What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-06-04 compared with 2020-12-04 · 116 added, 218 removed, 264 unchanged (56% of the section changed)

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Our fiscal year ends January 31.

Executive Overview of Third Quarter Results

Executive Overview of First Quarter Results

DocuSign accelerates the process of doing business for companies and simplifies life for their customers and employees.

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As a result, over 980,000 customers and hundreds of millions of users worldwide utilize DocuSign to create, upload and send documents for multiple parties to sign electronically.

The DocuSign Agreement Cloud allows users to complete approvals, agreements and transactions faster by

building end-to-end processes.

The DocuSign Agreement Cloud allows users to complete approvals, agreements and transactions faster by building end-to-end processes.

DocuSign eSignature integrates with popular business apps, and our functionality can also be embedded using our API.

Finally, the DocuSign Agreement Cloud allows our customers to automate and streamline their business-critical workflows to save time and money, while staying secure and legally compliant.

We offer access to our platform on a subscription basis with prices based on the functionality our customers require and the quantity of Envelopes provisioned.

We generally offer access to our platform on a subscription basis with prices based on the functionality our customers require and the quantity of Envelopes provisioned.

Similar to the physical envelopes historically used to mail paper documents, an Envelope is a digital container used to send one or more documents for signature or approval to one or more recipients.

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To drive customer reach and adoption, we also offer for free certain limited-time or feature-constrained versions of our platform.

We generate substantially all our revenue from sales of subscriptions, which accounted for 96% and 95% of our revenue in the three months ended October 31, 2020 and 2019.

Sales of subscriptions accounted for 95% and 94% of our revenue in the nine months ended October 31, 2020 and 2019.

We generate substantially all our revenue from sales of subscriptions, which accounted for 96% and 95% of our revenue in the three months ended April 30, 2021 and 2020.

Our subscription fees include the use of our software suite and access to customer support.

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Other revenue includes amounts derived from sales of on-premises solutions.

Professional services and other revenue accounted for 4% and 5% of our revenue in the three months ended October 31, 2020 and 2019.

It accounted for 5% and 6% of our revenue in the nine months ended October 31, 2020 and 2019.

We anticipate continuing to invest in customer success through our professional services offerings as we believe it plays an important role in accelerating our customers’ deployment of our software suite, which helps to drive customer retention and expansion of the use of the DocuSign Agreement Cloud.

Professional services and other revenue accounted for the remainder of total revenue in the three months ended April 30, 2021 and 2020.

We anticipate continuing to invest in customer success through our professional services offerings as we believe it plays an important role in accelerating our customers’ deployment of our software suite, which helps drive customer retention and expansion of the use of the DocuSign Agreement Cloud.

We offer subscriptions to our software suite to enterprise businesses, commercial businesses and very small businesses (“VSBs”), which we define as companies with fewer than 10 employees and includes professionals, sole proprietorships and individuals.

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We focused initially on selling our e-signature solutions to commercial businesses and VSBs, and later expanded our focus to target enterprise customers.

To demonstrate this growth over time, the number of our customers with greater than $300,000 in annual contract value (measured in billings) has increased from approximately 30 customers as of January 31, 2013 to 542 customers as of October 31, 2020.

Each of our customer types has a different purchasing pattern.

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COVID-19 Update

The COVID-19 pandemic has spread across the world and is particularly prevalent in the U.S., where we are headquartered and the majority of our workforce is located.

The COVID-19 pandemic has spread across the world including the United States , where we are headquartered and the majority of our workforce is located.

The pandemic and the public health measures taken in response to it have adversely affected workforces, organizations, customers, economies, and financial markets globally, leading to an economic downturn and increased market volatility.

We are continuing to monitor the actual and potential effects of the pandemic across our business.

Because these effects are dependent on highly uncertain future developments — including the duration, spread and severity of the outbreak, the actions taken to contain the virus, and how quickly and to what extent normal economic and operating conditions can resume — they are extremely difficult to predict.

Because these effects are dependent on highly uncertain future developments — including the duration, spread and severity of the pandemic, the actions taken to contain the virus, the distribution of vaccines, and how quickly and to what extent normal economic and operating conditions can or will resume — they are extremely difficult to predict.

While our revenue, billings and earnings are relatively predictable as a result of our subscription-based business model, the effects of the COVID-19 pandemic may not be fully reflected in our results of operations until future periods.

Since mid-March, we have taken a number of precautionary measures to ensure the health and safety of our employees, partners and customers.

DocuSign shifted to a largely remote work environment, providing nearly all employees the opportunity to work from home through at least May 31, 2021.

We suspended all business travel other than for essential

Since March 2020, we have taken a number of precautionary measures to ensure the health and safety of our employees, partners and customers.

DocuSign has shifted to a largely remote work environment, providing nearly all employees the opportunity to work from home until at least October 4, 2021.

We have suspended all business travel other than for essential functions.

We have cancelled or replaced planned events, such as our Momentum conferences, with virtual-only experiences.

We have incurred expenses to support our employees working from home, including reimbursements for home office equipment and a stipend for other qualifying expenses, as well as expenses associated with planning and risk mitigation for potential reopenings of our offices, and may incur similar expenses in the future.

We have incurred expenses to support our employees working from home, including reimbursements for home office equipment and a stipend for other qualifying expenses, as well as expenses associated with planning and risk mitigation for potential and actual reopening of our offices, and may incur similar expenses in the future.

