Sprinklr, Inc. (CXM) FY 2023 MD&A

Item 7. 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 consolidated financial statements and related notes included elsewhere in this Form 10-K. This discussion, particularly information with respect to our future results of operations or financial condition, business strategy and plans and objectives of management for future operations, includes forward-looking statements that involve risks and uncertainties as described under the heading “Special Note Regarding Forward-Looking Statements” in this Form 10-K. You should review the disclosure under the heading “Risk Factors” in this Form 10-K for a discussion of important factors that could cause our actual results to differ materially from those anticipated in these forward-looking statements.

This section of our Form 10-K discusses our financial condition and results of operations for the fiscal years ended January 31, 2023, 2022 and 2021 and year-to-year comparisons between fiscal 2023 and fiscal 2022. Year-to-year comparisons between fiscal 2022 and fiscal 2021 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended January 31, 2022, filed on April 11, 2022.

Overview

Sprinklr empowers the world’s largest and most loved brands to make their customers happier.

We do this with a new category of enterprise software – Unified Customer Experience Management (“Unified-CXM”) – that enables every customer-facing function across the front office, from Customer Service to Marketing, to collaborate across internal silos, communicate across digital channels, and leverage a complete suite of capabilities to deliver better, more human customer experiences at scale – all on one unified, AI-powered platform.

Our Unified-CXM platform utilizes an architecture purpose-built for managing CXM data and is powered by proprietary AI, collaborative workflow, seamless automation, broad-based listening and customer-led governance to help enterprises analyze massive amounts of unstructured and structured data.

We generate revenue from the sale of subscriptions to our Unified-CXM platform and related professional services. Our platform includes products that are licensed on a per-user basis as well as products that are licensed based on different tiers of volume.

We believe that our Unified-CXM platform is highly effective for organizations of all sizes, and we have a highly diverse group of customers across a broad array of industries and geographies. We focus primarily on selling our platform to large global enterprises, as we believe that we have significant competitive advantages attracting and serving such organizations given their complex needs and the broad capabilities our platform offers.

Our customers include global enterprises across a broad array of industries and geographies, as well as marketing agencies and government departments along with non-profit and educational institutions. Our customers are located in over 70 countries and use our platform in over 100 languages. As of January 31, 2023, we had 1,428 customers spanning organizations of a broad range of sizes and industries, including more than two-thirds of the Fortune 100 companies, compared to 1,166 customers as of January 31, 2022. We define our large customers as customers with greater than or equal to $1.0 million in subscription revenue on a trailing 12-month basis, as of the period presented. As of January 31, 2023, we had 108 large customers compared to 82 as of January 31, 2022.

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Key Business Metrics

We review a number of operating and financial metrics, including the following key metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans and make strategic decisions.

RPO and cRPO

Remaining Performance Obligation (“RPO”) represents contracted revenues that had not yet been recognized, and include deferred revenues and amounts that will be invoiced and recognized in future periods. Current RPO (“cRPO”) represents contracted revenue that has not yet been recognized and includes deferred revenue and amounts that will be invoiced and recognized in the next 12 months. The aggregate transaction price of RPO expected to be recognized as revenue was $719.5 million and $569.5 million as of January 31, 2023 and 2022, respectively. The transaction price of cRPO to be recognized as revenue in the next 12 months was $485.2 million and $395.0 million as of January 31, 2023 and 2022, respectively.

RPO as of January 31, 2022 has been reduced from $586.4 million previously reported to $569.5 million in order to correct the treatment of an immaterial number of contracts included in the calculation of RPO.

Net Dollar Expansion Rate

We believe that net dollar expansion rate (“NDE”) is an indicator of the value that our platform delivers to customers. We calculate NDE to measure our ability to retain and expand subscription revenue from our existing customers. NDE compares our subscription revenue from the same set of customers across comparable periods and reflects customer renewals, expansion, contraction and churn. We calculate NDE by dividing (i) subscription revenue in the trailing 12-month period from those customers who were on our platform during the most recent prior 12-month period by (ii) subscription revenue from the same customers in the preceding prior 12-month period. This calculation is net of upsells, contraction, cancellation or expansion during the period but excludes subscription revenue from new customers. NDE, on a trailing 12-month basis, was 123.9% and 119.8% for the 12-month periods ending January 31, 2023 and 2022, respectively.

