is driven primarily by the number of customers,
the number of users per customer, and the level of subscription purchased. We
generally invoice customers in advance in annual installments for subscriptions
to our software. For our cloud-hosted software subscriptions, we recognize
subscription revenue ratably over the term of the subscription period beginning
on the date we grant access to our platform, assuming that all other revenue
recognition criteria have been met. For our term-license software subscriptions,
we recognize license revenue upon delivery and software maintenance revenue
ratably, typically beginning on the start of the contractual term of the
arrangement.
Due to the low complexity of implementation and integration of our platform with
our customers' existing infrastructure, revenue from professional services has
been immaterial to date.
Cost of Revenue
Cost of revenue primarily consists of expenses related to providing our platform
to customers, including personnel expenses for operations and global support,
payments to our third-party cloud infrastructure providers for hosting our
software, payment processing fees, amortization of capitalized internal-use
software costs, amortization of acquired developed technology, and allocated
overhead costs for facilities, information technology, and other allocated
overhead costs. We will continue to invest additional resources in our platform
infrastructure and our customer support and success organizations to expand the
capability of our platform and ensure that our customers are realizing the full
benefit of our offerings. The level and timing of investment in these areas
could affect our cost of revenue in the future.
Gross Profit and Gross Margin
Gross profit represents revenue less cost of revenue. Gross margin is gross
profit expressed as a percentage of revenue. Our gross margin may fluctuate from
period to period as our revenue fluctuates, and as a result of the timing and
amount of investments to expand the capacity of our third-party cloud
infrastructure providers and our continued efforts to enhance our platform
support and customer success teams.
Operating Expenses
Our operating expenses consist of research and development, sales and marketing,
and general and administrative expenses. Personnel expenses are the most
significant component of operating expenses and consist of salaries, benefits,
bonuses, stock-based compensation expense, and sales commissions. Operating
expenses also include amortization of acquired intangible assets,
acquisition-related expenses, allocated overhead costs for facilities, shared IT
related expenses, including depreciation expense, and certain company-wide
events and functions.
Research and development
Research and development expenses consist primarily of personnel costs for our
engineering, product, and design teams. Additionally, research and development
expenses include contractor fees, depreciation of equipment used in research and
development activities, acquisition-related expenses, and allocated overhead
costs. We expect that our research and development expenses will increase in
dollar value as our business grows.
Sales and marketing
Sales and marketing expenses consist primarily of personnel costs, costs of
general marketing activities and promotional activities, travel related
expenses, amortization of acquired intangible assets, allocated overhead costs,
and bad debt expense. Sales commissions earned by our sales force that are
considered incremental and recoverable
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costs of obtaining a subscription with a customer are deferred and amortized on
a straight-line basis over the expected period of benefit, which we have
determined to be four years. We expect that our sales and marketing expenses
will increase in dollar value and continue to be our largest operating expense
for the foreseeable future as we expand our sales and marketing efforts.
General and administrative
General and administrative expenses consist primarily of personnel costs and
contractor fees for finance, legal, human resources, information technology, and
other administrative functions. In addition, general and administrative expenses
include non-personnel costs, such as legal, accounting, and other professional
fees, hardware and software costs, certain tax, license and insurance-related
expenses, acquisition-related expenses, and allocated overhead costs. We expect
that our general and administrative expenses will increase in dollar value as
our business grows. However, we expect that our general and administrative
expenses will decrease as a percentage of our revenue over the longer term as we
expect our investments to allow for improved efficiency for future growth in the
business.
Interest Income
Interest income consists of income earned on our cash and cash equivalents and
interest earned on our short-term investments which consist of U.S. Treasury
securities, commercial paper, corporate debt securities, and U.S. Government
agency securities.
Interest Expense
Interest expense consists primarily of contractual interest expense and
amortization of debt issuance costs on our 1.25% Convertible Senior Notes (the
"Notes") due 2025. Refer to Note 10, "Debt and Financing Arrangements" for
additional details.
Other (Expense) Income, Net
Other (expense) income, net primarily consists of accretion income and
amortization expense on our available-for-sale investments and foreign currency
transaction gains and losses.