The impact of these and any other operational changes we may implement is uncertain, but as of the date of this filing they have not materially affected our ability to maintain operations.

We have experienced a substantial increase in overall demand for our solutions, particularly DocuSign eSignature, as the shift to remote, web-enabled business operations has caused more organizations to adopt or expand their use of digital agreements.

This has resulted in a significant increase in customer spending across almost all industries and regions we serve, though we have experienced slower growth or declining spending in certain industries most impacted by the pandemic, such as travel and hospitality.

As the pandemic continues, however, we may experience volatility in customer demand;

increased customer churn;

increases in late payment or non-payment by customers;

delayed purchasing decisions;

and increased pressure on pricing, discounts and payment terms, any of which could materially harm our business, results of operations and overall financial performance.

See the section below titled “Risk Factors” for further discussion of the potential impact of the COVID-19 pandemic on our business, financial condition and results of operations.

Financial Results:

Three Months Ended October 31, Nine Months Ended October 31,

We have experienced a substantial increase in overall demand for our products, particularly DocuSign eSignature, as the shift to remote, digital business operations has caused more organizations to adopt or expand their use of digital agreements.

This acceleration of the digital transformation of agreements has resulted in growth in our customer base and a significant increase in customer spending across almost all industries and regions we serve.

We believe that businesses that have shifted to digital agreement processes will not return to manual ones.

However, if our expectations are incorrect, and if demand for our products decreases as the COVID-19 pandemic lessens in severity and businesses resume in-person operations, our business could suffer.

See the section below titled “ Risk Factors ” for further discussion of the potential impact of the COVID-19 pandemic, including the conclusion or tapering of the pandemic, on our business, financial condition and results of operations.

Financial Results for the Three Months Ended April 30, 2021 and 2020

Three Months Ended April 30,

(in thousands) 2021 2020

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Purchases of property and equipment (12,596) (26,389)

Cash, cash equivalents, restricted cash and investments were $675.6 million as of October 31, 2020 .

Cash, cash equivalents, restricted cash and investments were $875.8 million as of April 30, 2021 .

Key Factors Affecting Our Performance

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We have invested, and expect to continue to invest, heavily in our sales and marketing efforts to drive customer acquisition.

As of October 31, 2020, we had a total of over 820,000 customers, including over 110,000 enterprise and commercial customers, comp ared to over 560,000 customers and over 65,000 enterprise and commercial customers as of October 31, 2019.

As of April 30, 2021, we had a total of over 980,000 customers, including over 135,000 enterprise and commercial customers, comp ared to over 660,000 customers and over 85,000 enterprise and commercial customers as of April 30, 2020.

We define a customer as a separate and distinct buying entity, such as a company, an educational or government institution, or a distinct business unit of a large company that has an active contract to access our software suite.

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Increasing International Revenue

Our international revenue in the three months ended October 31, 2020 increased by 77% from the three months ended October 31, 2019 and represented 20% and 17% of our total revenue in the three months ended October 31, 2020 and 2019.

Our international revenue in the nine months ended October 31, 2020 increased by 61% from the nine months ended October 31, 2019 and represented 19% and 18% of our total revenue in the nine months ended October 31, 2020 and 2019.

Our international revenue represented 21% and 18% of our total revenue in the three months ended April 30, 2021 and 2020.

We started our international selling efforts in English-speaking common law countries, such as Canada, the United Kingdom and Australia, where we were able to leverage our core technologies due to similar approaches to e-signature in these jurisdictions and the United States (“U.S.”).

We have since made significant investments to be able to offer our solutions in select civil law countries.

For example, in Europe, we have Standards-Based Signature technology tailored for electronic IDentification, Authentication and trust Services (“eIDAS”).

Standards-Based Signatures support signatures that involve digital certificates, including those specified in the European Union’s (“EU”) eIDAS regulations for advanced and qualified electronic signatures.

We have since made significant investments to be able to offer our products in select civil law countries.

For example, in Europe, we have Standards-Based Signature (“SBS”) technology tailored for electronic IDentification, Authentication and trust Services (“eIDAS”).

SBS supports signatures that involve digital certificates, including those specified in the European Union’s (“EU”) eIDAS regulations for advanced and qualified electronic signatures.

In addition, to follow longstanding tradition in Japan, we enable signers to upload and apply their personal eHanko stamp to represent their signatures on an agreement.

We plan to increase our international revenue by leveraging and continuing to expand the investments we have already made in our technology, direct sales force and strategic partnerships, as well as helping existing U.S.-based customers manage agreements across their international businesses.

Additionally, we expect our strategic partnerships in key international markets to further grow.

We have experienced increased demand in Latin America and are expanding our sales and marketing resources to capitalize on the potential growth of these markets.

Additionally, we expect to continue to develop and enhance our strategic partnerships in key international markets as we grow internationally.

Investing for Growth

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We also plan to continue to invest in expanding the functionality of our software suite and underlying infrastructure and technology to meet the needs of our customers across industries.

Our recent acquisitions of Seal Software and Liveoak Technologies, intended to bring additional functionality to our DocuSign Agreement Cloud and further expand our eNotary offerings, as well as the continuous development of new features internally, are examples of our commitment to investing for ongoing growth.

Our acquisitions of Seal Software and Liveoak Technologies, intended to bring additional functionality to our DocuSign Agreement Cloud and further expand our eNotary offerings, as well as the continuous development of new features internally, are examples of our commitment to investing for ongoing growth.

