Gitlab Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q. You should review the section 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, those identified below, and those discussed in the section titled “Risk Factors” in this Quarterly Report on Form 10-Q. Our historical results are not necessarily indicative of the results that may be expected for any period in the future. Overview In today’s world, software defines the speed of innovation. Every industry, business, and every function within a company is dependent on software. Nearly all companies must digitally transform and become experts at building, delivering, and securing software to remain competitive and survive. To meet these market needs, GitLab pioneered The DevSecOps Platform, a fundamentally new approach to software development and delivery. Our platform is uniquely built as a single application with native artificial intelligence, or AI, assisted workflows, and a single interface with a unified data model, enabling all stakeholders in the software delivery lifecycle – from development teams to operations teams to security teams – to work together in a single tool with a single workflow. With GitLab, they can build better, more secure software, faster. GitLab is the solution to significant business transformation needs. Across every industry – and across companies of every size – technology leaders want to make developers more productive so they can deliver better products faster; they want to measure productivity so they can increase operational efficiency; they want to secure the software supply chain so they can reduce security and compliance risk; and, they want to accelerate secure cloud migration, so they can unlock digital transformation results. These technology leaders need a platform that enables a value stream-driven mindset that shortens the time from idea to customer value and establishes a powerful flywheel for data collection and aggregation. And they are looking for a platform approach that unifies the entire development experience, so that customers can be faster than their competition in moving from idea to customer value. We believe GitLab is the shortest path to unlocking business and technology transformation results. Our DevSecOps platform accelerates our customers’ ability to create business value and innovate by reducing their software development cycle times from weeks to minutes – achieving up to 7x faster cycle time. It removes the need for point tools and delivers enhanced operational efficiency by eliminating manual work, increasing productivity, and creating a culture of innovation and velocity. GitLab also embeds security earlier into the development process, improving our customers’ software security, quality, and overall compliance. GitLab is available to any team, regardless of the size, scope, and complexity of their deployment. As a result, we have more than 30 million registered users, and more than 50% of the Fortune 100 companies are GitLab customers. For purposes of determining the number of our active customers, we look at our customers with more than $5,000 of Annual Recurring Revenue, or ARR, in a given period, who we refer to as our Base Customers. For purposes of determining our Base Customers, a single organization with separate subsidiaries, segments, or divisions that use The DevSecOps Platform is considered a single customer. GitLab is the only DevSecOps platform built on an open-core business model. We enable any customer and contributor to add functionality to our platform. In calendar year 2023, nearly 700 people contributed more than 2,100 merge requests back to the core product, extending GitLab’s in-house R&D 29 Table of Contents efforts and empowering our most passionate users to make improvements to the DevOps tool they use every day. Our open-core approach has enabled us to build trust with our customers and maintain our high velocity of innovation so that we can rapidly create the most comprehensive DevSecOps platform. GitLab largely exists today thanks to the vast and growing community of open source contributors worldwide. We actively work to grow open source community engagement by operating with transparency. We make our strategy, direction, and product roadmap available to the wider community, where we encourage and solicit their feedback. By making non-sensitive information public, we create a deeper level of trust with our customers and make it easier to solicit contributions and collaboration from our users and customers. See the section entitled “ Key Business Metrics—Dollar-Based Net Retention Rate and ARR” below for additional information about how we define ARR. We make our plans available through our self-managed and software-as-a-service, or SaaS, offering. For our self-managed offering, the customer installs GitLab in their own on-premise or hybrid cloud environment. For our SaaS offering, the platform is managed by GitLab and hosted either in our public cloud or in our private cloud based on the customer’s preference. Factors Affecting Our Performance Sustaining innovation and technology leadership We believe we have built a highly differentiated platform that gives us an advantage over our competitors by empowering business, development, security, operations, and IT teams to collaborate in a single application across the entire DevSecOps lifecycle. Our technology leadership is an outcome of various factors, including our strong community, network of contributors, and continued enhancement of The DevSecOps Platform by developing new features and expanding the functionality of existing features with speed and consistency. We have had a history of releasing enhancements to The DevSecOps Platform every month and, as of April 30, 2024, had