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Zscaler Reports Fourth Quarter and Fiscal 2021 Financial Results

Sep 09, 2021 4:05 PM EDT

Fourth Quarter Highlights

  • Revenue grows 57% year-over-year to $197.1 million
  • Calculated billings grows 70% year-over-year to $332.2 million
  • Deferred revenue grows 71% year-over-year to $630.6 million
  • GAAP net loss of $81.0 million compared to GAAP net loss of $49.5 million on a year-over-year basis
  • Non-GAAP net income of $20.3 million compared to non-GAAP net income of $12.0 million on a year-over-year basis

SAN JOSE, Calif., Sept. 09, 2021 (GLOBE NEWSWIRE) -- Zscaler, Inc. (Nasdaq: ZS), the leader in cloud security, today announced financial results for its fiscal fourth quarter and fiscal year ended July 31, 2021.

"We delivered outstanding results for the fourth quarter, with a record number of large deals across diverse sectors driving 57% revenue growth and 70% billings growth year over year, finishing the fiscal year with strong business momentum," said Jay Chaudhry, Chairman and CEO of Zscaler. “Enterprises of all sizes are adopting Zscaler’s Zero Trust Exchange to accelerate their secure digital transformation journey as they turn away from legacy castle-and-moat security. We continue to invest and innovate across all our product pillars and help our customers adopt a Zero Trust architecture designed to secure the cloud and mobile world.”

Fourth Quarter Fiscal 2021 Financial Highlights

  • Revenue: $197.1 million, an increase of 57% year-over-year.
  • Income (loss) from operations: GAAP loss from operations was $67.4 million, or 34% of total revenue, compared to $44.9 million, or 36% of total revenue, in the fourth quarter of fiscal 2020. Non-GAAP income from operations was $20.6 million, or 10% of total revenue, compared to $12.4 million, or 10% of total revenue, in the fourth quarter of fiscal 2020.
  • Net income (loss): GAAP net loss was $81.0 million, compared to $49.5 million in the fourth quarter of fiscal 2020. Non-GAAP net income was $20.3 million, compared to $12.0 million in the fourth quarter of fiscal 2020.
  • Net income (loss) per share: GAAP net loss per share was $0.59, compared to $0.38 in the fourth quarter of fiscal 2020. Non-GAAP net income per share was $0.14, compared to $0.08 in the fourth quarter of fiscal 2020.
  • Cash flow: Cash provided by operations was $44.7 million, or 23% of revenue, compared to $31.6 million, or 25% of revenue, in the fourth quarter of fiscal 2020. Free cash flow was $27.7 million, or 14% of revenue, compared to $10.9 million, or 9% of revenue, in the fourth quarter of fiscal 2020.
  • Deferred revenue: $630.6 million as of July 31, 2021, an increase of 71% year-over-year.
  • Cash, cash equivalents and short-term investments: $1,502.6 million as of July 31, 2021, an increase of $132.0 million from July 31, 2020.

Full Year Fiscal 2021 Financial Highlights

  • Revenue: $673.1 million, an increase of 56% year-over-year.
  • Income (loss) from operations: GAAP loss from operations was $207.8 million, or 31% of total revenue, compared to $114.0 million, or 26% of total revenue, in fiscal 2020. Non-GAAP income from operations was $78.0 million, or 12% of total revenue, compared to $38.2 million, or 9% of total revenue, in fiscal 2020.
  • Net income (loss): GAAP net loss was $262.0 million, compared to $115.1 million in fiscal 2020. Non-GAAP net income was $75.7 million, compared to $40.8 million in fiscal 2020.
  • Net income (loss) per share: GAAP net loss per share was $1.93, compared to $0.89 in fiscal 2020. Non-GAAP net income per share was $0.52, compared to $0.30 in fiscal 2020.
  • Cash flow: Cash provided by operations was $202.0 million, or 30% of revenue, compared to $79.3 million, or 18% of revenue, in fiscal 2020. Free cash flow was $143.7 million, or 21% of revenue, compared to $27.5 million, or 6% of revenue, in fiscal 2020.