Components of Results of Operations

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Cost of Revenue

Cost of Subscription Revenue.

Cost of subscription revenue primarily consists of expenses related to hosting our software suite and providing support.

These expenses consist of employee-related costs, including salaries, bonuses, benefits, stock-based compensation and other related costs, as well as personnel costs for employees associated with our technical infrastructure, customer success and customer support.

Cost of Subscription Revenue Cost of subscription revenue primarily consists of expenses related to hosting our software suite and providing support.

These expenses consist of employee-related costs, including salaries, bonuses, benefits, stock-based compensation and other related costs, associated with our technical infrastructure, customer success and customer support.

These expenses also consist of software and maintenance costs, third-party hosting fees, outside services associated with the delivery of our subscription services, amortization expense associated with capitalized internal-use software and acquired intangible assets, credit card processing fees and allocated overhead costs.

Cost of Professional Services and Other Revenue.

Cost of professional services and other revenue consists primarily of personnel costs for our professional services delivery team, travel-related costs and allocated overhead costs.

We expect our cost of revenue to continue to increase in absolute dollar amounts as we invest in our business.

Cost of Professional Services and Other Revenue Cost of professional services and other revenue consists primarily of personnel costs for our professional services delivery team, travel-related costs and allocated overhead costs.

Gross Profit and Gross Margin

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We expect selling and marketing expense to continue to increase in absolute dollars as we enhance our product offerings and implement marketing strategies.

Research and Development Expense.

Research and development expense consists primarily of personnel costs.

Research and Development Expense Research and development expense consists primarily of personnel costs.

These expenses also include non-personnel costs, such as subcontracting, consulting and professional fees for third-party development resources, as well as allocated overhead costs.

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We expect research and development expense to increase in absolute dollars as we invest in the enhancement of our software suite.

General and Administrative Expense.

General and administrative expense consists primarily of employee-related costs for those employees providing administrative services such as legal, human resources, information technology related to internal systems, accounting and finance.

General and Administrative Expense General and administrative expense consists primarily of employee-related costs for those employees providing administrative services such as legal, human resources, information technology related to internal systems, accounting and finance.

These expenses also include certain third-party consulting services, certain facilities costs and allocated overhead costs.

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Interest expense consists primarily of contractual interest expense, amortization of discount and amortization of debt issuance costs on our Convertible Senior Notes (the “ Notes”).

Interest Income and Other Income (Expense), Net

Interest income and other income (expense), net , consists primarily of interest earned on our cash, cash equivalents and investments, as well as foreign currency transaction gains and losses.

Interest income and other income, net

Interest income and other income, net , consists primarily of interest earned on our cash, cash equivalents and investments, changes in fair value of our strategic investments and foreign currency transaction gains and losses.

Provision for income taxes

Our provision for income taxes consists primarily of income taxes in certain foreign jurisdictions where we conduct business, and tax benefits arising from deductions for stock options.

Our provision for income taxes consists primarily of income taxes in certain foreign jurisdictions where we conduct business, and tax benefits arising from deductions for stock-based compensation.

We have a valuation allowance against our U.S.

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The following table summarizes our historical consolidated statements of operations data:

Three Months Ended October 31, Nine Months Ended October 31,

(in thousands) 2020 2019 2020 2019

Subscription $ 366,617 $ 238,072 $ 971,182 $ 660,341

Professional services and other 16,306 11,430 50,967 38,735

Total revenue 382,923 249,502 1,022,149 699,076

Cost of revenue:

Subscription 69,905 43,178 186,645 115,769

Professional services and other 27,926 18,786 75,833 59,390

Total cost of revenue 97,831 61,964 262,478 175,159

Gross profit 285,092 187,538 759,671 523,917

Operating expenses:

Sales and marketing 209,944 149,231 576,729 430,053

Research and development 73,362 48,758 191,387 133,458

General and administrative 50,256 33,546 140,513 111,562

Total operating expenses 333,562 231,535 908,629 675,073

Loss from operations (48,470) (43,997) (148,958) (151,156)

Interest expense (7,769) (7,364) (23,013) (21,793)

Interest income and other income (expense), net (311) 5,801 6,032 15,549

Loss before provision for income taxes (56,550) (45,560) (165,939) (157,400)

Provision for income taxes 1,941 1,038 4,916 3,552

Net loss $ (58,491) $ (46,598) $ (170,855) $ (160,952)

The following table sets forth the components of our consolidated statements of operations data as a percentage of revenue:

Three Months Ended October 31, Nine Months Ended October 31,

(in thousands) 2020 2019 2020 2019

Three Months Ended April 30,

(in thousands) 2021 As % of revenue 2020 As % of revenue

Subscription $ 451,935 96 % $ 280,922 95 %

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Interest expense (1,672) — (7,560) (3)

Interest income and other income (expense), net — 3 1 2

Interest income and other income, net 6,037 1 3,742 2

Loss before provision for income taxes (6,372) (1) (45,671) (15)

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Net loss $ (8,354) (2) % $ (47,804) (16) %

The following discussion and analysis is for the three and nine months ended October 31, 2020, compared to the same period in 2019.

Three Months Ended October 31, 2020 versus 2019 Nine Months Ended October 31, 2020 versus 2019

The following discussion and analysis is for the three months ended April 30, 2021, compared to the same period in 2020, unless otherwise stated.

