Yext, Inc. (YEXT) FY 2023 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 consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. As discussed in the section titled "Special Note Regarding Forward Looking Statements," the following discussion and analysis contains forward looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed in the section titled "Risk Factors" under Part I, Item 1A in this Annual Report on Form 10-K.
Overview
Yext organizes a business's facts so it can deliver relevant, actionable answers to consumer questions throughout the digital ecosystem. Our platform lets businesses structure the facts about their brands in a database called the Knowledge Graph. Our platform is built to leverage the structured data stored in the Knowledge Graph to deliver a modern search experience on a business's or organization's own website, as well as across over 200 service and application providers, which we refer to as our Publisher Network and includes Amazon Alexa, Apple Maps, Bing, Cortana, Facebook, Google, Google Assistant, Google Maps, Siri and Yelp. Our platform powers all of our key features, including Listings, Pages, and Search, along with its other features and capabilities.
We sell our platform throughout the world to customers of all sizes, including our enterprise, mid-size, and third-party reseller customers. In transactions with resellers, we are only party to the transaction with the reseller and are not a party to the reseller's transaction with its customer.
Revenue is a function of the number of customers, the number of licenses or capacity purchased by each customer, the package to which each customer subscribes, the price of the package and renewal rates. We offer subscriptions in a discrete range of packages, with pricing based on specified feature sets and the number of licenses managed by the customer as well as on a capacity-basis.
Fiscal Year
Our fiscal year ends on January 31st. References to fiscal 2023, for example, are to the fiscal year ended January 31, 2023.
Macroeconomic Conditions
Our results of operations may be influenced by general macroeconomic conditions, including, but not limited to, the impact of foreign currency fluctuations, interest rates, inflation, recession risks and the COVID-19 pandemic. Fluctuations in foreign exchange rates and rising inflation have had, and may continue to have an adverse impact on our financial condition and operating results in future periods. The extent to which such disruptions will continue in future periods remains uncertain. The uncertain duration of these measures has had and may continue to have an adverse impact on our financial condition and operating results in future periods. We continue to be committed to our business, the strength of our platform, our ability to continue to execute on our strategy, and our efforts to support our customers.
Near-term revenues are relatively predictable as a result of our subscription-based business model. However, if the macroeconomic uncertainty increases, we may continue to experience a negative impact on existing and potential customers that may reduce, suspend or delay technology spending, request to renegotiate contracts to obtain concessions such as, extended billing and payment terms; shorten the duration of contracts; or elect not to renew their subscriptions which could materially adversely impact our business, financial condition and results of operations in future periods. Therefore, changes in our contracting activity in the near term may not be fully reflected in our results of operations and overall financial performance until future periods. See Part I Item 1A “Risk Factors” for further discussion of the possible impact of the current macroeconomic conditions on our business.
Key Metrics
We monitor the following key operational and financial metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans and make strategic decisions.
Customer Count
Customer count is defined as the total number of customers with contracts executed as of the last day of the reporting period and a unique administrative account identifier on our platform. Generally, we assign unique administrative accounts to each separate and distinct entity (such as a company or government institution) or a business unit of a large corporation, that has its own separate contract with us to access our platform. We believe that customer count provides insight into our ability to grow our enterprise and mid-size customer base. As such, customer count excludes third-party reseller customers and small business customers as well as customers only receiving free trials. As of January 31, 2023, customer count increased 7% year-over-year to over 2,960.
Annual Recurring Revenue ("ARR")
Annual recurring revenue, or ARR, for Direct customers is defined as the annualized recurring amount of all contracts in our enterprise, mid-size and small business customer base as of the last day of the reporting period. The recurring amount of a contract is determined based upon the terms of a contract and is calculated by dividing the amount of a contract by the term of the contract and
41
then annualizing such amount. The calculation assumes no subsequent changes to the existing subscription. Contracts include portions of professional services contracts that are recurring in nature.
ARR for Third-party Reseller customers is defined as the annualized recurring amount of all contracts with Third-party Reseller customers as of the last day of the reporting period. The recurring amount of a contract is determined based upon the terms of a contract and is calculated by dividing the amount of a contract by the term of the contract and then annualizing such amount. The calculation assumes no subsequent changes to the existing subscription. The calculation includes the annualized contractual minimum commitment and excludes amounts related to overages above the contractual minimum commitment. Contracts include portions of professional services contracts that are recurring in nature. See Part I Item 1A “Risk Factors" for further discussion of Third-party reseller customers.
Total ARR is defined as the annualized recurring amount of all contracts executed as of the last day of the reporting period. The recurring amount of a contract is determined based upon the terms of a contract and is calculated by dividing the amount of a contract by the term of the contract and then annualizing such amount. The calculation assumes no subsequent changes to the existing subscription, and where relevant, includes the annualized contractual minimum commitment and excludes amounts related to overages above the contractual minimum commitment. Contracts include portions of professional services contracts that are recurring in nature.
ARR is independent of historical revenue, unearned revenue, remaining performance obligations or any other accounting principles generally accepted in the United States of America, ("GAAP"), financial measure over any period. It should be considered in addition to, not as a substitute for, nor superior to or in isolation from, these measures and other measures prepared in accordance with GAAP. We believe ARR-based metrics provides insight into the performance of our recurring revenue business model while mitigating for fluctuations in billing and contract terms.
| January 31, | Variance | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | Dollars | Percent | |||||||||
| Annual Recurring Revenue | ||||||||||||
| Direct Customers | $ | 327,017 | $ | 312,132 | $ | 14,885 | 5 | % | ||||
| Third-Party Reseller Customers | 73,343 | 78,353 | (5,010) | (6) | % | |||||||
| Total Annual Recurring Revenue | $ | 400,360 | $ | 390,485 | $ | 9,875 | 3 | % |
Dollar-Based Net Retention Rate
We believe that our ability to retain our customers and expand the ARR they generate for us over time is an important component of our growth strategy and reflects the long term value of our customer relationships. We assess our performance in this area using a metric we refer to as our dollar-based net retention rate, which compares the ARR from a set of subscription customers across comparable periods.
