GITLAB INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q. You should review the section titled "Special Note Regarding Forward-Looking Statements" above in this Quarterly Report on Form 10-Q for a discussion of forward-looking statements and important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled "Risk Factors" in this Quarterly Report on Form 10-Q. Our historical results are not necessarily indicative of the results that may be expected for any period in the future.
Overview
We believe in an innovative world powered by software. To realize this vision, we pioneered The DevSecOps Platform, our fundamentally new approach to DevSecOps consisting of a single codebase and interface with a unified data model. The DevSecOps Platform allows everyone to contribute to build better software rapidly, efficiently, and securely. Today, every industry, business, and function within a company is dependent on software. To remain competitive and survive, nearly all companies must digitally transform and become experts at building and delivering software.GitLab is The DevSecOps Platform, a single application that brings together development, security, operations, IT, and business teams to deliver desired business outcomes. Having all teams on a single application with a single interface represents a step function change in how organizations plan, build, secure, and deliver software. The DevSecOps Platform accelerates our customers' ability to create business value and innovate by reducing their software development cycle times from weeks to minutes. It removes the need for point tools and delivers enhanced operational efficiency by eliminating manual work, increasing productivity, and creating a culture of innovation and velocity. The DevSecOps Platform also embeds security earlier into the development process, improving our customers' software security, quality, and overall compliance. The DevSecOps Platform is available to any company, regardless of the size, scope, and complexity of their deployment. As a result, we have a large number of customers on paid trials or with single-digit users. For purposes of determining the number of our active customers, we look at our customers with more than$5,000 of Annual Recurring Revenue, or ARR, in a given period, who we refer to as our Base Customers. For purposes of determining our Base Customers, a single organization with separate subsidiaries, segments, or divisions that use The DevSecOps Platform is considered a single customer for determining each organization's ARR. Our company exists today in large part thanks to the vast and growing community of open source contributors around the world. We actively work to grow open source community engagement by operating with intentional transparency. We make our strategy, direction, and product roadmap available to the wider community, where we encourage and solicit their feedback. By making information public, we make it easier to solicit contributions and collaboration from our users and customers. See the section entitled "-Key Business Metrics-Dollar-Based Net Retention Rate and ARR" below for additional information about how we define ARR. We make our plans available through our self-managed and software-as-a-service, or SaaS offering. For our self-managed offering, the customer installs The DevSecOps Platform in their own private or hybrid cloud environment. For our SaaS offering, the platform is managed byGitLab and hosted either in the public cloud or in a private cloud based on the customer's preference.
Impact of COVID-19
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The COVID-19 pandemic has caused general business disruption worldwide. While we have experienced and may continue to experience a modest adverse impact on certain parts of our business, including a lengthening in the sales cycle for some prospective customers and delays in the delivery of professional services and trainings to customers, our results of operations, cash flows, and financial condition have not been adversely impacted to date. However, as certain customers or partners experience downturns or uncertainty in their own business operations or revenue resulting from the spread of COVID-19, they may continue to decrease or delay their spending, request pricing discounts, or seek renegotiations of their contracts, any of which may result in decreased revenue and cash receipts for us. In addition, we may experience customer losses, including due to bankruptcy or customers ceasing operations, which may result in an inability to collect accounts receivable from these customers. The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations, cash flows, and financial condition will depend on future developments that are highly uncertain and cannot be accurately predicted. The global impact of COVID-19 continues to rapidly evolve, and we will continue to monitor the situation and the effects on our business and operations closely. We do not yet know the full extent of potential impacts on our business or operations or on the global economy as a whole, particularly if the COVID-19 pandemic continues and persists for an extended period of time. See Part II, Item 1A, "Risk Factors" in this Quarterly Report on Form 10-Q. Given the uncertainty, we cannot reasonably estimate the impact on our future results of operations, cash flows, or financial condition.
Factors Affecting Our Performance
Sustaining innovation and technology leadership
We believe we have built a highly differentiated platform that gives us an advantage over our competitors by empowering business, development, security, operations, and IT teams to collaborate in a single application across the entire DevSecOps lifecycle. Our technology leadership is an outcome of various factors, including our strong community, network of contributors, and continued enhancement of The DevSecOps Platform by developing new features and expanding the functionality of existing features with speed and consistency. We have had a history of releasing enhancements to The DevSecOps Platform on the 22nd of every month and, as ofOctober 31, 2022 , had done so for the last 133 months. We intend to continue releasing new software at this cadence. We also intend to continue investing in research and development to further enhance The DevSecOps Platform and sustain our innovation and technology leadership. We have a history of investing in our open source community and intend to continue to leverage our open core software to accelerate innovation. We also intend to continue to add headcount to our research and development team and support functions to extend the functionality and range of The DevSecOps Platform by bringing new and improved products and services to our customers. We expect our research and development expenses to increase on an absolute basis in future periods. We foresee that such investment in research and development will contribute to our long-term growth, but will also negatively impact our short-term profitability. As engaged members of theGitLab open-source community, our contributors often serve as subject matter experts at market-leading developer events and The DevSecOps Platform is presented on the cutting edge of innovation. We intend to continue to invest in building out this community to foster more contributions and collaboration in the space. Our open source community, in turn, accelerates our ability to innovate and provide a better platform to our customers. We intend to expend additional resources in the future to continue enhancing The DevSecOps Platform and introducing new products, features and functionality.
Acquiring New Customers
Our future growth depends in large part on our ability to acquire new customers.
