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You should read the following discussion and analysis of our financial condition and results of operations together with our condensed consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year endedJanuary 31, 2022 , filed with theSEC onMarch 14, 2022 . Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the sections titled "Special Note Regarding Forward-Looking Statements" and "Risk Factors" 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. The last day of our fiscal year isJanuary 31 . Our fiscal quarters end onApril 30 ,July 31 ,October 31 , andJanuary 31 . Our fiscal year endingJanuary 31, 2023 is referred to herein as fiscal 2023. Our fiscal years endedJanuary 31, 2022 and 2021 are referred to herein as fiscal 2022 and fiscal 2021, respectively. OverviewSumo Logic empowers the people who power modern, digital businesses. Our mission is to be the leading software-as-a-service analytics platform for reliable and secure cloud-native applications. With our platform, we help our customers ensure application reliability, secure and protect against modern security threats, and gain insights into their cloud infrastructure. Our multi-tenant, cloud-native platform - which we refer to as our Continuous Intelligence Platform - provides powerful, real-time, machine data analytics and insights across observability and security solutions. We generate revenue through the sale of subscriptions to customers that enable them to access our cloud-native platform. We recognize subscription revenue ratably over the term of the subscription, which is generally one to two years, but can be three years or longer. We offer multi-tiered paid subscription packages for access to our platform, the pricing for which differs based on a variety of factors, including volume of data to be ingested, duration of data retention, and breadth of access to platform features and functionalities. Our subscription packages encourage customers to expand their adoption of our platform by providing them with the flexibility to ingest and analyze large volumes of data and the ability to access a broad suite of platform features and functionalities without incurring overage fees, as well as insights into their usage patterns. We also deliver basic customer support with each of our paid subscription packages, and customers have the ability to purchase subscriptions to our premium support service. We recognize revenue from premium support service ratably over the term of the subscription. Our go-to-market strategy consists of self-service adoption through our website, an inside sales team, a field sales team, and a partner channel. We offer free trials that enable potential customers to experience the benefits of our platform, and we see significant conversion from our trial users to paid customers, with approximately one-third of our new customers in fiscal 2022 having been free trial users who converted into paying customers. We leverage our user community to proactively identify trends, gather global insights, and create new use cases, thereby empowering us to deliver out-of-the-box value to our customers. We employ a land-and-expand business model centered around our platform offerings, which have a rapid time to value for our customers and are easily extensible to multiple use cases across a business. We utilize the analytical capabilities of our platform and our customer success team to understand how our customers use, and how they would benefit from expanding their use of our platform. This understanding helps us successfully upsell and cross sell to our existing customers. The power of our platform, and the benefits that it delivers to customers, has driven rapid growth in our revenue. For the six months endedJuly 31, 2022 and 2021, our revenue was$142.0 million and$113.1 million , respectively, representing a period over period growth rate of 26%. For the six months endedJuly 31, 2022 and 2021, our annualized recurring revenue ("ARR") was$286.2 million and$229.8 million , respectively, representing a period over period growth rate of 25%. We generated GAAP operating losses of$71.4 million and$59.4 million for the six months endedJuly 31, 2022 and 2021, respectively. We define non-GAAP operating loss as loss from operations excluding stock-based compensation expense and related employer payroll taxes, amortization of acquired intangible assets, acquisition-related expenses, and expenses related to a cooperation agreement. We generated non-GAAP operating losses of$28.1 million and$23.2 million for the six months endedJuly 31, 2022 and 2021, respectively. See "Key Factors Affecting Our Performance" for a definition of ARR. See "Non-GAAP Financial Measures" for the reconciliation of GAAP operating loss to non-GAAP operating loss.
Impact of COVID-19
As a result of the ongoing COVID-19 pandemic, we have temporarily closed or reduced capacity at our offices, continue to require many of our employees and contractors to work remotely, and have reduced business travel, all of which represent a significant disruption in how we operate our business. InMay 2020 , as part of our efforts to respond to the COVID-19 pandemic and ensure longer-term financial stability, we initiated cost reduction measures, including a headcount reduction. The operations of our partners and customers have likewise been disrupted, and we believe this has caused delays in renewal decisions for some of our existing 25
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customers, caused customers to request concessions such as extended payment terms or better pricing, and affected contraction or churn rates for our customers. While the duration and extent of the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such as the duration and spread of the outbreak, the emergence of variants of the virus, the extent and effectiveness of containment actions, and the effectiveness of vaccination efforts, it has already had an adverse effect on the global economy and the ultimate societal and economic impact of the COVID-19 pandemic remains unknown. Since the fourth quarter of fiscal 2022, the Omicron variant of COVID-19 became the dominant strain in numerous countries around the world, includingthe United States , and it is more contagious than other previously identified COVID-19 strains. However, we believe that the COVID-19 pandemic will continue to accelerate customer transformation into digital businesses, which we anticipate could generate additional opportunities for us in the future. Due to our subscription-based business model, the effect of the COVID-19 pandemic may not be fully reflected in our revenue until future periods. See "Risk Factors - The global COVID-19 pandemic has harmed and could continue to harm our business and results of operations" for further discussion of the challenges and risks we have encountered and could encounter related to the COVID-19 pandemic.
