May 16, 2022

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MEDALLIA : MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our unaudited condensed
consolidated financial statements and related notes included elsewhere in this
Quarterly Report on Form 10-Q. This discussion contains forward-looking
statements that involve risks and uncertainties as discussed in "Special Note
Regarding Forward-Looking Statements" included in this Quarterly Report on Form
10-Q. Our actual results could differ materially from those discussed below.
Factors that could cause or contribute to such differences include, but are not
limited to, those identified below and those discussed in "Risk Factors" under
Part II, Item 1A in this Quarterly Report on Form 10-Q.
Overview
Medallia, Inc. was founded in 2001 to help the world's largest companies
understand and improve customer experiences at scale. In doing so, we created a
new category of enterprise software, experience management.

Our SaaS (software-as-a-service) platform, the Medallia Experience Cloud, is
built on modern technology and open architecture, utilizing artificial
intelligence (AI) and machine learning to analyze massive amounts of data. We
capture experience data from the expanding signal fields emitted by customers
and employees on their daily journeys so that our customers can understand,
analyze, and act upon omni-channel experiences. We believe that Medallia is the
only platform that makes all other applications customer and employee aware. We
utilize our proprietary in-memory analytics, dynamic organizational hierarchy
management, and AI technology to analyze the structured and unstructured data at
great scale with enterprise grade security and privacy deriving themes and
predictive insights that drive action in live time. Using our technology,
enterprises reduce churn, turn detractors into promoters and buyers, and create
in-the-moment cross-sell and up-sell opportunities, providing high returns on
investment.

Our platform captures and analyzes over 7.5 billion experiences annually. Our
products have high adoption rates and are used extensively from the front line
to the C-Suite; over 35% of our customers have more than 1,000 employees using
our platform. Our platform is deeply embedded in an enterprise's tech stack,
with enterprises integrating Medallia with more than 25 other business
applications. We believe this is significantly higher adoption than other
experience management solutions available in the market.

We offer our platform through a SaaS business model. We use a "land-and-expand"
model, whereby once customers have deployed our platform, they often increase
the number of end-users through expansion to additional business units and
geographies, and they also purchase more modules. We focus our selling efforts
on both business leaders who are often making a strategic purchase of our
platform with the potential for broad use throughout their enterprises, as well
as functional leaders purchasing for their teams. We price our subscriptions
based on the functionality and capacity needs of our customers. Subscription
periods for our customers generally range from one to three years and we
customarily invoice customers in advance in annual installments.

In December 2019 a novel strain of Coronavirus disease (COVID-19) was reported
and in March 2020 the World Health Organization (WHO) characterized the COVID-19
as a pandemic. The COVID-19 pandemic has impacted our business, and its full
impact is still uncertain and may continue to negatively affect our subscription
bookings and results of operations in future periods. The extent to which the
COVID-19 pandemic may impact our future financial condition or results of
operations remains uncertain. Also, we may experience curtailed customer demand
for our platform, reduced customer spending or contract duration or lengthened
payment terms that could materially adversely impact our business, results of
operations and overall financial performance in future periods. While our
subscription revenue is relatively predictable, the effect of the COVID-19
pandemic, along with the seasonality we historically experience, may not be
fully reflected in our results of operations and overall financial performance
until future periods.

