Le Lézard
Classified in: Business, Covid-19 virus
Subjects: EARNINGS, Conference Call, Webcast

CrowdStrike Reports Fiscal First Quarter 2021 Financial Results


CrowdStrike Holdings, Inc., (Nasdaq: CRWD), a leader in cloud-delivered endpoint protection, today announced financial results for the first quarter of its fiscal 2021, ended April 30, 2020.

"CrowdStrike finished the quarter with strong momentum and delivered results that exceeded our expectations across the board," said George Kurtz, CrowdStrike's co-founder and chief executive officer. "An increasing number of organizations recognize the power of CrowdStrike's cloud-native Falcon platform to effectively stop breaches as well as simplify their security and I.T. operations stack with a single, lightweight agent. Cybersecurity is mission critical and in the quarter our customers continued to prioritize their cybersecurity investments. With both security administrators and end-users working from home, we believe the rapid shift to a remote workforce has helped increase our leadership. We achieved 88% ARR growth and 105% subscription customer growth year-over-year as we continue to partner with customers to protect and manage their critical workloads in a heightened threat landscape and a rapidly evolving business environment."

Commenting on the company's financial results, Burt Podbere, CrowdStrike's chief financial officer, added, "As a result of our strong execution across the quarter and continued focus on unit economics, we drove substantial operating leverage, reduced GAAP operating loss and achieved non-GAAP operating profitability for the first time in company history. While continuing to aggressively invest in our business, we generated record positive cash flow from operations and free cash flow."

First Quarter Fiscal 2021 Financial Highlights

Recent Highlights

Financial Outlook

CrowdStrike is providing the following guidance for the second quarter of fiscal 2021 (ending July 31, 2020) and increasing its guidance for fiscal year 2021 (ending January 31, 2021):

 

Q2 FY21
Guidance

 

Full Year FY21
Guidance

Total revenue

$185.8 - $190.3 million

 

$761.2 - $772.6 million

Non-GAAP loss from operations

$(3.1) - $0.0 million

 

$(19.2) - $(11.1) million

Non-GAAP net loss

$(3.8) - $(0.7) million

 

$(18.1) - $(9.9) million

Non-GAAP net loss per share, basic and diluted

$(0.02) - $0.00

 

$(0.08) - $(0.05)

Weighted average shares used in computing Non-GAAP net loss per share attributable to common stockholders, basic and diluted

216 million

 

220 million

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

Guidance for non-GAAP financial measures excludes stock-based compensation expense and amortization expense of acquired intangible assets. We have not provided the most directly comparable GAAP measures because certain items are out of our control or cannot be reasonably predicted. Accordingly, a reconciliation for non-GAAP loss from operations, non-GAAP net loss, and non-GAAP net loss per share is not available without unreasonable effort.

Conference Call Information

CrowdStrike will host a conference call for analysts and investors to discuss its earnings results for the first quarter of fiscal 2021 and outlook for its fiscal second quarter and year 2021 today at 2:00 p.m. Pacific time (5:00 p.m. Eastern time). A recorded webcast of the event will also be available for one year on the CrowdStrike Investor Relations website ir.crowdstrike.com.

Date:

 

June 2, 2020

Time:

 

2:00 p.m. Pacific time / 5:00 p.m. Eastern time

Dial-in number:

 

409-937-8967, conference ID: 8038467

Webcast:

 

ir.crowdstrike.com

Forward-Looking Statements

This press release contains forward-looking statements that involve risks and uncertainties, including statements regarding our future financial and operating performance, including our financial outlook for the fiscal second quarter and year 2021. There are a significant number of factors that could cause actual results to differ materially from statements made in this press release, including: the impact of the COVID-19 pandemic on our and our customers' business; our limited operating history; our ability to identify and effectively implement the necessary changes to address execution challenges; risks associated with managing our rapid growth; our limited experience with new product and subscription and support introductions and the risks associated with new products and subscription and support offerings, including the risk of defects, errors, or vulnerabilities; our ability to attract new and retain existing customers; the failure to timely develop and achieve market acceptance of new products and subscriptions as well as existing products and subscriptions and support; rapidly evolving technological developments in the market for security products and subscription and support offerings; length of sales cycles; and general market, political, economic, and business conditions, including those related to COVID-19.

