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OFFON

SPRINT CORPORATION

(S)
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Sprint : SENTINELONE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

09/10/2021 | 05:22pm EST
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our unaudited condensed
consolidated financial statements and related notes appearing elsewhere in this
Quarterly Report on Form 10-Q and our audited consolidated financial statements
and the related notes and the discussion under the heading "Management's
Discussion and Analysis of Financial Condition and Results of Operations" for
the fiscal year ended January 31, 2021 included in the final prospectus for our
initial public offering, or IPO dated as of June 29, 2021 and filed with the
U.S. Securities and Exchange Commission, or the SEC, pursuant to Rule 424(b)(4)
on June 30, 2021, or the Final Prospectus. This discussion, particularly
information with respect to our future results of operations or financial
condition, business strategy and plans, and objectives of management for future
operations, includes forward-looking statements that involve risks and
uncertainties as described under the heading "Special Note About Forward-Looking
Statements" in this Quarterly Report on Form 10-Q. You should review the
disclosure under the heading "Risk Factors" in this Quarterly Report on Form
10-Q for a discussion of important factors that could cause our actual results
to differ materially from those anticipated in these forward-looking statements.
Our fiscal year ends on January 31, and our fiscal quarters end on April 30,
July 31, October 31, and January 31. Our fiscal years ended January 31, 2021 and
January 31, 2022 are referred to herein as fiscal 2021 and fiscal 2022,
respectively.
Unless the context otherwise requires, all references in this report to
"SentinelOne," the "Company," "we," "our," "us," or similar terms refer to
SentinelOne, Inc. and its subsidiaries.
Overview
We founded SentinelOne in 2013 with a dramatically new approach to
cybersecurity.
We pioneered the world's first purpose-built artificial intelligence, or
AI,-powered extended detection and response, or XDR, platform to make
cybersecurity defense truly autonomous, from the endpoint and beyond. Our
Singularity Platform instantly defends against cyberattacks - performing at a
faster speed, greater scale, and higher accuracy than otherwise possible from a
human-powered approach.
Our Singularity Platform ingests, correlates, and queries petabytes of
structured and unstructured data from a myriad of disparate external and
internal sources in real-time. We build rich context by constructing a dynamic
representation of data across an organization. As a result, our AI models are
highly accurate, actionable, and autonomous. Our distributed AI models run both
locally on every endpoint and every cloud workload, as well as on our cloud
platform. Our Static and vector-agnostic Behavioral AI models, which run on the
endpoints themselves, provide our customers with protection even when their
devices are not connected to the cloud. In the cloud, our Streaming AI detects
anomalies that surface when multiple data feeds are correlated. By providing
visibility across an organization's digital assets through one console, our
platform makes it very fast for analysts to easily search through petabytes of
data to investigate incidents and proactively hunt threats. We have extended our
control and visibility planes beyond the traditional endpoint to unmanaged IoT
devices.
Our Singularity Platform can be flexibly deployed on the environments that our
customers choose, including public, private, or hybrid clouds. Our feature
parity across Windows, macOS, Linux, and Kubernetes offers best-of-breed
protection, visibility, and control across today's heterogeneous IT
environments. Together, these capabilities make our platform the logical choice
for organizations of all sizes, industry verticals, and compliance requirements.
Our platform offers true multi-tenancy, which enables the world's largest
organizations and our managed security providers and incident response partners
the best management experience. Our customers realize improved cybersecurity
outcomes with fewer people, producing an attractive return on investment.
We generate substantially all of our revenue by selling subscriptions to our
Singularity Platform. Our subscription tiers include Singularity Core,
Singularity Control, and Singularity Complete. Additionally, customers can
extend the functionality of our platform through our eight subscription
Singularity Modules. We generally price
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our subscriptions and modules on a per agent basis, and each agent generally
corresponds with an endpoint, server, virtual machine, or container.
Our subscription contracts typically range from one to three years. We recognize
subscription revenue ratably over the term of a contract. Most of our contracts
are for terms representing annual increments, therefore contracts generally come
up for renewal in the same period in subsequent years. The timing of large
multi-year enterprise contracts can create some variability in subscription
order levels between periods, though the impact to our revenue in any particular
period is limited as a result of ratable revenue recognition.
Our go-to-market strategy is focused on acquiring new customers and driving
expanded usage of our platform by existing customers. Our sales organization is
comprised of our enterprise sales, inside sales and customer solutions
engineering teams. It leverages our global network of independent software
vendors, or ISVs, alliance partners, and channel partners for prospect access.
Additionally, our sales teams work closely with our customers, channel partners,
and alliance partners to drive adoption of our platform, and our software
solutions are fulfilled through our channel partners. Our channel partners
