Company Quick10K Filing
Quick10K
Docusign
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$53.50 173 $9,270
10-Q 2019-04-30 Quarter: 2019-04-30
10-K 2019-01-31 Annual: 2019-01-31
10-Q 2018-10-31 Quarter: 2018-10-31
10-Q 2018-07-31 Quarter: 2018-07-31
10-Q 2018-04-30 Quarter: 2018-04-30
8-K 2019-06-17 Shareholder Vote
8-K 2019-06-06 Earnings, Exhibits
8-K 2019-03-14 Earnings, Exhibits
8-K 2018-12-19 Shareholder Rights, Other Events
8-K 2018-12-06 Earnings, Exhibits
8-K 2018-12-05 Officers
8-K 2018-09-13 Enter Agreement, Off-BS Arrangement, Delisting, Exhibits
8-K 2018-09-04 M&A, Earnings, Exhibits
8-K 2018-07-31 Enter Agreement, Exhibits
8-K 2018-07-06 Officers
8-K 2018-06-07 Earnings, Exhibits
8-K 2018-05-01 Amend Bylaw, Exhibits
TIF Tiffany & Co. 12,740
CTL Centurylink 11,840
ACH Aluminum Corp of China 5,770
SHI Sinopec Shanghai Petrochemical 4,690
FNB FNB 3,890
SILC Silicom 241
GMDA Gamida Cell 196
RHNO Rhino Resource Partners 0
IASO IASO BioMed 0
ABVC American Brivision 0
DOCU 2019-04-30
Part I - Financial Information
Item 1. Condensed Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies
Note 2. Revenue and Performance Obligations
Note 3. Fair Value Measurements
Note 4. Property and Equipment, Net
Note 5. Acquisition of Springcm Inc.
Note 6. Goodwill and Intangible Assets, Net
Note 7. Contract Balances
Note 8. Deferred Contract Acquisition and Fulfillment Costs
Note 9. Convertible Senior Notes
Note 10. Leases
Note 11. Commitments and Contingencies
Note 12. Stockholders' Equity
Note 13. Net Loss per Share Attributable To Common Stockholders
Note 14. Income Taxes
Note 15. Geographic Information
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Qualitative and Quantitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 6. Exhibits
EX-31.1 q120exhibit311.htm
EX-31.2 q120exhibit312.htm
EX-32.1 q120exhibit321.htm

Docusign Earnings 2019-04-30

DOCU 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Document
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________________________
FORM 10-Q
______________________________________

(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 2019
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                 to                
Commission File Number: 001-38465
______________________________________
DOCUSIGN, INC.
(Exact name of registrant as specified in its charter)
______________________________________
Delaware
(State or Other Jurisdictions of Incorporation)
 
91-2183967
(I.R.S. Employer Identification Number)
 
 
 
 
221 Main St., Suite 1550
San Francisco, California
(Address of Principal Executive Offices and Zip Code)
 
 
 
 
 
(415) 489-4940
(Registrant’s Telephone Number, Including Area Code)
 
______________________________________
(Former name, former address and formal fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock, par value $0.0001 per share
DOCU
The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (Exchange Act) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x    No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x    No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
¨
Large accelerated filer
¨
Accelerated filer
 
 
 
 
x
Non-accelerated filer
¨
Smaller reporting company
 
 
 
 
x
Emerging growth company
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ¨    No x
The registrant has 173.8 million shares of common stock, par value $0.0001, outstanding at May 31, 2019.



DOCUSIGN, INC.
TABLE OF CONTENTS

 
 
 
 
 
 
 
 
 
 
 
 


2


NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which statements involve substantial risk and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:
our ability to effectively sustain and manage our growth and future expenses, and our ability to achieve and maintain future profitability;
our ability to attract new customers and to maintain and expand our existing customer base;
our ability to scale and update our software suite to respond to customers’ needs and rapid technological change;
the effects of increased competition on our market and our ability to compete effectively;
our ability to expand use cases within existing customers and vertical solutions;
our ability to expand our operations and increase adoption of our software suite internationally;
our ability to strengthen and foster our relationship with developers;
our ability to expand our direct sales force, customer success team and strategic partnerships around the world;
our ability to successfully integrate SpringCM's operations;
our ability to implement our plans, forecasts and other expectations with respect to SpringCM's business;
our ability to realize the anticipated benefits of the acquisition of SpringCM, including the possibility that the expected benefits from the acquisition will not be realized or will not be realized within the expected time period;
our ability to maintain, protect and enhance our brand;
the sufficiency of our cash and cash equivalents to satisfy our liquidity needs;
our failure or the failure of our software suite of services to comply with applicable industry standards, laws, and regulations;
our ability to maintain, protect and enhance our intellectual property;
our ability to successfully defend litigation against us;
our ability to attract large organizations as users;
our ability to maintain our corporate culture;
our ability to offer high-quality customer support;
our ability to hire, retain and motivate qualified personnel;
our ability to identify targets for, execute on and realize the benefits of potential acquisitions;
our ability to estimate the size and potential growth of our target market; and
our ability to maintain proper and effective internal controls.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely upon these statements.

You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations, and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors described in the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. We cannot assure you that the results, events, and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements.

The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which such statements are made. We undertake no obligation to update any forward-looking statements after the date of this

3


Quarterly Report on Form 10-Q or to conform such statements to actual results or revised expectations, except as required by law.

