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EX-32.1 - EXHIBIT 32.1 - ZUORA INCa73118-ex321.htm
EX-32.2 - EXHIBIT 32.2 - ZUORA INCa73118-ex322.htm
EX-31.2 - EXHIBIT 31.2 - ZUORA INCa73118-ex312.htm
EX-31.1 - EXHIBIT 31.1 - ZUORA INCa73118-ex311.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
_____________________________ 
FORM 10-Q
_____________________________ 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2018
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 001-38451
_____________________________ 
Zuora, Inc.
(Exact name of registrant as specified in its charter)
_____________________________ 
 
Delaware
 
20-5530976
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
3050 South Delaware Street, Suite 301,
San Mateo, California
 
94403
(Address of principal executive offices)
 
(Zip Code)
(800) 425-1281
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
_____________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý No  ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files)    Yes  ý    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
Accelerated filer
 
 
 
 
 
Non-accelerated filer
 
ý  (Do not check if a smaller reporting company)
Smaller reporting company
 
 
 
 
 
 
 
 
Emerging growth company
 
ý
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ☐    No  ý
As of August 31, 2018, the number of shares of the registrant’s Class A common stock outstanding was 61,124,245 and the number of shares of the registrant’s Class B Common Stock outstanding was 46,594,634.




 
 
Page
 
 
 
PART I.
Item 1.
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
PART II.
Item 1.
Item 1A.
Item 2.
Item 6.





SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Unless the context otherwise requires, references in this Quarterly Report on Form 10-Q (Form 10-Q) to “Zuora,” “Company,” “our,” “us,” and “we” refer to Zuora, Inc. and where appropriate, its consolidated subsidiaries.
This Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. All statements contained in this Form 10-Q, other than statements of historical fact, including statements regarding our future operating results and financial position, our business strategy and plans, market growth, and our objectives for future operations, are forward-looking statements. Words such as “believes,” “may,” “will,” “estimates,” “potential,” “continues,” “anticipates,” “intends,” “expects,” “could,” “would,” “projects,” “plans,” “targets,” and variations of such words and similar expressions are intended to identify forward-looking statements.
Forward-looking statements contained in this Form 10-Q include, but are not limited to, statements about our expectations regarding:
trends in revenue, cost of revenue, and gross margin;
our investments in our platform and the cost of third-party hosting fees;
trends in operating expenses, including research and development expense, sales and marketing expense, and general and administrative expense, and expectations regarding these expenses as a percentage of revenue;
our existing cash and cash equivalents and restricted cash balances, funds available under our loan and security agreement, and cash provided by subscriptions to our platform and related professional services being sufficient to meet our working capital and capital expenditure needs for at least the next 12 months; and
other statements regarding our future operations, financial condition, and prospects and business strategies.
Such forward-looking statements are based on our expectations as of the date of this filing and are subject to a number of risks, uncertainties and assumptions, including but not limited to, risks detailed in the “Risk Factors” section of this Form 10-Q. Readers are urged to carefully review and consider the various disclosures made in this Form 10-Q and in other documents we file from time to time with the Securities and Exchange Commission (SEC) that disclose risks and uncertainties that may affect our business. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for us to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and circumstances discussed in this Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, performance or achievements. In addition, the forward-looking statements in this Form 10-Q are made as of the date of this filing, and we do not undertake, and expressly disclaim any duty, to update such statements for any reason after the date of this Form 10-Q or to conform statements to actual results or revised expectations, except as required by law.


1



PART I—FINANCIAL INFORMATION
 
Item 1.
Financial Statements
ZUORA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
 
July 31,
2018
 
January 31,
2018
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
179,195

 
$
48,208

Accounts receivable, net of allowance for doubtful accounts of $3,018 and $3,292 as of July 31, 2018 and January 31, 2018, respectively
42,054

 
49,764

Restricted cash, current portion
1,770

 

Prepaid expenses and other current assets
8,793

 
9,302

Total current assets
231,812

 
107,274

Property and equipment, net
16,924

 
10,204

Restricted cash, net of current portion
4,884

 
5,155

Purchased intangibles, net
10,048

 
11,292

Goodwill
20,861

 
20,614

Other assets
2,708

 
827

Total assets
$
287,237

 
$
155,366

Liabilities and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
2,841

 
$
2,572

Accrued expenses and other current liabilities
14,677

 
24,496

Accrued employee liabilities
20,976

 
17,701

Lease obligation, current portion
1,648

 
1,066

Debt, current portion
5,000

 
2,917

Deferred revenue, current portion
69,094

 
66,058

Total current liabilities
114,236

 
114,810

Debt, net of current portion
9,616

 
12,052

Deferred revenue, net of current portion
741

 
346

Lease obligation, net of current portion
1,541

 
324

Other long-term liabilities
1,856

 
1,168

Total liabilities
127,990

 
128,700

Commitments and contingencies (note 13)

 

Stockholders’ equity:
 
 
 
Convertible preferred stock

 
6

Class A common stock
4

 

Class B common stock
6

 
3

Additional paid-in capital
461,804

 
286,152

Related party receivable
(5,657
)
 
(1,281
)
Accumulated comprehensive loss
809

 
471

Accumulated deficit
(297,719
)
 
(258,685
)
Total stockholders’ equity
159,247

 
26,666

Total liabilities and stockholders’ equity
$
287,237

 
$
155,366

See notes to condensed consolidated financial statements.


2



ZUORA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands, except per share data)
(unaudited)
 
 
Three Months Ended
July 31,
 
Six Months Ended
July 31,
 
2018
 
2017
 
2018
 
2017
Revenue:
 
 
 
 
 
 
 
Subscription
$
41,470

 
$
28,797

 
$
77,584

 
$
54,852

Professional services
16,284

 
10,615

 
31,914

 
16,899

Total revenue
57,754

 
39,412

 
109,498

 
71,751

Cost of revenue:
 
 
 
 
 
 
 
Subscription
10,421

 
8,071

 
20,286

 
14,106

Professional services
18,226

 
12,552

 
34,379

 
19,326

Total cost of revenue
28,647

 
20,623

 
54,665

 
33,432

Gross profit
29,107

 
18,789

 
54,833

 
38,319

Operating expenses:
 
 
 
 
 
 
 
Research and development
13,323

 
9,768

 
25,385

 
17,645

Sales and marketing
25,429

 
18,479

 
48,266

 
33,431

General and administrative
8,563

 
5,551

 
17,974

 
10,230

Total operating expenses
47,315

 
33,798

 
91,625

 
61,306

Loss from operations
(18,208
)
 
(15,009
)
 
(36,792
)
 
(22,987
)
Interest and other (expense) income, net
(1,178
)
 
407

 
(1,851
)
 
391

Loss before income taxes
(19,386
)
 
(14,602
)
 
(38,643
)
 
(22,596
)
Income tax provision
(201
)
 
(239
)
 
(391
)
 
(371
)
Net loss
(19,587
)
 
(14,841
)
 
(39,034
)
 
(22,967
)
Comprehensive loss:
 
 
 
 
 
 
 
Foreign currency translation adjustment
418

 
154

 
340

 
320

Comprehensive loss
$
(19,169
)
 
$
(14,687
)
 
$
(38,694
)
 
$
(22,647
)
Net loss per share attributable to common stockholders, basic and diluted
$
(0.19
)
 
$
(0.56
)
 
$
(0.52
)
 
$
(0.90
)
Weighted-average shares outstanding used in calculating net loss per share attributable to common stockholders, basic and diluted
105,146

 
26,417

 
75,529

 
25,654

See notes to condensed consolidated financial statements.


3



ZUORA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Six Months Ended July 31,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net loss
$
(39,034
)
 
$
(22,967
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
4,495

 
3,188

Stock-based compensation
10,263

 
2,954

Loss on disposal of assets
144

 

Provision for doubtful accounts
2,512

 
345

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
5,198

 
1,421

Prepaid expenses and other current assets
(1,905
)
 
(267
)
Other assets
(1,881
)
 
(76
)
Accounts payable
159

 
(3,106
)
Accrued expenses and other current liabilities
2,626

 
1,873

Accrued employee liabilities
3,275

 
1,643

Deferred revenue
3,431

 
2,042

Other long-term liabilities
495

 
(68
)
Net cash used in operating activities
(10,222
)
 
(13,018
)
Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(6,690
)
 
(1,658
)
Business combinations, net of cash acquired
(247
)
 
(11,420
)
Net cash used in investing activities
(6,937
)
 
(13,078
)
Cash flows from financing activities:
 
 
 
Payments under capital leases
(464
)
 
(903
)
Proceeds from issuance of common stock upon exercise of stock options
6,665

 
2,184

Payments of offering costs
(4,272
)
 

Proceeds from initial public offering costs, net of underwriters’ discounts and commissions
164,703

 

Payments under related party notes receivable
(4,344
)
 

Repurchases of unvested common stock
(6
)
 

Principal payments on long-term debt
(417
)
 

Payments related to business combination
(12,558
)
 

Proceeds from long-term debt, net of issuance costs

 
14,949

Net cash provided by financing activities
149,307

 
16,230

Effect of exchange rates on cash and cash equivalents and restricted cash
338

 
321

Net increase (decrease) in cash and cash equivalents and restricted cash
132,486

 
(9,545
)
Cash and cash equivalents and restricted cash, beginning of period
53,363

 
77,882

Cash and cash equivalents and restricted cash, end of period
$
185,849

 
$
68,337

Supplemental disclosure of non-cash investing and financing activities:
 
 
 
Property and equipment acquired under capital leases
$
2,335

 
$
488

Lapse in restrictions on early exercised common stock options
$
739

 
$
289

Property and equipment purchases accrued or in accounts payable
$
1,069

 
$
66

Deferred offering costs payable or accrued but not paid
$
337

 
$

Accrued acquisition-related payments
$

 
$
12,558

Reconciliation of cash and cash equivalents and restricted cash within the condensed consolidated balance sheets to the amounts shown in the condensed consolidated statements of cash flows above:
 
 
 
Cash and cash equivalents
$
179,195

 
$
63,176

Restricted cash, current
1,770

 
6

Restricted cash, net of current portion
4,884

 
5,155

Total cash and cash equivalents and restricted cash
$
185,849

 
$
68,337

See notes to condensed consolidated financial statements.

