What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2021-03-18 compared with 2020-03-20 · 172 added, 112 removed, 305 unchanged (48% of the section changed)

3 unchanged sentences

Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed in the section titled “Risk Factors” and in other parts of this Annual Report on Form 10-K.

Our mission is to make video communications frictionless.

We provide a video-first communications platform that delivers happiness and fundamentally changes how people interact.

We connect people through frictionless video, voice, chat, and content sharing and enable face-to-face video experiences for thousands of people in a single meeting across disparate devices and locations.

Our cloud-native platform delivers reliable and high-quality video that is easy to use, manage, and deploy;

Our mission is to make video communications frictionless and secure.

We provide a video-first unified communications platform that delivers happiness and fundamentally changes how people interact.

We connect people through frictionless and secure video, voice, chat, and content sharing and enable face-to-face video experiences for thousands of people in a single meeting across disparate devices and locations.

Our cloud-native platform delivers reliable, high-quality video that is easy to use, manage, and deploy;

provides an attractive return on investment;

and easily integrates with physical spaces and applications.

and easily integrates with applications and physical spaces.

We believe that rich and reliable communications lead to interactions that build greater empathy and trust.

We strive to live up to the trust our customers place on us by delivering a communications solution that “just works.” Our goal is to make Zoom Meetings better than in-person meetings.

Our 17 co-located data centers located worldwide enable us to provide both high-quality and high-definition, real-time video to our customers even in low-bandwidth environments.

We generate revenue from the sale of subscriptions to our video-first communications platform.

Subscription revenue is driven primarily by the number of paid hosts as well as purchases of additional products, including Zoom Rooms, Zoom Video Webinars, and Zoom Phone.

A host is any user of our video-first communications platform who initiates a Zoom Meeting and invites one or more participants to join that meeting.

We strive to live up to the trust our customers place in us by delivering a communications solution that “just works” while prioritizing their privacy and security.

Our goal is to make Zoom Meetings better than in-person meetings.

Our 21 co-located data centers located worldwide and the public cloud enable us to provide both high-quality and high-definition, real-time video to our customers even in low-bandwidth environments.

We generate revenue from the sale of subscriptions to our unified communications platform.

Subscription revenue is driven primarily by the number of paid hosts as well as purchases of additional products, including Zoom Rooms, Zoom Video Webinars, Zoom Phone, and Hardware-as-a-Service (“HaaS”) for rooms and phones.

A host is any user of our unified communications platform who initiates a Zoom Meeting and invites one or more participants to join that meeting.

We refer to hosts who subscribe to a paid Zoom Meeting plan as “paid hosts.” We define a customer as a separate and distinct buying entity, which can be a single paid host or an organization of any size (including a distinct unit of an organization) that has multiple paid hosts.

Our Basic offering is free and gives hosts access to Zoom Meetings with core features, but with limitations on the number of attendees and time.

Our paid offerings include our Pro, Business, and Enterprise plans, which provide incremental features and functionality, such as different participant limits, administrative controls, and reporting.

Our revenue was $622.7 million, $330.5 million, and $151.5 million for the fiscal years ended January 31, 2020, 2019, and 2018, respectively, representing period-over-period growth rate of 88% and 118% for fiscal year 2020 and fiscal year 2019, respectively.

We had net income of $25.3 million and $7.6 million for the fiscal years ended January 31, 2020 and 2019, respectively, and a net loss of $3.8 million for the fiscal year ended January 31, 2018.

Our Basic offering is free and gives hosts access to Zoom Meetings with core features but with the limitation that meetings with more than two endpoints time-out at 40 minutes.

Our paid offerings include our Pro, Business, Enterprise, Education, and Healthcare plans, which provide incremental features and functionality, such as different participant limits, administrative controls, and reporting.

For Zoom Phone, plans include Zoom Phone Pro, which provides extension-to-extension calling or can be used with the Bring Your Own Carrier model wherein the customer connects Zoom Phone to an existing carrier.

We also offer Regional Unlimited and Regional Metered calling plans in three specific markets (United States/Canada, United Kingdom/Ireland, and Australia/New Zealand).

In addition, we introduced the Global Select plan in August 2020, which allows customers to select from local numbers and domestic calling in over 40 countries and territories where Zoom has local PSTN coverage.

In addition, the Zoom United plan launched in December 2020 provides a single license for customers to purchase Zoom Phone, Meetings and chat capabilities as a bundled offering.

Our revenue was $2,651.4 million, $622.7 million, and $330.5 million for the fiscal years ended January 31, 2021, 2020, and 2019, respectively, representing period-over-period growth rate of 326% and 88% for fiscal year 2021 and fiscal year 2020,

respectively.

We had net income of $672.3 million, $25.3 million, and $7.6 million for the fiscal years ended January 31, 2021, 2020, and 2019, respectively.

Net cash provided by operating activities was $1,471.2 million, $151.9 million, and $51.3 million for the fiscal years ended January 31, 2021, 2020, and 2019, respectively.

Recent Developments

In December 2019, an outbreak of the COVID-19 disease was first identified and began to spread across the globe.

In March 2020, the World Health Organization declared COVID-19 a pandemic, impacting many countries around the world.

Governments have instituted lockdown or other similar measures to slow infection rates.

Many organizations have resorted to mandating employees to work from home, which has resulted in these organizations seeking out video communication solutions like ours to keep employees as productive as possible, even while working from home.

Schools, colleges, and universities globally have also closed as a result of this pandemic.

Many of these institutions are utilizing our platform to provide remote instruction to their students.

To help teachers and students navigate this unprecedented situation, we have temporarily removed the 40-minute time limit for meetings with more than two endpoints from our free Basic accounts for more than 125,000 K-12 domains worldwide.