include some of the world's largest resellers and distributors, managed service
providers, or MSPs, managed security service providers, or MSSPs, managed
detection and response providers, or MDRs, original equipment manufacturers, or
OEMs, and incident response firms, or IR firms. Once customers experience the
benefits of our platform, they often upgrade their subscriptions to benefit from
the full range of our XDR and IT and security operations capabilities.
Additionally, many of our customers adopt Singularity Modules over time to
extend the functionality of our platform and increase their coverage footprint.
The combination of platform upgrades and extended modules drives our powerful
land-and-expand motion.
Our Singularity Platform is used globally by organizations of all sizes across a
broad range of industries. As of July 31, 2021, we had over 5,400 customers,
increasing from over 3,000 customers as of July 31, 2020. We had 348 customers
with ARR of $100,000 or more as of July 31, 2021, up from 145 as of July 31,
2020. As of July 31, 2021, no single end customer accounted for more than 3% of
our ARR. We define ARR as the annualized revenue run rate of our subscription
contracts at the end of a reporting period, assuming contracts are renewed on
their existing terms for customers that are under subscription contracts with
us. Our ARR outside of the United States represented 34% and 27% for the three
months ended July 31, 2021 and 2020, respectively, illustrating the global
nature of our solutions.
We have grown rapidly since our inception. Our revenue was $45.8 million and
$20.7 million for the three months ended July 31, 2021 and 2020, respectively,
representing year-over-year growth of 121%. Our revenue was $83.1 million and
$38.6 million for the six months ended July 31, 2021 and 2020, respectively,
representing year-over-year growth of 115% . During this period, we continued to
invest in growing our business to capitalize on our market opportunity. As a
result, our net loss for the three months ended July 31, 2021 and 2020 was $68.2
million and $22.9 million, respectively, and our net loss for the six months
ended July 31, 2021 and 2020 was $130.8 million and $49.6 million, respectively.
Initial Public Offering and Private Placement
In July 2021, we completed our IPO and a concurrent private placement, in which
we issued and sold an aggregate of 41,678,568 shares of our Class A common stock
at $35 per share, including 5,250,000 shares issued upon the exercise of the
underwriters' option to purchase additional shares and 1,428,568 shares issued
pursuant to the concurrent private placement. We received net proceeds of
approximately $1.4 billion after deducting underwriting discounts and
commissions.
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 presents significant opportunities for our
business, they also pose important challenges that we must successfully address
in order to sustain our growth and improve our operating results.
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New Customer Acquisition
Our business model relies on rapidly and efficiently engaging with new customers
and expanding our relationship with our customers over time. To drive customer
acquisition, we have invested, and expect to continue to invest, heavily in our
sales and marketing efforts. While we cannot predict customer adoption rates and
demand, the future growth rate and size of the market for endpoint security
solutions, or the introduction of competitive products and services, our
business and operating results will be significantly affected by the degree and
speed with which organizations adopt endpoint security solutions and our
platform.
Expansion Within Our Existing Customers
Our growing base of customers represents a significant opportunity for further
adoption of our platform. As of July 31, 2021, we had over 5,400 customers and
345 customers with ARR of $100,000. Our customers may start with just the
Singularity Core version of our platform and upgrade to our Singularity Control
and Singularity Complete versions, add Singularity Modules such as Cloud
Workload Security and Ranger IoT, or increase the number of protected endpoints
and cloud workloads as well as mapped IoT devices. Several of our largest
enterprise and government customers have deployed our platform across tens of
thousands of endpoints and cloud workloads, running tens of thousands of
applications. Our ability to expand within our customer base, particularly large
enterprise and government customers, will depend on a number of factors,
including platform performance, our customers' satisfaction with our platform,
competitive offerings, pricing, overall changes in our customers' spending
levels, and the effectiveness of our efforts to help our customers realize the
benefits of our platform.
As of July 31, 2021, our dollar-based gross retention rate, or GRR, was 97% and
our dollar-based net retention rate, or NRR, was 129%. As of July 31, 2020, our
GRR was 97% and our NRR was 121%. To calculate these metrics, we first determine
Prior Period ARR, which is ARR from the population of our customers as of 12
months prior to the end of a particular reporting period. We calculate Gross
Retention ARR by subtracting from the total Prior Period ARR the portion of
Prior Period ARR accounted for by the subset of those customers that are no
longer active at the end of that reporting period. GRR is the quotient obtained
by dividing Gross Retention ARR by Prior Period ARR. GRR takes into account
customer attrition but does not reflect customer contraction. We calculate Net
Retention ARR as the total ARR at the end of a particular reporting period from
the set of customers that is used to determine Prior Period ARR. Net Retention
ARR includes any expansion, and is net of contraction and attrition associated
with that set of customers. NRR is the quotient obtained by dividing Net
Retention ARR by Prior Period ARR. We expect both our GRR and NRR to fluctuate