(Provision for) Benefit from Income Taxes
(Provision for) benefit from income taxes consists primarily of income taxes in
certain foreign jurisdictions in which we conduct business. We maintain a full
valuation allowance on our net federal and state deferred tax assets as we have
concluded that it is more likely than not that the deferred tax assets will not
be realized. (Provision for) benefit from income taxes also includes the
deferred tax liability associated with acquired intangible assets from the
Company's acquisitions.
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Results of Operations
The following table sets forth our condensed consolidated statements of
operations data for the periods indicated:
Three Months Ended October 31, Nine Months Ended October 31,
2021 2020 2021 2020
(in thousands)
Revenue $ 71,760 $ 53,772 $ 202,887 $ 154,272
Cost of revenue(1) 12,039 7,685 34,433 21,285
Gross profit 59,721 46,087 168,454 132,987
Operating expenses:
Research and development(1) 24,554 16,156 68,062 46,705
Sales and marketing(1) 40,176 34,024 118,224 88,271
General and administrative(1) 19,808 17,746 56,680 45,899
Total operating expenses 84,538 67,926 242,966 180,875
Loss from operations (24,817) (21,839) (74,512) (47,888)
Interest income 705 974 2,306 3,375
Interest expense (1,350) (4,133) (4,045) (5,741)
Other expense, net (729) (449) (1,931) (861)
Loss before (provision for) benefit from
income taxes (26,191) (25,447) (78,182) (51,115)
(Provision for) benefit from income taxes (150) 4,839 (378) 4,360
Net loss $ (26,341) $ (20,608) $ (78,560) $ (46,755)
______________
(1) Includes stock-based compensation expense as follows:
Three Months Ended October 31, Nine Months Ended October 31,
2021 2020 2021 2020
(in thousands)
Cost of revenue $ 861 $
488 $ 2,560
Research and development
6,183 2,807 16,230 7,459 Sales and marketing 4,606 6,254 12,961 11,409 General and administrative 6,128 3,910 16,115 11,772 Total $ 17,778$ 13,459 $ 47,866 $ 31,735 33
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Table of contents The following table presents our condensed consolidated statements of earnings expressed as a percentage of sales:
Three Months Ended October 31, Nine Months Ended October 31,
2021 2020 2021 2020
Revenue 100 % 100 % 100 % 100 %
Cost of revenue 17 14 17 14
Gross profit 83 % 86 % 83 % 86 %
Operating expenses:
Research and development 34 30 34 30
Sales and marketing 56 63 58 57
General and administrative 28 33 28 30
Total operating expenses 118 126 120 117
Loss from operations (35) (41) (37) (31)
Interest income 1 2 1 2
Interest expense (2) (8) (2) (4)
Other expense, net (1) (1) (1) (1)
Loss before (provision for) benefit
from income taxes (36) (47) (39) (33)
(Provision for) benefit from income
taxes - 9 - 3
Net loss (37) % (38) % (39) % (30) %
__________
Note: Certain figures may not sum due to rounding.
Comparison of the Three Months Ended October 31, 2021 and 2020
Revenue
Three Months Ended October 31,
2021 2020 Change % Change
(dollars in thousands)
Revenue $ 71,760 $ 53,772 $ 17,988 33 %
Revenue increased by $18.0 million , or 33%, for the three months ended October
31, 2021 compared to the three months ended October 31, 2020 . The increase in
revenue was attributable to a combination of growth from both new and existing
customers, including customers from the Rundeck acquisition. Growth from
existing customers is attributable to both increases in the number of users and
upsell of additional products and services.
