Company Quick10K Filing
PagerDuty
Price28.24 EPS-1
Shares76 P/E-54
MCap2,146 P/FCF-1,087
Net Debt-176 EBIT-39
TEV1,970 TEV/EBIT-50
TTM 2019-10-31, in MM, except price, ratios
10-Q 2020-10-31 Filed 2020-12-04
10-Q 2020-07-31 Filed 2020-09-03
10-Q 2020-04-30 Filed 2020-06-05
10-K 2020-01-31 Filed 2020-03-19
10-Q 2019-10-31 Filed 2019-12-06
10-Q 2019-07-31 Filed 2019-09-06
10-Q 2019-04-30 Filed 2019-06-07
S-1 2019-03-15 Public Filing
8-K 2020-10-01
8-K 2020-09-20
8-K 2020-09-02
8-K 2020-06-22
8-K 2020-06-16
8-K 2020-06-04
8-K 2020-03-18
8-K 2019-12-11
8-K 2019-12-05
8-K 2019-09-18
8-K 2019-09-05
8-K 2019-06-06
8-K 2019-04-15

PD 10Q Quarterly Report

Part I - Financial Information
Part II - Other Information
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Securities and Use of Proceeds
Item 6. Exhibits
EX-31.1 pagerdutyq22019ex311.htm
EX-31.2 pagerdutyq22019ex312.htm
EX-32.1 pagerdutyq22019ex321.htm

PagerDuty Earnings 2019-07-31

Balance SheetIncome StatementCash Flow
0.50.40.30.20.10.02018201820192020
Assets, Equity
0.10.10.0-0.0-0.1-0.12018201820192020
Rev, G Profit, Net Income
0.30.20.10.0-0.1-0.22018201820192020
Ops, Inv, Fin

Document
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________
FORM 10-Q
_________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 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: 001-38856
PAGERDUTY, INC.
(Exact name of registrant as specified in its charter)
_________________________
Delaware
 
27-2793871
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
600 Townsend St., Suite 200
San Francisco, CA 94103
(844) 800-3889
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
_________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading symbol(s)
 
Name of each exchange on which registered
Common Stock, $0.000005 par value
 
PD
 
New York Stock Exchange
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 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  o
Indicate by check mark whether the registrant has submitted electronically on its corporate Web site every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
 
Accelerated filer
o
Non-accelerated filer
x
 
Smaller reporting company
 
 
 
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 7(a)(2)(B) of the Securities Act.
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 total number of shares of common stock outstanding as of August 30, 2019, was 76,285,543.




PAGERDUTY, INC.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1
 
 
 
 
 
Item 2
Item 3
Item 4
Part II - OTHER INFORMATION
Item 1
Item 1A
Item 2
Item 6
 





SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, or this Form 10-Q, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, which statements involve substantial risk and uncertainties. All statements contained in this report other than statements of historical fact, including statements regarding our future operating results and financial position, our business strategy and plans, market growth and trends, and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “could,” “would,” “project,” “plan,” “potentially,” “likely,” and similar expressions are intended to identify forward-looking statements.
Forward-looking statement contained in this Form 10-Q include, but are not limited to, statements about our expectations regarding:
trends in key business metrics, including number of customers and dollar-based net retention rate, and non-GAAP financial measures and their usefulness in evaluating our business;
trends in revenue, cost of revenue, and gross margin;
trends in operating expenses, including research and development, sales and marketing, and general and administrative expense, and expectations regarding these expenses as a percentage of revenue;
our existing cash and cash equivalents and cash provided by sales of our subscriptions being sufficient to support working capital and capital expenditures for at least the next 12 months;
our efforts to maintain proper and effective internal controls;
our ability to expand our operations and increase adoption of our platform internationally;
our ability to stay abreast of new or modified laws and regulations that currently apply or become applicable to our business both in the United States and internationally;
the increased expenses and administrative workload associated with being a public company; and
other statements regarding our future operations, financial condition, and prospects and business strategies.
Such forward-looking statements are based on our expectations as of the date of this filing and are subject to a number of risks, uncertainties and assumptions, including but not limited to, risks detailed in the “Risk Factors” section of this Form 10-Q. Readers are urged to carefully review and consider the various disclosures made in this Form 10-Q and in other documents we file from time to time with the Securities and Exchange Commission, or the SEC, that disclose risks and uncertainties that may affect our business.  Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for us to predict all risks, nor can we assess the effect of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties, and assumptions, the future events and trends discussed in this Form 10-Q may not occur, and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
You should not rely on forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or may not occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, performance, or achievements. In addition, the forward-looking statements in this Form 10-Q are made as of the date of this filing, and we do not undertake, and expressly disclaim any duty, to update any of these forward-looking statements for any reason after the date of this Form 10-Q or to conform these statements to actual results or revised expectations.




PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
PAGERDUTY, INC.
Condensed Consolidated Balance Sheets
(in thousands)
 
July 31,
 
January 31,
 
2019
 
2019
 
(unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
306,316

 
$
127,875

Accounts receivable, net of allowance for doubtful accounts of $1,558 and $2,360 as of July 31, 2019 and January 31, 2019, respectively
36,079

 
33,538

Investments, current
34,805

 

Deferred contract costs, current
7,367

 
6,002

Prepaid expenses and other current assets
9,126

 
5,422

Total current assets
393,693

 
172,837

Property and equipment, net
10,135

 
5,772

Deferred contract costs, non-current
13,353

 
11,470

Other assets
1,131

 
7,155

Total assets
$
418,312

 
$
197,234

Liabilities, redeemable convertible preferred stock and stockholders’ equity (deficit)
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
4,302

 
$
7,657

Accrued expenses and other current liabilities
8,378

 
7,145

Accrued compensation
12,081

 
10,050

Deferred revenue, current
75,739

 
63,957

Total current liabilities
100,500

 
88,809

Deferred revenue, non-current
2,058

 
147

Other liabilities
6,591

 
4,185

Total liabilities
109,149

 
93,141

Commitments and contingencies (Note 6)

 

Redeemable convertible preferred stock

 
173,023

Stockholders’ equity (deficit):
 
 
 
Common stock

 

Additional paid-in capital
462,665

 
59,938

Accumulated deficit
(153,502
)
 