done so for the last 151 months. We intend to continue releasing new software at a monthly cadence. We also intend to continue investing in research a nd development to further enhance The DevSecOps Platform and sustain our innovation and technology leadership. We have a history of investing in our open source community and intend to continue to leverage our open core software to accelerate innovation. We also intend to continue to add headcount to our research and development team to extend the functionality and range of The DevSecOps Platform by bringing new and improved products and services to our customers. We expect our research and development expenses to increase on an absolute basis in future periods. We foresee that such investment in research and development will contribute to our long-term growth, but may also negatively impact our short-term profitability. As engaged members of the GitLab open-source community, our contributors often serve as subject matter experts at market-leading developer events and The DevSecOps Platform is presented on the cutting edge of innovation. We intend to continue to invest in building out this community to foster more contributions and collaboration in the space. Our open source community, in turn, accelerates our ability to innovate and provide a better platform to our customers. We intend to expend additional resources in the future to continue enhancing The DevSecOps Platform and introducing new products, features and functionality. Acquiring New Customers Our future growth depends in large part on our ability to acquire new customers. This, in turn, relies on our ability to reach teams and organizations through our marketing and sales efforts. To this end, we are making investments in our sales and marketing efforts to expand our reach and differentiate The DevSecOps Platform from competitive products and services. We believe that eventually the vast majority of organizations will switch to a DevSecOps platform and embrace a single application approach, creating a substantial opportunity to continue to grow our customer base. As a result, our Base Customers increased to 8,976 as of April 30, 2024 from 7,406 as of April 30, 2023, an increase of 21%, our $100,000 30 Table of Contents ARR customers increased to 1,025 as of April 30, 2024 from 760 as of April 30, 2023, an increase of 35%. See the section en titled “—Key Business Metrics—Dollar-Based Net Retention Rate and ARR” below for information about how we define ARR. Our operating results and growth prospects will depend in part on our ability to attract new customers. While we believe we have a significant market opportunity that The DevSecOps Platform addresses, we will need to continue to invest in sales and marketing, research and development, and customer support to further grow our customer base, both in the United States and internationally. We believe that our estimated 30 million registered users, which includes users of our free tier offering, provides a base of potential new customers. We intend to continue to add headcount to our global sales and marketing team to acquire new customers and to increase sales to existing customers. Retaining and Expanding Our Existing Customers We employ a “land and expand” business strategy that focuses on efficiently acquiring new customers and growing our relationships with existing customers over time. We believe that as our customers realize the benefits of a single application approach, they will increase the use of The DevSecOps Platform, enhancing our ability to expand revenue generation within our existing customers over time. As a result of our approach, as of April 30, 2024 and 2023, our Dollar-Based Net Retention Rate was 129% and above 130%, respectively. See the section entitled “—Key Business Metrics—Dollar-Based Net Retention R ate and ARR” below for information about how we define Dollar-Based Net Retention Rate. We plan to continue investing in sales and marketing, with a focus on expanding usage of our platform with our existing customers. We believe that this expansion will provide us with substantial operating leverage because the costs to expand sales within existing customers are significantly less than the costs to acquire new customers. Our future revenue growth and our ability to achieve and maintain profitability is dependent upon our ability to continue landing new customers, expanding the adoption of The DevSecOps Platform by additional users within their organizations, selling add-on offerings, and upgrading customers to higher-priced tiers. Ultimately, our ability to increase sales to existing customers will depend on several factors, including our customers’ satisfaction with The DevSecOps Platform, our pricing, competition, and overall changes in our customers’ spending levels. Partnerships, Alliances, Channels, and Integrations We believe that our further growth depends in part on our ability to build and maintain successful partnerships, alliances, channels and integrations. We are continuously investing in developing a strong ecosystem and partner network, comprised of cloud and technology partners, resellers, and system integrators, as a way to expand our go-to-market strategy. We plan to continue investing in and developing these relationships to broaden our distribution footprint and drive greater awareness of our brand and The DevSecOps Platform. We believe that these partnerships will extend our sales reach and provide product and technology integrations that will accelerate implementation of The DevSecOps Platform in the United States and internationally. While expending resources in developing these partnerships and alliances may adversely impact our short-term profitability, we believe these investments will lead to longer term growth for the business as a whole. Continuing to Scale our Business We plan to continue investing in our business so that we can capitalize on our market opportunity. We believe that these investments will contribute to our long-term growth, although they may adversely affect our operating results in the near term. Furthermore, we expect our general and administrative expenses to increase in absolute amount for the foreseeable future given the additional expenses for accounting, compliance, and insurance as a public company. We plan to balance these investments in future growth with a continued focus on managing our operating results. 