Cost of Revenue and Gross Margin
Three Months Ended October 31,
2021 2020 Change % Change
(dollars in thousands)
Cost of revenue $ 12,039 $ 7,685 $ 4,354 57 %
Gross margin 83 % 86 %
The cost of income has increased by
34 -------------------------------------------------------------------------------- Table of Contents$0.4 million in outside services, both of which are related to the support of the continued growth of the business and related infrastructure, and an increase of$0.2 million in other costs. Research and Development Three Months Ended October 31, 2021 2020 Change % Change (dollars in thousands) Research and development$ 24,554 $ 16,156 $ 8,398 52 % Percentage of revenue 34 % 30 % Research and development expenses increased by$8.4 million , or 52%, for the three months endedOctober 31, 2021 compared to the three months endedOctober 31, 2020 . The increase was primarily driven by an increase in personnel expenses of$6.8 million as a result of increased headcount to support our continued investment in our platform and a$0.9 million increase in costs to support the growth of the business and related infrastructure, which includes allocated overhead costs. Sales and Marketing Three Months Ended October 31, 2021 2020 Change % Change (dollars in thousands) Sales and marketing$ 40,176 $ 34,024 $ 6,152 18 % Percentage of revenue 56 % 63 % Sales and marketing expenses increased by$6.2 million , or 18%, for the three months endedOctober 31, 2021 compared to the three months endedOctober 31, 2020 . This increase was primarily due to an increase of$3.2 million in personnel expenses driven by headcount growth and amortization of deferred contract costs, partially offset by a one-time stock-based compensation charge due to the modification of certain option awards incurred in the third quarter of the prior fiscal year, an increase of$1.9 million in costs to support the business and related infrastructure which includes allocated overhead costs, an increase of$1.4 million in outside services due to a higher volume of activities to assist with the continued growth of the business, an increase of$0.4 million in travel and other program related costs as a result of increased travel due to reduced travel restrictions related to the COVID-19 pandemic, and an increase of$0.4 million in amortization of intangibles related to the acquisition of Rundeck. This was partially offset by a decrease in marketing expenses of$1.3 million primarily due to a change in timing of our annual Summit conference. General and Administrative Three Months Ended October 31, 2021 2020 Change % Change (dollars in thousands) General and administrative$ 19,808 $ 17,746 $ 2,062 12 % Percentage of revenue 28 % 33 % General and administrative expenses increased by$2.1 million , or 12%, for the three months endedOctober 31, 2021 compared to the three months endedOctober 31, 2020 . The increase was driven by an increase of$4.3 million in personnel expenses as a result of increased headcount and an increase of$0.4 million in travel and other program related costs as a result of increased travel due to reduced travel restrictions related to the COVID-19 pandemic. This was partially offset by a decrease in outside services of$1.8 million , the majority of which was due to transaction costs related to the Rundeck acquisition, and a decrease of$1.2 million in costs to support the business and related infrastructure which includes allocated overhead costs. 35 --------------------------------------------------------------------------------
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Interest Expense
Three Months Ended October 31,
2021 2020 Change % Change
(dollars in thousands)
Interest expense $ 1,350 $ 4,133 $ (2,783) (67) %
Interest expense decreased by
Three Months Ended October 31,
2021 2020 Change % Change
(dollars in thousands)
Interest income $ 705 $ 974 $ (269) (28) %
Other expense, net $ (729) $ (449) $ (280) 62 %
Interest income decreased by $0.3 million and other expense, net increased by
$0.3 million for the three months ended October 31, 2021 compared to the three
months ended October 31, 2020 , primarily due to lower interest rates on our
cash, cash equivalent and investment balances in the current year.
Comparison of the Nine Months Ended October 31, 2021 and 2020
Revenue
Nine Months Ended October 31,
2021 2020 Change % Change
(dollars in thousands)
Revenue $ 202,887 $ 154,272 $ 48,615 32 %
Revenue increased by $48.6 million , or 32%, for the nine months ended October
31, 2021 compared to the nine months ended October 31, 2020 . The increase in
revenue was attributable to a combination of growth from both new and existing
customers, including customers from the Rundeck acquisition. Growth from
existing customers is attributable to both increases in the number of users and
upsell of additional products and services.
Cost of Revenue and Gross Margin
Nine Months Ended October 31,
2021 2020 Change % Change
(dollars in thousands)
Cost of revenue $ 34,433 $ 21,285 $ 13,148 62 %
Gross margin 83 % 86 %
Cost of revenue increased by $13.1 million , or 62% for the nine months ended
October 31, 2021 compared to the nine months ended October 31, 2020 . The
increase is primarily due to an increase of $7.4 million in personnel expenses
as a result of increased headcount, increases of $2.5 million in hosting,
software, and telecom costs and $1.3 million in outside services, both of which
are related to the support of the continued growth of the business and related
infrastructure, and an increase of $0.7 million in amortization of intangibles
related to the acquisition of Rundeck.