This, in turn, relies on our ability to reach teams and organizations through
our marketing and sales efforts. To this end, we are making significant
investments in our sales and marketing efforts to expand our reach and
differentiate
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The DevSecOps Platform from competitive products and services. We believe that eventually the vast majority of organizations will switch to a DevSecOps platform and embrace a single application approach, creating a substantial opportunity to continue to grow our customer base. As a result, our Base Customers increased to 6,469 as ofOctober 31, 2022 from 4,057 as ofOctober 31, 2021 , an increase of 59%, our$100,000 ARR customers increased to 638 as ofOctober 31, 2022 from 427 as ofOctober 31, 2021 , an increase of 49%. See the section entitled "-Key Business Metrics-Dollar-Based Net Retention Rate and ARR" below for information about how we define ARR. Our operating results and growth prospects will depend in part on our ability to attract new customers. While we believe we have a significant market opportunity that The DevSecOps Platform addresses, we will need to continue to invest in sales and marketing, research and development, and customer support to further grow our customer base, both inthe United States and internationally. We believe that our estimated 30 million registered users, which includes users of our free tier offering, provides a base of potential new customers. We intend to continue to add headcount to our global sales and marketing team to acquire new customers and to increase sales to existing customers. While we cannot predict customer adoption rates and demand, the future growth rate and size of the market for DevOps platforms, or the introduction of competitive products and services, our business and operating results will be significantly affected by the degree and speed with which organizations adopt The DevSecOps Platform.
Retaining and Expanding Our Existing Customers
We employ a "land and expand" business strategy that focuses on efficiently acquiring new customers and growing our relationships with existing customers over time. We believe that as our customers realize the benefits of a single application approach, they will increase the use of The DevSecOps Platform, enhancing our ability to expand revenue generation within our existing customers over time. As a result of our approach, as ofOctober 31, 2022 and 2021, our Dollar-Based Net Retention Rate were above 130%. See the section entitled "-Key Business Metrics-Dollar-Based Net Retention Rate and ARR" below for information about how we define Dollar-Based Net Retention Rate. We plan to continue investing in sales and marketing, with a focus on expansion of The DevSecOps Platform with Base Customers. We believe that this expansion will provide us with substantial operating leverage because the costs to expand sales within existing customers are significantly less than the costs to acquire new customers. Our future revenue growth and our ability to achieve and maintain profitability is dependent upon our ability to continue landing new customers, expanding the adoption of The DevSecOps Platform by additional users within their organizations, and upgrading customers to higher-priced tiers. Ultimately, our ability to increase sales to existing customers will depend on several factors, including our customers' satisfaction with The DevSecOps Platform, our pricing, competition, and overall changes in our customers' spending levels.
Partnerships, Alliances, Channels, and Integrations
We believe that our further growth depends in part on our ability to build and maintain successful partnerships, alliances, channels and integrations. We are continuously investing in developing a strong ecosystem and partner network, comprised of cloud and technology partners, resellers, and system integrators, as a way to expand our go-to-market strategy. We plan to continue investing in and developing these relationships to broaden our distribution footprint and drive greater awareness of our brand and The DevSecOps Platform. We believe that these partnerships will extend our sales reach and provide product and technology integrations that will accelerate implementation of The DevSecOps Platform inthe United States and internationally, although investing in these relationships can be time consuming and costly. While expending resources in developing these partnerships and alliances may adversely impact our short-term profitability, we believe these investments will lead to longer term growth for the business as a whole. 36
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Continuing to Scale our Business
We plan to continue investing in our business so that we can capitalize on our market opportunity. We believe that these investments will contribute to our long-term growth, although they may adversely affect our operating results in the near term. Furthermore, we expect our general and administrative expenses to increase in absolute amount for the foreseeable future given the additional expenses for accounting, compliance, and investor relations as a public company. While we expect these investments will contribute to our long-term growth, they may adversely affect our profitability in the near term, until such time as we are able to sufficiently grow our number of customers and increase the value of ARR with existing customers. We plan to balance these investments in future growth with a continued focus on managing our operating results.
Key Business Metrics
We monitor the following key metrics to help us evaluate our business, identify trends affecting our business, formulate business plans, and make strategic decisions.
Dollar-Based Net Retention Rate and ARR
We believe that our ability to retain and expand our revenue generated from our
existing customers is an indicator of the long-term value of our customer
relationships and our potential future business opportunities. Dollar-Based Net
Retention Rate measures the percentage change in our ARR derived from our
customer base at a point in time. Our calculation of ARR and by extension
Dollar-Based Net Retention Rate, includes both self-managed and SaaS
subscription revenue. We report Dollar-Based Net Retention Rate on a threshold
basis of 130% each quarter, and provide a tighter threshold as of each fiscal
year end.
We calculate ARR by taking the monthly recurring revenue, or MRR, and
multiplying it by 12. MRR for each month is calculated by aggregating, for all
customers during that month, monthly revenue from committed contractual amounts
of subscriptions, including our self-managed and SaaS offerings but excluding
professional services. We calculate Dollar-Based Net Retention Rate as of a
period end by starting with our customers as of the 12 months prior to such
period end, or the Prior Period ARR. We then calculate the ARR from these
customers as of the current period end, or the Current Period ARR. The
calculation of Current Period ARR includes any upsells, price adjustments, user
growth within a customer, contraction, and attrition. We then divide the total
Current Period ARR by the total Prior Period ARR to arrive at the Dollar-Based
Net Retention Rate.