31 Table of Contents Key Business Metrics We monitor the following key metrics to help us evaluate our business, identify trends affecting our business, formulate business plans, and make strategic decisions. Dollar-Based Net Retention Rate and ARR We believe that our ability to retain and expand our revenue generated from our existing customers is an indicator of the long-term value of our customer relationships and our potential future business opportunities. Dollar-Based Net Retention Rate measures the percentage change in our ARR derived from our customer base at a point in time. Our calculation of ARR and by extension Dollar-Based Net Retention Rate, includes both self-managed and SaaS subscription revenue. We report Dollar-Based Net Retention Rate on a threshold basis of 130% each quarter or the actual number if below 130%. We calculate ARR by taking the monthly recurring revenue, or MRR, and multiplying it by 12. MRR for each month is calculated by aggregating, for all customers during that month, monthly revenue from committed contractual amounts of subscriptions, including our self-managed and SaaS offerings but excluding professional services. We calculate Dollar-Based Net Retention Rate as of a period end by starting with our customers as of the 12 months prior to such period end, or the Prior Period ARR. We then calculate the ARR from these customers as of the current period end, or the Current Period ARR. The calculation of Current Period ARR includes any upsells, price adjustments, user growth within a customer, contraction, and attrition. We then divide the total Current Period ARR by the total Prior Period ARR to arrive at the Dollar-Based Net Retention Rate. As of April 30, 2024 2023 Dollar-Based Net Retention Rate 129% >130% Customers with ARR of $100,000 or More We believe that our ability to increase the number of $100,000 ARR customers is an indicator of our market penetration and strategic demand for The DevSecOps Platform. A single organization with separate subsidiaries, segments, or divisions that use The DevSecOps Platform is considered a single customer for determining each organization’s ARR. We do not count our reseller or distributor channel partners as customers. In cases where customers subscribe to The DevSecOps Platform through our channel partners, each end customer is counted separately. As of April 30, 2024 2023 $100,000 ARR customers 1,025 760 32 Table of Contents Components of Our Results of Operations Revenue Subscription - self-managed and SaaS Subscription - self-managed Our self-managed subscriptions include support, maintenance, upgrades, and updates on a when-and-if-available basis. Revenue for self-managed subscriptions is recognized ratably over the contract period based on the stand-ready nature of subscription elements. The typical term of a subscription contract for self-managed offering is one to three years. SaaS Our SaaS subscriptions provide access to our latest managed version of our product hosted in a public or private cloud based on the customer’s preference. Revenue from our SaaS offerings is recognized ratably over the contract period when the performance obligation is satisfied. The typical term of a subscription contract for SaaS offering is one to three years. License - self-managed and other The license component of our self-managed subscriptions reflects the revenue recognized by providing customers with access to proprietary software features. License revenue is recognized up-front when the software license is made available to our customers. Other revenue consists of professional services revenue which is derived from fixed fee and time and materials offerings, subject to customer acceptance for fixed fee offerings. Uncertainty exists about customer acceptance and therefore, control is presumed to transfer upon confirmation from the customer, as defined in each professional services contract. Accordingly, revenue is recognized upon satisfaction of all requirements per the applicable contract. Revenue from professional services provided on a time and material basis is recognized over the periods services are delivered. Cost of Revenue Subscription - self-managed and SaaS Cost of revenue for self-managed and SaaS subscriptions consists primarily of allocated cloud-hosting costs paid to third-party service providers, personnel-related costs associated with our customer support personnel, including contractors, and allocated overhead. Personnel-related expenses consist of salaries, benefits, bonuses, and stock-based compensation. We expect our cost of revenue for self-managed and SaaS subscriptions to increase in absolute dollars as our self-managed and SaaS subscription revenue increases. As our SaaS offering makes up an increasing percentage of our total revenue, we expect to see increased associated cloud-related costs, such as hosting and managing costs, which may adversely impact our gross margins. License - self-managed and other Cost of self-managed license and other revenue consists primarily of contractor and personnel-related costs, including stock-based compensation expenses, associated with the professional services team and customer support team, and allocated overhead. We expect our cost of revenue for self-managed license and other to increase in absolute dollars as our self-managed and other revenue increases. 