While we have experienced a significant increase in paid hosts and revenue due to the pandemic, the aforementioned factors have also driven increased usage of our services and have required us to expand our network, data storage, and processing capacity, both in our own co-located data centers as well as through third-party cloud hosting, which has resulted, and is continuing to result, in an increase in our operating costs.

Furthermore, a significant portion of the increase in usage of our platform is attributable to free Basic accounts and our removal of the time limit for school domains, which do not generate any revenue, but still require us to incur these additional operating costs to expand our capacity.

Therefore, the recent increase in usage of our platform has adversely impacted, and may continue to adversely impact, our gross margin.

In addition, there is no assurance that we will experience an increase in paid hosts or that new or existing users will continue to utilize our service after the COVID-19 pandemic has tapered.

Moreover, the tapering of the COVID-19 pandemic, particularly as vaccinations become widely available, may result in a decline in paid hosts and users once individuals are no longer working or attending school from home.

Key Factors Affecting Our Performance

2 unchanged sentences

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 our platform addresses, it is difficult to predict customer adoption rates or the future growth rate and size of the market for our platform.

While we believe there is a significant market opportunity that our platform addresses, it is difficult to predict customer adoption rates or the future growth rate and size of the market for our platform.

We will need to continue to invest in sales and marketing in order to address this opportunity by hiring, developing, and retaining talented sales personnel who are able to achieve desired productivity levels in a reasonable period of time.

2 unchanged sentences

Many customers have increased the size of their subscriptions as they have expanded their use of our platform across their operations.

Some of our larger enterprise customers start with a single deployment of Zoom Meetings with one team, location, or geography before rolling out our platform throughout their organization.

Some of our larger enterprise customers start with a deployment of Zoom Meetings with one team, location, or geography, before rolling out our platform throughout their organization.

Several of our largest customers have deployed our platform globally to their entire workforce following smaller initial deployments.

This expansion in the use of our platform also provides us with opportunities to market and sell additional products to our customers, such as Zoom Rooms, at each office location and enablement of Zoom Video Webinars.

This expansion in the use of our platform also provides us with opportunities to market and sell additional products to our customers, such as Zoom Phone, Zoom HaaS, Zoom for Home, Zoom Rooms at each office location, and Zoom Video Webinars.

In order for us to address this opportunity to expand the use of our products with our existing customers, we will need to maintain the reliability of our platform and produce new features and functionality that are responsive to our customers’ requirements for enterprise-grade solutions.

3 unchanged sentences

We define ARR as the annualized revenue run rate of subscription agreements from all customers at a point in time.

We calculate ARR by taking the monthly recurring revenue (“MRR”) and multiplying it by 12.

MRR is defined as the recurring revenue run-rate of subscription agreements from all customers for the last month of the period, including revenue from monthly subscribers

who have not provided any indication that they intend to cancel their subscriptions.

We then calculate the ARR from these customers as of the current period end (“Current Period ARR”), which includes any upsells, contraction, and attrition.

6 unchanged sentences

For example, we have recently introduced a number of product enhancements, including new features for Zoom Phone, Zoom Meetings, and Zoom Video Webinars.

We addressed new work-from-home realities with the introduction of Zoom for Home, a solution designed for the home office that combines Zoom software enhancements with compatible hardware.

We also expanded our geographic footprint with Zoom Phone availability in 26 new countries and territories during fiscal year 2021, bringing the total to 44.

Third-party developers are also a key component of our strategy for platform innovation to make it easier for customers and developers to extend our product portfolio with new functionalities.

1 unchanged sentence

We will need to expend additional resources to continue introducing new products, features, and functionality, and supporting the efforts of third parties to enhance the value of our platform with their own applications.

An End-to-end encryption (“E2EE”) option is now available to free and paid Zoom customers globally who host meetings with up to 200 participants.

Zoom’s E2EE uses the same AES-256-GCM encryption that secures Zoom meetings by default, but with Zoom’s new E2EE, the meeting host generates encryption keys and uses public key cryptography to distribute these keys to the other meeting participants.

We recently announced two additions to the Zoom platform:

OnZoom and Zoom Apps.

OnZoom is an online event platform for Zoom users to create and host free, paid, and fundraising events.

OnZoom is currently offered as a public beta for U.S.

users to attend online events.

Zoom Apps are a new app type coming soon to the Zoom App Marketplace.

These in-product integrations will be accessible directly from Zoom Meetings and the Zoom Desktop client and are designed to facilitate collaboration and engagement during meetings.

International Expansion

2 unchanged sentences

We plan to add local sales support in further select international markets over time.

We use strategic partners and resellers to sell in international markets, such as China, where we have limited or no sales presence.

We use strategic partners and resellers to sell in certain international markets where we have limited or no direct sales presence.

While we believe global demand for our platform will continue to increase as international market awareness of Zoom grows, our ability to conduct our operations internationally will require considerable management attention and resources, and is subject to the particular challenges of supporting a rapidly growing business in an environment of multiple languages, cultures, customs, legal and regulatory systems, alternative dispute systems, and commercial markets.

5 unchanged sentences

To better distinguish business customers from our broader customer base, we review the number of customers with more than 10 employees.

As of January 31, 2020, 2019, and 2018, we had approximately 81,900, 50,800, and 25,800 customers with more than 10 employees, respectively.

As of January 31, 2021, 2020, and 2019, we had approximately 467,100, 81,900, and 50,800 customers, respectively, with more than 10 employees.

When disclosing the number of customers, we round down to the nearest hundred.

Since the start of the COVID-19 pandemic early this fiscal year, our customer cohort with 10 or fewer employees expanded as business owners and individual users adopted Zoom for many personal, professional, and social events.