4


PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DOCUSIGN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(in thousands, except per share data)
April 30, 2019
 
January 31, 2019
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
236,476

 
$
517,811

Investments—current
515,648

 
251,203

Restricted cash
167

 
367

Accounts receivable
117,134

 
174,548

Contract assets—current
13,360

 
10,616

Prepaid expense and other current assets
39,341

 
29,976

Total current assets
922,126

 
984,521

Investments—noncurrent
184,683

 
164,220

Property and equipment, net
84,094

 
75,832

Operating lease right-of-use assets
143,361

 

Goodwill
194,775

 
195,225

Intangible assets, net
69,490

 
74,203

Deferred contract acquisition costs—noncurrent
115,924

 
112,583

Other assets—noncurrent
23,947

 
8,833

Total assets
$
1,738,400

 
$
1,615,417

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities
 
 
 
Accounts payable
$
21,436

 
$
19,590

Accrued expenses
28,133

 
21,755

Accrued compensation
57,684

 
77,553

Contract liabilities—current
385,460

 
381,060

Operating lease liabilities—current
16,921

 

Deferred rent—current

 
2,452

Other liabilities—current
12,973

 
13,903

Total current liabilities
522,607

 
516,313

Convertible senior notes, net
445,385

 
438,932

Contract liabilities—noncurrent
7,586

 
7,712

Operating lease liabilities—noncurrent
154,778

 

Deferred rent—noncurrent

 
24,195

Deferred tax liability—noncurrent
4,267

 
4,207

Other liabilities—noncurrent
6,095

 
9,696

Total liabilities
1,140,718

 
1,001,055

Commitments and contingencies (Note 11)

 

Stockholders’ equity
 
 
 
Preferred stock, $0.0001 par value; 10,000 shares authorized, 0 shares issued and outstanding as of April 30, 2019 and January 31, 2019

 

Common stock, $0.0001 par value; 500,000 shares authorized, 173,628 shares outstanding as of April 30, 2019; 500,000 shares authorized, 169,303 shares outstanding as of January 31, 2019
17

 
17

Additional paid-in capital
1,575,471

 
1,545,088

Accumulated other comprehensive loss
(3,258
)
 
(1,965
)
Accumulated deficit
(974,548
)
 
(928,778
)
Total stockholders’ equity
597,682

 
614,362

Total liabilities and stockholders' equity
$
1,738,400

 
$
1,615,417

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

5


DOCUSIGN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (Unaudited)
 
Three Months Ended April 30,
(in thousands, except per share data)
2019
 
2018
Revenue:
 
 
 
Subscription
$
201,458

 
$
148,198

Professional services and other
12,504

 
7,610

Total revenue
213,962

 
155,808

Cost of revenue:
 
 
 
Subscription
33,119

 
32,438

Professional services and other
18,900

 
25,856

Total cost of revenue
52,019

 
58,294

Gross profit
161,943

 
97,514

Operating expenses:
 
 
 
Sales and marketing
129,936

 
191,085

Research and development
37,183

 
70,870

General and administrative
37,261

 
103,117

Total expenses
204,380

 
365,072

Loss from operations
(42,437
)
 
(267,558
)
Interest expense
(7,156
)
 
(193
)
Interest income and other income (expense), net
5,217

 
(2,228
)
Loss before provision for income taxes
(44,376
)
 
(269,979
)
Provision for income taxes
1,346

 
708

Net loss
$
(45,722
)
 
$
(270,687
)
Net loss per share attributable to common stockholders, basic and diluted
$
(0.27
)
 
$
(7.46
)
Weighted-average number of shares used in computing net loss per share attributable to common stockholders, basic and diluted
172,101

 
36,334

 
 
 
 
Other comprehensive loss:
 
 
 
Foreign currency translation losses, net of tax
$
(1,631
)
 
$
(2,328
)
Unrealized gains on investments, net of tax
338

 

Other comprehensive loss
(1,293
)
 
(2,328
)
Comprehensive loss
$
(47,015
)
 
$
(273,015
)
 
 
 
 
Stock-based compensation expense included in costs and expenses:
 
 
 
Cost of revenue—subscription
$
2,282

 
$
9,955

Cost of revenue—professional services
3,440

 
16,045

Sales and marketing
18,102

 
112,481

Research and development
7,317

 
47,268

General and administrative
11,130

 
84,045


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

6


DOCUSIGN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT) (Unaudited)
 
Common Stock
 
Additional Paid-In Capital
 
Accumulated Other Comprehensive Loss
 
Accumulated Deficit
 
Total Stockholders’ Equity
(in thousands)
Shares
 
Amount
 
 
 
 
Balances at January 31, 2019
169,303

 
$
17

 
$
1,545,088

 
$
(1,965
)
 
$
(928,778
)
 
$
614,362

Exercise of stock options
2,634

 

 
32,254

 

 

 
32,254

Settlement of RSUs
2,463

 

 

 

 

 

Tax withholding on RSU settlement
(1,003
)
 

 
(56,137
)
 

 

 
(56,137
)
Employee stock purchase plans
231

 

 
10,563

 

 

 
10,563

Employee stock-based compensation expense

 

 
43,669

 

 

 
43,669

Non-employee stock-based compensation expense

 

 
34

 

 

 
34

Net loss

 

 

 

 
(45,722
)
 
(45,722
)
Cumulative impact of Topic 842 adoption

 

 

 

 
(48
)
 
(48
)
Other comprehensive loss, net

 

 

 
(1,293
)
 

 
(1,293
)
Balances at April 30, 2019
173,628

 
$
17

 
$
1,575,471

 
$
(3,258
)
 
$
(974,548
)
 
$
597,682


 
Redeemable Convertible Preferred Stock
 
 
Common Stock
 
Additional Paid-In Capital
 
Accumulated Other Comprehensive Income
 
Accumulated Deficit
 
Total Stockholders’ Deficit
(in thousands)
Shares
 
Amount
 
 
Shares
 
Amount
 
 
 
 
Balances at January 31, 2018
100,226

 
$
547,501

 
 
35,700

 
$
4

 
$
160,265

 
$
3,403

 
$
(502,320
)
 
$
(338,648
)
Exercise of stock options

 

 
 
1,076

 

 
7,815

 

 

 
7,815

Employee stock-based compensation expense

 

 
 

 

 
269,753

 

 