4



ZUORA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1. Overview and Basis of Presentation
Description of Business
Zuora, Inc. was incorporated in the state of Delaware in 2006 and began operations in 2007. Zuora’s fiscal year ends on January 31. Zuora is headquartered in San Mateo, California.
The Company provides cloud-based software on a subscription basis that enables any company in any industry to successfully launch, manage, and transform into a subscription business. Architected specifically for dynamic, recurring subscription business models, Zuora functions as an intelligent hub that automates and orchestrates the entire subscription order-to-cash process. The Company’s cloud-based software solution is the new system of record for subscription businesses.
References to Zuora, “Company”, “our”, or “we” in these notes refer to Zuora, Inc. and its subsidiaries on a consolidated basis.
Initial Public Offering
In April 2018, the Company completed an initial public offering (IPO), in which the Company issued and sold an aggregate of 12.7 million shares of its newly authorized Class A common stock at a price to the public of $14.00 per share. The shares sold included 1.7 million shares pursuant to the exercise by the underwriters of an option to purchase additional shares at a price of $14.00 per share less underwriting discounts and commissions. The Company received aggregate net proceeds of $162.2 million from the IPO after deducting underwriting discounts and commissions and payments of offering costs as of April 30, 2018.
Prior to the completion of the IPO, all shares of common stock then outstanding were reclassified as Class B common stock, and all shares of convertible preferred stock outstanding immediately prior to the IPO were converted into 62.0 million shares of Class B common stock on a one-to-one basis.
As of July 31, 201845.0 million shares of the Company’s Class A common stock and 62.7 million shares of Class B common stock were outstanding.
Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements, which include the accounts of the Company and its wholly owned subsidiaries, have been prepared in conformity with accounting principles generally accepted in the United States (U.S. GAAP) and applicable rules and regulations of the Securities and Exchange Commission (SEC) regarding interim financial reporting. All intercompany balances and transactions have been eliminated in consolidation.
The unaudited condensed consolidated balance sheet as of January 31, 2018 included herein was derived from the audited financial statements as of that date, but does not include all disclosures including certain notes required by U.S. GAAP on an annual reporting basis. The unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the balance sheet, statements of comprehensive loss and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full fiscal year ending January 31, 2019 or any future period.
The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s final prospectus dated April 11, 2018 (Prospectus) filed with the SEC pursuant to Rule 424(b) under the Securities Act of 1933, as amended.

5



Use of Estimates
The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the consolidated financial statements, as well as reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from those estimates. The Company’s most significant estimates and assumptions are related to revenue recognition with respect to the determination of the relative selling prices for the Company’s services; determination of the fair value of the Company’s common stock for valuation of the Company’s stock-based awards issued prior to the completion of the IPO; valuation of the Company’s stock-based awards; estimates of allowance for doubtful accounts; estimates of the fair value of goodwill, intangible assets and other long-lived assets; and the valuation of deferred income tax assets and contingencies. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Accordingly, actual results may differ materially from these estimates under different assumptions or conditions.
Note 2. Summary of Significant Accounting Policies and Recent Accounting Pronouncements
The Company’s significant accounting policies are discussed in “Index to Consolidated Financial Statements—Note 1. Summary of Business and Significant Accounting Policies” in the Prospectus. There have been no significant changes to these policies during the six months ended July 31, 2018, except as noted below.
Stock-Based Compensation
All stock-based compensation to employees, including the purchase rights issued under the Company’s 2018 Employee Stock Purchase Plan (ESPP), is based on the fair value of the awards on the date of grant. This fair value is recognized as an expense following the straight-line attribution method over the requisite service period of the entire award for stock options, restricted stock units (RSUs) and restricted stock; and over the offering period for the purchase rights issued under the ESPP.
The Company uses the Black-Scholes option pricing model to measure the fair value of its stock options and the purchase rights issued under the ESPP. The fair value of the RSUs and restricted stock is determined using the fair value of the Company’s Class A common stock on the date of grant.
Prior to the IPO, the fair value of the Company’s common stock was determined by the estimated fair value of the Company’s common stock at the time of grant. After the IPO, the Company uses the closing price of its Class A common stock on the date of grant for the fair value.
Stock-based compensation expense is recorded net of estimated forfeitures in the Company’s unaudited condensed consolidated statements of comprehensive loss.
Recent Accounting Pronouncements—Not Yet Adopted
The Jumpstart Our Business Startups Act (JOBS Act) allows the Company, as an “emerging growth company,” to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. The Company has elected to use this extended transition period under the JOBS Act. The adoption dates discussed below reflect this election.
In May 2014, the Financial Accounting Standards Board (FASB) issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09) and has modified the standard thereafter. These standards replace existing revenue recognition rules with a comprehensive revenue measurement and recognition standard and expanded disclosure requirements. ASU 2014-09, as amended, became effective for public companies for the fiscal year beginning after December 15, 2017 and interim periods within that year. Private companies have an additional year to adopt the standard. The two permitted transition methods under the new standard are the full retrospective method, under which ASU 2014-09 would be applied to each prior reporting period presented and the cumulative effect of applying the standard would be recognized at the earliest period shown, or the modified retrospective method, under which the cumulative effect of applying ASU 2014-09 would be recognized at the date of initial application. The Company plans to adopt the new revenue standard when it becomes effective for the Company for the fiscal year ending January 31, 2020 (i.e., effective February 1, 2019). The Company is currently in the process of determining what method of adoption it plans to use. The Company is currently assessing the effect the guidance will have on its condensed consolidated financial statements.

6



The adoption also affects the deferral of incremental commission costs of obtaining subscription contracts, which previously were expensed as incurred. Under the new standard, the Company will defer all incremental commission costs to obtain the contract and amortize them over the expected period of benefit. The Company is currently assessing the expected period of benefit.
In addition, the new standard will expand the disclosures to be made in the Company’s consolidated financial statements, including disaggregation of revenue, information on contract balances, deferred contract acquisition costs, performance obligations, and remaining performance obligations.
In January 2016, the FASB issued ASU No. 2016-01 (Subtopic 825-10), Financial Instruments—Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01), which primarily affects the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the FASB clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The accounting for other financial instruments, such as loans, investments in debt securities, and financial liabilities is largely unchanged. ASU 2016-01 is effective for fiscal years beginning after December 15, 2018, and interim periods in fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company has not yet adopted ASU 2016-01 and is currently evaluating the impact of adoption on its condensed consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02 (Topic 842)—Leases (ASU 2016-02), which supersedes the guidance in topic ASC 840, Leases. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. ASU 2016-02 is effective for fiscal years beginning after December 15, 2019 and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted. The Company has not yet adopted ASU 2016-02 and is currently evaluating the impact of the adoption of this standard on its condensed consolidated financial statements.
In February 2018, the FASB issued ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (ASU 2018-02). Under existing U.S. GAAP, the effects of changes in tax rates and laws on deferred tax balances are recorded as a component of income tax expense in the period in which the law was enacted. When deferred tax balances related to items originally recorded in accumulated other comprehensive income (loss) are adjusted, certain tax effects become stranded in accumulated other comprehensive income. The amendments in ASU 2018-02 allow a reclassification from accumulated other comprehensive income (loss) to retained earnings (accumulated deficit) for stranded income tax effects resulting from the Tax Cuts and Jobs Act (the Tax Act). The amendments in this ASU also require certain disclosures about stranded income tax effects. The guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption in any period is permitted. The Company’s provisional adjustments recorded in the fiscal year ended January 31, 2018 to account for the impact of the Tax Act did not result in stranded tax effects. The Company has not yet adopted ASU 2018-02 and does not expect the adoption to have a significant impact on its condensed consolidated financial statements.
In June 2018, the FASB issued ASU No. 2018-07, Compensation—Stock Compensation (Topic 718) Improvements to Nonemployee Share-Based Payment Accounting (ASU 2018-07). The guidance expands the scope of the topic to include share-based payments granted to non-employees in exchange for goods or services. Upon adoption, the fair value of awards granted to non-employees will be determined as of the grant date, which will be recognized over the service period. Previous guidance required the awards to be remeasured at fair value periodically when determining the related expense. ASU 2018-07 is effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606. The Company has not yet adopted ASU 2018-07 and does not expect the adoption to have a significant impact on its condensed consolidated financial statements.

7



Recent Accounting Pronouncements—Adopted
The Company adopted ASU No. 2016-09 (Topic 718), Improvements to Employee Share-Based Payments Accounting (ASU 2016-09), effective February 1, 2018. The Company elected to continue to estimate its forfeiture rate. The adoption of this standard did not have an effect on the statement of cash flows.
In November 2016, the FASB issued ASU No. 2016-18 (Topic 230), Statement of Cash Flows, Restricted Cash (ASU 2016-18), which amends the guidance in ASC 230 Statement of Cash Flows and requires that entities show the changes in total of cash, cash equivalents, restricted cash, and restricted cash equivalents in their statement of cash flows. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017, and interim periods within those years, and is applied retrospectively when adopted. Early adoption is permitted. On February 1, 2018, the Company adopted ASU 2016-18 and is now presenting its cash and cash equivalents and restricted cash together in its condensed consolidated statements of cash flows.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805) Clarifying the Definition of a Business (ASU 2017-01), which amends the guidance of FASB Accounting Standards Codification Topic 805, “Business Combinations,” adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. This guidance is effective for annual and interim periods beginning after December 15, 2017, and early adoption is permitted under certain circumstances. On February 1, 2018, the Company adopted ASU 2017-01 and the adoption did not have an impact on its condensed consolidated financial statements as no business combinations have occurred since adoption.
In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment (ASU 2017-04), which removes the second step of the goodwill impairment test that requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This guidance is effective for interim and annual reporting periods beginning after December 15, 2019 and will be applied prospectively. On February 1, 2018, the Company adopted ASU 2017-04 and the adoption did not have a significant impact on its condensed consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718) Scope of Modification Accounting (ASU 2017-09), which clarifies which changes to the terms or conditions of a share-based payment award are subject to the guidance on modification accounting. Entities would apply the modification accounting guidance unless the value, vesting requirements, and classification of a share-based payment award are the same immediately before and after a change to the terms or conditions of the award. This guidance is effective for annual and interim periods beginning after December 15, 2017 and would be applied prospectively to awards modified on or after the effective date. Early adoption is permitted. On February 1, 2018, the Company adopted ASU 2017-09 and the adoption did not have a significant impact on its condensed consolidated financial statements.