Three Months Ended April 30, 2021 versus 2020

(in thousands, except for percentages) 2021 2020

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Total revenue $ 469,078 $ 297,017 58 %

Subscription Revenue

Subscription revenue increased by $128.5 million, or 54%, in the three months ended October 31, 2020, and by $310.8 million, or 47%, in the nine months ended October 31, 2020, primarily driven by strong customer growth and the addition of Seal.

Subscription revenue increased by $171.0 million, or 61%, in the three months ended April 30, 2021.

Due to the COVID-19 pandemic, there has been a shift to remote digital business operations that has led to an increase in demand for our solutions.

This resulted in a higher growth in our customer base and a significant increase in customer spending across almost all industries and regions we serve.

We continue to invest in a variety of customer programs and initiatives, which, along with expanded customer use cases, have helped increase our subscription revenue over time.

We expect subscription revenue to continue to increase as we offer new functionality, attract new customers and fully realize the potential of our acquisitions in our product offerings.

Professional Services and Other Revenue

Professional services and other revenue increased by $4.9 million, or 43%, in the three months ended October 31, 2020, and by $12.2 million, or 32%, in the nine months ended October 31, 2020, primarily due to the addition of Seal and increased engagement of professional services to support our growing customer base.

We continue to monitor the COVID-19 pandemic in fiscal 2022 and its impact on the economy, the digital transformation of business and demand for our solutions.

Professional services and other revenue had a slight increase in the three months ended April 30, 2021.

Cost of Revenue and Gross Margin

Three Months Ended October 31, 2020 versus 2019 Nine Months Ended October 31, 2020 versus 2019

Three Months Ended April 30, 2021 versus 2020

(in thousands, except for percentages) 2021 2020

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Gross margin:

Subscription 81 % 82 % (1) pts 81 % 82 % (1) pts

Professional services and other (71) % (64) % (7) pts (49) % (53) % 4 pts

Total gross margin 74 % 75 % (1) pts 74 % 75 % (1) pts

Cost of Subscription Revenue

Cost of subscription revenue increased $26.7 million, or 62%, in the three months ended October 31, 2020, primarily due to:

▪ An increase of $10.8 million in operating costs to support our platform, including increases of $3.4 million in depreciation and amortization, $2.8 million in third-party partner costs, and $2.2 million in data center costs.

The increase in depreciation and amortization reflects the higher existing technology intangible assets from the acquisition of Seal, as well as higher data center equipment and capitalized software assets;

▪ Increases of $9.1 million in personnel costs and $2.2 million in stock-based compensation expense, primarily due to higher headcount, including the addition of Seal employees to our workforce, annual merit increases, and annual grants issued in the second quarter.

Cost of subscription revenue increased $70.9 million, or 61%, in the nine months ended October 31, 2020, primarily due to:

▪ An increase of $32.4 million in operating costs to support our platform, including increases of $10.7 million in subscription reseller fees, $7.2 million in data center costs and $7.2 million in depreciation and amortization, and $2.3 million increase in processing fees.

The increase in depreciation and amortization reflects the higher existing technology intangible assets from the acquisition of Seal, as well as higher data center and capitalized software assets;

▪ An increase of $22.8 million in personnel costs and $5.7 million in stock-based compensation expense primarily due to higher headcount, including the addition of Seal employees, and annual merit increases;

▪ An increase of $4.7 million in professional fees mainly in third-party technical support and customer services;

▪ An increase of $2.4 million in software and technology costs to support higher headcount.

Cost of Professional Services and Other Revenue

Cost of professional services and other revenue increased $9.1 million, or 49%, in the three months ended October 31, 2020, and $16.4 million, or 28%, in the nine months ended October 31, 2020, primarily due to an increase in personnel costs driven by higher headcount, annual merit increases and the addition of Seal employees to our workforce.

Subscription 83 % 81 % 2 pts

Professional services and other (58) % (37) % (21) pts

Total gross margin 78 % 75 % 3 pts

Cost of subscription revenue increased $26.1 million, or 50%, in the three months ended April 30, 2021, primarily driven by higher costs to support our growing customer base and the impact of the Seal acquisition.

Significant increases consisted of:

▪ $9.7 million in personnel costs and $2.2 million in stock-based compensation expense primarily due to higher headcount, including the addition of Seal employees, and annual merit increases;

▪ $6.2 million in operating costs to support our platform and the growth in our revenue, including increases in subscription reseller fees, hosting costs and authentication and processing fees;

▪ $5.3 million in depreciation and amortization, which reflects the impact of higher data center and capitalized software assets as well as the higher existing technology intangible assets from the Seal acquisition.

Cost of professional services and other revenue increased $5.1 million, or 23%, in the three months ended April 30, 2021, primarily due to an increase in personnel costs driven by higher headcount, including the addition of Seal employees to our workforce, and annual merit increases.

Sales and Marketing

Three Months Ended October 31, 2020 versus 2019 Nine Months Ended October 31, 2020 versus 2019

Three Months Ended April 30, 2021 versus 2020

(in thousands, except for percentages) 2021 2020

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Percentage of revenue 51 % 58 %

Sales and marketing expenses increased $60.7 million, or 41%, in the three months ended October 31, 2020, primarily due to:

▪ An increase of $32.4 million in personnel costs due to higher headcount, annual merit increases, the addition of Seal employees to our workforce and higher commissions in line with higher sales;

▪ An increase of $12.2 million in stock-based compensation expense due to higher headcount and annual merit grants issued in the second quarter;

▪ An increase of $11.4 million in marketing and advertising costs to support higher spend on online advertising platforms to capture the increase in demand;

▪ An increase of $4.6 million in allocated overhead due to higher technology and facility costs;

partially offset by

▪ A decrease of $4.9 million in travel expenses due to travel restrictions resulting from the COVID-19 pandemic.