(128,868
)
Total stockholders’ equity (deficit)
309,163

 
(68,930
)
Total liabilities, redeemable convertible preferred stock and stockholders’ equity (deficit)
$
418,312

 
$
197,234

See Notes to Condensed Consolidated Financial Statements

4


PAGERDUTY, INC.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(in thousands, except per share data)
(unaudited)
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2019
 
2018
 
2019
 
2018
Revenue
$
40,361

 
$
27,744

 
$
77,675

 
$
52,764

Cost of revenue
6,106

 
3,912

 
11,592

 
7,797

Gross profit
34,255

 
23,832

 
66,083

 
44,967

Operating expenses:
 
 
 
 
 
 
 
Research and development
11,635

 
7,804

 
22,541

 
15,523

Sales and marketing
23,786

 
15,319

 
44,953

 
28,613

General and administrative
13,215

 
13,672

 
25,699

 
20,788

Total operating expenses
48,636

 
36,795

 
93,193

 
64,924

Loss from operations
(14,381
)
 
(12,963
)
 
(27,110
)
 
(19,957
)
Interest income
1,967

 
148

 
2,856

 
278

Other income, net
80

 
326

 
101

 
715

Loss before provision for income taxes
(12,334
)
 
(12,489
)
 
(24,153
)
 
(18,964
)
Provision for income taxes
(236
)
 
(91
)
 
(481
)
 
(195
)
Net loss and comprehensive loss
$
(12,570
)
 
$
(12,580
)
 
$
(24,634
)
 
$
(19,159
)
Net loss per share, basic and diluted
$
(0.17
)
 
$
(0.59
)
 
$
(0.45
)
 
$
(0.91
)
Weighted average shares used in calculating net loss per share, basic and diluted
75,433

 
21,190

 
54,327

 
21,036

See Notes to Condensed Consolidated Financial Statements

5


PAGERDUTY, INC.
Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)
(in thousands, except share data)
(unaudited)
 
Three Months Ended July 31, 2019
 
Redeemable Convertible
Preferred Stock
 
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
 
Shares
 
Amount
 
 
 
Balances as of April 30, 2019

 
$

 
 
76,013,403

 
$

 
$
454,559

 
$
(140,932
)
 
$
313,627

Issuance of common stock upon exercise of stock options and restricted stock agreements, net of repurchases

 

 
 
213,515

 

 
545

 

 
545

Vesting of restricted stock units, net of shares withheld for employee payroll taxes

 

 
 
183

 

 

 

 

Employee payroll taxes withheld related to vesting of restricted stock units

 

 
 

 

 
(10
)
 

 
(10
)
Vesting of early exercised options

 

 
 

 

 
338

 

 
338

Stock-based compensation

 

 
 

 

 
7,233

 

 
7,233

Net loss and comprehensive loss

 

 
 

 

 

 
(12,570
)
 
(12,570
)
Balances as of July 31, 2019

 
$

 
 
76,227,101

 
$

 
$
462,665

 
$
(153,502
)
 
$
309,163


 
Six Months Ended July 31, 2019
 
Redeemable Convertible
Preferred Stock
 
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
 
Shares
 
Amount
 
 
 
Balances as of January 31, 2019
41,273,345

 
$
173,023

 
 
23,189,921

 
$

 
$
59,938

 
$
(128,868
)
 
$
(68,930
)
Issuance of common stock upon exercise of stock options and restricted stock agreements, net of repurchases

 

 
 
1,165,345

 

 
2,785

 

 
2,785

Vesting of restricted stock units, net of shares withheld for employee payroll taxes

 

 
 
183

 

 

 

 

Exercise of common stock warrants

 

 
 
737,807

 

 

 

 

Repayment of promissory note

 

 
 

 

 
515

 

 
515

Issuance of common stock in connection with initial public offering, net of underwriting discounts and issuance costs

 

 
 
9,860,500

 

 
213,697

 

 
213,697

Conversion of convertible preferred stock to common stock in connection with initial public offering
(41,273,345
)
 
(173,023
)
 
 
41,273,345

 

 
173,023

 

 
173,023

Employee payroll taxes withheld related to vesting of restricted stock units

 

 
 

 

 
(10
)
 

 
(10
)
Vesting of early exercised options

 

 
 

 

 
672

 

 
672

Stock-based compensation

 

 
 

 

 
12,045

 

 
12,045

Net loss and comprehensive loss

 

 
 

 

 

 
(24,634
)
 
(24,634
)
Balances as of July 31, 2019

 
$

 
 
76,227,101

 
$

 
$
462,665

 
$
(153,502
)
 
$
309,163



6


PAGERDUTY, INC.
Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)
(in thousands, except share data)
(unaudited)
 
Three Months Ended July 31, 2018
 
Redeemable Convertible
Preferred Stock
 
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Total
Stockholders’
Deficit
 
Shares
 
Amount
 
 
Shares
 
Amount
 
 
 
Balances as of April 30, 2018
36,000,534

 
$
83,204

 
 
22,138,316

 
$

 
$
35,284

 
$
(94,706
)
 
$
(59,422
)
Issuance of common stock upon exercise of stock options and restricted stock agreements, net of repurchases

 

 
 
407,872

 

 
292

 

 
292

Warrant issued in conjunction with charitable contribution

 

 
 

 

 
6,217

 

 
6,217

Vesting of early exercised options

 

 
 

 

 
151

 

 
151

Stock-based compensation

 

 
 

 

 
2,529

 

 
2,529

Net loss and comprehensive loss

 

 
 

 

 

 
(12,580
)
 
(12,580
)
Balances as of July 31, 2018
36,000,534

 
$
83,204

 
 
22,546,188

 
$

 
$
44,473

 
$
(107,286
)
 
$
(62,813
)
 
Six Months Ended July 31, 2018
 
Redeemable Convertible
Preferred Stock
 
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Total
Stockholders’
Deficit
 
Shares
 
Amount
 
 
Shares
 
Amount
 
 
 
Balances as of January 31, 2018
36,000,534

 
$
83,204

 
 
21,705,352

 
$

 
$
31,762

 
$
(88,127
)
 