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The extent and continued impact of the COVID-19 pandemic on our operational and
financial performance will depend on certain developments, including the
duration, spread or resurgence of the outbreak; government responses to the
pandemic; impact on our customers' and our sales cycles; impact on our customer,
industry or employee events; extent of delays in hiring and onboarding new
employees; how quickly and to what extent normal economic and operating
activities can resume; speed of rollout of COVID-19 vaccines, lifting of
restrictions on movement, and normalization of full-time return to work and
social events; and effect on our partners and vendors, all of which are
uncertain and difficult to predict. In response to the COVID-19 pandemic, we
have temporarily closed most of our offices (including our headquarters),
mandated our employees to work remotely, implemented travel restrictions for all
non-essential business, and shifted certain of our customer, industry, analyst,
investor, and employee events, including our Medallia Experience conference, to
virtual-only, and we may similarly alter, postpone or cancel events in the
future. These changes remained in effect in the first and second quarters of
fiscal year 2022 and could extend into future quarters. The impact, if any, of
these and any additional operational changes we may implement is uncertain but
changes we have implemented have not affected and are not expected to affect our
ability to maintain operations, including financial reporting systems, internal
control over financial reporting and disclosure controls and procedures. See the
section "Risk Factors" for further discussion of the impact and possible
continued impact of the COVID-19 pandemic on our business.
Pending Merger
On July 25, 2021, we entered into the Merger Agreement with Parent and Merger
Sub. The Merger Agreement provides for our acquisition by entities affiliated
with Thoma Bravo in an all cash transaction valued at $6.4 billion.
Under the Merger Agreement, at the effective time of the Merger, each issued and
outstanding share of our common stock (except for certain shares specified in
the Merger Agreement) will be canceled and automatically converted into the
right to receive cash in an amount equal to $34.00 per share, without interest.
Completion of the Merger is subject to the satisfaction of certain terms and
conditions set forth in the Merger Agreement, including (i) approval of the
Merger Agreement by our stockholders; (ii) the absence of any law or order
restraining, enjoining or otherwise prohibiting the Merger; and (3) the
expiration or termination of the waiting period under the United States
Hart-Scott Rodino Antitrust Improvements Act of 1976, as amended, and clearance
under the antitrust laws of certain non-United States jurisdictions. A special
meeting of the Company's stockholders to consider and vote on the proposal to
adopt the Merger Agreement will take place subsequent to the expiration of the
"go-shop" period, which expires on September 4, 2021. The Merger is expected to
close in calendar year 2021. Upon consummation of the Merger, our common stock
will no longer be listed on any public market.
Key Business Metrics
We review a number of operating and financial metrics, including the following
key metrics, to evaluate our business, measure our performance, identify trends
affecting our business, formulate business plans and make strategic decisions.
Customers
We measure and track the number of customers, and we believe the number of
customers is useful information to investors, because our ability to attract new
customers, grow our customer base and retain existing customers helps drive our
success and is an important contributor to our revenue growth. We have
successfully demonstrated a history of growing our customer base. We define the
number of customers at the end of any particular period as the number of
customers with active annual subscription agreements that run through the
current or future period. In situations where a customer has multiple
subsidiaries or divisions, each entity that is invoiced as a separate entity is
treated as a separate customer. As of July 31, 2021 and 2020, we had 1,340 and
839 enterprise customers, respectively. If we count as a single enterprise
customer, all subsidiaries and divisions of a single parent, then as of July 31,
2021 and 2020, we had 984 and 590 enterprise customers, respectively.
We also serve a variety of small and mid-size businesses that prove our products
applicability across all levels of the market.
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Our use of customer count may have certain limitations as an analytical tool and
should not be considered in isolation or as a substitute for revenue or an
analysis of our results as reported under GAAP. For example, other companies,
including companies in our industry, may calculate number of customers
differently, which could reduce its usefulness as a comparative measure.
Subscription Billings
Subscription billings on a trailing 12-month basis also help investors better
understand our subscription sales activity for a particular period, which is not
necessarily reflected in our subscription revenue given that we recognize
subscription revenue ratably over the subscription term.
We define subscription billings, a non-GAAP financial measure, as total
subscription revenue plus the change in subscription deferred revenue and
contract assets, excluding contract assets acquired. We measure subscription
billings on a trailing 12-month basis because subscription billings vary from
quarter to quarter due to invoice timing. Subscription billings in any
particular period reflect amounts invoiced for subscriptions to access our
platform. We typically invoice our customers annually in advance for
subscriptions to our platform.
The following table sets forth our subscription billings and growth rate, and
provides a reconciliation of subscription revenue to subscription billings, for
the periods presented:
                                                                         

Trailing Twelve Months Ended July 31,

                                                                            2021                      2020

                                                                           (in thousands, except percentages)
Subscription revenue                                                 $          424,214       $             347,731
Increase in subscription deferred revenue                                        52,712                      34,450
(Increase) in contract assets                                                   (4,885)                     (2,448)
Subscription billings                                                $          472,041       $             379,733
Subscription billings growth rate                                           24%                        20%


