ZUORA INC - Quarter Report: 2019 October (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 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 October 31, 2019


☐			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: 001-38451

_____________________________

Zuora, Inc.

(Exact name of registrant as specified in its charter)

_____________________________


Delaware						20-5530976
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification Number)


3050 South Delaware Street, Suite 301, San Mateo, California						94403
(Address of principal executive offices)						(Zip Code)

(800) 425-1281

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

_____________________________

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name on each exchange on which registered
Class A common stock, $0.0001 par value per share	ZUO	New York Stock Exchange

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.

Large accelerated filer

☐

Accelerated filer

☐

Non-accelerated filer

☒

Smaller reporting company

☐

Emerging growth company

☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided 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 November 30, 2019, the Registrant had approximately 93.7 million shares of Class A common stock and 19.5 million shares of Class B common stock outstanding.


		Page
PART I.	FINANCIAL INFORMATION	2
Item 1.	Financial Statements (unaudited)	2
	Condensed Consolidated Balance Sheets as of October 31, 2019 and January 31, 2019	2
	Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended October 31, 2019 and 2018	3
	Condensed Consolidated Statements of Stockholders' Equity for the Three and Nine Months Ended October 31, 2019 and 2018	4
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended October 31, 2019 and 2018	6
	Notes to Unaudited Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	41
Item 4.	Controls and Procedures	41

PART II.	OTHER INFORMATION	43
Item 1.	Legal Proceedings	43
Item 1A.	Risk Factors	43
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	74
Item 6.	Exhibits	75
Signatures			76

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Unless the context otherwise requires, references in this Quarterly Report on Form 10-Q (Form 10-Q) to “Zuora,” “Company,” “our,” “us,” and “we” refer to Zuora, Inc. and, where appropriate, its consolidated subsidiaries.

This Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. All statements contained in this Form 10-Q, other than statements of historical fact, including statements regarding our future operating results and financial position, our business strategy and plans, market growth, and our objectives for future operations, are forward-looking statements. Words such as “believes,” “may,” “will,” “estimates,” “potential,” “continues,” “anticipates,” “intends,” “expects,” “could,” “would,” “projects,” “plans,” “targets,” and variations of such words and similar expressions are intended to identify forward-looking statements.

Forward-looking statements contained in this Form 10-Q include, but are not limited to, statements about our expectations regarding:

•trends in revenue, cost of revenue, and gross margin;

•our investments in our platform and the cost of third-party hosting fees;

•trends in operating expenses, including research and development expense, sales and marketing expense, and general and administrative expense, and expectations regarding these expenses as a percentage of revenue;

•our existing cash and cash equivalents, investment balances, funds available under our loan and security agreement, and cash provided by subscriptions to our platform and related professional services being sufficient to meet our working capital and capital expenditure needs for at least the next 12 months; and

•other statements regarding our future operations, financial condition, and prospects and business strategies.

Such forward-looking statements are based on our expectations as of the date of this filing and are subject to a number of risks, uncertainties and assumptions, including but not limited to, risks detailed in the “Risk Factors” section of this Form 10-Q. Readers are urged to carefully review and consider the various disclosures made in this Form 10-Q and in other documents we file from time to time with the Securities and Exchange Commission (SEC) that disclose risks and uncertainties that may affect our business. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for us to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and circumstances discussed in this Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, performance or achievements. In addition, the forward-looking statements in this Form 10-Q are made as of the date of this filing, and we do not undertake, and expressly disclaim any duty, to update such statements for any reason after the date of this Form 10-Q or to conform statements to actual results or revised expectations, except as required by law.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

ZUORA, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

(unaudited)


	October 31, 2019		January 31, 2019
			As Adjusted¹
Assets
Current assets:
Cash and cash equivalents	$	64,621	$	67,940
Short-term investments	105,777		107,908
Accounts receivable, net of allowance for doubtful accounts of $2,622 and $2,522 as of October 31, 2019 and January 31, 2019, respectively	60,073		58,258
Restricted cash, current portion	—		400
Deferred commissions, current portion	8,981		8,616
Prepaid expenses and other current assets	16,157		14,632
Total current assets	255,609		257,754
Property and equipment, net	28,392		19,625
Restricted cash, net of current portion	—		1,684
Purchased intangibles, net	6,043		7,396
Deferred commissions, net of current portion	18,044		18,664
Goodwill	17,632		17,632
Other assets	5,569		3,292
Total assets	$	331,289	$	326,047
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	1,719	$	1,512
Accrued expenses and other current liabilities	17,158		14,210
Accrued employee liabilities	27,227		22,603
Debt, current portion	4,447		2,963
Deferred revenue, current portion	94,010		86,784
Total current liabilities	144,561		128,072
Debt, net of current portion	7,187		10,494
Deferred revenue, net of current portion	209		112
Deferred tax liabilities	1,877		1,877
Other long-term liabilities	9,712		3,678
Total liabilities	163,546		144,233
Commitments and contingencies (note 16)
Stockholders’ equity:
Class A common stock	8		8
Class B common stock	3		3
Additional paid-in capital	534,642		488,776
Accumulated other comprehensive income	186		481
Accumulated deficit	(367,096)		(307,454)
Total stockholders’ equity	167,743		181,814
Total liabilities and stockholders’ equity	$	331,289	$	326,047

(1) See Note 2. Summary of Significant Accounting Policies and Recent Accounting Pronouncements for a summary of adjustments related to the adoption of Topic 606.