 
269,753

Non-employee stock-based compensation expense

 

 
 

 

 
720

 

 

 
720

Accretion of preferred stock

 
353

 
 

 

 
(353
)
 

 

 
(353
)
Net loss

 

 
 

 

 

 

 
(270,687
)
 
(270,687
)
Other comprehensive loss, net

 

 
 

 

 

 
(2,328
)
 

 
(2,328
)
Balances at April 30, 2018
100,226

 
$
547,854

 
 
36,776

 
$
4

 
$
438,200

 
$
1,075

 
$
(773,007
)
 
$
(333,728
)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


7


DOCUSIGN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
Three Months Ended April 30,
(in thousands)
2019
 
2018
Cash flows from operating activities:
 
 
 
Net loss
$
(45,722
)
 
$
(270,687
)
Adjustments to reconcile net loss to net cash used in operating activities
 
 
 
Depreciation and amortization
11,971

 
8,600

Amortization of deferred contract acquisition and fulfillment costs
14,260

 
9,246

Amortization of debt discount and transaction costs
6,454

 

Amortization of operating lease right-of-use assets
4,128

 

Stock-based compensation expense
42,271

 
269,794

Deferred income taxes
52

 
(6
)
Other
(1,111
)
 
2,225

Changes in operating assets and liabilities
 
 
 
Accounts receivable
57,414

 
19,622

Contract assets
(2,701
)
 
2,546

Prepaid expenses and other current assets
(7,107
)
 
(6,519
)
Deferred contract acquisition and fulfillment costs
(20,487
)
 
(12,326
)
Other assets
541

 
440

Accounts payable
282

 
(7,218
)
Accrued expenses
6,442

 
3,302

Accrued compensation
(19,869
)
 
(16,947
)
Contract liabilities
4,274

 
12,611

Operating lease liabilities
(3,705
)
 

Other liabilities
(1,732
)
 
309

Net cash provided by operating activities
45,655

 
14,992

Cash flows from investing activities:
 
 
 
Purchases of marketable securities
(375,211
)
 

Maturities of marketable securities
92,457

 

Purchases of strategic investments
(15,500
)
 

Purchases of property and equipment
(15,237
)
 
(6,184
)
Net cash used in investing activities
(313,491
)
 
(6,184
)
Cash flows from financing activities:
 
 
 
Payment of tax withholding obligation on RSU settlement
(56,137
)
 

Proceeds from exercise of stock options
32,254

 
7,815

Proceeds from employee stock purchase plan
10,563

 

Payment of deferred offering costs

 
(2,194
)
Net cash provided by (used in) financing activities
(13,320
)
 
5,621

Effect of foreign exchange on cash, cash equivalents and restricted cash
(379
)
 
(2,069
)
Net increase (decrease) in cash, cash equivalents and restricted cash
(281,535
)
 
12,360

Cash, cash equivalents and restricted cash at beginning of period
518,178

 
257,436

Cash, cash equivalents and restricted cash at end of period
$
236,643

 
$
269,796


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


8


DOCUSIGN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (Unaudited)
 
Three Months Ended April 30,
(in thousands)
2019
 
2018
Supplemental disclosure:
 
 
 
Cash paid for interest
$
1,414

 
$
144

Cash paid for operating lease liabilities
4,729

 

Cash paid for taxes
131

 
1,516

Non-cash investing and financing activities:
 
 
 
Property and equipment in accounts payable and other accrued liabilities
$
3,791

 
$
3,238

Preferred stock accretion

 
353

Deferred offering costs accrued and unpaid

 
1,173

Operating lease right-of-use assets exchanged for lease obligations
53,653

 

Derecognition of build-to-suit lease
2,479

 


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

9


DOCUSIGN, INC.
Index for Notes to the Condensed Consolidated Financial Statements



10



DOCUSIGN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1.    Summary of Significant Accounting Policies

Organization and Description of Business

DocuSign, Inc. (“we,” “our” or “us”) was incorporated in the State of Washington in April 2003. We merged with and into DocuSign, Inc., a Delaware corporation, in March 2015.

We provide a platform that enables businesses of all sizes to digitally prepare, execute and act on agreements, thereby simplifying and accelerating the process of doing business.

Basis of Presentation and Principles of Consolidation

Our condensed consolidated financial statements include the accounts of DocuSign, Inc. and our wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
    
Our condensed consolidated financial statements have been prepared in accordance with United States ("U.S.") generally accepted accounting principles (“GAAP”) for interim financial information. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the applicable rules and regulations of the Securities and Exchange Commission (“SEC”). Therefore, these unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our 2019 Annual Report on Form 10-K.

Our condensed consolidated financial statements are unaudited and have been prepared on a basis consistent with that used to prepare the audited annual consolidated financial statements and, in our opinion, include all adjustments of a normal recurring nature necessary for the fair statement of our financial position, results of operations and cash flows. Our condensed consolidated balance sheet as of January 31, 2019 was derived from audited financial statements but does not include all disclosures required by GAAP. The results of operations for the three months ended April 30, 2019 are not necessarily indicative of the results to be expected for the year ending January 31, 2020.

Our fiscal year ends on January 31. References to fiscal 2020, for example, are to the fiscal year ending January 31, 2020.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Significant items subject to such estimates and assumptions include those related to the allocation of revenue between recognized and deferred amounts, allowance for bad debts, goodwill, intangible assets, deferred contract acquisition costs, customer benefit period, fair value of financial instruments, valuation of stock-based compensation, valuation of common stock, fair value of the liability and equity components of the convertible notes, whether an arrangement is or contains a lease, the discount rate used for operating leases, and the valuation allowance for deferred income taxes.

Significant Accounting Policies

Other than described below, there have been no changes to our significant accounting policies described in our 2019 Annual Report on Form 10-K that have had a material impact on our consolidated financial statements and related notes.