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Research and Development
Nine Months Ended October 31,
2021 2020 Change % Change
(dollars in thousands)
Research and development $ 68,062 $ 46,705 $ 21,357 46 %
Percentage of revenue 34 % 30 %
Research and development expenses increased by $21.4 million , or 46%, for the
nine months ended October 31, 2021 compared to the nine months ended October 31,
2020 . The increase was primarily driven by an increase in personnel expenses of
$17.6 million as a result of increased headcount to support our continued
investment in our platform, a $2.2 million increase in costs to support the
growth of the business and related infrastructure, which includes allocated
overhead costs, and an increase of $1.3 million in outside services due to a
higher volume of activities to assist with the continued growth of the business.
Sales and Marketing
Nine Months Ended October 31,
2021 2020 Change % Change
(dollars in thousands)
Sales and marketing $ 118,224 $ 88,271 $ 29,953 34 %
Percentage of revenue 58 % 57 %
Sales and marketing expenses increased by $30.0 million , or 34%, for the nine
months ended October 31, 2021 compared to the nine months ended October 31,
2020 . This increase was primarily due to an increase of $16.3 million in
personnel expenses driven by headcount growth and amortization of deferred
contract costs partially offset by a one-time stock-based compensation charge
due to the modification of certain option awards incurred in the third fiscal
quarter of the prior fiscal year, an increase in marketing expenses of $5.3
million due to increased volume of marketing and advertising activities, an
increase of $3.9 million in costs to support the business and related
infrastructure which includes allocated overhead costs, an increase of $3.5
million in outside services due to a higher volume of activities to assist with
the continued growth of the business, and an increase of $1.6 million in
amortization of intangibles related to the acquisition of Rundeck.
General and Administrative
Nine Months Ended October 31,
2021 2020 Change % Change
(dollars in thousands)
General and administrative $ 56,680 $ 45,899 $ 10,781 23 %
Percentage of revenue 28 % 30 %
General and administrative expenses increased by $10.8 million , or 23%, for the
nine months ended October 31, 2021 compared to the nine months ended October 31,
2020 . The increase was driven by an increase of $10.5 million in personnel
expenses as a result of increased headcount, an increase in outside services of
$1.9 million , the majority of which was due to non-recurring strategic
consulting fees, and an increase in insurance, business taxes and licenses of
$0.8 million due to a higher volume of activities to support the continued
growth of the business. This was partially offset by a decrease of $3.2 million
in costs to support the business and related infrastructure which includes
allocated overhead costs.
Interest Expense
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Nine Months Ended October 31,
2021 2020 Change % Change
(dollars in thousands)
Interest expense $ 4,045 $ 5,741 $ (1,696) (30) %
Interest expense decreased by $1.7 million for the nine months ended October 31,
2021 compared to the nine months ended October 31, 2020 , primarily due to the
adoption of ASU 2020-06. Refer to Note 2, "Summary of Significant Accounting
Policies" , for additional details.
Interest Income and Other (Expense) Income, Net
Nine Months Ended October 31,
2021 2020 Change % Change
(dollars in thousands)
Interest income $ 2,306 $ 3,375 $ (1,069) (32) %
Other expense, net $ (1,931) $ (861) $ (1,070) 124 %
Interest income decreased by $1.1 million and other expense, net increased by
$1.1 million for the nine months ended October 31, 2021 compared to the nine
months ended October 31, 2020 , primarily due to lower interest rates on our
cash, cash equivalent and investment balances in the current year.
