UiPath, Inc. (PATH) FY 2024 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
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 audited consolidated financial statements and related notes for the fiscal year ended January 31, 2024 included elsewhere in this Annual Report on Form 10-K. This discussion, particularly 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 Annual Report on Form 10-K. Readers should review the disclosure under the heading “Risk Factors” in Part I, Item 1A of this Annual Report on 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. Our fiscal quarters end on April 30, July 31, and October 31, and our fiscal year ends January 31. References to fiscal years 2024, 2023, and 2022 in this Annual Report on Form 10-K refer to our fiscal years ended January 31, 2024, 2023, and 2022, respectively. A discussion regarding our financial condition and our results of operations for fiscal year 2024 compared to fiscal year 2023 is presented below. A discussion regarding our results of operations for fiscal year 2023 compared to fiscal year 2022 was presented in the 2023
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Form 10-K, under the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Overview
UiPath is at the forefront of technology innovation and thought leadership in automation, as the provider of an end-to-end platform that can help customers realize the true potential of digital transformation. The UiPath Business Automation Platform leverages AI, ML, and NLP to empower automations that emulate human behavior, driving operational efficiencies and meaningful business outcomes without requiring significant changes to the organization's underlying technology infrastructure.
Historically, we have grown our revenue and ARR significantly by helping customers adopt automation as a tool, process by process. Today, we continue to build on this foundation and drive the evolution of AI-powered automation by inspiring customers to see automation more holistically, as not just a tool but as a whole new way of operating and innovating.
Our results of operations and financial condition are impacted by the macro factors affecting our industry, including the proliferation of cloud-based applications, the cost of skilled human capital, and the global demand for automation solutions. While our business is influenced by these macro factors, our results of operations are more directly affected by certain company-specific factors, including:
•our ability to attract new customers, which depends on a number of other factors, including our ability to drive awareness of the benefits and power of automation among our existing and prospective customers, the effectiveness and pricing of our products, the offerings of our competitors, and competition among resellers;
•our ability to increase sales to existing customers, which depends on factors such as our customers’ satisfaction with our platform, competition, and pricing, and overall changes in our customers’ propensity to invest in automation;
•our ability to grow our partner base and execute on all aspects of partner relationships, which depends on the competitiveness of our platform and the profitability of our relationship for our partners and potential partners;
•our ability to sustain innovation and automation leadership in order to maintain our competitive advantage, which depends on our capacity to invest in research and development to expand the capabilities of our platform, our ability to collaborate with other leading technology companies to develop integrations, and our ability to execute strategic acquisitions and investments in businesses and technologies to drive our product and market expansion; and
•our ability to continue to grow our business over the long term, which depends on our ability to invest in scaling across all organizational functions and domestic and international operations.
For further discussion of our business, our platform, and our growth strategies, refer to Item 1. Business.
Fiscal Year 2024 Highlights
•Revenue of $1,308.1 million increased 24% year-over-year.
•ARR of $1,463.7 million increased 22% year-over-year.
•Gross margin was 85% for fiscal year 2024, compared to 83% for fiscal year 2023.
•Cash and cash equivalents, restricted cash, and marketable securities were $1,880.3 million as of January 31, 2024, compared to $1,759.8 million as of January 31, 2023.
Macroeconomic Environment
As a corporation with a global presence, we are subject to risks and uncertainties caused by significant events with macroeconomic impacts, including, but not limited to, the impact of changes in geopolitical relationships, rising inflation and interest rates, monetary policy changes, and foreign currency fluctuations. Additionally, these macroeconomic impacts have generally disrupted the operations of our customers, prospective customers, and partners.
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Internationally, we price our platform in currencies that may not be the functional currency. Accordingly, the heightened volatility of global markets has exposed us and will continue to expose us to foreign currency fluctuations, which may impact demand for our platform, our near-term results, comparison of results to prior periods, and our ability to predict future results.
Further, cash, cash equivalents, and marketable securities represent a significant portion of our total assets; as such, liquidity concerns in the financial services industry may have an effect on our business, financial conditions, and results of operations. Additionally, the return on our cash, cash equivalents, and marketable securities is sensitive to changes in interest rates. Volatility in the interest rate environment may impact the amount of interest and other income reported on our consolidated statements of operations, the comparability of these amounts to prior periods, and our ability to predict future profitability.
We continuously monitor the direct and indirect impacts of these circumstances on our business and financial results, as well as the overall global economy and geopolitical landscape.
Fiscal Year 2023 Restructuring Actions
On June 24, 2022, our board of directors approved restructuring actions to manage our operating expenses. These actions included an overall reduction of approximately 5% of our global workforce, aimed at simplifying our go-to-market approach to improve market segmentation, increase sales productivity, and provide best-in-class customer experience and outcomes. On November 10, 2022, our board of directors approved further restructuring actions, including an additional 6% workforce reduction to further support our strategic positioning to drive increased execution velocity, operational efficiency, and customer centricity. Restructuring actions were completed during the second quarter of fiscal year 2024. Refer to Note 11, Commitments and Contingencies—Fiscal Year 2023 Restructuring Actions included in Part II, Item 8 of this Annual Report on Form 10-K for more information.
Components of Results of Operations
Revenue
We derive revenue from the sale of: (1) software licenses for use of our proprietary software and related maintenance and support; (2) the right to access certain software products we host (i.e., SaaS); and (3) professional services.
