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As filed with the Securities and Exchange Commission on June 21, 2019.

Registration No. 333-          

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

Under

The Securities Act of 1933

 

 

Medallia, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   7370   77-0558353

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

575 Market Street, Suite 1850

San Francisco, California 94105

(650) 321-3000

(Address, including zip code, and telephone number, including

area code, of Registrant’s principal executive offices)

 

 

Leslie J. Stretch

Chief Executive Officer

Medallia, Inc.

575 Market Street, Suite 1850

San Francisco, California 94105

(650) 321-3000

(Name, address, including zip code, and telephone number, including

area code, of agent for service)

 

 

Copies to:

 

Steven E. Bochner

Rezwan D. Pavri

Andrew T. Hill

Wilson Sonsini Goodrich & Rosati, P.C.

650 Page Mill Road

Palo Alto, California 94304

(650) 493-9300

 

Alan K. Grebene

Medallia, Inc.

575 Market Street, Suite 1850

San Francisco, California 94105

(650) 321-3000

 

Eric C. Jensen

Kristin E. VanderPas

Charles S. Kim

Cooley LLP

3175 Hanover Street

Palo Alto, California 94304

(650) 843-5000

 

 

Approximate date of commencement of proposed sale to the public:

As soon as practicable after this registration statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the 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      Accelerated filer  
Non-accelerated filer      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 to Section 7(a)(2)(B) of the Securities Act.  ☐

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

 

Proposed

Maximum

Aggregate

Offering Price(1)(2)

 

Amount of

Registration Fee

Common Stock, $0.001 par value per share

  $100,000,000   $12,120

 

 

(1)

Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.

(2)

Includes the additional aggregate offering price of shares of our common stock that the underwriters have the option to purchase, if any.

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant will file a further amendment which specifically states that this registration statement will thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement will become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. We and the selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and neither we nor the selling stockholders are soliciting offers to buy these securities in any state or other jurisdiction where the offer or sale is not permitted.

 

Subject to Completion

Preliminary Prospectus dated                , 2019

                    Shares

 

 

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Common Stock

 

 

This is an initial public offering of shares of common stock of Medallia, Inc. We are selling                  shares of our common stock. The selling stockholders identified in this prospectus are selling an additional                  shares of common stock. We will not receive the proceeds from the sale of the shares being sold by the selling stockholders.

Prior to this offering, there has been no public market for our common stock. It is currently estimated that the initial public offering price will be between $         and $         per share. We have applied to list our common stock on the New York Stock Exchange under the symbol “MDLA”.

We are an “emerging growth company” as defined under the federal securities laws and, as such, we have elected to comply with certain reduced public company reporting requirements for this prospectus and may elect to do so in future filings.

Investing in our common stock involves risks that are described in the “Risk Factors” section beginning on page 16 of this prospectus.

 

 

 

     Per Share          Total    

Initial public offering price

   $      $

Underwriting discounts and commissions(1)

   $      $

Proceeds before expenses, to Medallia, Inc.

   $      $

Proceeds, before expenses, to selling stockholders

   $      $

 

  (1)

See the section titled “Underwriting” for additional information regarding compensation payable to the underwriters.

To the extent that the underwriters sell more than                shares of common stock, the underwriters have the option to purchase up to an additional                shares of common stock from us and up to an additional                  shares of common stock from the selling stockholders at the initial public offering price less the underwriting discount and commissions.

Neither the Securities and Exchange Commission nor any other state securities commission has approved or disapproved of these securities or passed on the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares to purchasers on or about                , 2019.

 

 

 

BofA Merrill Lynch   Citigroup   Wells Fargo Securities
Credit Suisse

 

Oppenheimer & Co.     William Blair       Needham & Company       Craig-Hallum Capital Group       Roth Capital Partners  

 

 

Prospectus dated                , 2019


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Experience data is everywhere medallia captures signal data across human, digital, and loT interactions Medallia


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Customers build the best products.
Employees build the best companies.
Together we build the best brands.
Medallia


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1As of and for the 12 months ended April 30, 2019 2As of May 31, 2019. Mobile daily engagement — mobile daily active users / mobile monthly active users MOBILE DAILY ENGAGEMENT2 CUSTOMERS1 CALCULATIONS IN A SINGLE DAY1 EXPERIENCES ANALYZED ANNUALLY1 50% 500+ 8T 4.9B


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TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1  

Risk Factors

     16  

Special Note Regarding Forward-Looking Statements

     56  

Industry, Market and Other Data

     58  

Use of Proceeds

     59  

Dividend Policy

     61  

Capitalization

     62  

Dilution

     65  

Selected Consolidated Financial Data

     68  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     70  

Letter from Our Co-Founders

     97  

Letter from Our Chief Executive Officer

     98  

Business

     99  

Management

     134  

Executive Compensation

     141  

Certain Relationships and Related Party Transactions

     155  

Principal and Selling Stockholders

     159  

Description of Capital Stock

     162  

Shares Eligible for Future Sale

     169  

Material U.S. Federal Income Tax Consequences to Non-U.S. Holders of Our Common Stock

     172  

Underwriting

     177  

Legal Matters

     185  

Experts

     185  

Where You Can Find Additional Information

     185  

Index to Consolidated Financial Statements

     F-1  

 

 

Through and including                     , 2019 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

Neither we, the selling stockholders, nor any of the underwriters have authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. Neither we, the selling stockholders, nor any of the underwriters take responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date, regardless of the time of delivery of this prospectus or of any sale of our common stock.

For investors outside the United States: Neither we, the selling stockholders, nor any of the underwriters have done anything that would permit our initial public offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of our common stock and the distribution of this prospectus outside the United States.

 

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PROSPECTUS SUMMARY

This summary highlights selected information that is presented in greater detail elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, including the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes thereto included elsewhere in this prospectus, before making an investment decision. Unless the context otherwise requires, the terms “Medallia,” “the company,” “we,” “us” and “our” in this prospectus refer to Medallia, Inc. and its consolidated subsidiaries. Our fiscal year ends on January 31 of each year.

Vision

We believe customers build the best products, employees build the best companies and together we build the best brands.

Overview

We created a new category of enterprise software, experience management, and we are the market leader. Our award-winning SaaS platform, the Medallia Experience Cloud, captures experience data from massive and expanding signal fields emitted by customers and employees on their daily journeys and it is a leader in the market for understanding and managing omni-channel experiences. We utilize our proprietary AI technology to analyze structured and unstructured data from these signal fields across human, digital and internet of things, or IoT, interactions at great scale to derive personalized and predictive insights that drive action with tremendous business results. Using our technology, enterprises reduce churn, turn detractors into promoters and buyers, and create in-the-moment cross-sell and up-sell opportunities, providing clear and potent returns on investment.

 

 

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Our platform captures and analyzes over 4.9 billion experiences annually and has performed 8 trillion calculations in a single day to drive business decisions. Our products have high adoption and are used extensively



 

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from the front line to the C-suite, enabling users to improve experiences in live time. Over half of our customers have more than 1,000 employees using our platform, which we believe is significantly higher adoption than many other experience management solutions available in the market.1 Even more importantly, these individuals use our platform daily to drive their businesses, with 50% of our mobile monthly active users, or MAUs, using our mobile applications on a daily basis as of May 31, 2019.2 We believe that our engagement metric illustrates the addictiveness of our applications, as it demonstrates that there is repeated, regular usage of our applications, which makes our platform even more powerful in delivering results for our customers. The Medallia platform has helped transform many of the world’s iconic brands and we believe our platform is mission-critical.

The success of today’s enterprises often depends on the experiences they deliver, and the cost of failure is high. The proliferation of digital and mobile technologies, along with greatly increased bandwidth, has vastly increased the number of engagement channels and the volume, variety and complexity of experience data. In addition, social media platforms amplify the impact of positive and negative experiences that enterprises deliver, further increasing the stakes for enterprises in the experience economy. This technology revolution has made meeting expectations for great experiences even more critical across all stakeholders of an enterprise and makes experience management critical to driving business success:

 

   

Customer experiences: Seventy-three percent of people point to customer experience as an important factor in purchasing decisions.3 However, only one out of five companies are able to deliver good or great customer experiences.4

 

   

Business experiences: Seventy-three percent of business buyers say their standard for good experiences is higher than ever.5

 

   

Employee experiences: Engaged employees help drive 4.3x greater earnings per share growth for their companies compared to competitors.6

 

   

Product experiences: Seventy percent of all business purchasers and consumers say that enterprises understanding how they use products and services is very important to winning their business.7

Many enterprises have not invested in the tools and technologies to systematically capture, analyze and derive actionable insights from experience signals. This creates gaps between the experiences that customers and employees expect and experiences that are actually delivered. We believe enterprises that are consistently able to identify these gaps and improve experiences will ultimately +win in the marketplace.

Our platform was purpose-built for customer experience, the largest segment of experience management and the most critical segment for enterprises to manage and master in order to drive transformational business impact. To continue to expand the experience management market and complement our customer experience offering, we have also developed powerful products for business, employee and product experiences to serve

 

1 

As of April 30, 2019. For purposes of this statistic, we count as a single customer all subsidiaries and divisions of a single parent.

2 

We define a mobile daily active user, or DAU, as a user who logged in and accessed our platform via either of our primary mobile applications, Medallia Mobile 2 or Medallia Mobile 3, any time in a single day. We define a mobile MAU as a user who logged in and accessed our platform via either of our primary mobile applications, Medallia Mobile 2 or Medallia Mobile 3, any time in the last 30 days as of the date of measurement. A user that logs into both the Medallia Mobile 2 and Medallia Mobile 3 applications, or that logs in to such applications multiple times during any given day or 30-day period, as applicable, from different mobile devices, is tracked and counted as a single user. For purposes of calculating the percentage of our mobile MAUs that use our platform on a daily basis, we use the average DAU number for the last 30 days as of the date of measurement.

3 

PricewaterhouseCoopers LLP, or PwC, Experience is everything. Get it right, 2018.

4 

Forrester Research, or Forrester, Why CX? Why Now?, October 2016.

5 

Salesforce Research, State of the Connected Customer, June 2018.

6 

Gallup, Inc., or Gallup, State of the American Workplace, 2017.

7 

Salesforce Research; see the section titled “Industry, Market and Other Data.”



 

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enterprises of all sizes. Today, our platform spans and integrates all four areas of experience management, Customer Experience, or CX, Business Experience, or BX, Employee Experience, or EX, and Product Experience, or PX:

 

   

Our CX product suite enables enterprises to engage their customers at numerous touchpoints across multiple channels throughout the customer lifecycle, capture and analyze extensive data to deeply understand customer experiences and optimize them in live time.

 

   

Our BX product suite enables enterprises to increase business value and loyalty from their business-to-business, or B2B, customers and partners by helping them understand and optimize interactions throughout the enterprise along the B2B customer journey.

 

   

Our EX product suite enables enterprises to gain insights into their employees’ experiences so they can improve employee engagement, optimize stages of the employee lifecycle and personalize employee experiences to create high-performing teams and thriving businesses.

 

   

Our PX product suite enables enterprises to gain insights into every stage of the product lifecycle, including concept design, product launch, usage and end of life. We enable enterprises to build and enhance great products that drive user engagement and loyalty.

While our BX, EX and PX products are separate offerings, we view them as allowing us to further extend and increase the impact of our CX offering, the most critical element of experience management for the customers we serve. We believe enterprises that engage across all four areas of experience management build the best brands by reliably and comprehensively delivering great experiences. Our platform allows our customers to address experiences holistically, recognizing the interconnection of experience areas and unifying insights across these areas to maximize the depth of analysis and impact of actionable insights we provide. Our platform also has natural network effects that drive expansion and increase value across teams and departments. Forrester has recognized us as a leader in their customer feedback management evaluation and gave us top scores in the current offering and strategy categories.

We have built a predictable, scalable subscription revenue model. For the year ended January 31, 2019, and the three months ended April 30, 2019, we generated 79% and 77%, respectively, of our revenue from sales of subscriptions to our platform. As of April 30, 2019, we had 565 customers around the world and across a wide range of industries, compared to 469 customers as of April 30, 2018, representing a growth rate of 20%. For the years ended January 31, 2018 and 2019, our subscription revenue was $201.8 million and $246.8 million, respectively, representing year-over-year growth of 22%, and our revenue was $261.2 million and $313.6 million, respectively, representing year-over-year growth of 20%. For the three months ended April 30, 2018 and 2019, our subscription revenue was $55.6 million and $71.7 million, respectively, representing period-over-period growth of 29%, and our revenue was $70.7 million and $93.6 million, respectively, representing period-over-period growth of 32%. For the years ended January 31, 2018 and 2019, and the three months ended April 30, 2018 and 2019, our net loss was $70.4 million, $82.2 million, $27.5 million and $2.6 million, respectively, which reflects our substantial investments in our business focused on our large market opportunity. Our customers have demonstrated high loyalty to us because of the transformational impact that we are able to deliver for their businesses. Our dollar-based net revenue retention rate was 126%, 116%, 122% and 119% as of January 31, 2018 and 2019 and April 30, 2018 and 2019, respectively, on a trailing 12-month basis.8 See the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a description of how we calculate customers and dollar-based net revenue retention rate.

 

8 

We define the number of customers at the end of any particular period as the number of customers with active subscription agreements that run through the current or future period. For purposes of calculating our customer count, 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. However, for purposes of calculating our dollar-based net revenue retention rate, we count as a single customer all subsidiaries and divisions of a single parent. Unless otherwise noted, references to our customers in this prospectus uses the same methodology as our customer count and treats each separate entity as a separate customer.



 

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Our Customers

Enterprises providing the best experiences run on Medallia. We are a strategic platform of choice for category-leading enterprises, including:9

 

   

eight of the top 10 global communications and media companies;10

 

   

seven of the top 10 global hospitality companies;11

 

   

six of the top 10 global banks;12

 

   

five of the top 10 global insurance companies;13 and

 

   

five of the top 10 global automotive companies.14

We have a profound impact on our customers, often driving transformational change. Our platform enables enterprises of all sizes to drive a culture of customer-centricity across their entire organizations.

We believe our platform helps create competitive differentiation through the experiences enterprises provide to their customers and employees. We enable our customers to deliver operational excellence, accelerate innovation and boost brand loyalty through customer and employee engagement, turning detractors into promoters and buyers. We provide direct and measurable returns to our customers. In an April 2018 study that we commissioned, The Total Economic Impact of Medallia Experience Cloud, Forrester Consulting quantified the benefits of using our platform:

 

 

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9 

Rankings are determined by last twelve month revenue; industry descriptions are based on Forbes Media LLC, or Forbes, Global 2000: The World’s Largest Public Companies, June 2018. Information excludes enterprises headquartered in China, a market that Medallia has not materially entered. For purposes of this statistic, we count as a single customer all subsidiaries and divisions of a single parent.

10 

Includes companies in the following categories of the Forbes Global 2000: (i) telecommunications services and (ii) broadcasting and media.

11 

Includes companies in the following category of the Forbes Global 2000: hotels and motels

12 

Includes companies in the following categories of the Forbes Global 2000: (i) major banks and (ii) regional banks.

13 

Includes companies in the following categories of the Forbes Global 2000: (i) diversified insurance, (ii) life and health insurance, and (iii) property and casualty insurance.

14 

Includes companies in the following category of the Forbes Global 2000: auto and truck manufacturers.



 

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We believe this is substantially greater than the economic benefits provided by other experience management solutions.

What Sets Us Apart

Category-defining experience management platform

At the forefront of innovation in our industry, we believe our platform provides the most comprehensive suite of products to address experience management and optimize outcomes at scale. Key features of our platform include:

 

   

Omni-channel data capture and engagement. Our platform is purpose-built to enable enterprises to capture experience data from human, digital and IoT interactions across multiple engagement channels at scale. Our platform also augments this massive signal field with operational data in live time to construct digital footprints of customer and employee journeys from which enterprises can derive actionable insights.

 

   

AI and analytics that anticipate needs and predict behavior. At the core of our platform is Medallia Athena, our deep learning-based AI that analyzes structured and unstructured data from billions of touchpoints to uncover actionable insights, predict behavior, anticipate needs and prescribe the right actions to improve experiences.

 

   

Highly personalized targeted actions in live time. As enterprises gain deep understanding of experience data, our platform is able to drive positive outcomes by surfacing highly personalized targeted actions to improve experiences before, when and after they occur. Operationalizing action-driven outcomes across the enterprise from the front line to the C-suite empowers our customers to better define strategic initiatives, focus resources on those initiatives and close experience gaps in live time.

 

   

Enterprise-grade scalability and security. We have developed a highly scalable enterprise-grade platform that facilitates a wide breadth of use cases and captures massive signal fields. In addition, our platform adheres to the high standards of data privacy and security that are demanded by the largest enterprises in the world. We have also achieved FedRAMP Ready status to deliver services to U.S. federal government agencies.

Enterprise-wide adoption with best-in-class engagement

Over half of our customers have more than 1,000 employees using our platform, which we believe is significantly higher adoption than many other experience management solutions available in the market.15 Even more importantly, these individuals use our platform daily to drive their businesses, with 50% of mobile MAUs using our mobile applications on a daily basis as of May 31, 2019. We believe that our engagement metric illustrates the addictiveness of our applications, as it demonstrates that there is repeated, regular usage of our applications, which makes our platform even more powerful in delivering results for our customers. We have purpose-built our platform to help drive active engagement. For example, executives at many of our customers use our mobile application, Medallia Voices, regularly throughout the day.

Drives transformational business impact

We believe the magnitude and strategic nature of our impact on enterprises is unrivaled in the experience management industry. Our flexible platform and deep industry expertise have enabled us to create

 

15 

As of April 30, 2019. For purposes of this statistic, we count as a single customer all subsidiaries and divisions of a single parent.



 

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more than 30 pre-packaged solutions that generate rapid time to value for enterprises, often within six to eight weeks. By enabling enterprises to rapidly eliminate experience gaps and deliver superior experiences, we garner customer loyalty for enterprises, driving top-line growth. By supplementing customer insights with employee feedback, we enable our customers to transform overall organizational culture towards customer- and employee-centricity.

Trends in Our Favor

Experience management is critical in today’s experience economy

The success of today’s enterprises depends largely on how they deliver experiences. As traditional sources of competitive advantages erode and barriers to entry collapse, new players are disrupting almost every sector, outmaneuvering and displacing those who do not consistently deliver great experiences. As a result, it is imperative for enterprises to understand, measure and improve all aspects of customer, business, employee and product experiences to drive competitive differentiation.

There has been a wholesale transfer of power to customers

Customers no longer passively accept the experiences that are offered, but are actively taking control of their own buying journeys. They have more choices than ever as enterprises leverage breakthroughs in digital technology to deliver personalized and valuable experiences to customers. With more choices, instant access to information and less incentive to be loyal, today’s customers are firmly in control of their relationships with enterprises, which must respond or risk losing those customers.

Enterprises struggle to capture and analyze experience signals at scale

The increase in digital and other engagement channels along with frequency of customer and employee interactions has spurred massive growth of experience signals. Enterprises need to capture and analyze this rapidly expanding universe of structured and unstructured data. Enterprises that rely on operational systems designed for transactional data alone lack predictive insights and personalization that comes from capturing and analyzing experience signals. Such deficiency can lead to a fragmented customer experience, increased customer complaints, high employee turnover and eventually brand degradation along with reduced growth and profitability.

Enterprises fail to retain and motivate talented employees

High demand for talented employees, coupled with increasing turnover costs, has made employee experience critical to engagement and retention. Similar to the customer journey, the advent of new technologies has increased the complexity of employee journeys and the number of channels through which employees engage with their employers. Employees also directly interact with and shape many customer experiences, so an active and engaged employee base is key to promoting great customer experiences.

Enterprises need a holistic platform with innovative technology to close experience gaps

In order to identify, assess and close experience gaps, enterprises need a comprehensive experience management platform that combines the complete signal set from experience data with operational data across customer, business, employee and product journeys. Technologies such as deep learning-based AI, text analytics and in-memory processing are key requirements of a successful experience management platform.



 

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Alternative approaches have failed to adequately address experience management

We believe alternative approaches fail to adequately address experience management and that none of our competitors offer a comprehensive experience management platform. Alternative approaches include the use of:

 

   

Survey-based or point solutions. Niche players focused on one dimension or limited data collection fail due to lack of advanced technology capabilities, such as AI, and scalability required to solve experience management challenges.

 

   

Operational systems. These systems, including customer relationship management, or CRM, enterprise resource planning, or ERP, human capital management, or HCM, and customer service systems are transaction-based and provide a limited, predominantly backwards-looking view. They generally fail to either explain why something happened or identify the important leading indicators of future behavior that can be gleaned from experience data.

 

   

Market research and consulting firms. These approaches are not scalable, lack comprehensiveness, are conducted at a point in time and cannot capture data or provide insights in live time. They also do not allow enterprises to easily take action across the organization on the most critical experience issues.

By replacing these siloed approaches and point solutions, our customers are able to take a holistic approach to experience management, gather, understand and analyze massive signal fields to more accurately identify issues and opportunities, and derive actionable insights.

Market Opportunity

We believe experience management is at an early stage of adoption and will disrupt the traditional ways of managing customers, business relationships, employees and products through CRM, ERP and HCM systems, driving a cultural shift towards enhancing experiences rather than managing transactions. As such, we believe that the market opportunity for our Experience Management platform is vast, rapidly-growing and largely underpenetrated.

Based on industry data and an analysis of sales to our existing customers, we estimate the total addressable market for our Experience Management platform, including our products for CX, BX, EX and PX, to be approximately $68 billion in 2019. We estimated this opportunity using the total number of global enterprises with estimated annual revenue greater than $150 million, based on independent data from S&P Global Market Intelligence, segmented into two tiers (consisting of (1) enterprises with estimated annual revenue greater than $1.5 billion and (2) enterprises with estimated annual revenue between $150 million and $1.5 billion), and multiplying by the average annual contract value, or ACV, of subscriptions and managed services for our top 100 customers within each tier.16 Our estimate assumes that all enterprises within each tier would purchase our Experience Management platform at the same levels as the average of our top 100 customers in such tier; however, the actual total addressable market will vary depending on the adoption of our platform by enterprises and the purchase levels of such enterprises once they have adopted our platform.

We operate in a large and rapidly-growing market where enterprises are only beginning to understand the power of using experience data to run their businesses. Since experience data provides the “why” behind business results and sheds light on what companies can do to drive improved results, we anticipate that it will prove to be just as valuable to enterprises as operational data. As a result, we expect experience management solutions to continue to increase in value and our total addressable market to expand.

 

16 

For purposes of this statistic, we count as a single customer all subsidiaries and divisions of a single parent.



 

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Our Growth Strategy

We intend to capitalize on our massive and growing market opportunity by executing on the following growth strategy:

Extend our technology leadership. We have a strong history of innovation and offer a comprehensive platform that addresses customer, business, employee and product experiences for enterprises of all sizes across multiple industries. We intend to continue to invest in building new products and features while extending our platform to bring the power of experience management to a broader range of enterprises, industries, geographies and use cases.

Drive sales to new customers. As of April 30, 2018 and 2019, we had 469 and 565 customers, respectively, including 26 and 32 of the Fortune Global 100,17 respectively, which we believe represents only a fraction of our total addressable customer base. As we extend our technology leadership, we also plan to continue to invest in sales and marketing to grow the number of customers. We have recently expanded our sales force to continue pursuing large enterprises and increase our efforts with mid-sized enterprises. In addition, we intend to continue to deepen our opportunity within existing verticals and expand to other verticals.

Drive cross-sell and up-sell. We believe there is a significant opportunity available to cross-sell and up-sell our various product offerings to existing customers. The mission-critical nature of our platform and enterprise-wide applicability and engagement drives adoption in additional divisions within enterprises and cross-sales of more products and modules.

Broaden and deepen our partner ecosystem. Our partner ecosystem extends our geographic coverage, accelerates the usage and adoption of our platform, augments our platform with complementary technology, promotes thought leadership and provides additional implementation resources. We intend to augment and deepen our relationships with global and regional services partners, as well as a range of complementary technology and go-to-market partners.

Continue international growth. During the year ended January 31, 2019 and the three months ended April 30, 2019, we generated 30% and 27%, respectively, of our revenue outside the United States and we see a significant opportunity to further expand the use of our platform in other regions. We intend to continue making substantial investments in building our global sales and marketing, service delivery and customer support capabilities to grow our business outside of the United States.

Risks Associated with Our Business

Our business is subject to numerous risks and uncertainties, including those highlighted in the section titled “Risk Factors” immediately following this prospectus summary. These risks include, but are not limited to, the following:

 

   

We have incurred significant net losses in recent years, we expect to incur losses in the future and we may not be able to generate sufficient revenue to achieve and maintain profitability.

 

   

We derive, have derived and expect to continue to derive, the substantial majority of our revenue from subscriptions to our platform. Any failure of our platform to satisfy customer demands, achieve increased market acceptance or adapt to changing market dynamics would adversely affect our business, results of operations, financial condition and growth prospects.

 

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Fortune Media IP Limited, or Fortune, Global 500 List 2018, May 2018.



 

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If we fail to effectively manage our growth and organizational change, our business and results of operations could be harmed.

 

   

The market for experience management solutions is new and rapidly evolving, and if this market develops more slowly than we expect or declines, or develops in a way that we do not expect, our business could be adversely affected.

 

   

If we are unable to attract new customers in a manner that is cost-effective and assures customer success, then our business, results of operations and financial condition would be adversely affected.

 

   

Our business depends on our customers renewing their subscriptions and expanding their use of our platform. Any decline in our customer renewals or expansion would harm our business, results of operations and financial condition.

 

   

The market in which we participate is new and rapidly evolving, and if we do not compete effectively, our results of operations and financial condition could be harmed.

 

   

If we are not able to effectively develop platform enhancements, introduce new products or keep pace with technological developments, our business, results of operations and financial condition could be adversely affected.

 

   

Any failure to offer high-quality customer service and support may adversely affect our relationships with our existing customers and prospective customers, and in turn our business, results of operations and financial condition.

 

   

The majority of our customer base consists of large and mid-sized enterprises, and we currently generate a significant portion of our revenue from a relatively small number of enterprises, the loss of any of which could harm our business, results of operations and financial condition.

 

   

If we or any of the third parties we work with experience a security breach or other incident or unauthorized parties otherwise obtain access to our customers’ data, our data or our platform, our platform may be perceived as not being secure, our reputation may be harmed, demand for our platform may be reduced and we may incur significant liabilities.

 

   

Interruptions or suboptimal performance associated with our technology and infrastructure may adversely affect our business, results of operations and financial condition.

Channels for Disclosure of Information

Investors, the media and others should note that, following the completion of this offering, we intend to announce material information to the public through filings with the Securities and Exchange Commission, or the SEC, the investor relations page on our website (www.medallia.com), press releases, public conference calls and public webcasts.

The information disclosed by the foregoing channels could be deemed to be material information. As such, we encourage investors, the media, and others to follow the channels listed above and to review the information disclosed through such channels.

Any updates to the list of disclosure channels through which we will announce information will be posted on the investor relations page on our website.



 

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Corporate Information

We originally incorporated as Berrypick, Inc. in California in July 2000 (which was renamed Medallia, Inc. in May 2001). We incorporated a wholly-owned subsidiary of Medallia, Inc. in Delaware in December 2009. In October 2010, we merged our California and Delaware corporations and the surviving entity was Medallia, Inc., a Delaware corporation. Our principal executive offices are located at 575 Market Street, Suite 1850, San Francisco, California 94105, and our telephone number is (650) 321-3000. Our website address is www.medallia.com. Information contained on, or that can be accessed through, our website does not constitute part of this prospectus and inclusions of our website address in this prospectus are inactive textual references only.

Medallia, the Medallia logo and our other registered or common law trademarks appearing in this prospectus are the property of Medallia, Inc. Other trademarks and trade names referred to in this prospectus are the property of their respective owners.

Implications of Being an Emerging Growth Company

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting requirements that are otherwise applicable generally to public companies. These reduced reporting requirements include:

 

   

the requirement to present only two years of audited financial statements and only two years of related management’s discussion and analysis in this prospectus;

 

   

an exemption from compliance with the auditor attestation requirement on the effectiveness of our internal control over financial reporting;

 

   

reduced disclosure about our executive compensation arrangements; and

 

   

an exemption from the requirements to obtain a non-binding advisory vote on executive compensation or shareholder approval of any golden parachute arrangements.

We may take advantage of these provisions until we are no longer an emerging growth company. We would cease to be an “emerging growth company” upon the earliest to occur of: (i) the last day of the fiscal year in which we have more than $1.07 billion in annual revenue; (ii) the date we qualify as a large accelerated filer, with at least $700 million of equity securities held by non-affiliates; (iii) the date on which we have, in any three-year period, issued more than $1.0 billion in non-convertible debt securities; and (iv) the last day of the fiscal year ending after the fifth anniversary of this offering. We may choose to take advantage of some but not all of these reduced reporting burdens. We have taken advantage of certain reduced reporting burdens in this prospectus. Accordingly, the information contained herein may be different than the information you receive from other public companies in which you hold stock.