33 Table of Contents Operating Expenses Our operating expenses consist of sales and marketing, research and development, and general and administrative expenses. Personnel-related expenses are the most significant component of operating expenses and consist of salaries, benefits, bonuses, stock-based compensation, and sales commissions. Operating expenses also include IT overhead costs. Sales and Marketing Sales and marketing expenses consist primarily of personnel-related expenses associated with our sales and marketing personnel, advertising, travel and entertainment related expenses, branding and marketing events, promotions, software subscriptions, and our allocated cloud infrastructure expenses for our free tier. Sales and marketing expenses also include sales commissions paid to our sales force. Such costs incurred on acquisition of an initial contract are capitalized and amortized over an estimated period of benefit of three years, and any such expenses paid for the renewal of a subscription are capitalized and amortized over the contractual term of the renewal. However, prorated costs for commissions that are incremental to obtain a self-managed license contract are expensed immediately. We expect sales and marketing expenses to increase in absolute dollars as we continue to make strategic investments in our sales and marketing organization to drive additional revenue, further penetrate the market, and expand our global customer base, but to decrease as a percentage of our total revenue over time, although our sales and marketing expenses may fluctuate as a percentage of our total revenue from period-to-period depending on the timing of these expenses. Research and Development Research and development expenses consist primarily of personnel-related expenses, including contractors, as well as cloud infrastructure expenses to support our internal development efforts, and software and subscription services. Costs related to research and development are expensed as incurred. We expect research and development expenses to increase in absolute dollars as we continue to increase investments in our existing products and services. However, we anticipate research and development expenses to decrease as a percentage of our total revenue over time, although our research and development expenses may fluctuate as a percentage of our total revenue from period-to-period depending on the timing of these expenses. General and Administrative General and administrative expenses consist primarily of personnel-related expenses for our executives, finance, legal, and human resources teams. General and administrative expenses also include external legal, accounting, and director and officer insurance, as well as other consulting and professional services fees, software and subscription services, in-person company-wide event expenses, and any contract termination fees. We incur expenses as a result of operating as a public company, including costs to comply with the rules and regulations applicable to companies listed on a national securities exchange, costs related to compliance and reporting obligations, costs related to Sarbanes-Oxley compliance, costs related to Environmental, Social, and Governance (ESG) compliance and expenses for insurance, investor relations, and related professional services. We expect that our general and administrative expenses will increase in absolute dollars as our business grows but will decrease as a percentage of our total revenue over time, although our general and administrative expenses may fluctuate as a percentage of our total revenue from period-to-period depending on the timing of these expenses. Interest Income, and Other Income (Expense), Net Interest income consists primarily of interest earned on our cash equivalents and short-term inve stments. 34 Table of Contents Other income (expense), net consists primarily of the foreign currency transaction gains and losses. Loss from Equity Method Investment, Net of Tax Loss from equity method investment, net of tax, consists of our share of losses from the results of operations of Arch , following its deconsolidation. Provision for Income Taxes Provision for income taxes consists primarily of income taxes in the foreign and state jurisdictions in which we conduct business. We maintain a full valuation allowance against our deferred tax assets in certain jurisdictions because we have concluded that it is not more likely than not that the deferred tax assets will be realized. Results of Operations The following table sets forth our results of operations for the periods presented (in thousands): Three Months Ended April 30, 2024 2023 Revenue: Subscription—self-managed and SaaS $ 151,179 $ 111,191 License—self-managed and other 18,008 15,687 Total revenue 169,187 126,878 Cost of revenue: (1) Subscription—self-managed and SaaS 13,839 10,891 License—self-managed and other 4,937 3,048 Total cost of revenue 18,776 13,939 Gross profit 150,411 112,939 Operating expenses: Sales and marketing (1) 92,424 86,537 Research and development (1) 54,140 50,387 General and administrative (1) 57,487 34,248 Total operating expenses 204,051 171,172 Loss from operations (53,640) (58,233) Interest income 12,030 7,315 Other income (expense), net (567) 253 Loss before income taxes and loss from equity method investment (42,177) (50,665) Loss from equity method investment, net of tax — (748) Provision for income taxes 12,710 1,486 Net loss $ (54,887) $ (52,899) Net loss