Macroeconomic Considerations

Unfavorable conditions in the economy both in the United States and abroad may negatively affect the growth of our business and our results of operations. For example, macroeconomic events, including the COVID-19 pandemic, rising inflation, the U.S. Federal Reserve raising interest rates and the Russia-Ukraine war, have led to economic uncertainty globally. Historically, during periods of economic uncertainty and downturns, businesses may slow spending on information technology, which may impact our business and our customers’ businesses.

The effect of macroeconomic conditions may not be fully reflected in our results of operations until future periods. If, however, economic uncertainty increases or the global economy worsens, our business, financial condition and results of operations may be harmed. For further discussion of the potential impacts of macroeconomic events on our business, financial condition, and operating results, see the section titled “Risk Factors.”

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Components of Results of Operations

Revenue

We generate revenue from the sale of subscriptions to our Unified-CXM cloud-based software platform and related professional services.

Subscription revenue consists primarily of fees from customers accessing our proprietary Unified-CXM platform, as well as related support services. Subscription revenue is generally recognized ratably over the related contract term beginning on the commencement date of each contract, which is generally the date our service is made available to customers. Our subscriptions typically have a term of one to three years. Historically, we have experienced seasonality in our sales cycle, as a large percentage of our customers make their purchases in the fourth quarter of a given fiscal year and pay us in the first quarter of the subsequent year. This seasonality may be reflected to a much lesser extent, and sometimes may not be immediately apparent, in our revenue, due to the fact that we recognize subscription revenue over the term of the applicable subscription agreement.

Professional services revenue consists of fees associated with providing services that assist our customers with the configuration and optimization of our Unified-CXM software. These fees also include managed services fees where our consultants work as part of our customers’ teams to help leverage the subscription services to execute on their customer experience management goals and enablement services which consist of initial design, configuration and education services.

Costs of Revenue

Costs of Subscription Revenue

Costs of subscription revenue consists primarily of costs to host our software platform, data costs, including cost of third-party data utilized in our platform, personnel-related expenses for our subscription and support operations personnel, including salaries, benefits, bonuses, stock-based compensation, professional fees, software costs, travel expenses, the amortization of our capitalized internal-use software and allocated overhead expenses, including facilities costs for our subscription and support operations. We expect that costs of subscription revenue will increase in absolute dollars as we expand our customer base and make continued investments in our cloud infrastructure and support organization.

Costs of Professional Services Revenue

Costs of professional services revenue consists primarily of personnel-related expenses for our professional services personnel, professional fees, software costs, subcontractor costs, travel expenses and allocated overhead expenses, including facilities costs, for our professional services organization. We expect that our costs of professional services revenue will increase in absolute dollars as we expand our customer base.

Gross Profit and Gross Margin

Gross profit is total revenue less total costs of revenue. Gross margin is gross profit expressed as a percentage of total revenue. We expect that gross profit and gross margin will continue to be affected by various factors, including our pricing, our mix of revenues and the costs required to deliver those revenues.

Our gross margin on subscription revenue is significantly higher than our gross margin on professional services revenue, and as a result our gross margin may vary from period to period if our mix of revenue or costs of revenue fluctuates. In addition, because personnel-related expenses represent the largest component in costs of professional services revenue, we may experience changes in our professional services gross margin due to the timing of delivery of those services. We expect that our gross margin may vary from period to period and increase modestly in the long term.

Operating Expense

Our operating expense consists of research and development, sales and marketing and general and administrative expense.

Research and Development Expense

Research and development expense consists primarily of costs relating to the maintenance, continued development and enhancement of our cloud-based software platform and includes personnel-related expense for our research and development organization, professional fees, travel expenses and allocated overhead expenses, including facilities costs. Research and development expenses are expensed as incurred, except for internal-use software development costs that qualify for capitalization. We expect research and development expenses to increase in absolute dollars as we continue to invest in enhancing and expanding the capabilities of our Unified-CXM platform.

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Sales and Marketing Expense

Sales and marketing expense consists primarily of personnel-related expenses for our sales and marketing organization, professional fees, software costs, advertising, marketing, promotional and brand awareness activities, travel expenses and allocated overhead expense, including facilities costs. Sales commissions earned by our sales force are considered incremental and recoverable costs of obtaining a contract with a customer and are deferred and amortized on a straight-line basis over the expected period of benefit. We intend to continue to invest in sales and marketing to help drive the growth of our business. We continue to optimize our sales and marketing expense and seek efficiencies in our investments.