We have a unified commercial offering for software products with both on-premise and cloud deployment options that allows customers the choice of either deployment option throughout the term of the contract. These Flex Offerings are comprised of three types of performance obligations: term license, maintenance and support, and SaaS.
Licenses
Our term licenses (typically sold as a portion of Flex Offerings) provide customers the right to use software for a specified period of time. Revenue for licenses is recognized at the point in time at which the customer is able to use and benefit from the software, which is generally upon delivery to the customer or upon commencement of the renewal term.
Subscription Services
We generate subscription services revenue through the provision of: (1) maintenance and support services, which include technical support and unspecified updates and upgrades on a when-and-if-available basis for our licenses, and (2) SaaS products (typically sold as a portion of Flex Offerings). Maintenance and support and SaaS products represent stand-ready obligations for which revenue is recognized ratably over the term of the arrangements.
Professional Services and Other
Professional services and other revenue consists of fees associated with professional services for process automation, customer education, and training services. Our professional services contracts are structured on a time and materials or fixed price basis, and the related revenue is recognized as the services are rendered.
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Cost of Revenue
Licenses
Cost of licenses revenue consists of all direct costs to deliver our licenses to customers, amortization of software development costs related to our licenses, and amortization of acquired developed technology.
Subscription Services
Cost of subscription services revenue consists of personnel-related expenses of our customer support and technical support teams, including salaries and bonuses, stock-based compensation expense, and employee benefit costs. Cost of subscription services revenue also includes third-party consulting services, hosting costs related to our SaaS products, amortization of acquired developed technology and capitalized software development costs related to SaaS products, depreciation, and allocated overhead. Overhead is allocated to cost of subscription services revenue based on applicable headcount. We recognize these expenses as they are incurred. We expect cost of subscription services revenue to continue to increase in absolute dollars for the foreseeable future as our SaaS business grows. In the future, we expect further expansion of our cloud-based deployments. As sales of SaaS products become a larger percentage of our total revenue, we expect our gross margin to be impacted by increased hosting fees and cloud infrastructure costs.
Professional Services and Other
Cost of professional services and other revenue primarily consists of personnel-related expenses of our professional services team, including salaries and bonuses, stock-based compensation expense, and employee benefit costs. Cost of professional services and other revenue also includes expenses related to subcontracted third-party services, depreciation, and allocated overhead. We recognize these expenses as they are incurred. We expect cost of professional services and other revenue to continue to increase in absolute dollars for the foreseeable future.
Operating Expenses
Our operating expenses consist of sales and marketing, research and development, and general and administrative expenses. Personnel-related expenses are the most significant component of operating expenses and consist of salaries and bonuses, stock-based compensation expense, and employee benefit costs. Operating expenses also include allocated overhead.
Sales and Marketing
Sales and marketing expenses consist primarily of personnel-related expenses associated with our sales and marketing teams and related sales support teams, including salaries and bonuses, stock-based compensation expense, and employee benefit costs. Sales and marketing expenses also include sales and partner commissions, marketing event costs, advertising costs, travel, trade shows, other marketing materials, and allocated overhead. We expect that over the longer term our sales and marketing expenses will decrease as a percentage of revenue, although this percentage may fluctuate from period to period due to timing and extent of expenses.
Research and Development
Research and development expenses consist primarily of personnel-related expenses, including salaries and bonuses, stock-based compensation expense, and employee benefits costs for our research and development employees, and allocated overhead. Research and development costs are expensed as incurred, with the exception of certain software development costs which are eligible for capitalization. We expect that our research and development expenses will increase in absolute dollars for the foreseeable future as we continue to invest in efforts to develop new technology and enhance the functionality and capabilities of our existing products and platform infrastructure. Our research and development expenses may fluctuate as a percentage of revenue from period to period due to the timing and extent of expenses.
General and Administrative
General and administrative expenses consist primarily of personnel-related expenses, including salaries and bonuses, stock-based compensation expense, and employee benefits costs associated with our finance, legal,
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human resources, compliance, and other administrative teams, as well as accounting and legal professional services fees, other corporate-related expenses, and allocated overhead. We expect that over the longer term our general and administrative expenses will decrease as a percentage of revenue, although this percentage may fluctuate from period to period due to timing and extent of expenses.
Interest Income
Interest income consists of interest income earned on our cash and cash equivalents and marketable securities.
Other Income (Expense), Net
Other income (expense), net primarily consists of foreign exchange gains and losses. Other income (expense), net also includes amortization of discounts and premiums on marketable securities, as well as gains and losses associated with foreign currency forward contracts for those periods in which such contracts were outstanding.
Provision For Income Taxes
Provision for income taxes consists of U.S. federal and state income taxes and income taxes in foreign jurisdictions in which we conduct business. We maintain a full valuation allowance on our U.S. federal and state, Romanian, and U.K. DTAs, as we have concluded as of January 31, 2024 that it is more likely than not that these DTAs will not be realized. Our effective tax rate is affected by tax rates in foreign jurisdictions and the relative amounts of income we earn in those jurisdictions, as well as by non-deductible expenses as permanent differences, and by changes in our valuation allowances.