over time.
Investing for Growth
We plan to continue investing in our business so that we can capitalize on our
market opportunity. We intend to continue to add headcount to our global sales
and marketing team to acquire new customers and to increase sales to existing
customers. We intend to continue to invest in building additional functionality
for our Singularity Platform that will extend our capabilities as our success is
dependent on our ability to sustain innovation and technology leadership in
order to maintain our competitive advantage. We also intend to continue to
evaluate strategic acquisitions and investments in businesses and technologies
to further accelerate our product capabilities. For example, we acquired Scalyr,
Inc., or Scalyr, in February 2021 to advance our data ingestion, search, and
retention capabilities.
We believe that the global opportunity for our Singularity Platform is
significant. Our revenue outside of the United States represented 32% and 29% of
our revenue for the three months ended July 31, 2021 and 2020, respectively, and
represented 31% and 30% of our revenue for the six months ended July 31, 2021
and 2020, respectively. We have made, and plan to continue to make, significant
investments to expand geographically, particularly in Europe, the Middle East,
Africa, Latin America, and Asia Pacific.
Although our investments in growth may adversely affect our operating results in
the near term, we believe that they will contribute to our long-term growth. If
our near-term investments do not lead to the expected revenue growth over time,
we may not achieve or maintain profitability or our growth rates may slow.
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Impact of COVID-19
Since January 2020, the COVID-19 pandemic has resulted in travel restrictions,
prohibitions of non-essential activities, disruption and shutdown of certain
businesses worldwide, and greater uncertainty in global financial markets. The
full extent to which the COVID-19 pandemic will directly or indirectly impact
our business, operating results, cash flows, and financial condition will depend
on future developments that are highly uncertain and cannot be accurately
predicted. We have experienced, and may continue to experience, a modest adverse
impact on certain parts of our business, including a lengthening of the sales
cycle for some prospective customers and delays in the delivery of professional
services and trainings to our customers.
We have also experienced, and may continue to experience, a positive impact as a
result of the COVID-19 pandemic. For example, in connection with the travel
restrictions and shelter-in-place and work-from-home policies resulting from the
COVID-19 pandemic, we have seen an increase in usage and subscriptions from
smaller customers, many of whom are small or medium sized businesses. We have
also seen slower growth in certain operating expenses due to reduced business
travel and the virtualization or cancellation of customer and employee events.
While a reduction in operating expenses may have an immediate positive impact on
our operating results, we do not yet have visibility into the full impact this
will have on our business. Moreover, as vaccines become widely available and
people begin to return to offices and other workplaces, any positive impacts of
the COVID-19 pandemic on our business may slow or decline once the impact of the
pandemic tapers.
We cannot predict how long we will continue to experience these impacts as
shelter-in-place orders, vaccine availability, and other related measures are
expected to change over time. Our operating results, cash flows, and financial
condition have not been adversely impacted to date. However, as certain of our
customers or partners experience downturns or uncertainty in their own business
operations or revenue resulting from the spread of COVID-19 our operating
results, cash flows, and financial condition could be adversely impacted. In
addition, in response to the spread of COVID-19, we previously required
substantially all of our employees to work remotely to minimize the risk of the
virus to our employees and the communities in which we operate. Most of our
employees continue to work remotely and we have slowly begun to open up some of
our offices at minimal capacity, subject to local COVID-19 restrictions. We may
take further actions as may be required by government authorities or that we
determine are in the best interests of our employees, customers, and business
partners.
The global impact of the COVID-19 pandemic continues to rapidly evolve, and we
will continue to monitor the situation and the effects on our business and
operations closely. We do not yet know the full extent of potential impacts on
our business or operations or on the global economy as a whole, particularly if
the COVID-19 pandemic continues and persists for an extended period of time.
Given the uncertainty, we cannot reasonably estimate the impact on our future
operating results, cash flows, or financial condition. For additional
information, see the section titled "Risk Factors."
Key Business Metrics
We monitor the following key metrics to help us evaluate our business, identify
trends affecting our business, formulate business plans, and make strategic
decisions.
Annualized Recurring Revenue
We believe that ARR is a key operating metric to measure our business because it
is driven by our ability to acquire new subscription customers and to maintain
and expand our relationship with existing subscription customers. ARR represents
the annualized revenue run rate of our subscription contracts at the end of a
reporting period, assuming contracts are renewed on their existing terms for
customers that are under subscription contracts
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Table of Contents with us. ARR is not a forecast of future revenue, which can be impacted by contract start and end dates and renewal rates.