8



Note 3. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following (in thousands):
 
 
July 31,
2018
 
January 31,
2018
Prepaid software subscriptions
$
3,458

 
$
3,239

Prepaid insurance
1,502

 
445

Prepaid hosting costs
1,151

 
486

Prepaid rent
876

 
657

Taxes
542

 
533

Short-term deposits
380

 
480

Prepaid employee-related costs
158

 
132

Capitalized offering costs

 
2,460

Other
726

 
870

Total
$
8,793

 
$
9,302

Note 4. Fair Value Measurements
The carrying amounts of the Company’s financial instruments, which include cash and cash equivalents, restricted cash, accounts receivable, accounts payable, other accrued expenses, debt and capital lease obligations, approximate their fair values due to their relatively short maturity, and in the case of leases, interest rates approximate current market interest rates.
The accounting guidance for fair value measurements establishes a three-tier hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value as follows:
 
Level input
  
Input definition
 
 
Level 1
  
Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets
 
 
Level 2
  
Inputs other than quoted prices included within Level 1 that are observable for the asset or liability through corroboration with market data at the measurement date
 
 
Level 3
  
Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date
In general, and where applicable, the Company uses quoted prices in active markets for identical assets or liabilities to determine fair value. If quoted prices in active markets for identical assets or liabilities are not available to determine fair value, then the Company uses quoted prices for similar assets and liabilities or inputs other than the quoted prices that are observable either directly or indirectly.
The Company does not have any significant assets or liabilities that utilize Level 2 or Level 3 (unobservable) inputs. As of July 31, 2018 and January 31, 2018, the Company held cash equivalents and restricted cash of approximately $162.6 million and $35.1 million, respectively, in money market funds measured at fair value using Level 1 inputs.

9



Note 5. Property and Equipment, Net
Property and equipment consisted of the following (in thousands):
 
 
July 31,
2018
 
January 31,
2018
Servers
$
14,413

 
$
11,283

Computer equipment
9,164

 
6,885

Software
8,521

 
7,148

Leasehold improvements
4,066

 
1,968

Furniture and fixtures
2,539

 
1,446

Vehicles
23

 
25

 
38,726

 
28,755

Less accumulated depreciation and amortization
(21,802
)
 
(18,551
)
Total
$
16,924

 
$
10,204

Depreciation and amortization expense was $1.7 million and $2.9 million for the three and six months ended July 31, 2018, respectively, and $1.3 million and $2.5 million for the three and six months ended July 31, 2017, respectively. Depreciation and amortization expense is included in operating expenses and cost of revenue in the accompanying unaudited condensed consolidated statements of comprehensive loss.
As of July 31, 2018 and January 31, 2018, capitalized internal-use software costs, net of amortization, were $4.1 million and $3.4 million, respectively. Internal-use software amortization recorded to cost of subscription revenue was $0.3 million and $0.6 million for the three and six months ended July 31, 2018, respectively, and $0.3 million and $0.7 million for the three and six months ended July 31, 2017, respectively.
Note 6. Purchased Intangible Assets
The following table summarizes the purchased intangible asset balances (in thousands):
 
 
As of July 31, 2018
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
Developed technology
$
7,697

 
$
(3,475
)
 
$
4,222

Customer relationships
5,933

 
(865
)
 
5,068

Trade names
909

 
(151
)
 
758

Total
$
14,539

 
$
(4,491
)
 
$
10,048

 
As of January 31, 2018
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
Developed technology
$
7,697

 
$
(2,666
)
 
$
5,031

Customer relationships
5,933

 
(494
)
 
5,439

Trade names
909

 
(87
)
 
822

Total
$
14,539

 
$
(3,247
)
 
$
11,292

Amortization expense related to purchased intangible assets was approximately $0.6 million and $1.2 million for the three and six months ended July 31, 2018, respectively, and $0.5 million and $0.7 million for the three and six months ended July 31, 2017, respectively. Amortization expense related to purchased intangible assets is included in cost of subscription revenue in the accompanying unaudited condensed consolidated statements of comprehensive loss.

10



Note 7. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following (in thousands):
 
 
July 31,
2018
 
January 31,
2018
Accrued goods and services taxes
$
3,172

 
$
2,488

Accrued outside services and consulting
2,542

 
2,006

Employee early exercised stock options
1,130

 
556

Accrued property and equipment purchases
980

 

Accrued sales and use tax liability
465

 
431

Deferred rent, current
922

 
604

Accrued legal fees
254

 
828

Accrued IPO-related costs
232

 
1,120

Accrued foreign income taxes
217

 
221

Accrued acquisition-related payments

 
12,558

Other accrued expenses
4,763

 
3,684

Total
$
14,677

 
$
24,496

Note 8. Other Long-Term Liabilities
Other long-term liabilities consisted of the following (in thousands):
 
 
July 31,
2018
 
January 31,
2018
Deferred rent, net of current portion
$
741

 
$
356

Long-term income taxes payable
436

 
472

Early exercised common stock options
304

 
139

Other
375

 
201

Total
$
1,856

 
$
1,168


11



Note 9. Debt
On June 14, 2017, the Company entered into a Loan and Security Agreement (Debt Agreement) with Silicon Valley Bank. The Debt Agreement established a revolving loan and a term loan facility in the amount of $10.0 million and $30.0 million, respectively.
Revolving Loan. The Debt Agreement allows the Company to borrow up to $10.0 million until June 2019 in revolving loans. The revolving loan is intended to support working capital and general corporate uses and is available to the Company to draw down upon anytime up to 24 months from the effective date of the agreement. Advances drawn down under the revolving loan incur interest at the prime rate as published by the Wall Street Journal (WSJ Prime Rate) which is due monthly on any amounts drawn down, with the principal due at maturity. Any outstanding amounts must be fully repaid before June 14, 2019. The Company is required to pay an annual fee of $20,000 on this revolving loan, regardless of any amounts drawn down. As of July 31, 2018, the Company had not drawn down any amounts under this revolving loan.
Term Loan. The Debt Agreement allowed the Company to borrow up to $30.0 million in the form of term loans until June 14, 2018. In June 2017, the Company drew down $15.0 million to partially finance the acquisition of Leeyo Software, Inc. (Leeyo), and the remaining $15.0 million was available for borrowing until June 14, 2018 but was not drawn down. Any outstanding amounts under the term loan accrue interest at the WSJ Prime rate plus 1.00%. The interest rate was 6.00% as of July 31, 2018. Beginning June 2018, the Company is required to make equal monthly payments of principal and interest over 36 months until the term loan is repaid. The Company may prepay all outstanding principal and accrued interest at any time without penalty. The Company will incur a facility fee of 1.5% upon the earlier to occur of prepayment or the termination of the facility. As of July 31, 2018, the Company had $14.6 million outstanding under the term loan.
Both the revolving loan and the term loan are subject to a certain financial covenant to maintain an adjusted quick ratio of no less than 1.10:1.00. As of July 31, 2018, the Company was in compliance with this financial covenant. The Debt Agreement also imposes certain limitations with respect to lines of business, mergers, investments and acquisitions, additional indebtedness, distributions, guarantees, liens, and encumbrances. The Company was also in compliance with these restrictions as of July 31, 2018.
The Company incurred transaction costs and fees payable to the lender related to the issuance of the term loan. The amount, net of amortization, is immaterial and is presented as a reduction to the carrying amount of the term loan and is presented under debt in the Company’s condensed consolidated balance sheets.
The Company’s indebtedness under the Debt Agreement is secured by a lien on substantially all of its assets, including its intellectual property.

12



Note 10. Income Taxes
For each of the three month periods ended July 31, 2018 and 2017, the Company recorded a tax provision of $0.2 million on pretax losses of $19.4 million and $14.6 million, respectively. The effective tax rates for the three month periods ended July 31, 2018 and 2017 were (1.0)% and (1.6)%, respectively. The effective tax rate for the three months ended July 31, 2018 and 2017 differs from the statutory rate primarily as a result of providing no benefit on pretax losses incurred in the United States. For the three months ended July 31, 2018, the Company maintained a full valuation allowance on its U.S. federal and state net deferred tax assets as it was more likely than not that those deferred tax assets will not be realized.
For each of the six month periods ended July 31, 2018 and 2017, the Company recorded a tax provision of $0.4 million on pretax losses of $38.6 million and $22.6 million, respectively. The effective tax rates for the six month periods ended July 31, 2018 and 2017 were (1.0)% and (1.6)%, respectively. The effective tax rate for the six months ended July 31, 2018 and 2017 differs from the statutory rate primarily as a result of providing no benefit on pretax losses incurred in the United States. For the six months ended July 31, 2018, the Company maintained a full valuation allowance on its U.S. federal and state net deferred tax assets as it was more likely than not that those deferred tax assets will not be realized.
On December 22, 2017, the Tax Act was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, and changes to how the United States imposes income tax on multinational corporations.
In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), which allows the Company to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. In fiscal 2018, we calculated an estimate of the expected decrease on our existing deferred tax balances due to the decrease in the tax rate. We determined the impact to be approximately a $30.0 million decrease to our deferred tax assets. Because we provide a valuation allowance against our tax assets, we consequently adjusted the valuation allowance to compensate for this reduction in the provision. As of January 31, 2018, we had not completed our accounting for the tax effects of enactment of the Tax Reform Act; however, we have made a reasonable estimate of the effects on our existing deferred tax balances and the one-time transition tax. We will continue to assess our provision for income taxes as future guidance is issued, but do not currently anticipate significant revisions will be necessary. Any such revisions will be treated in accordance with the measurement period guidance outlined in Staff Accounting Bulletin No. 118.
Note 11. Stockholders’ Equity
Convertible Preferred Stock
Immediately prior to the completion of the IPO, all shares of convertible preferred stock then outstanding were converted into 62.0 million shares of Class B common stock on a one-to-one basis. As of July 31, 2018, there were no shares of convertible preferred stock issued and outstanding.
Common Stock
Prior to the IPO, all shares of common stock then outstanding were reclassified into Class B common stock. Shares offered and sold in the IPO consisted of newly authorized shares of Class A common stock.

As of July 31, 2018, the Company had authorized 500 million shares of Class A common stock and 500 million shares of Class B common stock, each with a par value of $0.0001 per share. As of July 31, 201845.0 million shares of Class A common stock and 62.7 million shares of Class B common stock were issued and outstanding.
Holders of Class A and Class B common stock are entitled to one vote per share and ten votes per share, respectively, and the shares of Class A common stock and Class B common stock are identical, except for voting and conversion rights.