Additional risks and uncertainties that could affect our financial results are included under the captions "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" set forth from time to time in our filings and reports with the Securities and Exchange Commission ("SEC"), including our Annual Report on Form 10-K for the fiscal year ended January 31, 2020 filed with the SEC, dated March 23, 2020, and in our Quarterly Report on Form 10-Q for the quarter ended April 30, 2020, that will be filed with the SEC following this earnings release.

You should not rely on these forward-looking statements, as actual outcomes and results may differ materially from those contemplated by these forward-looking statements as a result of such risks and uncertainties. All forward-looking statements in this press release are based on information available to us as of the date hereof, and we do not assume any obligation to update the forward-looking statements provided to reflect events that occur or circumstances that exist after the date on which they were made.

Use of Non-GAAP Financial Information

We believe that the presentation of non-GAAP financial information provides important supplemental information to management and investors regarding financial and business trends relating to our financial condition and results of operations. For further information regarding these non-GAAP measures, including the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures, please refer to the financial tables below, as well as the "Explanation of Non-GAAP Financial Measures" section of this press release.

Channels for Disclosure of Information

We intend to announce material information to the public through the CrowdStrike Investor Relations website ir.crowdstrike.com, SEC filings, press releases, public conference calls, and public webcasts. We use these channels, as well as social media and our blog, to communicate with our investors, customers, and the public about our company, our offerings, and other issues. It is possible that the information we post on social media and our blog could be deemed to be material information. As such, we encourage investors, the media, and others to follow the channels listed above, including the social media channels listed on our investor relations website, and to review the information disclosed through such channels. Any updates to the list of disclosure channels through which we will announce information will be posted on the investor relations page on our website.

Disclaimer

Gartner Peer Insights Customers' Choice constitute the subjective opinions of individual end-user reviews, ratings, and data applied against a documented methodology; they neither represent the views of, nor constitute an endorsement by, Gartner or its affiliates.

Gartner does not endorse any vendor, product or service depicted in its research publications, and does not advise technology users to select only those vendors with the highest ratings or other designation. Gartner research publications consist of the opinions of Gartner's research organization and should not be construed as statements of fact. Gartner disclaims all warranties, expressed or implied, with respect to this research, including any warranties of merchantability or fitness for a particular purpose.

About CrowdStrike Holdings

CrowdStrike® provides cloud-delivered endpoint protection. Leveraging artificial intelligence (AI), the CrowdStrike Falcon® platform protects customers against cyberattacks on endpoints on or off the network by offering visibility and protection across the enterprise.

Copyright © 2020 CrowdStrike, Inc. All rights reserved. CrowdStrike® and CrowdStrike Falcon® are the registered trademarks of CrowdStrike, Inc. CrowdStrike owns other trademarks and service marks, and may use the brands of third parties to identify their products and services.

CROWDSTRIKE HOLDINGS, INC.

Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
(unaudited)

 

Three Months Ended April 30,

 

2020

 

2019

Revenue

 

 

 

Subscription

$

162,222

 

 

$

85,990

 

Professional services

15,856

 

 

10,087

 

Total revenue

178,078

 

 

96,077

 

Cost of revenue

 

 

 

Subscription (1)(2)

37,244

 

 

23,691

 

Professional services (1)

9,651

 

 

5,582

 

Total cost of revenue

46,895

 

 

29,273

 

Gross profit

131,183

 

 

66,804

 

Operating expenses

 

 

 

Sales and marketing (1)(2)

88,138

 

 

56,843

 

Research and development (1)(2)

40,578

 

 

23,875

 

General and administrative (1)

25,043

 

 

11,861

 

Total operating expenses

153,759

 

 

92,579

 

Loss from operations

(22,576)

 

 

(25,775)

 

Interest expense

(143)

 

 

(1)

 

Other income, net

4,533

 

 

394

 

Loss before provision for income taxes

(18,186)

 

 

(25,382)

 

Provision for income taxes

(1,036)

 

 

(595)

 

Net loss

$

(19,222)

 

 

$

(25,977)

 

Net loss per share attributable to Class A and Class B common stockholders, basic and diluted

$

(0.09)

 

 

$

(0.55)

 

Weighted-average shares used in computing net loss per share attributable to Class A and Class B common stockholders, basic and diluted

213,129

 

 

47,205

 

_____________________________

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

 

Three Months Ended April 30,

 

2020

 

2019

 

(in thousands)

Subscription cost of revenue

$

1,995

 

 

$

265

 

Professional services cost of revenue

971

 

 

103

 

Sales and marketing

8,687

 

 

1,518

 

Research and development

4,900

 

 

681

 

General and administrative

7,085

 

 

1,185

 

Total stock-based compensation expense

$

23,638

 

 

$

3,752

 

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

 

Three Months Ended April 30,

 

2020

 

2019

 

(in thousands)

Subscription cost of revenue

$

62

 

 

$

104

 

Sales and marketing

31

 

 

30

 

Research and development

10

 

 

11

 

Total amortization of purchased intangibles

$

103

 

$

145

 

CROWDSTRIKE HOLDINGS, INC.