Sales and marketing expenses increased $146.7 million, or 34%, in the nine months ended October 31, 2020, primarily due to:

▪ An increase of $93.2 million in personnel costs due to higher headcount, annual merit increases, the addition of Seal employees to our workforce and higher commissions in line with higher sales;

▪ An increase of $25.2 million in stock-based compensation expense due to higher headcount;

▪ An increase of $20.7 million in marketing and advertising expense, primarily due to higher spend on online advertising platforms to capture the increase in demand;

▪ An increase of $13.1 million in allocated overhead due to higher technology and facility costs;

▪ An increase of $5.0 million in depreciation and amortization due to the depreciation of additional fixed assets and the amortization of certain intangible assets acquired in the Seal and Liveoak acquisitions;

partially offset by

▪ A decrease of $13.9 million in travel expenses due to travel restrictions resulting from the COVID-19 pandemic.

Sales and marketing expenses increased $67.3 million, or 39%, in the three months ended April 30, 2021, primarily driven by investments in workforce and technology infrastructure to support the significant increase in demand due to the acceleration of the digital transformation of agreements.

Significant increases consisted of:

▪ $40.8 million in personnel costs and $13.5 million in stock-based compensation expense due to higher headcount, annual merit increases, the addition of Seal employees to our workforce, higher commissions in line with higher sales and higher taxes on employee stock transactions;

▪ $10.9 million in marketing and advertising expense, primarily due to higher spend on online advertising platforms to help capture the increased market interest in our product offering as a result of the shift to COVID-19 remote work environment.

Research and Development

Three Months Ended October 31, 2020 versus 2019 Nine Months Ended October 31, 2020 versus 2019

Three Months Ended April 30, 2021 versus 2020

(in thousands, except for percentages) 2021 2020

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Percentage of revenue 18 % 18 %

Research and development expenses increased $24.6 million, or 50%, in the three months ended October 31, 2020, primarily due to increases of $14.3 million in personnel costs and $7.2 million in stock-based compensation.

Research and development expenses increased $57.9 million, or 43%, in the nine months ended October 31, 2020, primarily due to increases of $38.9 million in personnel costs and $14.6 million in stock-based compensation expense.

The increases in both periods were primarily driven by higher headcount, annual merit increase and grants, and the addition of Seal and Liveoak employees to our workforce.

Research and development expenses increased $31.2 million, or 57%, in the three months ended April 30, 2021, primarily due to investments in workforce and technology infrastructure to support growth.

Personnel costs increased by $19.2 million and stock-based compensation by $8.6 million due to higher headcount, the addition of Seal and Liveoak employees to our workforce and annual merit increases.

General and Administrative

Three Months Ended October 31, 2020 versus 2019 Nine Months Ended October 31, 2020 versus 2019

Three Months Ended April 30, 2021 versus 2020

(in thousands, except for percentages) 2021 2020

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Percentage of revenue 11 % 13 %

General and administrative expenses increased $16.7 million, or 50%, in the three months ended October 31, 2020, primarily due to:

▪ Increases of $6.6 million in personnel costs and $4.1 million in stock-based compensation due to higher headcount, annual merit increases and grants, and the addition of Seal employees to our workforce;

▪ An increase of $2.6 million in professional fees due to higher legal and consulting fees.

General and administrative expenses increased $29.0 million, or 26%, in the nine months ended October 31, 2020, primarily due to:

▪ Increases of $15.0 million in personnel costs and $3.5 million in stock-based compensation due to higher headcount, annual merit increases and grants, and the addition of Seal employees to our workforce;

▪ An increase of $3.5 million in bad debt reserve related to the impact of the COVID-19 pandemic.

Interest Expense

Three Months Ended October 31, 2020 versus 2019 Nine Months Ended October 31, 2020 versus 2019

General and administrative expenses increased $11.2 million or 29%, in the three months ended April 30, 2021, primarily due to investments in workforce and technology infrastructure to support growth.

Personnel costs increased by $6.3 million and stock-based compensation by $2.0 million due to higher headcount and the impact of annual merit increases.

Other Income and Expense

Three Months Ended April 30, 2021 versus 2020

(in thousands, except for percentages) 2021 2020

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Percentage of revenue — % (3) %

Interest expense remained relatively flat in the three and nine months ended October 31, 2020 and primarily consisted of interest expense and amortization of discount and transaction costs on the Notes.

Interest Income and Other Income (Expense), Net

Three Months Ended October 31, 2020 versus 2019 Nine Months Ended October 31, 2020 versus 2019

(in thousands, except for percentages) 2020 2019 2020 2019

Interest income $ 1,126 3,381 (67) %

Foreign currency gain (loss) 266 (545) NM

Other (483) 669 NM (226) 4,060 NM

Interest income and other income (expense), net $ (311) $ 5,801 NM $ 6,032 $ 15,549 (61) %

Percentage of revenue — % 3 % 1 % 2 %

Interest income and other income (expense), net, decreased by $6.1 million and $9.5 million, in the three and nine months ended October 31, 2020, primarily due to lower interest income, losses on the revaluation of our foreign currency denominated monetary assets and liabilities, and amortization o n our marketable securities.