As of October 31,
2022 2021
Dollar-Based Net Retention Rate > 130% >130%
Customers with ARR of
We believe that our ability to increase the number of$100,000 ARR customers is an indicator of our market penetration and strategic demand for The DevSecOps Platform. A single organization with separate subsidiaries, segments, or divisions that use The DevSecOps Platform is considered a single customer for determining each organization's ARR. We do not count our reseller or distributor channel partners as customers. In cases where customers subscribe to The DevSecOps Platform through our channel partners, each end customer is counted separately. As of October 31, 2022 2021$100,000 ARR customers 638 427 37
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Components of Our Results of Operations
Revenue
Subscription - self-managed and SaaS
Our self-managed and SaaS subscriptions consist of support, maintenance, upgrades and updates on a when-and-if-available basis. Revenue for support and maintenance is recognized ratably over the contract period based on the stand-ready nature of these subscription elements.
Our SaaS subscriptions provide access to our latest managed version of our product hosted in a public or private cloud. Revenue from our SaaS offerings is recognized ratably over the contract period when the performance obligation is satisfied. The typical term of a subscription contract for self-managed or SaaS offering is one to three years.
License - self-managed and other
The license component of our self-managed subscriptions reflects the revenue recognized by providing customers with access to proprietary software features. License revenue is recognized up front when the software license is made available to our customer. Other revenue consists of professional services revenue which is primarily derived from fixed fee offerings which are subject to customer acceptance. Given our limited history of providing professional services, uncertainty exists about customer acceptance and therefore, control is presumed to transfer upon confirmation from the customer, as defined in each professional services contract. Accordingly, revenue is recognized upon satisfaction of all requirements per the applicable contract. Revenue from professional services provided on a time and material basis is recognized over the periods services are delivered. Revenue from professional services accounted for 2% of our total revenue for each of the three and nine months endedOctober 31, 2022 . Revenue from professional services accounted for 3% and 2% of our total revenue for the three and nine months endedOctober 31, 2021 , respectively.
Cost of Revenue
Subscription - self-managed and SaaS
Cost of revenue for self-managed and SaaS subscriptions consists primarily of allocated cloud-hosting costs paid to third-party service providers, personnel-related costs, including stock-based compensation expenses, associated with our customer support personnel, including contractors, and allocated overhead. We expect our cost of revenue for self-managed and SaaS subscriptions to increase in absolute dollars as our self-managed and SaaS subscription revenue increases. As our SaaS offering makes up an increasing percentage of our total revenue, we expect to see increased associated cloud-related costs, such as hosting and managing costs, which may adversely impact our gross margins.
License - self-managed and other
Cost of self-managed license sales includes personnel-related expenses, including stock-based compensation expenses. Other costs of sales include professional services, personnel-related costs associated with our customer support personnel, including contractors, and allocated overhead.
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, benefits,
bonuses, stock-based compensation, and sales commissions. Operating expenses
also include IT overhead costs.
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Sales and Marketing
Sales and marketing expenses consist primarily of personnel-related expenses associated with our sales and marketing personnel, advertising, travel and entertainment related expenses, branding and marketing events, promotions, software subscriptions, and our hosting expenses for our free tier. Sales and marketing expenses also include sales commissions paid to our sales force. Such costs are capitalized and amortized over an estimated period of benefit of three years, and any such expenses paid for the renewal of a subscription are capitalized and amortized over the contractual term of the renewal. Costs for commissions that are incremental to obtain a self-managed license contract are expensed immediately. We expect sales and marketing expenses to increase in absolute dollars as we continue to make significant investments in our sales and marketing organization to drive additional revenue, further penetrate the market, and expand our global customer base, but to decrease as a percentage of our total revenue over time, although our sales and marketing expenses may fluctuate as a percentage of our total revenue from period-to-period depending on the timing of these expenses.
Research and Development
Research and development expenses consist primarily of personnel-related expenses, including contractors, as well as third-party cloud infrastructure expenses to support our internal development efforts, allocated overhead associated with developing new features or enhancing existing features, and software and subscription services. Costs related to research and development are expensed as incurred. We expect research and development expenses to increase in absolute dollars as we continue to increase investments in our existing products and services. However, we anticipate research and development expenses to decrease as a percentage of our total revenue over time, although our research and development expenses may fluctuate as a percentage of our total revenue from period-to-period depending on the timing of these expenses.
General and Administrative
General and administrative expenses consist primarily of personnel-related expenses for our executives, finance, legal, and human resources. General and administrative expenses also include external legal, accounting, director and officer insurance, as well as other consulting and professional services fees, software and subscription services, other corporate expenses, and certain contract termination fees. We have incurred and expect to incur additional expenses as a result of operating as a public company, including costs to comply with the rules and regulations applicable to companies listed on a national securities exchange, costs related to compliance and reporting obligations, and increased expenses for insurance, investor relations, and professional services. We expect that our general and administrative expenses will increase in absolute dollars as our business grows but will decrease as a percentage of our total revenue over time, although our general and administrative expenses may fluctuate as a percentage of our total revenue from period-to-period depending on the timing of these expenses.
Interest Income, and Other Income (Expense), Net
Interest income consists primarily of interest earned on our cash equivalents and short-term investments.
Other income (expense), net consists primarily of the gain from the deconsolidation of a subsidiary, as well as foreign currency transaction gains and losses.
Loss from
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Loss from equity method investment, net of tax consists of our share of losses
from the results of operations of
Provision for (Benefit from) Income Taxes
Provision for (benefit from) income taxes consists primarily of income taxes in the foreign and state jurisdictions in which we conduct business. We maintain a full valuation allowance against our deferred tax assets in certain jurisdictions because we have concluded that it is not more likely than not that the deferred tax assets will be realized.