13



Note 12. Employee Stock Plans
Equity Incentive Plans
In March 2018, the Company’s Board of Directors adopted and its stockholders approved the 2018 Equity Incentive Plan (2018 Plan). The 2018 Plan authorizes the award of stock options, restricted stock awards, stock appreciation rights, RSUs, performance awards, and stock bonuses. As of July 31, 2018, approximately 9.0 million shares of Class A common stock were reserved and available for issuance under the 2018 Plan. In addition, as of July 31, 2018, 17.0 million stock options and RSUs exercisable or settleable for Class B common stock were outstanding in the aggregate under the Company’s 2006 Stock Plan (2006 Plan) and 2015 Equity Incentive Plan (2015 Plan), which plans were terminated in May 2015 and April 2018, respectively. The 2006 Plan and 2015 Plan continue to govern outstanding equity awards granted thereunder.
Stock Options
The following table summarizes stock option activity and related information (in thousands except exercise price and contractual term):
 
 
Shares
Subject To
Outstanding
Stock Options
 
Weighted
Average
Exercise
Price
 
Average
Remaining
Contractual
Term (Years)
 
Aggregate
Intrinsic
Value
Balance as of January 31, 2018
15,401

 
$
3.56

 
7.91
 
$
83,322

Granted
3,617

 
8.16

 

 

Exercised
(2,246
)
 
2.96

 

 


Forfeited
(323
)
 
5.23

 

 

Balance as of July 31, 2018
16,449

 
4.62

 
7.99
 
$
327,449

Exercisable as of July 31, 2018
15,747

 
4.53

 
7.94
 
314,980

Vested and expected to vest as of July 31, 2018
14,453

 
4.48

 
7.88
 
$
289,845

The weighted average grant date fair value per share of options granted during the three months ended July 31, 2018 was $6.85, and was $6.76 and $1.47 for the six months ended July 31, 2018 and 2017, respectively. The aggregate intrinsic value of options exercised during the three months ended July 31, 2018 was $5.9 million, and was $17.9 million and $1.8 million for the six months ended July 31, 2018 and 2017, respectively. As of July 31, 2018, there was $27.1 million of unrecognized compensation cost related to unvested stock options, which is expected to be recognized over the next 3.1 years.
The Company used the Black-Scholes option-pricing model to estimate the fair value of its stock options granted with the following assumptions:
 
 
Three Months Ended
July 31,
 
Six Months Ended
July 31,
 
2018
 
2017
 
2018
 
2017
Fair value of common stock

$19.63

 

$5.42

 
$12.28 - $19.63

 
$3.28 - $5.42

Expected volatility
29.9%

 
42.3%

 
29.9% - 40.9%

 
40.0% - 42.6%

Expected term (years)
5.98 - 6.05

 
5.99

 
5.06 - 6.44

 
5.14 - 6.99

Risk-free interest rate
2.87%

 
1.95%

 
2.62% - 2.87%

 
1.89% - 2.26%

Expected dividend yield

 

 

 


14



Options Subject to Early Exercise
At the discretion of the board of directors, certain options may be exercisable immediately at the date of grant but are subject to a repurchase right, under which the Company may buy back any unvested shares at the lower of their original exercise price or then current fair market value in the event of an employee’s termination prior to vesting. The consideration received for an exercise of an unvested option is considered to be a deposit of the exercise price and the related dollar amount is recorded as a liability. The liabilities are reclassified into equity as the awards vest. As of July 31, 2018 and January 31, 2018, the Company had $1.4 million and $0.7 million, respectively, recorded in accrued expenses and other current liabilities, and other long-term liabilities, related to early exercises of options to acquire 0.3 million and 0.2 million shares of common stock, respectively.
RSU and Restricted Stock Award Activity
The following table summarizes RSU and restricted stock award activity and related information for the six months ended July 31, 2018 (in thousands except grant date fair value):
 
Number of RSU and Restricted Shares Outstanding
 
Weighted-Average Grant Date Fair Value
Balance as of January 31, 2018
3,037

 
$
5.37

Granted
234

 
20.18

Vested
(737
)
 
5.49

Forfeited
(31
)
 
6.30

Balance as of July 31, 2018
2,503

 
$
6.71

As of July 31, 2018, there was $12.7 million of unrecognized compensation cost related to unvested RSUs and restricted stock awards, which is expected to be recognized over the next 2.4 years.
2018 Employee Stock Purchase Plan
In March 2018, the Company adopted the 2018 Employee Stock Purchase Plan (ESPP), which became effective on the date of the Prospectus. The ESPP initially reserved and authorized the issuance of up to a total of 2.4 million shares of Class A common stock to participating employees. The initial offering period began April 11, 2018 and will end on June 14, 2020 with purchase dates of December 14, 2018, June 14, 2019, December 14, 2019 and June 14, 2020. Except for the initial offering period, the ESPP provides for 24-month offering periods beginning June 15 and December 15 of each year, and each offering period will consist of four six-month purchase periods. On each purchase date, ESPP participants will purchase shares of the Company’s Class A common stock at a price per share equal to 85% of the lesser of (1) the fair market value of the Class A common stock on the offering date or (2) the fair market value of the Class A common stock on the purchase date.
As of July 31, 2018, there was approximately $5.5 million of unrecognized stock-based compensation expense related to the ESPP that is expected to be recognized over the remaining term of the initial offering period.
The Company estimated the fair value of ESPP purchase rights using a Black-Scholes option pricing model with the following assumptions:
 
 
Three Months Ended
July 31,
 
Six Months Ended
July 31,
 
2018
 
2017
 
2018
 
2017
Fair value of common stock
$
14.00

 
$

 
$
14.00

 
$

Expected volatility
24.6% - 29.9%

 

 
24.6% - 29.9%

 

Expected term (in years)
0.68 - 2.18

 

 
0.68 - 2.18

 

Risk-free interest rate
2.01% - 2.36%

 

 
2.01% - 2.36%

 

Expected dividend yield

 

 

 


15



Stock-Based Compensation Expense
Stock-based compensation expense was recorded in the following cost and expense categories in the Company’s unaudited condensed consolidated statements of comprehensive loss (in thousands):
 
 
Three Months Ended
July 31,
 
Six Months Ended
July 31,
 
2018
 
2017
 
2018
 
2017
Cost of subscription revenue
$
433

 
$
163

 
$
756

 
$
251

Cost of professional services revenue
1,399

 
356

 
2,430

 
496

Research and development
1,416

 
479

 
2,464

 
808

Sales and marketing
1,522

 
557

 
3,112

 
963

General and administrative
890

 
244

 
1,501

 
435

Total stock-based compensation expense
$
5,660

 
$
1,799

 
$
10,263

 
$
2,953


16



Note 13. Commitments and Contingencies
(a) Leases
The Company periodically leases facilities and equipment under noncancelable capital and operating leases. The terms of the lease agreements may provide for rental payments on a graduated basis, and accordingly, the Company recognizes related rent expense on a straight-line basis over the entire lease term, and has accrued for rent expense incurred but not paid.
The Company has capital lease agreements with a lender to use data center equipment and related software. The lease agreements provide the Company the ability to finance its equipment purchases over an extended period of time. At the end of the lease terms, the Company is obligated to purchase the equipment. In connection with the equipment financing agreement, the Company had outstanding bank issued irrevocable letters of credit of $4.4 million as of July 31, 2018, classified as restricted cash on its unaudited condensed consolidated balance sheet.
As of July 31, 2018, the Company had operating leases for its offices in the United States and other locations around the world. The Company also had operating leases for facilities related to its U.S. data centers in Las Vegas, Nevada and Santa Clara, California. The initial lease term for these facilities ranged from three to seven years and includes approximately 176,000 square feet of space. In connection with these leased facilities, the Company had outstanding bank issued irrevocable letters of credit on the leases of $2.3 million as of July 31, 2018, classified as restricted cash on the Company’s unaudited condensed consolidated balance sheet.
Certain facility lease agreements contain allowances, rent holidays, and escalation provisions. For these leases, the Company recognizes the related rental expense on a straight-line basis over the lease period of the facility and records the difference between amounts charged to operations and amounts paid as deferred rent. Deferred rent was $1.7 million and $1.0 million as of July 31, 2018 and January 31, 2018, respectively, and is included in accrued expenses and other current liabilities and other long-term liabilities in the condensed consolidated balance sheets. Rent expense was $2.7 million and $4.4 million for the three and six months ended July 31, 2018, respectively, and $1.4 million and $2.7 million for the three and six months ended July 31, 2017, respectively.
As of July 31, 2018, the future minimum lease payments under capital and operating leases by fiscal year were as follows (in thousands):
 
Capital Leases
 
Operating Leases
Remainder of 2019
$
1,134

 
$
3,180

2020
1,114

 
7,340

2021
578

 
5,568

2022
363

 
5,686

2023

 
5,560

Thereafter

 
4,362

Total future lease commitments
$
3,189

 
$
31,696

(b) Legal Matters
The Company may be subject to legal proceedings, as well as demands, claims and threatened litigation that arise in the normal course of its business. Although the results of litigation and claims cannot be predicted with certainty, the Company currently believes that the final outcome of such matters will not have a material adverse effect on the Company’s results of operations or financial condition.


17



Note 14. Net Loss Per Share Attributable to Common Stockholders
Basic and diluted net loss per common share is presented in conformity with the two-class method required for participating securities.
Class A and Class B common stock are the only outstanding equity in the Company. The rights of the holders of Class A and Class B common stock are identical, except with respect to voting and conversion. Each share of Class A common stock is entitled to one vote per share and each share of Class B common stock is entitled to ten votes per share. Shares of Class B common stock may be converted into Class A common stock at any time at the option of the stockholder, and are automatically converted into Class A common stock upon sale or transfer, subject to certain limited exceptions.
Basic net loss per share attributable to common stockholders is computed using the weighted-average number of common shares outstanding during the period. Diluted net loss per share attributable to common stockholders is computed using the weighted-average number of common shares and, if dilutive, potential common shares outstanding during the period. The dilutive effect of these potential common shares is reflected in diluted earnings per share by application of the treasury stock method.
The following table presents the calculation of basic and diluted net loss per share attributable to common stockholders for the periods presented (in thousands, except per share data):
 
 
Three Months Ended
July 31,
 
Six Months Ended
July 31,
 
2018
 
2017
 
2018
 
2017
Numerator:
 
 
 
 
 
Net loss
$
(19,587
)
 
$
(14,841
)
 
$
(39,034
)
 
$
(22,967
)
Denominator:
 
 
 
 
 
 
 
Weighted-average common shares outstanding, basic and diluted
105,146

 
26,417

 
75,529

 
25,654

Net loss per share attributable to common stockholders, basic and diluted
$
(0.19
)
 
$
(0.56
)
 
$
(0.52
)
 
$
(0.90
)

Since the Company was in a loss position for all periods presented, basic net loss per share attributable to common stockholders is the same as diluted net loss per share attributable to common stockholders as the inclusion of all potential common shares outstanding would have been anti-dilutive. Potentially dilutive securities that were not included in the diluted per share calculations because they would be anti-dilutive were as follows (in thousands):
 
 
As of July 31,
 
2018
 
2017
Conversion of convertible preferred stock

 
61,984

Issued and outstanding stock options
16,449

 
13,327

Unvested restricted stock issued and outstanding
1,731

 
2,133

Unvested RSUs issued and outstanding
772

 

Shares committed under ESPP
225

 

Total
19,177

 
77,444

Note 15. Related Party Transactions
Certain members of the Company’s Board of Directors serve or are closely affiliated with people who serve on the board of directors of companies that are customers or vendors of the Company. Certain of the Company’s executive officers also serve on the board of directors of companies that are customers or vendors of the Company. The Company had no related party transactions during the three months ended July 31, 2018.
In November 2017 and April 2018, the Company paid an aggregate $5.6 million of taxes owed in connection with restricted stock granted to two employees in exchange for full-recourse promissory notes, which notes were secured by 4.6 million shares of restricted common stock. The notes accrued interest at rates ranging from 1.85% to 2.72% and become payable in full upon the earlier of: (i) a change in control or (ii) January 12, 2019. Consistent with ASC 505-10-45, the notes receivable balance is presented as a deduction from stockholders’ equity. In August 2018, the notes were fully repaid.