Recent Business Highlights

  • Hosted virtual Zenith Live 2021 across the Americas, Europe and Asia Pacific, with keynote participants from Accenture, Freddie Mac, HSBC and other global leaders in their space. The two-day summit also featured more than 50 cybersecurity training sessions, workshops, and panel discussions to help organizations adopt zero trust to secure work-from-anywhere, prevent cyberthreats and data loss, and improve the digital experience for users everywhere.
  • Announced new integrations with ServiceNow, the leading digital workflow company, allowing customers to further benefit from zero trust architecture by gaining control of sensitive cloud-based data and enabling fast threat detection and response as they accelerate their secure digital transformation journey.
  • Selected as a key partner for the new Zero Trust Architecture Project by the National Institute of Standards and Technology (NIST)’s National Cybersecurity Center of Excellence (NCCoE). Zscaler will work alongside the NCCoE and other top Federal IT vendors on innovative approaches for implementing zero trust architecture.
  • The Zscaler ThreatLabZ research team leveraged unique data from the Zscaler cloud to reveal the current state of IoT malware on devices still connected inside empty office campuses during the pandemic. The Zscaler Zero Trust Exchange successfully blocked more than 800 IoT malware attacks per hour against these devices alone, representing a 700% increase in attacks year-over-year.

Change in Non-GAAP Measures Presentation

Effective August 1, 2020, the beginning of our fiscal year ending July 31, 2021, we have presented employer payroll taxes related to employee equity award transactions, which is a cash expense, as part of stock-based compensation expense in our non-GAAP results. These payroll taxes have been excluded from our non-GAAP results because they are tied to the timing and size of the exercise or vesting of the underlying equity awards and the price of our common stock at the time of vesting or exercise may vary from period to period independent of the operating performance of our business. Prior periods amounts have been recasted to conform to this presentation.

Financial Outlook

For the first quarter of fiscal 2022, we expect:

  • Total revenue of $210 million to $212 million
  • Non-GAAP income from operations of $18 million to $19 million 
  • Non-GAAP net income per share of approximately $0.12, assuming approximately 148 million common shares outstanding

For the full year fiscal 2022, we expect:

  • Total revenue of $940 million to $950 million
  • Calculated billings of $1,230 million to $1,250 million
  • Non-GAAP income from operations of $85 million to $90 million
  • Non-GAAP net income per share of $0.52 to $0.56, assuming approximately 149 million to 150 million common shares outstanding

These statements are forward-looking and actual results may differ materially. Refer to the Forward-Looking Statements safe harbor below for information on the factors that could cause our actual results to differ materially from these forward-looking statements.

Guidance for non-GAAP income from operations excludes stock-based compensation expense and related payroll taxes, amortization expense of acquired intangible assets, asset impairment related to facility exit, certain litigation-related expenses, amortization of debt discount and issuance costs and income tax effects generated by intangible assets acquired in business acquisitions. Guidance for non-GAAP net income per share includes the anti-dilutive impact of the capped call transactions entered into in connection with our convertible senior notes issued in June 2020. We have not reconciled our expectations to non-GAAP income from operations and non-GAAP net income per share to their most directly comparable GAAP measures because certain items are out of our control or cannot be reasonably predicted. Accordingly, a reconciliation for the guidance for non-GAAP income from operations and non-GAAP net income per share is not available without unreasonable effort.

Conference Call and Webcast Information

Zscaler will host a conference call for analysts and investors to discuss its fourth quarter fiscal 2021 earnings results and outlook for its first quarter of fiscal 2022 and full year fiscal 2022 today at 1:30 p.m. Pacific time (4:30 p.m. Eastern time).

Date:Thursday, September 9, 2021
Time:1:30 p.m. PT
Webcast:https://ir.zscaler.com
Dial-in number:918-922-3018

Upcoming Conferences

First quarter of fiscal 2022 virtual investor conference participation schedule:

  • Deutsche Bank Technology Conference
    Friday, September 10, 2021
  • Piper Sandler Global Technology Conference
    Tuesday, September 14, 2021
  • Citi's 2021 Global Technology Virtual Conference
    Wednesday, September 15, 2021

Sessions which offer a webcast will be available on the Investor Relations section of the Zscaler website at https://ir.zscaler.com.