Results of Operations
The following table sets forth our results of operations for the periods
presented (in thousands):
Three Months Ended October 31, Nine Months Ended October 31,
2022 2021 2022 2021
Revenue:
Subscription-self-managed and SaaS $ 98,435 $
59,774
14,546 7,026 37,135 18,315
Total revenue 112,981 66,800 301,429 174,857
Cost of revenue:(1)
Subscription-self-managed and SaaS 11,113 5,608 29,717 16,366
License-self-managed and other 3,451 1,587 7,725 4,446
Total cost of revenue 14,564 7,195 37,442 20,812
Gross profit 98,417 59,605 263,987 154,045
Operating expenses:
Sales and marketing(1) 81,080 50,543 228,479 133,562
Research and development(1) 41,113 24,664 112,463 68,607
General and administrative(1) 33,186 16,939 88,182 40,276
Total operating expenses 155,379 92,146 429,124 242,445
Loss from operations (56,962) (32,541) (165,137) (88,400)
Interest income 4,657 127 8,247 226
Other income (expense), net(2) 2,661 (10,209) 22,609 (21,252)
Loss before income taxes and loss from equity
method investment (49,644) (42,623) (134,281) (109,426)
Loss from equity method investment, net of tax (756) - (1,775) -
Provision for (benefit from) income taxes 65 (875) 2,519 1,370
Net loss $ (50,465) $
(41,748)
(2,010) (521) (4,997) (1,443)
Net loss attributable to GitLab $ (48,455) $ (41,227) $ (133,578) $ (109,353)
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(1)Includes stock-based compensation expense as follows:
Three Months Ended October 31, Nine Months Ended October 31,
2022 2021 2022 2021
(in thousands)
Cost of revenue $ 1,248 $ 331 $ 3,623 $ 722
Research and development 10,030 2,147 26,405 4,653
Sales and marketing 12,905 2,562 34,807 5,688
General and administrative 9,525 3,539 24,091 6,179
Total stock-based compensation
expense $ 33,708 $ 8,579 $ 88,926 $ 17,242
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(2)Includes
(3)Our results of operations include our variable interest entity, JiHu. The ownership interest of other investors is recorded as a noncontrolling interest. See "Note 11. Joint Venture andEquity Method Investment " to our condensed consolidated financial statements for additional details.
The following table sets forth the components of our condensed consolidated statements of operations as a percentage of total revenue for each of the periods presented:
Three Months Ended October 31, Nine Months Ended October 31,
2022 2021 2022 2021
(as a percentage of total revenue)
Revenue 100 % 100 % 100 % 100 %
Cost of revenue 13 11 12 12
Gross profit 87 89 88 88
Operating expenses:
Sales and marketing 72 76 76 76
Research and development 36 37 37 39
General and administrative 29 25 29 23
Total operating expenses 138 138 142 139
Loss from operations (50) (49) (55) (51)
Interest income 4 - 3 -
Other income (expense), net 2 (15) 8 (12)
Loss before income taxes and loss
from equity method investment (44) (64) (45) (63)
Loss from equity method investment,
net of tax (1) - (1) -
Provision for (benefit from) income
taxes - (1) 1 1
Net loss (45) % (62) % (46) % (63) %
Net loss attributable to
noncontrolling interest (2) % (1) % (2) % (1) %
Net loss attributable to GitLab (43) % (62) % (44) % (63) %
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Comparison of the Three and Nine Months Ended
Revenue
Three Months Ended October 31, Change Nine Months Ended October 31, Change
2022 2021 $ % 2022 2021 $ %
(in thousands, except percentages) (in thousands, except percentages)
Subscription-self-managed and SaaS $ 98,435 $ 59,774 $ 38,661 65 % $ 264,294 $ 156,542 $ 107,752 69 %
License-self-managed and other 14,546 7,026 7,520 107 37,135 18,315 18,820 103
Total revenue $ 112,981 $ 66,800 $ 46,181 69 % $ 301,429 $ 174,857 $ 126,572 72 %
Revenue increased $46.2 million , or 69%, to $113.0 million for the three months
ended October 31, 2022 from $66.8 million for the three months ended October 31,
2021 . Revenue increased $126.6 million , or 72%, to $301.4 million for the nine
months ended October 31, 2022 from $174.9 million for the nine months ended
October 31, 2021 . The increases in both the three and nine months ended October
31, 2022 were primarily due to the ongoing demand for The DevSecOps Platform,
including adding new customers, the expansion within our existing paid
customers, and an increase in our number of customers with $100,000 or greater
in ARR. As of October 31, 2022 and 2021, our expansion is reflected by our
Dollar-Based Net Retention Rate being above 130%. We had 638 customers with ARR
over $100,000 as of October 31, 2022 , increasing from 427 customers with ARR
over $100,000 as of October 31, 2021 .
Revenue attributed to our variable interest entity, JiHu, was $1.3 million and
$0.3 million for the three months ended October 31, 2022 and 2021, respectively,
and $3.4 million and $0.3 million for the nine months ended October 31, 2022 and
2021, respectively. See "Note 11. Joint Venture and Equity Method Investment " to
our condensed consolidated financial statements for additional details.