General and Administrative Expense

General and administrative expense includes personnel costs associated with administrative services, such as legal, human resources, information technology, accounting, and finance functions, as well as professional fees, software costs, travel expenses and allocated overhead expense, including facilities costs and any corporate overhead expenses not allocated to other expense categories.

We expect our general and administrative expense to increase in absolute dollars as we continue to grow our business. We also anticipate that we will incur additional costs for employees and third-party consulting services, which may cause our general and administrative expense to fluctuate as a percentage of revenue from period to period.

Other Income (Expense), Net

Other income (expense), net, consists of interest income on invested cash and cash equivalents and marketable securities, interest expense, foreign currency transaction gains and losses and other expenses and gains.

Provision for Income Taxes

Provision for income taxes consists primarily of income taxes related to foreign and U.S. jurisdictions in which we conduct business. Our annual estimated effective tax rate differed from the U.S. federal statutory rate primarily due to a full valuation allowance related to our U.S. deferred tax assets, partially offset by U.S. current state taxes and foreign tax rate differential on non-U.S. income.

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Results of Operations

The following table sets forth our consolidated statements of operations data for the periods indicated:

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

Comparison of Fiscal Years Ended January 31, 2023 and 2022

Revenue

Total revenue increased $125.8 million, or 26%, in fiscal year 2023, compared to fiscal year 2022, and was comprised of an increase in subscription revenue of $120.9 million, or 28%, and an increase in professional services of $4.9 million, or 8%.

The increase in subscription revenue for the fiscal year 2023, compared to the fiscal year 2022, was due primarily to (i) increased demand for our solutions from new customers and (ii) an increase in revenue from existing customers driven by the purchase of additional quantities of current subscription solutions and additional add-on solutions within our platform.

The increase in professional services revenues for the fiscal year 2023, compared to the fiscal year 2022, was primarily due to an increase in implementation and managed services performed during the fiscal year 2023, compared to the fiscal year 2022.

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Costs of Revenue and Gross Margin

Total costs of revenue increased $16.2 million, or 11%, in fiscal year 2023, compared to fiscal year 2022, and was comprised of an increase in costs of subscription revenue of $12.4 million, or 14%, and an increase in costs of professional services of $3.8 million, or 7%.

Costs of subscription revenue was $102.3 million for the fiscal year 2023, compared to $89.9 million for the fiscal year 2022. The increase in cost of subscription revenue was due primarily to higher costs related to third-party cloud infrastructure necessary to meet our increased customer demand, which included a combined $10.6 million increase in costs to host our software platform and our data costs. Also contributing to this increase in costs of subscription revenue was an increase of $2.5 million in amortization of capitalized research and development costs.

Costs of professional services revenue was $61.4 million for the fiscal year 2023, compared to $57.7 million for the fiscal year 2022. The increase in cost of professional services revenue was due primarily to increases in personnel costs of $1.7 million due to increased headcount of professional services employees and a $1.1 million increase in subcontractor costs.

Gross margin for subscription increased by 2 percentage points, primarily driven by the year-over-year growth in subscription revenue. Gross margin for professional services remained flat year-over-year as professional services revenue moved in-line with cost of services.

Research and Development Expense

Research and development expense increased $16.1 million, or 27%, in fiscal year 2023, compared to fiscal year 2022. The increase was primarily due to a $18.6 million increase in research and development personnel costs driven by increased headcount of research and development employees as we continue to add to and enhance our product, which included a $6.1 million increase in stock-based compensation. The increase to research and development personnel costs was partially offset by a $4.1 million increase in research and development costs that were capitalized.

Sales and Marketing Expense

Sales and marketing expense increased $49.8 million, or 17%, in fiscal year 2023, compared to fiscal year 2022. The increase was primarily due to a $38.1 million increase in personnel costs driven by increased headcount of sales and marketing employees to support growth, which included a $7.2 million increase in benefits, a $6.7 million increase in stock-based compensation and a $4.5 million increase in commissions and bonuses associated with an increase in customer contracts and revenue growth. Also contributing to the increase in sales and marketing expense was a combined increase of $8.6 million associated with increases in rent and facilities costs due to new leases entered into in fiscal 2023 and travel-related costs due to return to office and in-person meetings.