Leases

Leases arise from contractual obligations that convey the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. We determine whether an arrangement is or contains a lease at inception, based on whether there is an identified asset and whether we control the use of the identified asset throughout the period of use. At lease commencement date, we determine lease classification between finance and operating, allocate the

11



consideration to the lease and nonlease components and recognize a right-of-use asset and corresponding lease liability for each lease component. A right-of-use asset represents our right to use an underlying asset and a lease liability represents our obligation to make payments during the lease term.

The lease liability is initially measured as the present value of the remaining lease payments over the lease term. The discount rate used to determine the present value is our incremental borrowing rate unless the interest rate implicit in the lease is readily determinable. We estimate our incremental borrowing rate based on the information available at lease commencement date for borrowings with a similar term. The right-of-use asset is initially measured as the present value of the lease payments, adjusted for initial direct costs, prepaid lease payments to lessors and lease incentives. Our operating lease right-of-use assets and liabilities recognized at February 1, 2019, the adoption date, were based on the present value of lease payments over the remaining lease term as of that date, using the incremental borrowing rate as of that date.

We elected the practical expedients to not recognize right-of-use assets and liabilities for leases with a term of less than twelve months and to not separate nonlease components from the associated lease components for our office leases and certain other asset classes. The total consideration includes fixed payments and contractual escalation provisions. We are responsible for maintenance, insurance, property taxes and other variable payments, which are expensed as incurred. Our leases include options to renew or terminate. We include the option to renew or terminate in our determination of the lease term when the option is deemed to be reasonably assured to be exercised. We account for changes in the expected lease term as a modification of the original contract.

Operating leases are classified in "Operating lease right-of-use assets", "Operating lease liabilities—current", and "Operating lease liabilities—noncurrent" on our condensed consolidated balance sheets. Operating lease expense is recognized on a straight-line basis over the expected lease term and included in "Loss from operations" in our condensed consolidated statements of operations and comprehensive loss.

Strategic Investments

Our strategic investments consist of non-marketable equity investments in privately-held companies in which we do not have a controlling interest or significant influence. We have elected to apply the measurement alternative for equity investments that do not have readily determinable fair values, measuring them at cost, less any impairment, plus or minus adjustments resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. An impairment loss is recorded when event or circumstance indicates a decline in value has occurred.

In March 2019, we purchased equity investments in privately-held companies totaling $15.5 million that were classified in "Other assets—noncurrent" on our condensed consolidated balance sheets. As there have been no material observable price changes, we have not recorded any adjustments resulting from observable price changes for identical or similar investments or impairment charges for any of our equity investments in privately-held companies in the three months ended April 30, 2019. We had no such investments as of January 31, 2019.

Recently Adopted Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (the "FASB") issued accounting standards update ("ASU") No. 2016-02, Leases (Topic 842), which supersedes current guidance related to accounting for leases. This guidance is intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. In July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases. The ASU makes 16 technical corrections to the new leases standard and other accounting topics, alleviating unintended consequences from applying the new standard. It does not make any substantive changes to the core provisions or principles of the new standard. In July 2018, the FASB also issued ASU No. 2018-11, Leases (Topic 842). The ASU provides (1) an optional transition method that entities can use when adopting the standard and (2) a practical expedient that permits lessors to not separate nonlease components from the associated lease component if certain conditions are met.


12



The standard is effective for public entities for annual and interim reporting periods beginning after December 15, 2018. We adopted the new standard as of February 1, 2019, and recognized a cumulative-effect adjustment to the opening balance of accumulated deficit as of the adoption date. We elected the optional transition approach to not apply Topic 842 in the comparative periods presented. We elected the practical expedient to use hindsight when determining the lease term and the package of practical expedients to not reassess whether existing contracts contain leases, the lease classification for existing leases and whether existing initial direct costs meet the new definition. The adoption of Topic 842 resulted in the recognition of total right-of-use assets of $93.9 million and total lease liabilities of $121.8 million as of adoption date, with the most significant impact related to our office space leases. Additionally, we derecognized $26.6 million in deferred rent and $2.5 million related to the build-to-suit asset and liability upon adoption of this standard pursuant to the transition guidance provided for build-to-suit leases. The adoption of Topic 842 did not have a material impact to the consolidated statements of operations or statements of cash flows.

In February 2018, the FASB issued ASU No. 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220), which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act ("TCJA"). As the amendment only relates to the reclassification of the income tax effects of the TCJA, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. The standard is effective for annual and interim reporting periods beginning after December 15, 2018 for all entities. The amendment is to be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the TCJA is recognized. Early adoption is permitted. The adoption of the standard did not have an impact on our consolidated financial statements.

In June 2018, the FASB issued ASU No. 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The ASU aligns the measurement and classification guidance for share-based payments to nonemployees with the guidance for share-based payments to employees, with certain exceptions. Under the guidance, the measurement of equity-classified nonemployee awards will be fixed at the grant date. The ASU is effective for public business entities in annual periods beginning after December 15, 2018, and interim periods within those years. Early adoption is permitted, including in an interim period, but not before an entity adopts the topic 606 revenue guidance. The adoption of the standard did not have a material impact on our consolidated financial statements.

In July 2018, the FASB issued ASU No. 2018-09, Codification Improvements, which clarifies, corrects errors in and makes improvements to several topics in the FASB Accounting Standard Codification. The transition and effective date guidance is based on the facts and circumstances of each amendment. Some of the amendments do not require transition guidance and were effective upon issuance of the ASU. Amendments that do have transition guidance are effective for public business entities for annual periods beginning after December 15, 2018. The adoption of the standard did not have a material impact on our consolidated financial statements.