As a result, we have experienced a shift in the makeup of customer cohorts, with 36% of revenue attributable to customers with 10 or fewer employees during the fiscal year ended January 31, 2021, compared to 18% for the prior fiscal year.

Customers Contributing More Than $100,000 of Trailing 12 Months Revenue

10 unchanged sentences

It is important to note that other companies, including companies in our industry, may not use this metric, may calculate this metric differently, or may use other financial measures to evaluate their liquidity, all of which could reduce the usefulness of this non-GAAP metric as a comparative measure.

The following table presents a summary of our cash flows for the fiscal years presented and a reconciliation of FCF to net cash used in operating activities, the most directly comparable financial measure calculated in accordance with GAAP:

The following table presents a summary of our cash flows for the fiscal years presented and a reconciliation of FCF to net cash provided by operating activities, the most directly comparable financial measure calculated in accordance with GAAP:

Year Ended January 31,

5 unchanged sentences

Net cash used in investing activities $ (1,562,420) $ (499,468) $ (39,719)

Net cash provided by (used in) financing activities $ 615,690 $ 17,534 $ (3,997)

Net cash provided by financing activities $ 2,050,277 $ 615,690 $ 17,534

Components of Results of Operations

We derive our revenue from subscription agreements with customers for access to our video-first communications platform.

Our customers do not have the ability to take possession of our software.

We also provide services, which include professional services, consulting services, and online event hosting, which are generally considered distinct from the access to our video-first communications platform.

We derive our revenue from subscription agreements with customers for access to our unified communications platform.

Our customers generally do not have the ability to take possession of our software.

We also provide services, which include professional services, consulting services, and online event hosting, which are generally considered distinct from the access to our unified communications platform.

Cost of Revenue

Cost of revenue primarily consists of costs related to hosting our video-first communications platform and providing general operating support services to our customers.

These costs are related to our co-located data centers, third-party cloud hosting, integrated third-party PSTN services, personnel-related expenses, amortization of capitalized software development, and allocated overhead.

We expect our cost of revenue to increase for the foreseeable future, both in absolute dollars and as a percentage of total revenue, as we expand our data center capacity and third party cloud hosting due to increased usage stemming from the recent outbreak of the COVID-19 virus.

Cost of revenue primarily consists of costs related to hosting our unified communications platform and providing general operating support services to our customers.

We expect our cost of revenue to increase in absolute dollars during the upcoming fiscal year, as we expand our data center capacity due to increased usage stemming from the COVID-19 pandemic.

However, the cost of revenue as a percentage of revenue may decrease over time as we scale our data centers to accommodate usage from our increased customer base and as the ratio of free to paid users varies.

Operating Expenses

2 unchanged sentences

Research and development costs are expensed as incurred.

We plan to increase our investment in research and development for the foreseeable future, as we focus on further developing our platform and enhancing its use cases.

We plan to increase our investment in research and development for the foreseeable future, primarily by increasing research and development headcount, as we focus on further developing our platform, enhancing its use cases, and strengthening security and privacy.

As a result, we expect our research and development expenses to increase both in absolute dollars and as a percentage of total revenue, during the upcoming fiscal year.

1 unchanged sentence

Sales and marketing expenses primarily consist of personnel-related expenses directly associated with our sales and marketing organization.

Other sales and marketing expenses include advertising and promotional events to promote our brand, such as awareness programs, digital programs, tradeshows, and our user conference, Zoomtopia, and allocated overhead.

Sales and marketing expenses also include amortization of deferred contract acquisition costs.

We plan to increase our investment in sales and marketing over the foreseeable future, primarily from increased headcount in our sales force and investment in brand and product marketing efforts.

As a result, we expect our sales and marketing expenses to increase in absolute dollars during the upcoming fiscal year, although these expenses may fluctuate as a percentage of total revenue from quarter to quarter depending on the timing of various events.

Other sales and marketing expenses include advertising and promotional events to promote our brand, such as awareness programs, digital programs, public relations, tradeshows, and our user conference, Zoomtopia, and allocated overhead.

Sales and marketing expenses also include amortization of deferred contract acquisition costs and credit card processing fees related to sales.

We plan to increase our investment in sales and marketing over the foreseeable future, primarily by increasing the headcount of our direct sales force and marketing investments in demand generation.

As a result, we expect our sales and marketing expenses to increase both in absolute dollars and as a percentage of total revenue, during the upcoming fiscal year.

General and Administrative

1 unchanged sentence

professional fees for external legal, accounting, and other consulting services;

bad debt expense;

expected credit losses;

indirect taxes;

and allocated overhead.

We expect to increase the size of our general and administrative function to support the growth of our business.

We expect to increase the size of our general and administrative function to support the growth and complexity of our business.

As a result, we expect our general and administrative expenses to increase in absolute dollars, but to remain relatively constant as a percentage of total revenue, during the upcoming fiscal year.

Interest Income and Other, Net

Interest income and other, net consists primarily of interest income and net accretion earned on our marketable securities.

Interest income and other, net consists primarily of interest income and net accretion earned on our marketable securities, effect of changes in foreign currency exchange rates, and remeasurement gains or losses on our equity investment.

Provision for Income Taxes

Provision for income taxes consists primarily of income taxes related to foreign and state jurisdictions where we conduct business.

Provision for income taxes consists primarily of income taxes related to federal, state, and foreign jurisdictions where we conduct business.