Key factors affecting our performance
Acquisition of new customers
Our business depends, in part, on our ability to add new customers. We believe the continued trend of digital transformation and increase in digital services and cloud applications across all organizations will continue to drive demand for our platform and broaden our customer base. Since our platform has offerings for organizations of all sizes and across industries, including organizations of all stages of cloud maturity, we believe these market changes present a significant opportunity for growth. As ofJuly 31, 2022 , we had over 2,400 customers worldwide, spanning organizations of a broad range of sizes and industries. However, we anticipate that continued economic uncertainty, including as a result of the COVID-19 pandemic and expectations that the macroeconomic environment may become more challenging in the future, may adversely affect our ability to add new customers in the future. We will continue to focus on new customer acquisition by investing in sales and marketing to build brand awareness, expanding our community, and driving adoption of our platform as we further capture the opportunity in our addressable market. We define a customer as a separate legal entity, such as a company or an educational or government institution, that is under a paid contract with us or with which we are negotiating a renewal contract at the end of a given period. Given our historical experience of customer renewals, if we are in active discussions for a renewal or upgrade, we continue to include customers with expired contracts in our customer count until the customer either renews its contract or negotiations terminate without renewal. In situations where an organization has multiple subsidiaries or divisions that separately contract with us, we typically treat only the parent entity as the customer instead of treating each subsidiary or division as a separate customer. However, we count each purchaser of our self-service offering as a unique customer, regardless of other subscriptions such organization may have.
Expansion within our existing customer base
Our business depends, in part, on the degree to which our land-and-expand strategy is successful. Our customers often initially adopt our platform for a specific use case and subsequently increase their adoption as they realize the benefits and flexibility of our platform. We have been successful in expanding our existing customers' adoption of our platform as demonstrated by our dollar-based net retention rate, which we consider an indicator of our ability to retain and expand revenue from existing customers over time. Our dollar-based net retention rate as ofJuly 31, 2022 and 2021, was 115% and 104%, respectively. Due to the realignment of our sales force, which will likely result in a relatively higher focus on new customer acquisitions, we expect it will take several quarters before we start to see a sustained improvement in our dollar-based net retention rate.
Our successful implementation and expansion model has helped us accelerate adoption among our largest customers, as evidenced by our customers with over
We define ARR as the annualized recurring revenue run-rate from all customers
that are under contract with us at the end of the period or with which we are
negotiating a renewal contract. Given our historical experience of customer
renewals, if we are in active discussions for a renewal, we continue to include
customers with expired contracts in our ARR until the customer either renews its
contract or negotiations terminate without renewal. For certain customers whose
revenue may fluctuate from month to month based upon their specific contractual
arrangements, we calculate ARR using the annualized monthly recurring revenue,
or MRR, run-rate (MRR multiplied by 12). This enables us to calculate our
anticipated recurring revenue for all customers based on our packaging and
licensing models, which we believe provides a more accurate view of our
anticipated recurring revenue.
Our dollar-based net retention rate is calculated as of a period end by starting
with the ARR from all subscription customers as of 12 months prior to such
period end, or Prior Period ARR. We then calculate the ARR from these same
subscription customers as of the current period end, or Current Period ARR.
Current Period ARR includes any expansion and is net of contraction or churn
over the
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Rolling 12 months, but excludes ARR of new subscribers for the current period. We then divide the current period’s TAR by the previous period’s TAR to arrive at our net retention rate in dollars.
We intend to extend our leadership position by continuing to innovate, bringing new technologies to market, honing best practices, and driving thought leadership. Our success depends, in part, on our ability to sustain innovation and technology leadership in order to maintain a competitive advantage. We expect to continue to invest in research and development to increase our revenue and achieve long-term profitability, and we intend to continue extending the applicability of our platform as well as improving the value of our offerings for our customers. We believe that our platform is highly differentiated and has broad applicability to a wide variety of observability and security use cases, and we will continue to invest in developing and enhancing platform features and functionality to further extend the adoption of our platform. Additionally, we will continue to evaluate opportunities to acquire or invest in businesses, offerings, technologies, or talent that we believe could complement or expand our platform, enhance our technical capabilities, or otherwise offer growth opportunities. Once we complete acquisitions, we must successfully integrate and manage these acquisitions to realize their benefits.
International expansion
We intend to continue to invest in our international operations to grow our business outside ofthe United States . We generated 22% and 21% of our revenue outsidethe United States during the three and six months endedJuly 31, 2022 , respectively, and 17% for the three and six months endedJuly 31, 2021 , respectively. We believe that global demand for observability and security analytics will continue to increase as international businesses undergo digital transformations and adopt cloud-based technologies. We currently have a sales presence throughoutAsia-Pacific -Japan , andEurope , with sales offices inSydney, Australia , Noida,India ,Tokyo, Japan , andLondon, United Kingdom , and we further increase our global reach with our international channel partners. International expansion over the long term represents a significant opportunity and we plan to continue to invest in growing our presence internationally, both through expanding our sales and marketing efforts and leveraging channel and other ecosystem partners.