Our use of subscription billings has certain limitations as an analytical tool
and should not be considered in isolation or as a substitute for revenue or an
analysis of our results as reported under GAAP. Subscription billings are
recognized when invoiced, while the related subscription revenue is recognized
ratably over the subscription term. For the second quarter of fiscal year 2022,
our trailing 12-month subscription billings growth rate was 24%. There are a
wide variety of factors that influence this metric. For example, due to the
COVID-19 pandemic, we have modified subscription terms, flexible payment or
invoicing terms in exchange for extensions of existing contracts for certain
customers hardest hit by the pandemic. Therefore, fluctuations in billings
should not be taken as an indication of changes in future revenue. Also, other
companies, including companies in our industry, may not use subscription
billings, may calculate subscription billings differently, may have different
billing frequencies, or may use other financial measures to evaluate their
performance, all of which could reduce the usefulness of subscription billings
as a comparative measure.
Dollar-based Net Revenue Retention
We use a dollar-based net revenue retention rate to measure our ability to
retain and expand business generated from our existing customers. Our
dollar-based net revenue retention rate compares our subscription revenue from
the same set of customers across comparable periods, calculated on a trailing
twelve-month basis. We focus on a dollar-based net revenue retention rate
metric, and we believe it is useful information to investors, because it
captures the full impact on revenue of customers expanding, decreasing or ending
their subscriptions. Our dollar-based net revenue retention rate as of July 31,
2021 and 2020 was 112% and 117% respectively, on a trailing twelve-month basis.
We calculate our dollar-based net revenue retention rate by dividing (i)
subscription revenue in the trailing 12-month period from those customers who
were on our platform during the prior 12-month period by (ii) subscription
revenue from the same customers in the prior trailing 12-month period. For the
purposes of calculating
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our dollar-based net revenue retention rate, we count as customers all parent
companies of each billing entity enterprise. We believe that our ability to
retain customers and expand their use of our platform over time is an indicator
of the stability of our revenue base and the long-term value of our
relationships with customers. If our dollar-based net revenue retention rate for
a period exceeds 100%, this means that the subscription revenue retained during
the period, which includes up-sells and cross-sells, more than offset the
subscription revenue lost from customers that did not renew all or a portion of
their contracts with us during that period.
Our use of dollar-based net revenue retention rate may have certain limitations
as an analytical tool and should not be considered in isolation or as a
substitute for revenue or an analysis of our results as reported under GAAP. For
example, other companies, including companies in our industry, may calculate
dollar-based net revenue retention rate differently, which could reduce its
usefulness as a comparative measure.
Components of Results of Operations
Revenue
We generate revenue from sales of subscriptions and related professional
services. Professional services include managed services and implementation and
other services. For all periods presented, we have relied on sales of our
platform to large enterprises for a significant majority of our revenue.
Subscription revenue is recognized ratably over the related contractual term,
generally beginning on the date that our platform is made available to a
customer. In general, our agreements are non-cancellable and we primarily bill
in advance annually for our multi-year contracts. Amounts that have been billed
are initially recorded as deferred revenue until the revenue is recognized.
Subscription revenue as a percentage of total revenue may vary from period to
period.
Professional services revenue includes fees associated with managed services and
one-time implementation and other services. Managed services support our
customers by providing a range of ongoing services, including program design,
launch, enhancements, expansion and analytics. Managed services are typically
sold on a fixed-fee recurring basis. Managed services are a stand-ready
obligation to perform these services over the term of the arrangement and as a
result, revenue is recognized ratably over the term of the arrangement.
Implementation and other services are sold on a fixed-fee or time-and-materials
basis and consist primarily of initial design, integration and configuration
services. In addition, we provide advisory services that enable customers to
gain insightful business information through data analysis and our institute
training programs. Implementation and other services revenue are recognized as
services are performed.
As we continue to increase the number of partners that provide implementation
and advisory services, we generally expect professional services revenue to
decrease as a percentage of total revenue in the long term, although this
percentage may vary from period to period.
Cost of Revenue, Gross Profit and Gross Margin
Cost of Subscription Revenue
Cost of subscription revenue primarily consists of software, hardware and
hosting costs, personnel-related expenses including stock-based compensation
expense, travel expense and allocated overhead costs for our subscription
operations, third-party costs and security and customer support departments
including outside services.
Cost of Professional Services Revenue
Cost of professional services revenue primarily consists of personnel-related
expenses including stock-based compensation expense, travel expense and
allocated overhead costs associated with the delivery of
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managed services, implementation and other service offerings, facility costs,
sub-contractor costs and outside services.
We expect our cost of revenue will increase in absolute dollars in future
periods as we continue to invest in our business and may vary from period to
period as a percentage of revenue.
Gross Profit and Gross Margin
Gross profit is total revenue less cost of revenue. Gross margin is gross profit
expressed as a percentage of revenue. Our gross margin may vary from period to
period as our mix or cost of revenue fluctuates. Our gross margin on
subscription revenue is significantly higher than our gross margin on
professional services revenue, which is close to break-even. In addition, we may
experience changes in our professional services gross margin due to the timing
of delivery of implementation and other services. We expect our gross margin may
vary from period to period and increase modestly in the long term.
Operating Expenses
Research and Development
Research and development expenses primarily consists of personnel-related
expenses including stock-based compensation expense, travel expense and
allocated overhead costs, facility costs, software and hardware costs and
depreciation. Our research and development efforts focus on maintaining and
enhancing functionality of existing services and adding new products and
features. We believe that continued investment in our platform is important for
our growth. Although we expect our research and development expenses will
increase in absolute dollars in future periods and may vary from period to
period as a percentage of revenue in the near term, we expect that research and
development expenses will decline as a percentage of revenue in the long term.
Sales and Marketing
Sales and marketing expenses primarily consists of personnel-related expenses
including stock-based compensation expense, travel expense and allocated
overhead expenses and marketing and promotional activities expenses including
our annual Experience conference, advertising, facility and training costs.
Sales commissions earned by our sales force are considered incremental and
recoverable costs of obtaining a contract with a customer and are deferred and
amortized on a straight-line basis over the expected period of benefit. We
intend to continue to invest in sales and marketing to help drive the growth of
our business. During the short term we expect to see a decline in travel
expenses as well as certain of our marketing costs such as the Experience
conference due to the COVID-19 pandemic as we focus our marketing and sales
events on virtual platforms. However, we expect our sales and marketing expenses
will increase in future periods as we ramp up our sales efforts.
General and Administrative
General and administrative expenses primarily consist of personnel-related
expenses including stock-based compensation expense, travel expense and overhead
costs, and facility costs and outside services. General and administrative
expenses also include restructuring costs from subleasing of certain of our
office spaces. We expect to incur additional general and administrative expenses
due to the Merger in calendar year 2021, to support growth of the Company as
well as to support the transition back to being a private company. We expect
that general and administrative expenses will increase in absolute dollars in
future periods and vary from period to period as a percentage of revenue.
Other Income (Expense), net
Other income (expense), net consists primarily of interest expense, amortization
of the issuance costs on the convertible senior notes, and net foreign currency
exchange gains (losses). In addition, interest income includes interest on our
cash and marketable securities balances.
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Provision For Income Taxes
Provision for income taxes consists of U.S. federal and state income taxes and
income taxes on foreign jurisdictions in which we conduct business and foreign
withholding taxes. We maintain a full valuation allowance on our federal, state
and certain foreign deferred tax assets that we have determined are not
realizable on a more likely than not basis. For additional information regarding
our income taxes, see "Note 12: Income Taxes," included in this Quarterly Report
on Form 10-Q, in our notes to the unaudited condensed consolidated financial
statements.
Results of Operations
The following table sets forth our unaudited condensed consolidated statements
of operations data for the periods indicated (in thousands):
                                                  Three Months Ended July 31,                    Six Months Ended July 31,
                                                    2021                  2020                    2021                    2020
Revenue:
Subscription                                  $      117,392          $  92,831          $      223,463               $ 181,823
Professional services                                 26,716             22,694                  52,019                  46,393
Total revenue                                        144,108            115,525                 275,482                 228,216
Cost of revenue:
Subscription(1)                                       27,592             19,130                  51,748                  36,474
Professional services(1)                              26,931             22,042                  50,473                  44,261
Total cost of revenue                                 54,523             41,172                 102,221                  80,735
Gross profit                                          89,585             74,353                 173,261                 147,481
Operating expenses:
Research and development(1)                           35,363             27,790                  66,000                  60,169
Sales and marketing(1)                                80,150             51,942                 153,130                 103,957
General and administrative(1)                         33,909             29,137                  64,022                  50,635
Total operating expenses                             149,422            108,869                 283,152                 214,761
Loss from operations                                 (59,837)           (34,516)               (109,891)                (67,280)
Other income (expense), net                           (1,716)              (448)                 (3,309)                   (273)
Loss before provision for income taxes               (61,553)           (34,964)               (113,200)                (67,553)
Provision for income taxes                               937                234                   1,711                     174
Net loss                                      $      (62,490)         $ (35,198)         $     (114,911)              $ (67,727)