$
(56,365
)
Issuance of common stock upon exercise of stock options and restricted stock agreements, net of repurchases

 

 
 
840,836

 

 
598

 

 
598

Warrant issued in conjunction with charitable contribution

 

 
 

 

 
6,217

 

 
6,217

Vesting of early exercised options

 

 
 
 
 

 
210

 

 
210

Stock-based compensation

 

 
 

 

 
5,686

 

 
5,686

Warrant issued in conjunction with charitable contribution

 

 
 

 

 

 
 
 

Net loss and comprehensive loss

 

 
 

 

 

 
(19,159
)
 
(19,159
)
Balances as of July 31, 2018
36,000,534

 
$
83,204

 
 
22,546,188

 
$

 
$
44,473

 
$
(107,286
)
 
$
(62,813
)
See Notes to Condensed Consolidated Financial Statements





7


PAGERDUTY, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 
Six Months Ended July 31,
 
2019
 
2018
Cash flows from operating activities
 
 
 
Net loss
(24,634
)
 
$
(19,159
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
1,046

 
795

Amortization of deferred contract costs
3,442

 
1,841

Stock-based compensation
12,045

 
5,686

Warrant issued in conjunction with charitable contribution

 
6,217

Other
83

 
451

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(2,733
)
 
(8,087
)
Deferred contract costs
(6,690
)
 
(5,692
)
Prepaid expenses and other assets
(3,411
)
 
(3,923
)
Accounts payable
(2,712
)
 
(529
)
Accrued expenses and other liabilities
2,433

 
(694
)
Accrued compensation
2,031

 
2,639

Deferred revenue
13,693

 
11,408

Net cash used in operating activities
(5,407
)
 
(9,047
)
Cash flows from investing activities
 
 
 
Purchases of property and equipment
(2,019
)
 
(564
)
Capitalized internal-use software costs

 
(92
)
Purchases of held-to-maturity investments
(34,696
)
 

Net cash used in investing activities
(36,715
)
 
(656
)
Cash flows from financing activities
 
 
 
Proceeds from initial public offering, net of underwriters' discounts and commissions
220,086

 

Payments of costs related to initial public offering
(5,208
)
 

Proceeds from repayment of promissory note
515

 

Proceeds from issuance of common stock upon exercise of stock options
2,785

 
598

Proceeds from early exercised stock options, net of repurchases

 
2,234

Employee payroll taxes paid related to net share settlement of restricted stock units
(10
)
 

Net cash provided by financing activities
218,168

 
2,832

Net increase (decrease) in cash, cash equivalents and restricted cash
176,046

 
(6,871
)
Cash, cash equivalents and restricted cash at beginning of year
130,323

 
46,451

Cash, cash equivalents and restricted cash at end of year
$
306,369

 
$
39,580

 
 
 
 
Supplemental cash flow data:
 
 
 
Cash paid for taxes
$
56

 
$
24

Non-cash investing and financing activities:
 
 
 
Vesting of early exercised options
$
672

 
$
210

Purchase of property and equipment, accrued but not yet paid
$
1,032

 
$
2,601

Costs related to initial public offering, accrued but not yet paid
$
737

 
$

Non-cash additions of property and equipment
$
2,364

 
$

Reconciliation of cash, cash equivalents and restricted cash to the condensed consolidated balance sheets
 
 
 
Cash and cash equivalents
$
306,316

 
$
37,132

Restricted cash - included in other assets
$
53

 
$
2,448

Total cash, cash equivalents and restricted cash
$
306,369

 
$
39,580

See Notes to Condensed Consolidated Financial Statements

8


PAGERDUTY, INC.
Notes to Condensed Consolidated Financial Statements
1. Description of Business and Basis of Presentation
Description of Business
PagerDuty, Inc. (the Company or PagerDuty) was incorporated under the laws of the state of Delaware in May 2010.
PagerDuty acts as the central nervous system for the digital enterprise. PagerDuty harnesses digital signals from virtually any software-enabled system or device, combines it with human response data and orchestrates teams to take the right actions in real time. The Company’s products help organizations improve operations, accelerate innovation, increase revenue, mitigate security risk, and deliver a great customer experience.
Initial Public Offering
On April 15, 2019, the Company completed its initial public offering (IPO), pursuant to which the Company issued and sold 9,860,500 shares of common stock, inclusive of the over-allotment option, at a public offering price of $24.00 per share. The Company received net proceeds of $213.7 million, after deducting underwriters' discounts and commissions of $16.6 million and other issuance costs of $6.4 million. Immediately prior to the closing of the Company’s IPO, all shares of the redeemable convertible preferred stock automatically converted into 41,273,345 shares of common stock.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP), and applicable rules and regulations of the Securities and Exchange Commission (SEC) regarding interim financial reporting. The condensed consolidated balance sheet as of January 31, 2019 was derived from the audited consolidated financial statements as of that date but does not include all of the information and notes required by GAAP for complete financial statements. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, these condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes thereto as of and for the year ended January 31, 2019, included in the Company’s final prospectus related to the Company’s IPO dated April 11, 2019 (Prospectus), filed with the SEC pursuant to Rule 424 (b) under the Securities Act of 1933, as amended. There have been no changes to the Company’s significant accounting policies as described in the Prospectus that have had a material impact on the Company’s condensed consolidated financial statements and related notes, except as described below.
The condensed consolidated financial statements include the results of PagerDuty, Inc. and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated upon consolidation.
In the opinion of management, the information contained herein reflects all adjustments necessary for a fair presentation of the Company’s results of operations, financial position, cash flows, and statements of redeemable convertible preferred stock and stockholders’ deficit. The results of operations for the three and six months ended July 31, 2019 are not necessarily indicative of the results to be expected for the full year ending January 31, 2020 or for any other interim period, or for any future year.
The Company’s fiscal year ends on January 31. References to fiscal 2020, for example, refer to the fiscal year ended January 31, 2020.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make, on an ongoing basis, estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets

9


and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from these estimates. The Company’s most significant estimates and judgments involve the valuation of the Company’s stock-based awards, including the determination of fair value of common stock (prior to the closing of the IPO) and the fair value of the employee stock purchase plan expense, period of benefit for amortizing deferred contract costs, the determination of the allowance for doubtful accounts, and the provision for income taxes, including the related valuation allowance and any uncertain tax positions, among others. Management bases its estimates on historical experience and on various other assumptions which management believes to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.
Reclassification
Certain reclassifications of prior period amounts have been made in the Company’s condensed consolidated balance sheets and condensed consolidated statements of cash flows to conform to the current period presentation. These reclassifications had no effect on the reported results of operations.
Stock Split
In May 2018, the Company effected a two-for-one stock split of the Company’s redeemable convertible preferred stock and common stock effective May 3, 2018. All redeemable convertible preferred stock and common stock share and per-share amounts for the periods presented in these condensed financial statements have been retroactively adjusted for the stock split as if such stock split occurred on the first day of the periods presented.
2. Summary of Significant Accounting Policies
Segment Information
The Company operates as one operating segment. The Company’s chief operating decision maker is its chief executive officer, who reviews financial information presented on a consolidated basis for purposes of making operating decisions, assessing financial performance, and allocating resources.
Concentrations of Risk and Significant Customers
The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents, held-to-maturity investments, and accounts receivable. All of the Company’s cash and cash equivalents and held-to-maturity investments are invested in money market funds, United States (U.S.) Treasury securities, commercial paper, or corporate debt securities that management believes to be of high credit quality.
No customer accounted for more than 10% of the total accounts receivable balance as of July 31, 2019. One customer accounted for 10% of the total accounts receivable balance as of January 31, 2019. No single customer represented 10% or more of revenue for the three and six months ended July 31, 2019 or 2018.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand, highly liquid investments with original maturities of three months or less from the date of purchase, and money market funds.
Investments
Investments consist of highly liquid investments, primarily U.S. Treasury securities, commercial paper, and corporate debt securities, with maturities over three months from the date of purchase and less than 12 months from the date of the balance sheet. These investments are classified as held-to-maturity as the Company has the ability and positive intent to hold these investments to maturity. Held-to-maturity investments are carried at amortized cost, which approximates fair value. The Company had $34.8 million of investments classified as held-to-maturity as of July 31, 2019. The Company had no investments as of January 31, 2019.

10


Related Party Transactions
Certain members of the Company’s Board of Directors serve as directors of, or are executive officers of, and in some cases are investors in, companies that are customers or vendors of the Company. Related party transactions were not material as of either July 31, 2019 or January 31, 2019, or for the three and six months ended July 31, 2019 and 2018.
Deferred Offering Costs
Prior to the IPO, all deferred offering costs were capitalized in other noncurrent assets in the condensed consolidated balance sheets. Deferred offering costs of $6.4 million, primarily consisting of accounting, legal, and other fees related to the Company’s IPO, were offset against IPO proceeds upon the closing of the Company’s IPO in April 2019. As of January 31, 2019, there were $3.3 million of deferred offering costs which are included in other assets in the accompanying condensed consolidated balance sheet as of January 31, 2019.
Recently Adopted Accounting Pronouncements
In July 2018, the FASB issued ASU 2018-09, Codification Improvements. These amendments provide clarifications and corrections to certain ASC subtopics including the following: 220-10 (Income Statement - Reporting Comprehensive Income - Overall), 470-50 (Debt - Modifications and Extinguishments), 480-10 (Distinguishing Liabilities from Equity - Overall), 718-740 (Compensation - Stock Compensation - Income Taxes), 805-740 (Business Combinations - Income Taxes), 815-10 (Derivatives and Hedging - Overall), and 820-10 (Fair Value Measurement - Overall). Some of the amendments in ASU 2018-09 do not require transition guidance and will be effective upon issuance; however, many of the amendments do have transition guidance with effective dates for annual periods beginning after December 15, 2019. The amendments that were effective upon issuance of the update did not have an impact on the Company’s condensed consolidated financial statements. The Company early adopted this ASU beginning February 1, 2019 noting that the adoption of the standard had no material impact on its condensed consolidated financial statements.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, Leases, which would require lessees to recognize most leases on their balance sheets, whether operating or financing, while continuing to recognize the expenses on their income statements in a manner similar to current practice. The guidance states that a lessee would recognize a lease liability for the obligation to make lease payments and a right-to-use asset for the right to use the underlying asset for the lease term. The guidance will be effective for the Company beginning February 1, 2020. The Company is in the initial stage of its assessment of the new standard and is currently evaluating the timing of adoption, the quantitative impact of adoption, and the related disclosure requirements. The Company anticipates the adoption of this standard will result in an increase in its non-current assets and liabilities recorded on the consolidated balance sheets. The adoption of the standard is not expected to have a material impact on the consolidated statements of operations. While the Company is assessing all potential impacts of the adoption of the standard, it currently expects the most significant impact to be the capitalization of right-to-use assets and lease liabilities for its office space leases. The Company does not intend to early adopt the standard.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments, which requires an entity to utilize a new impairment model known as the current expected credit loss (“CECL”) model to estimate its lifetime “expected credit loss” and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The CECL model is expected to result in more timely recognition of credit losses. This guidance also requires new disclosures for financial assets measured at amortized cost, loans and available-for-sale debt securities. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. This guidance will be effective for the Company beginning February 1, 2020. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.

11


3. Fair Value Measurements
The Company measures its financial assets and liabilities at fair value each reporting period using a fair value hierarchy that prioritizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. A financial instrument’s classification within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Three levels of inputs may be used to measure fair value, as follows:
Level 1-Valuations based on observable inputs that reflect quoted prices for identical assets or liabilities in active markets.
Level 2-Valuations based on inputs that are directly or indirectly observable in the marketplace.
Level 3-Valuations based on unobservable inputs that are supported by little or no market activity.
The following table presents information about the Company’s financial assets that are required to be measured or disclosed at fair value using the above input categories (in thousands):
 
As of July 31, 2019
 
Level 1
 
Level 2
 
Level 3
 
Total
Money market funds
$
247,320

 
$

 
$

 
$
247,320

U.S. Treasury securities

 
4,980

 

 
4,980

Commercial paper

 
16,358

 

 
16,358

Corporate debt securities

 
14,967

 

 
14,967

Total
$
247,320

 
$
36,305

 
$

 
$
283,625

Included in cash equivalents
 
 
 
 
 
 
$
248,820

Included in investments
 
 
 
 
 
 
$
34,805


The Company’s assets that are measured by management at fair value on a recurring basis are generally classified within Level 1 or Level 2 of the fair value hierarchy. The Company did not have any transfers into and out of Level 1 or Level 2 during the six months ended July 31, 2019.
The Company considers all highly liquid investments purchased with a remaining maturity of three months or less to be cash equivalents. As of July 31, 2019 the Company’s Level 2 securities were priced by pricing vendors. These pricing vendors utilize observable market information in pricing these securities or, if specific prices are not available for these securities, use other observable inputs like market transactions involving identical or comparable securities.
The carrying amounts of certain financial instruments, including cash held in banks, accounts receivable and accounts payable approximate fair value due to their short-term maturities and are excluded from the fair value table above.