Results of Operations
The following table sets forth selected consolidated statement of operations data for each of the periods indicated (in thousands):
| Year Ended January 31, | ||||||
|---|---|---|---|---|---|---|
| 2024 | 2023 | |||||
| Revenue: | ||||||
| Licenses | $ | 621,392 | $ | 497,836 | ||
| Subscription services | 649,918 | 508,823 | ||||
| Professional services and other | 36,762 | 51,922 | ||||
| Total revenue | 1,308,072 | 1,058,581 | ||||
| Cost of revenue: | ||||||
| Licenses (1) | 10,469 | 10,421 | ||||
| Subscription services (1)(2)(3)(4) | 111,922 | 87,366 | ||||
| Professional services and other (2)(3)(4) | 73,533 | 82,264 | ||||
| Total cost of revenue | 195,924 | 180,051 | ||||
| Gross profit | 1,112,148 | 878,530 | ||||
| Operating expenses: | ||||||
| Sales and marketing(1)(2)(3)(4) | 713,130 | 701,558 | ||||
| Research and development(2)(3)(4) | 332,101 | 285,750 | ||||
| General and administrative(1)(2)(3)(4) | 231,637 | 239,505 | ||||
| Total operating expenses | 1,276,868 | 1,226,813 | ||||
| Operating loss | (164,720) | (348,283) | ||||
| Interest income | 57,130 | 27,955 | ||||
| Other income, net | 31,775 | 2,767 | ||||
| Loss before income taxes | (75,815) | (317,561) | ||||
| Provision for income taxes | 14,068 | 10,791 | ||||
| Net loss | $ | (89,883) | $ | (328,352) |
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| (1) Includes amortization of acquired intangible assets as follows (in thousands): | Year Ended January 31, | |||||
|---|---|---|---|---|---|---|
| 2024 | 2023 | |||||
| Cost of licenses revenue | $ | 3,371 | $ | 2,754 | ||
| Cost of subscription services revenue | 2,359 | 1,811 | ||||
| Sales and marketing | 2,706 | 2,153 | ||||
| General and administrative | 164 | 178 | ||||
| Total amortization of acquired intangible assets | $ | 8,600 | $ | 6,896 |
| (2) Includes stock-based compensation expense as follows (in thousands): | Year Ended January 31, | |||||
|---|---|---|---|---|---|---|
| 2024 | 2023 | |||||
| Cost of subscription services revenue | $ | 14,750 | $ | 11,894 | ||
| Cost of professional services and other revenue | 10,958 | 11,855 | ||||
| Sales and marketing | 144,863 | 154,922 | ||||
| Research and development | 117,965 | 102,546 | ||||
| General and administrative | 83,419 | 88,623 | ||||
| Total stock-based compensation expense | $ | 371,955 | $ | 369,840 |
| (3) Includes employer payroll tax expense related to employee equity transactions as follows (in thousands): | Year Ended January 31, | |||||
|---|---|---|---|---|---|---|
| 2024 | 2023 | |||||
| Cost of subscription services revenue | $ | 434 | $ | 272 | ||
| Cost of professional services and other revenue | 327 | 263 | ||||
| Sales and marketing | 4,176 | 4,605 | ||||
| Research and development | 3,027 | 1,692 | ||||
| General and administrative | 1,924 | 930 | ||||
| Total employer payroll tax expense related to employee equity transactions | $ | 9,888 | $ | 7,762 |
| (4) Includes restructuring expense as follows (in thousands): | Year Ended January 31, | |||||
|---|---|---|---|---|---|---|
| 2024 | 2023 | |||||
| Cost of subscription services revenue | $ | 114 | $ | 182 | ||
| Cost of professional services and other revenue | — | 710 | ||||
| Sales and marketing | 1,376 | 19,491 | ||||
| Research and development | 387 | 494 | ||||
| General and administrative | 749 | 2,569 | ||||
| Total restructuring expense | $ | 2,626 | $ | 23,446 |
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The following table sets forth our consolidated statement of operations data expressed as a percentage of revenue for the periods indicated:
| Year Ended January 31, | |||||
|---|---|---|---|---|---|
| 2024 | 2023 | ||||
| Revenue: | |||||
| Licenses | 47 | % | 47 | % | |
| Subscription services | 50 | % | 48 | % | |
| Professional services and other | 3 | % | 5 | % | |
| Total revenue | 100 | % | 100 | % | |
| Cost of revenue: | |||||
| Licenses | 1 | % | 1 | % | |
| Subscription services | 8 | % | 8 | % | |
| Professional services and other | 6 | % | 8 | % | |
| Total cost of revenue | 15 | % | 17 | % | |
| Gross profit | 85 | % | 83 | % | |
| Operating expenses: | |||||
| Sales and marketing | 55 | % | 66 | % | |
| Research and development | 25 | % | 27 | % | |
| General and administrative | 18 | % | 23 | % | |
| Total operating expenses | 98 | % | 116 | % | |
| Operating loss | (13) | % | (33) | % | |
| Interest income | 4 | % | 3 | % | |
| Other income, net | 3 | % | — | % | |
| Loss before income taxes | (6) | % | (30) | % | |
| Provision for income taxes | 1 | % | 1 | % | |
| Net loss | (7) | % | (31) | % |
Comparison of Fiscal Year 2024 and Fiscal Year 2023
Revenue
| Year Ended January 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | Change | % Change | |||||||||||
| (dollars in thousands) | ||||||||||||||
| Licenses | $ | 621,392 | $ | 497,836 | $ | 123,556 | 25 | % | ||||||
| Subscription services | 649,918 | 508,823 | 141,095 | 28 | % | |||||||||
| Professional services and other | 36,762 | 51,922 | (15,160) | (29) | % | |||||||||
| Total revenue | $ | 1,308,072 | $ | 1,058,581 | $ | 249,491 | 24 | % |
Total revenue increased by $249.5 million, or 24%, for fiscal year 2024 compared to fiscal year 2023, primarily due to a $141.1 million increase in subscription services revenue, related in part to the transition to our Flex Offerings, and a $123.6 million increase in licenses revenue. As we continued to expand our sales efforts in the U.S. and internationally, our revenue increased across all regions. Of the growth in total revenue, 12% was attributable to new customers and 88% was attributable to existing customers. Subscription services revenue is recognized ratably over the subscription term; therefore, the increase in subscription services revenue is driven both by sales in prior periods for which we continue to provide maintenance and support and SaaS and by new sales in the current period.