18



Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Form 10-Q and our Prospectus. As discussed in the section titled “Special Note Regarding Forward-Looking Statements,” the following discussion and analysis contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those identified below and those discussed in the section titled “Risk Factors” under Part II, Item 1A in this Form 10-Q and in our Prospectus. Our fiscal year ends January 31.
Overview
We provide cloud-based software on a subscription basis that enables any company in any industry to successfully launch, manage, and transform into a subscription business. Architected specifically for dynamic, recurring subscription business models, our solution functions as an intelligent subscription management hub that automates and orchestrates the subscription order-to-cash process, including quoting, billing, collections, analytics, and revenue recognition. We offer businesses the ability to meet the constantly-evolving needs of their subscribers, capitalize on new revenue opportunities, and accelerate business growth.
An increasing number of industries are undergoing a transformation in business models as part of a broader shift to the Subscription Economy. Success in the Subscription Economy requires companies with legacy product-centric businesses to undertake a large-scale systemic shift in how they operate, reorienting themselves around their subscribers.
This new business model is inherently dynamic, with multiple interactions and constantly-changing relationships and events. The capabilities to launch, price, and bill for products, facilitate and record cash receipts, process and recognize revenue, and produce the data required to close their books and drive key decisions are mission critical and particularly complex for companies with subscription business models. As a result, as companies launch or grow a subscription business, they often conclude that traditional ERP-centric systems are inadequate.
We began operations in 2007 with a vision of providing the cloud-based software necessary to bring about, and enable companies to succeed in, the Subscription Economy. Since our inception, we have continued to innovate and have made significant investments to deliver a comprehensive solution for a broad array of use cases in the Subscription Economy. In April, 2018, we completed our initial public offering, in which we sold approximately 12.7 million shares of our Class A common stock, including shares sold pursuant to the underwriters’ option to purchase additional shares. The shares were sold at a price to the public of $14.00 per share for aggregate net proceeds of approximately $162.2 million, after underwriting discounts and commissions and payments of offering costs as of April 30, 2018.
We generated subscription revenue of $41.5 million and total revenue of $57.8 million for the three months ended July 31, 2018, increases of 44% and 47% year-over-year, respectively. For the six months ended July 31, 2018, we generated subscription revenue of $77.6 million and total revenue of $109.5 million, increases of 41% and 53% year over year, respectively. We have continued to make significant expenditures and investments, including personnel-related costs, infrastructure, operations and innovation, and have incurred net losses in each period since our inception, including net losses of $19.6 million and $14.8 million for the three months ended July 31, 2018 and 2017, respectively and $39.0 million and $23.0 million for the six months ended July 31, 2018 and 2017, respectively.

19



Key Operational and Financial Metrics
We monitor the following key operational and financial metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans and make strategic decisions:
Customers with Annual Contract Value (ACV) Equal to or Greater than $100,000
We believe our ability to enter into larger contracts is indicative of broader adoption of our solution by larger organizations. It also reflects our ability to expand our revenue footprint within our current customer base. We define ACV as the subscription revenue we would contractually expect to recognize from that customer over the next twelve months, assuming no increases or reductions in their subscriptions. We define the number of customers at the end of any particular period as the number of parties or organizations that have entered into a distinct subscription contract with us for which the term has not ended. Each party with which we have entered into a distinct subscription contract is considered a unique customer, and in some cases, there may be more than one customer within a single organization. We have increased the number of customers with ACV equal to or greater than $100,000 to 474 as of July 31, 2018, as compared to 371 customers as of July 31, 2017.
Dollar-Based Retention Rate
We believe our dollar-based retention rate is a key measure of our ability to retain and expand revenue from our customer base over time. We calculate our dollar-based retention rate as of a period end by starting with the sum of the ACV from all customers as of twelve months prior to such period end, or prior period ACV. We then calculate the sum of the ACV from these same customers as of the current period end, or current period ACV. Current period ACV includes any upsells and also reflects contraction or attrition over the trailing twelve months, but excludes revenue from new customers added in the current period. We then divide the current period ACV by the prior period ACV to arrive at our dollar-based retention rate. Our dollar-based retention rate was 112% as of July 31, 2018 and April 30, 2018.
Components of Our Results of Operations
Revenue
Subscription revenue. Subscription revenue consists of fees for access to, and use of, our products, as well as customer support. We generate subscription fees pursuant to non-cancelable subscription agreements with terms that typically range from one to three years. Subscription revenue is primarily based on fees to access our services platform over the subscription term. We typically invoice customers in advance in either annual or quarterly installments. Customers can also elect to purchase additional volume blocks or products during the term of the contract. We recognize subscription revenue ratably over the term of the subscription period, beginning on the date that access to our platform is provided, which is generally on or about the date the subscription agreement is signed.
Professional services revenue. Professional services revenue consists of fees for services related to helping our customers deploy, configure, and optimize the use of our solutions. These services include system integration, data migration, process enhancement, and training. Professional services projects generally take three to twelve months to complete. Once the contract is signed, we generally invoice for professional services on a time and materials basis, although we occasionally engage in fixed-price service engagements and invoice for those based upon agreed milestone payments. We recognize revenue as services are performed for time and materials engagements and on a proportional performance method as the services are performed for fixed fee engagements.
Impact of ASC 606 Adoption. In May 2014, the FASB issued ASC 606, and has modified the standard thereafter. This standard replaces existing revenue recognition rules with a comprehensive revenue measurement and recognition standard and expanded disclosure requirements. This new revenue standard became effective for public companies for the fiscal year beginning after December 15, 2017, and interim periods within that year. Private companies have an additional year to adopt the standard. The two permitted transition methods under the new standard are the full retrospective method, under which ASC 606 would be applied to each prior reporting period presented and the cumulative effect of applying the standard would be recognized at the earliest period shown, or the modified retrospective method, under which the cumulative effect of applying ASC 606 would be recognized at the date of initial application. We plan to adopt ASC 606 when it becomes effective for us for the fiscal year ending January 31, 2020 (i.e., effective February 1, 2019). We are currently in the process of determining what method of adoption we plan to use and we are assessing the effect the guidance will have on our condensed consolidated financial statements.

20



Deferred Revenue
Deferred revenue consists of customer billings in advance of revenue being recognized from our subscription and support services and professional services arrangements. We primarily invoice our customers for subscription services arrangements annually or quarterly in advance. Amounts anticipated to be recognized within one year of the balance sheet date are recorded as deferred revenue, current portion, and the remaining portion is recorded as deferred revenue, net of current portion in the unaudited condensed consolidated balance sheets.
Overhead Allocation and Employee Compensation Costs
We allocate shared costs, such as facilities costs (including rent, utilities, and depreciation on capital expenditures related to facilities shared by multiple departments), information technology costs, and certain administrative personnel costs to all departments based on headcount and location. As such, allocated shared costs are reflected in each cost of revenue and operating expenses category. Employee compensation costs consist of salaries, bonuses, commissions, benefits, and stock-based compensation.
Cost of Revenue, Gross Profit and Gross Margin
Cost of subscription revenue. Cost of subscription revenue consists primarily of costs related to hosting our platform and providing customer support. These costs include data center costs and third-party hosting fees, employee compensation costs associated with our cloud-based infrastructure and our customer support organizations, amortization expense associated with capitalized internal-use software and purchased technology, allocated overhead, software and maintenance costs, and outside services associated with the delivery of our subscription services. We intend to continue to invest in our platform infrastructure, including third-party hosting capacity, and support organizations. However, the level and timing of investment in these areas could fluctuate and affect our cost of subscription revenue in the future.
Cost of professional services revenue. Cost of professional services revenue consists primarily of costs related to the deployment of our platform. These costs include employee compensation costs for our professional services team, allocated overhead, travel costs, and costs of outside services associated with supplementing our internal staff. Cost of providing professional services, excluding stock-based compensation, has historically been similar to the associated professional services revenue, and we expect this to continue for the foreseeable future.
Gross profit and gross margin. Our gross profit and gross margin may fluctuate from period to period as our revenue fluctuates, and as a result of the timing and amount of investments to expand hosting capacity, including through third party cloud providers, our continued efforts to build platform support and professional services teams, as well as the amortization expense associated with capitalized internal-use software and acquired technology.
Operating Expenses
Sales and marketing. Sales and marketing expense consists primarily of employee compensation costs, including commissions for our sales personnel, allocated overhead, costs of general marketing and promotional activities, and travel costs. We currently expense sales commissions in the period of sale. Once we adopt ASC 606, commissions will be amortized in sales and marketing expense over the period of benefit. Our sales and marketing expense as a percentage of total revenue has decreased in recent periods. We expect to continue to make significant investments as we expand our customer acquisition and retention efforts and, therefore, expect sales and marketing expense to increase in absolute dollars but may vary as a percentage of total revenue for the foreseeable future.
Research and development. Research and development expense consists primarily of employee compensation costs, allocated overhead, and travel costs. We capitalize research and development costs associated with the development of internal-use software and we amortize these costs over a period of approximately two to three years into cost of subscription revenue. All other research and development costs are expensed as incurred. We believe that continued investment in our platform is important for our growth, and as such, expect our research and development expense to continue to increase in absolute dollars for the foreseeable future but may increase or decrease as a percentage of revenue.
General and administrative. General and administrative expense consists primarily of employee compensation costs, allocated overhead, and travel costs for finance, accounting, legal, human resources, and recruiting personnel. In addition, general and administrative expense includes non-personnel costs, such as accounting fees, legal fees, and all other supporting corporate expenses not allocated to other departments. We expect to incur additional costs as a result of operating as a public company, including costs related to compliance and reporting obligations of public companies, and increased costs for insurance, investor relations, and professional services. As a result, we expect our general and administrative expense to continue to increase in absolute dollars for the foreseeable future but may vary as a percentage of revenue.