(1) Includes stock-based compensation expense as follows (in thousands):

                                                Three Months Ended July 31,                 Six Months Ended July 31,
                                                  2021                  2020                 2021                 2020
Cost of subscription revenue                $        1,105          $     946          $       1,959          $   1,855
Cost of professional services revenue                3,282              2,719                  5,500              5,402
Research and development expense                     5,944              4,746                 10,374             16,219
Sales and marketing expense                         11,945              8,745                 21,526             18,081
General and administrative expense                   7,421              7,478                 13,939             14,881
Total stock-based compensation              $       29,697          $  

24,634 $ 53,298 $ 56,438

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The following table sets forth our unaudited condensed consolidated statements
of operations data expressed as a percentage of total revenue for the periods
indicated:
                                                 Three Months Ended July 31,                  Six Months Ended July 31,
                                                 2021                  2020                  2021                  2020
Revenue:
Subscription                                          81  %                 80  %                 81  %                 80  %
Professional services                                 19  %                 20  %                 19  %                 20  %
Total revenue                                        100  %                100  %                100  %                100  %
Cost of revenue:
Subscription                                          19  %                 17  %                 19  %                 16  %
Professional services                                 19  %                 19  %                 18  %                 19  %
Total cost of revenue                                 38  %                 36  %                 37  %                 35  %
Gross profit                                          62  %                 64  %                 63  %                 65  %
Operating expenses:
Research and development                              25  %                 24  %                 24  %                 26  %
Sales and marketing                                   56  %                 45  %                 56  %                 46  %
General and administrative                            24  %                 25  %                 23  %                 22  %
Total operating expenses                             104  %                 94  %                103  %                 94  %
Loss from operations                                 (42) %                (30) %                (40) %                (29) %
Other income (expense), net                           (1) %                  -  %                 (1) %                  -  %
Loss before provision for income taxes               (43) %                (30) %                (41) %                (30) %
Provision for income taxes                             1  %                  -  %                  1  %                  -  %
Net loss                                             (43) %                (30) %                (42) %                (30) %


Three and Six Months Ended July 31, 2021 and 2020
Revenue
                               Three Months Ended July 31,                                                         Six Months Ended July 31,
                                 2021                  2020            $ Change            % Change                 2021                  2020            $ Change            % Change