12


4. Property and Equipment, Net
Property and equipment, net, consisted of the following (in thousands):
 
As of July 31,
 
As of January 31,
 
2019
 
2019
Leasehold improvements
$
10,194

 
$
6,512

Computers and equipment
3,917

 
2,998

Capitalized internal-use software
325

 
389

Furniture and fixtures
1,968

 
1,239

Gross property and equipment (1)
16,404

 
11,138

Accumulated depreciation and amortization
(6,269
)
 
(5,366
)
Property and equipment, net
$
10,135

 
$
5,772

(1) Gross property and equipment includes construction-in-progress for leasehold improvements of $2.5 million and $0.2 million that had not yet been placed in service as of July 31, 2019 and January 31, 2019, respectively. The costs associated with construction-in-progress are not amortized until placed in service.
Depreciation and amortization expense was $0.6 million and $0.4 million for the three months ended July 31, 2019 and 2018 and $1.0 million and $0.8 million for the six months ended July 31, 2019 and 2018, respectively.
5. Deferred Contract Costs
Deferred contract costs, which primarily consist of deferred sales commissions, were $20.7 million and $17.5 million as of July 31, 2019 and January 31, 2019, respectively. Amortization expense for the deferred costs was $1.8 million and $1.0 million for the three months ended July 31, 2019 and 2018, respectively, and $3.4 million and $1.8 million for the six months ended July 31, 2019 and 2018, respectively. There was no impairment charge related to the costs capitalized for the periods presented.
6. Commitments and Contingencies
Operating Leases
The Company has entered into various non-cancellable operating leases for its office spaces with lease periods expiring between fiscal 2020 and fiscal 2029. In addition to base rent the Company is also committed to pay a portion of the actual operating expenses under certain of these lease arrangements.
In December 2015, the Company entered into a sublease agreement for its former headquarters in San Francisco, California. The Company received sublease income of $0.3 million during the three months ended July 31, 2018 and $0.7 million for the six months ended July 31, 2018. The lease and related sublease expired in fiscal 2019.
The facility lease agreements generally provide for rental payments on a graduated basis and for options to renew, which could increase future minimum lease payments if exercised. The Company recognizes rent expense on a straight-line basis over the lease period and has accrued for rent expense incurred but not paid. Deferred rent was $6.2 million as of July 31, 2019, of which $0.8 million was included within accrued expenses and other current liabilities and $5.4 million was included within other liabilities on the condensed consolidated balance sheets. Deferred rent was $3.7 million as of January 31, 2019, of which $0.3 million was included within accrued expenses and other current liabilities and $3.4 million was included within other liabilities on the condensed consolidated balance sheets. Rent expense was $1.6 million and $1.1 million for the three months ended July 31, 2019 and 2018, respectively, and $2.9 million and $2.4 million for the six months ended July 31, 2019 and 2018, respectively.

13


As of July 31, 2019 the future minimum lease payments by fiscal year excluding sublease income under non-cancellable operating leases are as follows (in thousands):
 
Minimum Lease
Payments
2020
$
2,742

2021
5,629

2022
6,327

2023
6,502

2024
6,683

Thereafter
15,847

Total
$
43,730


Total future minimum lease payments under non-cancellable operating leases as of July 31, 2019 are primarily comprised of lease payments due under the lease of the Company’s headquarters in San Francisco, California, and leases for the Company’s offices in Toronto, Canada and Atlanta, Georgia.
In July 2019, the Company entered into a non-cancellable operating lease for office space in Atlanta, Georgia, with minimum lease payments of $14.4 million through the lease term of July 2028.
Legal Matters
From time to time in the normal course of business, the Company may be subject to various claims and other legal matters arising in the ordinary course of business. The Company investigates these claims as they arise and accrues estimates for resolution of legal and other contingencies when losses are probable and estimable. The Company is not currently a party to any legal proceedings and does not anticipate any pending or threatened litigation that would be expected to have a material adverse effect on its financial condition, results of operations, or cash flows.
Warranties and Indemnification
The Company has entered into service-level agreements with a portion of its customers defining levels of uptime reliability and performance and permitting those customers to receive credits if the Company fails to meet the defined levels of uptime. To date, the Company has not experienced any significant failures to meet defined levels of uptime reliability and performance as a result of those agreements and, as a result, the Company has not incurred or accrued any material liabilities related to these agreements in the financial statements.
7. Common Stock and Stockholders’ Equity (Deficit)
Redeemable Convertible Preferred Stock
Immediately prior to the completion of the IPO in April 2019, all shares of redeemable convertible preferred stock then outstanding were converted into 41,273,345 shares of common stock on a one-to-one basis and then immediately reclassified into common stock.
Equity Incentive Plans
The Company has two equity incentive plans: the 2010 Stock Plan (the 2010 Plan) and the 2019 Equity Incentive Plan (the 2019 Plan, collectively the Stock Plans). Upon completion of the Company’s IPO in April 2019, the Company ceased granting awards under the 2010 Plan, and all shares that remained available for future issuance under the 2010 Plan at that time were transferred to the 2019 Plan. The 2019 Plan superseded and replaced the 2010 Plan. Under the 2019 Plan, the Company’s Board of Directors (the Board) and any other committee or subcommittee of the Board may grant stock options and restricted stock awards (RSAs) and restricted stock units (RSUs) to employees, consultants, and advisors of the Company. Through July 31, 2019, the Company has granted stock options, RSAs, and RSUs. As