                                            As of July 31,
                                          2021           2020
                                            (in thousands)

Annualized recurring revenue (ARR) $ 197,963$ 87,284



ARR grew 127% year-over-year to $198.0 million for the three months ended July
31, 2021, primarily due to high growth in the number of new customers purchasing
our subscriptions and to additional purchases by existing customers.
Customers with ARR of $100,000 or More
We believe that our ability to increase the number of customers with ARR of
$100,000 or more is an indicator of our market penetration and strategic demand
for our platform. We define a customer as an entity that has an active
subscription for access to our platform. We count MSPs, MSSPs, MDRs, and OEMs,
who may purchase our products on behalf of multiple companies, as a single
customer. We do not count our reseller or distributor channel partners as
customers.
                                               As of July 31,
                                            2021             2020
                                               (in thousands)
Customers with ARR of $100,000 or more     348               145


Customers with ARR of $100,000 or more grew 140% year-over-year to 348 for the
three months ended July 31, 2021, primarily due to growth in the ARR of existing
customers from additional purchases and to growth in the average size of
purchases by new customers.
Dollar-Based Net Retention Rate
We believe that our ability to retain and expand our revenue generated from our
existing customers is an indicator of the long-term value of our customer
relationships and our potential future business opportunities. Dollar-based net
retention rate measures the percentage change in our ARR derived from our
customer base at a point in time.
                                          As of July 31,
                                         2021           2020
Dollar-based net retention rate              129  %     121  %


Our dollar-based net retention rate was 129% for the three months ended July 31,
2021, driven by existing customers primarily from expansion of the number of
endpoints, upgrades of subscription tiers, and purchases of additional modules.
Components of Our Results of Operations
Revenue
We generate substantially all of our revenue from subscriptions to our
Singularity Platform. Customers can extend the functionality of their
subscription to our platform by subscribing to additional Singularity Modules.
Subscriptions provide access to hosted software. The nature of our promise to
the customer under the subscription is to provide protection for the duration of
the contractual term and as such is considered as a series of distinct service.
Our arrangements may include fixed consideration, variable consideration, or a
combination of the two. Fixed consideration is recognized over the term of the
arrangement or longer if the fixed consideration relates to a material right.
Variable consideration in these arrangements is typically a function of
transaction volume or another usage-
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based measure. Depending upon the structure of a particular arrangement, we (1)
allocate the variable amount to each distinct service period within the series
and recognizes revenue as each distinct service period is performed (i.e. direct
allocation), (2) estimate total variable consideration at contract inception
(giving consideration to any constraints that may apply and updating the
estimates as new information becomes available) and recognizes the total
transaction price over the period to which it relates, or (3) apply the 'right
to invoice' practical expedient and recognizes revenue based on the amount
invoiced to the customer during the period. Premium support and maintenance and
other Singularity Modules are distinct from subscriptions and are recognized
ratably over the term as the performance obligations are satisfied.
We invoice our customers upfront upon signing for the entire term of the
contract, periodically, or in arrears. Most of our subscription contracts have a
term of one to three years.
Cost of Revenue
Cost of revenue consists primarily of third-party cloud infrastructure expenses
incurred in connection with the hosting and maintenance of our platform. Cost of
revenue also consists of personnel-related costs associated with our customer
support and services organization, including salaries, benefits, bonuses, and
stock-based compensation, amortization of acquired intangible assets,
amortization of capitalized internal-use software, software and subscription
services used by our customer support and services team, and allocated overhead
costs.
Our third-party cloud infrastructure costs are driven primarily by the number of
customers, the number of endpoints per customer, the number of modules, and the
incremental costs for storing additional data collected for such cloud modules.
We plan to continue to invest in our platform infrastructure and additional
resources in our customer support and services organization as we grow our
business. The level and timing of investment in these areas could affect our
cost of revenue from period to period.
Operating Expenses
Our operating expenses consist of research and development, sales and marketing,
and general and administrative expenses. Personnel-related expenses are the most
significant component of operating expenses and consist of salaries, benefits,
bonuses, stock-based compensation, and sales commissions. Operating expenses
also include allocated facilities and IT overhead costs.
Research and Development
Research and development expenses consist primarily of employee salaries,
benefits, bonuses, and stock-based compensation. Research and development
expenses also include consulting fees, software and subscription services, and
third-party cloud infrastructure expenses incurred in developing our platform
and modules.
We expect research and development expenses to increase in absolute dollars as
we continue to increase investments in our existing products and services.
However, we anticipate research and development expenses to decrease as a
percentage of our total revenue over time, although our research and development
expenses may fluctuate as a percentage of our total revenue from period to
period depending on the timing of these expenses. In addition, research and
development expenses that qualify as internal-use software are capitalized, the
amount of which may fluctuate significantly from period to period.
Sales and Marketing
Sales and marketing expenses consist primarily of employee salaries,
commissions, benefits, bonuses, stock-based compensation, travel and
entertainment related expenses, advertising, branding and marketing events,
promotions, and software and subscription services. Sales and marketing expenses
also include sales commissions paid to our sales force and referral fees paid to
independent third parties that are incremental to obtain a subscription
contract. Such costs are capitalized and amortized over an estimated period of
benefit of four years, and any such expenses paid for the renewal of a
subscription are capitalized and amortized over the contractual term of the
renewal.
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We expect sales and marketing expenses to increase in absolute dollars as we
continue to make significant investments in our sales and marketing organization
to drive additional revenue, further penetrate the market, and expand our global
customer base, but to decrease as a percentage of our revenue over time.
General and Administrative
General and administrative expenses consist primarily of salaries, benefits,
bonuses, stock-based compensation, and other expenses for our executive,
finance, legal, human resources, and facilities organizations. General and
administrative expenses also include external legal, accounting, other
consulting, and professional services fees, software and subscription services,
and other corporate expenses.
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, and increased expenses for insurance, investor
relations, and professional services. We expect that our general and
administrative expenses will increase in absolute dollars as our business grows
but will decrease as a percentage of our revenue over time.
Interest Income, Interest Expense, and Other Income (Expense), Net
Interest income consists primarily of interest earned on our cash equivalents
and short-term investments.
Interest expense consists primarily of interest on borrowings associated with
our loan and security agreement.
Other income (expense), net consists primarily of foreign currency transaction
gains and losses.
Provision for (Benefit from) Income Taxes
Provision for (benefit from) income taxes consists primarily of income taxes in
certain foreign and state jurisdictions in which we conduct business. We
maintain a full valuation allowance against our deferred tax assets because we
have concluded that it is more likely than not that the deferred tax assets will
not be realized. Based upon a change in operations of our Israel subsidiary,
there is a reasonable possibility that within the next several quarters,
sufficient positive evidence becomes available to reach a conclusion that all or
a significant portion of the valuation allowances against our Israel net
deferred tax assets would no longer be required. This could result in a material
income tax benefit in our consolidated statement of operations and a
corresponding increase in deferred tax assets on our consolidated balance sheet
in the period in which such valuation allowance is released.
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Results of Operations
The following table sets forth our results of operations for the periods
presented:
                                               Three Months Ended July 31,                    Six Months Ended July 31,
                                                2021                  2020                     2021                    2020
                                                                              (in thousands)
Revenue                                   $       45,750$   20,674$       83,145$   38,631
Cost of revenue(1)                                18,788               7,543                  37,071                   15,156
Gross profit                                      26,962              13,131                  46,074                   23,475
Operating expenses:
Research and development(1)                       31,037              13,476                  58,857                   27,341
Sales and marketing(1)                            40,970              16,302                  77,150                   34,053
General and administrative(1)                     22,110               5,914                  38,834                   10,871
Total operating expenses                          94,117              35,692                 174,841                   72,265
Loss from operations                             (67,155)            (22,561)               (128,767)                 (48,790)
Interest income                                       21                  46                      44                      196
Interest expense                                    (479)               (477)                   (782)                    (777)
Other income (expense), net                         (373)                182                    (966)                     (11)
Loss before provision for income taxes           (67,986)            (22,810)               (130,471)                 (49,382)
Provision for income taxes                           177                 128                     326                      194
Net loss                                  $      (68,163)$  (22,938)$     (130,797)$  (49,576)