                                                                                         (in thousands, except percentages)
Subscription               $      117,392          $  92,831          $ 24,561                    26  %       $      223,463          $ 181,823          $ 41,640                    23  %
Professional services              26,716             22,694             4,022                    18  %               52,019             46,393             5,626                    12  %
Total revenue              $      144,108          $ 115,525          $ 28,583                    25  %       $      275,482          $ 228,216          $ 47,266                    21  %


Total revenue was $144.1 million for the three months ended July 31, 2021
compared to $115.5 million for the three months ended July 31, 2020, which is an
increase of $28.6 million, or 25%. Total revenue was $275.5 million for the six
months ended July 31, 2021 compared to $228.2 million for the six months ended
July 31, 2020, which is an increase of $47.3 million or 21%.
Subscription revenue accounted for 81% of total revenue for each of the three
and six months ended July 31, 2021 and 80% of total revenue for each of the
three and six months ended July 31, 2020, respectively. Subscription revenue
increased by $24.6 million, or 26%, for the three months ended July 31, 2021
compared to the three months ended July 31, 2020. Subscription revenue increased
by $41.6 million, or 23%, for the six months ended July 31, 2021 compared to the
six months ended July 31, 2020. We increased subscription revenue due to
cross-selling to our existing customers and expansions as reflected in our
dollar-based net revenue retention rate of 112% for the six months ended July
31, 2021.
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Professional services revenue increased by $4.0 million, or 18%, for the three
months ended July 31, 2021 compared to the three months ended July 31, 2020.
Professional services increased by $5.6 million, or 12% for the six months ended
July 31, 2021 compared to the six months ended July 31, 2020. The increases were
driven by higher managed and implementation services.
Cost of Revenue, Gross Profit and Gross Margin
                              Three Months Ended July 31,                                                       Six Months Ended July 31,
                                 2021                2020            $ Change            % Change                 2021                2020            $ Change            % Change

                                                                                       (in thousands, except percentages)
Cost of revenue:
Subscription               $         27,592       $    19,130       $  8,462                    44  %       $         51,748       $    36,474       $ 15,274                    42  %
Professional services                26,931            22,042          4,889                    22  %                 50,473            44,261          6,212                    14  %
Total cost of revenue      $         54,523       $    41,172       $ 13,351                    32  %       $        102,221       $    80,735       $ 21,486                    27  %
Gross profit               $         89,585       $    74,353       $ 15,232                    20  %       $        173,261       $   147,481       $ 25,780                    17  %
Gross margin:
Subscription                         76   %            79   %                                                         77   %            80   %
Professional services                (1)  %             3   %                                                          3   %             5   %
Total gross margin                   62   %            64   %                                                         63   %            65   %


Total cost of revenue was $54.5 million for the three months ended July 31,
2021, an increase of $13.4 million, or 32% compared to the three months ended
July 31, 2020. Total cost of revenue was $102.2 million for the six months ended
July 31, 2021, an increase of $21.5 million, or 27% compared to the six months
ended July 31, 2020.
Cost of subscription revenue increased by $8.5 million, or 44%, for the three
months ended July 31, 2021 compared to the three months ended July 31, 2020. The
increase was primarily due to an increase in hosting, software and hardware,
including amortization of acquired intangibles, of $6.2 million and higher
personnel-related expenses of $2.0 million. Cost of subscription revenue
increased by $15.3 million, or 42%, for the six months ended July 31, 2021
compared to the six months ended July 31, 2020. This increase was primarily due
to an $11.4 million increase in hosting, software and hardware, including
amortization of acquired intangible assets, and a higher personnel-related
expenses of $3.3 million.
Cost of professional services revenue increased by $4.9 million, or 22%, for the
three months ended July 31, 2021 compared to the three months ended July 31,
2020 primarily due to an increase of $3.8 million in personnel-related expenses
and an increase of $0.6 million in outside services and other. Cost of
professional services revenue increased by $6.2 million, or 14%, for the six
months ended July 31, 2021 compared to the six months ended July 31, 2020
primarily due to increases in personnel-related expenses of $5.3 million.
Gross margin decreased during the three and six months ended July 31, 2021 as
compared to the three and six months ended July 31, 2020 due to higher hosting,
software and hardware, including amortization of acquired intangibles.
Research and Development
                                 Three Months Ended July 31,                                                       Six Months Ended July 31,
                                   2021                 2020            $ Change            % Change                 2021                2020            $ Change            % Change

                                                                                          (in thousands, except percentages)
Research and development     $      35,363           $ 27,790          $  7,573                    27  %       $     66,000           $ 60,169          $  5,831                    10  %
Percentage of revenue                   25   %             24  %                                                         24   %             26  %

Research and development expenses increased by $7.6 million or 27%, for the
three months ended July 31, 2021 compared to the three months ended July 31,
2020
. The increase was primarily due to an increase in