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Cost of Revenue and Gross Margin
| Year Ended January 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | Change | % Change | |||||||||||
| (dollars in thousands) | ||||||||||||||
| Licenses | $ | 10,469 | $ | 10,421 | $ | 48 | — | % | ||||||
| Subscription services | 111,922 | 87,366 | 24,556 | 28 | % | |||||||||
| Professional services and other | 73,533 | 82,264 | (8,731) | (11) | % | |||||||||
| Total cost of revenue | $ | 195,924 | $ | 180,051 | $ | 15,873 | 9 | % | ||||||
| Gross margin | 85 | % | 83 | % |
Total cost of revenue increased by $15.9 million, or 9%, for fiscal year 2024 compared to fiscal year 2023, primarily due to an increase in cost of subscription services revenue, partially offset by a decrease in cost of professional services and other revenue. The increase in cost of subscription services revenue was primarily driven by a $14.3 million increase in personnel-related expenses, which included a $9.7 million increase in salary-related and bonus expenses associated with both increased headcount and merit increases, a $2.9 million increase in stock-based compensation expense, and a $1.4 million increase in employee insurance costs. Cost of subscription services revenue was also impacted by a $5.1 million increase in hosting and software services costs as a result of increased usage, a $2.7 million increase in costs associated with the use of third-party vendors, an aggregate $0.8 million increase in depreciation and amortization and other administrative costs, and a $0.5 million increase in travel expenses. The decrease in cost of professional services and other revenue was primarily driven by a $6.1 million decrease in costs associated with the use of third-party subcontractors to deliver professional services to our customers. Additionally, cost of professional services and other revenue was impacted by a $2.7 million decrease in personnel-related expenses, primarily related to lower bonus expenses and stock-based compensation expenses due to a decrease in headcount driven by our fiscal year 2023 restructuring actions, partially offset by an increase in general employee severance.
Our gross margin increased to 85% for fiscal year 2024 compared to 83% for fiscal year 2023, due to change in mix driven by growth in higher-margin licenses and subscription services revenue and decrease in lower-margin professional services and other revenue.
Operating Expenses
Sales and Marketing
| Year Ended January 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | Change | % Change | |||||||||||
| (dollars in thousands) | ||||||||||||||
| Sales and marketing | $ | 713,130 | $ | 701,558 | $ | 11,572 | 2 | % | ||||||
| Percentage of revenue | 55 | % | 66 | % |
Sales and marketing expense increased by $11.6 million, or 2%, for fiscal year 2024 compared to fiscal year 2023. This increase was primarily attributable to a $29.0 million increase in sales commissions expense as a result of higher amortization of capitalized contract acquisition costs, an $11.6 million increase in marketing and travel-related expenses due in part to our Forward VI event, a $5.4 million increase in sales-related software expenses, and an aggregate $1.5 million increase in depreciation and amortization and other administrative costs. These increases were partially offset by a $32.7 million decrease in personnel-related expenses, which included a $17.6 million decrease in employee termination benefits as a result of the completion of our fiscal year 2023 restructuring actions in the second quarter of fiscal year 2024, a $10.1 million decrease in stock-based compensation expense, and an $8.0 million decrease in salary-related and bonus expenses, partially offset by a $3.1 million increase in employee insurance and other benefit costs. Sales and marketing expense was also impacted by a $4.8 million decrease in third-party consulting fees.
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Research and Development
| Year Ended January 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | Change | % Change | |||||||||||
| (dollars in thousands) | ||||||||||||||
| Research and development | $ | 332,101 | $ | 285,750 | $ | 46,351 | 16 | % | ||||||
| Percentage of revenue | 25 | % | 27 | % |
Research and development expense increased by $46.4 million, or 16%, for fiscal year 2024 compared to fiscal year 2023. The increase was primarily attributable to a $34.0 million increase in personnel-related costs, which included a $15.4 million increase in stock-based compensation expense, a $14.7 million increase in salary-related and bonus expenses, a $1.8 million increase in employee insurance costs, and a $1.3 million increase in employer payroll tax expense related to employee equity transactions. Research and development expense was also impacted by an $11.5 million increase in hosting and software services costs and a $2.5 million increase in travel-related expenses, partially offset by a $2.2 million decrease in third-party consulting fees.