Results of Operations

15 unchanged sentences

Total operating expenses 1,169,531 494,566 263,349

Income (loss) from operations 12,696 6,167 (4,833)

Income from operations 659,848 12,696 6,167

Interest income and other, net 18,186 13,666 2,182

Net income (loss) before provision for income taxes 26,362 8,349 (3,518)

Income before provision for income taxes 678,034 26,362 8,349

Provision for income taxes 5,718 1,057 765

Net income (loss) $ 25,305 $ 7,584 $ (3,822)

Net income $ 672,316 $ 25,305 $ 7,584

(1) Includes stock-based compensation expense as follows:

15 unchanged sentences

Total operating expenses 44 79 80

Income (loss) from operations 2 2 (3)

Income from operations 25 2 2

Interest income and other, net 1 2 1

Net income (loss) before provision for income taxes 4 3 (2)

Income before provision for income taxes 26 4 3

Provision for income taxes 1 0 1

Net income (loss) 4 % 2 % (3) %

Net income 25 % 4 % 2 %

Comparison of Fiscal Years Ended January 31, 2021 and 2020

1 unchanged sentence

2021 2020 $ Change % Change

(in thousands)

(in thousands, except percentages)

Revenue $ 2,651,368 $ 622,658 $ 2,028,710 326 %

Revenue for the fiscal year ended January 31, 2021 increased by $2,028.7 million, or 326%, compared to the fiscal year ended January 31, 2020.

The increase was primarily due to subscription services provided to existing customers, which accounted for approximately 63% of the increase, and to subscription services provided to new customers, which accounted for approximately 37% of the increase.

D ue to the COVID-19 pandemic, t here was an increase in usage of our services, as many organizations around the world started utilizing our platform to continue their operations remotely.

As a result, the increase in revenue was primarily due to subscription services provided to new customers, which accounted for approximately 73% of the increase, and to subscription services provided to existing customers, which accounted for approximately 27% of the increase.

Cost of Revenue

1 unchanged sentence

2021 2020 $ Change % Change

(in thousands)

(in thousands, except percentages)

Cost of revenue $ 821,989 $ 115,396 $ 706,593 612 %

2 unchanged sentences

Cost of revenue for the fiscal year ended January 31, 2021 increased by $706.6 million, or 612%, compared to the fiscal year ended January 31, 2020.

The increase in cost of revenue was primarily due to an increase of $31.3 million in costs related to our co-located data centers, third-party cloud hosting, and integrated third-party PSTN services to support the increase in customers and expanded use of our video-first communications platform by existing customers;

an increase of $17.6 million in personnel-related expenses mainly driven by increased headcount, which includes a $6.7 million increase in stock-based compensation expense;

and an increase of $4.1 million in allocated overhead expenses.

In response to the COVID-19 pandemic, we have temporarily removed the 40-minute time limit for meetings with more than two endpoints from our free Basic accounts for more than 125,000 K-12 school domains worldwide .

We also experienced a significant increase in usage from paid users as more companies started utilizing our platform to allow their employees to work remotely.

This increase in usage resulted in an increase of $619.2 million in costs related to third-party cloud hosting, integrated third-party PSTN services, and our co-located data centers to support the increase in customers and expanded use of our unified communications platform by existing customers.

The remaining increase was primarily due to an increase of $59.3 million in personnel-related expenses mainly driven by additional headcount, which includes a $27.1 million increase in stock-based compensation expense;

an increase of $18.4 million in professional services mainly for customer support, and an increase of $5.8 million related to subscription to software-based services.

Gross margin decreased to 69% for the fiscal year ended January 31, 2021 from 81% for the fiscal year ended January 31, 2020.

The decrease in gross margin was due to higher incremental cost from leveraging third-party cloud hosting providers to meet the significant increase in usage as well as the higher percentage of usage from free users.

Operating Expenses

2 unchanged sentences

2021 2020 $ Change % Change

(in thousands)

(in thousands, except percentages)

Research and development $ 164,080 $ 67,079 $ 97,001 145 %

Research and development expense for the fiscal year ended January 31, 2020 increased by $34.1 million, or 103%, compared to the fiscal year ended January 31, 2019, as we continued to add new features and functionalities to our video-first communications platform.

The increase was primarily due to an increase of $33.6 million in personnel-related expenses mainly driven by increased headcount, which includes a $10.3 million increase in stock-based compensation expense.

The remainder of the increase was primarily attributable to an increase of $2.2 million in allocated overhead expenses, partially offset by a decrease of $1.5 million related to government grants received.

Research and development expense for the fiscal year ended January 31, 2021 increased by $97.0 million, or 145%, compared to the fiscal year ended January 31, 2020.

The increase was primarily due to higher personnel-related expenses of $79.7 million mainly driven by additional headcount, which includes a $38.5 million increase in stock-based compensation expense.

The remainder of the increase was primarily attributable to an increase of $12.1 million in professional services mainly related to security, and an increase of $3.4 million related to subscription to software-based services.

Sales and Marketing

1 unchanged sentence

2021 2020 $ Change % Change

(in thousands)

(in thousands, except percentages)

Sales and marketing $ 684,904 $ 340,646 $ 344,258 101 %

Sales and marketing expense for the fiscal year ended January 31, 2021 increased by $344.3 million, or 101%, compared to the fiscal year ended January 31, 2020.

The increase in sales and marketing expense was primarily due to an increase of $103.5 million in personnel-related expenses mainly driven by increased headcount to support the growth in our sales force, which includes an increase of $37.9 million in stock-based compensation expense, of which $20.2 million is related to the Employee Stock Purchase Plan (“ESPP”) and $16.4 million is related to an increase in amortization of deferred contract acquisition costs driven by our increase in revenue.