Components of operating results
Revenue
We generate subscription revenue through the sale of subscriptions to customers that enable them to access our cloud-native platform. Subscription terms are generally one to two years, but can be three years or longer, and a substantial majority of our contracts are non-cancelable. Subscription revenue is driven by sales of our multi-tiered paid subscriptions, the pricing for which differs based on a variety of factors, including volume of data expected to be ingested, duration of data retention, and breadth of access to our platform features and functionalities. We deliver basic customer support with each of our paid subscription packages, and customers have the ability to purchase subscriptions to our premium support service. Due to the ease of using our platform, professional services revenue from configuration, implementation, and training services constituted approximately 1% of our total revenue for the six months endedJuly 31, 2022 and 2021. Cost of Revenue Cost of revenue includes all direct costs to deliver and support our platform, including personnel and related costs, third-party hosting fees related to our cloud platform, amortization of internal-use software and acquired developed technology, as well as allocated facilities and IT costs. As new customers purchase access to our platform and our existing customer base expands their utilization of our platform, we will incur greater cloud hosting costs related to the increased volume of data being hosted. We will continue to invest additional resources in our platform infrastructure and customer support organizations to expand the capabilities of our platform features and ensure that our customers are realizing the full benefit of our platform. The level and timing of investment in these areas could affect our cost of revenue in the future.
Gross profit and gross margin
Gross profit represents revenue less cost of revenue, and gross margin is gross
profit expressed as a percentage of revenue. Our gross margin may fluctuate from
period to period as our revenue fluctuates, and has been and will continue to be
affected by various factors, including the timing and amount of investments to
maintain or expand our cloud hosting capability, the continued growth of data
being hosted on our platform and customer support teams, increased compensation
expenses, as well as amortization of costs associated with capitalized
internal-use software and acquired intangible assets. We expect our gross profit
to increase and our gross margin to remain consistent over the near term due to
the continued growth in the use of our platform, but increase modestly over the
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longer term with cost savings related to our cloud hosting services, although our gross margins may fluctuate from period to period depending on the interaction of the factors described above.
Functionnary costs
Our operating expenses consist of research and development, sales and marketing, and general and administrative expenses. Personnel and related expenses are the most significant component of operating expenses and consist of salaries, employee benefit costs, payroll taxes, bonuses, sales commissions, travel-related expenses, and stock-based compensation expense, as well as the allocated portion of overhead costs for facilities and IT. Operating expenses also include cloud infrastructure fees and other services related to staging and development efforts for our platform.
Research and development
Research and development expenses consist primarily of costs related to research, design, maintenance, and minor enhancements of our platform that are expensed as incurred. These costs consist primarily of personnel and related expenses, including allocated overhead costs, contractor and consulting fees related to the design, development, testing, and enhancement of our platform, and software, hardware, and cloud infrastructure fees for staging and development related to research and development activities necessary to support growth in our employee base and in the adoption of our platform. We expect that our research and development expenses will increase in dollar value as we continue to increase our investments in our platform. However, we anticipate research and development expenses will decrease as a percentage of our revenue over the long term, although they may fluctuate as a percentage of our revenue from period to period depending on the timing of expenses.
Sales and Marketing
Sales and marketing expenses consist primarily of personnel and related expenses including allocated overhead costs and commissions, costs of general marketing and promotional activities, including free trials of our platform, fees for professional services related to marketing, and software and hardware to support growth in our employee base. Sales commissions earned by our sales force that are considered incremental costs of obtaining a subscription with a customer are deferred and amortized on a straight-line basis over the expected period of benefit, which we have determined to be five years. We expect that our sales and marketing expenses will increase in dollar value over the long term, though the dollar value of such expenses may fluctuate in the near term. We believe that sales and marketing expenses will continue to be our largest operating expense for the foreseeable future as we expand our sales and marketing efforts. We expect that our sales and marketing expenses will be relatively flat as a percentage of our revenue over the near term, but decrease over the long term, although they may fluctuate as a percentage of revenue from period to period depending on the timing of expenses.
General and administrative
General and administrative expenses consist primarily of personnel and related expenses associated with our executive, finance, legal, human resources, information technology and security, and other administrative personnel. In addition, general and administrative expenses include non-personnel costs, such as fees for professional services such as external legal, accounting, and other consulting services, hardware and software costs, certain taxes other than income taxes, and overhead costs not allocated to other departments. We expect that our general and administrative expenses will increase in dollar value as our business grows. However, we expect that our general and administrative expenses will decrease as a percentage of our revenue as our revenue grows over the long term, although they may fluctuate as a percentage of revenue from period to period depending on the timing of expenses.
Interest and other income (expenses), net
Interest and other income (expense), net primarily consists of interest earned from our cash, cash equivalents, and marketable securities, and foreign currency transaction gains (losses). Interest Expense
Interest expense consists primarily of interest incurred on our previous borrowings under our revolving line of credit.
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Provision (benefit) for income taxes
Provision (benefit) for income taxes consists primarily of income taxes in certain foreign jurisdictions in which we conduct business. We maintain a full valuation allowance on our federal and state net deferred tax assets as 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 condensed consolidated statements of earnings for the periods indicated (in thousands):
Three Months Ended July 31, Six Months Ended July 31,
2022 2021 2022 2021
Revenue $ 74,108 $ 58,841 $ 141,963 $ 113,060
Cost of revenue(1)(2)(3) 25,963 19,778 50,108 35,173
Gross profit 48,145 39,063 91,855 77,887
Operating expenses:
Research and development(1)(3) 27,636 23,861 53,889 44,304
Sales and marketing(1)(2)(3) 39,536 31,457 74,826 61,735
General and administrative(1)(3)(4) 17,552 16,670 34,548 31,243
Total operating expenses 84,724 71,988 163,263 137,282
Loss from operations (36,579) (32,925) (71,408) (59,395)
Interest and other income (expense), net 1,149 69 1,780 53
Interest expense (6) (3) (35) (89)
Loss before provision for income taxes (35,436) (32,859) (69,663) (59,431)
Provision (benefit) for income taxes 444 (810) 967 (468)
Net loss $ (35,880) $ (32,049) $ (70,630) $ (58,963)
____________
(1)Includes stock-based compensation expense and related payroll taxes as follows (in thousands):
Three Months Ended July 31, Six Months Ended July 31,
2022 2021 2022 2021
Cost of revenue $ 370 $ 193 $ 686 $ 366
Research and development(a) 7,752 6,103 14,306 10,961
Sales and marketing 5,890 4,291 8,807 8,013
General and administrative 5,176 3,906 8,935 8,094
Total stock-based compensation expense and
related employer payroll taxes $ 19,188 $
14,493
(a) See Note 9 to our condensed consolidated financial statements for capitalized stock-based compensation expense related to internal-use software development costs.