General and Administrative
| Year Ended January 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | Change | % Change | |||||||||||
| (dollars in thousands) | ||||||||||||||
| General and administrative | $ | 231,637 | $ | 239,505 | $ | (7,868) | (3) | % | ||||||
| Percentage of revenue | 18 | % | 23 | % |
General and administrative expense decreased by $7.9 million, or 3%, for fiscal year 2024 compared to fiscal year 2023. This decrease was primarily attributable to a $7.7 million decrease in personnel-related expenses, which included a $5.2 million decrease in stock-based compensation expense, a $1.6 million decrease in salary-related and bonus expense, and a $1.4 million decrease in employee termination benefits as a result of the completion of our fiscal year 2023 restructuring actions in the second quarter of fiscal year 2024, partially offset by a $1.0 million increase in employer payroll tax expense related to employee equity transactions. General and administrative expense was also impacted by a $4.8 million decrease in third-party consulting fees and a $4.5 million decrease in commercial insurance costs, partially offset by an $8.0 million increase in software service expenses.
Interest Income
| Year Ended January 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | Change | % Change | |||||||||||
| (dollars in thousands) | ||||||||||||||
| Interest income | $ | 57,130 | $ | 27,955 | $ | 29,175 | 104 | % | ||||||
| Percentage of revenue | 4 | % | 3 | % |
Interest income increased by $29.2 million, or 104%, for fiscal year 2024 compared to fiscal year 2023 as a result of a period-over-period increase in our marketable securities balance as well as increased interest rates.
Other Income, Net
| Year Ended January 31, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | Change | % Change | ||||||||||
| (dollars in thousands) | |||||||||||||
| Other income, net | $ | 31,775 | $ | 2,767 | $ | 29,008 | NM(1) | ||||||
| Percentage of revenue | 3 | % | — | % | |||||||||
| (1) Not meaningful |
Other income, net increased by $29.0 million for fiscal year 2024 compared to fiscal year 2023, primarily due to a $26.5 million increase in amortization of discounts on marketable securities and a $0.8 million increase in gains from foreign currency transactions.
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Provision For Income Taxes
| Year Ended January 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | Change | % Change | |||||||||||
| (dollars in thousands) | ||||||||||||||
| Provision for income taxes | $ | 14,068 | $ | 10,791 | $ | 3,277 | 30 | % | ||||||
| Percentage of revenue | 1 | % | 1 | % |
Provision for income taxes increased by $3.3 million, or 30%, for fiscal year 2024 compared to fiscal year 2023. The effective tax rate was (18.6)% and (3.4)% for fiscal years 2024 and 2023, respectively. The increase in provision for income taxes was primarily driven by higher foreign tax expenses of our cost-plus margin entities in certain foreign jurisdictions.
Key Performance Metric
We monitor ARR to help us measure and evaluate the effectiveness of our operations.
ARR is the key performance metric we use in managing our business because it illustrates our ability to acquire new subscription customers and to maintain and expand our relationships with existing subscription customers. We define ARR as annualized invoiced amounts per solution SKU from subscription licenses and maintenance and support obligations assuming no increases or reductions in customers' subscriptions. ARR does not include the costs we may incur to obtain such subscription licenses or provide such maintenance and support, and does not reflect any actual or anticipated reductions in invoiced value due to contract non-renewals or service cancellations other than for certain reserves, for example those for credit losses or disputed amounts. At January 31, 2024 and 2023, our ARR was $1,463.7 million and $1,203.8 million, respectively, representing a growth rate of 22%. Approximately 14% of this growth rate was due to new customers and 86% of this growth rate was due to existing customers. Our dollar-based net retention rate, which represents the net expansion of ARR from existing customers over the preceding 12 months, was 119% and 123% as of January 31, 2024 and 2023, respectively. We calculate dollar-based net retention rate as of a period end by starting with Prior Period ARR, the ARR from the cohort of all customers as of 12 months prior to such period end. We then calculate Current Period ARR, the ARR from these same customers as of the current period end. Current Period ARR includes any expansion and is net of contraction or attrition over the last 12 months, but does not include ARR from new customers in the current period. We then divide the total Current Period ARR by the total Prior Period ARR to arrive at the point-in-time dollar-based net retention rate.
Our ARR may fluctuate as a result of a number of factors, including customers’ satisfaction or dissatisfaction with our platform, pricing, competitive offerings, economic conditions, overall changes in our customers’ spending levels, and our ability to successfully execute on our strategic goals. ARR should be viewed independently of revenue and deferred revenue as ARR is an operating metric and is not intended to be combined with or to replace these items. For clarity, we use annualized invoiced amounts per solution SKU rather than revenue calculated in accordance with U.S. GAAP to calculate our ARR. Our invoiced amounts are not matched to transfer of control of the performance obligations associated with the underlying subscription licenses and maintenance and support obligations. This can result in timing differences between our GAAP revenue and ARR calculations. Our ARR calculation simply takes our invoiced amounts per solution SKU under a subscription license or maintenance agreement and divides that amount by the invoice term and multiplies by 365 days to derive the annualized value. In contrast, for our revenue calculated in accordance with GAAP, subscription licenses revenue derived from the sale of term-based licenses hosted on-premises is recognized at the point in time when the customer is able to use and benefit from our software, which is generally upon delivery to the customer or upon the commencement of the renewal term, and maintenance, support, and SaaS revenue is recognized ratably over the term of the arrangement. ARR is not a forecast of future revenue. Unlike ARR, future revenue can be impacted by contract start and end dates and duration. The timing of recognition of ARR is determined by contract billing structure, whereas billing structure will neither accelerate nor delay recognition of future revenue. For example, in a multi-year contract invoiced upfront, ARR is the annualized invoiced amount per solution SKU related to the final year of the contract assuming no reserve is applied, whereas revenue is determined by total contract value and timing of satisfaction of the underlying performance obligations. ARR does not include invoiced amounts associated with perpetual licenses or professional services. Investors should not place undue reliance on ARR as an indicator of our future or expected results. Moreover, our presentation of ARR may differ from similarly titled metrics presented by other companies and may not be comparable to such other metrics. For further information, see the section titled “Risk Factors—Risks
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Related to Our Business, Products, Operations, and Industry" included in Part I, Item 1A of this Annual Report on Form 10-K.