Non-GAAP Financial Measures
In addition to our results determined in accordance with U.S. GAAP, we believe
the following non-GAAP financial measures are useful in evaluating our operating
performance. We use the below referenced non-GAAP financial information,
collectively, to evaluate our ongoing operations and for internal planning and
forecasting purposes. We believe that non-GAAP financial information, when taken
collectively, may be helpful to investors because it provides consistency and
comparability with past financial performance and assists in comparisons with
other companies, some of which use similar non-GAAP financial information to
supplement their U.S. GAAP results. The non-GAAP financial information is
presented for supplemental informational purposes only, should not be considered
a substitute for financial information presented in accordance with U.S. GAAP,
and may be different from similarly-titled non-GAAP measures used by other
companies. The principal limitation of these non-GAAP financial measures is that
they exclude significant expenses that are required by U.S. GAAP to be recorded
in our financial statements. In addition, they are subject to inherent
limitations as they reflect the exercise of judgment by our management about
which expenses are excluded or included in determining these non-GAAP financial
measures. A reconciliation is provided below for each non-GAAP financial measure
to the most directly comparable financial measure stated in accordance with U.S.
GAAP.
Non-GAAP Gross Profit and Non-GAAP Gross Margin
We define non-GAAP gross profit as gross profit adjusted for stock-based
compensation expense and related employer taxes, and amortization of acquired
intangible assets. We define non-GAAP gross margin as non-GAAP gross profit as a
percentage of revenue.
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Three Months Ended October 31, Nine Months Ended October 31,
2021 2020 2021 2020
(in thousands)
Gross profit $ 59,721 $ 46,087 $ 168,454 $ 132,987
Add:
Stock-based compensation 861 488 2,560 1,095
Employer taxes related to employee
stock transactions 22 14 78 23
Amortization of acquired intangible
assets 280 93 840 93
Non-GAAP gross profit $ 60,884 $ 46,682 $ 171,932 $ 134,198
Gross margin 83 % 86 % 83 % 86 %
Non-GAAP gross margin 85 % 87 % 85 % 87 %
Non-GAAP Operating Loss and Non-GAAP Operating Margin
We define non-GAAP operating loss as loss from operations plus our stock-based
compensation expense and related employer taxes, amortization of acquired
intangible assets, and acquisition-related expenses, which include transaction
costs and acquisition-related retention payments, which are not necessarily
reflective of operational performance during a given period. We define non-GAAP
operating margin as non-GAAP operating loss as a percentage of revenue.
Three Months Ended October 31, Nine Months Ended October 31,
2021 2020 2021 2020
(in thousands)
Loss from operations $ (24,817) $
(21 839)
Add: Stock-based compensation
17,778 13,459 47,866 31,735 Employer taxes related to employee stock transactions 695 383 2,086 787 Amortization of acquired intangible assets 875 292 2,625 292 Acquisition-related expenses 442 1,786 1,356 1,786 Non-GAAP operating loss$ (5,027) $
(5,919)
Operating margin (35) % (41) % (37) % (31) %
Non-GAAP operating margin (7) % (11) % (10) % (9) %
Non-GAAP Net Loss
We define non-GAAP net loss as net loss plus our stock-based compensation
expense and related employer taxes, amortization of debt issuance costs,
amortization of acquired intangible assets, acquisition-related expenses, which
include transaction costs and acquisition-related retention payments, which are
not necessarily reflective of operational performance during a given period, and
acquisition-related tax benefit.