The JOBS Act permits an emerging growth company like us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have elected to use this extended transition period until we are no longer an emerging growth company or until we affirmatively and irrevocably opt out of the extended transition period. As a result, our consolidated financial statements may not be comparable to the financial statements of companies that comply with new or revised accounting pronouncements as of public company effective dates.

See the section titled “Risk Factors—Risks Related to Our Business—We are an “emerging growth company,” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.”



 

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The Offering

 

Common stock offered by us

                 shares.

 

Common stock offered by the selling stockholders

                 shares.

 

Option to purchase additional shares from us

                 shares.

 

Option to purchase additional shares from the selling stockholders

                 shares.

 

Common stock to be outstanding immediately after this offering

                 shares (                  shares if the underwriters’ option to purchase additional shares of our common stock from us and the selling stockholders is exercised in full).

 

Use of proceeds

We estimate that the net proceeds to us from the sale of shares of our common stock in this offering will be approximately $                  (or approximately $                  if the underwriters’ option to purchase additional shares of our common stock from us and the selling stockholders is exercised in full), based upon the assumed initial public offering price of $              per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

  The principal purposes of this offering are to increase our capitalization and financial flexibility, create a public market for our common stock and enable access to the public equity markets for us and our stockholders. We intend to use the net proceeds from this offering for working capital and other general corporate purposes, as well as the acquisition of, or investment in, complementary products, technologies, solutions or businesses, although we have no present commitments or agreements to enter into any material acquisitions or investments. We also intend to use the net proceeds from this offering to satisfy our anticipated tax withholding and remittance obligations related to the settlement of certain of our outstanding restricted stock units, or RSUs, which have both service-based and liquidity event-related performance vesting conditions, and for which we expect the liquidity event-related performance vesting condition will be satisfied in connection with this offering and the service-based vesting condition will be satisfied during the remainder of fiscal year 2020. We will not receive any of the proceeds from the sale of common stock in this offering by the selling stockholders. See the section titled “Use of Proceeds” for additional information.

 

Concentration of ownership

Upon completion of this offering, our executive officers, directors and holders of 5% or more of our common stock will beneficially own, in



 

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the aggregate, approximately      % of the outstanding shares of our common stock.

 

Risk factors

You should read the “Risk Factors” section of this prospectus and the other information in this prospectus for a discussion of factors to consider carefully before deciding to invest in shares of our common stock.

 

Proposed NYSE trading symbol

“MDLA”

The number of shares of our common stock that will be outstanding immediately after this offering is based on 108,278,976 shares of our common stock outstanding as of April 30, 2019, and reflects:

 

   

77,149,275 shares of convertible preferred stock that will automatically convert into the same number of shares of common stock immediately prior to the completion of this offering pursuant to the terms of our amended and restated certificate of incorporation, or the Preferred Stock Conversion; and

 

   

31,126,701 shares of our Class A common stock and 3,000 shares of our Class B common stock that will convert into an aggregate of 31,129,701 shares of our common stock prior to the completion of this offering, which, together with the Preferred Stock Conversion, we refer to as the Capital Stock Conversions.

The number of shares of our common stock outstanding as of April 30, 2019 exclude:

 

   

50,976,927 shares of our common stock issuable upon the exercise of options to purchase shares of our common stock that were outstanding as of April 30, 2019, with a weighted-average exercise price of $5.36 per share;

 

   

8,524,211 shares of our common stock subject to RSUs outstanding as of April 30, 2019 for which the service-based vesting condition was not satisfied;

 

   

830,657 shares of our common stock subject to RSUs granted after April 30, 2019;

 

   

75,000 shares of our common stock issuable upon the exercise of a warrant to purchase common stock outstanding as of April 30, 2019, with an exercise price of $0.84 per share;

 

   

55,814 shares of our common stock issuable upon the exercise of a warrant to purchase convertible preferred stock outstanding as of April 30, 2019, with an exercise price of $5.38 per share; and

 

   

                 shares of our common stock reserved for future issuance under our equity compensation plans, consisting of:

 

   

                 shares of our common stock to be reserved for future issuance under our 2019 Equity Incentive Plan, or 2019 Plan, which will become effective prior to the completion of this offering;

 

   

                 shares of our common stock reserved for future issuance under our 2017 Equity Incentive Plan, or our 2017 Plan, which number of shares will be added to the shares of our common stock to be reserved for future issuance under our 2019 Plan upon its effectiveness, at which time we will cease granting awards under our 2017 Plan; and



 

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                 shares of our common stock to be reserved for future issuance under our 2019 Employee Stock Purchase Plan, or our ESPP, which will become effective prior to the completion of this offering.

Our 2019 Plan and ESPP each provide for annual automatic increases in the number of shares of our common stock reserved thereunder, and our 2019 Plan also provides for increases to the number of shares of our common stock that may be granted thereunder based on shares under our 2017 Plan that expire, are forfeited, or otherwise repurchased by us, as more fully described in the section titled “Executive Compensation—Employee Benefits and Stock Plans.”

Except as otherwise indicated, all information in this prospectus assumes:

 

   

the filing and effectiveness of our amended and restated certificate of incorporation in Delaware and the effectiveness of our amended and restated bylaws, each of which will occur immediately prior to the completion of this offering;

 

   

the Capital Stock Conversions will occur prior to the completion of this offering;

 

   

the automatic conversion of an outstanding warrant exercisable for 55,814 shares of our convertible preferred stock as of April 30, 2019 into a warrant exercisable for the same number of shares of common stock immediately prior to the completion of this offering;

 

   

no exercise of outstanding stock options or warrants or the settlement of outstanding RSUs subsequent to April 30, 2019; and

 

   

no exercise by the underwriters of their option to purchase additional shares of common stock from us and the selling stockholders in this offering.



 

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Summary Consolidated Financial Data

The following summary consolidated financial data should be read in conjunction with the sections titled “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes thereto included elsewhere in this prospectus. The consolidated statements of operations data for each of the years ended January 31, 2018 and 2019, and the consolidated balance sheet data as of January 31, 2019, are derived from our audited consolidated financial statements that are included elsewhere in this prospectus. The consolidated statements of operations data for the three months ended April 30, 2018 and 2019 and the consolidated balance sheet data as of April 30, 2019 are derived from our unaudited interim consolidated financial statements that are included elsewhere in this prospectus. We have prepared the unaudited interim consolidated financial statements on the same basis as the audited consolidated financial statements and have included all adjustments, consisting only of normal recurring adjustments that, in our opinion, are necessary to state fairly the information set forth in those consolidated financial statements. Our historical results are not necessarily indicative of our results of operations to be expected for any future period and the results of operations for the three months ended April 30, 2019 are not necessarily indicative of the results to be expected for the full year or any future period. The summary consolidated financial data in this section are not intended to replace our consolidated financial statements and related notes thereto included elsewhere in this prospectus and are qualified in their entirety by our consolidated financial statements and related notes thereto included elsewhere in this prospectus.

 

     Year Ended
January 31,
     Three Months Ended
April 30,
 
     2018     2019      2018     2019  
     (in thousands except per share data)  

Consolidated Statements of Operations Data:

         

Revenue:

         

Subscription

   $ 201,801     $ 246,797      $ 55,583     $ 71,712  

Professional services

     59,394       66,845        15,083       21,907  
  

 

 

   

 

 

    

 

 

   

 

 

 

Total revenue

     261,195       313,642        70,666       93,619  

Cost of revenue:

         

Subscription(1)(2)

     36,397       47,948        11,435       13,461  

Professional services(1)

     59,380       67,953        16,185       19,134  
  

 

 

   

 

 

    

 

 

   

 

 

 

Total cost of revenue

     95,777       115,901        27,620       32,595  
  

 

 

   

 

 

    

 

 

   

 

 

 

Gross profit

     165,418       197,741        43,046       61,024  
  

 

 

   

 

 

    

 

 

   

 

 

 

Operating expenses:

         

Research and development(1)

     86,368       86,272        23,176       19,616  

Sales and marketing(1)

     110,002       138,674        35,430       33,615  

General and administrative(1)

     40,183       53,239        11,516       9,838  
  

 

 

   

 

 

    

 

 

   

 

 

 

Total operating expenses

     236,553       278,185        70,122       63,069  
  

 

 

   

 

 

    

 

 

   

 

 

 

Loss from operations

     (71,135     (80,444      (27,076     (2,045

Interest income and other income (expense), net

     2,412       (11      (136     142  
  

 

 

   

 

 

    

 

 

   

 

 

 

Loss before provision for income taxes

     (68,723     (80,455      (27,212     (1,903

Provision for income taxes

     1,638       1,779        316       656  
  

 

 

   

 

 

    

 

 

   

 

 

 

Net loss

   $ (70,361   $ (82,234    $ (27,528   $ (2,559
  

 

 

   

 

 

    

 

 

   

 

 

 

Net loss per share attributable to common stockholders, basic and diluted(3)

   $ (3.12   $ (3.07    $ (1.11   $ (0.08
  

 

 

   

 

 

    

 

 

   

 

 

 

Weighted-average shares outstanding used in computing net loss per share attributable to common stockholders, basic and diluted(3)

     22,571       26,770        24,699       30,430  
  

 

 

   

 

 

    

 

 

   

 

 

 

Pro forma net loss per share attributable to common stockholders, basic and diluted (unaudited)(3)

     $ (0.83      $ (0.02
    

 

 

      

 

 

 

Weighted-average shares used in computing pro forma net loss per share, attributable to common stockholders, basic and diluted (unaudited)(3)

       99,253          106,321  
    

 

 

      

 

 

 


 

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(1) 

Includes stock-based compensation expense as follows:

 

     Year Ended January 31,      Three Months Ended April 30,  
           2018                  2019                  2018                  2019        
     (in thousands)  

Cost of subscription revenue

   $ 423      $ 1,143      $ 279      $ 287  

Cost of professional services revenue

     2,256        2,379        523        557  

Research and development expense

     5,182        7,563        2,425        1,583  

Sales and marketing expense

     4,882        6,813        1,531        1,493  

General and administrative expense

     5,505        9,960        1,879        4,042  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 18,248      $ 27,858      $ 6,637      $ 7,962  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(2) 

Includes acquired intangible amortization expense as follows:

 

     Year Ended January 31,      Three Months Ended April 30,  
           2018                  2019                  2018                  2019        
     (in thousands)  

Cost of subscription revenue

   $      961      $      361      $      235      $        42  

 

(3) 

See Notes 1 and 13 to our consolidated financial statements included elsewhere in this prospectus for an explanation of the calculations of our basic and diluted net loss per share and unaudited pro forma net loss per share and the weighted-average number of shares used in the computation of the per share amounts.

 

    As of April 30, 2019  
    Actual     Pro Forma(1)     Pro Forma As
Adjusted(2)(3)
 
    (in thousands)  

Consolidated Balance Sheet Data:

     

Cash, cash equivalents and marketable securities

  $ 132,865     $ 132,865     $                    

Total assets

    300,776       300,776    

Total deferred revenue

    187,346       187,346    

Accumulated deficit

    (371,199     (381,837  

Total stockholders’ equity

    73,767       73,767    

 

(1) 

The pro forma column in the consolidated balance sheet data table above gives effect to (i) the Capital Stock Conversions, as if such conversions had occurred on April 30, 2019, (ii) the automatic conversion of an outstanding warrant exercisable for 55,814 shares of our convertible preferred stock as of April 30, 2019 into a warrant exercisable for the same number of shares of common stock immediately prior to the completion of this offering, (iii) the filing and effectiveness of our amended and restated certificate of incorporation in Delaware that will become effective immediately prior to the completion of this offering and (iv) an increase to additional paid-in capital and accumulated deficit related to stock-based compensation expense of $10.6 million associated with the satisfaction of the liquidity event-related performance vesting condition under certain of our RSUs.

(2) 

The pro forma as adjusted column in the consolidated balance sheet data table above gives effect to (i) the pro forma adjustments set forth in footnote (1) above and (ii) the sale and issuance by us of                  shares of common stock offered by this prospectus at the assumed initial public offering price of $              per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

(3)

Each $1.00 increase or decrease in the assumed initial public offering price of $              per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, each of our cash and cash equivalents, total assets and total stockholders’ equity by $             , assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions payable by us. Similarly, each increase or decrease of 1.0 million shares in the number of shares of our common stock offered by us would increase or decrease, as applicable, each of our cash and cash equivalents, total assets and total stockholders’ equity by $             , assuming an initial public offering price of $              per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions payable by us. The pro forma as adjusted information presented in the consolidated balance sheet data above is illustrative only and will change based on the actual initial public offering price and other terms of this offering determined at pricing.



 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information in this prospectus, including the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes thereto included elsewhere in this prospectus, before making a decision to invest in our common stock. Our business, results of operations, financial condition or prospects could also be harmed by risks and uncertainties that are not presently known to us or that we currently believe are not material. If any of the risks actually occur, our business, results of operations, financial condition and prospects could be adversely affected. In that event, the market price of our common stock could decline, and you could lose all or part of your investment.

Risks Related to Our Business

We have incurred significant net losses in recent years, we expect to incur losses in the future and we may not be able to generate sufficient revenue to achieve and maintain profitability.

We have incurred significant net losses in recent years, including net losses of approximately $70.4 million, $82.2 million, $27.5 million and $2.6 million in the fiscal years ended January 31, 2018 and 2019 and the three months ended April 30, 2018 and 2019, respectively. We had an accumulated deficit of approximately $371.2 million as of April 30, 2019. We expect our costs will increase over time and our losses to continue as we expect to invest significant additional funds towards growing our business and operating as a public company. To date, we have financed our operations principally through subscription payments by customers for use of our platform, equity and debt financings, capital lease arrangements and loans for equipment. We have expended and expect to continue to expend substantial financial and other resources on:

 

   

developing our Experience Management platform, including investing in our research and development team, developing or acquiring new products, features and functionality and improving the scalability, availability and security of our platform;

 

   

our technology infrastructure, including expansion of our activities in third-party data centers in which we lease space and where we manage our own hosting and network equipment, enhancements to our network operations and infrastructure and hiring of additional employees for our operations team;

 

   

sales and marketing, including expansion of our direct sales organization and marketing efforts; and

 

   

additional international expansion in an effort to increase our customer base and sales.

These investments may be more costly than we expect and may not result in increased revenue or growth in our business. Any failure to increase our revenue sufficiently to keep pace with our investments and other expenses could prevent us from achieving and maintaining profitability or positive cash flow on a consistent basis. If we are unable to successfully address these risks and challenges as we encounter them, our business, results of operations and financial condition would be adversely affected. In the event that we fail to achieve or maintain profitability, this could negatively impact the value of our common stock.

We derive, have derived and expect to continue to derive, the substantial majority of our revenue from subscriptions to our platform. Any failure of our platform to satisfy customer demands, achieve increased market acceptance or adapt to changing market dynamics would adversely affect our business, results of operations, financial condition and growth prospects.

We derive, have derived and expect to continue to derive the substantial majority of our revenue from subscriptions to our platform. As such, the market acceptance of our platform is critical to our success. Demand

 

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for our platform is affected by a number of factors, many of which are beyond our control, including the extension of our platform for new use cases, the timing of development and release of new products, features and functionality introduced by us or our competitors, technological change and the growth or contraction of the market in which we compete.

In addition, we expect that an increasing focus on customer satisfaction and the growth of various communications channels and new technologies will profoundly impact the market for experience management solutions. We believe that enterprises are increasingly looking for flexible solutions that bridge across traditionally separate systems for experience management, marketing automation and customer relationship management. If we are unable to meet this demand to manage customer experiences through flexible solutions designed to address a broad range of needs, or if we otherwise fail to achieve more widespread market acceptance of our platform, our business, results of operations, financial condition and growth prospects may be adversely affected.

If we fail to effectively manage our growth and organizational change, our business and results of operations could be harmed.

We have experienced, and may continue to experience, rapid growth and organizational change, which has placed, and may continue to place, significant demands on our management, operational and financial resources. In addition, we operate globally, sell subscriptions in more than 80 countries and have established subsidiaries in Argentina, the United Kingdom, Israel, Australia, Germany, Canada, Mexico, France, Brazil, Norway, the Netherlands, Singapore and the United States. We plan to continue to expand our international operations into other countries in the future, which will place additional demands on our resources and operations. We have also experienced significant growth in the number of enterprises, end users, transactions and amount of data that our platform and our associated hosting infrastructure support. For example, our number of customers has grown from 469 as of April 30, 2018 to 565 as of April 30, 2019, an increase of 20%.

Further, in order to successfully manage our growth, our organizational structure has become, and may continue to become, more complex. In addition, we may need to scale and adapt our operational, financial and management controls further, as well as our reporting systems and procedures to manage this complexity and our increased responsibilities as a public company. This will require us to invest in and commit significant financial, operational and management resources to grow and change in these areas without undermining the corporate culture that has been critical to our growth so far. These investments will require significant expenditures, and any investments we make will occur in advance of the benefits from such investments, making it difficult to determine in a timely manner if we are efficiently allocating our resources. If we do not achieve the benefits anticipated from these investments, if the achievement of these benefits is delayed, or if we are unable to achieve a high level of efficiency as our organization grows, in a manner that preserves the key aspects of our culture, our business, results of operations and financial condition may be adversely affected.

The market for experience management solutions is new and rapidly evolving, and if this market develops more slowly than we expect or declines, or develops in a way that we do not expect, our business could be adversely affected.

Because we generate, and expect to continue to generate, a large majority of our revenue from the sale of subscriptions to our platform, we believe our success and growth will depend to a substantial extent on the widespread acceptance and adoption of experience management solutions in general, and of our platform in particular. The market for experience management solutions is new and rapidly evolving, and if this market fails to grow or grows more slowly than we currently anticipate, demand for our platform could be adversely affected. The experience management market is also subject to rapidly changing user demand and trends and as a result it is difficult to predict enterprise adoption rates and demand for our platform, the future growth rate and size of our market or the impact of competitive solutions.

 

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The expansion of the experience management market depends on a number of factors, including awareness of the experience management category generally, ease of adoption and use, cost, features, performance and overall platform experience, data security and privacy, interoperability and accessibility across devices, systems and platforms and perceived value. If experience management solutions do not continue to achieve market acceptance, or there is a reduction in demand for experience management solutions for any reason, including a lack of category or use case awareness, technological challenges, weakening economic conditions, data security or privacy concerns, competing technologies and products or decreases in information technology spending, our business, results of operations and financial condition would be adversely affected.

If we are unable to attract new customers in a manner that is cost-effective and assures customer success, then our business, results of operations and financial condition would be adversely affected.

In order to grow our business, we must continue to attract new customers in a cost-effective manner and enable such enterprises to realize the benefits associated with our platform. We may not be able to attract new enterprises to our platform for a variety of reasons, including as a result of their use of traditional approaches to experience management, their internal timing or budget or the pricing of our platform compared to products and services offered by our competitors. After a customer makes a purchasing decision, we often must also help them successfully implement our platform in their organization, a process that can last several months.

Even if we do attract enterprises, the cost of new customer acquisition or ongoing customer support may prove so high as to prevent us from achieving or sustaining profitability. We intend to continue to hire additional sales personnel, increase our marketing activities to help educate the market about the benefits of our platform, grow our domestic and international operations and build brand awareness. If the costs of these sales and marketing efforts increase dramatically or if they do not result in the cost-effective acquisition of additional customers or substantial increases in revenue, our business, results of operations and financial condition may be adversely affected.

Our business depends on our customers renewing their subscriptions and expanding their use of our platform. Any decline in our customer renewals or expansion would harm our business, results of operations and financial condition.

In order for us to maintain or improve our results of operations, it is important that we maintain and expand our relationships with our customers and that our customers renew their subscriptions when the initial subscription term expires or otherwise expand their subscription program with us. Our customers are not obligated to, and may elect not to, renew their subscriptions on the same or similar terms after their existing subscriptions expire. Some of our customers have in the past elected, and may in the future elect, not to renew their agreements with us or otherwise reduce the scope of their subscriptions, and we do not have sufficient operating history with our business model and pricing strategy to accurately predict long-term customer renewal rates. In addition, the growth of our business depends in part on our customers expanding their use of our platform, which can be difficult to predict.

Our customer renewal rates, as well as the rate at which our customers expand their use of our platform, may decline or fluctuate as a result of a number of factors, including the customers’ satisfaction with our platform, defects or performance issues, our customer and product support, our prices, mergers and acquisitions affecting our customer base, the effects of global economic conditions, the entrance of new or competing technologies and the pricing of such competitive offerings or reductions in the enterprises’ spending levels for any reason. If our customers do not renew their subscriptions, renew on less favorable terms or reduce the scope of their subscriptions, our revenue may decline and we may not realize improved results of operations from our customer base, and as a result, our business and financial condition could be adversely affected.

 

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The market in which we participate is new and rapidly evolving, and if we do not compete effectively, our results of operations and financial condition could be harmed.

The market for experience management solutions is fragmented, rapidly evolving and highly competitive. Our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or enterprise requirements. With the introduction of new technologies, the evolution of our platform and new market entrants, we expect competition to intensify in the future. Pricing pressures and increased competition generally could result in reduced sales, reduced margins, losses or the failure of our platform to achieve or maintain more widespread market acceptance, any of which could harm our business.

Our competitors vary in size and in the breadth and scope of the products and services they offer. While we do not believe that any of our competitors currently offer a full suite of experience management solutions that competes across the breadth of our platform, certain features of our platform compete in particular segments of the overall experience management category. For example, we compete with a number of software-as-a-service, or SaaS, providers of survey tools, including Qualtrics (recently acquired by SAP) and SurveyMonkey, many of which offer significantly lower prices for their products or services. We also compete with contact center technology companies, such as Nice Ltd. and Verint Systems Inc., which may have longer operating histories, have invested heavily in experience management and may aggressively expand their products and services in the near future. Additionally, we face competition from full-service consulting firms such as MaritzCX and Towers Watson, which bundle additional market research services with competing products and services. Further, other established SaaS providers and other technology companies not currently focused on experience management may expand their services to compete with us.

Many of our current and potential competitors benefit from competitive advantages over us, including:

 

   

greater name and brand recognition;

 

   

longer operating histories;

 

   

deeper product development expertise;

 

   

greater market penetration;

 

   

larger and more established customer bases and relationships;

 

   

larger sales forces and more established networks;

 

   

larger marketing budgets; and

 

   

access to significantly greater financial, human, technical and other resources.

Some of our competitors may be able to offer products or functionality similar to ours at a more attractive price than we can, including by integrating or bundling such products with their other product offerings. Additionally, some potential customers, particularly large organizations, have elected, and may in the future elect, to develop their own internal experience management solutions. Acquisitions, partnerships and consolidation in our industry may provide our competitors even more resources or may increase the likelihood of our competitors offering bundled or integrated products that we may not be able to effectively compete against. In particular, as we rely on the availability and accuracy of various forms of customer feedback and input data, the acquisition of any such data providers or sources by our competitors could affect our ability to continue accessing such data. Furthermore, we are also subject to the risk of future disruptive technologies. If new technologies emerge that are able to collect and process experience data, or otherwise develop experience

 

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management solutions at lower prices, more efficiently, more conveniently or with functionality and features enterprises prefer to ours, such technologies could adversely impact our ability to compete. If we are not able to compete successfully against our current and future competitors, our business, results of operations and financial condition may be adversely affected.

If we are not able to effectively develop platform enhancements, introduce new products or keep pace with technological developments, our business, results of operations and financial condition could be adversely affected.

Our future success will depend on our ability to adapt and innovate. To attract new customers and increase revenue from our existing customers, we will need to enhance and improve our existing platform and introduce new products, features and functionality. Enhancements and new products that we develop may not be introduced in a timely or cost-effective manner, may contain errors or defects and may have interoperability difficulties with our platform or other products. We have in the past experienced delays in our internally planned release dates of new products, features and functionality, and there can be no assurance that these developments will be released according to schedule. We have also invested, and may continue to invest, in the acquisition of complementary businesses and technologies that we believe will enhance our platform. However, we may not be able to integrate these acquisitions successfully or achieve the expected benefits of such acquisitions. If we are unable to successfully develop, acquire or integrate new products, features and functionality or enhance our existing platform to meet the needs of our existing or potential customers in a timely and effective manner, our business, results of operations and financial condition could be adversely affected.

In addition, because our platform is designed to operate on a variety of networks, applications, systems and devices, we will need to continually modify and enhance our platform to keep pace with technological advancements in such networks, applications, systems and devices. If we are unable to respond in a timely, user-friendly and cost-effective manner to these rapid technological developments, our platform may become less marketable and less competitive or obsolete, and our business, results of operations and financial condition may be adversely affected.

Any failure to offer high-quality customer service and support may adversely affect our relationships with our existing and prospective customers, and in turn our business, results of operations and financial condition.

In implementing and using our platform, our customers depend on our customer service and support, including premium support offerings, which in some cases may be provided by third-party partners, to resolve complex technical and operational issues in a timely manner. We, or our partners, may be unable to respond quickly enough to accommodate short-term increases in demand for customer or product support. We also may be unable to modify the nature, scope and delivery of our professional services or customer and product support to compete with changes in solutions provided by our competitors. Increased customer demand for support, without corresponding revenue, could increase costs and adversely affect our results of operations and financial condition. Our sales are highly dependent on our reputation and on positive recommendations from our existing customers. Any failure to maintain high-quality customer or product support, or a market perception that we do not maintain high-quality enterprise or product support, could adversely affect our reputation, our ability to sell our platform, and in turn our business, results of operations, and financial condition.

The majority of our customer base consists of large and mid-sized enterprises, and we currently generate a significant portion of our revenue from a relatively small number of enterprises, the loss of any of which could harm our business, results of operations and financial condition.

In the years ended January 31, 2018 and 2019, and the three months ended April 30, 2018 and 2019, our top 10 customers accounted for 29%, 25%, 26% and 25% of our revenue, respectively.18 The majority of our customer base consists of large and mid-sized enterprises, many of which have high subscription amounts to our

 

18 

For purposes of this statistic, we count as a single customer all subsidiaries and divisions of a single parent.

 

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platform. For all periods presented, we have relied on sales of our platform to large enterprises for a significant majority of our revenue. Accordingly, the loss of any one of our customers could have a relatively higher impact on our business and results of operations than the loss of a client in businesses that have a broader client base where each client contributes to a smaller portion of revenue. While we expect that the revenue from our largest customers will decrease over time as a percentage of our total revenue as we generate more revenue from other customers, we also believe that revenue from our largest customers may continue to account for a significant portion of our revenue, at least in the near term. In the event that these large customers discontinue the use of our platform or uses our platform in a more limited capacity, our business, results of operations and financial condition could be adversely affected.

If we or any of the third parties we work with experience a security breach or other incident or unauthorized parties otherwise obtain access to our customers’ data, our data or our platform, our platform may be perceived as not being secure, our reputation may be harmed, demand for our platform may be reduced and we may incur significant liabilities.

Use of our platform involves storing, transmitting and processing our customers’ proprietary data, including personal data regarding their customers or employees. We may become the target of cyber-attacks by third parties seeking unauthorized access to our data or our customers’ data or to disrupt our ability to provide our platform. While we have taken steps to protect the confidential information that we have access to, including confidential information we may obtain through our customer support services or enterprise usage of our platform, our security measures or those of our third-party service providers could be breached or we could suffer data loss or unauthorized access to our platform or the systems or networks used in our business.

We also process, store and transmit our own data as part of our business and operations. This data may include personally identifiable, confidential or proprietary information. There can be no assurance that any security measures that we or our third-party service providers have implemented will be effective against current or future security threats. While we utilize certain measures in an effort to protect the security of our platform and the availability, integrity, confidentiality and security of our data, our security measures or those of our third-party service providers could fail and result in unauthorized access to or use of our platform or unauthorized, accidental or unlawful access to, or disclosure, modification, misuse, loss or destruction of, our or our customers’ data.

In addition, computer malware, viruses and computer hacking, fraudulent use, social engineering (predominantly spear phishing attacks) and general hacking have become more prevalent, and such incidents or incident attempts have occurred on our platform in the past and may occur on our platform in the future. Though it is difficult to determine what, if any, harm may directly result from any specific interruption or attack, any failure to maintain performance, reliability, security and availability of our platform to the satisfaction of our customers may harm our reputation and our ability to retain existing customers and attract new customers. A substantial portion of our business is with large enterprises, which often have heightened sensitivity to data security and privacy issues, and any actual or perceived security breach or other incident may have an especially large impact on the attractiveness of our platform to our customer base.

Because there are many different security breach techniques and such techniques continue to evolve, we may be unable to anticipate attempted security breaches or implement adequate preventative measures. We may also experience security breaches or other incidents that may remain undetected for an extended period of time. Further, third parties may also conduct attacks designed to disrupt or deny access to our platform. Additionally, other third parties we work with may experience security breaches or other incidents that affect our platform or our data or our customers’ data. Actual or perceived security breaches or other security incidents could result in unauthorized use of or access to our platform, unauthorized, accidental or unlawful access to, or disclosure, modification, misuse, loss or destruction of, our or our customers’ data, litigation, indemnity obligations, regulatory investigations and other proceedings, severe reputational damage adversely affecting client or investor confidence and causing damage to our brand, disruption to our operations, damages for contract breach and other liabilities and may adversely affect our business, results of operations and financial condition.