Forward-Looking Statements

This press release contains forward-looking statements that involve risks and uncertainties, including, but not limited to, statements regarding our future financial and operating performance, including our financial outlook for the first quarter of fiscal 2022 and full year fiscal 2022. There are a significant number of factors that could cause actual results to differ materially from statements made in this press release, including but not limited to: the duration and global impact of COVID-19 on our business, operations and financial results and the economy in general; our ability as an organization to acquire and integrate other companies, products or technologies in a successful manner; our limited operating history; our ability to identify and effectively implement the necessary changes to address execution challenges; risks associated with managing our rapid growth, including fluctuations from period to period; our limited experience with new product and subscription and support introductions and the risks associated with new products and subscription and support offerings, including the discovery of software bugs; our ability to attract and retain new customers; the failure to timely develop and achieve market acceptance of new products and subscriptions as well as existing products and subscription and support; rapidly evolving technological developments in the market for network security products and subscription and support offerings and our ability to remain competitive; length of sales cycles; and general market, political, economic and business conditions.

Additional risks and uncertainties that could affect our financial results are included under the captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” set forth from time to time in our filings and reports with the Security Exchange Commission (SEC), including our Quarterly Report on Form 10-Q for the three months ended April 30, 2021 filed on June 3, 2021, as well as future filings and reports by us, copies of which are available on our website at ir.zscaler.com and on the SEC’s website at www.sec.gov. You should not rely on these forward-looking statements, as actual outcomes and results may differ materially from those contemplated by these forward-looking statements as a result of such risks and uncertainties. Additional information will also be set forth in other filings that we make with the SEC from time to time. All forward-looking statements in this press release are based on information available to us as of the date hereof, and we do not assume any obligation to update the forward-looking statements provided to reflect events that occur or circumstances that exist after the date on which they were made.

Use of Non-GAAP Financial Information

We believe that the presentation of non-GAAP financial information provides important supplemental information to management and investors regarding financial and business trends relating to our financial condition and results of operations. For further information regarding why we believe that these non-GAAP measures provide useful information to investors, the specific manner in which management uses these measures, and some of the limitations associated with the use of these measures, please refer to the “Explanation of Non-GAAP Financial Measures" section of this press release.

About Zscaler

Zscaler (Nasdaq: ZS) accelerates digital transformation so customers can be more agile, efficient, resilient, and secure. The Zscaler Zero Trust Exchange protects thousands of customers from cyberattacks and data loss by securely connecting users, devices, and applications in any location. Distributed across more than 150 data centers globally, the SASE-based Zero Trust Exchange is the world’s largest in-line cloud security platform.

Zscaler™ and the other trademarks listed at https://www.zscaler.com/legal/trademarks are either (i) registered trademarks or service marks or (ii) trademarks or service marks of Zscaler, Inc. in the United States and/or other countries. Any other trademarks are the properties of their respective owners.

Investor Relations Contacts

Bill Choi, CFA
SVP, Investor Relations and Strategic Finance
(408) 816-1478
ir@zscaler.com

Natalia Wodecki
Media Relations Contact
press@zscaler.com

ZSCALER, INC.
Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
(unaudited)
        
 Three Months Ended Year Ended
 July 31, July 31,
 2021 2020 2021 2020
Revenue$197,074   $125,887   $673,100   $431,269  
Cost of revenue (1) (2)45,478   31,358   150,317   95,733  
Gross profit151,596   94,529   522,783   335,536  
Operating expenses:       
Sales and marketing (1) (2)136,385   89,222   459,407   277,981  
Research and development (1) (2)56,180   32,785   174,653   97,879  
General and administrative (1) (3) (4)26,428   17,409   96,535   73,632  
Total operating expenses218,993   139,416   730,595   449,492  
Loss from operations(67,397)  (44,887)  (207,812)  (113,956) 
Interest income524   1,072   2,812   6,477  
Interest expense (5) (13,634)  (5,025)  (53,364)  (5,025) 
Other income (expense), net329   (252)  1,186   (224) 
Loss before income taxes(80,178)  (49,092)  (257,178)  (112,728) 
Provision for income taxes845   457   4,851   2,388  
Net loss$(81,023)  $(49,549)  $(262,029)  $(115,116) 
Net loss per share, basic and diluted$(0.59)  $(0.38)  $(1.93)  $(0.89) 
Weighted-average shares used in computing net loss per share, basic and diluted137,778   131,660   135,654   129,323  