(2)Includes amortization of acquired intangible assets as follows (in
thousands):
Three Months Ended July 31, Six Months Ended July 31,
2022 2021 2022 2021
Cost of revenue $ 3,501 $ 3,006 $ 7,060 $ 4,543
Sales and marketing 150 83 300 83
Total amortization of acquired intangible
assets $ 3,651 $ 3,089 $ 7,360 $ 4,626
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(3) Includes acquisition-related expenses as follows (in thousands):
Three Months Ended July 31, Six Months Ended July 31,
2022 2021 2022 2021
Cost of revenue $ 71 $ 54 $ 152 $ 54
Research and development 257 238 549 238
Sales and marketing 85 86 186 86
General and administrative - 2,540 - 3,756
Total acquisition-related expenses $ 413
(4)Includes expenses for consulting and professional services of third parties associated with a cooperation agreement as follows (in thousands):
Three Months Ended July 31, Six Months Ended July 31,
2022 2021 2022 2021
General and administrative $ 634 $ - $ 2,354 $ -
Total expenses related to a cooperation
agreement $ 634 $
–
The following table presents the data of our condensed consolidated statements of results expressed as a percentage of sales:
Three Months Ended July 31, Six Months Ended July 31,
2022 2021 2022 2021
Revenue 100 % 100 % 100 % 100 %
Cost of revenue 35 34 35 31
Gross profit 65 % 66 % 65 % 69 %
Operating expenses:
Research and development 37 41 38 39
Sales and marketing 53 53 53 55
General and administrative 24 28 24 28
Total operating expenses 114 % 122 % 115 % 121 %
Loss from operations (49) (56) (50) (53)
Interest and other income (expense), net 1 - 1 -
Interest expense - - - -
Loss before provision for income taxes (48) (56) (49) (53)
Provision (benefit) for income taxes - (2) 1 (1)
Net loss (48) % (54) % (50) % (52) %
____________
Note: Some numbers may not match due to rounding.
Comparison of the three months ended
Revenue
Three Months Ended July 31,
2022 2021 Change % Change
(dollars in thousands)
Revenue $ 74,108 $ 58,841 $ 15,267 26 %
Revenue increased by $15.3 million , or 26%, during the three months ended July
31, 2022 compared to the three months ended July 31, 2021 . Approximately 90% of
the revenue was attributable to existing customers, and approximately 10% was
attributable to new customers for the three months ended July 31, 2022 . The
number of customers with greater than $100,000 of ARR increased to 489 as of
July 31, 2022 from 410 as of July 31, 2021 .
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Cost of revenue, gross profit and gross margin
Three Months Ended July 31,
2022 2021 Change % Change
(dollars in thousands)
Cost of revenue $ 25,963 $ 19,778 $ 6,185 31 %
Gross profit 48,145 39,063 9,082 23 %
Gross margin 65 % 66 %
Cost of revenue increased by $6.2 million , or 31%, during the three months ended
July 31, 2022 compared to the three months ended July 31, 2021 . The increase in
cost of revenue was primarily due to a $5.7 million increase in third-party
hosting fees and personnel costs related to providing access to and supporting
our platform and a $0.5 million increase in amortization of acquired developed
technology as a result of our acquisitions of Sensu and DFLabs in the second
quarter of fiscal 2022. Gross profit increased $9.1 million while gross margin
decreased 1% primarily as a result of increased third-party hosting fees and
increased amortization of acquired developed technology.
Research and Development
Three Months Ended July 31,
2022 2021 Change % Change
(dollars in thousands)
Research and development $ 27,636 $ 23,861 $ 3,775 16 %
Percentage of revenue 37 % 41 %
Research and development expenses increased by $3.8 million , or 16%, during the
three months ended July 31, 2022 compared to the three months ended July 31,
2021 . The increase in research and development expenses was primarily driven by
a $3.8 million increase in personnel and related expenses directly associated
with an increase in average headcount as well as an increase in the average cost
per head as we continued to hire and increase resources to develop and expand
the functionality of our software offerings, of which $1.7 million was related
to stock-based compensation expense and related employer payroll taxes. In
addition, software, hardware, and cloud infrastructure fees for staging and
development increased $0.5 million , partially offset by a $0.4 million increase
in capitalized internal-use software.