Condensed Consolidated Balance Sheets
(in thousands)
(unaudited)

 

April 30,

 

January 31,

 

2020

 

2020

Assets

 

 

 

Current assets:

 

 

 

Cash and cash equivalents

$

1,004,991

 

 

$

264,798

 

Marketable securities

?

 

 

647,266

 

Accounts receivable, net

144,187

 

 

164,987

 

Deferred contract acquisition costs, current

53,410

 

 

42,971

 

Prepaid expenses and other current assets

45,874

 

 

51,614

 

Total current assets

1,248,462

 

 

1,171,636

 

Strategic investments

1,000

 

 

1,000

 

Property and equipment, net

139,096

 

 

136,078

 

Operating lease right-of-use assets

35,738

 

 

?

 

Deferred contract acquisition costs, noncurrent

69,908

 

 

71,235

 

Goodwill

7,652

 

 

7,722

 

Intangible assets, net

419

 

 

527

 

Other assets

17,121

 

 

16,708

 

Total assets

$

1,519,396

 

 

$

1,404,906

 

Liabilities and Stockholders' Equity

 

 

 

Current liabilities:

 

 

 

Accounts payable

$

6,528

 

 

$

1,345

 

Accrued expenses

26,396

 

 

30,355

 

Accrued payroll and benefits

37,458

 

 

36,810

 

Operating lease liabilities, current

6,673

 

 

?

 

Deferred revenue

465,569

 

 

412,985

 

Other current liabilities

13,020

 

 

11,601

 

Total current liabilities

555,644

 

 

493,096

 

Deferred revenue, noncurrent

170,404

 

 

158,183

 

Operating lease liabilities, noncurrent

32,907

 

 

?

 

Other liabilities, noncurrent

7,288

 

 

11,020

 

Total liabilities

766,243

 

 

662,299

 

Commitments and contingencies

 

 

 

Stockholders' Equity

 

 

 

Common stock, Class A and Class B

108

 

 

106

 

Additional paid-in capital

1,409,758

 

 

1,378,479

 

Accumulated deficit

(656,709)

 

 

(637,487)

 

Accumulated other comprehensive income (loss)

(1,004)

 

 

1,009

 

Total CrowdStrike Holdings, Inc. stockholders' equity

752,153

 

 

742,107

 

Non-controlling interest

1,000

 

 

500

 

Total stockholders' equity

753,153

 

 

742,607

 

Total liabilities and stockholders' equity

$

1,519,396

 

 

$

1,404,906

 

CROWDSTRIKE HOLDINGS, INC.

Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)

 

Three Months Ended April 30,

 

2020

 

2019

Operating activities

 

 

 

Net loss

$

(19,222)

 

 

$

(25,977)

 

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

Depreciation and amortization

8,202

 

 

4,873

 

Amortization of intangible assets

103

 

 

146

 

Amortization of deferred contract acquisition costs

13,451

 

 

7,345

 

Non-cash operating lease costs

2,283

 

 

?

 

Change in fair value of redeemable convertible preferred stock warrant liability

?

 

 

1,167

 

Provision for bad debts

149

 

 

(254)

 

Stock-based compensation expense

23,638

 

 

3,752

 

Gain on sale of debt securities, net

(1,347)

 

 

?

 

Amortization (accretion) of marketable securities purchased at a discount

578

 

 

(513)

 

Non-cash interest expense

151

 

 

(424)

 

Changes in operating assets and liabilities

 

 

 

Accounts receivable

20,651

 

 

5,375

 

Deferred contract acquisition costs

(22,563)

 

 

(8,471)

 

Prepaid expenses and other assets

5,332

 

 

(4,049)

 

Accounts payable

4,736

 

 

2,818

 

Accrued expenses and other current liabilities

(1,095)

 

 

(2,407)

 

Accrued payroll and benefits

648

 

 

(6,601)

 

Operating lease liabilities

(2,975)

 

 

?