The remaining increase was primarily due to an increase of $22.1 million in

marketing and sales event-related costs as a result of increased costs related to digital and awareness programs, an increase of $17.1 million in allocated overhead expenses, an increase of $4.9 million in processing cost associated with sales, an increase of $4.1 million related to subscription to software-based services, and an increase of $1.9 million related to travel expenses.

The increase in sales and marketing expense was primarily due to higher personnel-related expenses of $266.1 million, mainly driven by additional headcount in our sales force to support the increased demand , which includes an increase of $104.9 million in stock-based compensation expense;

and an increase of $67.2 million in amortization of deferred contract acquisition costs driven by our increase in revenue.

The remaining increase was primarily due to an increase of $68.4 million in credit card processing fees as a result of increased online payments, an increase of $16.0 million in professional services primarily to support the increase in sales, and an increase of $6.2 million related to subscription to software-based services, partially offset by a decrease of $14.6 million in marketing and sales event-related costs mainly due to a decrease in digital and awareness programs and trade shows.

General and Administrative

1 unchanged sentence

2021 2020 $ Change % Change

(in thousands)

(in thousands, except percentages)

General and administrative $ 320,547 $ 86,841 $ 233,706 269 %

General and administrative expense for the fiscal year ended January 31, 2021 increased by $233.7 million, or 269%, compared to the fiscal year ended January 31, 2020.

The increase in general and administrative expense was primarily due to an increase of $24.8 million in personnel-related expenses mainly driven by increased headcount, which includes a $9.2 million increase in stock-based compensation expense.

The remaining increase was primarily due to an increase of $7.7 million related to professional services composed primarily of legal and accounting fees, an increase of $6.0 million related to insurance expenses, and an increase of $2.9 million related to a contingent liability for sales and other indirect taxes.

The increase in general and administrative expense was primarily due to an increase of $71.8 million in personnel-related expenses mainly driven by additional headcount, which includes a $32.2 million increase in stock-based compensation expense;

and an increase of $66.9 million related to professional services composed primarily of legal and other consulting fees.

The remaining increase was primarily due to an increase of $30.2 million related to a contingent liability for sales and other indirect taxes, an increase of $25.7 million due to charitable donations related mainly to shares transferred to a donor advised fund, an increase of $13.4 million related to subscription to software-based services, an increase of $10.2 million related to insurance expenses and $9.8 million for a one-time payment to MPEG LA, LLC (“MPEGLA”).

Interest Income and Other, Net

1 unchanged sentence

2021 2020 $ Change % Change

(in thousands)

(in thousands, except percentages)

Interest income and other, net $ 18,186 $ 13,666 $ 4,520 33 %

Interest income and other, net for the fiscal year ended January 31, 2021 increased by $4.5 million, or 33%, compared to the fiscal year ended January 31, 2020.

The increase was primarily attributable to an increase of $8.6 million in interest income earned from our investments in marketable securities and net accretion of $2.6 million on our investments in marketable securities.

The increase was primarily attributable to a gain of $3.5 million related to changes in foreign currency exchange rates and a gain of $2.5 million related to the remeasurement of our equity investment.

Provision for Income Taxes

1 unchanged sentence

2021 2020 $ Change % Change

(in thousands)

(in thousands, except percentages)

Provision for income taxes $ 5,718 $ 1,057 $ 4,661 441 %

Provision for income taxes for the fiscal year ended January 31, 2021 increased by $4.7 million, or 441%, compared to the fiscal year ended January 31, 2020.

The change in provision for income taxes was primarily due to international operations.

For discussion on comparison of the fiscal years ended January 31, 2019 and 2018, see the Results of Operations section disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Prospectus, which was filed with the SEC on April 18, 2019 and hereby incorporated by reference herein and considered part of this Annual Report on Form 10-K only to the extent referenced.

The change in provision for income taxes was primarily due to expansion in international operations.

For a discussion of the fiscal year ended January 31, 2020 compared to the fiscal year ended January 31, 2019, please refer to Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended January 31, 2020.

Liquidity and Capital Resources

As of January 31, 2020, our principal sources of liquidity were cash, cash equivalents, and marketable securities of $855.2 million, which were held for working capital purposes.

Our marketable securities generally consist of high-grade commercial paper, corporate bonds, agency bonds, corporate debt securities, U.S.

As of January 31, 2021, our principal sources of liquidity were cash, cash equivalents, and marketable securities of $4.2 billion, which were held for working capital purposes and for investment in growth opportunities.

Our marketable securities generally consist of high-grade commercial paper, corporate bonds, agency bonds, corporate and other debt securities, U.S.

government agency securities, and treasury bills.

We have financed our operations primarily through customer payments and sales of equity securities.

In April 2019, we completed our IPO, which resulted in aggregate net proceeds of $447.9 million, after underwriting discounts and commissions and before deducting offering costs of $6.4 million.

We also received aggregate proceeds of $100.0 million related to our concurrent private placement and did not pay any underwriting discounts or commissions with respect to the shares that were sold in this private placement.

We believe our existing cash, cash equivalents, and marketable securities, together with net cash provided by operations, will be sufficient to meet our needs for at least the next 12 months.

expansion and the timing and extent of additional capital expenditures to invest in existing and new office spaces.

We have financed our operations primarily through income from operations and sales of equity securities.

Cash from operations could also be affected by various risks and uncertainties, including, but not limited to, the effects of the COVID-19 pandemic, including timing of cash collections from our customers and other risks detailed in the section titled “Risk Factors.” However, based on our current business plan and revenue prospects, we believe our existing cash, cash equivalents, and marketable securities, together with net cash provided by operations, will be sufficient to meet our needs for at least the next 12 months and allow us to capitalize on growth opportunities.