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Three Months Ended October 31, Nine Months Ended October 31,
2021 2020 2021 2020
(in thousands)
Net loss $ (26,341) $
(20,608)
Add: Stock-based compensation
17,778 13,459 47,866 31,735 Amortization of debt discount and issuance costs (1) 452 3,235 1,350 4,493 Employer taxes related to employee stock transactions 695 383 2,086 787 Amortization of acquired intangibles assets 875 292 2,625 292 Acquisition-related expenses 442 1,786 1,356 1,786 Acquisition-related tax benefit - (5,058) - (5,058) Non-GAAP net loss $ (6,099)$ (6,511) $ (23,277) $ (12,720) (1) During the first quarter of fiscal 2022, we early adopted ASU 2020-06 which resulted in the elimination of amortization of debt discount on the convertible senior notes fromFebruary 1, 2021 . Free Cash Flow We define free cash flow as net cash (used in) provided by operating activities, less cash used for purchases of property and equipment and capitalized internal-use software costs. In addition to the reasons stated above, we believe that free cash flow is useful to investors as a liquidity measure because it measures our ability to generate or use cash in excess of our capital investments in property and equipment in order to enhance the strength of our balance sheet and further invest in our business and potential strategic initiatives. A limitation of the utility of free cash flow as a measure of our liquidity is that it does not represent the total increase or decrease in our cash balance for the period. We use free cash flow in conjunction with traditionalU.S. GAAP measures as part of our overall assessment of our liquidity, including the preparation of our annual operating budget and quarterly forecasts and to evaluate the effectiveness of our business strategies. Three Months Ended October 31, Nine Months Ended October 31, 2021 2020 2021 2020 (in thousands) Net cash provided by (used in) operating activities $ 2,650$ 4,844 $ (7,366) $ 6,706 Less: Purchases of property and equipment (85) (110) (1,376) (3,402) Capitalization of internal-use software costs (784) (217) (2,701) (328) Free cash flow $ 1,781$ 4,517 $ (11,443) $ 2,976 Net cash provided by (used in) investing activities $ 5,092 $
(45,488)
Net cash (used) provided by financing activities
$ (2,529) $
663
Liquidity and Capital Resources Since inception, we have financed operations primarily through sales of our cloud-hosted software subscriptions, net proceeds we have received from sales of equity securities, and the issuance of our Notes. OnApril 15, 2019 , upon the closing of our IPO, we received net proceeds of$213.7 million , after deducting underwriters' discounts and commissions of$16.6 million and other issuance costs of$6.4 million . OnJune 25, 2020 , we issued$287.5 million aggregate principal amount of convertible senior notes in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act. The total net 40 -------------------------------------------------------------------------------- Table of Contents proceeds from the sale of the Notes, after deducting the initial purchasers' discounts and debt issuance costs of$9.3 million , and purchases of the Capped Calls of$35.7 million , were$242.5 million . As ofOctober 31, 2021 , our principal sources of liquidity were cash and cash equivalents and investments totaling$545.3 million . We believe that our existing cash and cash equivalents, investments, and cash provided by sales of our subscriptions will be sufficient to support working capital and capital expenditure requirements for at least the next 12 months. Our future capital requirements will depend on many factors, including the effects of the COVID-19 pandemic, our subscription growth rate, subscription renewal activity, including the timing and the amount of cash received from customers, the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced product offerings, and the continuing market adoption of our platform. We may in the future enter into arrangements to acquire or invest in complementary businesses, services, and technologies. We may be required to seek additional equity or debt financing. In the event that we require additional financing, we may not be able to raise such financing on terms acceptable to us or at all. If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in continued innovation, we may not be able to compete successfully, which would harm our business, operations, and financial condition. A significant majority of our customers pay in advance for our cloud-hosted and term license software subscriptions. Therefore, a substantial source of our cash is from our deferred revenue, which is included in the liabilities section of our condensed consolidated balance sheet. Deferred revenue consists of the unearned portion of customer billings, which is recognized as revenue in accordance with our revenue recognition policy. As ofOctober 31, 2021 , we had deferred revenue of$142.9 million , of which$137.4 million was recorded as a current liability and expected to be recorded as revenue in the next 12 months, provided all other revenue recognition criteria have been met. Cash Flows The following table shows a summary of our cash flows for the periods presented: Nine Months Ended October 31, 2021 2020 (in thousands) Net cash (used in) provided by operating activities$ (7,366) $ 6,706 Net cash provided by (used in) investing activities$ 29,151 $ (45,963) Net cash (used in) provided by financing activities $
(1,213)