__________________

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

                                             Three Months Ended July 31,                   Six Months Ended July 31,
                                               2021                  2020                  2021                  2020
                                                                          (in thousands)
Cost of revenue                         $           840          $       65$        1,223$      135
Research and development                          8,823                 261                  15,962               3,024
Sales and marketing                               3,905                 606                   5,952               1,067
General and administrative                        7,825                 656                  11,693               1,013

Total stock-based compensation expense $ 21,393$ 1,588

$ 34,830$ 5,239

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The following table sets forth the components of our consolidated statements of
operations as a percentage of revenue for each of the periods presented:
                                               Three Months Ended July 31,                      Six Months Ended July 31,
                                              2021                    2020                    2021                    2020
                                                                   (as a percentage of total revenue)
Revenue                                            100  %                  100  %                  100  %                  100  %
Cost of revenue                                        41                      36                      45                      39
Gross profit                                           59                      64                      55                      61
Operating expenses:
Research and development                               68                      65                      71                      71
Sales and marketing                                    90                      79                      93                      88
General and administrative                             48                      29                      47                      28
Total operating expenses                              206                     173                     210                     187
Loss from operations                                (147)                   (109)                   (155)                   (126)
Interest income                                         -                       -                       -                       1
Interest expense                                      (1)                     (2)                     (1)                     (2)
Other income (expense), net                           (1)                       1                     (1)                       -
Loss before provision for income taxes              (149)                   (110)                   (157)                   (128)
Provision for income taxes                              -                       -                       -                       -
Net loss                                          (149) %                 (111) %                 (157) %                 (128) %



Note: Certain figures may not sum due to rounding.
Comparison of the Three Months Ended July 31, 2021 and 2020
Revenue
                   Three Months Ended July 31,                  Change
                       2021                   2020           $            %
                                  (dollars in thousands)
Revenue     $       45,750$ 20,674$ 25,076       121  %


Revenue increased by $25.1 million, or 121%, from $20.7 million for the three
months ended July 31, 2020 to $45.8 million for the three months ended July 31,
2021. The increase was primarily due to the ongoing demand for our platform and
the acquisition of Scalyr in the first quarter of 2022. The increase was due to
new customers, which accounted for 44% of the increase, to existing customers,
which accounted for 38% of the increase, and to MSP, MSSP, and OEM channel
partners, which accounted for 18% of the increase.
Cost of Revenue, Gross Profit, and Gross Margin
                         Three Months Ended July 31,                  Change
                        2021                       2020            $            %
                                        (dollars in thousands)
Cost of revenue   $      18,788$  7,543$ 11,245       149  %
Gross profit      $      26,962$ 13,131$ 13,831       105  %
Gross margin                 59  %                    64  %