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personnel-related expenses of $6.3 million and an increase of $1.6 million in
outside services and other. Research and development expenses increased by $5.8
million or 10%, for the six months ended July 31, 2021 compared to the six
months ended July 31, 2020. The increase was primarily due to higher
personnel-related expenses of $3.2 million and an increase of $3.3 million in
outside services and other.
Sales and Marketing
                               Three Months Ended July 31,                                                          Six Months Ended July 31,
                                 2021                 2020            $ Change            % Change                 2021                     2020            $ Change            % Change

                                                                                          (in thousands, except percentages)
Sales and marketing        $      80,150           $ 51,942          $ 28,208                    54  %       $    153,130               $ 103,957          $ 49,173                    47  %
Percentage of revenue                 56   %             45  %                                                         56   %                  46  %


Sales and marketing expenses increased by $28.2 million, or 54%, for the three
months ended July 31, 2021 compared to the three months ended July 31, 2020. The
increase was primarily due to higher personnel-related expenses of $22.1million
as we expanded our quota bearing sales force along with non-quota bearing sales
support positions, an increase of $2.2 million in software and outside
consulting services and an increase of $2.0 million in marketing costs. Sales
and marketing expenses increased by $49.2 million, or 47%, for the six months
ended July 31, 2021 compared to the six months ended July 31, 2020. The increase
was primarily due to higher personnel-related expenses of $35.1 million, as we
continue to expand our quota bearing sales force along with non-quota bearing
sales support positions, an increase in marketing costs of $7.5 million from
higher advertising and sponsorship expenses, and an increase of $4.1 million in
software and other consulting costs.
General and Administrative
                                   Three Months Ended July 31,                                                       Six Months Ended July 31,
                                     2021                 2020            $ Change            % Change                 2021                2020            $ Change            % Change

                                                                                            (in thousands, except percentages)
General and administrative     $      33,909           $ 29,137          $  4,772                    16  %       $     64,022           $ 50,635          $ 13,387                    26  %
Percentage of revenue                     24   %             25  %                                                         23   %             22  %


General and administrative expenses increased by $4.8 million, or 16%, for the
three months ended July 31, 2021 compared to the three months ended July 31,
2020. The increase was primarily due to transaction expenses associated with the
pending Thoma Bravo acquisition of $9.3 million, partially offset by a decrease
in restructuring and other expenses of $4.7 million. General and administrative
expenses increased by $13.4 million, or 26%, for the six months ended July 31,
2021 compared to the six months ended July 31, 2020. The increase was primarily
due to transaction expenses associated with the pending Thoma Bravo acquisition
of $9.3 million, as well as a payment of $5.4 million related to the
acceleration of certain stock options in conjunction with the acquisition of
Decibel.
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Other Income (Expense), net and Provision for Income Taxes

                         Three Months Ended July 31,                                                    Six Months Ended July 31,
                             2021             2020           $ Change            % Change                 2021                2020            $ Change            % Change

                                                                                  (in thousands, except percentages)
Interest expense and
other                    $  (1,863)         $ (626)         $ (1,237)                  198  %       $      (3,617)         $ (1,324)         $ (2,293)                  173  %
Interest income                147             178               (31)                  (17) %                 308             1,051              (743)                  (71) %
Other income (expense),
net                      $  (1,716)         $ (448)         $ (1,268)                  283  %       $      (3,309)         $   (273)         $ (3,036)                 1112  %

Provision for income
taxes                    $     937          $  234          $    703                   300  %       $       1,711          $    174          $  1,537                   883  %