Operating Activities Our largest source of operating cash is cash collection from sales of our cloud-hosted and term license software subscriptions to our customers. Our primary uses of cash from operating activities are for personnel expenses, marketing expenses and hosting and software expenses. In the last several years, we have had periods in which we generated negative cash flows from operating activities and have supplemented working capital requirements through net proceeds from both private and public sales of equity securities and issuance of the Notes. Cash used in operating activities for the nine months endedOctober 31, 2021 of$7.4 million primarily related to our net loss of$78.6 million , adjusted for non-cash charges of$72.0 million and net cash outflows of$0.8 million due to changes in our operating assets and liabilities. Non-cash charges primarily consisted of stock-based compensation of$47.9 million , amortization of our deferred contract costs of$10.7 million , depreciation and amortization of property and equipment, capitalized implementation costs, and acquired intangible assets of$6.2 million , and non-cash lease expense of$3.3 million . Changes in operating assets and liabilities reflected cash outflows from a$16.8 million increase in deferred contract costs due to commissions paid on new bookings in line with revenue growth,$3.8 million in payments for operating lease liabilities, and a$0.9 million increase in prepaid expenses and other assets related to timing of payments made in advance for future services. These amounts were partially offset by cash inflows from a$12.9 million increase in deferred revenue resulting primarily from increased 41 -------------------------------------------------------------------------------- Table of Contents billings for subscriptions, a$3.8 million increase in accounts payable and accrued expenses and liabilities, and a$3.8 million increase in accrued compensation and related benefits. Cash provided by operating activities for the nine months endedOctober 31, 2020 of$6.7 million primarily related to our net loss of$46.8 million , adjusted for non-cash charges of$52.7 million and net cash inflows of$0.8 million due to changes in our operating assets and liabilities. Non-cash charges primarily consisted of stock-based compensation of$31.7 million , amortization of our deferred contract costs of$7.9 million , amortization of debt discount and issuance costs of$4.5 million , depreciation and amortization of property and equipment, capitalized implementation costs, and acquired intangible assets of$3.4 million , and non-cash lease expense of$3.3 million . Changes in operating assets and liabilities reflected cash inflows from an$12.5 million increase in deferred revenue resulting primarily from increased billings for subscriptions, a$7.7 million increase in accrued compensation and related benefits, and a$2.0 million increase in accounts payable and accrued expenses and other liabilities. This was partially offset by outflows from a$10.9 million increase in deferred contract costs due to commissions paid on new bookings in line with revenue growth, a$3.9 million increase in accounts receivable due to timing of cash collections, a$3.6 million increase in prepaid expenses and other assets related to timing of payments made in advance for future services, and$3.0 million in payments for operating lease liabilities. Investing Activities Cash provided by investing activities for the nine months endedOctober 31, 2021 of$29.2 million consisted of proceeds from sales and maturities of investments of$184.0 million , offset by purchases of available-for-sale investments of$150.6 million , capitalization of internal-use software of$2.7 million , and purchases of property and equipment of$1.4 million primarily for purchases of computers for new employees and to support office space for ourSan Francisco office. Cash used in investing activities for the nine months endedOctober 31, 2020 of$46.0 million consisted of purchases of available-for-sale investments of$153.3 million , net cash paid for the Rundeck acquisition of$49.7 million , and purchases of property and equipment of$3.4 million primarily to support additional office space for ourAtlanta office and purchases of computers for new employees. These payments were partially offset by proceeds from maturities and sales of investments of$160.7 million . Financing Activities Cash used in financing activities for the nine months endedOctober 31, 2021 of$1.2 million consisted of$18.6 million in employee payroll taxes paid related to vesting of restricted stock units, partially offset by proceeds of$12.5 million from the exercise of stock options and proceeds from the ESPP of$4.9 million . Cash provided by financing activities for the nine months endedOctober 31, 2020 of$251.9 million consisted primarily of net proceeds of$278.7 million related to the issuance of the Notes, proceeds of$9.7 million from the exercise of stock options, and proceeds from the ESPP of$3.6 million . This was partially offset by purchases of the Capped Calls of$35.7 million . Contractual Obligations and Commitments There were no material changes during the nine months endedOctober 31, 2021 to our contractual obligations and other commitments, as disclosed in the Annual Report on Form 10-K for the fiscal year endedJanuary 31, 2021 , filed with theSEC onMarch 19, 2021 . For further information on our commitments and contingencies, refer to Note 11, "Commitments and Contingencies" in the condensed consolidated financial statements contained within this Quarterly Report on Form 10-Q. Indemnification Agreements In the ordinary course of business, we may agree to indemnify customers, vendors, lessors, business partners, and other parties with respect to certain matters, including, but not limited to, losses arising out of the breach of such agreements, services to be provided by us, or from intellectual property infringement claims made by third parties. 