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General and Administrative Expense

General and administrative expenses increased $7.6 million, or 9%, in fiscal year 2023, compared to fiscal year 2022. The increase was primarily due to a $8.2 million increase in general and administrative employee personnel costs, including benefits, as well as a combined increase of $4.0 million in insurance and software-related costs. These increases were partially offset by a $5.1 million decrease in stock-based compensation related to a one-time acceleration of stock-based compensation in fiscal year 2022. There was not a corresponding acceleration of stock-based compensation recognized in fiscal year 2023.

Litigation Settlement

In 2022 we agreed to settle all outstanding claims for a total amount of $12.0 million with Opal Labs Inc. (“Opal”) with respect to Opal’s complaints alleging breach of contract and violation of Oregon’s Uniform Trade Secrets Act. The settlement was recorded as a one-time operating expense charge in the fiscal year 2022. There were no litigation settlements accrued for during fiscal year 2023.

Other Income (Expense), Net

Other income of $3.8 million in fiscal year 2023 was primarily attributable to $8.2 million of interest income, net earned on money market and short-term investment accounts, partially offset by $4.7 million in net foreign currency transaction losses. Other expense in fiscal year 2022 was primarily attributable to $3.2 million of paid in kind interest expense related to the historical senior subordinated convertible notes and $1.6 million in foreign currency transaction losses.

Provision for Income Taxes

Provision for income taxes increased $1.4 million, or 20%, in fiscal year 2023, compared to fiscal year 2022. The increase was related to higher foreign income tax liability on our non-U.S. subsidiaries.

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Non-GAAP Financial Measures

In addition to our results determined in accordance with GAAP, we believe the following non-GAAP financial measures are useful in evaluating our operating performance:

•Non-GAAP gross profit and non-GAAP gross margin

•Non-GAAP operating (loss) income and non-GAAP operating margin

•Non-GAAP net (loss) income and non-GAAP net (loss) income per share

We define these non-GAAP financial measures as the respective GAAP measures, excluding, as applicable, stock-based compensation expense-related charges, charges on litigation settlements and amortization of acquired intangible assets. We believe that it is useful to exclude stock-based compensation expense-related charges and amortization of acquired intangible assets in order to better understand the long-term performance of our core business and to facilitate comparison of our results to those of peer companies over multiple periods. We also exclude charges on litigation settlements that are considered to be non-ordinary course as we do not consider such losses to be indicative of our core business. We calculate non-GAAP net (loss) income per share by using non-GAAP net (loss) income divided by basic weighted average shares for the period regardless of whether we are in a non-GAAP net (loss) or income position and assuming that all potentially dilutive securities are anti-dilutive.

In addition, we believe free cash flow and adjusted free cash flow are also useful non-GAAP financial measures. Free cash flow is defined as net cash provided by (used in) operating activities less cash used for purchases of property and equipment and capitalized internal-use software. Adjusted free cash flow is defined as free cash flow adjusted for litigation settlement costs. We believe that free cash flow and adjusted free cash flow are useful indicators of liquidity as they measure our ability to generate cash, or our need to access additional sources of cash, to fund operations and investments. We expect our free cash flow to fluctuate in future periods with changes in our operating expenses and as we continue to invest in our growth. We typically experience higher billings in the fourth quarter compared to other quarters and experience higher collections of accounts receivable in the first half of the year, which results in a decrease in accounts receivable in the first half of the year.

However, non-GAAP financial measures have limitations in their usefulness to investors because they have no standardized meaning prescribed by GAAP and are not prepared under any comprehensive set of accounting rules or principles. In addition, other companies, including companies in our industry, may calculate similarly titled non-GAAP financial measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measures as tools for comparison. As a result, our non-GAAP financial measures are presented for supplemental informational purposes only and should not be considered in isolation or as a substitute for our consolidated financial statements presented in accordance with GAAP.

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A reconciliation is provided below for each non-GAAP financial measure to the most directly comparable financial measure stated in accordance with GAAP:

(1) Includes $0.1 million and $0.1 million of employer payroll tax related to stock-based compensation expense for the years ended January 31, 2023 and 2022, respectively.

(2) Includes $1.2 million and $1.4 million of employer payroll tax related to stock-based compensation expense for the years ended January 31, 2023 and 2022, respectively.

(3) On February 25, 2022, we and Opal agreed to settle all outstanding claims with respect to Opal’s complaints alleging breach of contract and violation of Oregon’s Uniform Trade Secrets Act, among other claims. The settlement amount was recorded as a one-time operating expense charge in fiscal year 2022, which was paid in fiscal year 2023.