Other Recent Accounting Pronouncements

In June 2016, the FASB issued ASU No. 2016-13, Financial InstrumentsCredit Losses (Topic 326). ASU 2016-13 changes the impairment model for most financial assets and will require the use of an expected loss model in place of the currently used incurred loss method. Under this model, entities will be required to estimate the lifetime expected credit loss on such instruments and record an allowance to offset the amortized cost basis of the financial asset, resulting in a net presentation of the amount expected to be collected on the financial asset. The update to the standard is effective for interim and annual periods beginning after December 15, 2019. We are evaluating the impact of the adoption of the ASU on our consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820), which modifies, removes and adds certain disclosure requirements on fair value measurements based on the FASB Concepts Statement, Conceptual Framework for Financial Reporting—Chapter 8: Notes to Financial Statements. The ASU is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted. We are in the process of evaluating the impact of the adoption of the ASU on our consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40), which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a

13



service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this ASU. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. We are in the process of evaluating the impact of the adoption of the ASU on our consolidated financial statements.

Note 2.    Revenue and Performance Obligations

Subscription revenue is recognized over time and accounted for approximately 94% and 95% of our revenue for the three months ended April 30, 2019 and 2018.
    
The typical subscription term is one to three years. Most of our subscription contracts are noncancelable over the contractual term. Customers typically have the right to terminate their contracts for cause, if we fail to perform. As of April 30, 2019, the aggregate amount of the transaction price allocated to remaining performance obligations was $574.0 million, which consists of both billed and unbilled consideration that we expect to recognize as subscription revenue. We expect to recognize 53% of the transaction price in the twelve months following April 30, 2019, in our consolidated statement of operations and comprehensive loss with the remainder recognized thereafter.

We elected to apply the practical expedient to not disclose the transaction price allocated to remaining performance obligations for contracts with a contract term of one year or less. In addition, we do not disclose the transaction price related to revenue from professional services, training services and web revenue as revenue from these sources is recognized within one year.

Note 3.    Fair Value Measurements
We carry certain assets and liabilities at fair value. Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The three-tier hierarchy for inputs used in measuring fair value, which prioritizes the inputs based on the observability as of the measurement date, is as follows:
Level 1
Quoted prices in active markets for identical assets or liabilities;
Level 2
Observable inputs other than the quoted prices in active markets for identical assets and liabilities; and
Level 3
Unobservable inputs for which there is little or no market data, which require us to develop assumptions of what market participants would use in pricing the asset or liability.


14



The following table summarizes our financial assets that are measured at fair value on a recurring basis during the period:
 
April 30, 2019
(in thousands)
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
Level 1:
 
 
 
 
 
 
 
Cash equivalents
 
 
 
 
 
 
 
Money market funds
$
91,330

 
$

 
$

 
$
91,330

Level 2:
 
 
 
 
 
 
 
Cash equivalents
 
 
 
 
 
 
 
Commercial paper
4,998

 

 

 
4,998

Available-for-sale securities
 
 
 
 
 
 
 
Commercial paper
62,695

 
31

 
(8
)
 
62,718

Corporate notes and bonds
334,912

 
582

 
(34
)
 
335,460

U.S. Treasury securities
232,152

 
32

 
(15
)
 
232,169

U.S. government agency securities
69,977

 
12

 
(5
)
 
69,984

Level 2 total
704,734

 
657

 
(62
)
 
705,329

Total
$
796,064

 
$
657

 
$
(62
)
 
$
796,659

 
 
 
 
 
 
 
 
 
January 31, 2019
(in thousands)
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
Level 1:
 
 
 
 
 
 
 
Cash equivalents
 
 
 
 
 
 
 
Money market funds
$
350,063

 
$

 
$

 
$
350,063

Level 2:
 
 
 
 
 
 
 
Cash equivalents
 
 
 
 
 
 
 
Commercial paper
76,828

 

 
(11
)
 
76,817

Corporate notes and bonds
2,998

 

 

 
2,998

U.S. government agency securities
6,491

 

 

 
6,491

Available-for-sale securities
 
 
 
 
 
 
 
Commercial paper
86,655

 
4

 
(21
)
 
86,638

Corporate notes and bonds
287,496

 
389

 
(105
)
 
287,780

U.S. Treasury securities
4,982

 

 
(1
)
 
4,981

U.S. government agency securities
36,021

 
7

 
(4
)
 
36,024

Level 2 total
501,471

 
400

 
(142
)
 
501,729

Total
$
851,534

 
$
400

 
$
(142
)
 
$
851,792



Money market funds consist of cash equivalents with original maturities of three months or less at the date of purchase. We use quoted prices in active markets for identical assets or liabilities to determine the fair value of our Level 1 investments in money market funds. The fair value of our Level 2 investments is determined using pricing based on quoted market prices or alternative market observable inputs.

The fair value of our available-for-sale marketable securities as of April 30, 2019, by remaining contractual maturities, were as follows (in thousands):
Due in one year or less
$
515,648

Due in one to two years
184,683

 
$
700,331



15



As of April 30, 2019, we had a total of 155 available-for-sale securities, none of which were considered to be other-than-temporarily impaired.

Convertible Senior Notes

As of April 30, 2019, the estimated fair value of our 0.5% Convertible Senior Notes with aggregate principal amount of $575.0 million was $615.4 million. We estimated the fair value based on the quoted market prices in an inactive market on the last trading day of the reporting period (Level 2). These Convertible Senior Notes are recorded at face value less unamortized debt discount and transaction costs as "Convertible senior notes, net" on our consolidated balance sheets. Refer to Note 9 for further information.

Note 4.    Property and Equipment, Net

Property and equipment consisted of the following:
(in thousands)
April 30, 2019
 
January 31, 2019
Computer and network equipment
$
55,107

 
$
55,233

Software, including capitalized software development costs
30,477

 
27,959

Furniture and office equipment
11,587

 
9,511

Leasehold improvements
43,477

 
41,464

 
140,648

 
134,167

Less: Accumulated depreciation
(70,448
)
 
(66,479
)
 
70,200

 
67,688

Work in progress
13,894

 
8,144

 
$
84,094

 
$
75,832



Depreciation expense associated with property and equipment was $7.2 million and $6.2 million for the three months ended April 30, 2019 and 2018.