21



Interest and Other (Expense) Income, net
Interest and other (expense) income, net primarily consists of interest income from our investment holdings, interest expense associated with our Loan and Security Agreement (Debt Agreement), and foreign exchange fluctuations.
Income Tax Provision
Income tax provision consists primarily of income taxes related to foreign and state jurisdictions in which we conduct business. We maintain a full valuation allowance on our federal and state deferred tax assets as we have concluded that it is not more likely than not that the deferred assets will be utilized.

22



Results of Operations
The following tables set forth our unaudited condensed consolidated results of operations data for the periods presented in dollars and as a percentage of our total revenue (in thousands):
 
Three Months Ended
July 31,
 
Six Months Ended
July 31,
 
2018
 
2017
 
2018
 
2017
Revenue:
 
 
 
 
 
 
 
Subscription
$
41,470

 
$
28,797

 
$
77,584

 
$
54,852

Professional services
16,284

 
10,615

 
31,914

 
16,899

Total revenue
57,754

 
39,412

 
109,498

 
71,751

Cost of revenue:
 
 
 
 
 
 
 
Subscription¹
10,421

 
8,071

 
20,286

 
14,106

Professional services¹
18,226

 
12,552

 
34,379

 
19,326

Total cost of revenue
28,647

 
20,623

 
54,665

 
33,432

Gross profit
29,107

 
18,789

 
54,833

 
38,319

Operating expenses:
 
 
 
 
 
 
 
Research and development¹
13,323

 
9,768

 
25,385

 
17,645

Sales and marketing¹
25,429

 
18,479

 
48,266

 
33,431

General and administrative¹
8,563

 
5,551

 
17,974

 
10,230

Total operating expenses
47,315

 
33,798

 
91,625

 
61,306

Loss from operations
(18,208
)
 
(15,009
)
 
(36,792
)
 
(22,987
)
Interest and other (expense) income, net
(1,178
)
 
407

 
(1,851
)
 
391

Loss before income taxes
(19,386
)
 
(14,602
)
 
(38,643
)
 
(22,596
)
Income tax provision
(201
)
 
(239
)
 
(391
)
 
(371
)
Net loss
$
(19,587
)
 
$
(14,841
)
 
$
(39,034
)
 
$
(22,967
)

(1)
Includes stock-based compensation expense as follows: 
 
Three Months Ended
July 31,
 
Six Months Ended
July 31,
 
2018
 
2017
 
2018
 
2017
Subscription
$
433

 
$
163

 
$
756

 
$
251

Professional services
1,399

 
356

 
2,430

 
496

Research and development
1,416

 
479

 
2,464

 
808

Sales and marketing
1,522

 
557

 
3,112

 
963

General and administrative
890

 
244

 
1,501

 
435

Total stock-based compensation expense
$
5,660

 
$
1,799

 
$
10,263

 
$
2,953


23



 
Three Months Ended
July 31,
 
Six Months Ended
July 31,
 
2018
 
2017
 
2018
 
2017
Revenue:
 
 
 
 
 
 
 
Subscription
72
 %
 
73
 %
 
71
 %
 
76
 %
Professional services
28

 
27

 
29

 
24

Total revenue
100

 
100

 
100

 
100

Cost of revenue:
 
 
 
 
 
 
 
Subscription
18

 
20

 
19

 
20

Professional services
32

 
32

 
31

 
27

Total cost of revenue
50

 
52

 
50

 
47

Gross profit
50

 
48

 
50

 
53

Operating expenses:
 
 
 
 
 
 
 
Research and development
23

 
25

 
23

 
25

Sales and marketing
44

 
47

 
44

 
47

General and administrative
15

 
14

 
16

 
14

Total operating expenses
82

 
86

 
84

 
85

Loss from operations
(32
)
 
(38
)
 
(34
)
 
(32
)
Interest and other (expense) income, net
(2
)
 
1

 
(2
)
 
1

Loss before income taxes
(34
)
 
(37
)
 
(35
)

(31
)
Income tax provision

 
(1
)
 

 
(1
)
Net loss
(34
)%
 
(38
)%
 
(36
)%
 
(32
)%

Comparison of the Three Months Ended July 31, 2018 and 2017
The three months ended July 31, 2017 included only two months of results attributable to our Zuora RevPro product, as our acquisition of Leeyo occurred on May 31, 2017.
Revenue 
 
Three Months Ended
July 31,
 
 
 
 
 
2018
 
2017
 
$ Change
 
% Change
 
(dollars in thousands)
 
 
 
 
Revenue:
 
 
 
 
 
 
 
Subscription
$
41,470

 
$
28,797

 
$
12,673

 
44
%
Professional services
16,284

 
10,615

 
5,669

 
53
%
Total revenue
$
57,754

 
$
39,412

 
$
18,342

 
47
%
Percentage of revenue
 
 
 
 
 
 
 
Subscription
72
%
 
73
%
 
 
 
 
Professional services
28

 
27

 
 
 
 
Total revenue
100
%
 
100
%
 
 
 
 
Subscription revenue increased by $12.7 million, or 44%, for the three months ended July 31, 2018 compared to the three months ended July 31, 2017. The increase in subscription revenue was attributable to new customers acquired during the period and an increase in usage and sales of additional products to our existing customers. Additionally, the impact of purchase accounting from the acquisition of Leeyo resulted in higher subscription revenue recognition for the period ending July 31, 2018 compared to the period ending July 31, 2017. The number of customers with ACV equal to or greater than $100,000 increased by 28% percent year on year to 474 for the period ending July 31, 2018. The expansion in usage by, and sale of, additional products to our existing customers was reflected in our dollar-based retention rate of 112% at July 31, 2018.
Professional services revenue increased by $5.7 million, or 53%, for the three months ended July 31, 2018 compared to the three months ended July 31, 2017, primarily due to increased revenue from customer deployments of our products.

24



Cost of Revenue and Gross Margin
 
 
Three Months Ended
July 31,
 
 
 
 
 
2018
 
2017
 
$ Change
 
% Change
 
(dollars in thousands)
 
 
 
 
Cost of revenue:
 
 
 
 
 
 
 
Subscription
$
10,421

 
$
8,071

 
$
2,350

 
29
%
Professional services
18,226

 
12,552

 
5,674

 
45
%
Total cost of revenue
$
28,647

 
$
20,623

 
$
8,024

 
39
%
Gross margin:
 
 
 
 
 
 
 
Subscription
75
 %
 
72
 %
 
 
 
 
Professional services
(12
)
 
(18
)
 
 
 
 
Total gross margin
50
 %
 
48
 %
 
 
 
 
Cost of subscription revenue increased by $2.4 million, or 29%, for the three months ended July 31, 2018 compared to the three months ended July 31, 2017, primarily due to an increase of $1.0 million in data center costs, $0.4 million in software license costs, $0.3 million in employee compensation costs related to increased headcount, $0.3 million of professional services, and an increase of $0.3 million in allocated overhead including facilities expansions. The increase in these costs is driven by the growth in the number of customers as well as the increase in usage from existing customers.
Our gross margin for subscription revenue increased to 75% for the three months ended July 31, 2018 from 72% for the three months ended July 31, 2017, as a result of higher operational efficiencies as well as the impact of purchase accounting from the acquisition of Leeyo that resulted in higher subscription revenue recognition for the period ending July 31, 2018 as compared to the period ending July 31, 2017. In addition, gross margin for the period ending July 31, 2017 was impacted by one-time employee compensation costs related to the acquisition of Leeyo.
Cost of professional services revenue increased by $5.7 million for the three months ended July 31, 2018 compared to the three months ended July 31, 2017, due to an increase in headcount as well as professional services expenses in order to support a greater number of customer deployments.
Our gross margin for professional services revenue improved to (12)% for the three months ended July 31, 2018 from (18)% for the three months ended July 31, 2017, primarily from one-time employee compensation costs in the period ending July 31, 2017, related to the acquisition of Leeyo.
Operating Expenses
Research and Development
 
 
Three Months Ended
July 31,
 
 
 
 
 
2018
 
2017
 
$ Change
 
% Change
 
(dollars in thousands)
 
 
 
 
Research and development
$
13,323

 
$
9,768

 
$
3,555

 
36
%
Percentage of total revenue:
23
%
 
25
%
 
 
 
 
Research and development expense increased by $3.6 million, or 36%, for the three months ended July 31, 2018 compared to the three months ended July 31, 2017, primarily due to an increase of $2.7 million in employee compensation costs due to increased headcount, $0.8 million in allocated overhead including facilities expansions, $0.2 million in travel costs, $0.2 million in data center costs, and $0.2 million in professional services, partially offset by a decrease of $0.5 million in costs related to higher capitalized internal-use software costs. The increase in headcount is driven by our continued investment in technology, innovation, and new products.
Sales and Marketing
 

25



 
Three Months Ended
July 31,
 
 
 
 
 
2018
 
2017
 
$ Change
 
% Change
 
(dollars in thousands)
 
 
 
 
Sales and marketing
$
25,429

 
$
18,479

 
$
6,950

 
38
%
Percentage of total revenue:
44
%
 
47
%
 
 
 
 
Sales and marketing expense increased by $7.0 million, or 38%, for the three months ended July 31, 2018 compared to the three months ended July 31, 2017, primarily due to an increase of $4.2 million in employee compensation costs related to increased headcount, $1.3 million in allocated overhead including facilities expansions, $0.8 million in marketing and event costs, and $0.6 million in travel costs. The increase in headcount is driven by our continued investment to acquire new customers and to grow our revenues from existing customers.