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Liquidity and Capital Resources

Overview

As of January 31, 2023, our principal sources of liquidity were $188.4 million of cash and cash equivalents, $390.2 million of highly liquid marketable securities and an available line of credit of $50.0 million under our revolving credit facility. We believe that our existing cash and cash equivalents, marketable securities and cash from operations will be sufficient to meet our working capital needs, capital expenditures and financing obligations for at least the next 12 months and over the long-term. The majority of our cash is held in the United States and we do not anticipate a need to repatriate cash held outside of the United States. Further, it is our intent to indefinitely reinvest these funds outside the United States, and, therefore, we have not provided for any United States income taxes.

On June 25, 2021, we completed our IPO, in which we issued and sold 16,625,000 shares of our Class A common stock at a public offering price of $16.00 per share. On July 1, 2021, the underwriters’ option to purchase 1,662,500 additional shares of Class A common stock was exercised in full. We received net proceeds of $276.0 million after deducting underwriting discounts and commissions and other offering expenses.

SVB Credit Facility

We maintain a credit agreement with Silicon Valley Bank (the “SVB Credit Facility”). Under the most recent amended terms of the SVB Credit Facility, we can borrow up to $50.0 million on our revolving credit loan facility at the higher of prime interest rate or federal funds effective rate plus 0.50%, provided that in no event shall the total interest rate be less than 5.50%. The SVB Credit Facility, which expires on January 31, 2026, requires that we maintain a monthly adjusted quick ratio of no less than 1.25:1.00. As of January 31, 2023, we had a sub-limit of $15.0 million letters of credit available under the SVB Credit Facility, of which $4.6 million was issued.

On March 23, 2023, we provided notice to Silicon Valley Bank of our intent to terminate the SVB Credit Facility. The $4.6 million in letters of credit that were previously issued under the SVB Credit Facility as of January 31, 2023 will remain outstanding if the SVB Credit Facility is terminated.

Material Cash Requirements

Our expected material cash requirements comprise of contractually obligated expenditures. We have agreements in place with data and service providers that require us to make certain minimum guaranteed purchase commitments through fiscal year 2026 which totaled $220.9 million as of January 31, 2023. This amount includes a new purchase commitment entered into in June 2022 with a data and service provider for total minimum guaranteed purchase commitment of $60.0 million over 5 years. As of January 31, 2023, the remaining purchase commitment on this agreement was $52.0 million. We had no other material changes to the purchase commitments during fiscal 2023. In addition, we lease certain office facilities under operating lease arrangements that expire on various dates through fiscal year 2027.

Future Funding Requirements

Our future capital requirements will depend on many factors, including our growth rate, the expansion of our direct sales force, strategic relationships and international operations, the timing and extent of spending to support research and development efforts and the continuing market acceptance of our solutions. We historically have expanded our business in part by investing in strategic growth initiatives, including acquisitions of products, technologies and businesses. We may finance such acquisitions using cash, debt, stock or a combination of the foregoing; however, we have used cash and stock as consideration for substantially all of our historical business acquisitions. We continually examine our options with respect to terms and sources of existing and future short-term and long-term capital resources to enhance our operating results and to ensure that we retain financial flexibility, and may from time to time elect to raise capital through the issuance of additional equity or the incurrence of additional debt. Sales of additional equity could result in dilution to our stockholders. If we raise funds by borrowing from third parties, the terms of those financing arrangements would require us to incur interest expense and may include negative covenants or other restrictions on our business that could impair our operating flexibility. We can provide no assurance that financing will be available at all or, if available, that we would be able to obtain financing on terms favorable to us. If we are unable to raise additional capital when needed, we would be required to curtail our operating activities and capital expenditures, and our business operating results and financial condition would be adversely affected.

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Cash Flows

The following table shows a summary of our cash flows for the periods indicated:

Our net loss and cash flows provided by (used in) operating activities are influenced significantly by our investments in headcount to support growth and in costs of revenue to deliver our services. In fiscal year 2023, our net loss improved as a result of our increased subscription revenue and related billings, as well as the amount of non-cash charges that we incur. Non-cash charges primarily include depreciation and amortization, stock-based compensation, and non-cash lease expense. Our largest source of operating cash is cash collections from customers using our Unified-CXM Platform and related services. Our primary uses of cash from operating activities are for employee-related costs, costs to deliver our revenue and marketing expenses.