Sales and Marketing
Three Months Ended July 31,
2022 2021 Change % Change
(dollars in thousands)
Sales and marketing $ 39,536 $ 31,457 $ 8,079 26 %
Percentage of revenue 53 % 53 %
Sales and marketing expenses increased by $8.1 million , or 26%, during the three
months ended July 31, 2022 compared to the three months ended July 31, 2021 . The
increase in sales and marketing expenses was primarily driven by a $6.0 million
increase in personnel and related expenses associated with an increase in
average headcount as well as an increase in the average cost per head as we
continue to invest in our go-to-market coverage, capacity, and expansion into
new markets. In addition, advertising and promotional costs, and third-party
public relations and marketing services increased by $0.9 million , amortization
of referral fees increased by $0.6 million , and software subscription costs
increased by $0.4 million as we continue to increase our efforts to execute our
market expansion strategy.
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General and Administrative
Three Months Ended July 31,
2022 2021 Change % Change
(dollars in thousands)
General and administrative $ 17,552 $ 16,670 $ 882 5 %
Percentage of revenue 24 % 28 %
General and administrative expenses increased by $0.9 million , or 5%, during the
three months ended July 31, 2022 compared to the three months ended July 31,
2021 . The increase in general and administrative expenses was primarily driven
by a $3.0 million increase in personnel and related expenses associated with an
increase in average headcount as well as an increase in the average cost per
head as we continue to invest in personnel to support the growth of our
business, reporting and compliance requirements, partially offset by the absence
of $2.5 million in acquisition-related expenses during the three months ended
July 31, 2022 .
Interest and other income (expenses), net
Three Months Ended July 31,
2022 2021 Change % Change
(dollars in thousands)
Interest and other income (expense), net $ 1,149 $ 69 $ 1,080 1,565 %
Interest and other income (expense), net increased by $1.1 million , or 1,565%,
during the three months ended July 31, 2022 compared to the three months ended
July 31, 2021 . The increase in interest and other income (expense), net was
primarily driven by an increase in interest income due to higher yield on
invested funds.
Interest Expense
Three Months Ended July 31,
2022 2021 Change % Change
(dollars in thousands)
Interest expense $ (6) $ (3) $ (3) 100 %
Interest expense consists of amortization of costs related to our line of credit
facility. The change between the three months ended July 31, 2022 and 2021 was
immaterial.
Comparison of the six months ended
Revenue
Six Months Ended July 31,
2022 2021 Change % Change
(dollars in thousands)
Revenue $ 141,963 $ 113,060 $ 28,903 26 %
Revenue increased by $28.9 million , or 26%, during the six months ended July 31,
2022 compared to the six months ended July 31, 2021 . Approximately 90% of the
revenue was attributable to existing customers, and approximately 10% was
attributable to new customers for the six months ended July 31, 2022 . The number
of customers with greater than $100,000 of ARR increased to 489 as of July 31,
2022 from 410 as of July 31, 2021 .
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Cost of revenue, gross profit and gross margin
Six Months Ended July 31,
2022 2021 Change % Change
(dollars in thousands)
Cost of revenue $ 50,108 $ 35,173 $ 14,935 42 %
Gross profit 91,855 77,887 13,968 18 %
Gross margin 65 % 69 %
Cost of revenue increased by $14.9 million , or 42%, during the six months ended
July 31, 2022 compared to the six months ended July 31, 2021 . The increase in
cost of revenue was primarily due to a $12.6 million increase in third-party
hosting fees and personnel costs related to providing access to and supporting
our platform and a $2.5 million increase in amortization of acquired developed
technology as a result of our acquisitions of Sensu and DFLabs in the second
quarter of fiscal 2022. Gross profit increased $14.0 million while gross margin
decreased 4% primarily as a result of increased third-party hosting fees and
increased amortization of acquired developed technology.
Research and Development
Six Months Ended July 31,
2022 2021 Change % Change
(dollars in thousands)
Research and development $ 53,889 $ 44,304 $ 9,585 22 %
Percentage of revenue 38 % 39 %
Research and development expenses increased by $9.6 million , or 22%, during the
six months ended July 31, 2022 compared to the six months ended July 31, 2021 .
The increase in research and development expenses was primarily driven by a $9.2
million increase in personnel and related expenses directly associated with an
increase in average headcount as we continued to hire and increase resources to
develop and expand the functionality of our software offerings, of which $3.3
million was related to stock-based compensation expense and related employer
payroll taxes. In addition, software, hardware, and cloud infrastructure fees
for staging and development increased $1.2 million , partially offset by a $0.6
million increase in capitalized internal-use software.
Sales and Marketing
Six Months Ended July 31,
2022 2021 Change % Change
(dollars in thousands)
Sales and marketing $ 74,826 $ 61,735 $ 13,091 21 %
Percentage of revenue 53 % 55 %
Sales and marketing expenses increased by $13.1 million , or 21%, during the six
months ended July 31, 2022 compared to the six months ended July 31, 2021 . The
increase in sales and marketing expenses was primarily driven by a $9.0 million
increase in personnel and related expenses associated with an increase in
average headcount as well as an increase in the average cost per head as we
continue to invest in our go-to-market coverage, capacity, and expansion into
new markets. In addition, advertising and promotional costs, and third-party
public relations and marketing services increased by $2.0 million , amortization
of referral fees increased by $1.0 million , and software subscription costs
increased by $0.4 million as we continue our efforts to execute our market
expansion strategy.