Cost of Revenue, Gross Profit, and Gross Margin
Three Months Ended October Nine Months Ended October
31, Change 31, Change
2022 2021 $ % 2022 2021 $ %
(in thousands, except percentages) (in thousands, except percentages)
Cost of revenue $ 14,564 $ 7,195 $ 7,369 102 % $ 37,442 $ 20,812 $ 16,630 80 %
Gross profit 98,417 59,605 38,812 65 263,987 154,045 109,942 71
Gross margin 87 % 89 % 88 % 88 %
Cost of revenue increased by $7.4 million , to $14.6 million for the three months
ended October 31, 2022 from $7.2 million for the three months ended October 31,
2021 , primarily due to an increase of $2.1 million in personnel-related
expenses, driven by an increase in our average customer support and professional
services headcount and an increase of $0.9 million in stock-based compensation
expenses (as discussed in the section titled "Stock-Based Compensation Expense"
below). The remaining change was primarily attributable to an increase of $2.6
million in third-party hosting costs, $0.9 million in consulting expenses, and
$0.5 million in amortization of intangible assets. Gross margin decreased by 2%
to 87% for the three months ended October 31, 2022 from 89% for the three months
ended October 31, 2021 .
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Cost of revenue increased by$16.6 million , to$37.4 million for the nine months endedOctober 31, 2022 from$20.8 million for the nine months endedOctober 31, 2021 , primarily due to an increase of$6.2 million in personnel-related expenses, driven by an increase in our average customer support and professional services headcount and an increase of$2.9 million in stock-based compensation expenses (as discussed in the section titled "Stock-Based Compensation Expense" below). The remaining change was primarily attributable to an increase of$5.8 million in third-party hosting costs,$1.5 million in amortization of intangible assets, and$1.4 million in consulting expenses. Gross margin remained at 88% for the nine months endedOctober 31, 2022 compared to the nine months endedOctober 31, 2021 . Cost of revenue attributed to our variable interest entity, JiHu, was$0.5 million and$0.2 million for the three months endedOctober 31, 2022 and 2021, respectively, and$1.2 million and$0.6 million for the nine months endedOctober 31, 2022 and 2021, respectively. See "Note 11. Joint Venture andEquity Method Investment " to our condensed consolidated financial statements for additional details. Sales and Marketing Three Months Ended October 31, Change Nine Months Ended October 31, Change 2022 2021 $ % 2022 2021 $ % (in thousands, except percentages) (in thousands, except percentages) Sales and marketing expenses$ 81,080 $ 50,543 $ 30,537 60 %$ 228,479 $ 133,562 $ 94,917 71 % Sales and marketing expenses increased by$30.5 million , to$81.1 million for the three months endedOctober 31, 2022 from$50.5 million for the three months endedOctober 31, 2021 , primarily due to an increase of$24.6 million in personnel-related expenses, driven by an increase in our average sales and marketing headcount and an increase of$10.3 million in stock-based compensation expenses (as discussed in the section titled "Stock-Based Compensation Expense" below). The remaining change was mainly due to an increase of$1.0 million in marketing events and brand-related expenses, an increase of$0.9 million in software and consulting expenses as a result of our investment activities to increase the effectiveness of our sales motions, to increase our sales capacity, and to acquire more customers. Sales and marketing expenses increased by$94.9 million , to$228.5 million for the nine months endedOctober 31, 2022 from$133.6 million for the nine months endedOctober 31, 2021 , primarily due to an increase of$72.7 million in personnel-related expenses, driven by an increase in our average sales and marketing headcount and an increase of$29.1 million in stock-based compensation expenses (as discussed in the section titled "Stock-Based Compensation Expense" below). The remaining change was mainly due to an increase of$5.5 million in marketing events and brand-related expenses, an increase of$3.9 million in hosting expenses, an increase of$3.0 million in software and consulting expenses as a result of our investment activities to increase the effectiveness of our sales motions, to increase our sales capacity, and to acquire more customers. Sales and marketing expenses attributed to our variable interest entity, JiHu, was$2.0 million and$0.8 million , for the three months endedOctober 31, 2022 and 2021, respectively, and$5.3 million and$1.6 million for the nine months endedOctober 31, 2022 and 2021, respectively. See "Note 11. Joint Venture andEquity Method Investment " to our condensed consolidated financial statements for additional details. 44
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Research and Development
Three Months Ended October 31, Change Nine Months Ended October 31, Change
2022 2021 $ % 2022 2021 $ %
(in thousands, except percentages) (in thousands, except percentages)
Research and development
expenses $ 41,113 $ 24,664 $ 16,449 67 % $ 112,463 $ 68,607 $ 43,856 64 %
Research and development expenses increased by $16.4 million , to $41.1 million
for the three months ended October 31, 2022 from $24.7 million for the three
months ended October 31, 2021 , primarily due to an increase of $14.1 million in
personnel-related expenses, driven by an increase in our average research and
development headcount and an increase of $7.9 million in stock-based
compensation expenses (as discussed in the section titled "Stock-Based
Compensation Expense" below). The remaining change was mainly due to an increase
of $1.1 million in hosting expenses.
Research and development expenses increased by $43.9 million , to $112.5 million
for the nine months ended October 31, 2022 from $68.6 million for the nine
months ended October 31, 2021 , primarily due to an increase of $40.4 million in
personnel-related expenses, driven by an increase in our average research and
development headcount and an increase of $21.8 million in stock-based
compensation expenses (as discussed in the section titled "Stock-Based
Compensation Expense" below). The remaining change was mainly due to an increase
of $1.4 million in hosting expenses.