14


of July 31, 2019 and January 31, 2019, respectively, the Company was authorized to grant up to 12,724,831 shares and 23,929,932 shares of common stock under the Stock Plans.
The Company has issued stock options and RSAs to employees and non-employee directors under the 2010 Plan, and certain of these awards allow for early exercise. The Company has issued stock options and RSUs to employees pursuant to the 2019 Plan. Stock options are granted with exercise prices at the fair value of the underlying common stock on the grant date, in general vest based on continuous employment over four years and expire 10 years from the date of grant. RSUs are measured based on the grant date fair value of the awards and in general vest based on continuous employment over four years.
In March 2019, the Company granted 3,041,000 options to existing employees with 50 percent of these options vesting over four years from the grant date and 50 percent vesting over five years from the grant date.
The Company currently uses authorized and unissued shares to satisfy stock award exercises. As of July 31, 2019 and January 31, 2019, there were 12,533,564 shares and 2,221,216 shares available for future issuance under the Stock Plans, respectively.
Shares of common stock reserved for future issuance are as follows:
 
As of July 31, 2019
Stock options and unvested RSUs outstanding
16,278,346

Available for future stock option and RSU grants
12,533,564

Available for ESPP
1,850,000

Total common stock reserved at July 31, 2019
30,661,910


Stock Option Activity
Stock option activity is as follows:
 
Number of
Shares
 
Weighted
Average Exercise
Price
 
Weighted
Average
Remaining
Contractual Term
 
Aggregate
Intrinsic Value
 
 
 
 
 
 
 
(in thousands)
Outstanding at January 31, 2019
14,006,222

 
$
4.32

 
8.2 years
 
$
142,840

Granted
3,758,093

 
$
15.82

 
 
 
 
Exercised
(1,170,845
)
 
$
2.42

 
 
 
 
Canceled
(430,936
)
 
$
7.85

 
 
 
 
Outstanding at July 31, 2019
16,162,534

 
$
7.05

 
8.2 years
 
$
601,234

Vested as of July 31, 2019
6,588,059

 
$
3.11

 
7.3 years
 
$
270,688


Stock options granted during the three months ended July 31, 2019 and 2018 had a weighted average grant date fair value of $23.08 and $5.13 per share, respectively. The aggregate intrinsic value of stock options exercised during the three months ended July 31, 2019 and 2018 was $10.5 million and $1.8 million, respectively.
Stock options granted during the six months ended July 31, 2019 and 2018 had a weighted average grant date fair value of $10.83 and $4.39 per share, respectively. The aggregate intrinsic value of stock options exercised during the six months ended July 31, 2019 and 2018 was $30.5 million and $4.6 million, respectively.
The intrinsic value for options exercised is the difference between the market value of the stock and the exercise price of the stock option at the date of exercise.

15


As of July 31, 2019 and January 31, 2019, respectively, there was approximately $59.5 million and $30.6 million of total unrecognized compensation cost related to unvested stock options granted under the Stock Plan, which will be recognized over a weighted average period of 3.5 years and 2.7 years.
Restricted Stock Units
A summary of the Company’s RSU activity and related information is as follow:
 
Number of RSUs
 
Weighted
Average Grant Date Fair Value Per Share
Outstanding at January 31, 2019

 
$

Granted
117,966

 
$
48.04

 Vested, net of shares withheld for employee payroll taxes
(183
)
 
$
46.26

Canceled
(1,971
)
 
$
46.26

Outstanding at July 31, 2019
115,812

 
$
48.07


As of July 31, 2019, there was $5.4 million of unrecognized stock-based compensation expense related to unvested RSUs, which is expected to be recognized over a weighted average period of 3.9 years based on vesting under the award service conditions.
Employee Stock Purchase Plan
In April 2019, the Board adopted and approved the 2019 Employee Stock Purchase Plan, (ESPP), which became effective on April 11, 2019. The ESPP initially reserved and authorized the issuance of up to a total of 1,850,000 shares of common stock to participating employees. The initial offering period began April 11, 2019 and will end on June 15, 2021, with purchase dates of December 13, 2019, June 15, 2020, December 15, 2020 and June 15, 2021. The ESPP generally provides for 24-month offering periods beginning June 15 and December 15 of each year, with each offering period consisting of four six-month purchase periods, except for the initial offering period which began on April 11, 2019 and will end on December 15, 2019. On each purchase date, eligible employees will purchase the shares at a price per share equal to 85% of the lesser of (1) the fair market value of the Company’s stock as of the beginning of the offering period or (2) the fair market value of the Company’s stock on the purchase date, as defined in the ESPP.
The Company recognized $1.8 million and $2.2 million of stock-based compensation expense related to ESPP during the three and six months ended July 31, 2019, respectively beginning upon the IPO in April 2019. As of July 31, 2019, $2.6 million has been withheld on behalf of employees for a future purchase under the ESPP.
There were no purchases for the three and six months ended July 31, 2019 related to the ESPP.
Warrant Issued as Charitable Contribution
In fiscal 2019, the Company commenced an initiative to donate product, equity, and employee time for charitable purposes. In June 2018, as part of this initiative, the Company issued to the Tides Foundation a warrant to purchase up to 648,092 shares of the Company’s common stock, exercisable at a price of $0.01 per share. The common stock warrant was automatically net exercised for 647,822 shares of common stock upon the closing of the IPO.
The Company recognized $6.2 million of non-cash charitable contribution expense during the three and six months ended July 31, 2018 and this amount is included in general and administrative expense in the accompanying condensed consolidated statements of operations.