As of January 31, 2019, leasehold improvements include $2.5 million related to the fair value of the Israel leased space that was recorded under the build-to-suit lease guidance. Upon adoption of Topic 842 on February 1, 2019, we derecognized the build-to-suit asset and recognized an operating right-of-use asset for the related lease within the condensed consolidated balance sheet as of April 30, 2019. Refer to Note 1 for additional information.

Note 5. Acquisition of SpringCM Inc.

On September 4, 2018, we completed the acquisition of SpringCM Inc. ("SpringCM"), a cloud-based document generation and contract lifecycle management software company based in Chicago, Illinois. With the addition of SpringCM's capabilities in document generation, redlining, advanced document management and end-to-end agreement workflow, the deal further accelerates the broadening of our solution beyond e-signature to the rest of the agreement process—from preparing to signing, acting-on and managing agreements. Under the terms of the agreement, we acquired SpringCM for approximately $218.8 million in cash, excluding cash acquired, working capital and transaction cost adjustments. Of the cash paid at closing, $8.2 million will be held in escrow for an 18-month period after closing to secure our indemnification rights under the Merger Agreement.

Additionally, we granted certain continuing employees of SpringCM restricted stock units ("RSUs") with a service and performance conditions covering up to 0.5 million shares that will be accounted for as a post-acquisition compensation expense over the vesting period. The performance-based condition will be satisfied upon SpringCM meeting certain revenue targets. As of April 30, 2019, the performance-based condition was not considered probable.

We accounted for the transaction as a business combination using the acquisition method of accounting. We allocated the purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed based on their respective estimated fair values on the acquisition date. Fair values were determined using the valuation performed by management. Excess purchase price consideration was recorded as goodwill and is primarily attributable to the assembled workforce and expanded market opportunities when integrating SpringCM’s capabilities in document generation, redlining, advanced document management and end-to-end agreement workflow with our other offerings. 

We engaged third party valuation specialists to aid our analysis of the fair value of the acquired intangibles. All estimates, key assumptions, and forecasts were either provided by or reviewed by us. While we chose to utilize a third-party valuation specialist for assistance, the fair value analysis and related valuations reflect the conclusions of management and not those of any third party.

The fair values of the assets acquired and liabilities assumed were determined using the market, income and cost approaches. The purchase price allocation was prepared on a preliminary basis and is subject to further adjustments as additional information becomes available concerning the fair value of the assets acquired and liabilities assumed. Any adjustments to the purchase price allocation will be made as soon as practicable but no later than one year from the acquisition date.

The following table summarizes the acquisition date fair values of assets acquired and liabilities assumed at the date of acquisition:
(in thousands)
September 4, 2018
Cash and cash equivalents
$
6,950

Accounts receivable and other assets
10,542

Property and equipment
6,108

Goodwill
159,097

Intangible assets
73,000

Contract liabilities
(9,973
)
Other liabilities
(12,948
)
Deferred tax liability
(7,047
)
 
$
225,729



None of the goodwill recognized upon acquisition is deductible for U.S. federal income tax purposes.

The estimated useful lives, primarily based on the expected period of benefit to us, and fair values of the identifiable intangible assets at acquisition date were as follows:
(in thousands, except years)
Estimated Fair Value
 
Expected Useful Life
Existing technology
$
11,900

 
3 years
Customer relationships—subscription
54,200

 
9 years
Backlog—subscription
6,400

 
2 years
Tradenames / trademarks
500

 
1 year
Total preliminary intangible assets
$
73,000

 
 


In the year ended January 31, 2019, we incurred acquisition costs of $1.8 million. These costs included legal, accounting fees and other costs directly related to the acquisition and are classified within operating expenses in our condensed consolidated statements of operations.

The following unaudited pro forma information has been prepared for illustrative purposes only and assumes the acquisition occurred on February 1, 2017. It includes pro forma adjustments related to the amortization of acquired intangible assets, stock-based compensation expense, professional services revenue and contract acquisitions costs adjustments under the new revenue recognition standard, and contract liabilities fair value adjustment. The unaudited pro forma results have been prepared based on estimates and assumptions, which we believe are reasonable, however, they are not necessarily indicative of the consolidated results of operations had the acquisition occurred on February 1, 2017, or of future results of operations:
(in thousands, except per share data)
April 30, 2018
Revenue
$
162,104

Net loss
(280,642
)
Net loss per share attributable to common stockholders, basic and diluted
(7.72
)



16



Note 6.    Goodwill and Intangible Assets, Net

The changes in the carrying amount of goodwill for the three months ended April 30, 2019 were as follows (in thousands):
Balance at January 31, 2019
$
195,225

Cumulative translation adjustment
(450
)
Balance at April 30, 2019
$
194,775



Intangible assets consisted of the following:
 
 
 
As of April 30, 2019
 
As of January 31, 2019
(in thousands)
Weighted-average Remaining Useful Life (Years)
 
Estimated Fair Value
 
Accumulated Amortization
 
Acquisition-related Intangibles, Net
 
Estimated Fair Value
 
Accumulated Amortization
 
Acquisition-related Intangibles, Net
Existing technology
2.4
 
$
31,594

 
$
(22,053
)
 
$
9,541

 
$
31,594

 
$
(20,747
)
 
$
10,847

Tradenames / trademarks
0.7
 
2,419

 
(2,048
)
 
371

 
2,419

 
(1,858
)
 
561

Customer contracts & related relationships
8.1
 
65,782

 
(13,185
)
 
52,597

 
65,782

 
(11,168
)
 
54,614

Certifications
1.3
 
6,917

 
(5,191
)
 
1,726

 
6,917

 
(4,846
)
 
2,071

Maintenance contracts & related relationships
1.1
 
1,498

 
(1,179
)
 