Research and development expenses attributed to our variable interest entity,
JiHu, was $1.9 million and $0.5 million for the three months ended October 31,
2022 and 2021, respectively, and $4.7 million and $1.4 million for the nine
months ended October 31, 2022 and 2021, respectively. See "Note 11. Joint
Venture and Equity Method Investment " to our condensed consolidated financial
statements for additional details.
General and Administrative
Three Months Ended October 31, Change Nine Months Ended October 31, Change
2022 2021 $ % 2022 2021 $ %
(in thousands, except percentages) (in thousands, except percentages)
General and administrative
expenses $ 33,186 $ 16,939 $ 16,247 96 % $ 88,182 $ 40,276 $ 47,906 119 %
General and administrative expenses increased by $16.2 million , to $33.2 million
for the three months ended October 31, 2022 from $16.9 million for the three
months ended October 31, 2021 , primarily due to an increase of $10.6 million in
personnel-related expenses, mainly attributable to an increase in our average
general and administrative headcount and an increase of $6.0 million in
stock-based compensation expenses (as discussed in the section titled
"Stock-Based Compensation Expense" below). The remaining change was primarily
driven by an increase of $2.0 million in consulting and software expenses to
support our growth and an increase of $1.0 million in insurance expenses due to
becoming a publicly traded company. For the three months ended October 31, 2022 ,
we also recorded $1.1 million in loss attributable to the fair value
remeasurement of acquisition related contingent consideration and $1.0 million
of termination fees related to a company-wide event cancelled due to the
COVID-19 pandemic.
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General and administrative expenses increased by$47.9 million , to$88.2 million for the nine months endedOctober 31, 2022 from$40.3 million for the nine months endedOctober 31, 2021 , primarily due to an increase of$34.1 million in personnel-related expenses, mainly attributable to an increase in our average general and administrative headcount and an increase of$17.9 million in stock-based compensation expenses (as discussed in the section titled "Stock-Based Compensation Expense" below). The remaining change was primarily driven by an increase of$4.7 million in consulting and software expenses to support our growth and an increase of$3.9 million in insurance expenses due to becoming a publicly traded company. For the nine months endedOctober 31, 2022 , we also recorded$3.3 million of termination fees related to company-wide events cancelled due to the COVID-19 pandemic and$1.1 million in loss attributable to the fair value remeasurement of acquisition related contingent consideration. General and administrative expenses attributed to our variable interest entity, JiHu, was$3.1 million and$0.6 million for the three months endedOctober 31, 2022 and 2021, respectively, and$7.4 million and$2.0 million for the nine months endedOctober 31, 2022 and 2021, respectively. See "Note 11. Joint Venture andEquity Method Investment " to our condensed consolidated financial statements for additional details.
Stock-Based Compensation Expense
Three Months Ended October
31, Change Nine Months Ended October 31, Change
2022 2021 $ % 2022 2021 $ %
(in thousands, except percentages) (in thousands, except percentages)
Cost of revenue $ 1,248 $ 331 $ 917 277 % $ 3,623 $ 722 $ 2,901 402 %
Research and development 10,030 2,147 7,883 367 26,405 4,653 21,752 467
Sales and marketing 12,905 2,562 10,343 404 34,807 5,688 29,119 512
General and administrative 9,525 3,539 5,986 169 24,091 6,179 17,912 290
Total stock-based
compensation expense $ 33,708 $ 8,579 $ 25,129 293 % $ 88,926 $ 17,242 $ 71,684 416 %
Stock-based compensation expense increased by $25.1 million , to $33.7 million
for the three months ended October 31, 2022 from $8.6 million for the three
months ended October 31, 2021 , primarily due to a $17.5 million expense from
RSUs we started granting in December 2021 and $5.3 million expense from ESPP
introduced in November 2021 . Stock-based compensation expense for the three
months ended October 31, 2022 also includes $2.5 million attributable to our
variable interest entity, JiHu. See "Note 11. Joint Venture and Equity Method
Investment " to our condensed consolidated financial statements for additional
details.
Stock-based compensation expense increased by $71.7 million , to $88.9 million
for the nine months ended October 31, 2022 from $17.2 million for the nine
months ended October 31, 2021 , primarily due to a $41.8 million expense from
RSUs we started granting in December 2021 and $19.4 million expense from ESPP
introduced in November 2021 . Stock-based compensation expense for the nine
months ended October 31, 2022 also includes $5.5 million attributable to our
variable interest entity, JiHu. See "Note 11. Joint Venture and Equity Method
Investment " to our condensed consolidated financial statements for additional
details.
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Interest Income, and Other Income (Expense), Net
Three Months Ended October 31, Change Nine Months Ended October 31, Change
2022 2021 $ % 2022 2021 $ %
(in thousands, except percentages) (in thousands, except percentages)
Interest income $ 4,657 $ 127 $ 4,530 3567 % $ 8,247 $ 226 $ 8,021 3549 %
Gain from deconsolidation
of Meltano Inc. $ - $ - $ - - % $ 17,798 $ - $ 17,798 100 %
Foreign exchange gains
(losses), net 2,855 (9,831) 12,686 (129) 5,361 (19,703) 25,064 (127)
Other expense, net (194) (378) 184 (49) (550) (1,549) 999 (64)
Total other income
(expense), net $ 2,661 $ (10,209) $ 12,870 (126) % $ 22,609 $ (21,252) $ 43,861 (206) %
For the three and nine months ended October 31, 2022 compared to the three and
nine months ended October 31, 2021 , interest income increased primarily due to
income earned from our cash equivalents and short-term investments as a result
of investing the proceeds from our IPO into marketable securities in fiscal year
2023 as well as higher interest rates during the three and nine months ended
October 31, 2022 compared to the same period last year.