Cost of revenue increased by $11.2 million, from $7.5 million for the three
months ended July 31, 2020 to $18.8 million for the three months ended July 31,
2021, primarily due to higher third-party cloud infrastructure expenses of $6.2
million from increased data usage and an increase of $4.1 million in allocated
overhead costs. Gross margin decreased from 64% to 59%, primarily due to cloud
infrastructure expansion driven by fast customer adoption of our XDR platform,
growth in support personnel, and higher stock-based compensation.
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Research and Development
                                           Three Months Ended July 31,                  Change
                                               2021                   2020           $            %
                                                          (dollars in thousands)
Research and development expenses   $       31,037$ 13,476

$ 17,561 130 %



Research and development expenses increased from $13.5 million for the three
months ended July 31, 2020 to $31.0 million for the three months ended July 31,
2021, primarily due to an increase in personnel-related expenses of $13.3
million, including an increase of $8.5 million related to stock-based
compensation expense as a result of increased headcount, and an increase of $2.1
million in third-party cloud infrastructure expenses incurred in developing our
platform and modules.
                                        Three Months Ended July 31,                  Change
                                            2021                   2020           $            %
                                                       (dollars in thousands)
Sales and marketing expenses     $       40,970$ 16,302$ 24,668       151  %


Sales and marketing expenses increased from $16.3 million for the three months
ended July 31, 2020 to $41.0 million for the three months ended July 31, 2021,
primarily due to an increase in personnel-related expenses of $15.8 million,
including an increase of $3.3 million in stock-based compensation expense as a
result of increased headcount. In addition, there was an increase of $4.3
million in marketing related expenses, including an increase of $1.0 million in
corporate branding costs.
General and Administrative
                                              Three Months Ended July 31,                           Change
                                                2021                  2020                  $                   %
                                                                    

(dollars in thousands) General and administrative expenses $ 22,110$ 5,914$ 16,196

                  274  %


General and administrative expenses increased from $5.9 million for the three
months ended July 31, 2020 to $22.1 million for the three months ended July 31,
2021, primarily due to an increase in personnel-related expenses of $12.6
million, including an increase of $7.2 million in stock-based compensation
expense as a result of increased headcount. In addition, there was an increase
of $1.0 million in legal and accounting services to support our growth, and a
$0.7 million increase in software and subscription services.
Interest Income, Interest Expense, and Other Income (Expense), Net
                                        Three Months Ended July 31,                    Change
                                              2021                    2020         $           %
                                                       (dollars in thousands)
Interest income                 $            21                     $   46$  (25)       (54) %
Interest expense                $          (479)                    $ (477)$   (2)         -  %
Other income (expense), net     $          (373)                    $  182$ (555)      (305) %


The decrease in other income (expense), net is primarily due to net foreign
currency exchange losses.
Provision for Income Taxes
                                      Three Months Ended July 31,                   Change
                                            2021                    2020         $          %
                                                    (dollars in thousands)
Provision for income taxes    $          177                       $ 128$  49        38  %


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The provision for income taxes increased primarily as a result of the increase
in foreign taxes related to operations in international subsidiaries.
Comparison of the Six Months Ended July 31, 2021 and 2020
Revenue
                  Six Months Ended July 31,                  Change
                      2021                 2020           $            %
                                (dollars in thousands)
Revenue     $      83,145$ 38,631$ 44,514       115  %


Revenue increased by $44.5 million, or 115%, from $38.6 million for the six
months ended July 31, 2020 to $83.1 million for six months ended July 31, 2021,
primarily due to the ongoing demand for our platform and the acquisition of
Scalyr in the first quarter of fiscal 2022. The increase was primarily due to
the ongoing demand for our platform.The increase was due to new customers, which
accounted for 48% of the increase, to existing customers, which accounted for
35% of the increase, and to MSP, MSSP, and OEM channel partners, which accounted
for 17% of the increase.
Cost of Revenue, Gross Profit, and Gross Margin
                        Six Months Ended July 31,                  Change
                        2021                    2020            $            %
                                      (dollars in thousands)
Cost of revenue   $     37,071$ 15,156$ 21,915       145  %
Gross profit      $     46,074$ 23,475$ 22,599        96  %
Gross margin                55  %                  61  %


Cost of revenue increased by $21.9 million from $15.2 million for the six months
ended July 31, 2020 to $37.1 million for six months ended July 31, 2021,
primarily due to higher third-party cloud infrastructure expenses from increased
data usage of $13.0 million and an increase of $7.1 million in allocated
overhead costs. Gross margin decreased from 61% for the six months ended July
31, 2020 to 55% for the six months ended July 31, 2021, primarily due to cloud
infrastructure expansion driven by fast customer adoption of our XDR platform,
growth in support personnel, and higher stock-based compensation.
Research and Development
                                          Six Months Ended July 31,                  Change
                                              2021                 2020           $            %
                                                        (dollars in thousands)
Research and development expenses   $      58,857$ 27,341

$ 31,516 115 %



Research and development expenses increased from $27.3 million for the six
months ended July 31, 2020 to $58.9 million for six months ended July 31, 2021,
primarily due to an increase in personnel-related expenses of $23.6 million,
including an increase of $12.9 million related to stock-based compensation
expense as a result of increased headcount, an increase of $3.7 million in
third-party cloud infrastructure expenses incurred in developing our platform
and modules, and an increase of $1.6 million in consulting expenses.
Sales and Marketing
                                       Six Months Ended July 31,                  Change
                                           2021                 2020           $            %
                                                     (dollars in thousands)
Sales and marketing expenses     $      77,150$ 34,053$ 43,097       127  %


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Sales and marketing expenses increased from $34.1 million for the six months
ended July 31, 2020 to $77.2 million for six months ended July 31, 2021,
primarily due to an increase in personnel-related expenses of $28.1 million,
including an increase of $4.9 million in stock-based compensation expense as a
result of increased headcount. In addition, there was an increase of $9.2
million in marketing-related expenses, including an increase of $2.7 million in
corporate branding costs.
General and Administrative
                                             Six Months Ended July 31,                  Change
                                                 2021                 2020           $            %
                                                           (dollars in thousands)
General and administrative expenses    $      38,834$ 10,871

$ 27,963 257 %



General and administrative expenses increased from $10.9 million for the six
months ended July 31, 2020 to $38.8 million for six months ended July 31, 2021,
primarily due to an increase in personnel-related expenses of $20.5 million,
including an increase of $10.7 million in stock-based compensation expense as a
result of increased headcount. In addition, there was an increase of $3.1
million in legal and accounting services to support our growth, and a $1.4
million increase in software and subscription services.
Interest Income, Interest Expense, and Other Income (Expense), Net
                                        Six Months Ended July 31,                   Change
                                            2021                   2020         $           %
                                                     (dollars in thousands)
Interest income                 $           44                   $  196$ (152)       (78) %
Interest expense                $         (782)                  $ (777)$   (5)         1  %
Other income (expense), net     $         (966)                  $  (11)$ (955)      8682  %


Interest income decreased primarily due to decrease in the overall market
interest rate. The decrease in other income (expense), net is primarily due to
net foreign currency exchange losses.
Provision for Income Taxes
                                      Six Months Ended July 31,                  Change
                                           2021                  2020         $          %
                                                  (dollars in thousands)
Provision for income taxes    $         326                     $ 194$ 132        68  %


The provision for income taxes increased primarily as a result of the increase
in foreign taxes related to operations in international subsidiaries.
Liquidity and Capital Resources
In July 2021, upon completion of our IPO and the concurrent private placement,
we received net proceeds of $1.4 billion, after deducting underwriters'
discounts and commissions and estimated offering expenses of $81.6 million. We
did not pay any underwriting discounts or commissions with respect to shares
that were sold in the private placement.
Prior to the IPO, we financed operations primarily through proceeds received
from sales of equity securities, payments received from our customers, and
borrowings under our loan and security agreement, and we have generated
operating losses, as reflected in our accumulated deficit of $481.4 million and
$350.6 million as of July 31, 2021 and January 31, 2021, respectively. As of
July 31, 2021 and January 31, 2021, our principal source of liquidity was cash,
cash equivalents, and short-term investments of $1.7 billion and $395.8 million,
respectively.
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We believe that our existing cash, cash equivalents, and short-term investments
will be sufficient to support working capital and capital expenditure
requirements for at least the next 12 months. Our future capital requirements
will depend on many factors, including our revenue growth rate, the timing and
the amount of cash received from customers, the expansion of sales and marketing
activities, the timing and extent of spending to support research and
development efforts, the price at which we are able to purchase third-party
cloud infrastructure, expenses associated with our international expansion, the
introduction of platform enhancements, and the continuing market adoption of our
platform. In the future, we may enter into arrangements to acquire or invest in
complementary businesses, products, and technologies. We may be required to seek
additional equity or debt financing. In the event that we require additional
financing, we may not be able to raise such financing on terms acceptable to us
or at all. If we are unable to raise additional capital or generate cash flows
necessary to expand our operations and invest in continued innovation, we may
not be able to compete successfully, which would harm our business, operating
results, and financial condition.
The following table shows a summary of our cash flows for the period presented:
                                                     Six Months Ended July 31,
                                                        2021                2020

Net cash used in operating activities          $       (72,791)$ (25,507)
Net cash used in investing activities          $        (7,986)$  (1,819)
Net cash provided by financing activities      $     1,369,322           $ 