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General and Administrative
Six Months Ended July 31,
2022 2021 Change % Change
(dollars in thousands)
General and administrative $ 34,548 $ 31,243 $ 3,305 11 %
Percentage of revenue. 24 % 28 %
General and administrative expenses increased by $3.3 million , or 11%, during
the six months ended July 31, 2022 compared to the six months ended July 31,
2021 . The increase in general and administrative expenses was primarily driven
by a $4.0 million increase in personnel and related expenses associated with an
increase in average headcount, a $2.4 million increase in third-party fees
related to a cooperation agreement, and a $0.5 million increase in professional
fees partially offset by the absence of $3.8 million in acquisition-related
expenses during the six months ended July 31, 2022 .
Interest and other income (expenses), net
Six Months Ended July 31,
2022 2021 Change % Change
(dollars in thousands)
Interest and other income (expense), net $ 1,780 $ 53 $ 1,727 3,258 %
Interest and other income (expense), net increased by $1.7 million , or 3,258%,
during the six months ended July 31, 2022 compared to the six months ended July
31, 2021 . The increase in interest and other income (expense), net was primarily
driven by an increase in interest income due to higher yield on invested funds.
Interest Expense
Six Months Ended July 31,
2022 2021 Change % Change
(dollars in thousands)
Interest expense $ (35) $ (89) $ 54 (61) %
Interest expense decreased by $0.1 million , or 61%, during the six months ended
July 31, 2022 compared to the six months ended July 31, 2021 . The decrease in
interest expense was primarily driven by lower amortization of costs related to
our line of credit facility.
Non-GAAP Financial Measures
In addition to our financial information presented in accordance with GAAP and
the key business metrics presented above, we believe the following non-GAAP
financial measures are useful to investors in evaluating our operating
performance. We use the following non-GAAP financial measures, collectively, to
evaluate our ongoing operations and for internal planning and forecasting
purposes, including the preparation of our annual operating budget and quarterly
forecasts, to evaluate the effectiveness of our business strategies, and to
communicate with our board of directors concerning our financial performance. We
believe that non-GAAP financial measures, when taken together with the
corresponding GAAP financial measures, may be helpful to investors because they
provide consistency and comparability with past financial performance and
meaningful supplemental information regarding our performance by excluding
certain items that may not be indicative of our business, results of operations,
or outlook. The non-GAAP financial measures are presented for supplemental
informational purposes only, have limitations as analytical tools, and should
not be considered in isolation or as a substitute for financial information
presented in accordance with GAAP and may be different from similarly-titled
non-GAAP financial measures used by other companies. In addition, other
companies, including companies in our industry, may calculate similarly-titled
non-GAAP financial measures differently or may use other measures to evaluate
their performance, all of which could reduce the usefulness of our non-GAAP
financial measures as tools for comparison. Investors are encouraged to review
the related GAAP financial measures and the reconciliation of these non-GAAP
financial measures to their most directly comparable GAAP financial measures,
and not to rely on any single financial measure to evaluate our business.
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Non-GAAP Gross Profit and Non-GAAP Gross Margin
We define non-GAAP gross profit and non-GAAP gross margin as gross profit and
gross margin, respectively, excluding stock-based compensation expense and
related employer payroll taxes, amortization of acquired intangible assets, and
acquisition-related expenses. The following table sets forth our non-GAAP gross
profit and non-GAAP gross margin for the periods indicated (dollars in
thousands):
Three Months Ended July 31, Six Months Ended July 31,
2022 2021 2022 2021
Gross profit $ 48,145 $ 39,063 $ 91,855 $ 77,887
Add: Stock-based compensation expense and related
employer payroll taxes 370 193 686 366
Add: Amortization of acquired intangible assets 3,501 3,006 7,060 4,543
Add: Acquisition-related expenses 71 54 152 54
Non-GAAP gross profit $ 52,087 $ 42,316 $ 99,753 $ 82,850
Gross margin 65 % 66 % 65 % 69 %
Non-GAAP gross margin 70 % 72 % 70 % 73 %
Non-GAAP operating loss and non-GAAP operating margin
We define non-GAAP operating loss and non-GAAP operating margin as loss from
operations and operating margin, respectively, excluding stock-based
compensation expense and related employer payroll taxes, amortization of
acquired intangible assets, acquisition-related expenses, and expenses related
to a cooperation agreement. The following table sets forth our non-GAAP
operating loss and non-GAAP operating margin for the periods indicated (dollars
in thousands):
Three Months Ended July 31, Six Months Ended July 31,
2022 2021 2022 2021
Loss from operations $ (36,579) $ (32,925) $ (71,408) $ (59,395)
Add: Stock-based compensation expense and related
employer payroll taxes 19,188 14,493 32,734 27,434
Add: Amortization of acquired intangible assets 3,651 3,089 7,360 4,626
Add: Acquisition-related expenses 413 2,918 887 4,134
Add: Expenses related to a cooperation agreement 634 - 2,354 -
Non-GAAP operating loss $ (12,693) $ (12,425) $ (28,073) $ (23,201)
Operating margin (49) % (56) % (50) % (53) %
Non-GAAP operating margin (17) % (21) % (20) % (21) %
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Non-GAAP net loss
We define non-GAAP net loss as loss from operations, excluding stock-based
compensation expense and related employer payroll taxes, amortization of
acquired intangible assets, acquisition-related expenses, and expenses related
to a cooperation agreement. The following table sets forth our non-GAAP net loss
for the periods indicated (in thousands):
Three Months Ended July 31, Six Months Ended July 31,
2022 2021 2022 2021
Net loss $ (35,880) $
(32,049)