See notes to unaudited condensed consolidated financial statements.

ZUORA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands, except per share data)

(unaudited)


	Three Months Ended October 31,						Nine Months Ended October 31,
	2019		2018		2019		2018
			As Adjusted¹				As Adjusted¹
Revenue:
Subscription	$	54,038	$	43,083	$	151,996	$	119,849
Professional services	17,784		18,273		53,668		51,802
Total revenue	71,822		61,356		205,664		171,651
Cost of revenue:
Subscription	13,858		10,987		38,589		31,273
Professional services	20,443		19,190		61,445		53,569
Total cost of revenue	34,301		30,177		100,034		84,842
Gross profit	37,521		31,179		105,630		86,809
Operating expenses:
Research and development	17,903		14,282		53,662		39,667
Sales and marketing	28,027		24,849		80,818		71,008
General and administrative	10,597		9,579		32,366		27,553
Total operating expenses	56,527		48,710		166,846		138,228
Loss from operations	(19,006)		(17,531)		(61,216)		(51,419)
Interest and other income (expense), net	1,190		633		2,294		(1,218)
Loss before income taxes	(17,816)		(16,898)		(58,922)		(52,637)
Income tax provision	(421)		(326)		(720)		(921)
Net loss	(18,237)		(17,224)		(59,642)		(53,558)
Comprehensive loss:
Foreign currency translation adjustment	(141)		(679)		(416)		(341)
Unrealized gain (loss) on available-for-sale securities	75		(32)		121		(32)
Comprehensive loss	$	(18,303)	$	(17,935)	$	(59,937)	$	(53,931)
Net loss per share attributable to common stockholders, basic and diluted	$	(0.16)	$	(0.16)	$	(0.54)	$	(0.62)
Weighted-average shares outstanding used in calculating net loss per share attributable to common stockholders, basic and diluted	111,835		106,049		110,436		85,820

(1) See Note 2. Summary of Significant Accounting Policies and Recent Accounting Pronouncements for a summary of adjustments related to the adoption of Topic 606.

See notes to unaudited condensed consolidated financial statements.

ZUORA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(in thousands)

(unaudited)


	Nine Months Ended October 31, 2019
													Accumulated			Total
	Class A				Class B						Additional		Other		Accumulated	Stockholders'
	Common Stock				Common Stock						Paid-in		Comprehensive		Deficit	Equity
	Shares	Amount		Shares	Amount		Capital		Income		As Adjusted¹		As Adjusted¹
Balance, January 31, 2019	77,119	$	8	32,575	$	3	$	488,776	$	481	$	(307,454)	$	181,814
Conversion of Class B common stock to Class A common stock	15,477	—		(15,477)	—		—		—		—		—
Issuance of common stock upon exercise of stock options, net of repurchases	(15)	—		2,217	—		8,981		—		—		8,981
Lapse of restrictions on common stock related to early exercise of stock options	—	—		—	—		365		—		—		365
Purchases of common stock under the ESPP	422	—		—	—		5,069		—		—		5,069
RSU releases	595	—		147	—		—		—		—		—
Stock-based compensation	—	—		—	—		31,413		—		—		31,413
Deferred offering costs	—	—		—	—		38		—		—		38
Other comprehensive loss	—	—		—	—		—		(295)		—		(295)
Net loss	—	—		—	—		—		—		(59,642)		(59,642)
Balance, October 31, 2019	93,598	$	8	19,462	$	3	$	534,642	$	186	$	(367,096)	$	167,743

	Three Months Ended October 31, 2019
									Accumulated
	Class A				Class B						Additional		Other			Total
	Common Stock				Common Stock						Paid-in		Comprehensive		Accumulated	Stockholders'
	Shares	Amount		Shares	Amount		Capital		Income		Deficit		Equity
Balance, July 31, 2019	87,875	$	8	24,422	$	3	$	520,812	$	252	$	(348,859)	$	172,216
Conversion of Class B common stock to Class A common stock	5,413	—		(5,413)	—		—		—		—		—
Issuance of common stock upon exercise of stock options, net of repurchases	(7)	—		406	—		1,933		—		—		1,933
Lapse of restrictions on common stock related to early exercise of stock options	—	—		—	—		59		—		—		59
RSU releases	317	—		47	—		—		—		—		—
Stock-based compensation	—	—		—	—		11,838		—		—		11,838
Other comprehensive loss	—	—		—	—		—		(66)		—		(66)
Net loss	—	—		—	—		—		—		(18,237)		(18,237)
Balance, October 31, 2019	93,598	$	8	19,462	$	3	$	534,642	$	186	$	(367,096)	$	167,743

(1) See Note 2. Summary of Significant Accounting Policies and Recent Accounting Pronouncements for a summary of adjustments related to the adoption of Topic 606.