(1) Includes stock-based compensation expense and related payroll taxes as follows:

Cost of revenue$5,033   $3,117   $15,272   $7,851  
Sales and marketing42,957   32,054   144,273   71,468  
Research and development25,558   13,458   73,238   31,937  
General and administrative12,395   7,351   45,779   18,380  
Total$85,943   $55,980   $278,562   $129,636  

(2) Includes amortization expense of acquired intangible assets as follows:

Cost of revenue$1,958   $1,272   $6,468   $2,030  
Sales and marketing108   50   327   74  
Research and development—   —   —   1,280  
Total$2,066   $1,322   $6,795   $3,384  


(3) Includes asset impairment related to facility exit as follows:$—   $—   $416   $746  


(4) Includes litigation-related expenses as follows:$—   $  $—   $18,356  


(5) Includes amortization of debt discount and issuance costs as follows:$13,274   $4,885   $51,923   $4,885  


ZSCALER, INC.
Condensed Consolidated Balance Sheets
(in thousands)
(unaudited)
 July 31,
 2021 2020
Assets   
Current assets:   
Cash and cash equivalents$275,898    $141,851   
Short-term investments1,226,654    1,228,722   
Accounts receivable, net257,109    147,584   
Deferred contract acquisition costs57,373    32,240   
Prepaid expenses and other current assets31,269    31,396   
Total current assets1,848,303    1,581,793   
Property and equipment, net108,576    75,734   
Operating lease right-of-use assets44,339    36,119   
Deferred contract acquisition costs, noncurrent149,657    77,675   
Acquired intangible assets, net32,129    24,024   
Goodwill58,977    30,059   
Other noncurrent assets15,650    8,054   
Total assets$2,257,631    $1,833,458   
    
Liabilities and Stockholders’ Equity   
Current liabilities:   
Accounts payable$12,547    $5,233   
Accrued expenses and other current liabilities22,908    16,361   
Accrued compensation93,622    49,444   
Deferred revenue571,286    337,263   
Operating lease liabilities19,842    15,600   
Total current liabilities720,205    423,901   
Convertible senior notes, net913,538    861,615   
Deferred revenue, noncurrent59,315    32,504   
Operating lease liabilities, noncurrent31,225    28,023   
Other noncurrent liabilities4,453    2,586   
Total liabilities1,728,736    1,348,629   
Stockholders’ Equity   
Common stock139    133   
Additional paid-in capital1,131,006    823,804   
Accumulated other comprehensive income (loss)(650)  463   
Accumulated deficit(601,600)  (339,571) 
Total stockholders’ equity528,895    484,829   
Total liabilities and stockholders’ equity$2,257,631    $1,833,458   


ZSCALER, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 Year Ended
 July 31,
 2021 2020
Cash Flows From Operating Activities   
Net loss$(262,029)  $(115,116) 
Adjustments to reconcile net loss to cash provided by operating activities:   
Depreciation and amortization expense29,663   17,734  
Amortization expense of acquired intangible assets6,795   3,384  
Amortization of deferred contract acquisition costs40,558   24,922  
Amortization of debt discount and issuance costs51,923   4,885  
Non-cash operating lease costs20,995   13,555  
Stock-based compensation expense258,535   121,395  
Amortization of investments purchased at a premium11,715   50  
Deferred income taxes(2,406)  (1,172) 
Impairment of assets416   746  
Other307   321  
Changes in operating assets and liabilities, net of effects of business acquisitions   
Accounts receivable(111,605)  (54,222) 
Deferred contract acquisition costs(137,673)  (65,052) 
Prepaid expenses, other current and noncurrent assets(3,388)  (13,580) 
Accounts payable7,451   862  
Accrued expenses, other current and noncurrent liabilities6,532   2,292  
Accrued compensation43,877   27,900  
Deferred revenue262,425   118,017  
Operating lease liabilities(22,051)  (7,604) 
Net cash provided by operating activities202,040   79,317  
Cash Flows From Investing Activities   
Purchases of property, equipment and other assets(48,165)  (43,072) 
Capitalized internal-use software(10,132)  (8,737) 
Payments for business acquisitions, net of cash acquired(40,530)  (39,601) 
Purchases of strategic investments(3,077)  (2,000) 
Purchases of short-term investments(815,480)  (1,255,629) 
Proceeds from maturities of short-term investments785,217   289,785  
Proceeds from sale of short-term investments22,499   21,092  
Net cash used in investing activities(109,668)  (1,038,162) 
Cash Flows From Financing Activities   
Proceeds from issuance of common stock upon exercise of stock options18,221   21,602  
Proceeds from issuance of common stock under the employee stock purchase plan25,704   15,333  
Payment of deferred consideration related to a business acquisition(2,250)    
Proceeds from issuance of convertible senior notes, net of issuance costs   1,130,522  
Purchases of capped calls related to convertible senior notes   (145,245) 
Net cash provided by financing activities41,675   1,022,212  
Net increase in cash and cash equivalents (1)134,047   63,367  
Cash and cash equivalents at beginning of period (1)141,851   78,484  
Cash and cash equivalents at end of period (1)$275,898   $141,851  

_________

(1) We did not hold restricted cash for any periods presented.

ZSCALER, INC.
Reconciliation of GAAP to Non-GAAP Financial Measures
(in thousands, except percentages)
(unaudited)
        
 Three Months Ended Year Ended
 July 31, July 31,
 2021 2020 2021 2020
        
Revenue$197,074   $125,887   $673,100   $431,269  
        
Non-GAAP Gross Profit and Non-GAAP Gross Margin       
GAAP gross profit$151,596   $94,529   $522,783   $335,536  
Add:       
Stock-based compensation expense and related payroll taxes5,033   3,117   15,272   7,851  
Amortization expense of acquired intangible assets1,958   1,272   6,468   2,030  
Non-GAAP gross profit$158,587   $98,918   $544,523   $345,417  
GAAP gross margin77 % 75 % 78 % 78 %
Non-GAAP gross margin80 % 79 % 81 % 80 %
        
Non-GAAP Income from Operations and Non-GAAP Operating Margin       
GAAP loss from operations$(67,397)  $(44,887)  $(207,812)  $(113,956) 
Add:       
Stock-based compensation expense and related payroll taxes85,943   55,980   278,562   129,636  
Litigation-related expenses   3      18,356  
Amortization expense of acquired intangible assets2,066   1,322   6,795   3,384  
Asset impairment related to facility exit (1)      416   746  
Non-GAAP income from operations$20,612   $12,418   $77,961   $38,166  
GAAP operating margin(34)% (36)% (31)% (26)%
Non-GAAP operating margin10 % 10 % 12 % 9 %

___________

(1) Consists of asset impairment charges related to the relocation of our corporate headquarters.

ZSCALER, INC.
Reconciliation of GAAP to Non-GAAP Financial Measures
(in thousands, except per share amounts)
(unaudited)
        
 Three Months Ended Year Ended
 July 31, July 31,
 2021 2020 2021 2020
Non-GAAP Net Income per Share, Diluted       
GAAP net loss$(81,023)  $(49,549)  $(262,029)  $(115,116) 
Stock-based compensation expense and related payroll taxes85,943   55,980   278,562   129,636  
Litigation-related expenses   3      18,356  
Amortization of debt discount and issuance costs13,274   4,885   51,923   4,885  
Amortization expense of acquired intangible assets2,066   1,322   6,795   3,384  
Asset impairment related to facility exit (1)      416   746  
Provision for income taxes (2)   (620)     (1,110) 
Non-GAAP net income$20,260   $12,021   $75,667   $40,781  
        
GAAP net loss per share, diluted$(0.59)  $(0.38)  $(1.93)  $(0.89) 
Stock-based compensation expense and related payroll taxes0.59   0.40   1.92   0.94  
Litigation-related expenses         0.13  
Amortization of debt discount and issuance costs0.09   0.03   0.36   0.04  
Amortization expense of acquired intangible assets0.01   0.01   0.05   0.02  
Asset impairment related to facility exit (1)         0.01  
Provision for income taxes (2)         (0.01) 
Adjustment to total fully diluted earnings per share (3)0.04   0.02   0.12   0.06  
Non-GAAP net income per share, diluted$0.14   $0.08   $0.52   $0.30  
        