Interest expense and other increased during the three and six months ended
July 31, 2021 compared to the three and six months ended July 31, 2020 primarily
due to an increase in interest expense related to our convertible senior notes
and finance leases.
Interest income decreased during the three and six months ended July 31, 2021
compared to the three and six months ended July 31, 2020 primarily due to lower
interest rates on our cash, cash equivalent and marketable securities balances.
Income tax expense increased by $0.7 million during the three months ended July
31, 2021 compared to the three months ended July 31, 2020. This was primarily
attributed to excess tax benefits from stock-based compensation deductions in
the United Kingdom and the tax benefit realized acquisition of Voci during the
compartive three months ended July 31, 2020. During the six months ended July
31, 2021, income tax expense increased by $1.5 million compared to the six
months ended July 31, 2020, primarily due to excess tax benefits from
stock-based compensation deductions in the United Kingdom and the tax benefit
realized from the acquisition of Voci during the comparative six months ended
July 31, 2020.
Liquidity and Capital Resources
As of July 31, 2021 and January 31, 2021, we had cash, cash equivalents and
current marketable securities of $507.6 million and $682.4 million,
respectively. On March 12, 2021, we acquired Decibel, a leader in digital
experience analytics for approximately $162.3 million in cash, including a
payment of $5.4 million related to the acceleration of certain stock options in
conjunction with the acquisition of Decibel. We experience seasonality related
to our operating cash flows. Our quarterly operating cash flows are generally
positive in the first and fourth quarters and are generally negative in the
second and third quarters. The seasonality is primarily attributable to higher
billings in the fourth quarter of each year. We primarily bill in advance
annually for our multi-year contracts, resulting in higher cash collections of
trade and other receivables in the first and fourth quarters of each year. This
seasonality has not impacted, nor do we expect it to impact in the future, our
ability to fund our near-term working capital, finance lease payments or capital
expenditure requirements. While we may experience delays in collections which we
attribute to the COVID-19 pandemic, we believe that our existing cash, cash
equivalents and marketable securities and trade and other receivables will be
sufficient to support working capital, finance lease payments and capital
expenditure requirements for at least the next 12 months. Our long-term capital
expenditure requirements will depend on many factors including our growth rate,
the timing and extent of spending to support development efforts, the expansion
of sales and marketing activities, the introduction of new and enhanced products
and services offerings, and the continuing market acceptance of our products, as
well as the timing of the closing of the proposed Merger and the duration and
extent of the COVID-19 pandemic and its effect on our business. Since inception,
we have financed operations primarily through subscription payments by customers
for use of our platform, equity and debt financings, finance lease arrangements
and loans for equipment.
From time to time, we may seek additional equity or debt financing to fund
capital expenditures, strategic initiatives or investments and our ongoing
operations. In the event that we decide, or are required, to seek additional
financing from outside sources, we may not be able to raise it on terms
acceptable to us or at all. If we are unable to
                                       38
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raise additional capital when desired, our business, financial condition and
results of operations could be adversely affected.
Merger Agreement
On July 25, 2021, we entered into the Merger Agreement. We have agreed to
various representations, warranties, covenants and agreements, including, among
others, agreements to conduct our business in the ordinary course during the
period between the execution of the Merger Agreement and the effective time of
the Merger. If the Merger Agreement is terminated in certain circumstances,
including by us in order to enter into a superior proposal or by Parent because
the Board withdraws its recommendation in favor of the Merger, we would be
required to pay Parent a termination fee of up to $191.1 million. In addition,
without the consent of Parent, we may not take, authorize, agree or commit to do
certain actions outside of the ordinary course of business, including incurring
material capital expenditures above specified thresholds, or issuing additional
debt facilities. We do not believe that the restrictions in the Merger Agreement
will prevent us from meeting our debt obligations, ongoing costs of operations,
working capital needs or capital expenditure requirements.
Convertible Senior Notes
In September 2020, we issued $575.0 million aggregate principal amount of
convertible senior notes. The net proceeds from this offering were approximately
$558.2 million, after deducting the Initial Purchasers' discounts and
commissions and issuance costs.
Capped Call Transactions
In connection with the offering of the Notes, we entered into privately
negotiated capped call transactions with respect to our common stock at a cost
of approximately $61.9 million. We expect that the capped call transactions will
be terminated upon effectiveness of the Merger.
Wells Fargo Bank Credit Facility
On September 4, 2020 we entered into the Wells Fargo Bank Credit Facility (Wells
Fargo Credit Facility) to provide for a revolving line of credit of up to $50.0
million with the right (subject to certain conditions) to add incremental
revolving commitments of up to $50.0 million in the aggregate. The revolving
line of credit provides a sublimit of up to $40.0 million to be available for
the issuance of letters of credit. The outstanding balance, if any, is due at
the maturity date in September 2023. Loans bear interest, at our option, at an
annual rate based on LIBOR or a base rate. Loans based on LIBOR shall bear
interest at a rate of LIBOR plus 1.75%. Loans based on the base rate shall bear
interest at a rate of the base rate plus 0.75%. We are required to pay a
commitment fee equal to 0.25% per annum on the undrawn portion available under
the revolving line of credit. As of July 31, 2021, no amounts were outstanding
on this credit facility.
Silicon Valley Bank Credit Facility
On September 4, 2020 we paid all outstanding amounts owing under the Silicon
Valley Bank revolving line of credit and terminated the credit facility. We
continue to have unsecured letters of credit issued by Silicon Valley Bank in
the face amount of $4.9 million outstanding as of July 31, 2021.
Cash Flow Hedging
We conduct business on a global basis in multiple foreign currencies, which
subjects us to foreign currency fluctuations resulting from customer contracts
and operating expenses denominated in foreign currencies. To protect our margin,
we have instituted a cash flow hedging program to help mitigate the variability
in cash flows due to certain foreign currency fluctuations. For revenues, we
enter into foreign currency forward contracts to sell foreign currencies to
hedge the non-U.S. dollar denominated revenue related to year two and year three
of our multi-year
                                       39
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customer contracts. For expenses, we enter into foreign currency forward
contracts to purchase foreign currencies to hedge a percentage of certain
non-U.S. dollar denominated operating expenses over the next 12 months.
Cash Flows
The following table shows a summary of our cash flows for the periods presented
(in thousands):
                                                                       Six Months Ended July 31,
                                                                       2021                   2020
Net cash (used in) provided by operating activities             $       (16,791)         $      3,691
Net cash used in investing activities                                  (173,979)              (94,769)
Net cash provided by financing activities                                19,371                90,043
Effect of exchange rate changes on cash and cash
equivalents                                                                 122                   (49)
Net decrease in cash and cash equivalents                       $      