A summary of ARR-related data at January 31, 2024 and 2023 is as follows:
| At January 31, | ||||||
|---|---|---|---|---|---|---|
| 2024 | 2023 | |||||
| (dollars in thousands) | ||||||
| Annualized renewal run-rate (ARR) | $ | 1,463,698 | $ | 1,203,845 | ||
| Incremental ARR (1) | $ | 259,853 | $ | 278,569 | ||
| Customers with ARR ≥ $1 million: | ||||||
| Number of customers | 288 | 229 | ||||
| Percent of fiscal year revenue | 52 | % | 43 | % | ||
| Customers with ARR ≥ $100 thousand: | ||||||
| Number of customers | 2,054 | 1,785 | ||||
| Percent of fiscal year revenue | 86 | % | 81 | % | ||
| Dollar-based net retention rate | 119 | % | 123 | % | ||
| (1) For the twelve months ended January 31, 2024 and 2023, respectively |
Liquidity and Capital Resources
We have financed operations since our inception primarily through customer payments and net proceeds from sales of equity securities. Our principal uses of cash in recent periods have been to fund our operations, invest in capital expenditures, engage in various business acquisitions, and, more recently, repurchase shares of our Class A common stock. As of January 31, 2024 and 2023, our principal sources of liquidity were cash, cash equivalents, and marketable securities totaling $1,879.8 million and $1,759.8 million, respectively, and we had an accumulated deficit of $1,914.2 million and $1,824.3 million, respectively. During the fiscal years ended January 31, 2024 and 2023, we reported net losses of $89.9 million and $328.4 million, respectively, and net cash provided by (used in) operations of $299.1 million and $(10.0) million, respectively.
In April 2021, we completed our IPO, which resulted in the issuance of 13.0 million shares of our Class A common stock at a public offering price of $56.00 per share, including 3.6 million shares pursuant to the exercise in full of the underwriters’ option to purchase additional shares. Net proceeds were $687.9 million after deducting underwriting discounts and commissions of $35.6 million and offering expenses of $4.5 million.
In February 2021, we completed our Series F preferred stock financing with gross proceeds totaling $750.0 million. In connection with our IPO, all shares of convertible preferred stock then outstanding automatically converted into shares of Class A common stock.
In October 2020, we entered into the Credit Facility with an available borrowing capacity of $200.0 million. We did not borrow under the Credit Facility at any time, and it was terminated in September 2023, shortly prior to its scheduled maturity date. Refer to Note 10, Credit Facility for further details.
Our future capital requirements will depend on many factors, including our revenue growth rate, sales of our products and services, license renewal activity, the timing and the amount of cash received from customers, the expansion of sales and marketing activities, the timing and extent of spending to support development efforts, the introduction of new and enhanced products, the continuing market adoption of our products, expenses associated with international expansion, the timing and extent of capital expenditures to invest in existing and new office spaces, and the timing and extent of stock repurchases. We may in the future enter into arrangements to acquire or invest in complementary businesses, products, and technologies. We may be required to seek additional equity or debt financing. In the event that we require additional financing, we may not be able to raise such financing on terms acceptable to us or at all. If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in continued innovation, we may not be able to compete successfully, which would harm our business, operations and financial condition.
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We believe that our existing cash and cash equivalents, marketable securities, and payments from customers will be sufficient to fund our anticipated cash requirements for the next twelve months and the long term.
Stock Repurchase Program
On September 1, 2023, our board of directors authorized a stock repurchase program, pursuant to which we may repurchase from time to time up to $500.0 million of our outstanding shares of Class A common stock. Refer to Note 12, Stockholders' Equity—Stock Repurchase Program for further details.
Cash Flows
The following table summarizes our cash flows for the periods presented:
| Year Ended January 31, | ||||||
|---|---|---|---|---|---|---|
| 2024 | 2023 | |||||
| (dollars in thousands) | ||||||
| Net cash provided by (used in) operating activities(1) | $ | 299,082 | $ | (9,981) | ||
| Net cash used in investing activities | (439,569) | (289,143) | ||||
| Net cash used in financing activities | (196,895) | (60,669) | ||||
| (1) Inclusive of: | ||||||
| Cash paid for employer payroll taxes related to employee equity transactions | $ | (10,483) | $ | (9,112) | ||
| Net payments of employee tax withholdings on stock option exercises | (980) | (5,394) | ||||
| Cash paid for restructuring costs | (6,180) | (19,339) |
Operating Activities
Our largest source of operating cash is cash generation from sales to our customers. Our primary uses of cash from operating activities are for personnel-related expenses, direct costs to deliver licenses and provide subscription and professional services, and marketing expenses. Until recently, our operating cash flows have generally been negative and we have supplemented working capital requirements primarily through net proceeds from the sale of equity securities.