319

 
1,498

 
(1,104
)
 
394

Backlog—Subscription
1.4
 
6,400

 
(2,104
)
 
4,296

 
6,400

 
(1,304
)
 
5,096

 
6.6
 
$
114,610

 
$
(45,760
)
 
68,850

 
$
114,610

 
$
(41,027
)
 
73,583

Cumulative translation adjustment
 
 
 
 
 
 
640

 
 
 
 
 
620

Total
 
 
 
 
 
 
$
69,490

 
 
 
 
 
$
74,203



Amortization of finite-lived intangible assets for the three months ended April 30, 2019 and 2018 was as follows:
 
Three Months Ended April 30,
(in thousands)
2019
 
2018
Cost of subscription revenue
$
1,627

 
$
1,668

Sales and marketing
3,106

 
765

Total
$
4,733

 
$
2,433



As of April 30, 2019, future amortization of finite-lived intangibles that will be recorded in cost of revenue and operating expenses is estimated as follows, excluding cumulative translation adjustment (in thousands):
Fiscal 2020, remainder
$
12,984

Fiscal 2021
13,818

Fiscal 2022
8,370

Fiscal 2023
6,023

Fiscal 2024
6,023

Thereafter
21,632

Total
$
68,850




17



Note 7.    Contract Balances

Contract assets represent amounts for which we have recognized revenue, pursuant to our revenue recognition policy, for contracts that have not yet been invoiced to our customers where there is a remaining performance obligation, typically for multi-year arrangements. Total contract assets were $14.6 million and $11.9 million as of April 30, 2019 and January 31, 2019, of which $1.3 million was noncurrent and included within "Other assets—noncurrent" on our consolidated balance sheets as of both periods. The change in contract assets reflects the difference in timing between our satisfaction of remaining performance obligations and our contractual right to bill our customers.

Contract liabilities consist of deferred revenue and include payments received in advance of performance under the contract. Such amounts are generally recognized as revenue over the contractual period. For the three months ended April 30, 2019 and 2018, we recognized revenue of $157.0 million and $112.0 million that was included in the corresponding contract liability balance at the beginning of the periods presented.

We receive payments from customers based upon contractual billing schedules. We record accounts receivable when the right to consideration becomes unconditional. Payment terms on invoiced amounts are typically 30 days.

Note 8.    Deferred Contract Acquisition and Fulfillment Costs

The following table represents a rollforward of our deferred contract acquisition costs:
 
Three Months Ended April 30,
(in thousands)
2019
 
2018
Beginning balance
$
115,985

 
$
77,344

Additions to deferred contract acquisition costs
17,401

 
11,969

Amortization of deferred contract acquisition costs
(13,150
)
 
(8,788
)
Cumulative translation adjustment
(1,103
)
 

Ending balance
$
119,133

 
$
80,525

 
 
 
 
Deferred contract acquisition costs, current
$
3,209

 
$
2,124

Deferred contract acquisitions costs, noncurrent
115,924

 
78,401

Total
$
119,133

 
$
80,525


The following table represents our contract fulfillment costs, which include third-party service fees:
 
Three Months Ended April 30,
(in thousands)
2019
 
2018
Beginning balance
$
3,432

 
$
3,316

Additions to deferred contract fulfillment costs
3,086

 
357

Amortization of deferred contract fulfillment costs
(1,110
)
 
(458
)
Ending balance
$
5,408

 
$
3,215

 
 
 
 
Deferred contract fulfillment costs, current
$
2,493

 
$
1,188

Deferred contract fulfillment costs, noncurrent
2,915

 
2,027

Total
$
5,408

 
$
3,215



Current deferred contract acquisition and fulfillment costs are included in "Prepaid expense and other current assets" and noncurrent costs are included in "Other assets—noncurrent" on our consolidated balance sheets.


18



Note 9.    Convertible Senior Notes

In September 2018, we issued $575.0 million aggregate principal amount of 0.5% Convertible Senior Notes due in 2023 (the Notes), including the initial purchasers’ exercise in full of their option to purchase an additional $75.0 million principal amount of the Notes, in a private placement to qualified institutional buyers in an offering exempt from registration under the Securities Act. The net proceeds from the issuance of the Notes were $560.8 million after deducting the initial purchasers’ discounts and transaction costs.

The Notes are governed by an indenture (the “Indenture”) between us, as the issuer, and U.S. Bank National Association, as trustee. The Notes are senior unsecured obligations and rank senior in right of payment to any of our indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment to any of our unsecured indebtedness then existing and future liabilities that are not so subordinated; effectively junior in right of payment to any of our secured indebtedness, to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities (including trade payables) of our subsidiaries. The Indenture does not contain any financial covenants or restrictions on the payments of dividends, the incurrence of indebtedness, or the issuance or repurchase of securities by us or any of our subsidiaries. The Notes mature on September 15, 2023 unless earlier repurchased or redeemed by us or earlier converted in accordance with their terms prior to the maturity date. Interest is payable semi-annually in arrears on March 15 and September 15 of each year, beginning on March 15, 2019.

The Notes have an initial conversion rate of 13.9860 shares of our common stock per $1,000 principal amount of Notes, which is equal to an initial conversion price of approximately $71.50 per share of our common stock and is subject to adjustment in some events. Following certain corporate events that occur prior to the maturity date or following our issuance of a notice of redemption, we will increase the conversion rate for a holder who elects to convert its Notes in connection with such corporate event or during the related redemption period in certain circumstances. Additionally, upon the occurrence of a corporate event that constitutes a “fundamental change” per the Indenture, holders of the Notes may require us to repurchase for cash all or a portion of their Notes at a purchase price equal to 100% of the principal amount of the Notes plus accrued and unpaid interest.

On or after June 15, 2023, until the close of business on September 13, 2023, holders may convert all or any portion of their Notes at any time regardless of whether the conditions set forth below have been met. Upon conversion, holders will receive cash, shares of our common stock or a combination of cash and shares of our common stock, at our election.