The change in other income (expense), net is primarily due to the recognized
gain of $17.8 million on the deconsolidation and the fair valuation of our
retained interest in Meltano. The remaining change in other income (expense),
net is mainly due to strengthening of the U.S dollar.
Loss from
Three Months Ended October 31, Change Nine Months Ended October 31, Change
2022 2021 $ % 2022 2021 $ %
(in thousands, except percentages) (in thousands, except percentages)
Loss from equity method
investment, net of tax $ (756) $ - $ (756) 100 % $ (1,775) $ - $ (1,775) 100 %
Loss from equity method investment, net of tax consists of our share of losses
from the results of operations of Meltano Inc. , net of tax. Effective April 4,
2022 , due to a loss of control over Meltano, we account for Meltano investment
under the equity method.
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Provision for (Benefit from) Income Taxes
Nine Months Ended October
Three Months Ended October 31, Change 31, Change
2022 2021 $ % 2022 2021 $ %
(in thousands, except percentages) (in thousands, except percentages)
Provision for (benefit
from) income taxes $ 65 $ (875) $ 940 (107) % $ 2,519 $ 1,370 $ 1,149 84 %
Effective tax rate (0.1)% 2.1% (2.2)% (1.9) % (1.3) % (0.6)%
Our effective tax rate decreased by approximately 2.2% during the three months
ended October 31, 2022 as compared to the same period last year. The lower
effective tax rate was primarily due to our foreign and domestic operations and
the establishment of a deferred tax liability relating to the deconsolidation of
a majority-owned entity, Meltano, and simultaneous establishment of the
Company's equity method investment.
Our effective tax rate increased by approximately 0.6% during the nine months
ended October 31, 2022 as compared to the same period last year. The higher
effective tax rate was primarily due to an increase in losses from operations as
compared to the same period last year, for which a benefit is not derived due to
the existence of a valuation allowance on our deferred tax assets, as well as
the recognition of a deferred tax liability relating to the unrealized gain on
the on deconsolidation of a majority-owned entity, Meltano, and simultaneous
establishment of our equity method investment.
Our effective tax rate for the three and nine months ended October 31, 2022 was
lower than the U.S. federal statutory tax rate of 21%, primarily due to the
change in valuation allowance associated with the net operating losses generated
during the year.
Our provision for income taxes is based on our worldwide estimated annualized
effective tax rate, except for jurisdictions for which a loss is expected for
the year and no benefit can be realized for those losses, jurisdictions for
which forecasted pre-tax income or loss cannot be estimated, and the tax effect
of discrete items occurring during the period. The tax expense for jurisdictions
for which a forecast cannot be estimated is based on actual taxes and tax
reserves for the quarter.
Under the provisions of ASC 740, Income Taxes, the determination of our ability
to recognize our deferred tax assets requires an assessment of both negative and
positive evidence when determining our ability to recognize deferred tax assets.
We determined that it was not more likely than not that we could recognize
certain deferred tax assets. Evidence we evaluated included operating results
during the most recent three-year period and future projections, with more
weight given to historical results than expectations of future profitability,
which are inherently uncertain. Certain entities' net losses in recent periods
represented sufficient negative evidence to require a valuation allowance
against its net deferred tax assets. This valuation allowance will be evaluated
periodically and could be reversed partially or totally if business results have
sufficiently improved to support realization of deferred tax assets.
As of October 31, 2022 , unrecognized tax benefits were $5.6 million , of which
$0.8 million would affect the effective tax rate if recognized. We are unable to
reasonably estimate the timing of the long-term payments or the amount by which
the liability will increase or decrease.
It is our policy to classify accrued interest and penalties related to
unrecognized tax benefits in the provision for income taxes. For the three and
nine months ended October 31, 2022 and 2021, we recognized an insignificant
amount of interest and penalties related to unrecognized tax benefits. Accrued
interest and penalties were $0.2 million and $0.1 million as of October 31, 2022
and January 31, 2022 , respectively.
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As ofOctober 31, 2022 , the statutes for ourU.S. federal 2017 through 2021 tax years were open and the results from such tax years remained subject to potential examination in one or more jurisdictions. In addition, inthe United States , any net operating losses or credits that were generated in prior years but not yet fully utilized in a year that is closed under the statute of limitations may also be subject to examination. We are currently under examination inthe Netherlands for tax years 2015 and 2016. We are currently unable to estimate the financial outcome of this examination due to its preliminary status. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. We continue to monitor the progress of ongoing discussions with tax authorities and the effect, if any, of the expected expiration of the statute of limitations in various taxing jurisdictions.
Liquidity and Capital Resources
Since inception, we have financed operations primarily through proceeds received from issuances of equity securities and payments received from our customers.