Net cash provided by operating activities for fiscal year 2024 of $299.1 million was driven by by cash collections from our customers, which were approximately 25% higher than in the prior year, and interest income on our marketable securities, partially offset by cash payments for operating expenditures, primarily associated with the compensation of our teams, including bonuses paid in the first quarter of fiscal year 2024 and employer payroll taxes related to employee equity transactions. Other cash operating expenditures included payments related to our fiscal year 2023 workforce restructuring, which was concluded during the second quarter of fiscal year 2024, and payments for professional services, software, and office rent.
Net cash used in operating activities for fiscal year 2023 of $10.0 million was driven by cash payments for operating expenditures, primarily associated with the compensation of our teams, including bonuses paid in the first quarter of fiscal year 2023 and employer payroll taxes related to employee equity transactions. Other cash operating expenditures included payments related to our workforce restructuring, and payments for professional services, software, and office rent.
Investing Activities
Net cash used in investing activities for fiscal year 2024 of $439.6 million was primarily driven by $435.0 million in net purchases of marketable securities and $7.3 million in capital expenditures.
Net cash used in investing activities for fiscal year 2023 of $289.1 million was primarily driven by $237.0 million in net purchases of marketable securities, $29.5 million in cash consideration associated with the acquisition of Re:Infer, which is presented net of cash acquired, and $23.8 million in capital expenditures.
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Financing Activities
Net cash used in financing activities for fiscal year 2024 of $196.9 million was primarily driven by payments of tax withholdings on net settlement of equity awards of $112.1 million, $102.6 million in repurchases of Class A common stock under our stock repurchase program, and $5.9 million loan note payment on the first anniversary of the acquisition of Re:infer, partially offset by proceeds from ESPP contributions of $17.6 million and proceeds from stock option exercises of $6.7 million.
Net cash used in financing activities for fiscal year 2023 of $60.7 million was primarily driven by payments of tax withholdings on net settlement of equity awards of $73.1 million, net payments of tax withholdings on sell-to-cover equity award transactions of $9.5 million, and $1.5 million in repurchases of unvested early exercised stock options, partially offset by proceeds from ESPP contributions of $15.0 million and proceeds from stock option exercises of $8.4 million.
Material Cash Requirements
Our material cash requirements predominantly relate to working capital requirements, including employee compensation and payment of employee tax withholdings on net settlement of equity awards, and material contractual obligations, including leases and purchase commitments.
As of January 31, 2024, accrued compensation and benefits of $137.4 million are included in current liabilities on our consolidated balance sheet. Refer to Note 9, Consolidated Balance Sheet Components—Accrued Expenses and Other Liabilities for details of additional short-term payroll-related obligations included in accrued expenses and other current liabilities as of January 31, 2024.
The following table summarizes the aggregate effect that our material contractual obligations as of January 31, 2024 are expected to have on our cash flows in the periods indicated (in thousands):
| Payments Due by Period | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Total | Less Than 1 Year | 1-3 Years | 3-5 Years | More Than 5 Years | ||||||||||||||
| (dollars in thousands) | ||||||||||||||||||
| Operating lease commitments(1) | $ | 126,836 | $ | 13,463 | $ | 28,593 | $ | 22,102 | $ | 62,678 | ||||||||
| Purchase commitments | 171,115 | 68,958 | 93,689 | 8,468 | — | |||||||||||||
| Total contractual obligations | $ | 297,951 | $ | 82,421 | $ | 122,282 | $ | 30,570 | $ | 62,678 | ||||||||
| (1) Inclusive of $32.7 million of commitments related to operating leases which have not yet commenced. |
The amounts in the table above are associated with agreements that are enforceable and legally binding. Obligations under contracts that we can cancel without a significant penalty are not included in the table above.
Refer to Note 8, Operating Leases for more detailed information regarding timing of future lease payments, and to Note 11, Commitments and Contingencies—Non-Cancelable Purchase Commitments for more detailed information regarding timing of purchase commitments.
Additionally, our stock repurchase program may represent a material use of cash depending upon the number of shares repurchased, which is ultimately discretionary. As of January 31, 2024, approximately $397.5 million remained of the $500.0 million originally authorized. The authorization expires on March 1, 2025, subject to modification by our board of directors. Refer to Note 12, Stockholders' Equity—Stock Repurchase Program for further details.
Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance with U.S. GAAP. The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the amounts of assets and liabilities at the date of the consolidated financial statements and amounts of revenue and expenses reported during the period. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances, and we evaluate our estimates on an ongoing basis. The following are the accounting estimates that we believe have the most significant impact on our consolidated financial statements.