attributable to noncontrolling interest (2) (243) (430) Net loss attributable to GitLab $ (54,644) $ (52,469) 35 Table of Contents (1) Includes stock-based compensation expense as follows: Three Months Ended April 30, 2024 2023 Cost of revenue $ 1,855 $ 1,414 Sales and marketing 17,397 13,764 Research and development 12,336 11,702 General and administrative 10,664 5,450 Total stock-based compensation expense $ 42,252 $ 32,330 (2) Our results of operations include our variable interest entity, JiHu. The ownership interest of other investors is recorded as a noncontrolling interest. See “Note 11. Joint Venture and Equity Method Investment” to our condensed consolidated financial statements for additional details. The following table sets forth the components of our condensed consolidated statements of operations as a percentage of total revenue for each of the periods presented: Three Months Ended April 30, 2024 2023 Revenue 100 % 100 % Cost of revenue 11 11 Gross profit 89 89 Operating expenses: Sales and marketing 55 68 Research and development 32 40 General and administrative 34 27 Total operating expenses 121 135 Loss from operations (32) (46) Interest income 7 6 Other income (expense), net — — Loss before income taxes and loss from equity method investment (25) (40) Loss from equity method investment, net of tax — (1) Provision for income taxes 8 1 Net loss (32) % (42) % Net loss attributable to noncontrolling interest — % — % Net loss attributable to GitLab (32) % (41) % 36 Table of Contents Comparison of the Three Months Ended April 30, 2024 and 2023 Revenue Three Months Ended April 30, Change 2024 2023 $ % (in thousands, except percentages) Subscription—self-managed and SaaS $ 151,179 $ 111,191 $ 39,988 36 % License—self-managed and other 18,008 15,687 2,321 15 Total revenue $ 169,187 $ 126,878 $ 42,309 33 % Revenue increased $42.3 million, or 33%, to $169.2 million for the three months ended April 30, 2024 from $126.9 million for the three months ended April 30, 2023. The increase was primarily due to the ongoing demand for The DevSecOps Platform, including adding new customers, the expansion within our existing paid customers, and an increase in our number of customers with $100,000 or greater in ARR. As of April 30, 2024 and 2023, our expansion is reflected by our Dollar-Based Net Retention Rate being 129% and above 130% , respectively. We had 1,025 customers with ARR over $100,000 as of April 30, 2024, increasing from 760 customers with ARR over $100,000 as of April 30, 2023. Revenue attributed to our variable interest entity, JiHu, was $1.6 million and $1.5 million for the three months ended April 30, 2024 and 2023, respectively. See “Note 11. Joint Venture and Equity Method Investment” to our condensed consolidated financial statements for additional details. Cost of Revenue, Gross Profit, and Gross Margin Three Months Ended April 30, Change 2024 2023 $ % (in thousands, except percentages) Cost of revenue $ 18,776 $ 13,939 $ 4,837 35 % Gross profit 150,411 112,939 37,472 33 Gross margin 89 % 89 % — % Cost of revenue increased by $4.8 million, to $18.8 million for the three months ended April 30, 2024 from $13.9 million for the three months ended April 30, 2023, primarily due to an increase of $1.7 million in personnel-related expenses, driven by an increase in our average customer support and professional services headcount and an increase of $0.4 million in stock-based compensation expenses (as discussed in the section titled “Stock-Based Compensation Expense” below). The remaining change was primarily attributable to $1.7 million in third-party hosting expenses for increased SaaS and cloud usage, an increase of $0.8 million in software and consulting expenses to support our growth, and an increase of $0.6 million in the amortization of intangible assets, partially offset by a decrease of $0.4 million from restructuring costs. Gross margin remained at 89% for the three months ended April 30, 2024 compared to the three months ended April 30, 2023. Cost of revenue attributed to our variable interest entity, JiHu, was $0.5 million for the three months ended April 30, 2024 and 2023 . See “Note 11. Joint Venture and Equity Method Investment” to our condensed consolidated financial statements for additional details. 37 Table of Contents Sales and Marketing Three Months Ended April 30, Change 2024 2023 $ % (in thousands, except percentages) Sales and marketing expenses $ 92,424 $ 86,537 $ 5,887 7 % Sales and marketing expenses increased by $5.9 million, to $92.4 million for the three months ended April 30, 2024 from $86.5 million for the three months ended April 30, 2023, primarily due to an increase of $7.6 million in personnel-related expenses , driven by an increase of $3.6 million in stock-based compensation expenses (as discussed in the section titled “Stock-Based Compensation Expense” below). The remaining change was mainly due to an increase of $1.6 million in marketing spend, an increase of $1.6 million in hosting expenses, and an increase of $0.9 million in software and consulting expenses, partially offset by a decrease of $3.5 million from expenses related to an in-person sales kick-off event in the three months ended April 30, 2023 and a decrease of $2.8 million in restructuring costs. Sales and marketing expenses attributed to our variable interest entity, JiHu, were $1.6 million and $2.1 million for the three months ended April 30, 2024 and 2023, respectively. See “Note 11. Joint Venture and Equity Method Investment” to our condensed consolidated financial statements for additional details. Research and Development Three Months Ended April 30, Change 2024 2023 $ % (in thousands, except percentages) Research and development expenses $ 54,140 $ 50,387 $ 3,753 7 % Research and development expenses increased by $3.8 million , to $54.1 million for the three months ended April 30, 2024 from $50.4 million for the three months ended April 30, 2023, primarily due to an increase of $5.1 million in personnel-related expenses, driven by an increase in our average research and development headcount and an increase of $0.6 million in stock-based compensation expenses (as discussed in the section titled “Stock-Based Compensation Expense” below). The remaining change was mainly due to an increase of $0.3 million in hosting costs for internal usage, partially offset by a decrease of $2.1 million in restructuring costs. Research and development expenses attributed to our variable interest entity, JiHu, were $0.2 million gain and $2.0 million for the three months ended April 30, 2024 and 2023, respectively. See “Note 11. Joint Venture and Equity Method Investment” to our condensed consolidated financial statements for additional details. 38 Table of Contents General and Administrative Three Months Ended April 30, Change 2024 2023 $ % (in thousands, except percentages) General and administrative expenses $ 57,487 $ 34,248 $ 23,239 68 % General and administrative expenses increased by $23.2 million, to $57.5 million for the three months ended April 30, 2024 from $34.2 million for the three months ended April 30, 2023, primarily driven by $15.4 million expense related to our in-person company-wide event. The remaining change was primarily due to an increase of $6.0 million in personnel-related expenses, mainly attributable to an increase in our average general and administrative headcount and an increase of $5.2 million in stock-based compensation expenses (as discussed in the section titled “Stock-Based Compensation Expense” below), and an increase of $0.7 million in software and consulting expenses, partially offset by a decrease of $1.3 million in restructuring costs. General and administrative expenses attributed to our variable interest entity, JiHu, were $0.8 million and a $1.4 million gain for the three months ended April 30, 2024 and 2023 , respectively . See “Note 11. Joint Venture and Equity Method Investment” to our condensed consolidated financial statements for additional details. Stock-Based Compensation Expense Three Months Ended April 30, Change 2024 2023 $ % (in thousands, except percentages) Cost of revenue $ 1,855 $ 1,414 $ 441 31 % Sales and marketing 17,397 13,764 3,633 26 Research and development 12,336 11,702 634 5 General and administrative 10,664 5,450 5,214 96 Total stock-based compensation expense $ 42,252 $ 32,330 $ 9,922 31 % Stock-based compensation expense increased by $9.9 million, to $42.3 million for the three months ended April 30, 2024 from $32.3 million for the three months ended April 30, 2023, primarily due to an increase of $12.2 million of expense from RSUs, offset by a decrease of $1.9 million related to our ESPP and a decrease of $1.3 million in stock options. Stock-based compensation expense attributed to our variable intere st entity, JiHu, was a $0.3 million gain and $2.5 million gain for the three months ended April 30, 2024 and 2023, respectively. See “Note 11. Joint Venture and Equity Method Investment” to our condensed consolidated financial sta tements for additional details. 39 Table of Contents Interest Income and Other Income (Expense), Net Three Months Ended April 30, Change 2024 2023 $ % (in thousands, except percentages) Interest income $ 12,030 $ 7,315 $ 4,715 64 % Foreign exchange gains (losses), net (637) 274 (911) (332) Other income (expense), net 70 (21) 91 (433) Total other income (expense), net $ (567) $ 253 $ (820) (324) % For the three months ended April 30, 2024 compared to the three months ended April 30, 2023, interest income increased primarily due to income earned from our cash equivalents and short-term investments as a result of investing the proceeds from our initial public offering, or IPO, into marketable securities as well as higher interest rates during the three months ended April 30, 2024 compared to the three months ended April 30, 2023. The change in other income (expense), net is mainly due to currency exchange gains and losses. Loss from Equity Method Investment, Net of Tax Three Months Ended April 30, Change 2024 2023 $ % (in thousands, except percentages) Loss from equity method investment, net of tax $ — $ (748) $ 748 (100) % We recorded an impairment charge of $8.9 million in other income (expense), net in the condensed consolidated statement of operations during the year ended January 31, 2024 which reduced the equity method investment value to zero as of January 31, 2024. As a result there is no loss from equity method investment f or the three months ended April 30, 2024. Provision for Income Taxes Three Months Ended April 30, Change 2024 2023 $ % (in thousands, except percentages) Provision for income taxes $ 12,710 $ 1,486 $ 11,224 755.3% Effective tax rate (30.1)% (2.9)% (27.2)% Our effective tax rate decreased by approximately 27.2% for the three months ended April 30, 2024 as compared to the three months ended April 30, 2023. The higher tax expense was primarily due to the tax effects of the BAPA between the United States and Dutch taxing authorities, and the Company's foreign and domestic operations. Our effective tax rate for the three months ended April 30, 2024 was higher than the U.S. federal statutory tax rate of 21%, primarily due to the additional tax liabilities relating to the anticipated BAPA, an 40 Table of Contents increase in valuation allowance associated with tax attributes generated during the year, and non-deductible expenses. Under the provisions of ASC 740, Income Taxes , the determination of our ability to recognize our deferred tax assets requires