42 -------------------------------------------------------------------------------- Table of Contents As permitted underDelaware law, we have entered into indemnification agreements with our directors and certain officers and employees that will require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers, or employees. No demands have been made upon us to provide indemnification under such agreements, and there are no claims that we are aware of that could have a material effect on our consolidated balance sheets, consolidated statements of operations and comprehensive loss, or consolidated statements of cash flows. Off-Balance Sheet Arrangements We do not currently have and, as ofOctober 31, 2021 or during the periods presented, did not have any off-balance sheet financing arrangements or any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities, that were 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 withU.S. GAAP. In the preparation of these condensed consolidated financial statements, we are required 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 believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We refer to accounting estimates of this type as critical accounting policies and estimates. Other than as set forth below, there have been no significant changes to our critical accounting policies described in our Annual Report on Form 10-K for the fiscal year endedJanuary 31, 2021 , filed with theSEC onMarch 19, 2021 , that had a material impact on our condensed consolidated financial statements and related notes. Stock-Based Compensation The Company recognizes compensation expense for all stock-based payment awards, including stock options, restricted stock units ("RSUs"), and performance stock units ("PSUs"), based on the estimated fair value of the award on the grant date. The Company estimates the fair value of stock options issued to employees on the date of grant using the Black-Scholes option pricing model, which is impacted by the estimated fair value of the Company's common stock, as well as certain assumptions including the expected volatility over the term of the option awards, the expected term of the awards, risk-free interest rates and the expected dividend yield. Assumptions and estimates used in the determination of the fair value of stock options are as follows: Expected volatility-Expected volatility is a measure of the amount by which the stock price is expected to fluctuate. Since the Company does not have sufficient trading history for its common stock, it estimates the expected volatility of its stock options by taking the average historical volatility of a group of comparable publicly traded companies over a period equal to the expected life of the options. Expected term-The Company determines the expected term based on the average period the stock options are expected to remain outstanding, generally calculated as the midpoint of the stock options' vesting term and contractual expiration period, as the Company does not have sufficient historical information to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior. Risk-free rate-The Company uses theU.S. Treasury yield for its risk-free interest rate that corresponds with the expected term. Expected dividend yield-The Company utilizes a dividend yield of zero, as it does not currently issue dividends and does not expect to in the future. The Company estimates the fair value of RSUs and PSUs at our stock price on the grant date. 43 -------------------------------------------------------------------------------- Table of Contents The Company estimates the fair value of shares to be issued under the ESPP on the first day of the offering period using the Black-Scholes valuation model, which is impacted by the estimated fair value of the Company's common stock, as well as certain assumptions including the expected volatility over the term of the offering period, the expected term of the awards, risk-free interest rates and the expected dividend yield. Assumptions used in the determination of the fair value of the ESPP are the same as those used in the determination of the fair value of our stock options. The Company generally recognizes compensation expense for employee stock-based payment awards on a straight-line basis over the period during which an award recipient is required to provide services in exchange for the award (generally the vesting period of the award), with the exception of PSUs which are recognized using the accelerated attribution method and based on management's judgment around the probability of achievement of a performance condition. The Company accounts for forfeitures as they occur. The fair value of each non-employee stock option is estimated at the date of grant using the Black-Scholes option pricing model and is not remeasured over the vesting term. Assumptions used in valuing non-employee stock options are generally consistent with those used for employee stock options with the exception that the expected term is over the contractual life. Recent Accounting Pronouncements For further information on our recently adopted accounting pronouncements, refer to Note 2, "Summary of Significant Accounting Policies" in the condensed consolidated financial statements contained within this Quarterly Report on Form 10-Q. Item 3. Quantitative and Qualitative Disclosures about Market Risk There have been no material changes in our market risk as compared to the disclosures in Part II, Item 7A in our Annual Report on Form 10-K for the year endedJanuary 31, 2021 , filed with theSEC onMarch 19, 2021 . 44
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