General and Administrative 
 
Three Months Ended
July 31,
 
 
 
 
 
2018
 
2017
 
$ Change
 
% Change
 
(dollars in thousands)
 
 
 
 
General and administrative
$
8,563

 
$
5,551

 
$
3,012

 
54
%
Percentage of total revenue:
15
%
 
14
%
 
 
 
 
General and administrative expense increased by $3.0 million, or 54%, for the three months ended July 31, 2018 compared to the three months ended July 31, 2017, primarily due to an increase of $1.4 million in employee compensation costs related to increased headcount, $0.7 million in professional services primarily related to accounting, tax and legal costs, $0.6 million in allocated overhead including facilities expansions, and $0.2 million in software license costs. The increase in these costs is driven by investment required to support our growth as well as operations as a public company.
Interest and Other (Expense) Income, net
 
Three Months Ended
July 31,
 
 
 
 
 
2018
 
2017
 
$ Change
 
% Change
 
(dollars in thousands)
 
 
 
 
Interest and other (expense) income, net
$
(1,178
)
 
$
407

 
$
(1,585
)
 
(389
)%
Interest and other (expense) income, net increased by $1.6 million for the three months ended July 31, 2018 compared to the three months ended July 31, 2017, primarily from an increase of $1.7 million in currency translation losses related to revaluing cash, accounts receivable, and intercompany payables and receivables recorded in a foreign currency, and $0.1 million in loss from disposal of assets; partially offset by an increase of $0.3 million in net interest income.
Income Tax Provision
 
Three Months Ended
July 31,
 
 
 
 
 
2018
 
2017
 
$ Change
 
% Change
 
(dollars in thousands)
 
 
 
 
Income tax provision
$
(201
)
 
$
(239
)
 
$
38

 
(16
)%
We are subject to federal and state income taxes in the United States and taxes in foreign jurisdictions. For the three months ended July 31, 2018 and 2017, we recorded a tax provision of $0.2 million and $0.2 million, respectively, on losses before income taxes of $19.4 million and $14.6 million, respectively. The effective tax rates for the three months ended July 31, 2018 and 2017 were (1.0)% and (1.6)%, respectively. The effective tax rate for the three months ended July 31, 2018 and 2017 differs from the statutory rate primarily as a result of providing no benefit on pretax losses incurred in the United States. For the

26



three months ended July 31, 2018, the Company maintained a full valuation allowance on its U.S. federal and state net deferred tax assets as it was more likely than not that those deferred tax assets will not be realized.
Comparison of the Six Months Ended July 31, 2018 and 2017
The six months ended July 31, 2017 included only two months of results attributable to our Zuora RevPro product, as our acquisition of Leeyo occurred on May 31, 2017.

27



Revenue
 
Six Months Ended
July 31,
 
 
 
 
 
2018
 
2017
 
$ Change
 
% Change
 
(dollars in thousands)
 
 
 
 
Revenue:
 
 
 
 
 
 
 
Subscription
$
77,584

 
$
54,852

 
$
22,732

 
41
%
Professional services
31,914

 
16,899

 
15,015

 
89
%
Total revenue
$
109,498

 
$
71,751

 
$
37,747

 
53
%
Percentage of revenue
 
 
 
 
 
 
 
Subscription
71
%
 
76
%
 
 
 
 
Professional services
29
%
 
24
%
 
 
 
 
Total revenue
100
%
 
100
%
 
 
 
 
Subscription revenue increased by $22.7 million, or 41%, for the six months ended July 31, 2018 compared to the six months ended July 31, 2017. The increase in subscription revenue was attributable to new customers acquired during the period and an increase in usage and sales of additional products to our existing customers. Additionally, the impact of revenue accounting from the acquisition of Leeyo resulted in higher subscription revenue recognition for the period ending July 31, 2018 compared to the period ending July 31, 2017.
Professional services revenue increased by $15.0 million, or 89%, for the six months ended July 31, 2018 compared to the six months ended July 31, 2017, primarily due to increased revenue from customer deployment of our products.
Cost of Revenue and Gross Margin
 
Six Months Ended
July 31,
 
 
 
 
 
2018
 
2017
 
$ Change
 
% Change
 
(dollars in thousands)
 
 
 
 
Cost of revenue:
 
 
 
 
 
 
 
Subscription
$
20,286

 
$
14,106

 
$
6,180

 
44
%
Professional services
34,379

 
19,326

 
15,053

 
78
%
Total cost of revenue
$
54,665

 
$
33,432

 
$
21,233

 
64
%
Gross margin:
 
 
 
 
 
 
 
Subscription
74
 %
 
74
 %
 
 
 
 
Professional services
(8
)%
 
(14
)%
 
 
 
 
Total gross margin
50
 %
 
53
 %
 
 
 
 
Cost of subscription revenue increased by $6.2 million, or 44%, for the six months ended July 31, 2018 compared to the six months ended July 31, 2017, primarily due to increases of $2.1 million in data center costs to support customer growth, $1.6 million in employee compensation costs related to increased headcount, $0.9 million of professional services costs, $0.6 million in software license costs, $0.5 million related to the amortization of purchased technology and amortization of internal-use software, and $0.5 million in allocated overhead including facilities expansions. The increase in these costs was driven by the growth in number of customers as well as the increase in usage from existing customers.
Our gross margin for subscription revenue was 74% for both the six months ended July 31, 2018 and 2017, primarily from increased investment in infrastructure offset by the impact of purchase accounting from the Leeyo acquisition that resulted in higher subscription revenue recognition for the period ending July 31, 2018 as compared to the period ending July 31, 2017. In addition, gross margin for the period ending July 31, 2017 was impacted by one-time employee compensation costs related to the acquisition of Leeyo.

28



Cost of professional services revenue increased by $15.1 million for the six months ended July 31, 2018 compared to the six months ended July 31, 2017, due to an increase in headcount as well as professional services expenses in order to support a greater number of customer deployments.
Our gross margin for professional services revenue improved to (8)% for the six months ended July 31, 2018 from (14%) for the six months ended July 31, 2017, primarily from one-time employee compensation costs in the period ending July 31, 2017, related to the acquisition of Leeyo.
Operating Expenses
Research and Development
 
 
Six Months Ended
July 31,
 
 
 
 
 
2018
 
2017
 
$ Change
 
% Change
 
(dollars in thousands)
 
 
 
 
Research and development
$
25,385

 
$
17,645

 
$
7,740

 
44
%
Percentage of total revenue:
23
%
 
25
%
 
 
 
 
Research and development expense increased by $7.7 million, or 44%, for the six months ended July 31, 2018 compared to the six months ended July 31, 2017, primarily due to an increase of $6.2 million in employee compensation costs due to increased headcount, $1.4 million in allocated overhead including facilities expansions, $0.3 million in professional services, $0.3 million in data center costs, and $0.3 million in travel costs, partially offset by a decrease of $0.9 million in costs related to higher capitalized internal-use software costs. The increase in headcount is driven by our continued investment in technology, innovation, and new products.
Sales and Marketing
 
 
Six Months Ended
July 31,
 
 
 
 
 
2018
 
2017
 
$ Change
 
% Change
 
(dollars in thousands)
 
 
 
 
Sales and marketing
$
48,266

 
$
33,431

 
$
14,835

 
44
%
Percentage of total revenue:
44
%
 
47
%
 
 
 
 
Sales and marketing expense increased by $14.8 million, or 44%, for the six months ended July 31, 2018 compared to the six months ended July 31, 2017, primarily due to an increase of $9.6 million in employee compensation costs related to increased headcount, $2.1 million in marketing and event costs, $1.9 million in allocated overhead costs including facilities expansions, and $1.2 million in travel costs. The increase in headcount is driven by our continued investment to acquire new customers and to grow our revenues from existing customers.
General and Administrative
 
 
Six Months Ended
July 31,
 
 
 
 
 
2018
 
2017
 
$ Change
 
% Change
 
(dollars in thousands)
 
 
 
 
General and administrative
$
17,974

 
$
10,230

 
$
7,744

 
76
%
Percentage of total revenue:
16
%
 
14
%
 
 
 
 
General and administrative expense increased by $7.7 million, or 76%, for the six months ended July 31, 2018 compared to the six months ended July 31, 2017, primarily due to an increase of $3.2 million in employee compensation costs related to increased headcount, $2.3 million in professional services primarily related to accounting, tax and legal costs, $0.7 million in sales tax costs, $1.0 million in allocated overhead costs including facilities expansions, $0.4 million in software license costs,

29



and $0.2 million in travel costs. The increase in these costs is driven by investment required to support our growth as well as operations as a public company.
Interest and Other (Expense) Income, net
 
 
Six Months Ended
July 31,
 
 
 
 
 
2018
 
2017
 
$ Change
 
% Change
 
(in thousands)
 
 
 
 
Interest and other (expense) income, net
$
(1,851
)
 
$
391

 
$
(2,242
)
 
(573
)%
Interest and other (expense) income, net changed by $2.2 million for the six months ended July 31, 2018 compared to the six months ended July 31, 2017, primarily from an increase of $2.2 million in currency translation losses related to revaluing cash, accounts receivable, and intercompany payables and receivables recorded in foreign currency, and $0.1 million in loss from disposal of assets; partially offset by $0.1 million in net interest income.
Income Tax Provision
 
 
Six Months Ended
July 31,
 
 
 
 
 
2018
 
2017
 
$ Change
 
% Change
 
(in thousands)
 
 
 
 
Income tax provision
$
(391
)
 
$
(371
)
 
$
(20
)
 
5
%
We are subject to federal and state income taxes in the United States and taxes in foreign jurisdictions. For the six months ended July 31, 2018 and 2017, we recorded a tax provision of $0.4 million and $0.4 million on losses before income taxes of $38.6 million and $22.6 million, respectively. The effective tax rates for the six months ended July 31, 2018 and 2017 were (1.0)% and (1.6)%, respectively. The effective tax rate for the six months ended July 31, 2018 and 2017 differs from the statutory rate primarily as a result of providing no benefit on pretax losses incurred in the United States. For the six months ended July 31, 2018, the Company maintained a full valuation allowance on its U.S. federal and state net deferred tax assets as it was more likely than not that those deferred tax assets will not be realized.
Liquidity and Capital Resources
As of July 31, 2018, we had cash and cash equivalents and restricted cash of $185.8 million. Since inception, we have financed our operations primarily through the net proceeds we received through private sales of equity securities, payments received from customers for subscription and professional services, and borrowings from our Debt Agreement. Additionally, in April 2018, we completed our IPO, in which we issued and sold an aggregate of 12.7 million shares of Class A common stock at a price of $14.00 per share. We received aggregate net proceeds of $162.2 million from the IPO, after underwriting discounts and commissions and payments of offering costs as of April 30, 2018.
We believe our existing cash and cash equivalents and restricted cash balances, funds available under our Debt Agreement, and cash provided by subscriptions to our platform and related professional services will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months. Our future capital requirements will depend on many factors, including the rate of our revenue growth, the timing and extent of spending on research and development efforts and other business initiatives, the expansion of sales and marketing activities, the introduction of new and enhanced product offerings, and the continuing market adoption of our platform. We may in the future enter into arrangements to acquire or invest in complementary businesses, services, and technologies, including intellectual property rights. We may elect to or may be required to seek additional equity or debt financing. Sales of additional equity could result in dilution to our stockholders. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in new technologies, it could reduce our ability to compete successfully and harm our results of operations.
Debt Agreement