(171,277) $ (1,084)


Operating Activities
Our largest source of operating cash is cash collections from our customers for
subscriptions and professional services fees. Our primary uses of cash from
operating activities are for personnel-related expenses, facilities costs and
rent, marketing expenses and hosting fees. We typically experience relatively
higher billings in the fourth quarter compared to other quarters and experience
higher collections of trade and other receivables in the first and fourth
quarter of the year, which results in a decrease in trade and other receivables.
Cash used in operating activities for the six months ended July 31, 2021 of
$16.8 million primarily related to our net loss of $114.9 million, adjusted for
non-cash charges of $104.8 million and net cash outflows of $6.6 million from
changes in operating assets and liabilities. Non-cash charges primarily
consisted of stock-based compensation, depreciation and amortization of property
and equipment and intangible assets, non-cash lease expenses, amortization of
convertible debt issuance costs and amortization of deferred commissions. The
primary drivers of the changes in our operating assets and liabilities related
to a $39.0 million decrease in deferred revenue, a $28.1 million increase in
deferred commissions and a $9.4 million increase in prepaid expenses and other
current assets and other noncurrent assets, partially offset by a $58.8 million
decrease in trade and other receivables, and a $11.1 million increase in
accounts payable, accrued expenses, lease liabilities, and other current and
noncurrent liabilities.
Cash provided by operating activities for the six months ended July 31, 2020 of
$3.7 million primarily related to our net loss of $67.7 million, adjusted for
non-cash charges of $97.4 million and net cash outflows of $26.0 million from
changes in operating assets and liabilities. Non-cash charges primarily
consisted of stock-based compensation, depreciation and amortization of property
and equipment and intangible assets and amortization of our deferred
commissions. The primary drivers of the changes in our operating assets and
liabilities related to a $63.3 million decrease in accounts receivable,
partially offset by a $57.8 million decrease in deferred revenue, a $20.0
million increase in deferred commissions, a $10.3 million decrease in accounts
payable, accrued expenses, lease liabilities and non-current liabilities and a
$1.2 million increase in prepaid expense and other assets.
Investing Activities
Cash used in investing activities for the six months ended July 31, 2021 of
$174.0 million was due to acquisitions, net of cash acquired of CheckMarket and
Decibel for $163.8 million, which includes a payment of $5.4 million related to
the acceleration of certain stock options in conjunction with the acquisition of
Decibel, the purchases of property, equipment and other of $12.8 million,
partially offset by net maturities and proceeds from sale of marketable
securities of $2.6 million.
Cash used in investing activities for the six months ended July 31, 2020 of
$94.8 million was due to acquisitions, net of cash acquired of LivingLens and
Voci for $80.4 million, the purchases of property, equipment and other of $9.8
million, and net purchases of marketable securities of $4.6 million.
                                       40

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Financing Activities
Cash provided by financing activities for the six months ended July 31, 2021 of
$19.4 million consisted of $14.8 million in proceeds from the exercise of stock
options and $8.0 million in proceeds from the Employee Stock Purchase Plan,
partially offset by repayments on finance lease obligations of $3.2 million.
Cash provided by financing activities for the six months ended July 31, 2020 of
$90.0 million consisted of $43.0 million in proceeds from drawing down our
revolving line of credit, $41.0 million in proceeds from the exercise of stock
options and $10.3 million proceeds from the Employee Stock Purchase Plan,
partially offset by repayments on capital lease obligations of $2.1 million and
repayments of debt assumed on acquisitions of $2.1 million.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any
off-balance sheet financing arrangements or any relationships with
unconsolidated entities or financial partnerships, including entities sometimes
referred to as structured finance or special purpose entities, that were
established for the purpose of facilitating off-balance sheet arrangements or
other contractually narrow or limited purposes, except for the letters of credit
described in "Note 9: Debt" of our unaudited condensed consolidated financial
statements included elsewhere in this Quarterly Report on Form 10-Q.
Critical Accounting Policies
We prepare our unaudited condensed consolidated financial statements in
accordance with GAAP. Preparing our unaudited condensed consolidated financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenue and expenses as well as related
disclosures. Because these estimates and judgments may change from period to
period, actual results could differ materially, which may negatively affect our
financial condition or results of operations. We base our estimates and
judgments on historical experience and various other assumptions that we
consider reasonable, and we evaluate these estimates and judgments on an ongoing
basis. There have been no material changes to these policies and estimates for
the three and six months ended July 31, 2021 from those disclosed in Item 7 of
our Form 10-K for the year ended January 31, 2021.
Recent Accounting Pronouncements
See "Note 1: Description of Business and Summary of Significant Accounting
Policies" of our unaudited condensed consolidated financial statements included
elsewhere in this Quarterly Report on Form 10-Q for more information regarding
recently issued accounting pronouncements.

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