Denominator:       
Weighted-average shares used in computing GAAP net loss per share, diluted137,778   131,660   135,654   129,323  
Potentially diluted shares9,869   9,805   10,361   8,911  
Antidilutive impact of capped call transactions (4)(1,973)     (1,167)    
Weighted-average shares used in computing non-GAAP net income per share, diluted145,674   141,465   144,848   138,234  

___________
(1) Consists of asset impairment charges related to the relocation of our corporate headquarters.

(2) We use our GAAP provision for income taxes for purposes of determining our non-GAAP income tax expense. The difference between our GAAP and non-GAAP income tax expense represents the effects of stock-based compensation expense recognized in foreign jurisdictions and any income tax benefits associated with business combinations. The income tax benefit related to stock-based compensation expense included in the GAAP provision for income taxes was not material for all periods presented. In the fiscal quarter ended April 30, 2020 and July 31, 2020, we recorded a tax benefit of $0.5 million and $0.6 million, respectively, associated with intangible assets recognized as a result of our acquisitions of Cloudneeti Corporation and Edgewise Networks Inc., respectively.

(3) The sum of the fully diluted earnings per share impact of individual reconciling items may not total to fully diluted Non-GAAP net income per share due to the weighted-average shares used in computing the GAAP net loss per share differs from the weighted-average shares used in computing the Non-GAAP net income per share and due to rounding of the individual reconciling items. The GAAP net loss per share calculation uses a lower share count as it excludes potentially dilutive shares, which are included in calculating the non-GAAP net income per share.

(4) We exclude the in-the-money portion of our convertible senior notes for non-GAAP weighted-average diluted shares as they are covered by our capped call transactions. Our outstanding capped call transactions are antidilutive under GAAP but are expected to mitigate the dilutive effect of our convertible notes and therefore are included in the calculations of non-GAAP diluted shares outstanding.

ZSCALER, INC.
Reconciliation of GAAP to Non-GAAP Financial Measures
(in thousands, except percentages)
(unaudited)
        
 Three Months Ended Year Ended
 July 31, July 31,
 2021 2020 2021 2020
Calculated Billings       
Revenue$197,074   $125,887   $673,100   $431,269  
Add: Total deferred revenue, end of period630,601   369,767   630,601   369,767  
Less: Total deferred revenue, beginning of period(495,434)  (300,791)  (369,767)  (251,202) 
Calculated billings$332,241   $194,863   $933,934   $549,834  
        
Free Cash Flow       
Net cash provided by operating activities$44,736   $31,635   $202,040   $79,317  
Less: Purchases of property, equipment and other assets(13,950)  (18,279)  (48,165)  (43,072) 
Less: Capitalized internal-use software(3,085)  (2,441)  (10,132)  (8,737) 
Free cash flow$27,701   $10,915   $143,743   $27,508  
As a percentage of revenue:       
Net cash provided by operating activities23 % 25 % 30 % 18 %
Less: Purchases of property, equipment and other assets(7)% (14)% (7)% (10)%
Less: Capitalized internal-use software(2)% (2)% (2)% (2)%
Free cash flow margin14 % 9 % 21 % 6 %

ZSCALER, INC.
Explanation of Non-GAAP Financial Measures

In addition to our results determined in accordance with generally accepted accounting principles in the United States of America (GAAP), we believe the following non-GAAP measures are useful in evaluating our operating performance. We use the following non-GAAP financial information to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that non-GAAP financial information, when taken collectively, may be helpful to investors because it provides consistency and comparability with past financial performance. However, non-GAAP financial information is presented for supplemental informational purposes only, has limitations as an analytical tool and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP. In particular, free cash flow is not a substitute for cash provided by operating activities. Additionally, the utility of free cash flow as a measure of our liquidity is further limited as it does not represent the total increase or decrease in our cash balance for a given period. In addition, other companies, including companies in our industry, may calculate similarly-titled non-GAAP measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measures as tools for comparison. A reconciliation of our historical non-GAAP financial measures to their most directly comparable financial measures stated in accordance with GAAP has been included in this press release. Investors are cautioned that there are a number of limitations associated with the use of non-GAAP financial measures and key metrics as analytical tools. Investors are encouraged to review these reconciliations, and not to rely on any single financial measure to evaluate our business.