Provision for Income Taxes

Three Months Ended October 31, 2020 versus 2019 Nine Months Ended October 31, 2020 versus 2019

(in thousands, except for percentages) 2020 2019 2020 2019

Provision for income taxes $ 1,941 $ 1,038 87 % $ 4,916 $ 3,552 38 %

Fair value adjustments to strategic investments 5,119 — 100 %

Other (474) 906 NM

Interest income and other income, net $ 6,037 3,742 61 %

Percentage of revenue 1 % 2 %

Provision for income taxes increased by $0.9 million in the three months ended October 31, 2020 and increased by $1.4 million in the nine months ended October 31, 2020.

The provision consisted primarily of foreign tax expenses resulting from foreign earnings in certain foreign jurisdictions, partially offset by excess benefits from stock option settlements.

Interest expense decreased by $5.9 million in the three months ended April 30, 2021 primarily due to lower amortization expense under ASU 2020-06 effective February 1, 2021.

Interest income and other income, net, for the three months ended April 30, 2021 included $5.1 million adjustments to fair value of certain strategic investments resulting from observable price changes that occurred during the quarter.

Liquidity and Capital Resources

Our principal sources of liquidity were cash, cash equivalents and investments as well as cash generated from operations.

As of October 31, 2020, we had $598.6 million in cash and cash equivalents and short-term investments.

As of April 30, 2021, we had $780.6 million in cash and cash equivalents and short-term investments.

We also had $94.9 million in long-term investments that provide additional capital resources.

Since inception we have financed our operations primarily through equity financings and payments by our customers for use of our product offerings and related services.

In addition, in September 2018 we issued and sold $575.0 million in aggregate principal amount of 0.5% Convertible Senior Notes due 2023, which are further described in Note 9 of our condensed consolidated financial statements.

We finance our operations primarily through payments by our customers for use of our product offerings and related services and through debt financings.

In September 2018, we issued and sold $575.0 million in aggregate principal amount of 0.5% Convertible Senior Notes due 2023 ("2023 Notes").

In January 2021, we issued and sol d $690.0 million in aggregate principal amount of 0% Convertible Senior Notes due 2024 ("2024 Notes", and together with the 2023 Notes, the “Notes”).

A portion of the 2024 Notes proceeds was used to repurchase $460.0 million in aggregate principal amount of the 2023 Notes.

In January 2021 we entered into a $500.0 million credit facility, which may be increased by an additional $250.0 million subject to customary terms and conditions.

The credit facility is available until January 11, 2026 to optimize our capital structure and strengthen our balance sheet.

There were no outstanding borrowings under the credit facility as of April 30, 2021 .

Further details of these transactions are described in Note 7 to the Condensed Consolidated Financial Statements, included in Part I, Item 1 of this Form 10-Q.

We were in compliance with all debt covenants at April 30, 2021 .

We believe our existing cash, cash equivalents and marketable securities will be sufficient to meet our working capital and capital expenditures needs over at least the next 12 months.

While we have generated losses from operations in the past as reflected in our accumulated deficit of $1.3 billion as of October 31, 2020, we generated positive cash flows from operations of $234.7 million in the nine months ended October 31, 2020.

We expect to continue to incur operating losses for the foreseeable future due to the investments we intend to make and may require additional capital resources to execute strategic initiatives to grow our business.

While we have generated positive cash flows from operations in recent years, we have generated losses from operations in the past as reflected in our accumulated deficit of $1.4 billion as of April 30, 2021.

We may not achieve profitability in the foreseeable future due to the investments we intend to make and may require additional capital resources to execute strategic initiatives to grow our business.

We typically invoice our customers annually in advance.

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Accordingly, collections from our customers have a material impact on our cash flows from operating activities.

Our accounts receivable increased by $11.4 million, excluding the impact from acquisitions, in the nine months ended October 31, 2020, and decreased by $15.1 million in the nine months ended October 31, 2019, which resulted in a $26.5 million decrease in cash provided by operating activities year over year.

Our accounts receivable decreased by $73.2 million in the three months ended April 30, 2021, compared to a decrease of $17.2 million in the three months ended April 30, 2020, which resulted in a $56.0 million increase in cash provided by operating activities year over year.

Contract liabilities consist of the unearned portion of billed fees for our subscriptions, which is subsequently recognized as revenue in accordance with our revenue recognition policy.

Our contract liabilities increased by $172.5 million, excluding the impact from acquisitions, in the nine months ended October 31, 2020, compared to an increase of $44.3 million in the nine months ended October 31, 2019.

Our contract liabilities increased by $51.6 million in the three months ended April 30, 2021, compared to an increase of $44.6 million in the three months ended April 30, 2020.

The year over year increase contributed an additional $7.1 million to cash provided by operating activities.

Therefore, our growth in billings to existing and new customers has a material net beneficial impact on our cash flows from operating activities.

Our future capital requirements will depend on many factors including our growth rate, customer retention and expansion, tax withholding obligations related to settlement of our RSUs, the timing and extent of spending to support our efforts to develop our software suite, the expansion of sales and marketing activities and the continuing market acceptance of our software suite.