We expect our free cash flow to fluctuate in future periods with changes in our operating expenses and as we continue to invest in our growth. We typically experience higher billings in the fourth quarter compared to other quarters, primarily due to higher renewal activity, and experience higher collections of accounts receivable in the first half of the year, which results in a decrease in accounts receivable in the first half of the year.

Operating Activities

For the fiscal year 2023, cash provided by operating activities was $26.7 million resulting from net loss of $55.7 million offset by net non-cash expenses of $75.7 million and $6.7 million net cash flows provided as a result of changes in operating assets and liabilities. The $6.7 million of net cash flows provided as a result of changes in operating assets and liabilities reflected a $41.5 million increase in deferred revenue resulting primarily from increased billings for subscriptions, a $29.1 million decrease in prepaid expenses and other current assets driven by larger prepaid contracts in the prior fiscal year and a $14.5 million increase in accounts payable largely due to the timing of payments due. These changes were partially offset by a $44.8 million increase in accounts receivable due to increased billings, a $24.4 million increase in other non-current assets driven by an increase in capitalized commissions and the $12.0 million litigation settlement paid in March 2022.

For the fiscal year 2022, cash used in operating activities was $32.9 million resulting from net loss of $111.5 million offset by net non-cash expenses of $72.2 million and $6.3 million net cash flow provided as a result of changes in operating assets and liabilities. The $6.3 million of net cash flows provided as a result of changes in operating assets and liabilities reflected a $43.4 million increase in deferred revenue resulting primarily from increased billings for subscriptions and a $25.5 million increase in accrued expenses and other current liabilities, partially offset by a $47.1 million increase in accounts receivable due to increased billings and a $6.8 million increase in other non-current assets.

For the fiscal year 2021, cash provided by operating activities was $7.3 million resulting from net non-cash expenses of $55.2 million largely offset by net loss of $38.0 million and $9.9 million net cash flow used as a result of changes in operating assets and liabilities. The $9.9 million of net cash flows used as a result of changes in our operating assets and liabilities reflected a $28.7 million increase in prepaid expenses primarily associated with higher prepayments for data center operations costs and data costs and a $9.8 million increase in accounts receivable due to increased billings, partially offset by a $17.5 million increase in deferred revenue resulting primarily from increased billings for subscriptions and a $12.3 million increase in accrued expenses and other current liabilities.

Investing Activities

For the fiscal year 2023, net cash used in investing activities of $193.5 million was related to $816.7 million of purchases of marketable securities, $10.4 million in capitalized internal-use software costs and $6.1 million in capital expenditures. These cash outflows were largely offset by $636.8 million of cash from maturities of marketable securities and $2.8 million of sales of marketable securities.

For the fiscal year 2022, net cash used in investing activities of $15.7 million was related to $267.8 million of purchases of marketable securities, $6.3 million in capitalized internal-use software costs, $6.1 million in capital expenditures, and $3.6 million of cash paid to acquire a privately held company. These cash outflows were largely offset by $211.6 million of cash from maturities of marketable securities and $56.7 million of sales of marketable securities.

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For the fiscal year 2021, net cash used in investing activities of $219.5 million was related to $213.0 million of cash paid for marketable securities, purchase of property and equipment of $2.7 million and the capitalization of internal-use software of $3.8 million.

Financing Activities

Our financing activities consist primarily of proceeds from debt and equity financings and exercises of stock options, offset by repayments of debt and repurchase of capital stock.

For the fiscal year 2023, net cash provided by financing activities was primarily due to proceeds from the exercise of stock options of $24.7 million as well as $10.2 million from the purchase of common stock through our ESPP.

For the fiscal year 2022, net cash provided by financing activities of $303.1 million was primarily due to our IPO in which we received total net proceeds of $276.0 million, after deducting underwriting discounts and commissions and other offering expenses. In addition, there were proceeds from the exercise of stock options of $20.1 million as well as $7.1 million from the purchase of common stock through our ESPP.

For the fiscal year 2021, net cash provided by financing activities of $269.8 million was due to $191.8 million of proceeds from issuance of convertible preferred stock, $73.4 million of proceeds from the convertible note, $16.3 million of proceeds from exercises of stock options and $7.6 million of proceeds from issuance of stock warrants, partially offset by preferred and common stock repurchases of $12.4 million and $5.9 million, respectively, each in connection with a tender offer transaction, and payment of debt and equity issuance costs of $0.5 million.

Critical Accounting Estimates

Our consolidated financial statements have been prepared in accordance with GAAP. The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods.