This metric is calculated first by determining the ARR generated 12 months prior to the end of the current period for a cohort of customers who had active contracts at that time. We then calculate ARR from the same cohort of customers at the end of the current period, which includes customer expansion, contraction and churn. The current period ARR is then divided by the prior period ARR to arrive at our dollar-based net retention rate. The cohorts of customers that we present dollar-based net retention rate for include direct, third-party reseller, and total customers. Direct customers include enterprise, mid-size and small business customers. The following table provides our dollar-based net retention rate for the fiscal years ended January 31, 2023, 2022 and 2021:
| January 31, | |||
|---|---|---|---|
| 2023 | 2022 | 2021 | |
| Dollar-Based Net Retention Rate (ARR) | |||
| Direct Customers | 97% | 101% | 100% |
| Third-Party Reseller Customers | 92% | 101% | 92% |
| Total Customers | 96% | 101% | 98% |
Historically, we presented dollar-based net retention rate on a revenue basis whereby we first established a cohort of enterprise, mid-size, and third-party reseller customers, who had active contracts at the end of each month of the same period in the prior year. We divided the single month revenue from each of those customer cohorts for the applicable month in the current year by the single month revenue of that same customer cohort for the corresponding month in the prior year. We then determined the dollar-based weighted average of each of the monthly rates, which represented the dollar-based net retention rate for the period. Under this prior methodology, our dollar-based net retention rate was 95%, 98%, and 102% for the fiscal years ended January 31, 2023, 2022 and 2021, respectively.
42
We believe that the change in methodology in our dollar-based net retention rate from a revenue basis to an ARR basis is more meaningful to investors as it aligns more closely with how management views growth in the business, assesses Company performance, and provides better insight into the directional movements within ARR.
Components of Results of Operations
Revenue
We derive our revenue primarily from subscription and associated support to our Answers platform. Our contracts are typically one year in length, but may be up to three years or longer in length. Revenue is a function of the number of customers, the number of licenses or capacity purchased by each customer, the package to which each customer subscribes, the price of the package and renewal rates. Revenue is generally recognized ratably over the contract term beginning on the commencement date of each contract, which is the date our platform is made available to customers. At the beginning of each subscription term we invoice our customers, typically in annual installments, but also monthly, quarterly, and semi-annually. Amounts that have been invoiced for non-cancelable contracts are recorded in accounts receivable and unearned revenue. Unearned revenue is subsequently recognized as revenue when transfer of control to a customer has occurred.
Cost of Revenue
Cost of revenue consists primarily of employee-related costs, including personnel-related costs, which mainly consist of salaries and wages, and stock-based compensation expense. Cost of revenue also includes fees associated with our Publisher Network application provider arrangements, the nature of which may be unpaid, fixed, or variable, and are unpaid with many of our larger providers, as well as the costs associated with our data centers. In addition, cost of revenue includes depreciation expense, which includes amounts allocated based on employee headcount, as well as amounts related to certain capitalized software development costs incurred in connection with additional functionality to our platform. Cost of revenue also includes lease expenses associated with our office spaces, which are allocated based on employee headcount. In addition, cost of revenue includes software expense, which relates to licenses, professional services, and other costs associated with software for use in the operations of our business, which is also allocated based on employee headcount.
Operating Expenses
Sales and marketing expenses. Sales and marketing expenses consist primarily of employee-related costs which are comprised of personnel-related costs and stock-based compensation expense. Personnel-related costs mainly consist of salaries and wages and costs of obtaining revenue contracts. Sales and marketing expenses also include lease expenses associated with our office spaces, as well as software expense, each of which are allocated based on employee headcount. In addition, sales and marketing expenses include costs related to advertising and conferences and brand awareness events.
Research and development expenses. Research and development expenses consist primarily of employee-related costs which are comprised of personnel-related costs and stock-based compensation expense. Personnel-related costs mainly consist of salaries and wages. Capitalized software development costs related to additional functionality to our platform are excluded from research and development expenses as they are capitalized as a component of property and equipment, net and depreciated to cost of revenue over the term of their useful life. Research and development expenses also include data centers costs associated with pre-production costs for testing and quality assurance, as well as lease expenses associated with our office spaces, and software expense, each of which are allocated based on employee headcount.
General and administrative expenses. General and administrative expenses consist primarily of employee-related costs which are comprised of personnel-related costs and stock-based compensation expense for our finance and accounting, human resources, information technology and legal support departments. Personnel-related costs mainly consist of salaries and wages. General and administrative expenses also include lease expenses associated with our office spaces, as well as software expense, each of which are allocated based on employee headcount, and other professional related costs.