an assessment of both negative and positive evidence when determining our ability to recognize deferred tax assets. Consistent with prior years, we maintain that it is not more likely than not that we can recognize deferred tax assets in certain jurisdictions. The evidence we evaluated included operating results during the most recent three-year period and future projections. More weight is given to historical results than to expectations of future profitability, which are inherently uncertain. Certain entities’ net losses in recent periods represented sufficient negative evidence to require a valuation allowance against its net deferred tax assets. This valuation allowance will be evaluated periodically and could be reversed partially or totally if business results have sufficiently improved to support realization of deferred tax assets. We have been in BAPA negotiations between the IRS and the DTA relating to our transfer pricing arrangements between the United States and the Netherlands. In the year ended January 31, 2024, we for the first time discussed with the IRS and DTA a framework to finalize its transfer pricing arrangements for the proposed BAPA period consisting of tax years ending December 31, 2018 through January 31, 2026. The proposed agreements between us, the IRS and the DTA are not yet final; in anticipation of the agreements, $254.9 million of net tax liability was recorded in the year ended January 31, 2024, and an additional $8.7 million of net tax liability was recorded for the three months ended April 30, 2024. These amounts represent the unrecognized tax benefit relating to the BAPA. The unrecognized tax benefit represents our best estimate of the tax liability associated with the proposed agreements and their related effects. As of April 30, 2024 , our U.S. federal 2018 through 2022 tax years were open and subject to potential examination in one or more jurisdictions. In addition, in the United States, any net operating losses or credits that were generated in prior years but not yet fully utilized in a year that is closed under the statute of limitations may also be subject to examination. We are currently under examination in the Netherlands for the tax years ended December 31, 2015 and 2016. We expect negotiations to continue to the middle of fiscal year 2025. We believe that we have adequately reserved for the outcome of this audit. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. We continue to monitor the progress of ongoing discussions with tax authorities and the effect, if any, of the expected expiration of the statute of limitations in various taxing jurisdictions. As of April 30, 2024 , unrecognized tax benefits were $398.3 million , of which $210.3 million would affect the effective tax rate if recognized. We have classified approximately $209.7 million of unrecognized tax benefit as current tax liability due to anticipated timing of the settlement with the Internal Revenue Service and Dutch taxing authorities and their associated payments, which are expected to be made within the next 12 months. We are unable to reasonably estimate the timing of remaining long-term payments or the amount by which the liability will increase or decrease. It is our policy to classify accrued interest and penalties related to unrecognized tax benefits in provision for income taxes. Accrued interest and penalties were $56.7 million as of April 30, 2024 and $52.1 million as of January 31, 2024, respectively. Liquidity and Capital Resources Since inception, we have financed operations primarily through proceeds received from issuances of equity securities, preferred stock and payments received from our customers. As of April 30, 2024 and January 31, 2024, our principal source of liquidity was cash, cash equivalents, and short-term investments aggregating t o $1.1 billion and $1.0 billion, respectively, which were held for working capital and strategic investment purposes. As of April 30, 2024 , cash and cash equivalents consist of cash in banks, money markets funds, treasuries , and commercial paper, while 41 Table of Contents short-term investments mainly consist of treasuries, corporate debt securities, agency securities, and commercial paper. We believe that our existing cash, cash equivalents, and short-term investments will be sufficient to support working capital and capital expenditure requirements for at least the next 12 months. Our future capital requirements will depend on many factors, including our revenue growth rate, the timing and the amount of cash received from customers, the expansion of sales and marketing activities, the timing and extent of spending to support research and development efforts, the price at which we are able to procure third-party cloud infrastructure, expenses associated with our international expansion, the introduction of platform enhancements, and the continuing market adoption of The DevSecOps Platform. In the future, we may enter into arrangements to acquire or invest in complementary businesses, products, and technologies. We may be required to seek additional equity or debt financing. In the event that we require additional financing, we may not be able to raise such financing on terms acceptable to us or at all. If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in continued innovation, we may not be able to compete successfully, which would harm our business, operating results, and financial condition. The following table shows a summary of our cash flows for the periods presented: Three Months Ended April 30, 2024 2023 (in thousands) Net cash provided by (used in) operating activities $ 38,138 $ (10,961) Net cash provided by investing activities $ 89,385 $ 24,380 Net cash provided by financing activities $ 5,093 $ 7,513 Operating Activities Our largest source of operating cash is payments received from our customers. Our primary uses of cash from operating activities are for personnel-related expenses, sales and marketing expenses, third-party cloud infrastructure expenses, and overhead expenses. We have generated positive cash flows from operating activities and have supplemented working capital through net proceeds from the issuance of equity securities. Cash provided by operating activities during the three months ended April 30, 2024 was $38.1 million, primarily consisting of our net loss of $54.9 million, adjusted for non-cash items of $54.4 million (mainly attributable to stock-based compensation expense of $42.3 million and amortization of deferred contract acquisition costs, net of $11.1 million), and net cash inflows of $38.6 million provided by changes in our operating assets and liabilities. The main drivers of the changes in operating assets and liabilities were the decrease in accounts receivable of $31.1 million, the decrease in prepaid expenses and other current assets of $10.4 million and the increase in accrued expenses and other liabilities of $19.6 million, partially offset by the increase in deferred contract acquisition costs of $8.5 million, the decrease in deferred revenue of $4.4 million and the decrease in accrued compensation and related expenses of $13.2 million. Cash used in operating activities during the three months ended April 30, 2023 was $11.0 million, primarily consisting of our net loss of $52.9 million, adjusted for non-cash items of $44.3 million (mainly attributable to stock-based compensation expense of $32.3 million), and net cash outflows of $2.3 million used by changes in our operating assets and liabilities. The main drivers of the changes in operating assets and liabilities were the decrease in accrued compensation and related expenses of $5.1 million and the decrease in deferred contract acquisition costs of $8.5 million, partially offset by the decrease in accounts receivable of $4.8 million and the increase in deferred revenue of $8.4 million. 42 Table of Contents Investing Activities Cash provided by investing activities during the three months ended April 30, 2024 was $89.4 million, primarily consisting of $110.3 million in proceeds from maturities, net of purchases of short-term investments, partially offset by a $20.2 million payment for a business combination, net of cash acquired, and $0.7 million in purchases of property and equipment. Cash provided by investing activities during the three months ended April 30, 2023 was $24.4 million, primarily consisting of $24.6 million in proceeds from maturities, net of purchases of short-term investments, and partially offset by $0.3 million in purchases of property and equipment. Financing Activities Cash provided by financing activities during the three months ended April 30, 2024 was $5.1 million, attributable to proceeds from the issuance of common stock upon stock options exercises. Cash provided by financing activities during the three months ended April 30, 2023 was $7.5 million, attributable to proceeds from the issuance of common stock upon stock options exercises. Adjusted Free Cash Flow Adjusted free cash flow is a non-GAAP financial measure that we calculate as net cash provided by (used in) operating activities less cash used for purchases of property and equipment and any non-recurring income tax payments related to the BAPA. We believe that adjusted free cash flow is a useful indicator of liquidity that provides information to management and investors about the amount of cash generated from our operations that, after the investments in property and equipment and any non-recurring income tax payments related to the BAPA, can be used for strategic initiatives, including investing in our business, and strengthening our financial position. One limitation of adjusted free cash flow is that it does not reflect our future contractual commitments. Additionally, adjusted free cash flow does not represent the total increase or decrease in our cash balance for a given period. The following table presents a reconciliation of adjusted free cash flow to net cash provided by (used in) operating activities, the most directly comparable financial measure calculated in accordance with GAAP, for the periods presented (in thousands): Three Months Ended April 30, 2024 2023 Computation of adjusted free cash flow (1) GAAP net cash provided by (used in) operating activities $ 38,138 $ (10,961) Less: Purchases of property and equipment (700) (256) Non-GAAP adjusted free cash flow $ 37,438 $ (11,217) (1) No income tax payments related to the BAPA were recorded during the periods presented. Contractual Obligations and Commitments For more information regarding our contractual obligations, refer to “Note 14. Commitments and Contingencies” to our condensed consolidated financial statements . Critical Accounting Estimates Our condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles, or GAAP. The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and 43 Table of Contents liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. We base these estimates on historical and anticipated results, trends, and various other assumptions that it believes are reasonable under the circumstances, including assumptions as to future events. Actual results could differ from those estimates. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, operating results, and cash flows will be affected. For additional information about our critical accounting policies and estimates, see the disclosure included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2024, which was filed with the SEC on March 26, 2024. 44 Table of Contents