Critical accounting estimates are those estimates that, in accordance with GAAP, involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our consolidated financial statements. Management has determined that our most critical accounting estimates are those relating to revenue recognition and stock-based compensation expense, including historical common stock valuations and performance-based award valuations. We evaluate our estimates and assumptions on an ongoing basis using historical experience and other factors and adjust those estimates and assumptions when facts and circumstances dictate. Actual results could differ materially from those estimates and assumptions.

Our significant accounting policies are more fully described in Note 2, Basis of Presentation and Summary of Significant Accounting Policies, in our consolidated financial statements included elsewhere in this Form 10-K.

Revenue Recognition

At times, revenue recognition requires judgment, especially for our arrangements that include multiple performance obligations, or deliverables, such as arrangements that include promises to transfer multiple subscription services, premium support, professional services and managed services. A performance obligation is a promise in a contract with a customer to transfer products or services that are distinct. Determining whether products and services are distinct performance obligations that should be accounted for separately or combined as one unit of accounting may require judgment.

Subscription services are distinct as such offerings are often sold separately. In determining whether professional services are distinct, we consider the following factors for each professional services agreement: availability of the services from other vendors, the nature of the professional services, the timing of when the professional services contract was signed in comparison to the subscription start date and the contractual dependence of the service on the customer’s satisfaction with the professional services work. To date, we have concluded that professional services included in contracts with multiple performance obligations are generally distinct.

The determination of standalone selling price (“SSP”) for each distinct performance obligation requires judgement. We rarely sell our enterprise cloud software products and services as readily observable standalone sales, so we are required to estimate the SSP for each performance obligation. In the determination of the SSP, we use information that includes contractually stated prices, size of the arrangement, renewal contracts, list prices and internal discounting tables. Based on these results, the estimated SSP is set for each distinct product or service delivered to customers. As our go-to-market strategies evolve, we may modify our pricing strategies in the future, which could result in changes to SSP.

There were no material changes in the estimates or assumptions used to recognize revenue during the year ended January 31, 2023.

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Stock-Based Compensation

We measure and record the expense related to stock-based awards based upon the fair value at the date of grant. We estimate the grant date fair value of each common stock option using the Black-Scholes Merton method, which requires the input of subjective assumptions and management’s best estimates. The assumptions used, including (i) fair value of the underlying common stock, (ii) expected volatility, (iii) expected term, (iv) risk-free interest rate and (v) dividend yield, and how they are estimated is detailed within Note 12, Stock-Based Compensation, to our Consolidated Financial Statements included in “Part II, Item 8. Financial Statements” of this Form 10-K. There were no options granted during fiscal 2023.

Historical Common Stock Valuations

For all periods prior to the IPO, the fair values of our common stock were determined by our board of directors, with input from management and taking into account our most recent valuations from an independent third-party valuation specialist. Given the absence of a public trading market for our common stock, our board of directors exercised reasonable judgment and considered a number of objective and subjective factors to determine the best estimate of the fair value of our common stock, including our stage of development; the rights, preferences and privileges of our convertible preferred stock relative to those of our common stock; our financial condition and operating results, including our levels of available capital resources; equity market conditions affecting comparable public companies; general U.S. market conditions; recent secondary stock sales and a tender offer and the lack of marketability of our common stock. Valuations of our common stock were determined in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation.

Performance-Based Award Valuations

For awards granted that vest upon the achievement of certain performance conditions and market conditions, we estimated the grant date fair value of these units using a Monte Carlo Simulation. The simulation modeled multiple stock price paths in order to estimate the grant date fair value of those with market conditions while the estimated grant date fair value of those with performance conditions was based on the probability of those conditions being met. Once the performance conditions were deemed probable, stock-based compensation recognition began and was recognized over the derived service period produced by the model, unless otherwise accelerated as noted within Note 12, Stock-Based Compensation, to our Consolidated Financial Statements included in “Part II, Item 8. Financial Statements” of this Form 10-K. For those awards with market conditions, stock-based compensation will be recognized regardless of if the market targets were achieved. However, if the grantee does not continue their employment through the derived service period, all related stock-based compensation for that individual was reversed in the period of termination. There were no performance-based awards granted during fiscal 2023.

Recent Accounting Pronouncements

Refer to Note 2, Basis of Presentation and Summary of Significant Accounting Policies, included elsewhere in this Form 10-K for more information regarding recently issued accounting pronouncements.

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