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The following table summarizes our cash flows for the periods indicated:

Nine Months Ended October 31,

(in thousands) 2020 2019 Change

Three Months Ended April 30,

(in thousands) 2021 2020

Net cash provided by (used in):

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Financing activities (112,954) (25,498)

Effect of foreign exchange on cash and cash equivalents 1,432 (310) 1,742

Effect of foreign exchange on cash, cash equivalents and restricted cash 779 (2,280)

Net change in cash, cash equivalents and restricted cash $ (47,084) $ 201,034

Cash Flows from Operating Activities

Net cash provided by operating activities increased by $164.5 million, driven by an increase in the add-back of non-cash expenses of $98.1 million and an increase in the net cash provided by changes in operating assets and liabilities by $76.4 million.

The higher add-back was primarily due to increases of $52.4 million in stock-based compensation expense driven by higher headcount and $43.4 million non-cash amortization expense.

The increase in the net cash provided by changes in operating assets and liabilit ies was primarily due to:

▪ An increase of $128.2 million in cash provided by changes in contract liabilities;

▪ An increase of $30.2 million in cash provided by changes in accrued compensation;

▪ An increase of $17.3 million in cash provided by changes in accrued expenses and other liabilities;

partially offset by

▪ An increase of $66.8 million in cash used from changes in deferred contract acquisition and fulfillment costs;

▪ An increase of $26.5 million in cash used from changes in accounts receivable;

▪ An increase of $7.4 million in cash used from changes in other assets.

Cash provided by operating activities was $135.6 million and $59.1 million for the three months ended April 30, 2021 and 2020.

The improvement of $76.5 million, as compared to prior year, was primarily the result of increased sales and the related cash collections, partially offset by higher operating costs from increased headcount and to support growth.

Cash Flows from Investing Activities

Net cash provided by investing activities was $100.1 million, as compared to $350.8 million net cash used in investing activity in prior year.

This change was primarily due to cash inflows of $353.1 million from net maturities and sales of marketable securities compared to cash outflows of $293.2 million from net purchases of marketable securities in prior year.

Additionally, there was a $10.2 million decrease in purchases of strategic investments.

The cash inflows were partially offset by cash outflows of $180.4 million paid for acquisitions, net of cash acquired, and a $22.1 million increase in capital expenditures.

For the three months ended April 30, 2021, net cash used in investing activities of $70.5 million was primarily driven by $57.4 million net purchases of marketable securities and $12.6 million purchases of property and equipment.

For the three months ended April 30, 2020 , cash provided by investing activities of $169.7 million was primarily driven by $199.1 million from maturities and sales of marketable securities, partially offset by $26.4 million purchases of property and equipment.

Cash Flows from Financing Activities

Net cash used in financing activities increased by $163.3 million due to a $122.0 million increase in cash used to remit tax withholding obligations on settled RSUs, a $47.3 million decrease in proceeds from exercises of stock options, partially offset by a $6.0 million increase in proceeds from purchases under the ESPP.

Contractual Obligations and Commitments

For the three months ended April 30, 2021, cash used in financing activities of $113.0 million was primarily driven by $76.3 million in net payments related to our equity plans, as compared to $25.5 million in the prior year for similar activities.

We also used $36.7 million for repayments of our 2023 Notes.

Obligations and Commitments

Our principal contractual obligations and commitments consist of obligations under the Notes (including principal and coupon interest), operating leases, as well as noncancelable contractual commitments that primarily relate to cloud infrastructure support and sales and marketing activities .

Refer to Note 9 for more information on the Notes and Note 10 and Note 11 for our lease and other commitments.

As of October 31, 2020, we had unused letters of credit outstanding associated with our various operating leases totaling $8.3 million.

Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently 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.

Refer to Note 7 and Note 8 to the Condensed Consolidated Financial Statements, included in Part I, Item 1 of this Form 10-Q, for our leases and other commitments.

We do not have any special purpose entities and we do not engage in off-balance sheet financing arrangements.

Critical Accounting Policies and Estimates

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Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances.

The current COVID-19 pandemic has caused uncertainty and disruption in the global economy and financial markets.

We are not aware of any specific event or circumstance that would require us to update our estimates, judgments or revise the carrying value of our assets or liabilities.

These estimates may change, as new events occur and additional information is obtained.

Our actual results could differ from these estimates.

The critical accounting estimates, assumptions and judgments that we believe to have the most significant impact on our consolidated financial statements are revenue recognition, deferred contract acquisition costs, stock-based compensation, business combinations and valuation of goodwill and other acquired intangible assets and income taxes.

The critical accounting estimates, assumptions and judgments that we believe to have the most significant impact on our consolidated financial statements are revenue recognition, deferred contract acquisition costs, stock-based compensation, valuation of acquired intangible assets in business combinations and income taxes.

There have been no material changes to our critical accounting policies and estimates as described in our 2021 Annual Report on Form 10-K.

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We present these non-GAAP measures to assist investors in seeing our financial performance using a management view, and because we believe that these measures provide an additional tool for investors to use in comparing our core financial performance over multiple periods with other companies in our industry.

Non-GAAP gross profit, non-GAAP gross margin, non-GAAP income from operations, non-GAAP operating margin, non-GAAP net income and non-GAAP net income per share :

We define these non-GAAP financial measures as the respective GAAP measures, excluding expenses related to stock-based compensation, employer payroll tax on employee stock transactions, amortization of acquisition-related intangibles, amortization of debt discount and issuance costs from our convertible senior notes issued in September 2018, acquisition-related expenses and, as applicable, other special items.

The amount of employer payroll tax-related items on employee stock transactions is dependent on our stock price and other factors that are beyond our control and that do not correlate to the operation of the business.