43
Results of Operations
The following table sets forth selected consolidated statement of operations data for each of the periods indicated:
| (in thousands) | Fiscal year ended January 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Statements of Operations Data: | 2023 | 2022 | 2021 | |||||||
| Revenue | $ | 400,850 | $ | 390,577 | $ | 354,661 | ||||
| Cost of revenue(1) | 103,960 | 98,299 | 86,404 | |||||||
| Gross profit | 296,890 | 292,278 | 268,257 | |||||||
| Operating expenses: | ||||||||||
| Sales and marketing(1) | 211,479 | 230,467 | 228,417 | |||||||
| Research and development(1) | 70,903 | 68,350 | 58,146 | |||||||
| General and administrative(1) | 79,336 | 83,420 | 76,026 | |||||||
| Total operating expenses | 361,718 | 382,237 | 362,589 | |||||||
| Loss from operations | (64,828) | (89,959) | (94,332) | |||||||
| Interest income | 1,684 | 22 | 532 | |||||||
| Interest expense | (589) | (544) | (614) | |||||||
| Other expense, net | (125) | (1,501) | (181) | |||||||
| Loss from operations before income taxes | (63,858) | (91,982) | (94,595) | |||||||
| Provision for income taxes | (2,080) | (1,277) | (97) | |||||||
| Net loss | $ | (65,938) | $ | (93,259) | $ | (94,692) |
(1) Amounts include stock-based compensation expense as follows:
| Fiscal year ended January 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | 2023 | 2022 | 2021 | |||||||
| Cost of revenue | $ | 5,042 | $ | 7,099 | $ | 5,724 | ||||
| Sales and marketing | 22,961 | 26,496 | 32,581 | |||||||
| Research and development | 16,401 | 20,654 | 17,071 | |||||||
| General and administrative | 18,674 | 19,231 | 16,918 | |||||||
| Total stock-based compensation expense | $ | 63,078 | $ | 73,480 | $ | 72,294 |
Decreases in stock-based compensation expense for the fiscal year ended January 31, 2023, compared to the fiscal year ended January 31, 2022 are largely due to decreases in the fair value of awards granted.
44
The following table sets forth selected consolidated statements of operations data for each of the periods indicated as a percentage of total revenue:
| Fiscal year ended January 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | 2021 | ||||||
| Revenue | 100 | % | 100 | % | 100 | % | ||
| Cost of revenue | 26 | 25 | 24 | |||||
| Gross profit | 74 | 75 | 76 | |||||
| Operating expenses: | ||||||||
| Sales and marketing | 53 | 59 | 65 | |||||
| Research and development | 17 | 18 | 16 | |||||
| General and administrative | 20 | 21 | 21 | |||||
| Total operating expenses | 90 | 98 | 102 | |||||
| Loss from operations | (16) | (23) | (26) | |||||
| Interest income | — | — | — | |||||
| Interest expense | — | — | (1) | |||||
| Other expense, net | — | — | — | |||||
| Loss from operations before income taxes | (16) | (23) | (27) | |||||
| Provision for income taxes | — | — | — | |||||
| Net loss | (16) | % | (23) | % | (27) | % |
Note: Numbers rounded for presentation purposes and may not sum.
Fiscal Year Ended January 31, 2023 Compared to Fiscal Year Ended January 31, 2022
Revenue
| Fiscal year ended January 31, | Variance | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | 2023 | 2022 | Dollars | Percent | ||||||||||
| Revenue | $ | 400,850 | $ | 390,577 | $ | 10,273 | 3 | % | ||||||
| Cost of revenue | 103,960 | 98,299 | $ | 5,661 | 6 | % | ||||||||
| Gross profit | $ | 296,890 | $ | 292,278 | $ | 4,612 | 2 | % | ||||||
| Gross margin | 74.1 | % | 74.8 | % |
Total revenue was $400.9 million for the fiscal year ended January 31, 2023, compared to $390.6 million for the fiscal year ended January 31, 2022, an increase of $10.3 million or 3%, primarily driven by new customer subscriptions to our platform, as well as expanded subscriptions for existing customers. Revenue recognized from subscriptions and associated support to our platform was 91% and 92%, while revenue recognized from professional services was 9% and 8%, for the fiscal years ended January 31, 2023 and 2022, respectively.
Revenue for the fiscal year ended January 31, 2023 included a negative impact from foreign currency exchange rates of approximately $10.2 million, using a constant currency basis. We calculate constant currency by translating our current period results for entities reporting in currencies other than USD into USD at the average monthly exchange rates in effect during the comparative period, as opposed to the average monthly exchange rates in effect during the current period.
The following table summarizes our revenue by sales channel for the periods presented:
| Fiscal year ended January 31, | Variance | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | Dollars | Percent | |||||||||
| (in thousands) | ||||||||||||
| Direct Customers | $ | 318,032 | $ | 303,338 | $ | 14,694 | 5 | % | ||||
| Third-Party Reseller Customers | 82,818 | 87,239 | (4,421) | (5) | % | |||||||
| Total Revenue | $ | 400,850 | $ | 390,577 | $ | 10,273 | 3 | % |
Revenue attributable to direct customers was $318.0 million for the fiscal year ended January 31, 2023, compared to $303.3 million for the fiscal year ended January 31, 2022, an increase of $14.7 million or 5%, primarily driven by new customer subscriptions to our platform, as well as expanded subscriptions for existing customers. Revenue attributable to third-party reseller customers was $82.8 million for the fiscal year ended January 31, 2023, compared to $87.2 million for the fiscal year ended January 31, 2022, a decrease of $4.4 million or 5% primarily due to customer attrition.
45
Cost of Revenue and Gross Margin
Cost of revenue was $104.0 million for the fiscal year ended January 31, 2023, compared to $98.3 million for the fiscal year ended January 31, 2022, an increase of $5.7 million, or 6%. The increase was primarily driven by a $5.1 million increase in personnel-related costs, reflecting higher headcount, a $1.7 million increase in costs associated with our data centers and a $1.4 million increase in depreciation expense. These increases were partially offset by a $2.1 million decrease in stock-based compensation expense, largely due to decreases in the fair value of awards granted, as well as a $1.2 million decrease in Publisher Network provider fees due to favorable contract renewal terms with certain providers in the prior year.
Gross margin was 74.1% for the fiscal year ended January 31, 2023, compared to 74.8% for the fiscal year ended January 31, 2022 as reflected in the discussion above.
Operating Expenses
| Fiscal year ended January 31, | Variance | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | 2023 | 2022 | Dollars | Percent | ||||||||||
| Sales and marketing | $ | 211,479 | $ | 230,467 | $ | (18,988) | (8) | % | ||||||
| Research and development | $ | 70,903 | $ | 68,350 | $ | 2,553 | 4 | % | ||||||
| General and administrative | $ | 79,336 | $ | 83,420 | $ | (4,084) | (5) | % |
Sales and marketing expense was $211.5 million for the fiscal year ended January 31, 2023, compared to $230.5 million for the fiscal year ended January 31, 2022, a decrease of $19.0 million, or 8%. The decrease was primarily driven by employee-related costs, as personnel-related costs decreased $10.4 million, reflecting lower headcount, and stock-based compensation expense which decreased $3.5 million, largely due to decreases in the fair value of awards granted. In addition, advertising costs decreased $4.9 million due to certain brand media campaigns in the prior period and professional related costs decreased $2.8 million. These decreases were partially offset by a $3.1 million increase in conferences and events and a $2.8 million increase in employee travel.
Research and development expense was $70.9 million for the fiscal year ended January 31, 2023, compared to $68.4 million for the fiscal year ended January 31, 2022, an increase of $2.6 million, or 4%. The increase was primarily driven by a $4.9 million increase in personnel-related costs and a $1.3 million increase in costs associated with our data centers. These increases were partially offset by a $4.3 million decrease in stock-based compensation expense, largely due to decreases in the fair value of awards granted.
General and administrative expense was $79.3 million for the fiscal year ended January 31, 2023, compared to $83.4 million for the fiscal year ended January 31, 2022, a decrease of $4.1 million or 5%. The decrease was primarily driven by a $4.2 million decrease in professional related costs, a $1.1 million decrease in bad debt expense and a $0.6 million decrease in stock-based compensation expense, largely due to decreases in the fair value of awards granted. This was partially offset by a $0.7 million increase in personnel-related costs, reflecting higher headcount, a $0.7 million increase in software expense and a $0.4 million increase in depreciation expense.
Fiscal Year Ended January 31, 2022 Compared to Fiscal Year Ended January 31, 2021
Revenue and Cost of Revenue
| Fiscal year ended January 31, | Variance | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | 2022 | 2021 | Dollars | Percent | ||||||||||
| Revenue | $ | 390,577 | $ | 354,661 | $ | 35,916 | 10 | % | ||||||
| Cost of revenue | 98,299 | 86,404 | $ | 11,895 | 14 | % | ||||||||
| Gross profit | $ | 292,278 | $ | 268,257 | $ | 24,021 | 9 | % | ||||||
| Gross margin | 74.8 | % | 75.6 | % |
Total revenue was $390.6 million for the fiscal year ended January 31, 2022, compared to $354.7 million for the fiscal year ended January 31, 2021, an increase of $35.9 million or 10%, primarily driven by new customer subscriptions to our platform, and to a lesser extent included expanded subscriptions for existing customers. Our revenue is predominately derived from our enterprise, mid-size, and third-party reseller customers. Revenue recognized from subscriptions and associated support to our platform was 92% and revenue recognized from professional services was 8%, for the fiscal year ended January 31, 2022, compared to 93% and 7%, respectively, for the fiscal year ended January 31, 2021.
46
The following table summarizes our revenue by sales channel for the periods presented:
| Fiscal year ended January 31, | Variance | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | Dollars | Percent | |||||||||
| (in thousands) | ||||||||||||
| Direct Customers | $ | 303,338 | $ | 265,756 | $ | 37,582 | 14 | % | ||||
| Third-Party Reseller Customers | 87,239 | 88,905 | (1,666) | (2) | % | |||||||
| Total Revenue | $ | 390,577 | $ | 354,661 | $ | 35,916 | 10 | % |
Revenue attributable to direct customers was $303.3 million for the fiscal year ended January 31, 2022, compared to $265.8 million for the fiscal year ended January 31, 2021, an increase of $37.6 million or 14%, primarily driven by new customer subscriptions to our platform, as well as expanded subscriptions for existing customers. Revenue attributable to third-party reseller customers was $87.2 million for the fiscal year ended January 31, 2022, compared to $88.9 million for the fiscal year ended January 31, 2021, a decrease of $1.7 million or 2% primarily due to customer attrition.
Cost of Revenue and Gross Margin
Cost of revenue was $98.3 million for the fiscal year ended January 31, 2022, compared to $86.4 million for the fiscal year ended January 31, 2021, an increase of $11.9 million, or 14%. This increase was primarily driven by employee-related costs, as personnel-related costs increased $8.8 million and stock-based compensation expense increased $1.4 million, reflecting higher headcount and employee stock grants. In addition, depreciation expense increased $2.2 million and costs associated with our data centers increased $1.5 million. These increases were partially offset by Publisher Network application provider fees which decreased $5.1 million due to favorable contract renewal terms with certain providers in the prior year.
Gross margin was 74.8% for the fiscal year ended January 31, 2022, compared to 75.6% for the fiscal year ended January 31, 2021 as reflected in the discussion above.
Operating Expenses
| Fiscal year ended January 31, | Variance | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | 2022 | 2021 | Dollars | Percent | ||||||||||
| Sales and marketing | $ | 230,467 | $ | 228,417 | $ | 2,050 | 1 | % | ||||||
| Research and development | $ | 68,350 | $ | 58,146 | $ | 10,204 | 18 | % | ||||||
| General and administrative | $ | 83,420 | $ | 76,026 | $ | 7,394 | 10 | % |
Sales and marketing expense was $230.5 million for the fiscal year ended January 31, 2022, compared to $228.4 million for the fiscal year ended January 31, 2021, an increase of $2.1 million, or 1%. The increase reflected a $5.5 million increase in personnel-related costs, inclusive of a $3.5 million increase in costs to obtain revenue contracts. In addition, there was a $2.3 million increase in depreciation expense and a $0.9 million increase in advertising costs associated with certain brand media campaigns. These increases were largely offset by a $6.1 million decrease in stock-based compensation expense, which is lower in the current period reflecting the impact of certain departures of senior management in the prior periods.
Research and development expense was $68.4 million for the fiscal year ended January 31, 2022, compared to $58.1 million for the fiscal year ended January 31, 2021, an increase of $10.2 million, or 18%. The increase was primarily driven by a $3.6 million increase in stock-based compensation expense due to employee stock grants, a $3.6 million increase in personnel-related costs, reflecting higher headcount, which mainly consisted of salaries and wages, as well as a $0.8 million increase in depreciation expense.
General and administrative expense was $83.4 million for the fiscal year ended January 31, 2022, compared to $76.0 million for the fiscal year ended January 31, 2021, an increase of $7.4 million or 10%. The increase was primarily driven by a $2.6 million increase in personnel-related costs, a $2.3 million increase in stock-based compensation due to employee stock grants, as well as a $0.9 million increase in depreciation expense. This was partially offset by a $1.3 million decrease in bad debt expense as the prior year period had higher expense to reflect the initial impacts of the COVID-19 pandemic.
Net Loss
Net loss was $65.9 million, $93.3 million, and $94.7 million for the fiscal years ended January 31, 2023, 2022 and 2021, respectively.
Non-GAAP Financial Measures
In addition to our financial results determined in accordance with GAAP, we believe that certain non-GAAP financial measures are useful in evaluating our operating performance and our business.
47
Non-GAAP net loss is a financial measure that is not calculated in accordance with GAAP. We define non-GAAP net loss as our GAAP net loss as adjusted to exclude the effects of stock-based compensation expense. We believe non-GAAP net loss provides investors and other users of our financial information consistency and comparability with our past financial performance and facilitates period-to-period comparisons of our results of operations. We also believe non-GAAP net loss is useful in evaluating our operating performance compared to that of other companies in our industry, as it eliminates the effects of stock-based compensation, which may vary for reasons unrelated to overall operating performance. We use non-GAAP net loss in conjunction with traditional GAAP net loss as part of our overall assessment of our performance, including the preparation of our annual operating budget and quarterly forecasts, and to evaluate the effectiveness of our business strategies.
Adjusted EBITDA is a non-GAAP financial measure that we believe offers a useful view of overall operations used to assess the performance of core business operations and for planning purposes. We define Adjusted EBITDA as net income (loss) before (1) interest income (expense), net, (2) provision for income taxes, (3) depreciation and amortization, (4) other income (expense), net, and (5) stock-based compensation expense. The most directly comparable GAAP financial measure to Adjusted EBITDA is GAAP net loss. Users should consider the limitations of using Adjusted EBITDA, including the fact that this measure does not provide a complete measure of our operating performance. Adjusted EBITDA is not intended to purport to be an alternate to net loss as a measure of operating performance.
The definitions of our non-GAAP financial measures may differ from the definitions used by other companies and therefore comparability may be limited. In addition, other companies may not publish this or similar metrics. Thus, our non-GAAP financial measures should be considered in addition to, not as a substitute for, nor superior to or in isolation from, measures prepared in accordance with GAAP.
Our Non-GAAP financial measures may be limited in their usefulness because they do not present the full economic effect of expenses mentioned above. We compensate for these limitations by providing a reconciliation of our non-GAAP financial measures to the most closely related GAAP financial measures. We encourage investors and others to review our financial information in its entirety, not to rely on any single financial measure and to view non-GAAP net loss and Adjusted EBITDA in conjunction with GAAP net loss.
The following table reconciles our GAAP net loss to non-GAAP net loss:
| Fiscal year ended January 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | 2023 | 2022 | 2021 | |||||||
| GAAP net loss | $ | (65,938) | $ | (93,259) | $ | (94,692) | ||||
| Plus: Stock-based compensation expense | 63,078 | 73,480 | 72,294 | |||||||
| Non-GAAP net loss | $ | (2,860) | $ | (19,779) | $ | (22,398) |
The following table reconciles our GAAP net loss to Adjusted EBITDA:
| Fiscal year ended January 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | 2021 | ||||||||||||
| GAAP net loss to Adjusted EBITDA: | ||||||||||||||
| GAAP net loss | $ | (65,938) | $ | (93,259) | $ | (94,692) | ||||||||
| Interest (income) expense | (1,095) | 522 | 82 | |||||||||||
| Provision for income taxes | 2,080 | 1,277 | 97 | |||||||||||
| Depreciation and amortization | 17,583 | 16,783 | 10,612 | |||||||||||
| Other expense (income) | 125 | 1,501 | 181 | |||||||||||
| Stock-based compensation expense | 63,078 | 73,480 | 72,294 | |||||||||||
| Adjusted EBITDA | $ | 15,833 | $ | 304 | $ | (11,426) |
48
Constant Currency
We provide revenue, including year-over-year growth rates, adjusted to remove the impact of foreign currency rate fluctuations, which we refer to as constant currency. We believe providing revenue on a constant currency basis helps our investors to better understand our underlying performance, given the current macroeconomic environment. We calculate constant currency by using the current period results for entities reporting in currencies other than U.S. Dollars (“USD”), which are then converted into USD at the average monthly exchange rates in effect during the comparative period, as opposed to the average monthly exchange rates in effect during the current period. Our definition may differ from the definitions used by other companies and therefore comparability may be limited. In addition, other companies may not publish these or similar metrics. Thus, our revenue on a constant currency basis should be considered in addition to, not as a substitute for, nor superior to or in isolation from, measures prepared in accordance with GAAP. We provide a reconciliation of revenue on a constant currency basis to the most closely related GAAP financial measure. We encourage investors and others to review our financial information in its entirety and to view revenue on a constant currency basis in conjunction with revenue on a GAAP basis.
The following table provides a reconciliation of revenue on a GAAP basis to revenue on a constant currency basis:
| Fiscal year ended January 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | 2023 | 2022 | Growth Rates | |||||||
| Revenue (GAAP) | $ | 400,850 | $ | 390,577 | 3 | % | ||||
| Effects of foreign currency rate fluctuations | 10,232 | |||||||||
| Revenue on a constant currency basis (Non-GAAP) | $ | 411,082 | 5 | % |
Liquidity and Capital Resources
As of January 31, 2023, our principal sources of liquidity were cash and cash equivalents of $190.2 million. We believe our existing cash and cash equivalents will be sufficient to meet our projected operating requirements for at least the next 12 months. Our cash flows, including net cash used in or provided by operating activities, may vary significantly from quarter to quarter, due to the timing of billings, cash collections and lease payments, significant marketing events and related expenses, and other factors.
Our future capital requirements will depend on many factors, including those set forth under "Risk Factors." We may in the future enter into arrangements to acquire or invest in complementary businesses, services, technologies, and intellectual property rights. In addition, we may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, operating results and financial condition would be adversely affected.
Credit Arrangements
On March 11, 2020, we entered into a credit agreement with Silicon Valley Bank (the “Credit Agreement”). In January 2021, we amended the Credit Agreement which modified the conditions pursuant to which subsidiaries are required to become guarantors. On December 22, 2022, we entered into a second amendment (“Amendment No. 2”) to the Credit Agreement, dated March 11, 2020, collectively referred to as the Credit Facility. No significant debt issuance costs were incurred in association with the December 2022 Credit Facility.
Amendment No. 2 amends the Credit Facility to, among other things (i) extend the maturity date of the Credit Facility to December 22, 2025, (ii) amend the interest rate provisions to replace LIBOR with SOFR as the interest rate benchmark, and (iii) amend the recurring revenue growth rate financial covenant.
The Credit Facility provides for a senior secured revolving loan facility of up to $50.0 million that matures three years after the effective date, with the right subject to certain conditions to add an incremental revolving loan facility of up to $50.0 million in the aggregate. The three-year revolving loan facility provides for borrowings up to the amount of the facility with sub-limits of up to (i) $30.0 million to be available for the issuance of letters of credit and (ii) $10.0 million to be available for swingline loans.
As amended, the revolving loans bear interest, at our election, at an annual rate based on SOFR or a base rate. Loans based on SOFR shall bear interest at a rate between SOFR plus 2.50% and SOFR plus 3.00%, depending on our average daily usage of the revolving loan facility and subject to a SOFR floor of 1.00%. Loans based on the base rate shall bear interest at a rate between the base rate minus 0.50% and the base rate plus 0.00%, depending on our average daily usage of the revolving loan facility. See Part I Item 1A “Risk Factors - Our credit facility contains restrictive covenants that may limit our operating flexibility".
The obligations under the Credit Facility are secured by a lien on substantially all of our tangible and intangible property and by a pledge of all of our equity interests of material direct and indirect domestic subsidiaries and 66% of each class of capital stock of any material first-tier foreign subsidiaries, subject to limited exceptions.
The Credit Facility contains customary affirmative and negative covenants and restrictions, as well as financial covenants that require us to maintain the year-over-year growth rate of its recurring revenue for a trailing four fiscal quarter period above specified
49
rates when certain liquidity thresholds are not met and to maintain a consolidated quick ratio of at least 1.50 to 1.00 tested on a monthly basis.
As of January 31, 2023, we were in compliance with all debt covenants. As of such date, the $50.0 million revolving loan facility had $35.9 million available and $14.1 million in letters of credit allocated as security in connection with office space.
On March 10, 2023, the Federal Deposit Insurance Corporation was appointed as receiver for SVB and created the National Bank of Santa Clara to hold the deposits of SVB after SVB was unable to continue their operations. While the National Bank of Santa Clara has publicly assured holders of credit facilities that they intend to honor those facilities, our credit agreement may not be available in all or in part in the near future depending on the resolution of SVB.
Share Repurchase Program
In March 2022, our Board of Directors authorized a $100.0 million share repurchase program of our common stock. As of January 31, 2023, a total of 13,844,279 shares have been purchased at an average price of $5.59 per share for a total cost of $77.4 million since the commencement of the share repurchase program. As of January 31, 2023, there was approximately $22.6 million that remained available to be purchased under this share repurchase program.
Cash Flows
The following table summarizes our cash flows:
| Fiscal year ended January 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | 2023 | 2022 | 2021 | |||||||
| Net cash provided by operating activities | $ | 17,853 | $ | 21,849 | $ | 1,204 | ||||
| Net cash used in investing activities | $ | (6,193) | $ | (13,418) | $ | (65,111) | ||||
| Net cash (used in) provided by financing activities | $ | (79,021) | $ | 24,617 | $ | 22,548 |
Operating Activities
Net cash provided by operating activities of $17.9 million for the fiscal year ended January 31, 2023 reflected our net loss of $65.9 million, adjusted by non-cash charges including stock-based compensation expense of $63.1 million, depreciation and amortization expense of $17.6 million and amortization of operating lease right-of-use assets of $8.8 million. In addition, there were positive adjustments resulting from changes in costs to obtain revenue contracts of $8.0 million, unearned revenue of $3.5 million and accounts payable, accrued expenses and other current liabilities of $2.7 million. These increases were partially offset by changes in operating lease liabilities of $11.0 million, accounts receivable of $10.1 million, mainly due to timing of billing and cash collections during the period, and changes in prepaid expenses and other current assets of $2.3 million.
Net cash provided by operating activities of $21.8 million for the fiscal year ended January 31, 2022 reflected our net loss of $93.3 million, adjusted by non-cash charges including stock-based compensation expense of $73.5 million, depreciation and amortization expense of $16.8 million, amortization of operating lease right-of-use assets of $9.3 million, and bad debt expense of $1.3 million. In addition, there were positive adjustments resulting from changes in unearned revenue of $33.3 million and changes in prepaid expenses and other current assets of $4.2 million. These increases were partially offset by changes in costs to obtain revenue contracts of $9.1 million, operating lease liabilities of $6.6 million, and accounts receivable of $6.1 million, mainly due to timing of billing and cash collections during the period.
Net cash provided by operating activities of $1.2 million for the fiscal year ended January 31, 2021 reflected our net loss of $94.7 million, adjusted by non-cash charges including stock-based compensation expense of $72.3 million, amortization of operating lease right-of-use assets of $12.2 million, depreciation and amortization expense of $10.6 million, and bad debt expense of $2.5 million, reflecting an increase in the allowance for doubtful accounts in light of impacts from the COVID-19 pandemic. In addition, there were positive adjustments resulting from changes in unearned revenue of $12.7 million, operating lease liabilities of $8.9 million, and costs to obtain revenue contracts of $2.4 million. These increases were partially offset by changes in accounts receivable of $18.0 million, mainly due to timing of billing and cash collections during the period, changes in prepaid expenses and other current assets of $5.5 million, and changes in accounts payable, accrued expenses and other current liabilities of $2.0 million.
Investing Activities
Net cash used in investing activities of $6.2 million for the fiscal year ended January 31, 2023 reflected capital expenditures.
Net cash used in investing activities of $13.4 million for the fiscal year ended January 31, 2022 reflected capital expenditures primarily associated with our new corporate headquarters in New York, NY.
Net cash used in investing activities of $65.1 million for the fiscal year ended January 31, 2021 reflected capital expenditures primarily associated with our new corporate headquarters in New York, NY, and our office spaces in Rosslyn, VA and Tokyo, Japan, among others.
50
Financing Activities
Net cash used in financing activities of $79.0 million for the fiscal year ended January 31, 2023 was primarily related to $77.3 million in cash outflows associated with repurchases of common stock as part of our share repurchase program, as well as payments for taxes related to the net share settlement of stock-based compensation awards of $5.1 million and payments of deferred financing costs of $0.5 million. This was partially offset by net proceeds from employee stock purchase plan withholdings of $3.2 million and proceeds from exercise of stock options of $0.7 million.
Net cash provided by financing activities of $24.6 million for the fiscal year ended January 31, 2022 was primarily related to proceeds from exercise of stock options of $19.2 million, and net proceeds from employee stock purchase plan withholdings of $5.7 million, partially offset by payments of deferred financing costs of $0.3 million.
Net cash provided by financing activities of $22.5 million for the fiscal year ended January 31, 2021 was primarily related to proceeds from exercise of stock options of $16.5 million, and net proceeds from employee stock purchase plan withholdings of $7.0 million, partially offset by payments of deferred financing costs of $0.9 million.
Contractual Obligations
See Note 14 "Commitments and Contingencies", to the consolidated financial statements for our discussion on contractual obligations.
Critical Accounting Policies and Estimates
Our management's discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenue generated and expenses incurred during the reporting periods. Our estimates are based on our historical experience and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about items that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
See Note 2 "Summary of Significant Accounting Policies" to our consolidated financial statements for further discussion on our accounting policies. Our most critical accounting policies and estimates, based on the degree of judgment and complexity, are discussed below.
Revenue Recognition
We derive our revenue primarily from our subscriptions and associated support to the Answers platform. Our subscriptions do not provide customers with the right to take possession of the software supporting the applications and, as a result, are accounted for as service contracts. Our subscription and associated support performance obligation is distinct because a customer's use of the Answers platform is fully functional upon access, does not require any additional development, modification or customization, and is often sold separately. In certain instances, we enter into a contract that includes a promise to provide certain technical or customized professional services, in addition to a promise to provide its subscription and associated support. Our professional services performance obligation is distinct as it does not significantly change or enhance the functionality of the Answers platform.
In instances when a contract includes more than one performance obligation, we must allocate the transaction price to the performance obligations on a relative standalone selling price basis ("SSP"). SSP represents the price at which a company would sell a promised product or service separately to a customer. We determine the SSP based on a series of complex factors. Our selling prices associated with our subscription and associated support are considered highly variable based on discounting practices, customer geography, customer size, and other such factors. In contrast, our selling prices associated with our professional services are more observable, predictable and consistent. Accordingly, we use the residual method to determine SSP.
The recognition of revenue is determined through application of the five-step model in accordance with ASC 606. Revenue is recognized upon transfer of control of services to our customers, including third-party reseller customers, in an amount that reflects the consideration we expect to receive in exchange for those services. In transactions with resellers, we contract only with the reseller, in which pricing and length of subscription and support services are agreed upon. The reseller negotiates the price charged and length of subscription and support service directly with its customer. We do not pay separate fees to third-party reseller customers in association with these transactions, and do not have direct interactions with the reseller’s customer.
Revenue is generally recognized ratably over the contract term beginning on the commencement date of each contract, which is the date our platform is made available to our customers. Amounts that have been invoiced for non-cancelable contracts are recorded in accounts receivable and unearned revenue or revenue. See Note 2 "Summary of Significant Accounting Policies" and Note 3 "Revenue" to our consolidated financial statements for further discussion on our revenue recognition.
51
Costs Capitalized to Obtain Revenue Contracts
We capitalize costs of obtaining revenue contracts that are incremental and recoverable. Incremental costs primarily include sales commissions, certain related incentives, and associated payroll tax and fringe benefit costs. We amortize such costs on a straight-line basis over the average benefit period, which is typically three years for new contracts and one year for renewals. We determine the average benefit period by considering both qualitative and quantitative factors, which include the estimated life of capitalized software development costs resulting from additional functionality to the Answers platform and estimated customer life, among other such factors. Amortization of costs capitalized to obtain revenue contracts is included in sales and marketing expense in the consolidated statements of operations and comprehensive loss.
Stock-Based Compensation
Stock-based compensation for all employee and non-employee stock-based awards, including restricted stock units, restricted stock, performance-based restricted stock units, and options to purchase common stock, is measured at fair value on the date of grant and recognized over the service period. The fair value of restricted stock units and restricted stock are estimated on the date of grant based on the fair value of our Company’s common stock. The fair value of performance-based restricted stock units are estimated on the date of grant using a Monte Carlo simulation model. The fair value of stock options are estimated on the date of grant using a Black-Scholes option-pricing model.
Stock-based compensation expense is generally recognized over the requisite service periods of awards, which is typically one to four years for restricted stock units and restricted stock, and four years for options and performance-based restricted stock units. The estimated forfeiture rate applied to employee awards is based on historical forfeiture rates. The estimated number of stock-based awards that will ultimately vest requires judgment, and to the extent actual results, or updated estimates, differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period actual results are realized or estimates are revised. A higher forfeiture rate will result in an adjustment that will decrease stock-based compensation expense, whereas a lower forfeiture rate will result in an adjustment that will increase stock-based compensation expense. We do not apply a forfeiture rate assumption to value non-employee awards, given the nature of the services provided.
For our Employee Stock Purchase Plan ("ESPP"), we measure stock-based compensation expense at fair-value using a Black-Scholes option-pricing model, at the commencement of each offering period and recognize the expense over that offering period, which is generally six months. The key assumptions used in the Black-Scholes option-pricing model include a volatility assumption based on the historical volatility of our stock price and the risk-free rate assumption based on the U.S. treasury yield curve in effect at the commencement of the offering period or grant date. The dividend yield assumption is zero as we have not historically paid any dividends and do not expect to declare or pay any dividends in the foreseeable future.
We will continue to use judgment in evaluating the assumptions related to our stock-based compensation. As we continue to accumulate additional data related to our common stock, we may refine our estimates. If factors change and different assumptions are used, the impact to our stock-based compensation expense could be material.
Income Taxes
We account for income taxes in accordance with ASC Topic 740, “Income Taxes,” under which deferred income taxes are provided for temporary differences between the financial reporting and tax basis of our assets and liabilities. We classify all deferred tax assets and liabilities as non-current on the consolidated balance sheet. The effect of a change in tax rates on deferred tax assets and liabilities is recognized within the (provision for) benefit from income taxes on the consolidated statement of operations and comprehensive loss in the period that includes the enactment date.
We reduce deferred tax assets, if necessary, by a valuation allowance if it is more likely than not that we will not realize some or all of our deferred tax assets. In making such a determination, we consider all available positive and negative evidence, including results of operations, future reversals of existing taxable temporary differences, projected future taxable income and tax-planning strategies.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. We recognize interest and penalties related to uncertain tax positions within the (provision for) benefit from income taxes on our consolidated statement of operations and comprehensive loss.
Leases
We enter into contracts in the normal course of business and assess whether any such contracts contain a lease. We classify leases as operating or financing in nature, and record the associated lease liability and right-of-use asset on our balance sheet. The lease liability represents the present value of future lease payments, net of lease incentives, discounted using incremental borrowing rates.
For each individual lease arrangement, we estimate an incremental borrowing rate at the commencement date. The incremental borrowing rate is determined based on what we would estimate to pay for a collateralized loan over a similar term and economic environment for each lease arrangement.
52
With respect to our operating lease arrangements, we account for lease components, and non-lease components that are fixed, as a single lease component in the measurement of operating lease liabilities and right-of-us assets. Non-lease components that are variable are expensed as incurred in the consolidated statement of operations and comprehensive loss. Lease arrangements with an initial term of 12 months or less are recognized on a straight-line basis over the lease term and are not recorded on the consolidated balance sheet.
Recent Accounting Pronouncements
See Note 2 "Summary of Significant Accounting Policies- Recent Accounting Pronouncements", to the consolidated financial statements for our discussion about adopted and pending recent accounting pronouncements.
53