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Revenue Recognition
We recognize revenue in accordance with ASC 606, Revenue from Contracts with Customers. ASC 606 requires recognition of revenue when control of promised goods or services is transferred to customers, in an amount that reflects the consideration we expect to be entitled to receive in exchange for those goods or services. Revenue recognition is inherently judgmental, particularly for complex arrangements that include multiple performance obligations, which are common for us. Our most significant judgment relates to allocation of the transaction price, specifically determining the SSP for each performance obligation, which impacts the pattern and timing of revenue recognition.
At the inception of a contract with a customer, we assess the goods or services promised to identify distinct performance obligations. The distinct performance obligations identified in our typical contracts include, but are not limited to, software licenses, SaaS, maintenance and support, and professional services. The pattern and timing of revenue recognition for each of these performance obligations varies. Specifically, revenue from licenses is recognized at the point in time at which the customer is able to use and benefit from the software, which is generally upon delivery to the customer or upon commencement of the renewal term; revenue from SaaS and maintenance and support services is recognized ratably over the contract term; and revenue from professional services is recognized over time as the services are performed.
Most of our contracts contain multiple of these performance obligations. In such arrangements, the transaction price is allocated to the separate performance obligations on a relative SSP basis. Since the performance obligations have different revenue recognition models, SSP estimates directly affect the timing and amount of revenue recognized during a particular period. For example, if the SSP of a license delivered in one period is greater than the SSP of professional services that are sold with that license but delivered in future periods, a greater portion of the transaction price will be recognized at contract inception in the current period versus over time as the services are performed in later periods.
Whenever possible, we allocate the transaction price based on observable SSP, which is the price of the same good or service in standalone sales to similar customers in similar circumstances. If observable SSP is not available, we estimate the SSP using data that may include historical prices, discounting practices, list prices, cost data, and other observable inputs. We may have more than one SSP for individual performance obligations when our data population indicates that pricing practices vary by class of customer (for example, based on the customer’s geographic region). We update our SSPs at least annually.
For further information about our revenue recognition, refer to Note 2, Summary of Significant Accounting Policies—Revenue Recognition and Note 3, Revenue Recognition, included in Part II, Item 8 of this Annual Report on Form 10-K.
Stock-Based Compensation
We recognize stock-based compensation expense in accordance with the provisions of ASC 718, Compensation—Stock Compensation. ASC 718 requires the measurement and recognition of compensation expense for all stock-based awards made to employees, directors, and non-employees based on the grant date fair value of the awards.
Stock Options
The fair value of stock options is determined using the Black-Scholes pricing model, which considers the value of our Class A common stock, exercise price, expected term, expected volatility, risk-free interest rate, and expected dividend yield.
Stock options granted during fiscal year 2024 were granted in-the-money with an exercise price of $0.10, which is our current broad-based granting practice in certain non-U.S. jurisdictions; given their immaterial exercise price, the fair values of these in-the-money stock options closely approximated the closing price of our publicly
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traded Class A common stock on the respective grant dates and were not sensitive to the other inputs to the Black-Scholes pricing model.
However, during fiscal year 2023, 2.1 million stock option grants were U.S. executive-level grants with an at-the-money exercise price, the fair values of which were sensitive to the other inputs of the Black-Scholes pricing model. The most subjective of these inputs are as follows:
•Expected term. We do not yet have sufficient relevant historical exercise data to provide a reasonable basis for estimation of expected term post-IPO; we presently use the simplified method permitted under Staff Accounting Bulletin 14, which deems the expected term to be the average of the time-to-vest and the contractual life. The expected term for the aforementioned 2.1 million stock options ranged from 5.3 to 6.1 years at grant.
•Expected volatility. As a public market for our common stock did not exist prior to our IPO, we have limited trading history on which to base expectations of volatility; during fiscal year 2023 we estimated expected volatility based on the volatility of a group of similar publicly held entities, referred to as “guideline companies,” over a look-back period equivalent to the expected term. In evaluating the similarity of guideline companies, we consider factors such as industry, stage of life cycle, size, and degree of financial leverage. The expected volatility for the aforementioned 2.1 million stock options ranged from 59.4% to 61.8% at grant. (Beginning in fiscal year 2024, we have begun to include our own stock price volatility within the reference group and will continue to increase the weighting of our own volatility over time as sufficient trading history is established.)
A ten percent change in the Black-Scholes values of these 2.1 million stock options would have impacted our fiscal year 2024 stock-based compensation expense by $0.6 million.
ESPP`
The fair value of ESPP awards is determined using the Black-Scholes pricing model, with the most subjective input being expected volatility. As a public market for our common stock did not exist prior to our IPO, we have limited trading history on which to base expectations of volatility; until late fiscal year 2023, we estimated expected volatility based on the volatility of the same group of guideline companies used for our stock options, over a look-back period equal to the six-month term of our ESPP offering periods. Beginning with the offering period in the fourth quarter of fiscal year 2023, having established sufficient trading history, we have estimated expected volatility using the volatility of our own Class A common stock over the look-back period. The expected volatility used in valuing ESPP offering periods outstanding during fiscal year 2024 ranged from 60.8% to 76.7%. A ten percent change in the Black-Scholes values of these ESPP awards would have impacted our fiscal year 2024 stock-based compensation expense by $0.7 million.
Recent Accounting Pronouncements
See Note 2, Summary of Significant Accounting Policies—Recently Issued Accounting Pronouncements, included in Part II, Item 8 of this Annual Report on Form 10-K for more information.