Add: Stock-based compensation expense and related employer payroll taxes
19,188 14,493 32,734 27,434 Add: Amortization of acquired intangible assets 3,651 3,089 7,360 4,626 Add: Acquisition-related expenses 413 2,918 887 4,134 Add: Expenses related to a cooperation agreement 634 - 2,354 - Non-GAAP net loss$ (11,994) $ (11,549) $ (27,295) $ (22,769) Free Cash Flow We define free cash flow as cash used in operating activities less purchases of property and equipment and capitalized internal-use software costs. We believe free cash flow is a useful indicator of liquidity that provides our management, board of directors, and investors with information about our future ability to generate or use cash to enhance the strength of our balance sheet and further invest in our business and pursue potential strategic initiatives. The following table sets forth our free cash flow for the periods indicated (in thousands): Three Months Ended July 31, Six Months Ended July 31, 2022 2021 2022 2021 Cash used in operating activities$ (12,007) $ (4,538) $ (13,439) $ (7,257) Less: Purchases of property and equipment (15) (1,054) (386) (1,301) Less: Capitalized internal-use software costs (418) - (605) - Free cash flow$ (12,440) $ (5,592) $ (14,430) $ (8,558) Cash provided by (used) in investing$ (318,060) activities$ 9,682 $
(51,823)
Cash provided by financing activities
$ 17,959
Cash and capital resources
Since inception, we have financed our operations primarily through subscription revenue from customers accessing our cloud-native platform and the net proceeds of issuances of equity securities. We have incurred losses and generated negative cash flows from operations, as reflected in our accumulated deficit of$591.8 million as ofJuly 31, 2022 . As ofJuly 31, 2022 , we had$82.2 million in cash and cash equivalents and$268.3 million in marketable securities. We believe our existing cash and cash equivalents, marketable securities, and cash provided by sales of access to our platform will be sufficient to meet our projected operating requirements for at least the next 12 months, despite the ongoing COVID-19 pandemic, continued supply chain disruptions, and uncertainty in the changing market and macroeconomic conditions, including inflation and rising interest rates, which may have an impact on our available cash due to customer requests for extended payment terms or better pricing. As a result of our revenue growth plans, we expect that losses and negative cash flows from operations may continue in the near term. Our future capital requirements will depend on many factors, including our subscription growth rate, subscription renewals, billing timing and frequency, pricing changes, the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced platform features and functionality, the continued market adoption of our platform, and the impact of the COVID-19 pandemic on our business and results of operations, the business of our customers, and the economy. We may in the future pursue acquisitions of businesses, technologies, assets, and talent. InFebruary 2021 , we entered into an Amended and Restated Loan and Security Agreement withSilicon Valley Bank , or the SVB Agreement, which provides for a revolving line of credit. The SVB Agreement amends and restates the Loan and Security 36
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Agreement dated as ofJanuary 31, 2016 . Under the SVB Agreement, we can borrow up to$50 million . Interest on any drawdown accrues at the prime rate minus a spread rate ranging from 0.25% to 0.75%, as determined by our adjusted quick ratio, subject to either a 3.00% or 2.50% floor depending on the adjusted quick ratio. The SVB agreement is secured by substantially all of our assets and includes restrictive covenants, in each case subject to certain exceptions, that limit our ability to, among other things: incur debt, grant liens, make acquisitions, undergo a change in control, make investments, make certain dividends or distributions, repurchase or redeem stock, dispose of or transfer assets, and enter into transactions with affiliates. Pursuant to the SVB Agreement, we are also required to maintain a minimum adjusted quick ratio of 1.25 to 1.00. The SVB Agreement also contains customary events of default, upon whichSilicon Valley Bank may declare all or a portion of our outstanding obligations payable to be immediately due and payable. As ofJuly 31, 2022 , we did not have any debt outstanding. We typically invoice our subscription customers annually in advance, and in certain cases, we invoice upfront for multi-year contracts. Therefore, a substantial source of our cash is from such prepayments, which are included on our condensed consolidated balance sheets as deferred revenue. Deferred revenue consists of billed fees for our subscriptions and to a lesser extent, premium support services, prior to satisfying the criteria for revenue recognition, which are subsequently recognized as revenue in accordance with our revenue recognition policy. As ofJuly 31, 2022 , future estimated revenue related to performance obligations from non-cancelable contracts that were unsatisfied or partially unsatisfied was$340.4 million , of which we expect to recognize approximately 93% as revenue over the next 24 months, with the remaining balance recognized thereafter. As ofJuly 31, 2022 , we had deferred revenue of$150.9 million , of which$143.2 million was recorded as a current liability and is expected to be recognized as revenue within the next 12 months, subject to applicable revenue recognition criteria.
Cash flow
The following table shows a summary of our cash flows for the periods presented
(in thousands):
Six Months Ended July 31,
2022 2021
Net cash provided by (used in):
Operating activities $ (13,439) $ (7,257)
Investing activities $ 4,383 $ (318,060)
Financing activities $ 12,122 $ 17,959
Operating Activities
Our main source of operating cash comes from receipts from sales of subscriptions to our customers. Our primary uses of cash flow from operations are personnel and related expenses, marketing expenses, and hosting and third-party software costs. Over the past few years, we have generated negative cash flow from operations and supplemented our working capital requirements with net proceeds from equity financings.