16


Stock-Based Compensation
The Company uses the Black-Scholes option-pricing model to estimate the fair value of stock options on the date of grant. The Company uses the fair value of RSUs based on the fair value of the underlying shares on the date of grant. The Company accounts for forfeitures as they occur.
Stock-based compensation expense included in the Company’s condensed consolidated statements of operations is as follows (in thousands):
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2019
 
2018
 
2019
 
2018
Cost of revenue
$
327

 
$
70

 
$
470

 
$
131

Research and development
1,437

 
398

 
2,297

 
1,113

Sales and marketing
2,326

 
914

 
3,790

 
1,766

General and administrative(1)
3,143

 
1,147

 
5,488

 
2,676

Total
$
7,233

 
$
2,529

 
$
12,045

 
$
5,686

(1) Stock-based compensation expense above does not include $6.2 million of non-cash charitable contribution expense.
8. Deferred Revenue and Performance Obligations
During the three months ended July 31, 2019 and 2018, the Company recognized $28.8 million and $17.9 million of revenue, respectively, which were included in the deferred revenue balance as of April 30, 2019 and 2018, respectively.
During the six months ended July 31, 2019 and 2018, the Company recognized $46.7 million and $26.5 million of revenue, respectively, which was included in the deferred revenue balance as of January 31, 2019 and 2018, respectively.
As of July 31, 2019 and January 31, 2019, future estimated revenue related to performance obligations for subscriptions with terms of more than one year that are unsatisfied or partially unsatisfied at the end of the reporting periods was approximately $60.1 million and $43.6 million, respectively. The Company expects to satisfy the substantial majority of these unsatisfied performance obligations over the next 24 months and the remainder thereafter. The Company applied the optional exemption for subscriptions with terms of less than a one year.
9. Net Loss per Share
The following table presents the calculation of basic and diluted net loss per share (in thousands, except per share data):
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2019
 
2018
 
2019
 
2018
Numerator:
 
 
 
 
 
 
 
Net loss
$
(12,570
)
 
$
(12,580
)
 
$
(24,634
)
 
$
(19,159
)
Denominator:
 
 
 
 
 
 
 
Weighted average shares used in calculating net loss per share, basic and diluted
75,433

 
21,190

 
54,327

 
21,036

Net loss per share, basic and diluted
$
(0.17
)
 
$
(0.59
)
 
$
(0.45
)
 
$
(0.91
)


17


Since the Company was in a loss position for the periods presented, basic net loss per share is the same as diluted net loss per share as the inclusion of all potential common shares outstanding would have been anti-dilutive. Potentially dilutive securities that were not included in the diluted per share calculations because they would be anti-dilutive were as follows (in thousands):
 
As of July 31,
 
2019
 
2018
Redeemable convertible preferred stock

 
36,001

Shares subject to outstanding common stock options
16,278

 
13,546

Unvested early exercised stock options
205

 
470

Warrants to purchase common stock

 
852

Early exercised stock options in exchange for note receivable

 
250

Restricted stock awards purchased with promissory notes
429

 
510

Shares issuable pursuant to the 2019 Employee Stock Purchase Plan
125

 

Total
17,037

 
51,629


10. Income Taxes
The Company's provision for income taxes for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items, if any, that arise during the period. Each quarter, the Company updates its estimate of the annual effective tax rate, and if the estimated annual effective tax rate changes, the Company makes a cumulative adjustment in such period.
The Company's quarterly tax provision, and estimate of its annual effective tax rate, is subject to variation due to several factors, including variability in pre-tax income (or loss), the mix of jurisdictions to which such income (or loss) relates, changes in how the Company does business, and tax law developments. The Company's estimated effective tax rate for the year differs from the U.S. statutory rate of 21% as a result of our U.S. losses for which no benefit will be realized, as well as our foreign operations which are subject to tax rates that differ from those in the U.S.
The Company recorded an income tax expense of $0.2 million and $0.1 million for the three months ended July 31, 2019 and 2018, respectively, and $0.5 million and $0.2 million for the six months ended July 31, 2019 and 2018, respectively. The income tax expense for the three and six months ended July 31, 2019 as compared to the income tax expense for the three and six months ended July 31, 2018, changed primarily due to growth in our foreign operations.
11. Geographic Information
Revenue by location is determined by the billing address of the customer. The following table sets forth revenue by geographic area (in thousands):
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2019
 
2018
 
2019
 
2018
United States
$
31,592

 
$
22,223

 
$
61,060

 
$
42,441

International
8,769

 
5,521

 
16,615

 
10,323

Total
$
40,361

 
$
27,744

 
$
77,675

 
$
52,764


Other than the United States, no other individual country accounted for 10% or more of revenue for the three and six months ended July 31, 2019 or 2018. As of July 31, 2019, 69% of the Company’s property and equipment was located in the United States and 31% was located in Canada. As of January 31, 2019, 48% of the Company’s property and equipment was located in the United States and 52% was located in Canada.
12. Subsequent Events
The Company has evaluated subsequent events through September 6, 2019.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations together with our condensed consolidated financial statements and the related notes appearing elsewhere in this Quarterly Report on Form 10-Q and in our final prospectus related to our initial public offering, or IPO, dated April 11, 2019, or the Prospectus, filed with the SEC pursuant to Rule 424 (b) under the Securities Act of 1933 (File No. 333-230323). You should review the sections 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” included in Part II, Item 1A below. The last day of our fiscal year is January 31. Our fiscal quarters end on April 30, July 31, October 31 and January 31.
Overview
Our mission is to connect teams to real-time opportunity and elevate work to the outcomes that matter.
We act as the central nervous system for the digital enterprise, providing for real-time operations. We collect digital signals from virtually any software-enabled system or device, correlate and interpret these signals, and combine them with human response data, orchestrating teams to take the right actions in real time.
We mine machine data and human response data to embed analytics, machine learning, and automation within our platform. Our platform learns from every incident, allowing teams to be proactive and incorporate best practices into their operations to improve performance.
Our products help organizations improve operations, accelerate innovation, increase revenue, mitigate security risk, and deliver great customer experience.
Since our founding in 2009, we have expanded our capabilities from a single product focused on on-call management to a real-time operations platform, spanning event intelligence, incident response, on-call management, business visibility, and analytics. We have invested in developing the scalability, reliability, and security of our platform to address the needs of even the largest and most demanding customers. We have over 350 integrations with ecosystem partners that enable our customers to gather and correlate digital signals from virtually any software-enabled system or device.
As of July 31, 2019, we had over 12,000 customers - ranging from startups to Fortune 50 companies. Our customers use our products across a broad range of use cases such as DevOps, Security, IT Operations, Business and Internet of Things.
Our platform is easy to adopt and scalable for businesses of all sizes. We generate revenue primarily through sales of subscriptions to our software. We offer a range of pricing plans aligned with our customers’ needs and their digital operations maturity. We have a land and expand business model that leads to viral adoption of our products and subsequent expansion. Our online self-service model is the primary mechanism for landing new customers, and enabling teams to get started without assistance. We complement our self-service model with a high-velocity inside sales team focused on the midmarket and small and medium business, and a field sales team focused on enterprise customers. These teams drive expansion to additional users, additional teams, and new use cases, as well as upsell premium functionality.