153,296



Operating Activities
Our largest source of operating cash is payments received from our customers.
Our primary uses of cash from operating activities are for personnel-related
expenses, sales and marketing expenses, third-party cloud infrastructure
expenses, and overhead expenses. We have generated negative cash flows from
operating activities and have supplemented working capital through net proceeds
from the sale of equity securities.
Cash used in operating activities primarily consists of our net loss adjusted
for certain non-cash items, including stock-based compensation expense,
depreciation and amortization, amortization of deferred contract acquisition
costs, and changes in operating assets and liabilities during each period.
Cash used in operating activities during the six months ended July 31, 2021 was
$72.8 million, primarily consisting of our net loss of $130.8 million, adjusted
for non-cash items of $49.1 million and net cash inflows of $8.9 million
provided by changes in our operating assets and liabilities. The main drivers of
the changes in operating assets and liabilities were a $37.7 million increase in
deferred revenue resulting primarily from increased subscription contracts, a
$6.9 million increase in accrued payroll and benefits due to increased
headcount, a $6.6 million increase in accrued liabilities due to timing of
invoices received from vendors, and a $2.8 million increase in other liabilities
due to deferred credit received from a vendor. These amounts were partially
offset by a $16.5 million increase in deferred contract acquisition costs, a
$11.2 million increase in prepaid expenses and other current assets, primarily
due to annual insurance renewal and prepaid sponsorship costs, a $10.3 million
increase in accounts receivable due to an increase in sales, and a $5.1 million
decrease in accounts payable due to timing of payments.
Cash used in operating activities during the six months ended July 31, 2020 was
$25.5 million, primarily consisting of our net loss of $49.6 million, adjusted
for non-cash items of $13.4 million and net cash inflows of $10.7 million
provided by changes in our operating assets and liabilities. The main drivers of
the changes in operating assets and liabilities were a $9.8 million increase in
deferred revenue resulting primarily from increased subscription contracts, and
a $8.7 million decrease in accounts receivable due to payment from customers.
These amounts were partially offset by a $6.7 million increase in deferred
contract acquisition costs.
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Investing Activities
Cash used in investing activities during the six months ended July 31, 2021 was
$8.0 million, consisting of $3.5 million of cash paid for the acquisition of
Scalyr, $2.8 million of capitalized internal-use software costs, and
$1.7 million of purchases of property and equipment to support additional office
facilities.
Cash used in investing activities during the six months ended July 31, 2020 was
$1.8 million, consisting of $1.3 million of capitalized internal-use software
costs, $0.4 million of purchases of property and equipment to support additional
office facilities and $0.1 million of purchases of intangible assets.
Financing Activities
Cash provided by financing activities during the six months ended July 31, 2021
was $1.4 billion, consisting of $1.4 billion of aggregate net proceeds from our
IPO and the concurrent private placement completed in July 2021, net of
underwriting discounts and commissions, and $5.8 million of proceeds from the
exercise of stock options, partially offset by a $20.0 million repayment of our
revolving line of credit and $5.1 million of payments of deferred offering
costs.
Cash provided by financing activities during the six months ended July 31, 2020
was $153.3 million, consisting of $152.5 million of net proceeds from the
issuance of our Series E redeemable convertible preferred stock, $19.9 million
of net proceeds from our revolving line of credit, and $0.9 million of proceeds
from the exercise of stock options, partially offset by a $20.0 million
repayment of our term loan.
Debt Obligations
In May 2018, we entered into a loan and security agreement with a certain
lender, which was restated in May 2020, or the Amended Loan and Security
Agreement. The Amended Loan and Security Agreement provided a revolving line of
credit of up to $45.0 million, maturing in May 2023. In June 2021, we repaid all
outstanding indebtedness owed pursuant to the Amended Loan and Security
Agreement, terminated the agreement, and closed our revolving line of credit.
Pursuant to our termination of the Amended Loan and Security Agreement, the
related security interests have been removed and the covenants shall be of no
further force and effect.
Contractual Obligations and Commitments
There were no material changes outside of the ordinary course of business in our
contractual obligations and commitments for the three and six months ended July
31, 2021 from the contractual obligations and commitments disclosed in the
section titled "Management's Discussion and Analysis of Financial Condition and
Results of Operations," set forth in our Final Prospectus.
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, such 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.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in accordance with
United States generally accepted accounting policies, or GAAP. The preparation
of condensed consolidated financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue,
expenses, and related disclosures. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances, and we evaluate our estimates and assumptions on an
ongoing basis. Actual results could differ significantly from the estimates made
by management. To the extent that there are differences between our estimates
and actual results, our future financial statement presentation, financial
condition, operating results, and cash flows will be affected.
                                       42

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Table of Contents There have been no material changes to our critical accounting policies and estimates as compared to those described in "Management's Discussion and Analysis of Financial Condition and Results of Operations" set forth in our Final Prospectus.


Recently Issued Accounting Pronouncements
See Note 2, Summary of Significant Accounting Policies, in the notes to our
condensed consolidated financial statements included in Part I, Item I of this
Quarterly Report on Form 10-Q for more information regarding recently issued
accounting pronouncements.

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