Cash used in operating activities for the six months endedJuly 31, 2022 of$13.4 million consisted of our net loss of$70.6 million , adjusted for non-cash charges of$53.8 million and net cash inflows of$3.4 million provided by changes in our operating assets and liabilities. Non-cash charges primarily consisted of stock-based compensation of$32.2 million , amortization of deferred sales commissions of$9.7 million , depreciation and amortization of$8.5 million , and$2.1 million of non-cash operating lease costs. Net cash inflows from changes in operating assets and liabilities were primarily the result of a$13.7 million increase in deferred revenue resulting from increased billings for subscriptions, a$2.0 million increase in accounts payable and accrued expenses due to timing of payments to vendors, and a$0.6 million decrease in prepaid expenses and other assets related to the timing of payments to vendors and amortization of prior amounts paid. Net cash inflows were partially offset by cash outflows resulting from a$9.4 million increase in deferred sales commissions due to commissions paid on new bookings, a$2.3 million decrease in lease liabilities due to monthly rental payments for our operating leases and a$1.5 million increase in accounts receivable due to new billings outpacing collections during the period. Cash used in operating activities for the six months endedJuly 31, 2021 of$7.3 million consisted of our net loss of$59.0 million , adjusted for non-cash charges of$41.4 million and net cash inflows of$10.3 million provided by changes in our operating assets and liabilities. Non-cash charges primarily consisted of stock-based compensation of$26.2 million , amortization of deferred sales commissions of$7.2 million , depreciation and amortization of$5.6 million , and$2.1 million of non-cash operating lease costs. Net cash inflows from changes in operating assets and liabilities were primarily the result of a$14.7 million decrease in accounts receivable due to collections being greater than billings during the period, a$4.9 million increase in deferred revenue resulting from increased billings for subscriptions, and a$4.9 million decrease in prepaid expenses and other assets related to the timing of payments to vendors and amortization of prior amounts paid. Net cash inflows were partially offset by cash outflows resulting from a$9.5 37
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million increase in deferred sales commissions due to commissions paid on new bookings, a$2.5 million decrease in accounts payable and accrued expenses due to the timing of payments to vendors and a$2.2 million decrease in lease liabilities due to monthly rental payments for our operating leases.
Investing activities
Cash provided by investing activities for the six months endedJuly 31, 2022 of$4.4 million primarily consisted of$123.9 million of maturities and sales of marketable securities partially offset by$118.5 million of purchases of marketable securities and$1.0 million in purchases of property and equipment primarily related to purchases of computers for new employees as well as additions of capitalized internal-use software development costs. Cash used in investing activities for the six months endedJuly 31, 2021 of$318.1 million primarily consisted of purchases of marketable securities of$291.7 million , and cash paid for acquisitions, net of cash and restricted cash acquired of$40.3 million , partially offset by$15.2 million of maturities of marketable securities. Financing Activities Cash provided by financing activities for the six months endedJuly 31, 2022 of$12.1 million consisted of proceeds from common stock option exercises of$9.7 million and proceeds from employee stock purchase plan of$2.8 million , partially offset by$0.5 million of cash paid for holdback consideration in connection with acquisitions. Cash provided by financing activities for the six months endedJuly 31, 2021 of$18.0 million primarily consisted of proceeds from common stock option exercises of$13.3 million and proceeds from employee stock purchase plan of$4.7 million .
Contractual obligations and commitments
The Company enters into contracts that are enforceable and legally binding and that specify all significant terms, including fixed or minimum services to be used, fixed, minimum, or variable price provisions, and the approximate timing of the actions under the contracts. The Company's material contractual obligations consist of data hosting and lease arrangements with its corporate facilities. Refer to Notes 5 and 7 to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. There has been no material change in our contractual obligations and commitments other than in the ordinary course of business since our fiscal year endedJanuary 31, 2022 . See the Annual Report on Form 10-K for the fiscal year endedJanuary 31, 2022 for additional information regarding the Company's contractual obligations. Indemnification Agreements In the ordinary course of business, we enter into agreements of varying scope and terms pursuant to which we agree to indemnify customers, vendors, lessors, business partners, and other parties with respect to certain matters. Some of these indemnification provisions do not provide for a maximum potential amount of future payments we could be obligated to make. No demands have been made upon us to provide indemnification under such agreements, and there are no claims that we are aware of that could have a material effect on our condensed consolidated balance sheets, condensed consolidated statements of operations and condensed consolidated statements of comprehensive loss, or condensed consolidated statements of cash flows.
Significant Accounting Policies and Estimates
We prepared our condensed consolidated financial statements and the related notes thereto, included elsewhere in this Quarterly Report on Form 10-Q, in accordance with GAAP. In preparation of these condensed consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, as of the date of the financial statements, and the reported amounts of income and expenses during the reporting period. These estimates are based on information available as of the date of the financial statements and may involve subjective or significant judgment by management; therefore, actual results could differ from the estimates made by management. We refer to accounting estimates of this type as critical accounting policies and estimates. Our significant accounting policies are described in the section titled "Summary of Significant Accounting Policies" in Note 2 in our Annual Report on Form 10-K for the year endedJanuary 31, 2022 . There have been no significant changes to these policies for the six months endedJuly 31, 2022 . 38
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Recent accounting pronouncements
See Note 2 to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for more information about the impact of certain recent accounting pronouncements on our condensed consolidated financial statements.
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