Our future capital requirements will depend on many factors, including our revenue growth rate, subscription renewal activity, billing frequency, the timing and extent of spending to support further sales and marketing and research and development efforts, as well as expenses associated with our international expansion, and the timing and extent of additional capital expenditures to invest in existing and new office spaces as well as data center infrastructure.

We may, in the future, enter into arrangements to acquire or invest in complementary businesses, services, and technologies, including intellectual property rights.

8 unchanged sentences

Net cash used in investing activities $ (1,562,420) $ (499,468) $ (39,719)

Net cash provided by (used in) financing activities $ 615,690 $ 17,534 $ (3,997)

Net cash provided by financing activities $ 2,050,277 $ 615,690 $ 17,534

Operating Activities

Our largest source of operating cash is cash collections from our paying users for subscriptions to our platform.

Our largest source of operating cash is cash collections from our customers for subscriptions to our platform.

Our primary uses of cash from operating activities are for employee-related expenditures, costs related to hosting our platform, and marketing expenses.

Net cash provided by operating activities is impacted by our net income (loss) adjusted for certain non-cash items, such as stock-based compensation, depreciation and amortization expenses, as well as the effect of changes in operating assets and liabilities.

Net cash provided by operating activities is impacted by our net income adjusted for certain non-cash items, such as stock-based compensation expense, depreciation and amortization expenses, as well as the effect of changes in operating assets and liabilities.

Net cash provided by operating activities was $1,471.2 million for the fiscal year ended January 31, 2021, compared to $151.9 million for the fiscal year ended January 31, 2020.

The increase in operating cash flow was due to an increase in net income of $17.7 million and an increase in non-cash adjustments of $100.1 million, partially offset by the impact on operating cash flow from changes in operating assets and liabilities.

The increase in operating cash flow was due to an increase in net income of $647.0 million, the positive impact from changes in operating assets and liabilities of $332.1 million, and an increase in non-cash adjustments of $340.2 million, which is primarily a result of higher stock-based compensation expense, higher deferred contract acquisition cost amortization due to an increase in capitalized commissions as we continue to grow and expand our customer base, higher provision for accounts receivable allowances due to higher accounts receivable balances, and expenses related to a charitable donation of common stock in the current fiscal year.

Investing Activities

Net cash used in investing activities of $499.5 million for the fiscal year ended January 31, 2020 was primarily due to net purchases of marketable securities of $456.7 million, purchases of property and equipment of $38.1 million, and purchase of an equity investment of $3.0 million.

Net cash used in investing activities of $39.7 million for the fiscal year ended January 31, 2019 was primarily due to purchases of property and equipment of $28.4 million, net purchases of marketable securities of $9.3 million, and purchases of intangible assets of $2.0 million.

Net cash used in investing activities of $1,562.4 million for the fiscal year ended January 31, 2021 was primarily due to net purchases of marketable securities of $1,438.8 million, purchases of property and equipment of $80.0 million, cash paid for acquisition, net of cash acquired, of $26.5 million, purchase of an equity investment of $8.0 million, purchases of intangible assets of $5.8 million, and purchase of a convertible note of $5.0 million.

Net cash used in investing activities of $499.5 million for the fiscal year ended January 31, 2020 was primarily due to net purchases of marketable securities of $456.7 million and purchases of property and equipment of $38.1 million.

Financing Activities

Net cash provided by financing activities of $615.7 million for the fiscal year ended January 31, 2020 was primarily due to proceeds from the issuance of Class A common stock in connection with the IPO and private placement, net of underwriting discounts and commissions and other offering costs, of $542.5 million, proceeds from international employee stock sales to be remitted to employees and tax authorities of $48.5 million, proceeds from issuance of common stock for ESPP of $15.5 million, and proceeds from the exercise of stock options, net of repurchases, of $9.2 million.

Net cash provided by financing activities of $17.5 million for the fiscal year ended January 31, 2019 was primarily due to proceeds from issuance of convertible promissory notes and derivatives of $15.0 million and proceeds from the exercise of stock options of $3.6 million.

For discussion on operating, investing, and financing activities of the fiscal year ended January 31, 2018, see the Liquidity and Capital Resources section disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Prospectus, which was filed with the SEC on April 18, 2019 and hereby incorporated by reference herein and considered part of this Annual Report on Form 10-K only to the extent referenced.

Net cash provided by financing activities of $2,050.3 million for the fiscal year ended January 31, 2021 was due to proceeds from our follow-on offering, net of underwriting discounts and commissions and other offering costs, of $1,979.2

million, proceeds from issuance of common stock pursuant to our employee stock purchase plan (“ESPP”) of $38.4 million, proceeds from the exercise of stock options of $28.6 million, and proceeds from international employee stock sales to be remitted to employees and tax authorities of $4.1 million.

Net cash provided by financing activities of $615.7 million for the fiscal year ended January 31, 2020 was due to proceeds from the issuance of Class A common stock in connection with the IPO and private placement, net of underwriting discounts and commissions and other offering costs, of $542.5 million, proceeds from international employee stock sales to be remitted to employees and tax authorities of $48.5 million, proceeds from issuance of common stock pursuant to our ESPP of $15.5 million, and proceeds from the exercise of stock options, net of repurchases, of $9.2 million.

For a discussion of the fiscal year ended January 31, 2019 , please refer to Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended January 31, 2020.

Commitments and Contractual Obligations

11 unchanged sentences

Off-Balance Sheet Arrangements

As of January 31, 2020, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special-purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

We do not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated by the SEC under the Securities Act.

Critical Accounting Policies and Estimates

4 unchanged sentences

Revenue Recognition

We derive our revenue from subscription agreements with customers for access to our video-first communications platform and services.

We derive our revenue primarily from subscription agreements with customers for access to our unified communications platform and services.

We also provide other services, which include professional services, consulting services, and online event hosting, which were immaterial to our consolidated financial statements.

Revenue is recognized when a customer obtains control of promised services.

6 unchanged sentences

Identification of the performance obligations in the contract

Performance obligations committed in a contract are identified based on the services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the service either on its own or together with other resources that are readily available from third parties or from us, and are distinct in the context of the contract, whereby the transfer of the services and the products is separately identifiable from other promises in the contract.

Our performance obligations generally consist of access to our video-first communications platform and related support services, which is considered one performance obligation.

Performance obligations committed in a contract are identified based on the services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the service either on its own or together with other resources that are readily available from third parties or from us, and are distinct in the context of the contract, whereby the transfer of the services or products is separately identifiable from other promises in the contract.

Promised services or products under which both of these two criteria are not met are recognized as a combined, single performance obligation.

Our performance obligations primarily relate to access to our unified communications platform, which consists of one or more software-based services.

Our customers do not have the ability to take possession of our software, and through access to our platform, we provide a series of distinct software-based services that are satisfied over the term of the subscription.

Determination of the transaction price

3 unchanged sentences

Revenue is recognized net of any taxes collected from customers, which are subsequently remitted to governmental entities (e.g., sales and other indirect taxes).

Our video-first communications platform and related support services are typically warranted to perform in a professional manner that will comply with the terms of the subscription agreements.

Our unified communications platform and related services are typically warranted to perform in a professional manner that will comply with the terms of the subscription agreements.

In addition, we include service-level commitments to our customers warranting certain levels of uptime reliability and performance and permitting those customers to receive credits in the event that we fail to meet those service levels.

These credits represent a form of variable consideration.

Historically, we have not experienced any significant incidents affecting the defined levels of reliability and performance as required by the subscription agreements.

We have not provided any material refunds related to these agreements in the consolidated financial statements during the periods presented.

1 unchanged sentence

Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on each performance obligation’s relative standalone selling price.

As noted above, access to our video-first communications platform and related support services are considered one performance obligation in the context of the contract and, accordingly, the transaction price is allocated to this single performance obligation.

Our contracts with multiple performance obligations are generally sold over the same subscription term and have the same pattern of transfer to the customer, and so they are accounted for as one combined performance obligation in the context of the contract.

Accordingly, the transaction price is allocated to this single performance obligation.

Recognition of the revenue when, or as, a performance obligation is satisfied

1 unchanged sentence

Revenue is recognized in an amount that reflects the consideration that we expect to receive in exchange for those services.

Fees for access to our video-first communications platform and related support services are subscription revenue and are considered one performance obligation, and the related revenue is recognized ratably over the subscription period as we satisfy the performance obligation.

Professional services are time-based arrangements, and revenue is recognized as these services are performed.

Fees for access to our unified communications platform and related services are subscription revenue and are considered one performance obligation, and the related revenue is recognized ratably over the subscription period as we satisfy the performance obligation.

Contract Balances

6 unchanged sentences

Cost to Obtain a Contract

We capitalize sales commissions and associated payroll taxes paid to internal sales personnel that are incremental to the acquisition of customer contracts.

These costs are recorded as deferred contract acquisition costs on the consolidated balance sheets.

We primarily capitalize sales commissions and associated payroll taxes paid to internal sales personnel that are incremental costs from the acquisition of customer contracts.

These costs are recorded as deferred contract acquisition costs in the consolidated balance sheets.

We determine whether costs should be deferred based on our sales compensation plans and if the commissions are incremental and would not have occurred absent the customer contract.

2 unchanged sentences

Amortization is recognized on a straight-line basis commensurate with the pattern of revenue recognition.

We determine the period of benefit for commissions paid for the acquisition of the initial customer contract by taking into consideration the initial estimated customer life and the technological life of our video-first communications platform and related significant features.

We determine the period of benefit for commissions paid for the acquisition of the initial customer contract by taking into consideration the initial estimated customer life and the technological life of our unified communications platform and related significant features.

Amortization of deferred contract acquisition costs is included in sales and marketing expense in the consolidated statements of operations.

Allowance for Credit Losses

We maintain an allowance for credit losses for expected uncollectible accounts receivable, which is recorded as an offset to accounts receivable, and changes in such are classified as general and administrative expense in the consolidated statements of operations.

The allowance for credit losses is based on management’s estimate for expected credit losses for outstanding accounts receivable.

We determine expected credit losses based on historical write-off experience, an analysis of the aging of outstanding receivables, customer payment patterns, the establishment of specific reserves for customers in an adverse financial condition, and adjust based upon our expectations of changes in macroeconomic conditions that may impact the collectibility of outstanding receivables, including noncurrent accounts receivable.

We also consider current market conditions and reasonable and supportable forecasts of future economic conditions to inform adjustments to historical loss data.

We reassess the adequacy of the allowance for credit losses each reporting period.

Business Combinations and Valuation of Goodwill and Intangible Assets

We account for our business combinations using the acquisition method of accounting, which requires, among other things, allocation of the fair value of purchase consideration to the tangible and intangible assets acquired and liabilities assumed at their estimated fair values on the acquisition date.

The excess of the fair value of purchase consideration over the values of these identifiable assets and liabilities is recorded as goodwill.

When determining the fair value of assets acquired and liabilities assumed, we make estimates and assumptions, especially with respect to intangible assets.

Our estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.

During the measurement period, not to exceed one year from the date of acquisition, we may record adjustments to the assets acquired and liabilities assumed, with a corresponding offset to goodwill if new information is obtained related to facts and circumstances that existed as of the acquisition date.

After the measurement period, any subsequent adjustments are reflected in the consolidated statements of operations.

Acquisition costs, such as legal and consulting fees, are expensed as incurred.

Goodwill amounts are not amortized, but rather tested for impairment at least annually, in the fourth quarter of each fiscal year, or more often if circumstances indicate that the carrying value may not be recoverable.

As of January 31, 2021, no impairment of goodwill has been identified.

Intangible assets consist of acquired identifiable intangible assets resulting from business combinations, as well as other intangible assets purchased outside of a business combination.

Finite-lived intangible assets are initially recorded at fair value and are amortized on a straight-line basis over their estimated useful lives.

We routinely evaluate the estimated remaining useful lives of our finite-lived intangible assets and whether events or changes in circumstances warrant a revision to the remaining period of amortization.

Indefinite-lived intangible assets are recorded at fair value and are not amortized.

We review the useful lives of indefinite-lived intangible assets each reporting period to determine whether events and circumstances continue to support the indefinite useful life classification.

If we determine that the life of an intangible asset is no longer indefinite, that asset would be tested for impairment and amortized prospectively over its estimated remaining useful life.

We have not recorded any impairment charges during the fiscal years presented.

Stock-Based Compensation

1 unchanged sentence

The fair value of each option award is estimated on the grant date using the Black-Scholes option pricing model.

The Black-Scholes option pricing model requires the input of highly subjective assumptions, including the fair value of the underlying common stock, the expected term of the option, the expected volatility of the price of our common stock, risk-free interest rates,

and the expected dividend yield of our common stock.

The assumptions used to determine the fair value of the option awards represent management’s best estimates.

The assumptions used to determine the fair value of the option awards

represent management’s best estimates.

These estimates involve inherent uncertainties and the application of management’s judgment.

37 unchanged sentences

After the equity value was determined and allocated to the various classes of shares, a discount for lack of marketability (“DLOM”) was applied to arrive at the fair value of common stock on a non-marketable basis.

A DLOM is applied based on the

theory that as an owner of a private company stock, the stockholder has limited information and opportunities to sell this stock.

A DLOM is applied based on the theory that as an owner of a private company stock, the stockholder has limited information and opportunities to sell this stock.

A market participant that would purchase this stock would recognize this risk and thereby require a higher rate of return, which would reduce the overall fair market value.

2 unchanged sentences

This determination included an evaluation of whether the subsequent valuation indicated that any significant change in valuation had occurred between the previous valuation and the grant date.

For valuation after our IPO, the fair value of common stock for each grant date was determined based on the closing price of our Class A common stock as reported on the date of the respective grant.

For valuation after our IPO, the fair value of common stock for each grant date was determined based on the closing price of our Class A common stock as reported on the Nasdaq Global Select Market on the date of the respective grant.

Employee Stock Purchase Plan Valuation

13 unchanged sentences

• Expected Volatility.

As we have a limited trading history for our common stock, the expected volatility was estimated by taking the average historic price volatility for industry peers, consisting of several public companies in our industry which are either similar in size, stage of life cycle, or financial leverage, over a period equivalent to the expected term of the awards.

For the ESPP purchase rights granted during the fiscal year ended January 31, 2020, as we have a limited trading history for our common stock, the expected volatility was estimated by taking the average historic price volatility for industry peers, consisting of several public companies in our industry which are either similar in size, stage of life cycle, or financial leverage, over a period equivalent to the expected term of the awards.

For the ESPP purchase rights granted during the fiscal year ended January 31, 2021, expected volatility was determined using a combination of the implied volatility of publicly traded options in our stock and historical volatility of our stock price.

• Expected Dividend Yield.

1 unchanged sentence

As a result, an expected dividend yield of zero percent was used.

JOBS Act Accounting Election

We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act (“JOBS Act”).

Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies.

We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards, and therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

Recent Accounting Pronouncements

2 unchanged sentences

Foreign Currency and Exchange Risk

The vast majority of our cash generated from revenue are denominated in U.S.

The vast majority of our cash generated from revenue is denominated in U.S.

dollars, with a small amount denominated in foreign currencies.

Our expenses are generally denominated in the currencies of the jurisdictions in which we conduct our operations, which are primarily in the United States, China, Europe, and Australia.

Our results of current and future operations

and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates.

Our results of current and future operations and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates.

The effect of a hypothetical 10% change in foreign currency exchange rates applicable to our business would not have had a material impact on our historical consolidated financial statements for the fiscal years ended January 31, 2021, 2020, and 2019.

As the impact of foreign currency exchange rates has not been material to our historical operating results, we have not entered into derivative or hedging transactions, but we may do so in the future if our exposure to foreign currency becomes more significant.

As the impact of

foreign currency exchange rates has not been material to our historical operating results, we have not entered into derivative or hedging transactions, but we may do so in the future if our exposure to foreign currency becomes more significant.

Interest Rate Risk

We had cash and cash equivalents of $283.1 million and marketable securities of $572.1 million as of January 31, 2020.

We had cash and cash equivalents of $2.2 billion and marketable securities of $2.0 billion as of January 31, 2021.

Cash and cash equivalents consist of bank deposits, money market funds, high-grade commercial paper, and agency bonds.

Our marketable securities generally consist of high-grade commercial paper, corporate bonds, agency bonds, corporate debt securities, U.S.

Our marketable securities generally consist of high-grade commercial paper, agency bonds, corporate and other debt securities, U.S.

government agency securities, and treasury bills.

The cash, cash equivalents, and marketable securities are held for working capital purposes.

The cash and cash equivalents and marketable securities are held for working capital purposes.

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

4 unchanged sentences

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-K

Item 7. Management’s Discussion and Analysis