 

Deferred revenue

64,805

 

 

24,812

 

Other liabilities

1,052

 

 

(177)

 

Net cash provided by operating activities

98,577

 

 

1,415

 

Investing activities

 

 

 

Purchases of property and equipment

(9,694)

 

 

(15,541)

 

Capitalized internal-use software

(1,882)

 

 

(1,984)

 

Purchases of marketable securities

(84,904)

 

 

(51,805)

 

Proceeds from sales of marketable securities

639,586

 

 

4,473

 

Maturities of marketable securities

91,605

 

 

68,995

 

Net cash provided by investing activities

634,711

 

 

4,138

 

Financing activities

 

 

 

Payments of deferred offering costs

?

 

 

(2,392)

 

Proceeds from issuance of common stock upon exercise of stock options

6,393

 

 

1,510

 

Capital contributions from non-controlling interest holders

500

 

 

?

 

Net cash provided by (used in) financing activities

6,893

 

 

(882)

 

 

 

 

 

Effect of foreign exchange rates on cash and cash equivalents

12

 

 

(86)

 

 

 

 

 

Net increase in cash and cash equivalents

740,193

 

 

4,585

 

 

 

 

 

Cash and cash equivalents, beginning of period

264,798

 

 

88,408

 

Cash and cash equivalents, end of period

$

1,004,991

 

 

$

92,993

 

CROWDSTRIKE HOLDINGS, INC.

Non-GAAP Financial Measures with Reconciliation to GAAP
(in thousands, except percentages)
(unaudited)

 

Three Months Ended April 30,

 

2020

 

2019

GAAP subscription revenue

$

162,222

 

 

$

85,990

 

 

 

 

 

GAAP subscription gross profit

$

124,978

 

 

$

62,299

 

Add: Stock-based compensation expense

1,995

 

 

265

 

Add: Amortization of acquired intangible assets

62

 

 

104

 

Non-GAAP subscription gross profit

$

127,035

 

 

$

62,668

 

 

 

 

 

GAAP subscription gross margin

77

%

 

72

%

 

 

 

 

Non-GAAP subscription gross margin

78

%

 

73

%

 

Three Months Ended April 30,

 

2020

 

2019

GAAP total revenue

$

178,078

 

 

$

96,077

 

 

 

 

 

GAAP loss from operations

$

(22,576)

 

 

$

(25,775)

 

Add: Stock-based compensation expense

23,638

 

 

3,752

 

Add: Amortization of acquired intangible assets

103

 

 

145

 

Non-GAAP income (loss) from operations

$

1,165

 

 

$

(21,878)

 

 

 

 

 

GAAP operating margin

(13)

%

 

(27)

%

 

 

 

 

Non-GAAP operating margin

1

%

 

(23)

%

CROWDSTRIKE HOLDINGS, INC.

Non-GAAP Financial Measures with Reconciliation to GAAP (Continued)
(in thousands, except percentages and per share amounts)
(unaudited)

 

Three Months Ended April 30,

 

2020

 

2019

GAAP net loss

$

(19,222)

 

 

$

(25,977)

 

 

 

 

 

Add: Stock-based compensation expense

$

23,638

 

 

$

3,752

 

Add: Amortization of acquired intangible assets

103

 

 

145

 

 

 

 

 

Non-GAAP net income (loss)

$

4,519

 

 

$

(22,080)

 

 

 

 

 

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

213,129

 

 

47,205

 

 

 

 

 

GAAP net loss per share attributable to common stockholders, basic and diluted

$

(0.09)

 

 

$

(0.55)

 

 

 

 

 

Non-GAAP net income (loss) per share attributable to common stockholders, basic and diluted

$

0.02

 

 

$

(0.47)

 

 

Three Months Ended April 30,

 

2020

 

2019

GAAP total revenue

$

178,078

 

 

$

96,077

 

 

 

 

 

GAAP net cash provided by operating activities

98,577

 

 

1,415

 

Less: Purchases of property and equipment

(9,694)

 

 

(15,541)

 

Less: Capitalized internal-use software

(1,882)

 

 

(1,984)

 

Free cash flow

$

87,001

 

 

$

(16,110)

 

 

 

 

 

GAAP net cash used in investing activities

$

634,711

 

 

$

4,138

 

GAAP net cash provided by (used in) financing activities

$

6,893

 

 

$

(882)

 

 

 

 

 

GAAP net cash used in operating activities as a percentage of revenue

55

%

 

1

%

Less: Purchases of property and equipment as a percentage of revenue

(5)

%

 

(16)

%

Less: Capitalized internal-use software as a percentage of revenue

(1)

%

 

(2)

%

Free cash flow margin

49

%

 

(17)

%

CROWDSTRIKE HOLDINGS, INC.

Statements of Operations: GAAP to Non-GAAP Reconciliations
(in thousands)
(unaudited)

 

Three Months Ended April 30,

 

2020

 

2019

GAAP cost of revenue

$

46,895

 

 

$

29,273

 

Less:

 

 

 

Stock based compensation expense

2,966

 

 

368

 

Amortization of acquired intangible assets

62

 

 

104

 

Non-GAAP cost of revenue

$

43,867

 

 

$

28,801

 

 

 

 

 

GAAP subscription gross profit

$

124,978

 

 

$

62,299

 

Add:

 

 

 

Stock based compensation expense

1,995

 

 

265

 

Amortization of acquired intangible assets

62

 

 

104

 

Non-GAAP subscription gross profit

$

127,035

 

 

$

62,668

 

 

 

 

 

GAAP professional services gross profit

$

6,205

 

 

$

4,505

 

Add:

 

 

 

Stock based compensation expense

971

 

 

103

 

Non-GAAP professional services gross profit

$

7,176

 

 

$

4,608

 

 

 

 

 

GAAP sales and marketing operating expenses

$

88,138

 

 

$

56,843

 

Less:

 

 

 

Stock based compensation expense

8,687

 

 

1,518

 

Amortization of acquired intangible assets

31

 

 

30

 

Non-GAAP sales and marketing operating expenses

$

79,420

 

 

$

55,295

 

 

 

 

 

GAAP research and development operating expenses

$

40,578

 

 

$

23,875

 

Less:

 

 

 

Stock based compensation expense

4,900

 

 

681

 

Amortization of acquired intangible assets

10

 

 

11

 

Non-GAAP research and development operating expenses

$

35,668

 

 

$

23,183

 

 

 

 

 

GAAP general and administrative operating expenses

$

25,043

 

 

$

11,861

 

Less:

 

 

 

Stock based compensation expense

7,085

 

 

1,185

 

Non-GAAP general and administrative operating expenses

$

17,958

 

 

$

10,676

 

 

 

 

 

GAAP loss from operations

$

(22,576)

 

 

$

(25,775)

 

Add:

 

 

 

Stock based compensation expense

23,638

 

 

3,752

 

Amortization of acquired intangible assets

103

 

 

145

 

Non-GAAP income (loss) from operations

$

1,165

 

 

$

(21,878)

 

 

 

 

 

CROWDSTRIKE HOLDINGS, INC.

Statements of Operations: GAAP to Non-GAAP Reconciliations (continued)
(in thousands, except per share amounts)
(unaudited)

 

Three Months Ended April 30,

 

2020

 

2019

GAAP net loss

$

(19,222)

 

 

$

(25,977)

 

Add:

 

 

 

Stock based compensation expense

23,638

 

 

3,752

 

Amortization of acquired intangible assets

103

 

 

145

 

Non-GAAP net income (loss)

$

4,519

 

 

$

(22,080)

 

 

 

 

 

Weighted-average shares used in computing basic net income (loss) per share (GAAP and Non-GAAP)

213,129

 

47,205

 

 

 

 

GAAP basic net loss per share

$

(0.09)

 

 

$

(0.55)

 

 

 

 

 

Non-GAAP basic net income (loss) per share

$

0.02

 

 

$

(0.47)

 

 

 

 

 

GAAP diluted loss per common share

$

(0.09)

 

 

$

(0.55)

 

Stock-based compensation

0.10

 

 

?

 

Amortization of acquired intangible assets

?

 

 

?

 

Provision for income taxes (1)

?

 

 

?

 

Adjustment to fully diluted earnings per share (2)

0.01

 

 

?

 

Non-GAAP diluted income (loss) per common share

$

0.02

 

 

$

(0.55)

 

 

 

 

 

Weighted-average shares used in diluted net income (loss) per share calculation:

 

 

 

GAAP

213,129

 

 

47,205

 

Non-GAAP

229,796

 

 

47,205

 

_____________________________

(1) We use our GAAP provision for income taxes for the purpose of determining our non-GAAP income tax expense. The difference between our GAAP and non-GAAP income tax expense represents the excess tax deduction of stock-based compensation expense recognized in foreign jurisdictions. The income tax benefit related to stock-based compensation expense included in the GAAP provision for income taxes was not material for all periods presented.

(2) For periods in which we had diluted non-GAAP net income per share, the sum of the impact of individual reconciling items may not total to diluted Non-GAAP net income per share because the basic share counts used to calculate GAAP net loss per share differ from the diluted share counts used to calculate non-GAAP net income per share and because of rounding differences. The GAAP net loss per share calculation uses a lower share count as it excludes dilutive shares which are included in calculating the non-GAAP net income per share.

Explanation of Non-GAAP Financial Measures

In addition to our results determined in accordance with U.S. generally accepted accounting principles ("GAAP"), we believe the following non-GAAP measures are useful in evaluating our operating performance. We use the following non-GAAP financial information to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that non-GAAP financial information, when taken collectively, may be helpful to investors because it provides consistency and comparability with past financial performance. However, non-GAAP financial information is presented for supplemental informational purposes only, has limitations as an analytical tool, and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP.

Other companies, including companies in our industry, may calculate similarly titled non-GAAP measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measures as tools for comparison. In addition, the utility of free cash flow as a measure of our financial performance and liquidity is limited as it does not represent the total increase or decrease in our cash balance for a given period.

Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures and not rely on any single financial measure to evaluate our business.

Non-GAAP Subscription Gross Profit and Non-GAAP Subscription Gross Margin

We define non-GAAP subscription gross profit and non-GAAP subscription gross margin as GAAP subscription gross profit and GAAP subscription gross margin, respectively, excluding stock-based compensation expense and amortization of acquired intangible assets. We believe non-GAAP subscription gross profit and non-GAAP subscription gross margin provide our management and investors consistency and comparability with our past financial performance and facilitate period-to-period comparisons of operations, as these measures eliminate the effects of certain variables unrelated to our overall operating performance.

Non-GAAP Income (Loss) from Operations

We define non-GAAP income (loss) from operations as GAAP income (loss) from operations excluding stock-based compensation expense, amortization of acquired intangible assets, and acquisition-related expenses. We believe non-GAAP income (loss) from operations provides our management and investors consistency and comparability with our past financial performance and facilitate period-to-period comparisons of operations, as this metric generally eliminates the effects of certain variables unrelated to our overall operating performance.

Non-GAAP Net Income (Loss) per Share Attributable to Common Stockholders, Basic and Diluted

We define non-GAAP net income (loss) per share attributable to common stockholders, as non-GAAP net income (loss) divided by the weighted-average shares outstanding, which includes the dilutive effect of potentially diluted common stock equivalents outstanding during the period. We may periodically incur charges or receive payments in connection with litigation settlements. We exclude these charges and payments received from non-GAAP net income (loss) when associated with a significant settlement because we do not believe they are reflective of ongoing business and operating results.

Free Cash Flow

Free cash flow is a non-GAAP financial measure that we define as net cash provided by (used in) operating activities less purchases of property and equipment and capitalized internal-use software. We monitor free cash flow as one measure of our overall business performance, which enables us to analyze our future performance without the effects of non-cash items and allow us to better understand the cash needs of our business. While we believe that free cash flow is useful in evaluating our business, free cash flow is a non-GAAP financial measure that has limitations as an analytical tool, and free cash flow should not be considered as an alternative to, or substitute for, net cash provided by (used in) operating activities in accordance with GAAP. The utility of free cash flow as a measure of our liquidity is further limited as it does not represent the total increase or decrease in our cash balance for any given period. In addition, other companies, including companies in our industry, may calculate free cash flow differently or not at all, which reduces the usefulness of free cash flow as a tool for comparison.

Explanation of Operational Measures

Annual Recurring Revenue

ARR is calculated as the annualized value of our customer subscription contracts as of the measurement date, assuming any contract that expires during the next 12 months is renewed on its existing terms. To the extent that we are negotiating a renewal with a customer after the expiration of the subscription, we continue to include that revenue in ARR if we are actively in discussion with such an organization for a new subscription or renewal, or until such organization notifies us that it is not renewing its subscription.

Magic Number

Magic Number is calculated by performing the following calculation for the most recent four quarters and taking the average: annualizing the difference between a quarter's Subscription Revenue and the prior quarter's Subscription Revenue, and then dividing the resulting number by the previous quarter's Non-GAAP Sales & Marketing Expense. Magic Number = Average of previous four quarters: ((Quarter Subscription Revenue ? Prior Quarter Subscription Revenue) x 4) / Prior Quarter Non-GAAP Sales & Marketing Expense.


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