Non-GAAP gross profit, non-GAAP gross margin, non-GAAP income from operations, non-GAAP operating margin and non-GAAP net income :

We define these non-GAAP financial measures as the respective GAAP measures, excluding expenses related to stock-based compensation, employer payroll tax on employee stock transactions, amortization of acquisition-related intangibles, amortization of debt discount and issuance costs, acquisition-related expenses, fair value adjustments to strategic investments and, as applicable, other special items.

The amount of employer payroll tax-related items on employee stock transactions is dependent on our stock price and other factors that are beyond our control and do not correlate to the operation of the business.

When evaluating the performance of our business and making operating plans, we do not consider these items (for example, when considering the impact of equity award grants, we place a greater emphasis on overall stockholder dilution rather than the accounting charges associated with such grants).

We believe it is useful to exclude these expenses in order to better understand the long-term performance of our core business and to facilitate comparison of our results to those of peer companies and over multiple periods.

Free cash flows :

Free cash flow :

We define free cash flow as net cash provided by operating activities less purchases of property and equipment.

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Reconciliation of gross profit and gross margin:

Three Months Ended October 31, Nine Months Ended October 31,

Three Months Ended April 30,

(in thousands) 2021 2020

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Reconciliation of income (loss) from operations and operating margin:

Three Months Ended October 31, Nine Months Ended October 31,

Three Months Ended April 30,

(in thousands) 2021 2020

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Amortization of acquisition-related intangibles 6,529 4,259

Acquisition-related expenses 336 — 7,962 —

Employer payroll tax on employee stock transactions 16,283 6,548

Acquisition-related expenses — 694

Non-GAAP income from operations $ 93,211 $ 23,199

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Reconciliation of net income (loss):

Three Months Ended October 31, Nine Months Ended October 31,

(in thousands, except per share data) 2020 2019 2020 2019

Three Months Ended April 30,

(in thousands) 2021 2020

GAAP net loss $ (8,354) $ (47,804)

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Amortization of acquisition-related intangibles 6,529 4,259

Acquisition-related expenses 336 — 7,962 —

Employer payroll tax on employee stock transactions 16,283 6,548

Acquisition-related expenses — 694

Amortization of debt discount and issuance costs 1,319 6,842

Fair value adjustments to strategic investments (5,119) —

Non-GAAP net income $ 91,794 $ 24,090

Computation of free cash flow:

Three Months Ended October 31, Nine Months Ended October 31,

Three Months Ended April 30,

(in thousands) 2021 2020

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Non-GAAP free cash flow $ 123,001 $ 32,755

Net cash provided by (used in) investing activities $ 9,691 $ (19,067) $ 100,064 $ (350,795)

Net cash (used in) provided by investing activities $ (70,506) $ 169,668

Net cash used in financing activities $ (112,954) $ (25,498)

Computation of billings:

Three Months Ended October 31, Nine Months Ended October 31,

Three Months Ended April 30,

(in thousands) 2021 2020

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Contract assets and unbilled accounts receivable, end of period (19,737) (16,390)

Contract assets and unbilled accounts receivable by acquisitions — — 6,589 —

Contract liabilities and refund liability contributed by acquisitions — — (9,344) —

Non-GAAP billings $ 527,391 $ 342,052

QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risks in the ordinary course of our business.

Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates.

Our market risk exposure is primarily the result of fluctuations in foreign currency exchange and interest rates.

Interest Rate Risk

As of October 31, 2020, we had cash, cash equivalents and investments totaling $675.4 million, which consisted primarily of bank deposits, money market funds, commercial paper, corporate notes and bonds and U.S.

Treasury and government agency securities.

Interest-earning instruments carry a degree of interest rate risk.

Our investment portfolio is comprised of highly rated securities and limits the amount of credit exposure to any one issuer.

A hypothetical 100 basis point increase in interest rates would result in an approximately $1.3 million decrease of the fair value of our investment portfolio as of October 31, 2020 .

Such losses would only be realized if we sold the investments prior to maturity.

We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure.

On September 18, 2018, we offered and issued $575.0 million aggregate principal amount of Notes.

The Notes have a fixed annual interest rate of 0.5%, and, therefore, we do not have economic interest rate exposure on the Notes.

The fair value of the Notes changes when the market price of our stock fluctuates or interest rates change.

However, we carry the Notes at face value less unamortized discount on our balance sheet and present the fair value for required disclosure purposes only.

Foreign Currency Exchange Risk

Our reporting currency is the U.S.

dollar, and the functional currency of each of our subsidiaries is either its local currency or the U.S.

dollar, depending on the circumstances.

The assets and liabilities of each of our subsidiaries are translated into U.S.

dollars at exchange rates in effect at each balance sheet date.

Operations accounts are translated using the average exchange rate for the relevant period.

A strengthening or weakening of the U.S.

dollar against the other currencies may negatively or positively affect our operating results as expressed in U.S.

Foreign currency translation adjustments are accounted for as a component of “Accumulated other comprehensive loss” within “Stockholders’ equity.” Gains or losses due to remeasurements of transactions denominated in foreign currencies are included in “Interest and other income, net” in our consolidated statements of operations and comprehensive loss.

We have not engaged in the hedging of foreign currency transactions to date, although we may choose to do so in the future.

We do not believe that an immediate 10% increase or decrease in the relative value of the U.S.

dollar to other currencies would have a material effect on our operating results.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis