UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________________________________
FORM 10-Q
___________________________________________________________________
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended July 31, 2022
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
FOR THE TRANSITION PERIOD FROM TO
Commission File Number 001-38865
___________________________________________________________________
(Exact name of registrant as specified in its Charter)
___________________________________________________________________
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
(Address of principal executive offices and Zip Code)
(888 ) 799-9666
(Registrant’s telephone number, including area code)
___________________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| ☒ | 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 pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of August 12, 2022, the number of shares of the registrant’s Class A common stock outstanding was 250,975,154 and the number of shares of the registrant’s Class B common stock outstanding was 46,669,985 .
Zoom Video Communications, Inc.
Quarterly Report on Form 10-Q
For the Quarterly Period Ended July 31, 2022
TABLE OF CONTENTS
| Page | ||||||||
2
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which statements involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding our future results of operations or financial condition; business strategy and plans; and objectives of management for future operations, including our statements regarding the benefits and timing of the roll out of new technology, are forward-looking statements. In some cases, you can identify forward-looking statements because they contain words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will,” or “would” or the negative of these words or other similar terms or expressions. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about: our future financial performance, including our revenue, cost of revenue, gross profit, margins, and operating expenses; trends in our key business metrics; the sufficiency of our cash and cash equivalents, investments, and cash provided by sales of our products and services to meet our liquidity needs; market trends; our market position and opportunity; our growth strategy and business aspirations for our communications platform; our product strategy; our efforts to enhance the security and privacy of our platform; the potential impacts of the COVID-19 pandemic recovery and related public health measures on our business, the business of our customers, suppliers and channel partners, and the economy; our ability to operate our business and effectively manage our growth under evolving macroeconomic conditions, such as high inflation and recessionary environments; our ability to become the ubiquitous platform for communications; our ability to attract new customers and retain existing customers; our ability to successfully expand into our existing markets and into new markets; our ability to effectively manage our growth and future expenses; and the impact of recent accounting pronouncements on our unaudited condensed consolidated financial statements.
You should not rely on forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, and operating results. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors described in the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. The results, events, and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements.
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this Quarterly Report on Form 10-Q. While we believe that such information provides a reasonable basis for these statements, that information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements.
The forward-looking statements made in this Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q 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.
You should read this Quarterly Report on Form 10-Q and the documents that we reference in this Quarterly Report on Form 10-Q and have filed with the Securities and Exchange Commission as exhibits to this Quarterly Report on Form 10-Q with the understanding that our actual future results, levels of activity, performance, and events and circumstances may be materially different from what we expect.
3
SUMMARY RISK FACTORS
Investing in our Class A common stock involves numerous risks, including the risks described in “Part II—Other Information, Item 1A. Risk Factors” of this Quarterly Report on Form 10-Q. Below are some of these risks, any one of which could materially adversely affect our business, financial condition, results of operations, and prospects.
•Our business depends on our ability to attract new customers, retain and upsell additional products and new product categories to existing customers, and upgrade free users to our paid offerings. Any decline in new customers, renewals, or upgrades would harm our business.
•While we continue to add paid users to our customer base, we expect our user growth rate to continue to slow or decline as the impact of the COVID-19 pandemic continues to taper, particularly as users return to work or school or are otherwise no longer subject to limitations on in-person meetings.
•Our revenue growth rate has begun to decline, and we expect our revenue growth rate to generally decline in future periods.
•Interruptions, delays, or outages in service from our co-located data centers and a variety of other factors would impair the delivery of our services, require us to issue credits or pay penalties, and harm our business.
•We operate in competitive markets, and we must continue to compete effectively. Many of our actual and potential competitors benefit from competitive advantages over us, such as greater name recognition; longer operating histories; more varied products and services; larger marketing budgets; more established marketing relationships; more third-party integration; greater accessibility across devices or applications; greater access to larger user bases; major distribution agreements with hardware manufacturers and resellers; and greater financial, technical, and other resources. In addition, as we introduce new products and services, and with the introduction of new technologies and market entrants, we expect competition to intensify in the future.
•Failures in internet infrastructure or interference with broadband access could cause current or potential users to believe that our systems are unreliable, possibly leading our customers and hosts to switch to our competitors, or to cancel their subscriptions to our platform.
•As we increase sales to large organizations, our sales cycles could lengthen, and we could experience greater deployment challenges.
•We generate revenue from sales of subscriptions to our platform, and any decline in demand for our platform or for communications and collaboration technologies in general would harm our business.
•We expect to continue to increase our expenses in the future, which could decrease our profitability or prevent us from maintaining profitability.
•We may not be able to respond to rapid technological changes, extend our platform or develop new features.
•Our security measures have been compromised in the past and may be compromised in the future. If our security measures are compromised in the future or if our information technology fails, this could harm our reputation, expose us to significant fines and liability, impair our sales, and harm our business. In addition, our products and services may be perceived as not being secure. This perception may result in customers and hosts curtailing or ceasing their use of our products, our incurring significant liabilities, and our business being harmed.
•We have a limited operating history at the current scale of our business, which makes it difficult to evaluate our prospects and future results of operations.
•The actual or perceived failure by us, our customers, partners, or vendors to comply with stringent and evolving privacy, data protection, and information security laws, regulations, standards, policies, and contractual obligations could harm our reputation and business or subject us to significant fines and liability.
•If we were to lose the services of our Chief Executive Officer or other members of our senior management team, we may not be able to execute our business strategy.
•We have significant and expanding operations outside the United States, which may subject us to increased business, regulatory and economic risks that could harm our business.
•We may be subject to, or assist law enforcement with enforcement of, a variety of U.S. and international laws that could result in claims, increase the cost of operations, or otherwise harm our business due to changes in the laws,
4
changes in the interpretations of the laws, greater enforcement of the laws, or investigations into compliance with the laws.
•Zoom Phone is subject to U.S. federal and international regulation, and other products we may introduce in the future may also be subject to U.S. federal, state, or international laws, rules, and regulations. Any failure to comply with such laws, rules, and regulations could harm our business and expose us to liability.
•The dual class structure of our common stock as contained in our amended and restated certificate of incorporation has the effect of concentrating voting control with those stockholders who held our stock prior to our initial public offering, including our executive officers, employees, and directors and their affiliates, limiting your ability to influence corporate matters.
If we are unable to adequately address these and other risks we face, our business may be harmed.
5
PART I—Financial Information
Item 1. FINANCIAL STATEMENTS
ZOOM VIDEO COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
| As of | |||||||||||
| July 31, 2022 | January 31, 2022 | ||||||||||
| Assets | (unaudited) | ||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Marketable securities | |||||||||||
Accounts receivable, net of allowances of $ | |||||||||||
| Deferred contract acquisition costs, current | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
| Deferred contract acquisition costs, noncurrent | |||||||||||
| Property and equipment, net | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Strategic investments | |||||||||||
| Goodwill | |||||||||||
| Deferred tax assets | |||||||||||
| Other assets, noncurrent | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and stockholders’ equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued expenses and other current liabilities | |||||||||||
| Deferred revenue, current | |||||||||||
| Total current liabilities | |||||||||||
| Deferred revenue, noncurrent | |||||||||||
| Operating lease liabilities, noncurrent | |||||||||||
| Other liabilities, noncurrent | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies (Note 7) | |||||||||||
| Stockholders’ equity: | |||||||||||
Preferred stock, $ | |||||||||||
Common stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Retained earnings | |||||||||||
| Total stockholders’ equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
ZOOM VIDEO COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
(unaudited)
| Three Months Ended July 31, | Six Months Ended July 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Revenue | $ | $ | $ | $ | |||||||||||||||||||
| Cost of revenue | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Research and development | |||||||||||||||||||||||
| Sales and marketing | |||||||||||||||||||||||
| General and administrative | |||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
| Income from operations | |||||||||||||||||||||||
| (Losses) gains on strategic investments, net | ( | ( | |||||||||||||||||||||
| Other income (expense), net | ( | ( | ( | ||||||||||||||||||||
| Income before provision for income taxes | |||||||||||||||||||||||
| Provision for income taxes | |||||||||||||||||||||||
| Net income | |||||||||||||||||||||||
| Undistributed earnings attributable to participating securities | ( | ( | ( | ( | |||||||||||||||||||
| Net income attributable to common stockholders | $ | $ | $ | $ | |||||||||||||||||||
| Net income per share attributable to common stockholders: | |||||||||||||||||||||||
| Basic | $ | $ | $ | $ | |||||||||||||||||||
| Diluted | $ | $ | $ | $ | |||||||||||||||||||
| Weighted-average shares used in computing net income per share attributable to common stockholders: | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
7
ZOOM VIDEO COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
| Three Months Ended July 31, | Six Months Ended July 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Other comprehensive loss: | |||||||||||||||||||||||
| Unrealized loss on available-for-sale marketable securities, net of tax | ( | ( | ( | ( | |||||||||||||||||||
| Comprehensive income | $ | $ | $ | $ | |||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
8
ZOOM VIDEO COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share data)
(unaudited)
| Three Months Ended July 31, 2022 | |||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Loss | Retained Earnings | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance as of April 30, 2022 | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||
| Issuance of common stock upon exercise of stock options | — | — | — | ||||||||||||||||||||||||||||||||
| Issuance of common stock upon release of restricted stock units | ( | — | — | ||||||||||||||||||||||||||||||||
| Issuance of common stock for employee stock purchase plan | — | — | — | ||||||||||||||||||||||||||||||||
| Repurchase of common stock | ( | ( | ( | ( | |||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Balance as of July 31, 2022 | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||
| Three Months Ended July 31, 2021 | |||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income | Retained Earnings | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance as of April 30, 2021 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
| Issuance of common stock upon exercise of stock options | — | — | |||||||||||||||||||||||||||||||||
| Issuance of common stock upon release of restricted stock units | — | — | — | ||||||||||||||||||||||||||||||||
| Issuance of common stock for employee stock purchase plan | — | — | |||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Balance as of July 31, 2021 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
9
ZOOM VIDEO COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share data)
(unaudited)
| Six Months Ended July 31, 2022 | |||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Loss | Retained Earnings | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance as of January 31, 2022 | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||
| Issuance of common stock upon exercise of stock options | — | — | |||||||||||||||||||||||||||||||||
| Issuance of common stock upon release of restricted stock units | ( | — | — | ||||||||||||||||||||||||||||||||
| Issuance of common stock for employee stock purchase plan | — | — | — | ||||||||||||||||||||||||||||||||
| Repurchases of common stock | ( | ( | ( | ( | |||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Balance as of July 31, 2022 | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||
| Six Months Ended July 31, 2021 | |||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income | Retained Earnings | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance as of January 31, 2021 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
| Issuance of common stock upon exercise of stock options | — | — | |||||||||||||||||||||||||||||||||
| Issuance of common stock upon release of restricted stock units | — | — | — | ||||||||||||||||||||||||||||||||
| Issuance of common stock for employee stock purchase plan | — | — | |||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Balance as of July 31, 2021 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
10
ZOOM VIDEO COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
| Six Months Ended July 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Stock-based compensation expense | |||||||||||
| Amortization of deferred contract acquisition costs | |||||||||||
| Losses (gains) on strategic investments, net | ( | ||||||||||
| Depreciation and amortization | |||||||||||
| Provision for accounts receivable allowances | |||||||||||
| Non-cash operating lease cost | |||||||||||
| Amortization on marketable securities | |||||||||||
| Other | |||||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | ( | ( | |||||||||
| Prepaid expenses and other assets | ( | ( | |||||||||
| Deferred contract acquisition costs | ( | ( | |||||||||
| Accounts payable | |||||||||||
| Accrued expenses and other liabilities | |||||||||||
| Deferred revenue | |||||||||||
| Operating lease liabilities, net | ( | ( | |||||||||
| Net cash provided by operating activities | |||||||||||
| Cash flows from investing activities: | |||||||||||
| Purchases of marketable securities | ( | ( | |||||||||
| Maturities of marketable securities | |||||||||||
| Sales of marketable securities | |||||||||||
| Purchases of property and equipment | ( | ( | |||||||||
| Purchases of strategic investments | ( | ( | |||||||||
| Cash paid for acquisition, net of cash acquired | ( | ( | |||||||||
| Purchases of intangible assets | ( | ||||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities: | |||||||||||
| Cash paid for repurchases of common stock | ( | ||||||||||
| Proceeds from issuance of common stock for employee stock purchase plan | |||||||||||
| Proceeds from employee equity transactions (remitted) to be remitted to employees and tax authorities, net | ( | ||||||||||
| Proceeds from exercise of stock options | |||||||||||
| Other | |||||||||||
| Net cash (used in) provided by financing activities | ( | ||||||||||
| Effect of exchange rate changes on cash, cash equivalents, and restricted cash | ( | ||||||||||
| Net decrease in cash, cash equivalents, and restricted cash | ( | ( | |||||||||
| Cash, cash equivalents, and restricted cash – beginning of period | |||||||||||
| Cash, cash equivalents, and restricted cash – end of period | $ | $ | |||||||||
| Reconciliation of cash, cash equivalents, and restricted cash within the condensed consolidated balance sheets to the amounts shown in the condensed consolidated statements of cash flows above: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash, current included in prepaid expenses and other current assets | |||||||||||
| Restricted cash, noncurrent included in other assets, noncurrent | |||||||||||
| Total cash, cash equivalents, and restricted cash | $ | $ | |||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
11
ZOOM VIDEO COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1.Summary of Business and Significant Accounting Policies
Description of Business
Zoom Video Communications, Inc. and its subsidiaries (collectively, “Zoom,” the “Company,” “we,” “us,” or “our”) connect people through our core unified communications offering, which frictionlessly brings together video, phone, chat, webinars events, and contact center, and enables meaningful experiences across disparate devices and locations. We were incorporated in the state of Delaware in April 2011, and are headquartered in San Jose, California.
Fiscal Year
Our fiscal year ends on January 31. References to fiscal year 2023, for example, refer to the fiscal year ending January 31, 2023.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and applicable regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting, and include the accounts of Zoom Video Communications, Inc., its subsidiaries, and variable interest entities for which we are the primary beneficiary. All intercompany balances and transactions have been eliminated in consolidation.
The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended January 31, 2022, filed with the SEC on March 7, 2022.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Significant items subject to such estimates and assumptions include, but are not limited to, the estimated expected benefit period for deferred contract acquisition costs, the useful lives of long-lived assets, the incremental borrowing rate for operating leases, stock-based compensation expense, sales and other tax liabilities, the fair value of marketable securities and strategic investments, acquired intangible assets and goodwill, the valuation of deferred income tax assets and uncertain tax positions, and accruals and contingencies. Actual results could materially differ from those estimates.
Summary of Significant Accounting Policies
Our significant accounting policies are discussed in Note 1. “Summary of Business and Significant Accounting Policies” in the notes to consolidated financial statements included in our Annual Report on Form 10-K for the year ended January 31, 2022, filed with the SEC on March 7, 2022. There have been no significant changes to these policies during the six months ended July 31, 2022.
Accounting Pronouncements Not Yet Adopted
In June 2022, the FASB issued ASU No. 2022-03, Fair Value Measurements (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions, which clarifies and amends the guidance of measuring the fair value of equity securities subject to contractual restrictions that prohibit the sale of the equity securities. The guidance will be effective for fiscal years beginning after December 15, 2023 and interim periods within those fiscal years. We do not expect the adoption to have a material impact on our condensed consolidated financial statements.
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2. Revenue Recognition
Disaggregation of Revenue
| Three Months Ended July 31, | Six Months Ended July 31, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||||||||||||||||||||||||
| Amount | Percentage of Revenue | Amount | Percentage of Revenue | Amount | Percentage of Revenue | Amount | Percentage of Revenue | ||||||||||||||||||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||||||||||||||||||||
| Americas | $ | % | $ | % | $ | % | $ | % | |||||||||||||||||||||||||||||||||||||||
Asia Pacific (“APAC”) | |||||||||||||||||||||||||||||||||||||||||||||||
Europe, Middle East, and Africa (“EMEA”) | |||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | % | $ | % | $ | % | $ | % | |||||||||||||||||||||||||||||||||||||||
Contract Balances
We receive payments from customers based on a billing schedule as established in our customer contracts. Accounts receivable are recorded when we contractually have the right to consideration. In some arrangements, a right to consideration for our performance under the customer contract may occur before invoicing to the customer, resulting in an unbilled accounts receivable. The amount of unbilled accounts receivable included within accounts receivable, net of allowances on the condensed consolidated balance sheets was $70.6 million and $59.7 million as of July 31, 2022 and January 31, 2022, respectively.
Contract liabilities consist of deferred revenue. Revenue is deferred when we have the right to invoice in advance of performance under a customer contract. The current portion of deferred revenue balances is recognized over the next 12 months. The amount of revenue recognized during the three months ended July 31, 2022 and 2021 that was included in deferred revenue at the beginning of each period was $572.7 million and $480.5 million, respectively, and $867.6 million and $660.1 million during the six months ended July 31, 2022 and 2021, respectively.
Remaining Performance Obligations
The terms of our subscription agreements are monthly, annual, and multiyear, and we may bill for the full term in advance or on an annual, quarterly, or monthly basis, depending on the billing terms with customers. As of July 31, 2022, the aggregate amount of the transaction price allocated to our remaining performance obligations was $3,213.0 million, which consists of both billed consideration in the amount of $1,401.1 million and unbilled consideration in the amount of $1,811.9 million that we expect to recognize as revenue. We expect to recognize 61 % of our remaining performance obligations as revenue over the next 12 months and the remainder thereafter.
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3. Investments
Marketable Securities
As of July 31, 2022 and January 31, 2022, our marketable securities consisted of the following:
| As of July 31, 2022 | |||||||||||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Commercial paper | $ | $ | $ | $ | |||||||||||||||||||
| Agency bonds | ( | ||||||||||||||||||||||
| Corporate and other debt securities | ( | ||||||||||||||||||||||
| U.S. government agency securities | ( | ||||||||||||||||||||||
| Treasury bills | ( | ||||||||||||||||||||||
| Marketable securities | $ | $ | $ | ( | $ | ||||||||||||||||||
| As of January 31, 2022 | |||||||||||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Commercial paper | $ | $ | $ | $ | |||||||||||||||||||
| Agency bonds | ( | ||||||||||||||||||||||
| Corporate and other debt securities | ( | ||||||||||||||||||||||
| U.S. government agency securities | ( | ||||||||||||||||||||||
| Treasury bills | ( | ||||||||||||||||||||||
| Marketable securities | $ | $ | $ | ( | $ | ||||||||||||||||||
Unrealized losses for securities that have been in an unrealized loss position for less than 12 months were $56.4 million as of July 31, 2022 and $23.3 million as of January 31, 2022. Unrealized losses for securities that have been in an unrealized loss position for 12 months or longer were $8.0 million as of July 31, 2022 and were immaterial as of January 31, 2022. We review the individual securities that have unrealized losses on a regular basis to evaluate whether or not any security has experienced, or is expected to experience, credit losses resulting in the decline in fair value. We evaluate, among other factors, whether we have the intention to sell any of these marketable securities and whether it is more likely than not that we will be required to sell any of them before recovery of the amortized cost basis. We have not recorded an allowance for credit losses, as we believe any such losses would be immaterial based on the high-grade credit rating for each of our marketable securities as of the end of each period. There were no material realized gains or losses from available-for-sale securities that were reclassified out of accumulated other comprehensive loss for the three and six months ended July 31, 2022 and 2021.
The following table presents the contractual maturities of our marketable securities as of July 31, 2022 and January 31, 2022:
| As of | |||||||||||
| July 31, 2022 | January 31, 2022 | ||||||||||
| (in thousands) | |||||||||||
| Less than one year | $ | $ | |||||||||
| Due in one to five years | |||||||||||
| Total | $ | $ | |||||||||
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Strategic Investments
Strategic investments by form and measurement category as of July 31, 2022 were as follows:
| Measurement Category | |||||||||||||||||||||||
| Fair Value | Measurement Alternative | Equity Method | Total | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Equity securities | $ | $ | $ | $ | |||||||||||||||||||
| Debt securities | — | — | |||||||||||||||||||||
| Strategic investments | $ | $ | $ | $ | |||||||||||||||||||
Strategic investments by form and measurement category as of January 31, 2022 were as follows:
| Measurement Category | |||||||||||||||||||||||
| Fair Value | Measurement Alternative | Equity Method | Total | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Equity securities | $ | $ | $ | $ | |||||||||||||||||||
| Debt securities | — | — | |||||||||||||||||||||
| Strategic investments | $ | $ | $ | $ | |||||||||||||||||||
In the second quarter of fiscal year 2023, we made a strategic investment of $40.0 million for common shares in a company in the B2B software and services travel space's private placement. We recorded a loss of $12.2 million related to this investment for the three months ended July 31, 2022. As of July 31, 2022, the fair value of the investment was $27.8 million and our ownership interest represents less than 1 % percent of the economic interest of the investee's outstanding capital stock.
4. Fair Value Measurements
The following tables present information about our financial instruments that are measured at fair value on a recurring basis and indicate the fair value hierarchy of the valuation inputs utilized to determine such fair value:
| As of July 31, 2022 | |||||||||||||||||||||||
| Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Financial Assets: | |||||||||||||||||||||||
| Money market funds | $ | $ | $ | $ | |||||||||||||||||||
| Treasury bills | |||||||||||||||||||||||
| Commercial paper | |||||||||||||||||||||||
| U.S. government agency securities | |||||||||||||||||||||||
| Agency bonds | |||||||||||||||||||||||
| Cash equivalents | |||||||||||||||||||||||
| Commercial paper | |||||||||||||||||||||||
| Agency bonds | |||||||||||||||||||||||
| Corporate and other debt securities | |||||||||||||||||||||||
| U.S. government agency securities | |||||||||||||||||||||||
| Treasury bills | |||||||||||||||||||||||
| Marketable securities | |||||||||||||||||||||||
| Publicly held equity securities included in strategic investments | |||||||||||||||||||||||
| Privately held debt securities included in strategic investments | |||||||||||||||||||||||
| Certificates of deposit included in other assets, noncurrent | |||||||||||||||||||||||
| Total financial assets | $ | $ | $ | $ | |||||||||||||||||||
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| As of January 31, 2022 | |||||||||||||||||||||||
| Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Financial Assets: | |||||||||||||||||||||||
| Money market funds | $ | $ | $ | $ | |||||||||||||||||||
| Treasury bills | |||||||||||||||||||||||
| Corporate debt securities | |||||||||||||||||||||||
| Cash equivalents | |||||||||||||||||||||||
| Commercial paper | |||||||||||||||||||||||