Expenses Excluded from Non-GAAP Measures

Stock-based compensation expense is excluded primarily because it is a non-cash expense that management believes is not reflective of our ongoing operational performance. Effective August 1, 2020, the beginning of our fiscal year ending July 31, 2021, we have presented employer payroll taxes related to employee equity award transactions, which is a cash expense, as part of stock-based compensation expense in our non-GAAP results. These payroll taxes have been excluded from our non-GAAP results as these are tied to the timing and size of the exercise or vesting of the underlying equity awards and the price of our common stock at the time of vesting or exercise, which may vary from period to period independent of the operating performance of our business. Prior period amounts have been recasted to conform to this presentation. Amortization expense of acquired intangible assets is excluded because these are considered by management to be outside of our core business operating performance. Asset impairments related to facility exit costs are excluded because such charges are not reflective of our ongoing operational performance. Amortization of debt discount and issuance costs from our convertible senior notes are excluded because they are non-cash expenses and are not reflective of our ongoing operational performance. We also exclude certain litigation-related expenses consisting of professional fees and related costs incurred by us in defending against significant claims that we deem not to be in the ordinary course of our business and, if applicable, actual losses and accruals related to estimated losses in connection with these claims. There are many uncertainties and potential outcomes associated with any litigation, including the expense of litigation, timing of such expenses, court rulings, unforeseen developments, complications and delays, each of which may affect our results of operations from period to period, as well as the unknown magnitude of the potential loss relating to any lawsuit, all of which are inherently subject to change, difficult to predict and could adversely affect our results of operations. We estimate the tax effect of these items on our non-GAAP results and may adjust our GAAP provision for income taxes, if such effects have a material impact to our non-GAAP results.

Non-GAAP Financial Measures

Non-GAAP Gross Profit and Non-GAAP Gross Margin. We define non-GAAP gross profit as GAAP gross profit excluding stock-based compensation expense and related payroll taxes and amortization expense of acquired intangible assets. We define non-GAAP gross margin as non-GAAP gross profit as a percentage of revenue.

Non-GAAP Income from Operations and Non-GAAP Operating Margin. We define non-GAAP income from operations as GAAP loss from operations excluding stock-based compensation expense and related payroll taxes, amortization expense of acquired intangible assets, asset impairment related to facility exit and certain litigation-related expenses. We define non-GAAP operating margin as non-GAAP income from operations as a percentage of revenue.

Non-GAAP Net Income per Share, Diluted. We define non-GAAP net income as GAAP net loss excluding stock-based compensation expense and related payroll taxes, amortization expense of acquired intangible assets, asset impairment related to facility exit, amortization of debt discount and issuance costs, certain litigation-related expenses, income tax effects generated by the effects of stock-based compensation expense recognized in foreign jurisdictions and any income tax benefits associated with business combinations. We define non-GAAP net income per share, diluted, as non-GAAP net income divided by the weighted-average diluted shares outstanding, which includes the dilutive effect of potentially diluted common stock equivalents outstanding during the period and the antidilutive impact of the capped call transactions entered into in connection with our convertible senior notes issued in June 2020.

Calculated Billings. We define calculated billings as total revenue plus the change in deferred revenue in a period. Calculated billings in any particular period aims to reflect amounts invoiced for subscriptions to access our cloud platform, together with related support services related to our new and existing customers. We typically invoice our customers annually in advance, and to a lesser extent quarterly in advance, monthly in advance or multi-year in advance.

Free Cash Flow and Free Cash Flow Margin. We define free cash flow as net cash provided by operating activities less purchases of property, equipment and other assets and capitalized internal-use software. We define free cash flow margin as free cash flow divided by revenue. We believe that free cash flow and free cash flow margin are meaningful indicators of liquidity information to management and investors about the amount of cash generated from our operations that, after the investments in property, equipment and other assets and capitalized internal-use software, can be used for strategic initiatives.

 


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