Holders of the Notes may convert all or any portion of their Notes at any time prior to the close of business on June 14, 2023, in integral multiples of $1,000 principal amount, only under the following circumstances:
During any fiscal quarter commencing after the fiscal quarter ending on January 31, 2019 (and only during such fiscal quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price on each applicable trading day;
During the 5-business day period after any 10 consecutive trading day period (the “measurement period”) in which the trading price as defined in the Indenture per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day;
If we call any or all of the notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or
Upon the occurrence of specified corporate events described in the Indenture.

We may redeem for cash or shares all or any portion of the Notes, at our option, at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest, beginning on or after September 20, 2021 if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price on each applicable trading day.

As of April 30, 2019, the conditions allowing holders of the Notes to convert have not been met and therefore the Notes are not yet convertible.

We account for the Notes as separate liability and equity components. We determined the carrying amount of the liability component as the present value of its cash flows using a discount rate of 6% based on comparable convertible transactions for similar companies. The carrying amount of the equity component representing the conversion option was $134.7 million and

19



was calculated by deducting the carrying value of the liability component from the principal amount of the Notes as a whole. This difference represents a debt discount that is amortized to interest expense over the term of the Notes using the effective interest rate method. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.

We allocate transaction costs related to the issuance of the Notes to the liability and equity components using the same proportions as the initial carrying value of the Notes. Transaction costs attributable to the liability component were $10.9 million and are being amortized to interest expense using the effective interest method over the term of the Notes. Transaction costs attributable to the equity component were $3.3 million and are netted with the equity component of the Notes in stockholders’ equity.

The net carrying value of the liability component of the Notes was as follows:
(in thousands)
April 30, 2019
Principal
$
575,000

Less: unamortized debt discount
(119,903
)
Less: unamortized transaction costs
(9,712
)
Net carrying amount
$
445,385


The net carrying amount of the equity component of the Notes was as follows:
(in thousands)
April 30, 2019
Proceeds allocated to the conversion option (debt discount)
$
134,667

Less: transaction costs
(3,336
)
Net carrying amount
$
131,331


The interest expense recognized related to the Notes was as follows:
(in thousands)
Three Months Ended April 30, 2019
Contractual interest expense
$
710

Amortization of debt discount
484

Amortization of transaction costs
5,970

Total
$
7,164



Capped Calls

In connection with the offering of the Notes, we entered into privately-negotiated capped call transactions ("Capped Calls") with certain counterparties. The Capped Calls each have an initial strike price of approximately $71.50 per share, subject to certain adjustments, which corresponds to the initial conversion price of the Notes. The Capped Calls have initial cap prices of $110.00 per share, subject to certain adjustments. The Capped Calls cover, subject to anti-dilution adjustments, approximately 8.0 million shares of our common stock. The Capped Calls are generally intended to reduce or offset the potential dilution to our common stock upon any conversion of the Notes with such reduction or offset, as the case may be, subject to a cap based on the cap price. As the Capped Call transactions are considered indexed to our own stock and are considered equity classified, they are recorded in stockholders’ equity and are not accounted for as derivatives. The cost of $67.6 million incurred in connection with the Capped Calls was recorded as a reduction to additional paid-in capital.


20



Impact on Earnings Per Share

The Notes will not have an impact on our diluted earnings per share until the average market price of our common stock exceeds the cap price of $110.00 per share, as we intend and have the ability to settle the principal amount of the Notes in cash upon conversion. We are required under the treasury stock method to compute the potentially dilutive shares of common stock related to the Notes for periods we report net income. However, upon conversion, there will be no economic dilution from the Notes until the average market price of our common stock exceeds the cap price of $110.00 per share, as exercise of the Capped Calls offsets any dilution from the Notes from the conversion price up to the cap price. Capped Calls are excluded from the calculation of diluted earnings per share, as they would be antidilutive under the treasury stock method.

Note 10. Leases

We lease office space and equipment under non-cancelable operating lease agreements that expire at various dates through February 2032. As of April 30, 2019, we have no finance leases.
    
The following table is a summary of our operating lease costs for the three months ended April 30, 2019, (in thousands, except years and rates):
 
Three Months Ended April 30, 2019
Operating lease cost
$
5,706

Short-term lease cost
269

Variable lease cost and other, net
49

Total lease cost
$
6,024

Weighted average remaining term (years)
8.3

Weighted average discount rate
4.4
%


Future lease payments as of April 30, 2019 were as follows (in thousands):
Fiscal 2020, remainder
$
16,872

Fiscal 2021
26,319

Fiscal 2022
27,285

Fiscal 2023
27,724

Fiscal 2024
27,834

Thereafter
79,580

Total undiscounted cash flows
$
205,614

Less imputed interest
(33,915
)
Present value of lease liabilities
$
171,699



The future minimum annual lease payments as of January 31, 2019, related to the outstanding lease agreements were as follows (in thousands):
Fiscal 2020
$
22,198

Fiscal 2021
22,617

Fiscal 2022
22,556

Fiscal 2023
23,173

Fiscal 2024
23,373

Thereafter
34,634

Total minimum lease payments
$
148,551




21



Note 11.    Commitments and Contingencies

As of April 30, 2019, we had unused letters of credit outstanding associated with our various operating leases totaling $9.7 million.

We have entered into certain noncancelable contractual arrangements that require future purchases of goods and services. These arrangements primarily relate to cloud infrastructure support and sales and marketing activities. As of April 30, 2019, our noncancelable contractual obligations with a remaining term of more than one year were as follows (in thousands):

Fiscal 2020, remainder
$
6,142

Fiscal 2021
10,987

Fiscal 2022
9,379

Fiscal 2023
898

Fiscal 2024
943

Thereafter
4,555

Total
$
32,904