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In June 2017, we entered into a Debt Agreement with Silicon Valley Bank. The Debt Agreement established a revolving loan and a term loan facility of $10.0 million and $30.0 million, respectively.
Revolving Loan. The Debt Agreement allows us to borrow up to $10.0 million until June 2019 in revolving loans. Advances drawn down under the revolving loan incur interest at the prime rate as published by the Wall Street Journal (WSJ Prime Rate), which is due monthly on any amounts drawn down, with the principal due at maturity. Any outstanding amounts must be fully repaid before June 14, 2019. We are required to pay an annual fee of $20,000 on this revolving loan, regardless of any amounts drawn down. As of April 30, 2018, we had not drawn down any amounts under this revolving loan.
Term Loan. The Debt Agreement allowed the Company to borrow up to $30.0 million in the form of term loans until June 14, 2018. In June 2017, the Company drew down $15.0 million to partially finance the acquisition of Leeyo Software, Inc. (Leeyo), and the remaining $15.0 million was available for borrowing until June 14, 2018 but was not drawn down. Any outstanding amounts under the term loan accrue interest at the WSJ Prime rate plus 1.00%. The interest rate was 6.00% as of July 31, 2018. Beginning June 2018, the Company is required to make equal monthly payments of principal and interest over 36 months to until the term loan is repaid. The Company may prepay all outstanding principal and accrued interest at any time without penalty. The Company will incur a facility fee of 1.5% upon the earlier to occur of prepayment or the termination of the facility. As of July 31, 2018, the Company had $14.6 million outstanding under the term loan.
Both the revolving loan and the term loan are subject to certain covenants, including a requirement to maintain an adjusted quick ratio of no less than 1.10:1.00. As of July 31, 2018, we were in compliance with the covenants under the Debt Agreement.
Cash Flows
The following table summarizes our cash flows for the periods indicated:
 
 
Six Months Ended
July 31, 2018
 
2018
 
2017
Net cash used in operating activities
$
(10,222
)
 
$
(13,018
)
Net cash used in investing activities
(6,937
)
 
(13,078
)
Net cash provided by financing activities
149,307

 
16,230

Effects of changes on foreign currency exchange rates on cash and cash equivalents
338

 
321

Net increase (decrease) in cash and cash equivalents and restricted cash
$
132,486


$
(9,545
)
Operating Activities
Our largest source of operating cash is cash collections from our customers for subscription and professional services. Our primary uses of cash from operating activities are for employee-related expenditures, marketing expenses, third-party consulting expenses, and third-party hosting costs.
For the six months ended July 31, 2018, net cash used in operating activities was $10.2 million, which consisted of a net loss of $39.0 million, adjusted for non-cash charges of $17.4 million and net cash inflows of $11.4 million provided by changes in our operating assets and liabilities. Non-cash charges primarily consisted of stock-based compensation, depreciation and amortization of property and equipment and intangible assets, and provision for doubtful accounts. The changes in operating assets and liabilities were primarily due to an increase in accrued expenses and other current liabilities and accrued employee liabilities of $5.9 million, a $5.2 million decrease in net accounts receivable resulting from strong cash collections, and a $3.4 million increase in deferred revenue due to growth. The changes in operating assets and liabilities was primarily due to a $3.8 million increase in prepaid expenses and other current assets, and other assets, due to the timing of payments.
For the six months ended July 31, 2017, net cash used in operating activities was $13.0 million, which consisted of a net loss of $23.0 million, adjusted for non-cash charges of $6.5 million and net cash inflows of $3.5 million provided by changes in our operating assets and liabilities. Non-cash charges primarily consisted of stock-based compensation, depreciation and amortization of property and equipment and intangible assets and provision for doubtful accounts. The changes in operating assets and liabilities were primarily due to a $3.5 million increase in accrued expenses and other current liabilities and accrued employee liabilities and a $2.0 million increase in deferred revenue due to growth, and a $1.4 million decrease in net accounts

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receivable due to the timing of cash collections, partially offset by a $3.1 million decrease in accounts payable due to the timing of payments.
Investing Activities
Net cash used in investing activities for the six months ended July 31, 2018 of $6.9 million was due to $6.7 million in purchases of property and equipment and capitalized internal-use software and $0.2 million in cash paid to investors in connection with our acquisition of Leeyo.
Net cash used in investing activities for the six months ended July 31, 2017 of $13.1 million was due to $11.4 million in cash paid to investors in connection with our acquisition of Leeyo and $1.7 million in purchases of property and equipment and capitalized internal-use software.
Financing Activities
Cash provided by financing activities for the six months ended July 31, 2018 of $149.3 million was primarily the result of net IPO proceeds of $160.4 million and $6.7 million in stock option exercise proceeds, partially offset by $12.6 million in payments to investors and $4.3 million in loans made to related parties in connection with the Leeyo acquisition, $0.5 million in payments made on leased equipment and $0.4 million of debt payments.
Cash provided by financing activities for the six months ended July 31, 2017 of $16.2 million was primarily the result of $14.9 million in proceeds from the issuance of long-term debt, net of issuance costs and $2.2 million in stock option exercise proceeds, partially offset by $0.9 million in payments made on leased equipment.
Off-Balance Sheet Arrangements
As of July 31, 2018, 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.
Obligations and Other Commitments
Our principal commitments consist of obligations under our operating leases for office space and our Debt Agreement. The following table summarizes our contractual obligations as of July 31, 2018:
 
Total
 
Less than 1 year
 
1-3 years
 
3-5 years
 
More than 5 years
Operating lease obligations¹
$
31,696

 
$
6,962

 
$
13,167

 
$
9,051

 
$
2,516

Debt principal and interest²
14,820

 
5,000

 
9,820

 

 

Capital lease obligations³
3,189

 
1,784

 
1,405

 

 

 
$
49,705

 
$
13,746

 
$
24,392

 
$
9,051

 
$
2,516

_________________________________
(1) We lease our facilities under long-term operating leases which expire on varying dates through March 2024. The lease agreements often contain provisions which require us to pay taxes, insurance, and maintenance costs.
(2) Debt principal and interest includes amounts owed under our Debt Agreement with Silicon Valley Bank including principal, interest and a $0.2 million facility fee on the term loan. Interest payments were calculated using the applicable rate as of July 31, 2018. See Note 9 of the notes to our condensed consolidated financial statements included in this Form 10-Q.
(3) Capital lease obligations include data center equipment under capital lease agreements which expire on varying dates through October 2021.
As of July 31, 2018, we had accrued liabilities related to uncertain tax positions, which are reflected in our consolidated balance sheets. These accrued liabilities are not reflected in the table above since it is unclear when these liabilities will be repaid.

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Critical Accounting Policies and Estimates
We prepare our condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States (U.S. GAAP). In the preparation of these condensed consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations would be affected. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We refer to accounting estimates of this type as critical accounting policies and estimates, which we discuss below.
The Company’s significant accounting policies are discussed in “Index to Consolidated Financial Statements—Note 1. Summary of Business and Significant Accounting Policies” in the Prospectus. There have been no significant changes to these policies for the six months ended July 31, 2018, except as noted in Note 2 of our unaudited condensed consolidated financial statements “Summary of Significant Accounting Policies and Recent Accounting Pronouncements.” See Note 2 of our unaudited condensed consolidated financial statements for more information.
Recent Accounting Pronouncements
See “Summary of Significant Accounting Policies and Recent Accounting Pronouncements” in Note 2 of our unaudited condensed consolidated financial statements for more information.

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Item 3.
Quantitative and Qualitative Disclosures About Market Risk
We are exposed to certain market risks in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in foreign currency exchange rates and interest rates.
Foreign Currency Exchange Risk
The functional currencies of our foreign subsidiaries are the respective local currencies. Our sales are typically denominated in the local currency of the country in which the sale was made. The majority of our sales are made in the United States and those sales are denominated in U.S. dollars. Therefore, our revenue is not currently subject to significant foreign currency risk. Our operating expenses are denominated in the currencies of the countries in which our operations are located, which are primarily in the United States, Europe, China, India, Japan, and Australia. Our results of operations and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates and may be adversely affected in the future due to changes in foreign exchange rates. To date, we have not entered into any hedging arrangements with respect to foreign currency risk or other derivative financial instruments. For the six months ended July 31, 2018, a hypothetical 10% change in foreign currency exchange rates applicable to our business would not have had a material impact on our unaudited condensed consolidated financial statements.
Interest Rate Risk
We had cash and cash equivalents of $179.2 million as of July 31, 2018. Our cash and cash equivalents are held for working capital purposes. We do not make investments for trading or speculative purposes.
Our cash equivalents are subject to market risk due to changes in interest rates. Fixed rate securities may have their market value adversely affected due to a rise in interest rates. Due in part to these factors, our future investment income may fall short of our expectations due to changes in interest rates or we may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates. However, because we classify our short-term investments as “available for sale,” no gains or losses are recognized due to changes in interest rates unless such securities are sold prior to maturity or declines in fair value are determined to be other-than-temporary.
Under our Debt Agreement, we pay interest on any outstanding balances based on a variable market rate. A significant change in these market rates may adversely affect our operating results.
As of July 31, 2018, a hypothetical 10% relative change in interest rates would not have had a material impact on the value of our cash equivalents. Fluctuations in the value of our cash equivalents caused by a change in interest rates (gains or losses on the carrying value) are recorded in other comprehensive income, and are realized only if we sell the underlying securities prior to maturity. In addition, a hypothetical 10% relative change in interest rates would not have had a material impact on our operating results for the six months ended July 31, 2018.
Item 4.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act), as of July 31, 2018. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of July 31, 2018, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding its required disclosure.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the three months ended July 31, 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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Inherent Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. Accordingly, our disclosure controls and procedures provide reasonable assurance of achieving their objectives.

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PART II—OTHER INFORMATION
 
Item 1.
Legal Proceedings
We are not a party to any material pending legal proceedings. From time to time, we may be subject to legal proceedings and claims arising in the ordinary course of business.