As ofOctober 31, 2022 andJanuary 31, 2022 , our principal source of liquidity was cash, cash equivalents, and short-term investments of$927.8 million and$934.7 million , respectively, which were held for working capital purposes and strategic investment purposes. As ofOctober 31, 2022 , cash and cash equivalents consist of cash in banks, money markets funds, agency securities and treasuries, while short-term investments mainly consist of treasuries, corporate debt securities and commercial paper. We believe that our existing cash, cash equivalents, and short-term investments will be sufficient to support working capital and capital expenditure requirements for at least the next 12 months. Our future capital requirements will depend on many factors, including our revenue growth rate, the timing and the amount of cash received from customers, the expansion of sales and marketing activities, the timing and extent of spending to support research and development efforts, the price at which we are able to procure third-party cloud infrastructure, expenses associated with our international expansion, the introduction of platform enhancements, and the continuing market adoption of The DevSecOps Platform. In the future, we may enter into arrangements to acquire or invest in complementary businesses, products, and technologies. We may be required to seek additional equity or debt financing. In the event that we require additional financing, we may not be able to raise such financing on terms acceptable to us or at all. If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in continued innovation, we may not be able to compete successfully, which would harm our business, operating results, and financial condition. The following table shows a summary of our cash flows for the periods presented: Nine Months Ended October 31, 2022 2021 (in thousands) Net cash used in operating activities$ (65,688) $ (48,720) Net cash used in investing activities$ (523,888) $ (100,031) Net cash provided by financing activities $ 85,597$ 691,588 Operating Activities Our largest source of operating cash is payments received from our customers. Our primary uses of cash from operating activities are for personnel-related expenses, sales and marketing expenses, third-party cloud infrastructure expenses, and overhead expenses. We have generated negative cash flows from operating activities and have supplemented working capital through net proceeds from the issuance of equity securities. 49
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Cash used in operating activities during the nine months endedOctober 31, 2022 was$65.7 million , primarily consisting of our net loss of$138.6 million , adjusted for non-cash items of$103.0 million (mainly attributable to stock-based compensation expense of$88.9 million ), and net cash outflows of$30.2 million used by changes in our operating assets and liabilities. The main drivers of the changes in operating assets and liabilities were the decrease in accrued compensation and related expenses of$15.2 million , the increase in deferred contract acquisition costs of$33.1 million , the increase in accounts receivable of$22.2 million , partially offset by the increase in deferred revenue of$40.2 million . Cash used in operating activities during the nine months endedOctober 31, 2021 was$48.7 million , primarily consisting of our net loss of$110.8 million , adjusted for non-cash items of$60.7 million (including stock-based compensation expense of$17.2 million , amortization of deferred contract acquisition costs of$23.6 million , and unrealized foreign exchange loss of$19.8 million ) and net cash inflows of$1.4 million used in changes in our operating assets and liabilities. The main drivers of the changes in operating assets and liabilities were the increase in costs deferred related to contract acquisition of$24.6 million and the increase in accounts receivable of$17.4 million , offset by the increase in deferred revenue of$41.5 million .
Investing Activities
Cash used in investing activities during the nine months endedOctober 31, 2022 was$523.9 million , primarily consisting of$509.3 million in purchases of short-term investments, net of maturities,$9.6 million cash outflow as a result of a deconsolidation of a subsidiary, and$5.0 million in purchases of property and equipment.
Cash used in investing activities during the nine months ended
Financing Activities
Cash provided by financing activities during the nine months endedOctober 31, 2022 was$85.6 million , primarily attributable to$61.7 million of contributions received from noncontrolling interests,$17.5 million of proceeds from the issuance of common stock upon stock options exercises, and$9.6 million of proceeds from the issuance of common stock under our employee stock purchase plan, offset by the partial settlement of acquisition related contingent consideration of$3.1 million . Cash provided by financing activities during the nine months endedOctober 31, 2021 was$691.6 million , primarily attributable to$654.6 million in proceeds from the initial public offering, net of underwriting discounts,$26.5 million of contributions received from noncontrolling interests and$14.6 million of proceeds from the issuance of common stock upon stock options exercises.
Contractual Obligations and Commitments
Our contractual commitments relate mainly to third-party non-cancellable hosting infrastructure agreements and subscription arrangements used in the ordinary course of business. There have been no material changes to the contractual obligations with a term of 12 months or longer since the filing of our Annual Report on Form 10-K for the fiscal year endedJanuary 31, 2022 , except for a non-cancelable 3-year hosting infrastructure arrangement for an aggregate consideration of$7.4 million , and a non-cancelable 3-year software subscription arrangement for an aggregate consideration of$2.3 million .
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements have been prepared in conformity withU.S. generally accepted accounting principles, or GAAP. The preparation of the condensed consolidated financial statements in conformity withU.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of 50
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revenue and expenses during the reporting period. We base these estimates on historical and anticipated results, trends, and various other assumptions that it believes are reasonable under the circumstances, including assumptions as to future events. Actual results could differ from those estimates. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, operating results, and cash flows will be affected. For additional information about our critical accounting policies and estimates, see the disclosure included in our Annual Report on Form 10-K for the fiscal year endedJanuary 31, 2022 , which was filed with theSEC onApril 8, 2022 , as well as "Note 2. Basis of Presentation and Summary of Significant Accounting Policies" to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
Recently Issued Accounting Pronouncements
See "Note 2. Basis of Presentation and Summary of Significant Accounting Policies" to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for more information regarding recently issued accounting pronouncements.
JOBS Act Accounting Election
We are an emerging growth company, as defined in the Jumpstart Our Business
Startups Act, or JOBS Act. The JOBS Act provides that an emerging growth company
can take advantage of an extended transition period for complying with new or
revised accounting standards. This provision allows an emerging growth company
to delay the adoption of some accounting standards until those standards would
otherwise apply to private companies. We have elected to use this extended
transition period until the earlier of the date we (i) are no longer an emerging
growth company or (ii) affirmatively and irrevocably opt out of the extended
transition period provided in the JOBS Act. As a result, our financial
statements may not be comparable to companies that comply with new or revised
accounting pronouncements as of public company effective dates.
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