 

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Any actual or perceived security breach or other incident may lead to the expenditure of significant financial and other resources in efforts to investigate or correct a breach, address and eliminate vulnerabilities and prevent future security breaches or incidents, as well as the incurring of significant expenses for remediation that may include liability for stolen assets or information, repair of system damage that may have been caused, incentives offered to our customers or business partners in an effort to maintain business relationships after a breach and other liabilities. We have incurred and expect to incur significant expenses in an effort to prevent security breaches and other incidents, including deploying additional personnel and protection technologies, training personnel and engaging third-party experts and consultants.

We cannot be certain that our insurance coverage will be adequate for data security liabilities actually incurred or cover any indemnification claims against us relating to any security incident, that insurance will continue to be available to us on economically reasonable terms, or at all, or that any insurer will not deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceed available insurance coverage or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could adversely affect our business, reputation, results of operations and financial condition.

Furthermore, because data security is a critical competitive factor in our industry, we make numerous statements in our privacy policies and terms of service, through our certifications to certain industry standards and in our marketing materials providing assurances about the security of our platform, including detailed descriptions of security measures we employ. Should any of these statements be untrue or become untrue, even through circumstances beyond our reasonable control, we may face claims, investigations or other proceedings by the U.S. Federal Trade Commission, state and foreign regulators and private litigants.

Interruptions or suboptimal performance associated with our technology and infrastructure may adversely affect our business, results of operations and financial condition.

Our continued growth, brand, reputation and ability to attract and retain customers depend in part on the ability of our customers to access our platform at any time and within an acceptable amount of time. Our platform is proprietary, and we are dependent on the expertise and efforts of members of our engineering, operations and software development teams for their continued performance. We have experienced, and may in the future experience, service disruptions, outages and other performance problems due to a variety of factors, including infrastructure changes, introductions of new functionality, human or software errors, capacity constraints due to an overwhelming number of users accessing our platform concurrently and denial of service attacks or other security-related incidents. In some instances, we may not be able to rectify or even identify the cause or causes of these performance issues within an acceptable period of time. It may become increasingly difficult to maintain and improve our performance, especially during peak usage times, as our platform becomes more complex and our user traffic increases. If our platform is unavailable or if users are unable to access our platform within a reasonable amount of time, or at all, our business, results of operations and financial condition would be adversely affected. Moreover, some of our customer agreements include performance guarantees and service-level standards that obligate us to provide credits or termination rights in the event of a significant disruption in the functioning of our platform.

To the extent that we do not effectively address capacity constraints, upgrade our systems and data centers as needed and continually develop our technology and network architecture to accommodate actual and anticipated changes in technology or an increased user base, we may experience service interruptions and performance issues, and our business, results of operations and financial condition may be adversely affected.

 

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Our business and growth depend in part on the success of our strategic relationships with third parties, as well as on the continued availability and quality of feedback data from third parties over whom we do not have control.

We depend on, and anticipate that we will continue to depend on, various third-party relationships in order to sustain and grow our business, including technology companies whose products integrate with ours. Failure of any of these technology companies to maintain, support or secure their technology platforms in general, and our integrations in particular, or errors or defects in their technologies or products, could adversely affect our relationships with our customers, damage our brand and reputation and result in delays or difficulties in our ability to provide our platform. We also rely on the availability and accuracy of various forms of client feedback and input data, including data solicited via survey or based on social media data sources, and any changes in the availability or accuracy of such data could adversely impact our business and results of operations and harm our reputation and brand.

Identifying, negotiating and documenting relationships with strategic third parties such as systems integrators, implementation, software and technology and consulting partners, servicing subcontractors and data providers requires significant time and resources. Furthermore, integrating third-party technology is complex, costly and time-consuming and increases the risk of defects or errors on our platform and our platform’s functionality. Our agreements with technology partners, implementation providers, servicing subcontractors and data providers are typically limited in duration, non-exclusive and do not prohibit our partners from working with our competitors or from offering competing services. Our competitors may be effective in providing incentives to third parties to favor their solutions or to prevent or reduce subscriptions to our platform.

We rely on our ecosystem of partners to support our cost structure. If we are unsuccessful in establishing or maintaining our relationships with these strategic third parties, our ability to compete in the marketplace or to grow our revenue could be impaired and our results of operations would suffer. Even if we are successful in establishing and maintaining these relationships, we cannot assure you that they will result in improved results of operations.

We rely on our infrastructure and third-party data centers, and any interruption or delay in service from these facilities could impair the delivery of our platform and harm our business.

We currently serve our customers from a combination of our own custom-built infrastructure that we lease and operate in co-location facilities, hosted by several different providers, and third-party data centers located primarily in the United States and Europe. Some of these facilities may be located in areas prone to natural disasters and may experience events such as earthquakes, floods, fires, power loss, telecommunication failures and similar events. They may also be subject to break-ins, sabotage, intentional acts of vandalism and similar misconduct. As we grow and continue to add new co-location facilities and third-party data centers and expand the capacity of our existing co-location facilities and third-party data centers, we may move or transfer our data and our customers’ data. Despite precautions taken during this process, any unsuccessful data transfers may impair the delivery of our platform. Any damage to, or failure of, our systems, or those of our third-party data centers, could result in interruptions on our platform or damage to, or loss or compromise of, our data and our customers’ data. Any impairment of our or our customers’ data or interruptions in the functioning of our platform, whether due to damage to, or failure of, our co-location facilities and third-party data centers or unsuccessful data transfers, may reduce our revenue, cause us to issue credits or pay penalties, subject us to claims for indemnification and litigation, cause our customers to terminate their subscriptions and adversely affect our reputation, renewal rates and our ability to attract new customers. Our business will also be harmed if our existing and potential customers believe our platform is unreliable.

Further, our leases and other agreements with data center providers expire at various times, and the owners of our data center facilities have no obligation to renew their agreements with us on commercially reasonable terms, or at all. If services are interrupted at any of these facilities, or we are unable to renew these

 

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agreements on commercially reasonable terms, or if one of our data center providers is acquired or encounters financial difficulties, including bankruptcy, we may be required to transfer our servers and other infrastructure to new data centers, and we may incur significant costs and possible service interruptions in connection with doing so. In addition, if we do not accurately plan for our data center capacity requirements, and we experience significant strains on our data center capacity, we may experience delays and additional expenses in arranging new data center arrangements, and our customers could experience service outages that may subject us to financial liabilities, result in customer losses and harm our business.

Real or perceived defects or errors on our platform could harm our reputation, result in significant costs to us, and impair our ability to sell subscriptions to our platform and related services.

The software underlying our platform is complex and may contain material defects or errors, particularly when first introduced or when new features or capabilities are released. In addition, our solution depends on the ability of our software to store, retrieve, process and manage immense amounts of data. Any real or perceived defects, errors, failures, bugs or vulnerabilities on our platform could result in negative publicity, data security, access, retention or other performance issues and customer terminations and impair our ability to sell subscriptions to our platform and related services in the future. The costs incurred in correcting any defects in our platform may be substantial and could adversely affect our results of operations. Although we continually test our platform for defects and work with customers through our customer support organization to identify and correct errors, we have from time to time found defects or errors on our platform, and defects or errors on our platform are likely to occur again in the future. Any defects that cause interruptions to the availability of our platform or other performance issues could result in, among other things:

 

   

lost revenue or delayed market acceptance and sales of our platform;

 

   

early termination of customer agreements or loss of customers;

 

   

credits or refunds to customers;

 

   

product liability lawsuits and other claims against us;

 

   

diversion of development resources;

 

   

increased expenses associated with remedying any defect, including increased technical support costs;

 

   

injury to our brand and reputation; and

 

   

increased maintenance and warranty costs.

While our customer agreements typically contain limitations and disclaimers that purport to limit our liability for damages related to defects in our solution, such limitations and disclaimers may not be enforced by a court or other tribunal or otherwise effectively protect us from such claims.

We depend on our management team and key employees, and the loss of one or more of these employees or an inability to attract and retain highly skilled employees could adversely affect our business.

Our success depends substantially on the continued services of our management team, who are critical to our vision, strategic direction, culture, services and technology. Some members of our management team have recently joined us. For example, Leslie Stretch, our Chief Executive Officer, joined us in August 2018, and Roxanne Oulman, our Chief Financial Officer, joined us in November 2018. From time to time, there may be additional changes in our management team resulting from the hiring or departure of executives, which could

 

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disrupt our business. New hires also require significant training and, in most cases, take significant time before they achieve full productivity. Furthermore, we do not have employment agreements with members of our management team or other key employees that require them to continue to work for us for any specified period and, therefore, they could terminate their employment with us at any time. The loss of one or more of our executives or key employees, or the failure by our executives to effectively work with our employees and lead our company, could have an adverse effect on our business.

In addition, to execute our growth plan, we must attract and retain highly qualified personnel. Competition for these individuals in the San Francisco Bay Area, where our headquarters is located, and in other locations where we maintain offices, is intense, especially for hiring experienced software engineers and sales professionals. We have from time to time experienced, and we expect to continue to experience, difficulty in hiring and retaining employees with appropriate qualifications. Many of the companies with which we compete for experienced personnel have greater resources than we have. If we hire employees from competitors or other companies, their former employers may attempt to assert that these employees or we have breached their legal obligations, resulting in a diversion of our time and resources. In addition, job candidates and existing employees often consider the value of the equity awards they receive in connection with their employment. If the perceived value of our equity awards declines, it may adversely affect our ability to recruit and retain highly skilled employees. Furthermore, we are limited in our ability to recruit internationally by restrictive domestic immigration laws. If we fail to attract new personnel or fail to identify, retain and motivate our current employees, our business and future growth prospects could be adversely affected.

Our business is subject to a variety of U.S. and foreign laws, many of which are unsettled and still developing and which could subject us to claims or otherwise harm our business.

We are subject to a variety of laws in the United States and internationally, including laws regarding privacy, data protection, data security, data retention and consumer protection, accessibility, sending and storing of electronic messages (and related traffic data where applicable), intellectual property, human resource services, employment and labor laws, workplace safety, consumer protection laws, anti-bribery and anti-corruption laws, import and export controls, immigration laws, securities laws and tax regulations, all of which are continuously evolving and developing. The scope and interpretation of these laws, regulations and other obligations that are or may be applicable to us, our customers or partners are often uncertain and may be conflicting, particularly laws and other obligations outside of the United States.

In addition, regulatory authorities around the world are considering a number of legislative and regulatory proposals concerning privacy, spam, data storage, data protection, data collection, content regulation, cybersecurity, government access to personal information and private data and other matters that may be applicable to our business. Compliance with these laws may require substantial investments or may provide technical challenges for our business. More countries are enacting and enforcing laws related to the appropriateness of content and enforcing those and other laws by blocking access to services that are found to be out of compliance. It is also likely that as our business grows and evolves, as an increasing portion of our business shifts to mobile, and as our solutions are used in a greater number of countries and by additional groups, we will become subject to laws and regulations in additional jurisdictions. Our customers could also abuse or misuse our platform in ways that violate laws or cause damage to our business. It is difficult to predict how existing laws will be applied to our business and whether we will become subject to new laws or legal obligations that will impact our business.

If we are not able to comply with these laws, regulations or other legal obligations, or if we, our customers or partners become liable under these laws or legal obligations, or if the use of our platform is suspended or blocked, even in part, we could be directly harmed and we may be forced to implement new measures to reduce exposure to this liability. This may require us to expend substantial resources or to discontinue certain solutions, which would negatively affect our business, results of operations and financial condition. We could also be subject to investigations, enforcement actions and sanctions, mandatory changes to

 

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our platform, disgorgement of profits, fines and damages, civil and criminal penalties or injunctions, claims for damages, termination of contracts and loss of intellectual property rights. In addition, the increased attention focused upon liability issues as a result of lawsuits and legislative proposals could harm our reputation or brand or otherwise impact the growth of our business. Any costs incurred as a result of this potential liability could harm our business, results of operations and financial condition.

Privacy concerns and laws or other domestic or foreign regulations may reduce the effectiveness of our platform and adversely affect our business.

Our customers can use our platform to collect, use and store personal data regarding their employees, customers and partners. We also collect, use and receive such information in the course of our operations. We and our customers may be subject to privacy- and data protection-related laws and regulations that impose obligations in connection with the collection, processing and use of financial data, health-related data and other types of personal data. The U.S. federal and various state and foreign governments have adopted or proposed limitations on, or requirements regarding, the collection, distribution, use, security and storage of data, including personal data, of individuals. For example, the Health Insurance Portability and Accountability Act of 1996, or HIPAA, establishes privacy and security standards that limit the use and disclosure of individually identifiable health information and requires the implementation of administrative, physical and technical safeguards to protect the privacy of protected health information and ensure the confidentiality, integrity and availability of electronic protected health information by certain institutions. We act as a “business associate” through our relationships with certain customers and are thus directly subject to certain provisions of HIPAA. The U.S. Federal Trade Commission and numerous state attorneys general also are applying federal and state consumer protection laws to impose standards on the online collection, use and dissemination of data, and to the security measures applied to such data.

Laws and regulations relating to data processing and data protection are particularly stringent in Europe and Asia, and in the financial services and health care industries, among others. Numerous foreign countries and governmental bodies, including the European Union, or EU, and its member states, have laws and regulations concerning the collection and processing of personal data obtained from individuals located in their jurisdictions, which often are more restrictive than those in the United States. Laws and regulations in these jurisdictions apply broadly to the collection, use, security and other processing of data that identifies or may be used to identify an individual, such as names, telephone numbers, email addresses and, in some jurisdictions, data such as IP addresses and other online identifiers.

For example, the EU has adopted a General Data Protection Regulation, or GDPR, which took full effect on May 25, 2018. The GDPR enhances data protection obligations for businesses and requires service providers processing personal data on behalf of customers to cooperate with European data protection authorities, implement security measures and keep records of personal data processing activities. Noncompliance with the GDPR can trigger fines equal to or greater of €20 million or 4% of global annual revenue. Our efforts to meet GDPR requirements have required significant time and resources, including a review of our technology and systems against its requirements.

Further, following a referendum in June 2016 in which voters in the United Kingdom approved an exit from the EU, the United Kingdom has initiated a process to leave the EU, generally referred to as Brexit. The United Kingdom enacted a Data Protection Act in May 2018 that substantially implements the GDPR, but Brexit has created uncertainty with regard to the regulation of data protection in the United Kingdom. In particular, it is unclear how data transfers to and from the United Kingdom will be regulated.

Additionally, although we have self-certified under the U.S.-EU and U.S.-Swiss Privacy Shield Frameworks with regard to our transfer of certain personal data from the EU and Switzerland to the United States, and make use of model contractual clauses approved by the EU Commission, both the U.S.-EU Privacy Shield and such model clauses have been subject to legal challenge, and some regulatory uncertainty remains

 

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surrounding the future of data transfers from the EU and Switzerland to the United States. We may experience hesitancy, reluctance or refusal by European or multinational enterprises to use our services due to potential risk exposure to such enterprises relating to cross-border data transfer.

Furthermore, outside of the EU, we continue to see increased regulation of data privacy and security, including the adoption of more stringent laws in the United States. For example, in June 2018, California enacted the California Consumer Privacy Act, or CCPA. The CCPA gives California residents expanded rights to access and delete their personal information, opt out of certain personal information sharing and receive detailed information about how their personal information is used. The CCPA provides for civil penalties for violations, as well as a private right of action for data breaches that is expected to increase data breach litigation. The CCPA was amended in September 2018 and it may be amended again prior to going into effect on January 1, 2020. The CCPA may increase our compliance costs and potential liability.

Some countries also are considering or have passed legislation implementing data protection requirements or requiring local storage and processing of data, or similar requirements, which could increase the cost and complexity of delivering our services. In addition to government activity, privacy advocacy groups and certain industries have imposed or are considering various new, additional or different industry standards that may place additional burdens on us, and we may be contractually obligated to comply with these standards or otherwise considered subject to them. We also are subject to other contractual obligations relating to privacy, data protection and information security.

With laws, regulations and other obligations relating to privacy, data protection, and information security imposing new and relatively burdensome obligations, and with substantial uncertainty over the interpretation and application of these and other obligations, we may face challenges in addressing their requirements and making necessary changes to our policies and practices, and may incur significant costs and expenses in an effort to do so. Additionally, if third parties we work with, such as vendors or service providers, violate applicable laws or regulations or our policies, such violations may also put our or our customers’ data at risk and could in turn have an adverse effect on our business. Any failure or perceived failure by us or our service providers to comply with our applicable policies or notices relating to privacy or data protection, our contractual or other obligations to customers or other third parties, or any of our other legal obligations relating to privacy, data protection or information security, may result in governmental investigations or enforcement actions, litigation, claims or public statements against us by privacy advocacy groups or others, and could result in significant liability or cause our customers to lose trust in us, which could have an adverse effect on our reputation and business.

The costs of compliance with, and other burdens imposed by, laws, regulations and other obligations relating to privacy, data protection and information security applicable to the businesses of our customers may adversely affect our customers’ ability and willingness to process, handle, store, use and transmit information from their employees, customers and partners, which could limit the use, effectiveness and adoption of our platform and reduce overall demand. Even the perception of privacy concerns, whether or not valid, may inhibit market adoption, effectiveness or use of our applications. The rapid development of laws, regulations and other obligations relating to privacy, data protection and information security throughout the world, and the dynamic nature of their interpretation and enforcement, make it difficult to predict compliance requirements.

Our revenue growth rate has fluctuated in prior periods and may decline again in the future.

Our revenue growth rate has fluctuated in prior periods. We have previously experienced periods of revenue growth rate decline and our revenue growth rate may decline again in future periods as the size of our customer base increases and as we achieve higher market penetration rates. In particular, we expect the growth rate of our subscription revenue to fluctuate from period to period, and in the near term subscription revenue growth rates may be lower compared to comparable periods in the prior fiscal year. Many factors may also contribute to declines in our revenue growth rate, including slowing demand for our platform, increasing

 

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competition, a decrease in the growth of our overall market, our failure to continue to capitalize on growth opportunities and the maturation of our business, among others. You should not rely on the revenue growth of any prior quarterly or annual period as an indication of our future performance. If our revenue growth rate declines, investors’ perceptions of our business and the trading price of our common stock could be adversely affected.

We invest significantly in research and development, and to the extent our research and development investments do not translate into new solutions or material enhancements to our current solutions, or if we do not use those investments efficiently, our business and results of operations would be harmed.

A key element of our strategy is to invest significantly in our research and development efforts to improve and develop new technologies, features and functionality for our platform. For the years ended January 31, 2018 and 2019 and the three months ended April 30, 2018 and 2019, our research and development expenses were 33%, 28%, 33% and 21% of our revenue, respectively. If we do not spend our research and development budget efficiently or effectively, our business may be harmed and we may not realize the expected benefits of our strategy. Moreover, research and development projects can be technically challenging, time-consuming and expensive. The nature of these research and development cycles may cause us to experience delays between the time we incur expenses associated with research and development and the time we are able to offer compelling platform updates and generate revenue, if any, from such investment. Additionally, anticipated enterprise demand for a solution or solutions we are developing could decrease after the development cycle has commenced, and we would nonetheless be unable to avoid substantial costs associated with the development of any such solutions or solution. If we expend a significant amount of resources on research and development and our efforts do not lead to the successful introduction or improvement of solutions that are competitive in our current or future markets, our business and results of operations would be adversely affected.

We may fail to accurately predict the optimal pricing strategies necessary to attract new customers, retain existing customers and respond to changing market conditions.

We have in the past, and may in the future, need to change our pricing model from time to time. As the market for our platform matures, or as competitors introduce new solutions that compete with ours, we may be unable to attract new customers at the same prices or based on the same pricing models that we have used historically. While we do and will attempt to set prices based on our prior experiences and customer feedback, our assessments may not be accurate and we could be underpricing or overpricing our platform and professional services. In addition, if the offerings on our platform or our professional services change, then we may need to revise our pricing strategies. Any such changes to our pricing strategies or our ability to efficiently price our offerings could adversely affect our business, results of operations and financial condition. In addition, as we expand internationally, we also must determine the appropriate pricing strategy to enable us to compete effectively internationally. Pricing pressures and decisions could result in reduced sales, reduced margins, losses or the failure of our platform to achieve or maintain more widespread market acceptance, any of which could negatively impact our overall business, results of operations and financial condition. Moreover, larger organizations, which are a primary focus of our direct sales efforts, may demand substantial price concessions. As a result, we may be required to price below our targets in the future, which could adversely affect our revenue, gross margin, profitability, cash flows and financial condition.

If our investments to increase adoption of our platform by small and medium-sized businesses are not successful, our business, results of operations and financial condition may be adversely affected.

Historically, we have relied on sales of our platform to large enterprises for a significant majority of our revenue. We currently generate only a small portion of our revenue from enterprises that are mid-sized enterprises. Our ability to increase our customer base, especially among mid-sized enterprises, and achieve broader market acceptance of our platform will depend, in part, on our ability to effectively organize, focus and train our sales and marketing employees, develop efficient pricing and product strategies for mid-sized enterprise use cases and educate the mid-sized enterprise market about the benefits and features of our platform.

 

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We have limited experience selling to mid-sized enterprises and only began hiring sales and marketing personnel with a mid-sized enterprise focus in 2018. Adapting our platform and marketing efforts to target the mid-sized enterprise market will require the diversion of significant resources that could otherwise be deployed to grow the business. If the costs of these sales and marketing efforts and investments do not result in corresponding increases in revenue, our business, results of operations, and financial condition may be adversely affected.

Failure to effectively expand our sales and marketing capabilities could harm our ability to increase our customer base and achieve broader market acceptance of our platform.

Increasing our customer base and achieving broader market acceptance of our platform will depend, to a significant extent, on our ability to effectively expand and manage our sales and marketing operations and activities. We are substantially dependent on our direct sales force and on our marketing efforts to obtain new customers. We are expanding our direct sales force both domestically and internationally. In particular, we are expanding our sales and marketing efforts for the acquisition of mid-sized enterprises. We believe that there is significant competition for experienced sales professionals with the sales skills and technical knowledge that we currently or may in the future require. Our ability to achieve revenue growth in the future will depend, in part, on our success in recruiting, training and retaining a sufficient number of qualified and experienced sales professionals. New hires require significant training and time before they achieve full productivity, particularly in new sales segments, such as with mid-sized enterprises, and new industries or geographies. Our recent hires and planned hires may not become as productive as quickly as we expect, or at all, and we may be unable to hire or retain sufficient numbers of qualified individuals in the future in the markets and segments where we do business. Because we do not have a long history of expanding our sales force or managing a sales force at the scale that we intend operate, we cannot accurately predict whether, or to what extent, our sales will increase as we expand our sales force or how long it will take for sales personnel to become productive. Furthermore, due to our limited experience selling direct to mid-sized enterprises through our sales force, the results of any such efforts are difficult to predict and may result in diverted financial and management resources without a corresponding increase in revenue. Our business will be harmed if our sales expansion efforts do not generate a significant increase in revenue.

Our sales cycle with enterprise and international clients can be long and unpredictable.

A substantial portion of our business is with large enterprises and, as we invest in markets outside of the United States, we will increasingly do business with international enterprises. The timing of our sales with our enterprise and international clients and related revenue recognition is difficult to predict because of the length and unpredictability of the sales cycle for these clients. We are often required to spend significant time and resources to educate and familiarize these potential clients with the value proposition of paying for our platform. The length of our sales cycle for these clients, from initial evaluation to payment for our platform is often around nine months or more, and can vary substantially from client to client. As a result, it is difficult to predict whether and when a sale will be completed.

If we are unable to effectively operate on or capture data from mobile devices, our business could be adversely affected.

Our customers and users of our platform are increasingly accessing our platform or interacting via mobile devices. We are devoting valuable resources to solutions related to mobile usage and cannot assure you that these solutions will be successful. If the mobile solutions we have developed for our platform do not meet the needs of current or prospective customers, or if our solutions are difficult to access, customers or users may reduce their usage of our platform or cease using our platform altogether and our business could suffer. Additionally, we are dependent on the interoperability of our products with popular mobile networks and standards that we do not control, and any changes in such systems or terms of service that degrade our platform’s functionality or gives preferential treatment to competitive products could adversely affect our business. As new

 

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mobile devices and products are continually being released, it is difficult to predict the challenges we may encounter in enhancing our platform for use on such devices. If we are unable to successfully implement elements of our platform on mobile devices, or if these strategies are not as successful as our offerings for personal computers or if we incur excessive expenses in this effort, our business, results of operations and financial condition would be negatively affected.

If we are unable to develop and maintain successful relationships with channel partners, our business, results of operations, and financial condition could be adversely affected.

To date, we have primarily relied on our direct sales force, online marketing and word-of-mouth to sell subscriptions to our platform. Although we have developed relationships with certain channel partners, such as referral partners, resellers and integration partners, these channels have resulted in limited revenue to date. We believe that continued growth in our business is dependent upon identifying, developing and maintaining strategic relationships with additional channel partners that can drive additional revenue. Our agreements with our existing channel partners are non-exclusive, meaning our channel partners may offer enterprises the products of several different companies, including products that compete with ours. They may also cease marketing our platform with limited notice and with little or no penalty. We expect that any additional channel partners we identify and develop will be similarly non-exclusive and not bound by any requirement to continue to market our platform. If we fail to identify additional channel partners in a timely and cost-effective manner, or at all, if we are unable to assist our current and future channel partners in independently selling and implementing our platform, or if our channel partners choose to use greater efforts to market their own products or those of our competitors, our business, results of operations and financial condition could be adversely affected. Furthermore, if our channel partners do not effectively market and sell our platform, or fail to meet the needs of our customers, our reputation and ability to grow our business may also be adversely affected.

Sales by channel partners are more likely than direct sales to involve collection issues, in particular sales by our channel partners into developing markets, and accordingly, variations in the mix between revenue attributable to sales by channel partners and revenue attributable to direct sales may result in fluctuations in our results of operations.

If we are not able to maintain and enhance our brand, our business, results of operations and financial condition may be adversely affected.

We believe that maintaining and enhancing our reputation as a differentiated and category-defining company in experience management is critical to our relationships with our existing customers and key employees and to our ability to attract new customers and talented personnel. The successful promotion of our brand will depend on a number of factors, including our marketing efforts, our ability to continue to develop a high-quality platform and our ability to successfully differentiate our platform from competitive solutions. We do not have sufficient operating history to know if our brand promotion activities will ultimately be successful or yield increased revenue and, if they are not successful, our business may be adversely affected. Any unfavorable publicity of our business or platform generally, for example, relating to our privacy practices, terms of service, service quality, litigation, regulatory activity, the actions of our employees, partners or customers or the actions of other companies that provide similar solutions to us, all of which can be difficult to predict, could adversely affect our reputation and brand. In addition, independent industry analysts often provide reviews of our platform, as well as solutions offered by our competitors, and our brand and perception of our platform in the marketplace may be significantly influenced by these reviews. If these reviews are negative, or less positive compared to those of our competitors’ solutions, our brand and market position may be adversely affected. It may also be difficult to maintain and enhance our brand as we expand our marketing and sales efforts through channel or strategic partners.

The promotion of our brand also requires us to make substantial expenditures. We anticipate that these expenditures will increase as our market becomes more competitive, as we expand into new markets and as more

 

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sales are generated through our channel partners. To the extent that these activities yield increased revenue, this revenue may not offset the increased expenses we incur. If we do not successfully maintain and enhance our brand or incur substantial expenses in unsuccessful attempts to promote and maintain our brand, our business may not grow, we may have reduced pricing power relative to competitors and we could lose customers and key employees or fail to attract potential customers or talented personnel, all of which would adversely affect our business, results of operations and financial condition.

We recognize revenue over the term of our customers’ contracts. Consequently, increases or decreases in new sales may not be immediately reflected in our results of operations and may be difficult to discern.

We generally recognize subscription revenue from customers ratably over the terms of their contracts and a majority of our revenue is derived from subscriptions that have terms of one to three years. As a result, a portion of the revenue we report in each quarter is derived from the recognition of deferred revenue relating to subscriptions entered into during previous quarters. Consequently, a decline in new or renewed subscriptions in any single quarter may have a small impact on our revenue results for that quarter. However, such a decline will negatively affect our revenue in future quarters. Accordingly, the effect of significant downturns in sales and market acceptance of our platform and potential changes in our pricing policies or rate of expansion or retention may not be fully reflected in our results of operations until future periods. We may also be unable to reduce our cost structure in line with a significant deterioration in sales. In addition, a significant majority of our costs are expensed as incurred, while revenue is recognized over the term of the agreements with our customers. As a result, increased growth in the number of our customers could continue to result in our recognition of more costs than revenue in the earlier periods of the terms of our agreements. Our subscription model also makes it difficult for us to rapidly increase our revenue through additional sales in any period, as revenue from new customers must be recognized over the applicable subscription term.

Our customers may fail to pay us in accordance with the terms of their agreements, at times necessitating action by us to attempt to compel payment.

We typically enter into annual or multiple year arrangements with our customers. If our customers fail to pay us in accordance with the terms of our agreements, we may be adversely affected both from the inability to collect amounts due and the cost of enforcing the terms of our agreements, including litigation and arbitration costs. The risk of these issues increases with the term length of our customer arrangements. Furthermore, some of our customers may seek bankruptcy protection or other similar relief and fail to pay amounts due to us, or pay those amounts more slowly, either of which could adversely affect our results of operations, financial condition and cash flow.

Certain of our results of operations and financial metrics may be difficult to predict.

Our results of operations and financial metrics, including the levels of our revenue, gross margin, profitability, cash flow and deferred revenue, have fluctuated in the past and may vary significantly in the future. As a result, period-to-period comparisons of our results of operations may not be meaningful and the results of any one period should not be relied upon as an indication of future performance. Our results of operations may fluctuate as a result of a variety of factors, many of which are outside of our control, and as a result, may not fully reflect the underlying performance of our business. Fluctuation in results of operations may negatively impact the value of our common stock. Factors that may cause fluctuations in our results of operations include, without limitation, those listed below:

 

   

fluctuations in the demand for our platform and the market for platforms like ours;

 

   

our ability to attract new customers or retain existing customers;

 

   

variability in our sales cycle, including as a result of the budgeting cycles and internal purchasing priorities of our customers;

 

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the payment terms and subscription term length associated with sales of our platform and their effect on our bookings and free cash flow;

 

   

the addition or loss of large customers, including through acquisitions or consolidations;

 

   

the timing of sales and recognition of revenue, which may vary as a result of changes in accounting rules and interpretations, such as the adoption of Accounting Standards Update, or ASU, 2014-09, Revenue from Contracts with Customers, or ASC 606;

 

   

the amount and timing of operating expenses related to the maintenance and expansion of our business, operations and infrastructure;

 

   

network outages or actual or perceived security breaches or other incidents;

 

   

general economic, market and political conditions;

 

   

customer renewal rates;

 

   

increases or decreases in the number of elements of our services or pricing changes upon any renewals of customer agreements;

 

   

changes in our pricing policies or those of our competitors;

 

   

the mix of services sold during a period;

 

   

the timing of our recognition of stock-based compensation expense for our equity awards, particularly in cases where awards covering a large number of our shares are tied to a specific event or date, such as the performance condition on our awards that will be satisfied upon the effectiveness of this offering and recognized in the period in which this offering occurs; and

 

   

the timing and success of introductions of new platform features and services by us or our competitors or any other change in the competitive dynamics of our industry, including consolidation among competitors, customers or strategic partners.

The cumulative effects of the factors discussed above could result in large fluctuations and unpredictability in our quarterly and annual results of operations. This variability and unpredictability could also result in our failing to meet the expectations of industry or financial analysts or investors for any period. If our revenue or results of operations fall below the expectations of analysts or investors or below any guidance we may provide, or if the guidance we provide is below the expectations of analysts or investors, the price of our common stock could decline substantially. Such a stock price decline could occur even if we have met any previously publicly stated guidance we may provide.

Our results of operations may be difficult to predict as a result of seasonality.

Our results of operations may also fluctuate as a result of seasonality. We have seen seasonality in our sales cycle as a large percentage of our customers make their purchases in the fourth quarter of a given fiscal year and pay us in the first quarter of the subsequent year. We may also be affected by seasonal trends in the future, particularly as our business matures. Such seasonality may result from a number of factors, including a slowdown in our customers’ procurement process during certain times of the year, both domestically and internationally, and customers choosing to spend remaining budgets shortly before the end of their fiscal years. Additionally, this seasonality may be reflected to a much lesser extent, and sometimes may not be immediately apparent, in our revenue, due to the fact that we recognize subscription revenue over the term of the applicable

 

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subscription agreement. To the extent we experience this seasonality, it may cause fluctuations in our results of operations and financial metrics, and make forecasting our future results of operations and financial metrics more difficult.

We anticipate spending substantial funds in connection with the tax liabilities that arise upon the settlement of RSUs following this offering.

The RSUs that we have issued to date generally vest upon the satisfaction of both service-based and liquidity event-related performance vesting conditions. The service-based vesting period is generally between three to four years. The liquidity event-related performance vesting condition is generally satisfied on the earlier of: (i) a change in control event or (ii) either the effectiveness of the registration statement of which this prospectus forms a part, or a specified time period following this offering, or the IPO Condition. We have also issued RSUs that, in addition to the satisfaction of the service-based and liquidity event-related performance vesting conditions, also require the fulfillment of a performance vesting condition which includes the achievement of certain subscription revenue growth targets. As of April 30, 2019, 8,524,211 RSUs were outstanding, including 1,091,419 RSUs for which the IPO Condition will be satisfied in connection with this offering and for which we expect the service-based vesting condition will be satisfied during the remainder of the year ending January 31, 2020. In connection with the satisfaction of the IPO Condition and the service-based vesting condition for such RSUs, we expect to withhold an aggregate of                 shares of our common stock subject to such RSUs to satisfy tax withholding and remittance obligations at an assumed tax rate of         %, and to pay $                 to the relevant tax authorities in cash to satisfy our tax withholding and remittance obligations related to the settlement of such RSUs. This amount is based upon the assumed initial public offering price of $         per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and the actual amount of this obligation could be higher or lower, depending on the market price of shares of our common stock on the date of settlement. In the event that the market price of our common stock increases, the amount of cash required to satisfy our tax withholding and remittance obligations related to the settlement of such RSUs would increase.

We may be sued by third parties for alleged infringement of their proprietary rights.

There is considerable patent and other intellectual property development activity in our industry. Our future success depends in part on not infringing upon the intellectual property rights of others. From time to time, we have received and may receive claims from third parties, including our competitors, that our platform and underlying technology infringe or violate a third party’s intellectual property rights, and we may be found to be infringing upon such rights. In a patent infringement claim against us, we may assert, as a defense, that we do not infringe the relevant patent claims, that the patent is invalid or both. The strength of our defenses will depend on the patents asserted, the interpretation of these patents, and our ability to invalidate the asserted patents. However, we could be unsuccessful in advancing non-infringement or invalidity arguments in our defense. In the United States, issued patents enjoy a presumption of validity, and the party challenging the validity of a patent claim must present clear and convincing evidence of invalidity, which is a high burden of proof. Conversely, the patent owner need only prove infringement by a preponderance of the evidence, which is a lower burden of proof. We may also be unaware of the intellectual property rights of others that may cover some or all of our technology. Because patent applications can take years to issue and are often afforded confidentiality for some period of time, there may currently be pending applications, unknown to us, that later result in issued patents that could cover one or more of our products. Any claims or litigation, regardless of their merit, could cause us to incur significant expenses, pay substantial amounts in damages, ongoing royalty or license fees, or other payments, or could prevent us from offering all or aspects of our platform or using certain technologies, require us to re-engineer all or a portion of our platform or require that we comply with other unfavorable terms. We may also be obligated to indemnify our customers or business partners in connection with any such litigation and to obtain licenses or refund subscription fees, which could further exhaust our resources. Even if we were to prevail in the event of claims or litigation against us, any claim or litigation regarding our technology or intellectual property could be costly and time-consuming and divert the attention of our management and other employees from our business operations. Such disputes could also disrupt our platform and products, which

 

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would adversely impact our client satisfaction and ability to attract customers. In the case of infringement or misappropriation caused by technology that we obtain from third parties, any indemnification or other contractual protections we obtain from such third parties, if any, may be insufficient to cover the liabilities we incur as a result of such infringement or misappropriation.

Indemnity provisions in various agreements potentially expose us to substantial liability for intellectual property infringement and other losses.

Our agreements with customers and other third parties may include indemnification or other provisions under which we agree to indemnify or otherwise be liable to them for losses suffered or incurred as a result of claims of intellectual property infringement, damages caused by us to property or persons or other liabilities relating to or arising from our platform or our acts or omissions. In addition, customers typically require us to indemnify or otherwise be liable to them for breach of confidentiality or failure to implement adequate security measures with respect to their data stored, transmitted or processed by our platform. The terms of these contractual provisions often survive termination or expiration of the applicable agreement. Large indemnity payments or damage claims from contractual breach could harm our business, results of operations and financial condition. Although we generally attempt to contractually limit the scope of our liability with respect to such obligations, we are not always successful and we may incur substantial liability related to them. Any dispute with a customer with respect to such obligations could have adverse effects on our relationship with that customer and other current and prospective customers, reduce demand for our platform and harm our business, financial condition and results of operations.

Our platform utilizes open source software, which may subject us to litigation, require us to re-engineer our platform or otherwise divert resources away from our development efforts.

We use open source software in connection with our platform and products and operations. We could be subject to suits by parties claiming ownership of what we believe to be open source software, noncompliance with open source licensing terms or that our use of such software infringes a third party’s intellectual property rights. Some open source software licenses require users who distribute open source software as part of their software to publicly disclose all or part of the source code to such software and/or make available any derivative works of the open source code (which may include our modifications and/or product code into which such open source software has been integrated) on terms allowing further modification and redistribution and at no or nominal cost. The terms of many open source licenses have not been interpreted by U.S. or foreign courts, and these licenses could be construed in a way that could impose other unanticipated conditions or restrictions on our ability to commercialize our products. While we monitor our use of open source software and try to ensure that none is used in a manner that would require us to disclose source code that we have decided to maintain as proprietary or that would otherwise breach the terms or fail to meet the conditions of an open source license or third-party contract, such use could inadvertently occur and we may as a result be subject to claims for breach of contract, infringement of intellectual property rights, or indemnity, required to release our proprietary source code, pay damages, royalties, or license fees or other amounts, seek licenses, re-engineer our applications, discontinue sales in the event re-engineering cannot be accomplished on a timely basis or take other remedial action that may divert resources away from our development efforts, any of which could adversely affect our business.

Any failure to protect our intellectual property rights could impair our ability to protect our proprietary technology and our brand.

Our success and ability to compete depend in part upon our ability to secure, protect, maintain, assert and enforce our intellectual property. As of April 30, 2019, we had eight issued patents and 13 pending non-provisional or provisional patent applications filed. We rely on a combination of patent, copyright, trade secret and trademark laws, trade secret protection, and confidentiality or license agreements with our employees, customers, partners, and others to protect our intellectual property rights. However, the steps we take to protect

 

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our intellectual property rights may be inadequate, and our intellectual property may still be challenged or invalidated. We cannot guarantee that any of our pending applications will be approved or that our existing and future intellectual property rights will be sufficiently broad to protect our proprietary technology. Effective trademark, copyright, patent and trade secret protection may not even be available in every country in which we conduct business. Failure to comply with applicable procedural, documentary, fee payment and other similar requirements with the United States Patent and Trademark Office, or the USPTO, and various similar foreign governmental agencies could result in abandonment or lapse of the affected patent, trademark or application. If this occurs, our competitors might be more successful in their efforts to compete with us. Furthermore, we may not always detect infringement of our intellectual property rights, and any infringement of our intellectual property rights, even if successfully detected, prosecuted and enjoined, could be costly to deal with and could harm our business. In addition, other parties, including our competitors, may independently develop similar technology, duplicate our services or design around our intellectual property and, in such cases, we may not be able to assert our intellectual property rights against such parties. Further, our contractual arrangements may not effectively prevent disclosure of our confidential information or provide an adequate remedy in the event of unauthorized disclosure of our confidential information, and we may be unable to detect the unauthorized use of, or take appropriate steps to enforce, our intellectual property rights. In the event that any of the foregoing occur, this could adversely affect our business, results of operations and financial condition.

In order to protect our intellectual property rights, we may be required to spend significant resources to monitor and protect these rights. Litigation brought to protect and enforce our intellectual property rights could be costly, time-consuming and distracting to management, and could result in the impairment or loss of portions of our intellectual property. Furthermore, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims and countersuits attacking the validity and enforceability of our intellectual property rights, which could result in the impairment or loss of portions of our intellectual property portfolio. An adverse determination of any litigation proceedings could put our intellectual property at risk of being invalidated or interpreted narrowly and could put our related pending patent applications at risk of not issuing. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential or sensitive information could be compromised by disclosure in the event of litigation. In addition, during the course of litigation there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock. Our failure to secure, protect, maintain, assert and enforce our intellectual property rights could adversely affect our brand and business.

If we fail to integrate our platform with a variety of software applications, operating systems, platforms, and hardware that are developed by others, our platform may become less marketable, less competitive or obsolete and our business and results of operations would be harmed.

Our platform must integrate with a variety of network, hardware and software systems, including human resource information and customer relationship management systems, and we need to continuously modify and enhance our platform to adapt to changes in hardware, software, networking, browser and database technologies. In particular, we have developed our platform to be able to easily integrate with certain third-party SaaS applications, through the interaction of application programming interfaces, or APIs. In general, we rely on the fact that the providers of such software systems continue to allow us access to their APIs to enable these customer integrations. To date, we have not relied on a long-term written contract to govern our relationship with these providers. Instead, we are subject to the standard terms and conditions for application developers of such providers, which govern the distribution, operation and fees of such software systems, and which are subject to change by such providers from time to time.

 

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We may acquire or invest in companies, which may divert our management’s attention and result in additional dilution to our stockholders. We may be unable to integrate acquired businesses and technologies successfully or achieve the expected benefits of such acquisitions.

Our success will depend, in part, on our ability to expand our platform and grow our business in response to changing technologies, customer demands and competitive pressures. We have in the past, and we may in the future, attempt to do so through strategic transactions, including acquisitions of, or investments in, businesses, technologies, services, products and other assets that we believe could complement, expand or enhance our platform or otherwise offer growth opportunities. For example, in May 2019, we acquired Strikedeck, Inc., a provider of a customer success platform for business-to-business customers and, in June 2019, we acquired Cooladata Ltd., a cloud-based behavioral analytics platform that can derive and predict customer sentiment. We may also enter into relationships with other businesses to expand our platform, which could involve preferred or exclusive licenses, additional channels of distribution, discount pricing or investments in other companies.

Any acquisition, investment or business relationship may result in unforeseen operating difficulties and expenditures. In particular, we may encounter difficulties assimilating or integrating the businesses, technologies, products, personnel or operations of the acquired companies, particularly if the key personnel of the acquired company choose not to work for us, their software is not easily adapted to work with our platform or we have difficulty retaining the customers of any acquired business due to changes in ownership, management or otherwise. Acquisitions, investments or other business relationships may also disrupt our business, divert our resources and require significant management attention that would otherwise be available for development of our existing business. Moreover, the anticipated benefits of any acquisition, investment or business relationship may not be realized or we may be exposed to unknown risks or liabilities.

Identifying and negotiating these transactions can be time-consuming, difficult and expensive, and our ability to complete these transactions may often be subject to approvals that are beyond our control. We cannot predict the number, timing or size of these transactions. Our prior acquisitions have been relatively small and we are relatively inexperienced in effectively implementing another business with our own. Consequently, these transactions, even if announced, may not be completed. The risks we face in connection with these transactions include:

 

   

the issuance of additional equity securities that would dilute our existing stockholders and adversely affects the value of our common stock;

 

   

the use of substantial portions of our available cash and other resources that we may need in the future to operate our business;

 

   

issuance of large charges or substantial liabilities;

 

   

diversion of management’s attention from other business concerns;

 

   

issuance of debt on terms unfavorable to us or that we are unable to repay;

 

   

harm to our existing relationships with customers and partners as a result of the transaction;

 

   

claims and disputes from stockholders and third parties, including intellectual property claims and disputes;

 

   

difficulties retaining key employees or customers of the acquired business or integrating diverse software codes or business cultures; and

 

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adverse tax consequences, substantial depreciation deferred compensation charges or other unfavorable accounting treatment.

The occurrence of any of these risks could have an adverse effect on our business, results of operations and financial condition.

In addition, our entry into any future acquisition, investment or business relationship may be prohibited. In September 2016, we entered into the Second Amended and Restated Loan and Security Agreement, as amended, or the SVB Credit Facility, with Silicon Valley Bank, or SVB. The SVB Credit Facility restricts our ability to pursue certain mergers, acquisitions, amalgamations or consolidations that we may believe to be in our best interest.

We may not be able to secure additional financing on favorable terms, or at all, to meet our future capital needs.

We have funded our operations since inception primarily through subscription payments by our customers for use of our platform, equity and debt financings, capital lease arrangements and loans for equipment. We do not know when or if our operations will generate sufficient cash to fund our ongoing operations. In the future, we may require additional capital to respond to business opportunities, challenges, acquisitions, a decline in the level of subscriptions for our platform or unforeseen circumstances.

We evaluate financing opportunities from time to time, and our ability to obtain financing will depend, among other things, on our operating performance and the condition of the capital markets at the time we seek financing. We may not be able to timely secure additional equity or debt financing on favorable terms, or at all. If we engage in any debt financing, the holders of debt would have priority over the holders of common stock. The holders of debt could impose restrictions on our business during the time the loan is outstanding, including restrictive covenants relating to financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. The holders of debt would also likely obtain security interests on our assets enabling the debt holders to seize and take ownership or dispose of the property, whether tangible or intangible, in which they have a security interest if we default on repayment of the loan or any of the conditions associated with the loan. We may also be required to take other actions that would be in the interests of the debt holders and force us to maintain specified liquidity or other ratios, any of which could harm our business, results of operations and financial condition. The SVB Credit Facility prohibits us from incurring additional indebtedness without SVB’s prior written consent. If we raise additional funds through further issuances of equity, convertible debt securities or other securities convertible into equity, our existing stockholders could suffer significant dilution in their percentage ownership of our company, and any new equity securities we issue could have rights, preferences and privileges senior to those of holders of our common stock. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to grow or support our business and to respond to business challenges could be significantly limited, and our business, results of operations and financial condition could be adversely affected.

Our international sales and operations subject us to additional risks and challenges that can adversely affect our business, results of operations and financial condition.

As part of our growth strategy, we expect to continue to expand our international operations, which may include opening additional offices in new jurisdictions and providing our platform in additional languages. Any new markets or countries into which we attempt to sell subscriptions to our platform may not be receptive. We currently have sales personnel and sales and customer and product support operations in the United States and certain countries across Europe, the Asia Pacific region and the Americas. Our sales organization outside the United States is smaller than our sales organization in the United States and to date a limited portion of our sales has been driven by resellers or other channel partners. We believe our ability to attract new customers to our

 

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platform and to convince existing customers to renew or expand their use of our platform is directly correlated to the level of engagement we achieve with our customers. To the extent we are unable to effectively engage with non-U.S. customers due to our limited sales force capacity and limited channel partners, we may be unable to effectively grow in international markets.

Our international operations also subject us to a variety of additional risks and challenges, including:

 

   

increased management, travel, infrastructure and legal compliance costs associated with having operations in multiple jurisdictions;

 

   

providing our platform and operating our business across a significant distance, in different languages, among different cultures and time zones, including the potential need to modify our platform and products to ensure that they are culturally appropriate and relevant in different countries;

 

   

compliance with foreign privacy and security laws and regulations, including data localization requirements, and the risks and costs of non-compliance;

 

   

longer payment cycles and difficulties enforcing agreements, collecting accounts receivable or satisfying revenue recognition criteria, especially in emerging markets;

 

   

hiring, training, motivating and retaining highly-qualified personnel, while maintaining our unique corporate culture;

 

   

increased financial accounting and reporting burdens and complexities;

 

   

longer sales cycle and more time required to educate enterprises on the benefits of our platform outside of the United States;

 

   

requirements or preferences for domestic products;

 

   

limitations on our ability to sell our platform and for our solution to be effective in foreign markets that have different cultural norms and related business practices that de-emphasize the importance of positive customer and employee experiences;

 

   

differing technical standards, existing or future regulatory and certification requirements and required features and functionality;

 

   

political and economic conditions and uncertainty in each country or region in which we operate and general economic and political conditions and uncertainty around the world;

 

   

compliance with laws and regulations for foreign operations, including anti-bribery laws, import and export control laws, tariffs, trade barriers, economic sanctions and other regulatory or contractual limitations on our ability to sell our platform in certain foreign markets, and the risks and costs of non-compliance;

 

   

heightened risks of unfair or corrupt business practices in certain geographies and of improper or fraudulent sales arrangements that may impact our financial condition and result in restatements of our consolidated financial statements;

 

   

fluctuations in currency exchange rates and related effects on our results of operations;

 

   

difficulties in repatriating or transferring funds from or converting currencies in certain countries;

 

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communication and integration problems related to entering new markets with different languages, cultures and political systems;

 

   

new and different sources of competition;

 

   

differing labor standards, including restrictions related to, and the increased cost of, terminating employees in some countries;

 

   

the need for localized subscription agreements;

 

   

the need for localized language support and difficulties associated with delivering support, training and documentation in languages other than English;

 

   

increased reliance on channel partners;

 

   

reduced protection for intellectual property rights in some countries and practical difficulties of enforcing such rights abroad; and

 

   

compliance with the laws of numerous foreign taxing jurisdictions, including withholding tax obligations, and overlapping of different tax regimes.

Any of these risks and challenges could adversely affect our operations, reduce our revenue or increase our operating costs, each of which could adversely affect our business, results of operations, financial condition and growth prospects.

Compliance with laws and regulations applicable to our international operations substantially increases our cost of doing business. We may be unable to keep current with changes in government requirements as they change from time to time. Failure to comply with these regulations could have adverse effects on our business. In many foreign countries it is common for others to engage in business practices that are prohibited by our internal policies and procedures or U.S. or other regulations applicable to us. Although we have implemented policies and procedures designed to ensure compliance with these laws and policies, there can be no assurance that our employees, contractors, partners and agents will comply with these laws and policies. Violations of laws or our policies by our employees, contractors, partners or agents could result in delays in revenue recognition, financial reporting misstatements, enforcement actions, disgorgement of profits, fines, civil and criminal penalties, damages, injunctions, other collateral consequences and increased costs, including the costs associated with defending against such actions, or the prohibition of the importation or exportation of our platform and related services, each of which could adversely affect our business, results of operations and financial condition.

Further, risks associated with operating in Israel may adversely affect our business. We have operations in Israel through our wholly-owned subsidiary, Medallia Digital Ltd. As of April 30, 2019, we had a total of 50 employees located in Israel, of which 42 were engaged in research and development and SaaS operations activities. Given our employee headcount in Israel, our business, results of operations and financial condition could be adversely affected by political, economic and military instability in Israel. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and neighboring countries. Any hostilities involving Israel or a full or partial mobilization of the reserve forces of the Israeli armed forces could adversely affect our operations in Israel. In addition, some of our employees in Israel are obligated to perform up to 40 days, depending on rank and position, of military reserve duty annually and are subject to being called for active duty under emergency circumstances. Increased military activity could also result in a reduction of qualified prospective employees available to grow our business or to replace employees on active military duty. As a result, our business could be disrupted by the absence of our employees for a significant period of time as a result of military service. Additionally, the interruption or curtailment of trade between Israel and its present trading partners or a significant downturn in the economic or financial conditions in Israel could adversely affect

 

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our operations. In the past, the State of Israel and Israeli companies have been subjected to an economic boycott and several countries still restrict business and trade activity with the State of Israel and with Israeli companies. These restrictive laws and policies could also have an adverse impact on our business and results of operations.

We believe our success depends on continuing to invest in the growth of our worldwide operations by entering new geographic markets. If our investments in these markets are greater than anticipated, or if our customer growth or sales in these markets do not meet our expectations, our results of operations and financial condition may be adversely affected.

We believe our success depends on expanding our business into new geographic markets and attracting customers in countries other than the United States. We anticipate continuing to expand our operations worldwide and have made, and will continue to make, substantial investments and incur substantial costs as we enter new geographic markets. This includes investments in data centers, cloud-based infrastructure and applications and other information technology investments, sales, marketing and administrative personnel and facilities. Often we must make these investments when it is still unclear whether future sales in the new market will justify the costs of these investments. In addition, these investments may be more expensive than we initially anticipate. If our investments are greater than we initially anticipate or if our customer growth or sales in these markets do not meet our expectations or justify the cost of the initial investments, our results of operations and financial condition may be adverse affected.

We are subject to governmental export and import controls and economic sanctions laws and regulations that could impair our ability to compete in international markets and subject us to liability if we are not in full compliance with applicable laws.

Our business activities are subject to various restrictions under U.S. export and similar laws and regulations, including the United States Department of Commerce’s Export Administration Regulations, or the EAR, and various economic and trade sanctions regulations administered by the United States Treasury Department’s Office of Foreign Assets Controls, or OFAC. The U.S. export control laws and economic sanctions laws include restrictions or prohibitions on the sale or supply of certain products and services to certain embargoed or sanctioned countries, governments, persons and entities. In addition, we may incorporate encryption technology into certain of our offerings, and encryption offerings and the underlying technology may be exported outside of the United States only with the required export authorizations, including by license, and we cannot guarantee that any required authorization will be obtained. If we are found to be in violation of U.S. economic sanctions or export control laws, it could result in substantial fines and penalties for us and for the individuals working for us. We may also experience other adverse effects, including reputational harm and loss of access to certain markets.

In addition, various countries regulate the import of certain technology and have enacted or could enact laws that could limit our ability to provide our customers access to our platform or could limit our customers’ ability to access or use our platform in those countries. Changes in our platform or future changes in export and import regulations may prevent our customers with international operations from utilizing our platform globally or, in some cases, prevent the export or import of our platform to certain countries, governments or persons altogether. Any decreased use of our platform or limitation on our ability to export or sell our platform could adversely affect our business, results of operations and financial condition.

Failure to comply with anti-bribery, anti-corruption and anti-money laundering laws could subject us to penalties and other adverse consequences.

We are subject to the U.S. Foreign Corrupt Practices Act of 1977, as amended, or the FCPA, the U.K. Bribery Act and other anticorruption, anti-bribery and anti-money laundering laws in the jurisdictions in which we do business, both domestic and abroad. These laws generally prohibit us and our employees from improperly influencing government officials or commercial parties in order to obtain or retain business, direct business to

 

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any person or gain any advantage. The FCPA, U.K. Bribery Act and other applicable anti-bribery and anti-corruption laws also may hold us liable for acts of corruption and bribery committed by our third-party business partners, representatives and agents. In addition to our own sales force, we leverage third parties to sell our products and conduct our business abroad. We and our third-party business partners, representatives and agents may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities and we may be held liable for the corrupt or other illegal activities of these third-party business partners and intermediaries, our employees, representatives, contractors, channel partners and agents, even if we do not explicitly authorize such activities. These laws also require that we keep accurate books and records and maintain internal controls and compliance procedures designed to prevent any such actions. While we have policies and procedures to address compliance with such laws, we cannot assure you that our employees and agents will not take actions in violation of our policies or applicable law, for which we may be ultimately held responsible and our exposure for violating these laws increases as our international presence expands and as we increase sales and operations in foreign jurisdictions. Any violation of the FCPA, U.K. Bribery Act or other applicable anti-bribery, anti-corruption laws and anti-money laundering laws could result in whistleblower complaints, adverse media coverage, investigations, imposition of significant legal fees, loss of export privileges, severe criminal or civil sanctions or suspension or debarment from U.S. government contracts, substantial diversion of management’s attention, a decline in the market price of our common stock or overall adverse consequences to our reputation and business, all of which may have an adverse effect on our results of operations and financial condition.

Disputes with our customers and other third parties could be costly, time-consuming and harm our business and reputation.

Our business requires us to enter into agreements with a large number of customers and other third parties in many different jurisdictions. Our subscription and other agreements contain a variety of terms, including service levels, data privacy and security obligations, indemnification, dispute resolution procedures and regulatory requirements. Agreement terms may not be standardized across our business and can be subject to differing interpretations and local law requirements, which could result in disputes with our customers and other third parties from time to time. If our customers and other third parties notify us of a breach of contract or otherwise dispute the terms of our agreements, the dispute resolution process can be expensive and time consuming and result in the diversion of resources that could otherwise be deployed to grow our business. Even if these disputes are resolved in our favor, we may be unable to recoup the expenses and other diverted resources committed to resolving the dispute and, if we receive negative publicity in connection with the dispute, our reputation and brand may be harmed. Furthermore, the ultimate resolution of such disputes may be adverse to our interests and as a result could adversely affect our results of operations and financial condition.

We depend and rely upon SaaS technologies from third parties to operate our business, and interruptions or performance problems with these technologies may adversely affect our business and results of operations.

We rely heavily on hosted SaaS applications from third parties in order to operate critical functions of our business, including billing and order management, financial accounting services, enterprise resource planning, customer relationship management, human resources management and customer support. If these services become unavailable or lose certain functionalities that we depend on, due to extended outages, interruptions, errors or defects, acquisitions or integration into other solutions or because they are no longer available on commercially reasonable terms, our expenses could increase, our ability to manage finances could be interrupted and our processes for managing sales of our platform and supporting our customers could be impaired until equivalent services, if available, are identified, obtained and implemented, all of which could adversely affect our business.

 

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We face exposure to foreign currency exchange rate fluctuations, and if foreign currency exchange rates fluctuate substantially in the future, our results of operations and financial condition, which are reported in U.S. dollars, could be adversely affected.

We conduct our business in countries around the world and a portion of our transactions outside the United States are denominated in currencies other than the U.S. dollar. While we have primarily transacted with customers and vendors in U.S. dollars to date, we have from time to time transacted in foreign currencies for subscriptions to our platform and may significantly expand the number of transactions with customers that are denominated in foreign currencies in the future. The majority of our international costs are also denominated in local currencies. In addition, our international subsidiaries maintain net assets or liabilities that are denominated in currencies other than the functional operating currencies of these entities. Accordingly, changes in the value of foreign currencies relative to the U.S. dollar can affect our revenue and results of operations due to transactional and translational remeasurements that are reflected in our results of operations. As a result of such foreign currency exchange rate fluctuations, it could be more difficult to detect underlying trends in our business and results of operations.

We currently maintain a program to hedge transactional exposures in foreign currencies. We use derivative instruments, such as foreign currency forward contracts, to hedge certain exposures to fluctuations in foreign currency exchange rates. The use of such hedging activities may not offset any or more than a portion of the adverse financial effects of unfavorable movements in foreign exchange rates over the limited time the hedges are in place. Moreover, the use of hedging instruments may introduce additional risks if we are unable to structure effective hedges with such instruments. There can be no assurance that we will be successful in managing our exposure to currency exchange rate risks, which may adversely affect our business, results of operations and financial condition.

Taxing authorities may successfully assert that we should have collected or in the future should collect sales and use, value added or similar taxes, and we could be subject to liability with respect to past or future sales, which could adversely affect our results of operations.

Sales and use, value added and similar tax laws and rates vary greatly by jurisdiction. Certain jurisdictions in which we do not collect such taxes may assert that such taxes are applicable, which could result in tax assessments, penalties and interest, and we may be required to collect such taxes in the future. Such tax assessments, penalties, and interest, or future requirements may adversely affect our results of operations.

Our international operations subject us to potentially adverse tax consequences.

We generally conduct our international operations through subsidiaries and are subject to income taxes as well as non-income-based taxes, such as payroll, value-added, goods and services and other local taxes. Our domestic and international tax liabilities are subject to various jurisdictional rules regarding the calculation of taxable income in various jurisdictions worldwide based upon our business operations in those jurisdictions. Our intercompany relationships are subject to complex transfer pricing regulations administered by taxing authorities in various jurisdictions. The relevant taxing authorities may disagree with our determinations as to the value of assets sold or acquired or income and expenses attributable to specific jurisdictions. If such a disagreement were to occur, and our position were not sustained, we could be required to pay additional taxes, interest and penalties, which could result in one-time tax charges, higher effective tax rates, reduced cash flows and lower overall profitability of our operations.

Changes in, or interpretations of, tax rules and regulations may adversely affect our effective tax rates.

Unanticipated changes in our tax rates could affect our future results of operations. Our tax expense could also be impacted by changes in, or interpretations of, tax rules and regulations regarding non-deductible expenses, excess tax benefits of equity-based compensation, the applicability of withholding taxes and the impact

 

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of changes in the evaluation of tax positions we have taken in prior tax periods. Our future effective tax rates could be unfavorably affected by changes in tax laws or the interpretation of tax laws, or by changes in the valuation of our deferred tax assets and liabilities. Additionally, the Organization for Economic Co-Operation and Development, or OECD, has released guidance covering various topics, including transfer pricing, country-by-country reporting and definitional changes to permanent establishment that could ultimately impact our tax liabilities as countries adopt the OECD’s guidance.

We are subject to tax examinations of our tax returns by the Internal Revenue Service, or the IRS, and other domestic and foreign tax authorities. An adverse outcome of any such audit or examination by the IRS or other tax authority could have a material adverse effect on our results of operations and financial condition.

We are, and expect to continue to be, subject to audit by the IRS and other tax authorities in various domestic and foreign jurisdictions. As a result, we have received, and may in the future receive, assessments in multiple jurisdictions on various tax-related assertions. Taxing authorities have also challenged, and may in the future challenge, our tax positions and methodologies on various matters. We regularly assess the likelihood of adverse outcomes resulting from ongoing tax examinations to determine the adequacy of our provision for income taxes. These assessments can require considerable estimates and judgments. The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a variety of jurisdictions. There can be no assurance that our tax positions and methodologies or calculation of our tax liabilities are accurate or that the outcomes from ongoing and future tax examinations will not have an adverse effect on our results of operations and financial condition. A difference in the ultimate resolution of tax uncertainties from what is currently estimated could have an adverse effect on our results of operations and financial condition.

Changes in the U.S. taxation of international business activities or the adoption of other tax reform policies could materially impact our business, results of operations and financial condition.

Changes to U.S. tax laws that may be enacted in the future could impact the tax treatment of our foreign earnings. Due to the expansion of our international business activities, any changes in the U.S. taxation of such activities may increase our worldwide effective tax rate and adversely affect our business, results of operations and financial condition. On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act, or Tax Act, which significantly revises the Internal Revenue Code of 1986, as amended, or the Code. The Tax Act, among other things, reduces the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, repeals the alternative minimum tax for corporations, limits the tax deduction for interest expense to 30% of adjusted taxable income (except for certain small businesses), limits the deduction for net operating losses, or NOLs, carried forward from taxable years beginning after December 31, 2017, eliminates NOL carrybacks, imposes a one-time tax on offshore earnings at reduced rates regardless of whether they are repatriated, eliminates U.S. tax on foreign earnings (subject to certain exceptions) and modifies or repeals many business deductions and credits.

Our ability to use our net operating losses to offset future taxable income may be subject to certain limitations.

As of January 31, 2019, we had federal and state NOL carryforwards, or NOLs, of approximately $303.0 million and $41.4 million, respectively, due to prior period losses, which will begin to expire in 2031. As of January 31, 2019, we had federal and state research and development tax credit carryforwards, or R&D tax credits, of approximately $7.9 million and $8.2 million, respectively. Our federal R&D tax credits will begin to expire in 2029 and our state R&D tax credits do not have an expiration. In general, under Sections 382 and 383 of the Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its NOLs and other tax attributes including R&D tax credits to offset future taxable income. Similar rules apply under state tax laws. Future changes in our stock ownership, some of which are outside of our control, could result in an ownership change under Sections 382 and 383 of the Code (or applicable state tax laws). Furthermore, our ability to utilize NOLs and other tax attributes of companies that we may acquire in the future may be subject to limitations. There is also a risk that due to regulatory changes, such as suspensions on the use

 

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of NOLs and R&D tax credits, or other unforeseen reasons, our existing NOLs and R&D tax credits could expire or otherwise be unavailable to offset future income tax liabilities. For these reasons, we may not be able to realize a tax benefit from the use of our NOLs and R&D tax credits, whether or not we attain profitability.

The terms of the SVB Credit Facility require us to meet certain operating and financial covenants and place restrictions on our operating and financial flexibility. If we raise additional capital through debt financing, the terms of any new debt could further restrict our ability to operate our business.

The SVB Credit Facility contains customary affirmative and negative covenants that either limit our ability to, or, if we make future draws, require a mandatory prepayment in the event we, incur additional indebtedness and liens, merge with other companies or consummate certain changes of control, acquire other companies, engage in new lines of business, make certain investments, pay dividends, transfer or dispose of assets, amend certain material agreements and enter into various specified transactions. As a result, we may not be able to engage in any of the foregoing transactions unless we obtain the consent of our lender or prepay any outstanding amount under the SVB Credit Facility. The SVB Credit Facility also contains certain financial covenants, including minimum revenue and cash balance requirements, and financial reporting requirements. Our obligations under the SVB Credit Facility are secured by substantially all of our property, with limited exceptions, including our intellectual property. We may not be able to generate sufficient cash flow or sales to meet our financial covenants or, if we make future draws, pay the principal and interest under the SVB Credit Facility. Furthermore, if we made a subsequent draw, our future working capital, borrowings or equity financings could be unavailable to repay or refinance the amounts outstanding under the SVB Credit Facility. In the event of a liquidation, our lender would be repaid all outstanding principal and interest prior to distribution of assets to unsecured creditors, and the holders of our common stock would receive a portion of any liquidation proceeds only if all of our creditors, including our lenders, were first repaid in full. Any declaration by our lender of an event of default could significantly harm our business and prospects and could cause the price of our common stock to decline. If we raise any additional debt financing, the terms of such additional debt could further restrict our operating and financial flexibility.

As of April 30, 2019, we did not owe any principal or accrued interest under the SVB Credit Facility. However, it is possible that we will in the future draw down on the SVB Credit Facility or enter into new debt obligations. Our ability to make scheduled payments or to refinance such debt obligations depends on numerous factors, including the amount of our cash balances and our actual and projected financial and operating performance. We may be unable to maintain a level of cash balances or cash flows sufficient to permit us to pay the principal, premium, if any, and interest on our existing or future indebtedness. If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell assets or operations, seek additional capital or restructure or refinance our indebtedness. We may not be able to take any of these actions, and even if we are, these actions may be insufficient to permit us to meet our scheduled debt service obligations. In addition, in the event of our breach of the SVB Credit Facility, we may be required to repay any outstanding amounts earlier than anticipated. If for any reason we become unable to service our debt obligations under the SVB Credit Facility, or any new debt obligations that we may enter into from time to time, holders of our common stock would be exposed to the risk that their holdings could be lost in an event of a default under such debt obligations and a foreclosure and sale of our assets for an amount that is less than the outstanding debt.

Unfavorable conditions in our industry or the economy more generally or reductions in information technology spending could limit our ability to grow our business and adversely affect our results of operations and financial condition.

Our results of operations may vary based on the impact of changes in our industry or the economy more generally on us or our customers. Our business and results of operations depend on demand for information technology generally and for experience management solutions in particular, which in turn is influenced by the scale of business that our customers are conducting. Weak economic conditions, either in the United States or

 

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internationally, including as a result of changes in gross domestic product growth, financial and credit market fluctuations, political turmoil, natural catastrophes or conflict, could cause a decrease in business investments, including spending on information technology generally. To the extent that weak economic conditions cause our existing customers or potential customers to reduce their budget for experience management solutions or to perceive spending on such systems as discretionary, demand for our platform may be adversely affected. Moreover, customers and potential customers may require extended billing terms and other financial concessions, which would limit our ability to grow our business and adversely affect our business, results of operations and financial condition.

Our business could be adversely impacted by changes in laws and regulations related to the Internet or changes in access to the Internet generally.

The future success of our business depends upon the continued use of the Internet as a primary medium for communication, business applications and commerce. Federal or state government bodies or agencies have in the past adopted, and may in the future adopt, laws or regulations affecting the use of the Internet as a commercial medium. Legislators, regulators or government bodies or agencies may also make legal or regulatory changes or interpret or apply existing laws or regulations that relate to the use of the Internet in new and materially different ways. Changes in these laws, regulations or interpretations could require us to modify our platform in order to comply with these changes, to incur substantial additional costs or divert resources that could otherwise be deployed to grow our business, or expose us to unanticipated civil or criminal liability, among other things.

In addition, government agencies and private organizations have imposed, and may in the future impose, additional taxes, fees or other charges for accessing the Internet or commerce conducted via the Internet. Internet access is frequently provided by companies that have significant market power and could take actions that degrade, disrupt or increase the cost of our customers’ use of our platform, which could negatively impact our business. In December 2017, the Federal Communications Commission, or FCC, voted to repeal its “net neutrality” Open Internet rules, effective June 2018. The rules were designed to ensure that all online content is treated the same by internet service providers and other companies that provide broadband services. The FCC’s new rules, which took effect on June 11, 2018, repealed the neutrality obligations imposed by the Open Internet rules and granted providers of broadband internet access services greater freedom to make changes to their services, including, potentially, changes that may discriminate against or harm our business. A number of parties have appealed this order, which is currently being reviewed by the United States Court of Appeals for the Federal Circuit. Should the net neutrality rules be relaxed or eliminated, we could incur greater operating expenses or our customers’ use of our platform could be adversely affected, either of which could harm our business and results of operations.

These developments could limit the growth of Internet-related commerce or communications generally or result in reductions in the demand for Internet-based platforms and services such as ours, increased costs to us or the disruption of our business. In addition, as the Internet continues to experience growth in the numbers of users, frequency of use and amount of data transmitted, the use of the Internet as a business tool could be adversely affected due to delays in the development or adoption of new standards and protocols to handle increased demands of Internet activity, security, reliability, cost, ease-of-use, accessibility and quality of service. The performance of the Internet and its acceptance as a business tool has been adversely affected by “viruses,” “worms” and similar malicious programs and the Internet has experienced a variety of outages and other delays as a result of damage to portions of its infrastructure. If the use of the Internet generally, or our platform specifically, is adversely affected by these or other issues, we could be forced to incur substantial costs, demand for our platform could decline and our results of operations and financial condition could be harmed.

 

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The estimates of market opportunity and forecasts of market growth included in this prospectus may prove to be inaccurate, and even if the markets in which we compete achieve the forecasted growth, our business may not grow at similar rates, or at all.

Market opportunity estimates and growth forecasts included in this prospectus are subject to significant uncertainty and are based on assumptions and estimates which may not prove to be accurate. The estimates and forecasts included in this prospectus relating to size and expected growth of our target market may prove to be inaccurate. Even if the markets in which we compete meet the size estimates and growth forecasts included in this prospectus, our business may not grow at similar rates, or at all. Our growth is subject to many factors, including our success in implementing our business strategy, which is subject to many risks and uncertainties.

Our corporate culture has contributed to our success, and if we cannot maintain this culture as we grow, we could lose the innovation, creativity and teamwork fostered by our culture, which could harm our business.

We have worked to develop a strong culture around our team. We believe that our culture has been and will continue to be a key contributor to our success. We expect to hire aggressively as we expand but if we do not continue to maintain our corporate culture as we grow, we may be unable to foster the innovation, creativity and teamwork we believe we need to support our growth. Moreover, many of our employees may be able to receive significant proceeds from sales of our common stock in the public markets after this offering, which could lead to disparities of wealth among our employees that adversely affects relations among employees and our culture in general. Our substantial anticipated headcount growth and our transition from a private company to a public company may result in a change to our corporate culture, which could harm our business.

Risks associated with operating in Argentina could have an impact on our results of operations.

A significant number of our research and development employees are located in Argentina, and therefore, a portion of our operating expenses are denominated in Argentine pesos. As of April 30, 2019, we had a total of 201 employees located in Argentina, of which 179 were engaged in research and development and SaaS operations activities. If the peso strengthens against the U.S. dollar, it could have a negative impact on our results of operations as it would increase our operating expenses. Our business activities in Argentina also subject us to risks associated with changes in and interpretations of Argentine law, including laws related to employment, the protection and ownership of intellectual property and U.S. ownership of Argentine operations. Furthermore, if we had to scale down or close our Argentine operations, there would be significant time and cost required to relocate those operations elsewhere, which could have an adverse impact on our overall cost structure.

The Argentine government has historically exercised significant influence over the country’s economy. Additionally, the country’s legal and regulatory frameworks have at times suffered radical changes due to political influence and significant political uncertainties. In the past, government policies in Argentina included expropriation, nationalization, forced renegotiation or modification of existing contracts, suspension of the enforcement of creditors’ rights, new taxation policies, including royalty and tax increases and retroactive tax claims and changes in laws and policies affecting foreign trade and investment. Such policies could destabilize the country and adversely affect our business and operating expenses.

In addition, Argentina has experienced labor unrest over wages and benefits paid to workers. In the past, the Argentine government has passed laws, regulations and decrees requiring companies in the private sector to maintain minimum wage levels and provide specified benefits to employees and may do so again in the future. Employers have also experienced significant pressure from their employees and labor organizations to increase wages and to provide additional employee benefits. Any disruptions, labor unrest or increased personnel-related expenses in Argentina could have a material and adverse effect on our business and operating expenses.

 

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The nature of our business requires the application of complex accounting rules, and any significant changes in current rules could affect our financial statements and results of operations.

The accounting rules and regulations that we must comply with are complex and are subject to interpretation by the Financial Accounting Standards Board, or the FASB, the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. Recent actions and public comments from the FASB and SEC have focused on the integrity of financial reporting and internal controls over financial reporting. In addition, many companies’ accounting policies and practices are subject to heightened scrutiny by regulators and the public. A change in these principles or interpretations could have a significant effect on our reported results of operations and may even affect the reporting of transactions completed before the announcement or effectiveness of a change. It is difficult to predict the impact of future changes to accounting principles or our accounting policies, any of which could negatively affect our results of operations.

If our judgments or estimates relating to our critical accounting policies are based on assumptions that change or prove to be incorrect, our results of operations could fall below expectations of securities analysts and investors, resulting in a decline in the market price of our common stock.

The preparation of our financial statements in conformity with United States generally accepted accounting principles, or GAAP, requires management to make judgments, estimates and assumptions that affect the amounts reported in our consolidated financial statements and related notes thereto included elsewhere in this prospectus. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as provided in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the results of which form the basis for making judgments about the carrying values of assets, liabilities and equity, and the amount of revenue and expenses that are not readily apparent from other sources. Our results of operations may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our results of operations to fall below the expectations of securities analysts and investors, resulting in a decline in the trading price of our common stock. Significant judgments, estimates and assumptions used in preparing our consolidated financial statements include, or may in the future include, those related to revenue recognition, stock-based compensation expense, income taxes, goodwill and intangible assets.

If we fail to maintain an effective system of disclosure controls and internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable regulations could be impaired.

As a public company, we will be subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and the listing standards of the New York Stock Exchange, or the NYSE. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are continuing to develop and refine our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we will file with the SEC is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that information required to be disclosed in reports under the Exchange Act is accumulated and communicated to our principal executive and financial officers. We are also continuing to improve our internal control over financial reporting. We have expended, and anticipate that we will continue to expend, significant resources in order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting.

Our current controls and any new controls that we develop may become inadequate because of changes in the conditions in our business, including increased complexity resulting from our international expansion. Further, weaknesses in our disclosure controls or our internal control over financial reporting may be discovered in the future. Any failure to develop or maintain effective controls, or any difficulties encountered in their implementation or improvement, could harm our results of operations or cause us to fail to meet our reporting

 

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obligations and may result in a restatement of our financial statements for prior periods. Any failure to implement and maintain effective internal control over financial reporting could also adversely affect the results of periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting that we will eventually be required to include in our periodic reports that will be filed with the SEC. Ineffective disclosure controls and procedures and internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely adversely affect the market price of our common stock. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on the NYSE. We are not currently required to comply with the SEC rules that implement Section 404 of the Sarbanes-Oxley Act and are therefore not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. As a public company, we will be required to provide an annual management report on the effectiveness of our internal control over financial reporting commencing with our second annual report on Form 10-K.

Our independent registered public accounting firm is not required to formally attest to the effectiveness of our internal control over financial reporting until after we are no longer an “emerging growth company.” At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our internal control over financial reporting is documented, designed or operating. Any failure to maintain effective disclosure controls and internal control over financial reporting could have an adverse effect on our business, results of operations and financial condition and could cause a decline in the market price of our common stock.

Our business is subject to the risks of earthquakes, fire, floods and other natural catastrophes and to interruption by man-made problems such as power disruptions, computer viruses, data security breaches or other incidents or terrorism.

Our corporate headquarters are located in the San Francisco Bay Area and we operate or utilize data centers that are located in North America and Europe. Additionally, we rely on our network and third-party infrastructure, enterprise applications, internal technology systems and our website for our development, marketing, operational support, hosted services and sales activities. The west coast of the United States, where our corporate headquarters and many of our key operations are located, contains active earthquake zones. In the event of a catastrophic event, including a natural disaster such as an earthquake, hurricane, fire, flood, tsunami or tornado, or other catastrophic event such as power loss, telecommunications failure, software or hardware malfunction, cyber-attack, war, terrorist attack or incident of mass violence in the San Francisco Bay Area or elsewhere where our operations or data centers are located or where certain other systems and applications that we rely on are hosted, we may be unable to continue our operations and may endure significant system interruptions, reputational harm, delays in our application development, lengthy interruptions in our platform, breaches of data security and loss of critical data, all of which could have an adverse effect on our future results of operations. In addition, natural disasters, cyber-attacks, acts of terrorism or other catastrophic events could cause disruptions in our or our customers’ businesses, national economies or the world economy as a whole.

We are an “emerging growth company,” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to public companies that are not “emerging growth companies,” including, but not limited to, not being required to comply with the independent auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, being required to provide fewer years of audited financial statements and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.

 

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We may take advantage of these provisions until we are no longer an “emerging growth company.” We would cease to be an “emerging growth company” upon the earliest to occur of: (i) the last day of the fiscal year in which we have more than $1.07 billion in annual revenue; (ii) the date we qualify as a large accelerated filer, with at least $700 million of equity securities held by non-affiliates; (iii) the issuance, in any three-year period, by us of more than $1.0 billion in non-convertible debt securities; and (iv) the last day of the fiscal year ending after the fifth anniversary of this offering. We may choose to take advantage of some but not all of these reduced reporting burdens. We have taken advantage of certain reduced reporting burdens in this prospectus. Accordingly, the information contained herein may be different than the information you receive from other public companies in which you hold stock.

In addition, the JOBS Act also provides that an “emerging growth company” can take advantage of an extended transition period for complying with new or revised accounting standards. We have chosen to take advantage of such extended transition period, and as a result, our consolidated financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of the effective dates applicable to public companies.

We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock, and the market price of our common stock may be more volatile and may decline.

Risks Related to Ownership of Our Common Stock and This Offering

There has been no prior public trading market for our common stock, and an active trading market may not develop or be sustained following this offering.

We have applied to list our common stock on the NYSE under the symbol “MDLA”. However, prior to this offering, there has been no prior public trading market for our common stock. We cannot assure you that an active trading market for our common stock will develop on such exchange or elsewhere or, if developed, that any market will be sustained. The initial public offering price of our common stock will be determined through negotiation between us and the underwriters. This price will not necessarily reflect the price at which investors in the market will be willing to buy and sell shares of our common stock following this offering.

In addition, the market price of our common stock following this offering is likely to be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. Accordingly, we cannot assure you of the liquidity of any trading market, your ability to sell your shares of our common stock when desired or the prices that you may obtain for your shares of our common stock.

The market price of our common stock could be volatile, and you could lose all or part of your investment.

Technology stocks have historically experienced high levels of volatility. The market price of our common stock following this offering may fluctuate substantially and be higher or lower than the initial public offering price, depending on a number of factors, including those described in this “Risk Factors” section, many of which are beyond our control and may not be related to our operating performance. These fluctuations could cause you to lose all or part of your investment in our common stock. Factors that could cause fluctuations in the trading price of our common stock include the following:

 

   

price and volume fluctuations in the overall stock market from time to time;

 

   

announcements of new products, solutions or technologies, commercial relationships, acquisitions or other events by us or our competitors;

 

   

changes in how enterprises perceive the benefits of our platform and products;

 

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departures of key personnel;

 

   

the public’s reaction to our press releases, other public announcements and filings with the SEC;

 

   

fluctuations in the trading volume of our shares or the size of our public float;

 

   

sales of large blocks of our common stock;

 

   

actual or anticipated changes or fluctuations in our results of operations;

 

   

whether our results of operations meet the expectations of securities analysts or investors;

 

   

changes in actual or future expectations of investors or securities analysts;

 

   

actual or perceived significant data breach involving our platform;

 

   

litigation involving us, our industry or both;

 

   

governmental or regulatory actions or audits;

 

   

regulatory developments in the United States, foreign countries or both;

 

   

general economic conditions and trends;

 

   

major catastrophic events in our domestic and foreign markets; and

 

   

“flash crashes,” “freeze flashes” or other glitches that disrupt trading on the securities exchange on which we are listed.

In addition, if the market for technology stocks or the stock market in general experiences a loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, results of operations or financial condition. The trading price of our common stock might also decline in reaction to events that affect other companies in our industry even if these events do not directly affect us. In the past, following periods of volatility in the trading price of a company’s securities, securities class action litigation has often been brought against that company. If the market price of our common stock is volatile, we may become the target of securities litigation. Securities litigation could result in substantial costs and divert our management’s attention and resources from our business. This could have an adverse effect on our business, results of operations and financial condition.

Upon the completion of this offering, our directors, executive officers and holders of 5% or more of our common stock will beneficially own approximately     % of our common stock and will be able to exert significant control over us, which will limit your ability to influence the outcome of important transactions, including a change of control.

Upon completion of this offering, our directors, executive officers and holders of 5% or more of our outstanding common stock, and their respective affiliates, will beneficially own, in the aggregate, approximately     % of the shares of our outstanding common stock, based on the number of shares outstanding as of             , 2019. Further, entities affiliated with Sequoia Capital, collectively, are currently our largest stockholder. Upon completion of this offering, entities affiliated with Sequoia Capital will hold approximately     % of the total voting power of our capital stock. See the section titled “Principal and Selling Stockholders” for additional information. As a result, our directors, executive officers and holders of 5% or more of our outstanding capital stock, and their respective affiliates, if acting together, will be able to determine or significantly influence all

 

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matters requiring stockholder approval, including the elections of directors, amendments of our organizational documents and approval of any merger, sale of assets or other major corporate transaction. These stockholders may have interests that differ from yours and may vote in a way with which you disagree and which may be adverse to your interests. This concentration of ownership may delay, prevent or discourage acquisition proposals or other offers for our common stock that you may feel are in your best interest as a stockholder and ultimately could deprive you of an opportunity to receive a premium for your common stock as part of a sale of our company, which in turn might adversely affect the market price of our common stock.

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about us, our business or our market, or if they change their recommendations regarding our common stock adversely, the market price and trading volume of our common stock could decline.

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us, our business, our market or our competitors. The analysts’ estimates are based upon their own opinions and are often different from our estimates or expectations. If any of the analysts who cover us change their recommendation regarding our common stock adversely, provide more favorable relative recommendations about our competitors or publish inaccurate or unfavorable research about our business, the price of our securities would likely decline. If few securities analysts commence coverage of us, or if one or more of these analysts cease coverage of us or fail to publish reports on us regularly, we could lose visibility in the financial markets and demand for our securities could decrease, which could cause the price and trading volume of our common stock to decline.

We have broad discretion over the use of the proceeds from this offering and we may not use them effectively.

We intend to use the proceeds from this offering, net of underwriting discounts and commissions and expenses payable by us, for working capital and other general corporate purposes, as well as the acquisition of, or investment in, complementary products, technologies, solutions or businesses, although we have no present commitments or agreements to enter into any material acquisitions or investments. Accordingly, our management will have broad discretion in the application of the proceeds from this offering, and you will not have the opportunity as part of your investment decision to assess whether the proceeds are being used effectively. Because of the number and variability of factors that will determine our use of the proceeds from this offering, their ultimate use may vary substantially from their currently intended use. Our investments may not yield a favorable return to our investors and may negatively impact the price of our common stock. The failure by our management to apply these proceeds effectively could adversely affect our business, results of operations and financial condition. See the section titled “Use of Proceeds” for additional information.

If you purchase our common stock in this offering, you will incur immediate and substantial dilution in the book value of your shares.

The assumed initial public offering price of $             per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, is substantially higher than the pro forma as adjusted net tangible book value per share of our outstanding common stock of $             per share (after giving effect to the Capital Stock Conversions, the automatic conversion of an outstanding warrant exercisable for 55,814 shares of our convertible preferred stock as of April 30, 2019 into a warrant exercisable for the same number of shares of common stock upon the completion of this offering as if such conversions had occurred on April 30, 2019, and the sale of our common stock in this offering) as of April 30, 2019. Investors purchasing shares of our common stock in this offering will pay a price per share that substantially exceeds the book value of our tangible assets after subtracting our liabilities. Therefore, if you purchase common stock in this offering, you will incur immediate dilution of $             per share in the net tangible book value per share from the price you paid.

This dilution is due in large part to the fact that our earlier investors paid substantially less than the initial public offering price when they purchased shares prior to this offering. In addition, as of April 30, 2019,

 

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options to purchase 50,976,927 shares of our common stock with a weighted-average exercise price of approximately $5.36 per share were outstanding, as well as 8,524,211 shares of our common stock subject to RSUs. The exercise of any of these options and settlement of any of these RSUs would result in additional dilution. As a result of the dilution to investors purchasing shares in this offering, investors may receive less than the purchase price paid in this offering, if anything, in the event of our liquidation. See the section titled “Dilution” for additional information.

A substantial portion of the outstanding shares of our common stock after this offering will be restricted from immediate resale, but may be sold on a stock exchange in the near future. The large number of shares eligible for public sale or subject to rights requiring us to register them for public sale could depress the market price of our common stock.

The market price of our common stock could decline as a result of sales of a large number of shares of our common stock in the market after this offering, and the perception that these sales could occur may also depress the market price of our common stock. Following the completion of this offering, based on the number of shares of our capital stock outstanding as of April 30, 2019 (including the Capital Stock Conversions), we will have a total of              shares of common stock outstanding. Our directors, executive officers and the holders of substantially all of our capital stock and securities convertible into or exchangeable for our capital stock have entered into market standoff agreements with us or have entered or will enter into lock-up agreements with the underwriters under which they have agreed or will agree, subject to specific exceptions, not to sell any of our stock for 180 days following the date of this prospectus. We refer to such period as the lock-up period. Pursuant to the lock-up agreements with the underwriters (other than those with our Chief Executive Officer and Chief Financial Officer), if (i) at least 120 days have elapsed since the date of this prospectus and (ii) the lock-up period is scheduled to end during a broadly applicable and regularly scheduled period during which trading in our securities would not be permitted under our insider trading policy, or a blackout period, or within five trading days prior to a blackout period, such lock-up period will end with respect to 10% of the securities subject to such lock-up agreements 15 trading days prior to the commencement of the blackout period (which represents up to              shares of our common stock in the aggregate). We and the underwriters may release certain stockholders from the market standoff agreements or lock-up agreements prior to the end of the lock-up period.

As a result of these agreements and the provisions of our Amended and Restated Investor Rights Agreement dated as of February 25, 2019, or our IRA, described further in the section titled “Description of Capital Stock—Registration Rights,” and subject to the provisions of Rule 144 or Rule 701, shares of our common stock will be available for sale in the public market as follows:

 

   

beginning on the date of this prospectus, the              shares of our common stock sold in this offering will be immediately available for sale in the public market; and

 

   

beginning 181 days after the date of this prospectus, subject to the terms of the lock-up and market standoff agreements described above,              additional shares of capital stock will become eligible for sale in the public market, of which              shares will be held by affiliates and subject to the volume and other restrictions of Rule 144.

Upon completion of this offering, stockholders owning an aggregate of up to              shares of our common stock will be entitled, under our IRA, to certain demand registration rights. In addition, we intend to file a registration statement to register shares reserved for future issuance under our equity compensation plans. Upon effectiveness of that registration statement, subject to the satisfaction of applicable exercise periods and the expiration or waiver of the market standoff agreements and lock-up agreements referred to above, the shares issued upon exercise of outstanding stock options or upon settlement of outstanding RSU awards will be available for immediate resale in the United States in the open market.

Sales of our common stock as restrictions end or pursuant to registration rights may make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. These sales

 

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also could cause the trading price of our common stock to fall and make it more difficult for you to sell shares of our common stock.

We will incur increased costs and demands upon management as a result of complying with the laws and regulations affecting public companies, which could adversely affect our business, results of operations and financial condition.

As a public company, we will incur greater legal, accounting and other expenses than we incurred as a private company. For example, we will be subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, and the rules and regulations of the SEC and the listing standards of the NYSE. The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and results of operations. Compliance with these requirements has increased and will continue to increase our legal, accounting and financial compliance costs and increase demand on our systems, making some activities more time-consuming and costly. We expect these rules and regulations to make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to maintain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as our executive officers. After we are no longer an “emerging growth company,” we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act. In that regard, we will need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge. In addition, as a public company, we may be subject to shareholder activism, which can lead to substantial costs, distract management and impact the manner in which we operate our business in ways we cannot currently anticipate. As a result of disclosure of information in this prospectus and in filings required of a public company, our business and financial condition will become more visible, which may result in threatened or actual litigation, including by competitors. These increased costs and demands upon management could adversely affect our business, results of operations and financial condition.

Delaware law and provisions in our amended and restated certificate of incorporation and amended and restated bylaws could make a merger, tender offer or proxy contest difficult, thereby depressing the market price of our common stock.

Our status as a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law may discourage, delay or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the date of the transaction in which the person became an interested stockholder, even if a change of control would be beneficial to our existing stockholders. In addition, our amended and restated certificate of incorporation and amended and restated bylaws will contain provisions that may make the acquisition of our company more difficult, including the following:

 

   

vacancies on our board of directors will be able to be filled only by our board of directors and not by stockholders;

 

   

our board of directors will be classified into three classes of directors with staggered three-year terms;

 

   

our stockholders will only be able to take action at a meeting of stockholders and will not be able to take action by written consent for any matter;

 

   

a special meeting of our stockholders may only be called by a majority of our board of directors, the chairperson of our board of directors, our Chief Executive Officer or our President;

 

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advance notice procedures apply for stockholders to nominate candidates for election as directors or to bring matters before an annual meeting of stockholders;

 

   

our amended and restated certificate of incorporation will not provide for cumulative voting;

 

   

our amended and restated certificate of incorporation will allow stockholders to remove directors only for cause;

 

   

certain amendments to our amended and restated certificate of incorporation will require the approval of the holders of at least     % of our then-outstanding common stock;

 

   

authorize undesignated preferred stock, the terms of which may be established and shares of which may be issued by our board of directors, without further action by our stockholders; and

 

   

certain litigation against us can only be brought in Delaware.

These provisions, alone or together, could discourage, delay or prevent a transaction involving a change in control of our company. These provisions could also discourage proxy contests and make it more difficult for stockholders to elect directors of their choosing and to cause us to take other corporate actions they desire, any of which, under certain circumstances, could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.

Our amended and restated bylaws will designate a state or federal court located within the State of Delaware as the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to choose the judicial forum for disputes with us or our directors, officers or employees.

Our amended and restated bylaws, which will become effective immediately prior to the completion of this offering, will provide that, unless we consent in writing to the selection of an alternative forum, to the fullest extent permitted by law, the sole and exclusive forum for the following types of actions and proceedings under Delaware statutory or common law: (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders, (iii) any action arising pursuant to any provision of the Delaware General Corporation Law, our amended and restated certificate of incorporation or our amended and restated bylaws or (iv) any other action asserting a claim that is governed by the internal affairs doctrine shall be the Court of Chancery of the State of Delaware (or, if the Court of Chancery does not have jurisdiction, the federal district court for the District of Delaware), in all cases subject to the court having jurisdiction over indispensable parties named as defendants. This exclusive forum provision will not apply to any causes of action arising under the Securities Act or the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction. Nothing in our amended and restated bylaws will preclude stockholders that assert claims under the Securities Act or Exchange Act from bringing such claims in state or federal court, subject to applicable law. Any person or entity purchasing or otherwise acquiring any interest in any of our securities shall be deemed to have notice of and consented to this provision. This exclusive-forum provision may limit a stockholder’s ability to bring a claim in a judicial forum of its choosing for disputes with us or our directors, officers or other employees, which may discourage lawsuits against us and our directors, officers and other employees.

If a court were to find the exclusive-forum provision in our amended and restated bylaws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving the dispute in other jurisdictions, which could harm our results of operations.

 

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Because we do not anticipate paying any cash dividends on our capital stock in the foreseeable future, capital appreciation, if any, will be your sole source of gain.

You should not rely on an investment in our common stock to provide dividend income. We have never declared or paid cash dividends on our capital stock, and we do not anticipate paying any cash dividends in the foreseeable future. We currently intend to retain future earnings, if any, to fund the development and growth of our business. In addition, the SVB Credit Facility contains, and any future credit facility or financing we obtain may contain, terms limiting the amount of dividends that may be declared or paid on our common stock. Any future determination to pay dividends will be at the discretion of our board of directors and will be dependent upon our results of operations, financial condition, capital requirements, applicable contractual restrictions and such other factors as we may deem relevant. As a result, stockholders must rely on sales of their common stock after price appreciation as the only way to realize any future gains on their investment.

We could be subject to securities class action litigation.

In the past, securities class action litigation has often been brought against a company following a decline in the market price of its securities. This risk is especially relevant for us, because technology companies have experienced significant stock price volatility in recent years. If we face such litigation, it could result in substantial costs and a diversion of management’s attention and resources, which could harm our business.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements within the meaning of the federal securities laws, which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. Forward-looking statements contained in this prospectus include, but are not limited to, statements about:

 

   

our ability to attract new customers;

 

   

our ability to retain customers;

 

   

our ability to maintain and improve our products;

 

   

our ability to up-sell and cross-sell within our existing customer base;

 

   

our future financial performance, including trends in revenue, cost of revenue, gross profit or gross margin, operating expenses and customers;

 

   

our expectations and management of future growth;

 

   

our ability to achieve or maintain profitability;

 

   

possible harm caused by significant disruption of service or loss or unauthorized access to users’ data;

 

   

our ability to prevent serious errors or defects in our products;

 

   

our ability to protect our brand;

 

   

our ability to attract and retain key personnel and highly qualified personnel;

 

   

our ability to manage our international expansion;

 

   

our ability to maintain, protect and enhance our intellectual property;

 

   

our ability to effectively integrate our products and solutions with others;

 

   

our ability to successfully identify, acquire and integrate companies and assets;

 

   

our ability to offer high-quality customer support;

 

   

the increased expenses associated with being a public company;

 

   

our anticipated uses of net proceeds from this offering;

 

   

the demand for our platform or for customer experience market solutions in general; our ability to compete successfully in competitive markets; and

 

   

our ability to respond to rapid technological changes.

 

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We caution you that the foregoing list may not contain all of the forward-looking statements made in this prospectus.

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

The forward-looking statements made in this prospectus relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this prospectus to reflect events or circumstances after the date of this prospectus or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.

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

 

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INDUSTRY, MARKET AND OTHER DATA

This prospectus contains estimates and information concerning our industry, including market size of the markets in which we participate, that are based on various third-party industry publications and reports, as well as our own internal information. This information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates and information. We have not independently verified the accuracy or completeness of the data contained in these industry publications and reports. The markets in which we operate are subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the section titled “Risk Factors.” These and other factors could cause results to differ materially from those expressed in these publications and reports.

The source of certain statistical data, estimates and forecasts contained in this prospectus are the following independent industry publications or reports:

 

   

Forbes Media LLC, Global 2000: The World’s Largest Public Companies, June 2018.

 

   

Forrester Research, Inc., The Forrester Wave: Customer Feedback Management Platforms, Q4 2018, October 2018.

 

   

Forrester Consulting, The Total Economic Impact of Medallia Experience Cloud, April 2018.

 

   

Forrester Research, Inc., Why CX? Why Now?, October 2016.

 

   

Fortune Media IP Limited, Global 500 List 2018, May 2018.

 

   

Gallup, Inc.: State of the American Workplace, 2017.

 

   

Gartner, How Customer Centricity Improves Both Customer and Employee Experience, March 2019.*

 

   

Harvard Business Review, Closing the Customer Experience Gap, August 2017.

 

   

Ipsos, The Customer Experience Tipping Point, June 2018.

 

   

Pew Research Center, Online Shopping and E-Commerce, December 2016.

 

   

PricewaterhouseCoopers LLP, Experience is everything. Get it right, 2018.

 

   

Salesforce Research, State of the Connected Customer, June 2018.

 

   

Andrew Trice, The Future of Cognitive Computing, November 2015. This article can be accessed on the IBM Cloud Blog at: www.ibm.com/blogs/bluemix/2015/11/future-of-cognitive-computing/

 

*

The Gartner Report(s) described herein, or the Gartner Report(s), represent(s) research opinion or viewpoints published, as part of a syndicated subscription service, by Gartner, Inc., or Gartner, and are not representations of fact. Each Gartner Report speaks as of its original publication date (and not as of the date of this prospectus) and the opinions expressed in the Gartner Report(s) are subject to change without notice.

 

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USE OF PROCEEDS

We estimate that the net proceeds to us from the sale of shares of our common stock in this offering will be approximately $            , based upon the assumed initial public offering price of $             per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters’ option to purchase additional shares of our common stock from us and the selling stockholders is exercised in full, we estimate that the net proceeds to us would be approximately $                , after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any of the proceeds from the sale of common stock in this offering by the selling stockholders.

Each $1.00 increase or decrease in the assumed initial public offering price of $             per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, the net proceeds that we receive from this offering by approximately $            , assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions payable by us. Similarly, each increase or decrease of 1.0 million shares in the number of shares of our common stock offered by us would increase or decrease, as applicable, the net proceeds that we receive from this offering by approximately $            , assuming the assumed initial public offering price remains the same and after deducting the estimated underwriting discounts and commissions payable by us.

The principal purposes of this offering are to increase our capitalization and financial flexibility, create a public market for our common stock and enable access to the public equity markets for us and our stockholders.

We intend to use a portion of the net proceeds we receive from this offering for working capital and other general corporate purposes, as well as the acquisition of, or investment in, complementary products, technologies, solutions or businesses, although we have no present commitments or agreements to enter into any material acquisitions or investments.

We also intend to use the net proceeds from this offering to satisfy our anticipated tax withholding and remittance obligations related to the settlement of certain of our RSUs. The RSUs that we have issued to date generally vest upon the satisfaction of both service-based and liquidity event-related performance vesting conditions. The service-based vesting period is generally between three to four years. The liquidity event-related performance vesting condition is generally satisfied on the earlier of: (i) a change in control event or (ii) the IPO Condition. We have also issued RSUs that, in addition to the satisfaction of the service-based and liquidity event-related performance vesting conditions, also require the fulfillment of a performance vesting condition which includes the achievement of certain subscription revenue growth targets. As of April 30, 2019, 8,524,211 RSUs were outstanding, including                  RSUs for which the IPO Condition will be satisfied in connection with this offering, and for which we expect the service-based vesting condition will be satisfied during the remainder of the year ending January 31, 2020. In connection with the satisfaction of the IPO Condition and the service-based vesting condition for such RSUs, we expect to withhold an aggregate of                  shares of our common stock subject to such RSUs to satisfy tax withholding and remittance obligations at an assumed tax rate of             %, and to pay $             to the relevant tax authorities in cash to satisfy our tax withholding and remittance obligations related to the settlement of such RSUs. This amount is based upon the assumed initial public offering price of $             per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and the actual amount of this obligation could be higher or lower, depending on the market price of shares of our common stock on the date of settlement. In the event that the market price of our common stock increases, the amount of cash required to satisfy our tax withholding and remittance obligations related to the settlement of such RSUs would increase.

 

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We cannot further specify with certainty the particular uses of the net proceeds that we will receive from this offering. Accordingly, we will have broad discretion in using these proceeds. Pending the use of proceeds from this offering as described above, we plan to invest the net proceeds that we receive in this offering in short-term, investment grade, interest-bearing instruments, including U.S. government and investment-grade debt securities and money-market funds.

 

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DIVIDEND POLICY

We have never declared or paid any cash dividends on our capital stock. We currently intend to retain any future earnings and do not expect to pay any dividends in the foreseeable future. Additionally, our ability to pay dividends on our capital stock may also be limited by the terms of the SVB Credit Facility and the terms of any future debt or preferred securities or future credit facility. Any future determination to declare cash dividends will be made at the discretion of our board of directors, subject to applicable laws, and will depend on a number of factors, including our financial condition, results of operations, capital requirements, contractual restrictions, general business conditions and other factors that our board of directors may deem relevant.

 

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CAPITALIZATION

The following table sets forth cash and cash equivalents, as well as our capitalization, as of April 30, 2019 as follows:

 

   

on an actual basis;

 

   

on a pro forma basis, giving effect to (i) the Capital Stock Conversions, (ii) the automatic conversion of an outstanding warrant exercisable for 55,814 shares of our convertible preferred stock as of April 30, 2019 into a warrant exercisable for the same number of shares of common stock upon the completion of this offering, as if such conversion had occurred on April 30, 2019, (iii) the filing and effectiveness of our amended and restated certificate of incorporation in Delaware that will become effective immediately prior to the completion of this offering and (iv) an increase to additional paid-in capital and accumulated deficit related to stock-based compensation expense of $10.6 million associated with the satisfaction of the liquidity event-related performance vesting condition under certain of our RSUs;

 

   

on a pro forma as adjusted basis, giving effect (i) to the pro forma adjustments set forth above and (ii) the sale and issuance by us of              shares of our common stock in this offering, based upon the assumed initial public offering price of $             per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

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The pro forma and pro forma as adjusted information set forth in the table below is illustrative only and may change based on the actual initial public offering price and other terms of this offering determined at pricing. You should read this table together with our consolidated financial statements and related notes thereto included elsewhere in this prospectus, and the sections titled “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

    As of April 30, 2019  
   

      Actual      

   

 Pro Forma 

   

Pro Forma
As  Adjusted(1)

 
    (in thousands, except share and per share data)  

Cash, cash equivalents and marketable securities

  $ 132,865     $ 132,865     $                
 

 

 

   

 

 

   

 

 

 

Stockholders’ equity (deficit):

     

Convertible preferred stock, par value $0.001 per share: 77,288,882 shares authorized, 77,149,275 issued and outstanding, actual; no shares authorized, issued and outstanding, pro forma and pro forma as adjusted

    77       —         —    

Preferred stock, par value $0.001 per share: no shares authorized, issued and outstanding, actual;              shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted

    —         —         —    

Class A common stock, par value $0.001 per share: 200,000,000 shares authorized, 31,126,701 shares issued and outstanding, actual; no shares authorized, issued and outstanding, pro forma and pro forma as adjusted

    31       —         —    

Class B common stock, par value $0.001 per share: 3,000 shares authorized, 3,000 shares issued and outstanding, actual; no shares authorized, issued and outstanding, pro forma and pro forma as adjusted

    —         —         —    

Common stock, par value $0.001 per share: no shares authorized, issued and outstanding, actual;             shares authorized,             shares issued and outstanding, pro forma; and              shares authorized,              shares issued and outstanding, pro forma as adjusted

    —         108    

Additional paid-in capital

    446,355       456,993    

Accumulated other comprehensive loss

    (1,497     (1,497  

Accumulated deficit

    (371,199     (381,837  
 

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

    73,767       73,767    
 

 

 

   

 

 

   

 

 

 

Total capitalization

  $ 73,767     $ 73,767     $                    
 

 

 

   

 

 

   

 

 

 

 

(1) 

Each $1.00 increase or decrease in the assumed initial public offering price of $             per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, each of our pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization by $            , assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions payable by us. Similarly, each increase or decrease of 1.0 million shares in the number of shares of our common stock offered by us would increase or decrease, as applicable, each of our pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization by $            , assuming the assumed initial public offering price remains the same, and after deducting the estimated underwriting discounts and commissions payable by us.

If the underwriters’ option to purchase additional shares of our common stock from us and the selling stockholders were exercised in full, pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders’ equity (deficit), total capitalization and shares of common stock issued and outstanding as of April 30, 2019 would be $             million, $             million, $             million, $             million and              shares, respectively.

 

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The number of shares of our common stock issued and outstanding pro forma and pro forma as adjusted in the table above is based on 108,278,976 shares of our common stock (after giving effect to the Capital Stock Conversions) outstanding as of April 30, 2019, and excludes:

 

   

50,976,927 shares of our common stock issuable upon the exercise of options to purchase shares of our common stock that were outstanding as of April 30, 2019, with a weighted-average exercise price of $5.36 per share;

 

   

8,524,211 shares of our common stock subject to RSUs outstanding for which the service-based vesting condition was not satisfied, as of April 30, 2019;

 

   

830,657 shares of our common stock subject to RSUs granted after April 30, 2019;

 

   

75,000 shares of our common stock issuable upon the exercise of a warrant to purchase common stock outstanding as of April 30, 2019, with an exercise price of $0.84 per share;

 

   

55,814 shares of our common stock issuable upon the exercise of a warrant to purchase convertible preferred stock outstanding as of April 30, 2019, with an exercise price of $5.38 per share; and

 

   

                 shares of our common stock reserved for future issuance under our equity compensation plans, consisting of:

 

   

             shares of our common stock to be reserved for future issuance under our 2019 Plan, which will become effective prior to the completion of this offering;

 

   

             shares of our common stock reserved for future issuance under our 2017 Plan, which number of shares will be added to the shares of our common stock to be reserved for future issuance under our 2019 Plan upon its effectiveness, at which time we will cease granting awards under our 2017 Plan; and

 

   

             shares of our common stock to be reserved for future issuance under our ESPP, which will become effective prior to the completion of this offering.

Our 2019 Plan and ESPP each provide for annual automatic increases in the number of shares of our common stock reserved thereunder, and our 2019 Plan also provides for increases to the number of shares of our common stock that may be granted thereunder based on shares under our 2017 Plan that expire, are forfeited, or otherwise repurchased by us, as more fully described in the section titled “Executive Compensation—Employee Benefits and Stock Plans.”

 

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DILUTION

If you invest in our common stock in this offering, your ownership interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the pro forma net tangible book value per share of our common stock immediately after this offering. Net tangible book value dilution per share to new investors represents the difference between the amount per share paid by purchasers of shares of our common stock in this offering and the pro forma net tangible book value per share of common stock immediately after completion of this offering.

Net tangible book value (deficit) per share is determined by dividing our total tangible assets less our total liabilities by the number of shares of our common stock outstanding. Our historical net tangible book deficit as of April 30, 2019 was $(2.3) million, or $(0.07) per share. Our pro forma net tangible book deficit as of April 30, 2019 was $         million, or $         per share, based on the total number of our common stock outstanding as of April 30, 2019, after giving effect to (i) the Capital Stock Conversions, (ii) the automatic conversion of an outstanding warrant exercisable for 55,814 shares of our convertible preferred stock as of April 30, 2019 into a warrant exercisable for the same number of shares of common stock upon the completion of this offering as if such conversion had occurred on April 30, 2019, (iii) the filing and effectiveness of our amended and restated certificate of incorporation in Delaware that will become effective immediately prior to the completion of this offering and (iv) an increase to additional paid-in capital and accumulated deficit related to the satisfaction of the liquidity event-related performance vesting condition under certain of our RSUs.

After giving further effect to the sale by us of              shares of our common stock in this offering at the assumed initial public offering price of $         per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of April 30, 2019 would have been $             million, or $         per share. This represents an immediate increase in pro forma net tangible book value of $         per share to our existing stockholders and an immediate dilution in pro forma net tangible book value of $             per share to investors purchasing shares of our common stock in this offering at the assumed initial public offering price. The following table illustrates this dilution:

 

Assumed initial public offering price per share

     $                

Historical net tangible book value per share as of April 30, 2019

   $ (0.07  

Increase per share attributable to the pro forma adjustments described above

    

Pro forma net tangible book value per share as of April 30, 2019

    

Increase in pro forma net tangible book value per share attributable to new investors
purchasing shares of common stock in this offering

    
  

 

 

   

Pro forma as adjusted net tangible book value per share immediately after this offering

    
    

 

 

 

Dilution in pro forma net tangible book value per share to new investors in this offering

     $                
    

 

 

 

Each $1.00 increase or decrease in the assumed initial public offering price of $             per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, our pro forma net tangible book value per share to new investors by $            , and would increase or decrease, as applicable, dilution per share to new investors purchasing shares of our common stock in this offering by $            , assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions. Similarly, each increase or decrease of 1.0 million shares in the number of shares of our common stock offered by us would increase or decrease, as applicable, our pro forma net tangible book value by approximately $             per share and increase or decrease, as applicable, the dilution to new investors purchasing shares of our common stock in this offering by $             per share, assuming the assumed initial public offering price remains the same, and after deducting the estimated underwriting discounts and commissions payable by us.

 

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If the underwriters’ option to purchase additional shares of our common stock from us and the selling stockholders is exercised in full, the pro forma as adjusted net tangible book value per share of our common stock, would be $             per share, and the dilution in pro forma net tangible book value per share to new investors purchasing shares of our common stock in this offering would be $             per share, in each case assuming an initial public offering price of $         per share.

The following table presents, as of April 30, 2019, the differences between the existing stockholders and the new investors purchasing shares of our common stock in this offering with respect to the number of shares purchased from us, the total consideration paid or to be paid to us, which includes net proceeds received from the issuance of our common stock, cash received from the exercise of stock options and the average price per share paid or to be paid to us at the assumed initial public offering price of $         per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, before deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us:

 

     Shares Purchased      Total Consideration     

Weighted-
Average
Price Per
Share

 
     Number      Percent      Amount      Percent  

Existing stockholders

                             %      $                          %      $                

New investors

               $    
  

 

 

    

 

 

    

 

 

    

 

 

    

Totals

        100%      $          100%     
  

 

 

    

 

 

    

 

 

    

 

 

    

Each $1.00 increase or decrease in the assumed initial public offering price of $         per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, the total consideration paid by new investors and total consideration paid by all stockholders by approximately $             million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions payable by us. Similarly, each increase or decrease of 1.0 million in the number of shares of our common stock offered by us would increase or decrease, as applicable, the total consideration paid by new investors and total consideration paid by all stockholders by approximately $            , assuming the assumed initial public offering price remains the same and after deducting the estimated underwriting discounts and commissions payable by us.

Except as otherwise indicated, the above discussion and tables assume no exercise of the underwriters’ option to purchase additional shares of our common stock from us and the selling stockholders. If the underwriters’ option to purchase additional shares of our common stock from us and the selling stockholders were exercised in full, our existing stockholders would own     % and our new investors would own     % of the total number of shares of our common stock outstanding upon completion of this offering.

Sales by the selling stockholders in this offering will cause the number of shares held by existing stockholders to be reduced to                  shares, or     % of the total number of shares of our common stock outstanding following the completion of this offering, and will increase the number of shares held by new investors to                  shares, or     % of the total number of shares outstanding following the completion of this offering.

The foregoing tables and calculations (other than the historical net tangible book value calculation) are based on 108,278,976 shares of our common stock (after giving effect to the Capital Stock Conversions) outstanding as of April 30, 2019, and excludes:

 

   

50,976,927 shares of our common stock issuable upon the exercise of options to purchase shares of our common stock that were outstanding as of April 30, 2019, with a weighted-average exercise price of $5.36 per share;

 

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8,524,211 shares of our common stock subject to RSUs outstanding as of April 30, 2019 for which the service-based vesting condition was not satisfied;

 

   

830,657 shares of our common stock subject to RSUs granted after April 30, 2019;

 

   

75,000 shares of our common stock issuable upon the exercise of a warrant to purchase common stock outstanding as of April 30, 2019, with an exercise price of $0.84 per share;

 

   

55,814 shares of our common stock issuable upon the exercise of a warrant to purchase convertible preferred stock outstanding as of April 30, 2019, with an exercise price of $5.38 per share; and

 

   

             shares of our common stock reserved for future issuance under our equity compensation plans, consisting of:

 

   

             shares of our common stock to be reserved for future issuance under our 2019 Plan, which will become effective prior to the completion of this offering;

 

   

             shares of our common stock reserved for future issuance under our 2017 Plan, which number of shares will be added to the shares of our common stock to be reserved for future issuance under our 2019 Plan upon its effectiveness, at which time we will cease granting awards under our 2017 Plan; and

 

   

             shares of our common stock to be reserved for future issuance under our ESPP, which will become effective prior to the completion of this offering.

Our 2019 Plan and ESPP each provide for annual automatic increases in the number of shares of our common stock reserved thereunder, and our 2019 Plan also provides for increases to the number of shares of our common stock that may be granted thereunder based on shares under our 2017 Plan that expire, are forfeited, or otherwise repurchased by us, as more fully described in the section titled “Executive Compensation—Employee Benefits and Stock Plans.”

To the extent that any outstanding options to purchase our common stock or warrants are exercised, RSUs are settled or new awards are granted under our equity compensation plans, there will be further dilution to investors participating in this offering.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data should be read in conjunction with the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes thereto included elsewhere in this prospectus. The consolidated statements of operations data for each of the years ended January 31, 2018 and 2019, and the consolidated balance sheet data as of January 31, 2018 and 2019, are derived from our audited consolidated financial statements that are included elsewhere in this prospectus. The consolidated statements of operations data for the three months ended April 30, 2018 and 2019 and the consolidated balance sheet data as of April 30, 2019 are derived from our unaudited interim consolidated financial statements that are included elsewhere in this prospectus. We have prepared the unaudited interim consolidated financial statements on the same basis as the audited consolidated financial statements and have included all adjustments, consisting only of normal recurring adjustments that, in our opinion, are necessary to state fairly the information set forth in those consolidated financial statements. Our historical results are not necessarily indicative of our results of operations to be expected for any future period and the results of operations for the three months ended April 30, 2019 are not necessarily indicative of the results to be expected for the full year or any future period. The selected consolidated financial data in this section are not intended to replace our consolidated financial statements and related notes thereto included elsewhere in this prospectus and are qualified in their entirety by our consolidated financial statements and related notes thereto included elsewhere in this prospectus.

 

    Year Ended January 31,     Three Months Ended April 30,  
    2018     2019           2018                 2019        
    (in thousands except per share data)  

Consolidated Statements of Operations Data:

       

Revenue:

       

Subscription

  $ 201,801     $ 246,797     $ 55,583     $ 71,712  

Professional services

    59,394       66,845       15,083       21,907  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    261,195       313,642       70,666       93,619  
 

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenue:

       

Subscription(1)(2)

    36,397       47,948       11,435       13,461  

Professional services(1)

    59,380       67,953       16,185       19,134  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

    95,777       115,901       27,620       32,595  
 

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    165,418       197,741       43,046       61,024  
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

       

Research and development(1)

    86,368       86,272       23,176       19,616  

Sales and marketing(1)

    110,002       138,674       35,430       33,615  

General and administrative(1)

    40,183       53,239       11,516       9,838  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    236,553       278,185       70,122       63,069  
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (71,135     (80,444     (27,076     (2,045

Interest income and other income (expense), net

    2,412       (11     (136     142  
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

    (68,723     (80,455     (27,212     (1,903

Provision for income taxes

    1,638       1,779       316       656  
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (70,361   $ (82,234   $ (27,528   $ (2,559
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to common stockholders, basic and diluted(3)

  $ (3.12   $ (3.07   $ (1.11   $ (0.08
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted(3)

    22,571       26,770       24,699       30,430  
 

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share attributable to common stockholders, basic and diluted (unaudited)(3)

    $ (0.83     $ (0.02
   

 

 

     

 

 

 

Weighted-average shares used in computing pro forma net loss per share attributable to common stockholders, basic and diluted (unaudited)(3)

      99,253         106,321  
   

 

 

     

 

 

 

 

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(1) 

Includes stock-based compensation expense as follows:

 

     Year Ended January 31,      Three Months Ended April 30,  
           2018                  2019                2018              2019      
     (in thousands)  

Cost of subscription revenue

   $ 423      $ 1,143      $ 279      $ 287  

Cost of professional services revenue

     2,256        2,379        523        557  

Research and development expense

     5,182        7,563        2,425        1,583  

Sales and marketing expense

     4,882        6,813        1,531        1,493  

General and administrative expense

     5,505        9,960        1,879        4,042  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 18,248      $ 27,858      $ 6,637      $ 7,962  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(2) 

Includes acquired intangible amortization expense as follows:

 

     Year Ended January 31,      Three Months Ended April 30,  
           2018                  2019                2018              2019      
     (in thousands)  

Cost of subscription revenue

   $      961      $      361      $      235      $      42  

 

(3) 

See Notes 1 and 13 to our consolidated financial statements included elsewhere in this prospectus for an explanation of the calculations of our basic and diluted net loss per share and unaudited pro forma net loss per share, and the weighted-average number of shares used in the computation of the per share amounts.

 

     As of January 31,     As of April 30,  
     2018     2019     2019  
     (in thousands)  

Consolidated Balance Sheet Data:

      

Cash, cash equivalents and marketable securities

   $ 60,087     $ 44,876     $ 132,865  

Total assets

     265,182       280,184       300,776  

Total deferred revenue(1)

     168,937       211,817       187,346  

Accumulated deficit

     (286,219     (368,640     (371,199

Total stockholders’ equity (deficit)

     35,057       (6,558     73,767  

 

(1) 

Includes $136.3 million, $175.4 million and $156.2 million in subscription deferred revenue as of January 31, 2018 and 2019 and April 30, 2019, respectively.

 

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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 should be read in conjunction with the section titled “Selected Consolidated Financial Data” and our consolidated financial statements and related notes thereto included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. 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 the section titled “Risk Factors” included elsewhere in this prospectus. Our fiscal year ends on January 31 of each year.

Overview

We created a new category of enterprise software, experience management, and we are the market leader. Our award-winning SaaS platform, the Medallia Experience Cloud, captures experience data from massive and expanding signal fields emitted by customers and employees on their daily journeys and it is a leader in the market for understanding and managing omni-channel experiences. We utilize our proprietary AI technology to analyze structured and unstructured data from these signal fields across human, digital and IoT interactions at great scale to derive personalized and predictive insights that drive action with tremendous business results. Using our technology, enterprises reduce churn, turn detractors into promoters and buyers, and create-in-the moment cross-sell and up-sell opportunities, providing clear and potent returns on investment.

We were founded on a vision that customer experience would transform the world’s leading enterprises, and we built a scalable technology platform from inception to serve the most sophisticated global enterprises. We were founded in 2000 and focused on developing a solution for enterprises in the hospitality industry, where experiences mattered the most. In 2002, Hilton became the first enterprise on our platform, and we are proud that Hilton continues to be a strategic customer to this day. We quickly became the customer experience platform of choice for many leaders in the hospitality industry. In 2007, we started expanding across numerous verticals, including retail, technology, manufacturing, financial services, insurance and hospitality, and over time became the experience management standard for many leaders in those industries.

 

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Since our inception, we have achieved several key milestones which have driven rapid and substantial revenue growth:

 

 

LOGO

Today, we offer a broad range of solutions on our Medallia Experience Cloud platform, including our Customer Experience, Business Experience, Employee Experience and Product Experience product suites. We also sell separate modules, including Medallia Athena Text Analytics, Medallia Social, Medallia Digital and Medallia Conversations. We have invested in continuous innovation to enhance our platform and expand our product offerings and capabilities. Since inception, we have invested over $500 million in research and development and SaaS operations. Our investments have enabled us to build what we believe to be the most innovative, AI-driven, comprehensive technology platform for experience management. We architected our technology for the security, compliance, reliability and scalability requirements of the world’s most demanding enterprises. As we have broadened the power and functionality of our platform, we have become an increasingly strategic partner for enterprises.

We generate revenue primarily from sales of subscriptions to our SaaS platform. We price our subscriptions based on the functionality and capacity needs of our customers. For customers using our Customer Experience and Product Experience product suites, we price our subscriptions based on the determination of a value unit. A value unit is often determined based on the industry. For example, a value unit could be a hotel property, retail location, airline route or product SKU. The calculation of the pricing of a value unit considers multiple factors, such as user and transaction counts, amounts of feedback captured and storage required. For customers using our Employee Experience and Business Experience product suites, we price our subscriptions based on employee and user counts, respectively. We recognize revenue from subscriptions ratably over the subscription term. Subscription periods for our customers generally range from one to three years and we customarily invoice customers in advance in annual installments. We typically experience a higher volume of billings in the fourth quarter of each year.

We also generate revenue from professional services, the substantial majority of which consists of fees associated with managed services, as well as from implementation and other services. Our managed services offering provides enterprises with value creation experts to help them develop deeper analysis and obtain additional benefits from our platform. Revenue from managed services is generally recognized ratably over the contract term. Revenue from implementation and other services is generally recognized as the services are

 

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rendered. We believe our professional services serve an important role in accelerating enterprises’ realization of the benefits of our platform, which drives customer retention and expansion and provides an opportunity to up-sell and cross-sell our subscription products. For the year ended January 31, 2019, 91% of our total revenue was from subscription revenue and managed services revenue, which are recurring revenue sources. We calculate the recurring revenue percentage for a particular year by dividing (x) subscription revenue plus managed services revenue for the year by (y) total revenue for the year.

We are focused on attracting businesses, particularly large and mid-sized enterprises, to our platform and expanding their use of our platform over time. We consider large enterprises to be those enterprises with estimated annual revenue greater than $1.5 billion and mid-sized enterprises to be those enterprises with estimated annual revenue between $150 million and $1.5 billion. As of April 30, 2018 and 2019, we had 469 and 565 customers, respectively, including 26 and 32 of the Fortune Global 100, respectively.19 We focus on winning over the leaders within each industry vertical to utilize them as reference customers as we expand within that industry. We then extend our efforts to reach businesses of different sizes across these verticals. For the years ended January 31, 2018 and 2019 and the three months ended April 30, 2018 and 2019, no customer represented more than 10% of our revenue.20

We have built a powerful marketing engine that drives demand for our platform and products with new customers. Our marketing function generates leads for our sales team through online and offline marketing initiatives, including user conferences (such as our annual Experience conference, as well as participation in other industry and partner conferences), digital marketing, search engine optimization, case studies and customer testimonials.

We sell subscriptions to our platform and professional services primarily through our direct sales team. 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 use a “land and expand” model to capitalize on this potential opportunity. Once customers have deployed our platform, they often increase the number of end-users through expansion to additional business units and geographies. This expansion often generates a natural network effect in which the value of our platform increases as more use cases are adopted, more end-users are connected and greater amounts of data are brought into our platform. Our customers have demonstrated high loyalty to us because of the transformational impact that we deliver for their businesses. Our dollar-based net revenue retention rate was 126%, 116%, 122% and 119% as of January 31, 2018 and 2019 and April 30, 2018 and 2019, respectively, on a trailing 12-month basis. We continue to invest in our go-to-market efforts, as there is a massive and growing market opportunity for our platform.

We have a strong and growing international presence. We generated 27%, 30%, 29% and 27% of our revenue outside the United States during the years ended January 31, 2018 and 2019 and the three months ended April 30, 2018 and 2019, respectively, and we expect our revenue from customers outside the United States to continue to grow in absolute dollars.

We have built a predictable, scalable subscription revenue model. For the year ended January 31, 2019, and the three months ended April 30, 2019, we generated 79% and 77%, respectively, of our revenue from sales of subscriptions to our platform. For the years ended January 31, 2018 and 2019, our subscription revenue was $201.8 million and $246.8 million, respectively, representing year-over-year growth of 22%, and our revenue was $261.2 million and $313.6 million, respectively, representing year-over-year growth of 20%. For the three months ended April 30, 2018 and 2019, our subscription revenue was $55.6 million and $71.7 million, respectively, representing period-over-period growth of 29%, and our revenue was $70.7 million and $93.6 million, respectively, representing period-over-period growth of 32%. For the years ended January 31,

 

19 

Fortune; see the section titled “Industry, Market and Other Data.”

20 

For purposes of this statistic, we count as a single customer all subsidiaries and divisions of a single parent.

 

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2018 and 2019 and the three months ended April 30, 2018 and 2019, our net loss was $70.4 million, $82.2 million, $27.5 million and $2.6 million, respectively, which reflects substantial investments in our business focused on our large market opportunity.

Key Factors Affecting Our Performance

We believe that the growth and future success of our business depends on many factors. While each of these factors present significant opportunities for our business, they also pose important challenges that we must successfully address in order to sustain our growth, improve our results of operations and establish and maintain profitability.

New Customer Acquisition

We are focused on continuing to acquire new customers to drive our long-term growth. We expect to continue to work closely with enterprises to solve their most pressing experience management needs, allowing us to innovate, maintain our industry leadership and attract new customers. Our sales and marketing efforts are focused primarily on large and mid-sized enterprises. However, our comprehensive Experience Management platform provides multiple entry points for a broad range of enterprises. As a result, we will continue to expand our go-to-market efforts to address additional opportunities with new industry verticals and geographies and mid-sized enterprises. We are also building out a network of systems integrators and implementation partners, as well as software and technology and consulting partners, that scale our coverage and help us to reach a broader base of potential customers than we would be able to on our own, both domestically and internationally. We must continue to attract new customers to drive growth in the future, and our results of operations will depend in part on the degree to which these efforts are successful.

Expand Sales to Existing Customers

Our business model relies on rapidly and efficiently landing new customers and expanding our relationships with them over time. We have a history of driving expanded use through up-selling our platform across the enterprise and cross-selling through the subsequent deployment of additional products. The chart below illustrates the recurring billings of each cohort over the periods presented, with recurring billings referring to total subscription billings plus managed services billings, and each cohort representing customers that made their first purchase from us in a given fiscal year. Our multi-year subscription and managed service arrangements are generally billed annually and are represented in the chart below as they are billed for each year presented. For example, the 2018 cohort includes all customers that purchased their first subscription from us between February 1, 2017 and January 31, 2018. Our recurring billings from customers for the 2014 cohort, 2015 cohort, 2016 cohort, 2017 cohort and 2018 cohort in fiscal year 2019 represent an increase over each cohort’s initial aggregate recurring billings by 2.9x, 1.5x, 2.5x, 1.6x and 1.3x, respectively.21 By increasing recurring billings for customers over time, we can significantly increase the return on our upfront sales and marketing investments. As a result, our results of operations will depend in part on the degree to which our “land and expand” model is successful.

 

21 

For purposes of this statistic, we count as a single customer all subsidiaries and divisions of a single parent.

 

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LOGO

We also 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 because it captures the full impact on revenue of customers expanding, decreasing or ending their subscriptions. Our dollar-based net revenue retention rate was 126%, 116%, 122% and 119% as of January 31, 2018 and 2019 and April 30, 2018 and 2019, respectively, on a trailing 12-month basis. Our dollar-based net revenue rate was relatively higher as of January 31, 2018 primarily due to a large increase in subscription revenue from one of our customers from fiscal year 2017 to fiscal year 2018.

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 our dollar-based net revenue retention rate, we count as a single customer all subsidiaries and divisions of a single parent. Using this methodology, our customer count would have been 231, 300, 244 and 319 at the beginning of the trailing 12-month period ending on January 31, 2018 and 2019 and April 30, 2018 and 2019, respectively. Eighty-eight percent of the parent customers have only one billing entity. 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 dollar-based net revenue retention rate does not reflect the impact of an invoiced entity choosing to terminate or not renew its subscription if another invoiced entity with the same parent company chooses to purchase a subscription in the same period. While historically this scenario has happened rarely, our dollar-based net revenue retention rate could be overstated if this occurs more often or on a larger scale in the future.

Pace of Adoption of Experience Management Solutions

Our ability to grow our customer base and drive market adoption of our platform is affected by the overall demand for experience management solutions. We believe the market is still in the early stages of adopting experience management solutions. We expect as the awareness that experiences are critical to enterprises increases, the need for experience management solutions, particularly a comprehensive platform such as ours, will increase. As a result, our customer base and the breadth and deployment of usage of our platform

 

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will also increase. Further, we have established a leadership position in the experience management market, and we believe our investments in our partner ecosystem will further drive the awareness and adoption of our platform. While we do not believe that any of our competitors currently offers an AI-driven comprehensive solution for experience management, certain competitors offer point solution that compete with specific products within the broad range of products offered on our platform, and potential customers may believe that such point solution are sufficient for their needs. In addition, some potential customers, have elected, and may in the future elect, to rely on CRM, ERP or HCM systems or to develop their own internal customer experience management solutions. It is difficult to predict adoption rates and demand and the future growth rate and size of the market for experience management solutions or the entry of competitive products, and we will need to continue to innovate in the face of a rapidly-changing industry to extend our leadership and grow our business.

Investments in Growth

We intend to continue to invest in our business to capitalize on our large and growing market opportunity. We plan to further invest in research and development to extend our technology leadership and enhance the functionality of our platform. We also intend to continue to invest in development efforts and acquisitions to offer new products. For example, in May 2019, we acquired Strikedeck, Inc., a provider of a customer success platform for business-to-business customers and, in June 2019, we acquired Cooladata Ltd., a cloud-based behavioral analytics platform that can derive and predict customer sentiment. We will also continue to invest in sales and marketing activities to acquire new customers and increase sales to existing customers. In particular, we intend to expand our sales and marketing efforts for the acquisition of customers that are mid-sized enterprises. We also expect to incur additional general and administrative expenses to support our growth and our transition to a publicly-traded company. Further, we intend to continue to invest in our international operations, which will increase expenses and capital expenditures. As cost of revenue and operating expenses vary over time, we may experience short-term, negative impacts to our results of operations and cash flows, but we are undertaking such investments with the belief that they will contribute to long-term growth.

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 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 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.

Subscription Billings

We use subscription billings to measure and monitor our ability to sell subscriptions to our platform to both new and existing customers and our ability to provide our business with the working capital generated by upfront payments from our customers. Subscription billings 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 (unbilled receivables) in the period. We measure

 

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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 reflects 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:

 

     Year Ended January 31,     Twelve Months
Ended April 30,
 
     2018      2019           2018                  2019        
     (in thousands, except percentages)  

Subscription revenue

   $ 201,801      $ 246,797     $ 209,658      $ 262,926  

Change in subscription deferred revenue and contract assets (unbilled receivables)

     31,987        42,670       20,658        36,315  
  

 

 

    

 

 

   

 

 

    

 

 

 

Subscription billings

   $ 233,788      $ 289,467     $ 230,316      $ 299,241  
  

 

 

    

 

 

   

 

 

    

 

 

 

Subscription billings growth rate

        24 %         30 % 

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. 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.

Components of Results of Operations

Revenue

We generate revenue from sales of subscriptions and related professional services. Subscription revenue represented 77%, 79%, 79% and 77% of our total revenue for the years ended January 31, 2018 and 2019 and three months ended April 30, 2018 and 2019, respectively. 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. Our contractual subscription agreements are typically one to three years in duration with our dollar-weighted average contractual term being 2.5 years as of April 30, 2019. 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, and we expect the growth rate of our subscription revenue to fluctuate from period to period. In the near term, subscription revenue growth rates may be lower compared to comparable periods in the prior fiscal year.

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 is recognized as services are performed.

 

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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 for our subscription operations, security and customer support departments and outside services, third-party costs and allocated overhead costs.

Cost of Professional Services Revenue

Cost of professional services revenue primarily consists of personnel-related expenses including stock-based compensation associated with the delivery of managed services, implementation and other service offerings, outside services, travel expenses, and allocated overhead costs.

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 or negative in recent periods. 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, allocated overhead costs and software and hardware costs and depreciation. Research and development costs are expensed as incurred. 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, marketing expenses and promotional activities including our annual Experience conference, training, travel-related expenses and allocated overhead 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, which we have determined to be five years. We intend to continue to invest in sales and marketing to help drive the growth of our business. Although we expect our sales and marketing expenses will increase in absolute dollars in future periods and vary from period to period as a percentage of revenue in the near term, we expect that sales and marketing expenses will decline as a percentage of revenue in the long term.

 

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General and Administrative

General and administrative expenses primarily consists of personnel-related expenses including stock-based compensation, outside services and allocated overhead costs.

Following the completion of this offering, we expect to incur additional expenses as a result of operating as a public company, including costs to comply with the rules and regulations applicable to companies listed on a national securities exchange, costs related to compliance and reporting obligations pursuant to the rules and regulations of the SEC and increased expenses for insurance, investor relations and professional services. Although we expect our general and administrative 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 general and administrative expenses will decline as a percentage of revenue in the long term.

As a result of certain stock-based compensation charges described in “—Critical Accounting Policies —Stock-Based Compensation,” we expect our cost of revenue and operating expenses will increase in absolute dollars and as a percentage of revenue in the quarter during which we complete this offering.

Results of Operations

The following table sets forth our consolidated statements of operations data for the periods indicated:

 

     Year Ended January 31,     Three Months Ended April 30  
    

          2018           

   

          2019           

   

          2018           

   

          2019           

 
    

(in thousands)

 

Revenue:

        

Subscription

   $    201,801     $    246,797     $    55,583     $    71,712  

Professional services

     59,394       66,845       15,083       21,907  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     261,195       313,642       70,666       93,619  
  

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenue:

        

Subscription(1)(2)

     36,397       47,948       11,435       13,461  

Professional services(1)

     59,380       67,953       16,185       19,134  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     95,777       115,901       27,620       32,595  
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     165,418       197,741       43,046       61,024  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Research and development(1)

     86,368       86,272       23,176       19,616  

Sales and marketing(1)

     110,002       138,674       35,430       33,615  

General and administrative(1)

     40,183       53,239       11,516       9,838  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     236,553       278,185       70,122       63,069  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (71,135     (80,444     (27,076     (2,045

Interest income and other income (expense), net

     2,412       (11     (136     142  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

     (68,723     (80,455     (27,212     (1,903

Provision for income taxes

     1,638       1,779       316       656  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (70,361   $ (82,234   $ (27,528   $ (2,559
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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(1) 

Includes stock-based compensation expense as follows:

 

     Year Ended January 31,      Three Months Ended April 30,  
         2018              2019              2018              2019      
     (in thousands)  

Cost of subscription revenue

   $ 423      $ 1,143      $ 279      $ 287  

Cost of professional services revenue

     2,256        2,379        523        557  

Research and development expense

     5,182        7,563        2,425        1,583  

Sales and marketing expense

     4,882        6,813        1,531        1,493  

General and administrative expense

     5,505        9,960        1,879        4,042  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 18,248      $ 27,858      $ 6,637      $ 7,962  
  

 

 

    

 

 

    

 

 

    

 

 

 

(2)  Includes acquired intangible amortization expense as follows:

           
     Year Ended January 31,      Three Months Ended April 30,  
         2018              2019              2018              2019      
     (in thousands)  

Cost of subscription revenue

   $ 961      $ 361      $ 235      $ 42  

The following table sets forth our consolidated statements of operations data expressed as a percentage of total revenue for the periods indicated:

 

     Year Ended January 31,     Three Months Ended
April 30,
 
    

    2018    

   

    2019    

   

    2018    

   

    2019    

 

Revenue:

        

Subscription

     77     79     79     77

Professional services

     23     21     21     23
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     100     100     100      100
  

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenue:

        

Subscription

     14       15     16     14

Professional services

     23       22     23     20
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     37     37     39     35
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     63       63     61     65
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Research and development

     33       28     33     21

Sales and marketing

     42       44     50     36

General and administrative

     15       17     16     11
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     90        89     99     67
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (27 )%      (26 )%      (38 )%      (2 )% 

Interest income and other income (expense), net

     1     —       —       —  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

     (26 )%      (26 )%      (38 )%      (2 )% 

Provision for income taxes

     1     1      —       1
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (27 )%      (26 )%      (39 )%      (3 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Three Months Ended April 30, 2018 and 2019

Revenue

 

     Three Months Ended April 30,                
           2018                  2019            Change      % Change  
     (in thousands, except percentages)  

Subscription

   $ 55,583      $ 71,712      $ 16,129        29

Professional services

     15,083        21,907        6,824        45
  

 

 

    

 

 

    

 

 

    

Total revenue

   $ 70,666      $ 93,619      $ 22,953        32
  

 

 

    

 

 

    

 

 

    

Total revenue was $93.6 million for the three months ended April 30, 2019, compared to $70.7 million for the three months ended April 30, 2018, which is an increase of $23.0 million, or 32%.

Subscription revenue accounted for 79% and 77% of our revenue for the three months ended April 30, 2018 and 2019, respectively. Subscription revenue increased by $16.1 million, or 29%, for the three months ended April 30, 2019, compared to the three months ended April 30, 2018. The increase was primarily due to expansions and cross-sell with existing customers, as reflected in our dollar-based net revenue retention rate of 119% for the trailing 12 months ended April 30, 2019. The increase was also driven by revenue from new customers, as the number of customers increased from 496 as of April 30, 2018 to 565 as of April 30, 2019, representing a 20% increase. The expansions and cross-sell with existing customers and revenue from new customers also helped drive growth in our subscription billings, which increased from $230.3 million for the trailing 12 months ended April 30, 2018 to $299.2 million for the trailing 12 months ended April 30, 2019, representing a 30% increase.

Professional services revenue increased by $6.8 million, or 45%, for the three months ended April 30, 2019, compared to the three months ended April 30, 2018. The increase was primarily driven by higher implementation and other services.

Cost of Revenue, Gross Profit and Gross Margin

 

     Three Months Ended April 30,               
    

      2018      

   

      2019      

   

Change

    

% Change

 
     (in thousands, except percentages)  

Cost of revenue:

         

Subscription

   $ 11,435     $ 13,461     $ 2,026        18

Professional services

     16,185       19,134       2,949        18
  

 

 

   

 

 

   

 

 

    

Total cost of revenue

   $ 27,620     $ 32,595     $ 4,975        18
  

 

 

   

 

 

   

 

 

    

Gross profit

   $ 43,046     $ 61,024     $ 17,978        42
  

 

 

   

 

 

   

 

 

    

Gross margin:

         

Subscription

     79     81     

Professional services

     (7 )%      13     

Total gross margin

     61     65     

Total cost of revenue was $32.6 million for the three months ended April 30, 2019, compared to $27.6 million for the three months ended April 30, 2018, an increase of $5.0 million, or 18%.

Cost of subscription revenue increased by $2.0 million, or 18%, for the three months ended April 30, 2019, compared to the three months ended April 30, 2018. The increase was primarily due to higher personnel-related expenses of $1.0 million as the result of a 6% increase in headcount and an increase of $0.9 million in hosting costs, software and hardware related to infrastructure necessary to support our customer base.

 

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Cost of professional services revenue increased by $2.9 million, or 18%, for the three months ended April 30, 2019, compared to the three months ended April 30, 2018. The increase was primarily due to higher personnel-related expenses of $1.5 million and an increase of $1.2 million in outside services.

Research and Development

 

     Three Months Ended April 30,               
           2018                 2019           Change      % Change  
     (in thousands, except percentages)  

Research and development

   $ 23,176     $ 19,616     $ (3,560      (15 )% 

Percentage of revenue

     33     21     

Research and development expenses decreased by $3.6 million, or 15%, for the three months ended April 30, 2019, compared to the three months ended April 30, 2018. The decrease was primarily due to a decrease of $3.0 million in personnel-related expenses, primarily due to decreases in stock-based compensation expense. In addition, we incurred lower overhead costs of $0.5 million due to our facility cost reduction initiatives.

Sales and Marketing

 

     Three Months Ended April 30,               
    

      2018      

   

      2019      

   

Change

    

% Change

 
     (in thousands, except percentages)  

Sales and marketing

   $ 35,430     $ 33,615     $ (1,815      (5 )% 

Percentage of revenue

     50     36     

Sales and marketing expenses decreased by $1.8 million, or 5%, for the three months ended April 30, 2019, compared to the three months ended April 30, 2018. The decrease was primarily due to lower personnel-related expenses as a result of a 12% decrease in headcount.

General and Administrative

 

     Three Months Ended April 30,               
           2018                 2019           Change      % Change  
     (in thousands, except percentages)  

General and administrative

   $ 11,516     $ 9,838     $ (1,678      (15 )% 

Percentage of revenue

     16     11     

General and administrative expenses decreased by $1.7 million, or 15%, for the three months ended April 30, 2019, compared to the three months ended April 30, 2018. The decrease was primarily due to a one-time gain on restructuring of $4.0 million due to the termination of our former corporate headquarters lease in San Mateo. The decrease was partially offset by an increase in personnel-related expenses of $1.9 million, primarily due to an increase in stock-based compensation expense.

Years Ended January 31, 2018 and 2019

Revenue

 

     Year Ended January 31,                
     2018      2019      Change      % Change  
     (in thousands, except percentages)  

Subscription

   $ 201,801      $ 246,797      $ 44,996        22

Professional services

     59,394        66,845        7,451        13
  

 

 

    

 

 

    

 

 

    

Total revenue

   $ 261,195      $ 313,642      $ 52,447        20
  

 

 

    

 

 

    

 

 

    

 

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Total revenue was $261.2 million for the year ended January 31, 2018, compared to $313.6 million for the year ended January 31, 2019, which is an increase of $52.4 million, or 20%.

Subscription revenue accounted for 77% and 79% of our revenue for the years ended January 31, 2018 and 2019, respectively. Subscription revenue increased by $45.0 million, or 22%, for the year ended January 31, 2019, compared to the year ended January 31, 2018. The increase was primarily due to expansions and cross-sell with existing customers, as reflected in our dollar-based net revenue retention rate of 116% for the year ended January 31, 2019. The increase was also driven by revenue from new customers, as the number of customers increased from 452 at the end of January 31, 2018 to 543 at the end of January 31, 2019, representing a 20% increase. The expansions and cross-sell with existing customers and revenue from new customers also helped drive growth in our subscription billings, which increased from $233.8 million for the year ended January 31, 2018 to $289.5 million for the year ended January 31, 2019, representing a 24% increase.

Professional services revenue increased by $7.5 million, or 13%, for the year ended January 31, 2019, compared to the year ended January 31, 2018. The increase was driven by higher managed services.

Cost of Revenue, Gross Profit and Gross Margin

 

     Year Ended January 31,               
    

    2018    

   

    2019    

   

Change

    

% Change

 
     (in thousands, except percentages)  

Cost of revenue:

         

Subscription

   $ 36,397     $ 47,948     $ 11,551        32

Professional services

     59,380       67,953       8,573        14
  

 

 

   

 

 

   

 

 

    

Total cost of revenue

   $ 95,777     $ 115,901     $ 20,124        21
  

 

 

   

 

 

   

 

 

    

Gross profit

   $ 165,418     $ 197,741     $ 32,323        20
  

 

 

   

 

 

   

 

 

    

Gross margin:

         

Subscription

     82     81     

Professional services

     0     (2 )%      

Total gross margin

     63     63     

Total cost of revenue was $115.9 million for the year ended January 31, 2019, compared to $95.8 million for the year ended January 31, 2018, an increase of $20.1 million, or 21%.

Cost of subscription revenue increased by $11.6 million, or 32%, for the year ended January 31, 2019, compared to the year ended January 31, 2018. The increase was primarily due to higher personnel-related expenses of $10.4 million as a result of a 132% increase in headcount in our infrastructure teams in lower-cost jurisdictions, as measured by the change in the average quarterly headcount for those teams for the year ended January 31, 2018 compared to the year ended January 31, 2019, to support our growth and an increase of $2.3 million in hosting, software and hardware related to infrastructure necessary to support our customer base. The increase was partially offset by decreases in outside services and third-party costs of $1.2 million.

Cost of professional services revenue increased by $8.6 million, or 14%, for the year ended January 31, 2019, compared to the year ended January 31, 2018, primarily due to an increase of $5.8 million in personnel-related expenses and an increase of $2.6 million in outside services.

As a result of our gross profit increasing relatively proportionately to the increase in revenue for the year ended January 31, 2019, compared to the year ended January 31, 2018, our gross margin did not materially change between those periods.

 

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Research and Development

 

     Year Ended January 31,               
         2018             2019         Change      % Change  
     (in thousands, except percentages)  

Research and development

   $ 86,368     $ 86,272     $ (96      0

Percentage of revenue

     33     28     

Research and development expenses remained flat for the years ended January 31, 2018 and 2019. Personnel-related expenses increased by $1.6 million in 2019, primarily due to increases in stock-based compensation expense. This increase was offset by a decrease in outside services of $1.6 million.

Sales and Marketing

 

     Year Ended January 31,               
    

    2018    

   

    2019    

   

Change

    

% Change

 
     (in thousands, except percentages)  

Sales and marketing

   $ 110,002     $ 138,674     $ 28,672        26

Percentage of revenue

     42     44     

Sales and marketing expenses increased by $28.7 million, or 26%, for the year ended January 31, 2019, compared to the year ended January 31, 2018. The increase was primarily due to higher personnel-related expenses of $21.9 million as we expanded our sales force by 25%, as measured by the change in the average quarterly sales force headcount for the year ended January 31, 2018 compared to the year ended January 31, 2019, marketing and promotional expenses of $2.6 million and training and travel-related expenses of $2.1 million.

General and Administrative

 

     Year Ended January 31,               
           2018                 2019           Change      % Change  
     (in thousands, except percentages)  

General and administrative

   $ 40,183     $ 53,239     $ 13,056        32

Percentage of revenue

     15     17     

General and administrative expenses increased by $13.1 million, or 32%, for the year ended January 31, 2019, compared to the year ended January 31, 2018. The increase was primarily due to $8.6 million in personnel-related expenses, of which $4.3 million related to stock-based compensation, mainly for our new management team. In addition, we incurred restructuring costs of $4.5 million primarily related to the impairment of property and equipment due to facility cost reduction initiatives at our former corporate headquarters in San Mateo.

 

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Quarterly Results of Operations

The following table sets forth our unaudited quarterly statements of operations data for each of the last eight quarters ended April 30, 2019. The information for each of these quarters has been prepared on the same basis as our audited consolidated financial statements included elsewhere in this prospectus and includes all adjustments, consisting only of normal recurring adjustments that, in our opinion, are necessary to state fairly the results of operations for these periods. This data should be read in conjunction with our consolidated financial statements and related notes thereto included elsewhere in this prospectus. These quarterly results of operations are not necessarily indicative of the future results of operations that may be expected for any future period.

 

    Three Months Ended  
    Jul. 31,
2017
    Oct. 31,
2017
    Jan. 31,
2018
    Apr. 30,
2018
    Jul. 31,
2018
    Oct. 31,
2018
    Jan. 31,
2019
    Apr. 30,
2019
 
    (unaudited, in thousands)  

Revenue:

               

Subscription

  $ 48,669     $ 51,399     $ 54,007     $ 55,583     $ 60,099     $ 63,241     $ 67,874     $ 71,712  

Professional services

    15,028       14,803       14,717       15,083       15,327       17,925       18,510       21,907  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    63,697       66,202       68,724       70,666       75,426       81,166       86,384       93,619  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenue:

               

Subscription(1)(2)

    8,567       9,795       9,828       11,435       11,968       11,942       12,603       13,461  

Professional services(1)

    14,697       14,666       14,750       16,185       17,591       17,459       16,718       19,134  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

    23,264       24,461       24,578       27,620       29,559       29,401       29,321       32,595  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    40,433       41,741       44,146       43,046       45,867       51,765       57,063       61,024  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

               

Research and development(1)

    21,956       22,271       23,391       23,176       22,409       20,995       19,692       19,616  

Sales and marketing(1)

    25,863       26,541       30,787       35,430       38,623       34,243       30,378       33,615  

General and administrative(1)

    10,411       9,630       11,040       11,516       12,404       13,020       16,299       9,838  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    58,230       58,442       65,218       70,122       73,436       68,258       66,369       63,069  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (17,797     (16,701     (21,072     (27,076     (27,569     (16,493     (9,306     (2,045

Interest income and other income (expense), net

    1,135       (84     964       (136     154       205       (234     142  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

    (16,662     (16,785     (20,108     (27,212     (27,415     (16,288     (9,540     (1,903

Provision for income taxes

    448       548       460       316       732       323       408       656  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (17,110   $ (17,333   $ (20,568   $ (27,528   $ (28,147   $ (16,611   $ (9,948   $ (2,559
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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(1) 

Includes stock-based compensation expense as follows:

 

    Three Months Ended  
    Jul. 31,
2017
    Oct. 31,
2017
    Jan. 31,
2018
    Apr. 30,
2018
    Jul. 31,
2018
    Oct. 31,
2018
    Jan. 31,
2019
    Apr. 30,
2019
 
    (unaudited, in thousands)  

Cost of subscription revenue

  $ 104     $ 116     $ 139     $ 279     $ 321     $ 321     $ 222     $ 287  

Cost of professional services revenue

    606       609       562       523       719       580       557       557  

Research and development expense

    1,345       1,355       1,422       2,425       1,755       1,665       1,718       1,583  

Sales and marketing expense

    1,245       1,289       1,345       1,531       1,909       1,593       1,780       1,493  

General and administrative expense

    1,559       1,370       1,431       1,879       1,780       2,373       3,928       4,042  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $   4,859     $   4,739     $   4,899     $   6,637     $   6,484     $   6,532     $   8,205     $   7,962  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(2) 

Includes acquired intangible amortization expense as follows:

 

    Three Months Ended  
    Jul. 31,
2017
    Oct. 31,
2017
    Jan. 31,
2018
    Apr. 30,
2018
    Jul. 31,
2018
    Oct. 31,
2018
    Jan. 31,
2019
    Apr. 30,
2019
 
    (unaudited, in thousands)  

Cost of subscription revenue

  $     233     $     233     $     261     $     235     $     42     $     42     $     42     $     42  

The following table sets forth our results of operations for the last eight quarterly periods presented as a percentage of our total revenue for those periods:

 

    Three Months Ended  
    Jul. 31,
2017
    Oct. 31,
2017
    Jan. 31,
2018
    Apr. 30,
2018
    Jul. 31,
2018
    Oct. 31,
2018
    Jan. 31,
2019
    Apr. 30,
2019
 
    (unaudited)  

Revenue:

               

Subscription

    76     78     79     79     80     78     79     77

Professional services

    24     22     21     21     20     22     21     23

Total revenue

    100     100     100     100     100     100     100     100

Cost of revenue:

               

Subscription

    13     15     14     16     16     15     15     14

Professional services

    23     22     21     23     23     22     19     20

Total cost of revenue

    37     37     36     39     39     36     34     35

Gross margin

    63     63     64     61     61     64     66     65

Operating expenses:

               

Research and development

    34     34     34     33     30     26     23     21

Sales and marketing

    41     40     45     50     51     42     35     36

General and administrative

    16     15     16     16     16     16     19     11

Total operating expenses

    91     88     95     99     97     84     77     67

Loss from operations

    (28 )%      (25 )%      (31 )%      (38 )%      (37 )%      (20 )%      (11 )%      (2 )% 

Interest income and other income (expense), net

    2     —       1     —       —       —       —       —  

Loss before provision for income taxes

    (26 )%      (25 )%      (29 )%      (38 )%      (36 )%      (20 )%      (11 )%      (2 )% 

Provision for income taxes

    1     1     1         1     —       —       1

Net loss

    (27 )%      (26 )%      (30 )%      (39 )%      (37 )%      (20 )%      (12 )%      (3 )% 

Quarterly Revenue Trends

Our total revenue increased sequentially in each of the quarters presented due to expansion and cross-sell with existing customers and sales to new customers. We generally experience seasonality in subscription billings and we typically record a higher percentage of subscription billings in our fourth quarter. However, because we recognize subscription revenue ratably over the terms of our subscription agreements, a substantial

 

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portion of the subscription revenue that we report in each period is attributable to the recognition of deferred revenue relating to agreements that we entered into during previous periods. Consequently, increases or decreases in new or renewal billings in any one period may not be immediately reflected as subscription revenue for that period. Our professional services revenue may fluctuate from period to period due to the timing or volume of the delivery of our implementation and other services.

Quarterly Cost of Revenue and Gross Margin Trends

Our total cost of revenue increased sequentially in each of the quarters presented through the second quarter of the year ended January 31, 2019, and then decreased sequentially in the second half of the year ended January 31, 2019. The increase was due to sales and delivery of subscriptions and professional services to new and existing customers. In the second half of the year ended January 31, 2019, our cost of professional services revenue declined sequentially as we gained further efficiencies in our professional services organization, in addition to cost reduction initiatives. In the quarter ended April 30, 2019, our cost of professional services revenue increased due to the strong sales and delivery of professional services to our customers. Our cost of subscription revenue may vary based on the timing of investments that we make in our infrastructure as well as the hiring of personnel. Overall, our gross margins ranged between 61% and 66% and subscription gross margins ranged between 79% and 82% for the periods presented.

Quarterly Operating Expenses Trends

Our total operating expenses increased sequentially in each of the quarters presented through the second quarter of the year ended January 31, 2019, and then decreased in the second half of the year ended January 31, 2019 and the quarter ended April 30, 2019. Research and development expenses increased sequentially in each of the quarters presented through the year ended January 31, 2018, and then decreased sequentially in the year ended January 31, 2019 and the quarter ended April 30, 2019. Sales and marketing expenses increased sequentially in each of the quarters presented through the second quarter of the year ended January 31, 2019, and then decreased sequentially in the second half of the year ended January 31, 2019. Sales and marketing expenses increased during the quarter ended April 30, 2019 as we increased spending on our marketing programs. The decreases in both research and development and sales and marketing expenses were due to cost reduction initiatives. General and administrative expenses increased sequentially in each quarter presented other than the third quarter of the year ended January 31, 2018. The significant increases in the second half of the year ended January 31, 2019 were due to stock-based compensation expense related to new executive officer grants and restructuring costs of $4.5 million primarily due to the impairment of property and equipment related to facility cost reduction initiatives, the majority of which was in the fourth quarter of the year ended January 31, 2019. For the quarter ended April 30, 2019, general and administrative expenses decreased as a result of a one-time gain of $4.0 million due to the termination of our former corporate headquarters lease in San Mateo.

Liquidity and Capital Resources

As of January 31, 2018 and 2019 and April 30, 2019, we had cash, cash equivalents and marketable securities of $60.1 million, $44.9 million and $132.9 million, respectively. 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 accounts receivable 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, capital lease payment or capital expenditure requirements. We believe that our existing cash, cash equivalents and marketable securities and trade and other receivables will be sufficient to support working capital, capital lease payments and capital expenditure requirements for at least the next 12 months. Since inception, we have financed operations primarily through subscription payments by customers for use of our platform, equity and debt financings, capital lease arrangements and loans for equipment.

 

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In February 2019, we issued and sold 4,666,666 shares of our Series F convertible preferred stock at a purchase price of $15.00 per share for approximately $69.8 million, net of issuance costs.

Credit Facility

In April 2013, we entered into a revolving line of credit agreement to provide borrowings of up to $15.0 million. In September 2016, we entered into an amended and restated revolving line of credit agreement to increase the aggregate borrowing under the revolving credit line up to $40.0 million. In May 2018, we entered into the SVB Credit Facility, which amended and restated our existing revolving line of credit agreement to increase the aggregate borrowing amount to $50.0 million.

The outstanding balance, if any, is due at the maturity date in September 2020. At any point prior to the maturity date, at our option we may borrow an aggregate amount not to exceed $15.0 million and convert the borrowing to a term loan, or Term-Out Loan, provided that no prior event of default had occurred. The existing aggregate borrowing amount under the SVB Credit Facility would be reduced by the amount of the Term-Out Loan. Principal payments on the Term-out Loan would be repaid in consecutive monthly installments. The Term-Out Loan maturity date is the earliest to occur between (i) the date that is 48 months after such Term-Out Loan was made and (ii) September 2023. The applicable rate for borrowings under the SVB Credit Facility and the Term-Out Loan would be determined by the following: For borrowings less than $5.0 million, the interest rate is based on the Wall Street Journal’s Prime Rate plus a 0.5% margin. For borrowings greater than or equal to $5.0 million, but less than $10.0 million, the interest rate is based on the Wall Street Journal’s Prime Rate. For borrowings greater or equal to $10.0 million, the interest rate is based on the Wall Street Journal’s Prime Rate minus a 0.5% margin.

As of April 30, 2019, there were no amounts drawn against the SVB Credit Facility. Of the aggregate borrowing amount of $50.0 million, $4.1 million was used to secure standby letters of credit related to our office lease facilities as of April 30, 2019. The remaining amount of $45.9 million was available for borrowing under the SVB Credit Facility as of April 30, 2019. The standby letters of credit typically cover a one-year period, bear a commitment fee of approximately 1% of the amount and auto-renew at the end of the stated period.

As of April 30, 2019, we were in compliance with the financial covenants contained in the SVB Credit Facility. The SVB Credit Facility requires us to achieve a minimum level of quarterly subscription revenue and liquidity as defined in the agreement.

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 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.

 

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Cash Flows

The following table shows a summary of our cash flows for the periods presented:

 

     Year Ended January 31,     Three Months Ended April 30,  
     2018     2019           2018                 2019        
    

(in thousands)

 

Net cash provided by (used in) operating activities

   $ 16,410     $ (15,197   $ 20,819     $ 18,242  

Net cash provided by (used in) investing activities

     (8,796     6,193       (6,986     (70,067

Net cash provided by financing activities

     6,043       11,385       1,848       71,447  

Effect of currency translation on cash and cash equivalents

     267       (204     (87     (42
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in cash and cash equivalents

   $ 13,924     $ 2,177     $ 15,594     $ 19,580  
  

 

 

   

 

 

   

 

 

   

 

 

 

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. During the first quarter of each year, we typically experience relatively lower billings than in the fourth quarter, as well as higher collections of accounts receivable, which results in a decrease in accounts receivable during the first quarter.

Cash provided by operating activities for the three months ended April 30, 2018 of $20.8 million primarily related to our net loss of $27.5 million, adjusted for net cash inflows of $13.2 million provided by changes in our operating assets and liabilities and non-cash charges of $35.2 million. The primary drivers of the changes in our operating assets and liabilities relate to a decrease in accounts receivable of $56.9 million, partially offset by a decrease in deferred revenue of $16.3 million, an increase in deferred commissions of $3.1 million and a decrease in accounts payable and accrued expenses of $2.1 million.

Cash provided by operating activities for the three months ended April 30, 2019 of $18.2 million primarily related to our net loss of $2.6 million, adjusted for net cash inflows of $18.8 million provided by changes in our operating assets and liabilities and non-cash charges of $2.0 million. The primary drivers of the changes in our operating assets and liabilities relate to a decrease in accounts receivable of $55.3 million, partially offset by a decrease in deferred revenue of $25.1 million, an increase in deferred commissions of $6.7 million and a decrease in accounts payable and accrued expenses of $3.5 million.

Cash provided by operating activities for the year ended January 31, 2018 of $16.4 million primarily related to our net loss of $70.4 million, adjusted for net cash inflows of $45.4 million provided by changes in our operating assets and liabilities and non-cash charges of $41.4 million. The primary drivers of the changes in our operating assets and liabilities relate to an increase in deferred revenue of $42.7 million and $33.8 million in one-time items related to our former corporate headquarters in San Mateo, of which $22.2 million related to the lease incentive receivables, and $11.6 million related to an increase in deferred rent. The associated tenant improvement capital expenditures are reflected below within investing activities. Non-cash charges primarily consisted of depreciation and amortization of property and equipment, amortization of our deferred commissions and stock-based compensation. In addition, a net increase in accounts payable and accrued expenses of $3.4 million impacted cash provided by operating activities. These amounts were partially offset by an increase in deferred commissions of $16.0 million, an increase in accounts receivable of $12.4 million and an increase in prepaid expenses and other current assets of $6.2 million.

Cash used in operating activities for the year ended January 31, 2019 of $15.2 million primarily related to our net loss of $82.2 million, adjusted for non-cash charges of $57.9 million and net cash inflows of $9.1 million provided by changes in our operating assets and liabilities. Non-cash charges primarily consisted of stock-based compensation, depreciation and amortization of property and equipment and amortization of our

 

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deferred commissions. The primary drivers of the changes in operating assets and liabilities related to an increase in deferred revenue of $42.9 million and an increase in accounts payable and accrued expenses of $7.7 million, as well as an overall decrease in prepaid expenses and other current assets of $2.2 million. These amounts were partially offset by an increase in deferred commissions of $27.2 million and an increase in accounts receivable of $16.4 million.

Investing Activities

Cash used in investing activities for the three months ended April 30, 2018 of $7.0 million was the result of purchases net of maturities of our marketable securities of $3.9 million and purchases of property and equipment of $3.1 million.

Cash used in investing activities for the three months ended April 30, 2019 of $70.1 million was the result of purchases net of sales of our marketable securities net of $68.2 million and purchases of property and equipment of $1.9 million.

Cash used in investing activities for the year ended January 31, 2018 of $8.8 million was the result of $38.5 million in purchases of property and equipment related to significant leasehold improvements on our former corporate headquarters in San Mateo of $22.3 million, as well as purchases of computers and equipment to support our headcount growth. These expenditures were partially offset by maturities, net of purchases, of our marketable securities of $29.7 million.

Cash provided by investing activities for the year ended January 31, 2019 of $6.2 million was the result of sales and maturities, net of purchases, of our marketable securities of $17.5 million. This increase in cash was partially offset by our investment in leasehold improvements at our Argentina and U.K. offices as well as purchases of data center equipment of $11.3 million.

Financing Activities

Cash provided by financing activities for the three months ended April 30, 2018 of $1.8 million consisted of proceeds from the exercise of stock options, net of repurchases of unvested early exercises.

Cash provided by financing activities for the three months ended April 30, 2019 of $71.4 million consisted of net proceeds of $69.8 million from our Series F convertible preferred stock financing, $5.3 million in proceeds from the exercise of stock options, partially offset by $3.1 million related to the payment of deferred offering costs in connection with this offering and repayments on capital lease obligations of $0.6 million.

Cash provided by financing activities for the year ended January 31, 2018 of $6.0 million consisted of proceeds from the exercise of stock options, net of repurchases of unvested early exercises.

Cash provided by financing activities for the year ended January 31, 2019 of $11.4 million consisted primarily of $12.1 million in proceeds from the exercise of stock options, net of repurchases of unvested early exercises, partially offset by repayments on capital lease obligations of $0.7 million.

RSU Settlement

The RSUs that we have issued to date generally vest upon the satisfaction of both service-based and liquidity event-related performance vesting conditions. The service-based vesting period is generally between three to four years. The liquidity event-related performance vesting condition is generally satisfied on the earlier of: (i) a change in control event or (ii) the IPO Condition. We have also issued RSUs that, in addition to the satisfaction of the service-based and liquidity event-related performance vesting conditions, also require the fulfillment of a performance vesting condition which includes the achievement of certain subscription revenue

 

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growth targets. As of April 30, 2019, 8,524,211 RSUs were outstanding, including 1,091,419 RSUs for which the IPO Condition will be satisfied in connection with this offering and for which the service-based vesting condition will be satisfied during the remainder of the year ending January 31, 2020. In connection with the satisfaction of the IPO Condition and the service-based vesting condition for such RSUs, we expect to withhold an aggregate of             shares of our common stock subject to such RSUs to satisfy tax withholding and remittance obligations at an assumed tax rate of             %, and to pay $             to the relevant tax authorities in cash to satisfy our tax withholding and remittance obligations related to the settlement of such RSUs. This amount is based upon the assumed initial public offering price of $            per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and the actual amount of this obligation could be higher or lower, depending on the market price of shares of our common stock on the date of settlement. In the event that the market price of our common stock increases, the amount of cash required to satisfy our tax withholding and remittance obligations related to the settlement of such RSUs would increase.

Contractual Obligations and Commitments

The following table summarizes our contractual obligations and commitments at April 30, 2019 (in thousands):

 

     Payments Due By Fiscal Year  
     Total      Remainder
2020
     2021      2022      2023      2024      Thereafter  

Operating lease commitments

   $ 49,859      $ 11,662      $ 9,088      $ 9,089      $ 5,284      $ 4,339      $ 10,397  

Capital lease obligations

     7,591        2,292        3,055        2,181        63        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 57,450      $ 13,954      $ 12,143      $ 11,270      $ 5,347      $ 4,339      $ 10,397  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

In February 2019, we entered into a lease termination agreement related to our former corporate headquarters in San Mateo, California. The commitment related to this lease was approximately $161.2 million as of January 31, 2019. See Note 7 to our consolidated financial statements included elsewhere in this prospectus for further details.

In February and March 2019, we executed four separate lease agreements for office facilities, located in San Francisco, San Mateo and Pleasanton, California. The new corporate headquarters lease in San Francisco spans a term from April 1, 2019 through April 30, 2026, for a total commitment of $5.3 million. The new Pleasanton lease facility spans a term from April 1, 2019 through April 30, 2027, for a total commitment of $18.5 million. We also entered into shorter-term office leases in San Mateo and San Francisco that contain early termination rights and minimum future lease commitment within one year of the balance-sheet date totaling $4.7 million.

The purchase obligation amounts in the table above are associated with contracts that are enforceable and legally binding and that specify all significant terms, including fixed or minimum services to be used, fixed, minimum or variable price provisions, and the approximate timing of the actions under the contracts. The table does not include obligations under agreements that we can cancel without a significant penalty.

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 7 to our consolidated financial statements included elsewhere in this prospectus.

 

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Segment Information

We operate as a single operating segment. Our chief operating decision maker, or CODM, is our Chief Executive Officer, who reviews our results of operations on a consolidated basis in order to make decisions about allocating resources and assessing performance for the entire company.

Qualitative and Quantitative Disclosures about Market Risk

We are exposed to market risks in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily the result of fluctuations in interest rates and foreign currency exchange rates.

Interest Rate Risk

As of January 31, 2019 and April 30, 2019, we had cash and cash equivalents of $44.9 million and $132.9 million, respectively.

As of April 30, 2019, the SVB Credit Facility consisted of a $50.0 million available revolving line of credit. Borrowings on the SVB Credit Facility bear interest at a floating per annum rate equal to the Wall Street Journal’s Prime Rate plus or minus a margin. Although there was no outstanding balance under the SVB Credit Facility as of April 30, 2019, we may draw on the facility in future periods.

A hypothetical 10% change in interest rates would not result in a material impact on our consolidated financial statements.

Foreign Currency Exchange Risk

We conduct business on a global basis in multiple currencies, including the U.S dollar, Euro, British pound, Argentine peso, Canadian dollar, Australian dollar and Swiss franc. This subjects us to foreign currency fluctuations resulting from customer contracts and operating expenses denominated in foreign currencies. To protect our margin, we 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 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.

We operate in Argentina and the inflation levels in Argentina have been elevated for several years. In the first half of 2018, Argentina’s reported inflation rates began to increase dramatically and the Argentine central bank significantly increased interest rates in an effort to combat inflation. Based on Argentina’s reported inflation rates and trends, we designated Argentina as a highly inflationary economy for accounting purposes as of the beginning of the third quarter of the year ended January 31, 2019. The change to highly inflationary accounting did not have a material impact on our consolidated financial statements for the year ended January 31, 2019 and for the three months ended April 30, 2019.

A hypothetical 10% change in foreign currency exchange rates would not result in a material impact on our consolidated financial statements.

Critical Accounting Policies

We prepare our consolidated financial statements in accordance with GAAP. See Note 1 to our consolidated financial statements included elsewhere in this prospectus for a description of our other significant

 

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accounting policies. The preparation of our consolidated financial statements in conformity with GAAP requires us to make estimates and judgments that affect the amounts reported in those financial statements and related notes. Although we believe that the estimates we use are reasonable, due to the inherent uncertainty involved in making those estimates, actual results reported in future periods could differ from those estimates.

Revenue Recognition

Revenue is recognized when promised goods or services are transferred to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services.

We determine revenue recognition through the following steps:

 

   

identification of the contract, or contracts, with a customer;

 

   

identification of the performance obligations in the contract;

 

   

determination of the transaction price;

 

   

allocation of the transaction price to the performance obligations in the contract; and

 

   

recognition of revenue when, or as, we satisfy a performance obligation.

Subscription Revenue

Subscription revenue is derived from customers accessing our proprietary hosted cloud application. Our customers do not have the ability to take possession of the software operating our cloud application. The contracted subscription terms are typically one to three years.

We recognize subscription revenue ratably over the subscription term, commencing on the date the service is provisioned.

Professional Services Revenue

Professional services revenue consists of managed services and implementation and other services. These services are distinct from subscription revenue.

Managed services support our customers by providing a range of ongoing services, including program design, launch, enhancements, expansion and analytics. Managed services are considered 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 services primarily consists of initial design, integration and configuration services. Other professional services include insights projects that enable customers to gain insightful business information through data analysis, and our institute training programs. Implementation and other services revenue is recognized as services are performed.

Contracts with Multiple Performance Obligations

Most of our contracts with customers contain multiple performance obligations. Our subscription services are sold for a broad range of amounts (that is, the selling price is highly variable) and a representative standalone selling price, or SSP, is not discernible from past transactions or other observable evidence. As a result, the SSP for subscription services included in a contract with multiple performance obligations is

 

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determined by applying a residual approach whereby performance obligations related to professional services within a contract are first allocated a portion of the transaction price based upon their respective SSPs, with the residual amount of transaction price allocated to subscription services.

Contract Balances and Remaining Performance Obligations

Contract assets represent revenue recognized for contracts that have not yet been invoiced to customers, typically for multi-year arrangements. Total contract assets were $6.0 million, $2.5 million and $2.8 million as of January 31, 2018 and 2019 and April 30, 2019, respectively, and are included within trade and other receivables, net, in our consolidated balance sheets.

Contract liabilities consist of deferred revenue. Revenue is deferred when we have the right to invoice in advance of services being provided. We recognized revenue of $123.6 million, $168.2 million, $58.8 million and $76.0 million during the years ended January 31, 2018 and 2019 and the three months ended April 30, 2018 and 2019, respectively, that were included in the deferred revenue balances at the beginning of the respective periods.

Remaining performance obligations represent contracted revenues that had not yet been recognized, and include deferred revenues, and amounts that will be invoiced and recognized as revenues in future periods. As of January 31, 2019, our remaining performance obligations were $470.6 million, approximately 56% of which we expect to recognize as revenue over the next 12 months and the remaining balance thereafter. As of April 30, 2019, our remaining performance obligations were $468.0 million, approximately 57% of which we expect to recognize as revenue over the next 12 months and the remaining balance thereafter.

Deferred Commissions

Sales commissions earned by our sales force are considered incremental and recoverable costs of obtaining a contract with a customer. Sales commissions for initial contracts are deferred and then amortized on a straight-line basis over a period of benefit, determined to be five years. We determined the period of benefit by taking into consideration our customer contracts, technology and other factors. Sales commissions for renewal contracts (which are not considered commensurate with sales commission for new revenue contracts) are deferred and amortized on a straight-line basis over the related contractual renewal period. Amortization expense is included in sales and marketing expenses in the consolidated statements of operations.

Stock-Based Compensation

We recognize stock-based compensation expense for all share-based payments to employees based on their estimated grant-date fair values determined in accordance with the provisions of ASC 718, Compensation-Stock Compensation. Stock-based compensation expense is recognized on a straight-line basis over the award’s requisite service period, which is generally three to four years. We account for forfeitures as they occur.

Our option-pricing model requires the input of highly subjective assumptions, including the fair value of the underlying common stock, the expected volatility of the price of our common stock, the expected term of the option, risk-free interest rates and the expected dividend yield of our common stock. The assumptions used in our option-pricing model represent management’s best estimates. These estimates involve inherent uncertainties and the application of management’s judgment. If factors change and different assumptions are used, our stock-based compensation expense could be materially different in the future.

The fair value of each RSU is estimated on the date of grant. The fair value of the stock option is based on using the Black-Scholes-Merton valuation model. The fair value assumptions are described as follows:

Fair value of common stock—Because our common stock is not yet publicly traded, we must estimate the fair value of our common stock, as discussed in the section titled “—Common Stock Valuations” below.

 

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Risk-free interest rate—The risk-free interest rate is based on the average U.S. Treasury zero­coupon issues in effect at the time of grant with maturities approximately equal to the expected term of the options.

Expected volatility—We base the expected volatility on the weighted-average historical stock volatility of a group of comparable publicly-listed companies over a period approximately equal to the expected terms of the options, because there was insufficient trading history to calculate the volatility of our own common stock.

Expected term—We use the simplified method, which calculates the expected term as the average of the time-to-vesting and the contractual life of the options, as there is not sufficient historical information to develop reasonable expectations about future patterns and post-vesting employment termination behavior.

Expected dividend rate—The expected dividend rate was zero because we have never paid dividends and do not expect to pay dividends.

We will continue to use judgment in evaluating the assumptions related to our stock-based compensation on a prospective basis. As we continue to accumulate additional data related to our common stock, we may have refinements to our estimates, which could materially impact our future stock-based compensation expense. For valuations after the consummation of this offering, our board of directors will determine the fair value of each share of underlying common stock based on the closing price of our common stock on the date of grant or other relevant determination date, as reported on                 . Based on the assumed initial offering price of $                , which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, the aggregate intrinsic value of our outstanding options as of as of                 , 2019 was $                 million, with $                million related to vested stock options, and the aggregate intrinsic value of RSUs outstanding as of                 , 2019 was $                 million.

The RSUs that we have issued to date generally vest upon the satisfaction of both service-based and liquidity event-related performance vesting conditions. The service-based vesting period is generally between three to four years. The liquidity event-related performance vesting condition is generally satisfied on the earlier of: (i) a change in control event or (ii) the IPO Condition. We have also issued RSUs that, in addition to the satisfaction of the service-based and liquidity event-related performance vesting conditions, also require the fulfillment of a performance vesting condition which includes the achievement of certain subscription revenue growth targets. We expect the liquidity event-related performance vesting condition will be satisfied in connection with this offering.

Through April 30, 2019, no stock-based compensation expense was recognized for the RSUs because the liquidity event-related performance vesting condition, as described above, was not probable. If our IPO had occurred on April 30, 2019, we would have had approximately $