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Key Business Metrics
We review the following key business metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans, and make strategic decisions.
Number of Customers
We believe that the number of customers using our platform, particularly those that have subscription agreements for more than $100,000 in annual recurring revenue, or ARR, are indicators of our market penetration, particularly within enterprise accounts, the growth of our business, and our potential future business opportunities. Increasing awareness of our platform and its broad range of capabilities, coupled with the mainstream adoption of cloud-based, “always on” technology, has expanded the diversity of our customer base to include organizations of all sizes across virtually all industries. Over time, larger customers have constituted a greater share of our revenue.
 
As of July 31,
 
2019
 
2018
Customers
12,045

 
10,454

Customers greater than $100,000 in ARR
274

 
181

Dollar-based Net Retention Rate
We use dollar-based net retention rate to evaluate the long-term value of our customer relationships, since this metric reflects our ability to retain and expand the ARR from our existing customers. Our dollar-based net retention rate compares our ARR from the same set of customers across comparable periods.
We calculate dollar-based net retention rate as of a period end by starting with the ARR from the cohort of all customers as of 12 months prior to such period end, or Prior Period ARR. We then calculate the ARR from these same customers as of the current period end, or Current Period ARR. Current Period ARR includes any expansion and is net of downgrades or churn over the last 12 months but excludes ARR from new customers in the current period. We then divide the total Current Period ARR by the total Prior Period ARR to arrive at the dollar-based net retention rate.
 
Last 12 Months Ended
July 31,
 
2019
 
2018
Dollar-based net retention rate for all customers
132
%
 
138
%
Components of Results of Operations
Revenue
We generate subscription revenue from customers accessing our platform. Our subscriptions are typically one year in duration but can range from monthly to multi-year. Subscription revenue is driven primarily by the number of customers, the number of users per customer, and the level of subscription purchased. We generally invoice customers in advance in annual installments for subscriptions to our platform. We recognize subscription revenue ratably over the term of the subscription period beginning on the date we grant access to our platform, assuming that all other revenue recognition criteria have been met.
Due to the low complexity of implementation and integration of our platform with our customers’ existing infrastructure, revenue from professional services has been immaterial to date.
Cost of Revenue
Cost of revenue primarily consists of expenses related to providing our platform to customers, including personnel expenses for operations and global support, payments to our third-party cloud infrastructure providers for hosting our software, payment processing fees, amortization of capitalized internal-use software costs, and allocated overhead costs

20



for facilities, information technology, and other overhead costs. We will continue to invest additional resources in our platform infrastructure and our customer support and success organizations to expand the capability of our platform and ensure that our customers are realizing the full benefit of our offerings. The level and timing of investment in these areas could affect our cost of revenue in the future.
Gross Profit and Gross Margin
Gross profit represents revenue less cost of revenue. Gross margin is gross profit expressed as a percentage of revenue. Our gross margin may fluctuate from period to period as our revenue fluctuates, and as a result of the timing and amount of investments to expand the capacity of our third-party cloud infrastructure providers and our continued efforts to enhance our platform support and customer success teams.
Operating Expenses
Our operating expenses consist of research and development, sales and marketing, and general and administrative expenses. Personnel expenses are the most significant component of operating expenses and consist of salaries, benefits, bonuses, stock-based compensation expense, and sales commissions. Operating expenses also include allocated overhead costs for facilities, shared IT related expenses, including depreciation expense, and certain company wide events and functions.
Research and Development
Research and development expenses consist primarily of personnel costs for our engineering, product, and design teams. Additionally, research and development expenses include contractor fees, depreciation of equipment used in research and development activities, and allocated overhead costs. We expect that our research and development expenses will increase in dollar value as our business grows.
Sales and Marketing
Sales and marketing expenses consist primarily of personnel costs, costs of general marketing activities and promotional activities, travel related expenses, and allocated overhead costs. Sales commissions earned by our sales force that are considered incremental and recoverable costs of obtaining a subscription with a customer are deferred and amortized on a straight-line basis over the expected period of benefit, which we have determined to be four years. We expect that our sales and marketing expenses will increase in dollar value and continue to be our largest operating expense for the foreseeable future as we expand our sales and marketing efforts.
General and Administrative
General and administrative expenses consist primarily of personnel costs and contractor fees for finance, legal, human resources, information technology, and other administrative functions. In addition, general and administrative expenses include non-personnel costs, such as legal, accounting, and other professional fees, hardware and software costs, certain tax, license and insurance-related expenses, and allocated overhead costs.
We are incurring additional expenses than we have historically experienced 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 pursuant to the rules and regulations of the SEC, and increased expenses for insurance, investor relations, and professional services and to invest in processes and systems. We expect that our general and administrative expenses will increase in dollar value as our business grows. However, we expect that our general and administrative expenses will decrease as a percentage of our revenue over the longer term as we expect our investments to allow for improved efficiency for future growth in the business.
Interest Income
Interest income consists of income earned on our cash and cash equivalents and interest earned on our short term investments which consist of U.S. Treasury securities, commercial paper, and corporate debt securities.

21



Other Income, Net
Other income, net primarily consists of sublease income related to our San Francisco lease, accretion income on our held-to-maturity investments, and foreign currency transaction gains and losses.
Provision for Income Taxes
Provision for income taxes consists primarily of income taxes in certain foreign jurisdictions in which we conduct business. We maintain a full valuation allowance on our federal and state deferred tax assets as we have concluded that it is more likely than not that the deferred tax assets will not be realized.
Results of Operations
The following table sets forth our condensed consolidated statements of operations data for the periods indicated (in thousands):
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2019
 
2018
 
2019
 
2018
Revenue
$
40,361

 
$
27,744

 
$
77,675

 
$