See notes to unaudited condensed consolidated financial statements.

ZUORA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)

(in thousands)

(unaudited)


	Nine Months Ended October 31, 2018
														Accumulated				Total
	Convertible				Class A					Class B						Additional		Related		Other	Accumulated	Stockholders'
	Preferred Stock				Common Stock					Common Stock						Paid-in		Party		Comprehensive	Deficit	Equity
	Shares	Amount		Shares	Amount		Shares	Amount		Capital		Receivable		Income		As Adjusted¹		As Adjusted¹
Balance, January 31, 2018	61,984	$	6	—	$	—	30,524	$	3	$	286,152	$	(1,281)	$	471	$	(234,713)	$	50,638
Conversion of convertible preferred stock to common stock in connection with initial public offering	(61,984)	(6)		—	—		61,984	6		—		—		—		—		—
Issuance of common stock in connection with initial public offering, net of underwriting discounts and issuance costs	—	—		12,650	1		—	—		159,999		—		—		—		160,000
Conversion of Class B common stock to Class A common stock	—	—		59,478	6		(59,478)	(6)		—		—		—		—		—
Issuance of common stock upon exercise of stock options, net of repurchases	—	—		369	—		2,543	1		7,012		—		—		—		7,013
RSU releases	—	—		106	—		212	—		—		—		—		—		—
Lapse of restrictions on common stock related to early exercise of stock options	—	—		—	—		—	—		1,751		—		—		—		1,751
Deferred offering costs	—	—		—	—		—	—		(543)		—		—		—		(543)
Stock-based compensation	—	—		—	—		—	—		17,722		—		—		—		17,722
Related party notes receivable	—	—		—	—		—	—		—		1,281		—		—		1,281
Other comprehensive loss	—	—		—	—		—	—		—		—		(373)		—		(373)
Net loss	—	—		—	—		—	—		—		—		—		(53,558)		(53,558)
Balance, October 31, 2018	—	$	—	72,603	$	7	35,785	$	4	$	472,093	$	—	$	98	$	(288,271)	$	183,931

	Three Months Ended October 31, 2018
														Accumulated				Total
	Convertible				Class A					Class B						Additional		Related		Other	Accumulated	Stockholders'
	Preferred Stock				Common Stock					Common Stock						Paid-in		Party		Comprehensive	Deficit	Equity
	Shares	Amount		Shares	Amount		Shares	Amount		Capital		Receivable		Income		As Adjusted¹		As Adjusted¹
Balance, July 31, 2018	—	$	—	44,970	$	4	62,680	$	6	$	461,804	$	(5,657)	$	809	$	(271,047)	$	185,919
Conversion of Class B common stock to Class A common stock	—	—		27,239	3		(27,239)	(2)		—		—		—		—		1
Issuance of common stock upon exercise of stock options	—	—		369	—		297	—		2,264		—		—		—		2,264
RSU releases	—	—		25	—		47	—		—		—		—		—		—
Lapse of restrictions on common stock related to early exercise of stock options	—	—		—	—		—	—		614		—		—		—		614
Deferred offering costs	—	—		—	—		—	—		(10)		—		—		—		(10)
Stock-based compensation	—	—		—	—		—	—		7,459		—		—		—		7,459
Related party notes receivable	—	—		—	—		—	—		(38)		5,657		—		—		5,619
Other comprehensive loss	—	—		—	—		—	—		—		—		(711)		—		(711)
Net loss	—	—		—	—		—	—		—		—		—		(17,224)		(17,224)
Balance, October 31, 2018	—	$	—	72,603	$	7	35,785	$	4	$	472,093	$	—	$	98	$	(288,271)	$	183,931

(1) See Note 2. Summary of Significant Accounting Policies and Recent Accounting Pronouncements for a summary of adjustments related to the adoption of Topic 606. The cumulative effect adjustment to Accumulated Deficit and Total Stockholders' Equity related to the adoption of Topic 606 as of January 31, 2018 was a credit of $24.0 million primarily related to deferred commissions.

See notes to unaudited condensed consolidated financial statements.

ZUORA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)


	Nine Months Ended October 31,
	2019		2018
			As Adjusted¹
Cash flows from operating activities:
Net loss	$	(59,642)	$	(53,558)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	8,399		6,628
Stock-based compensation	31,413		17,722
Provision for doubtful accounts	3,229		4,518
Amortization of deferred commissions	7,049		5,769
Other	(1,268)		68
Changes in operating assets and liabilities:
Accounts receivable	(5,044)		(6,133)
Prepaid expenses and other assets	(3,521)		(4,254)
Deferred commissions	(6,794)		(8,923)
Accounts payable	(228)		26
Accrued expenses and other liabilities	6,861		4,211
Accrued employee liabilities	4,624		6,815
Deferred revenue	7,323		10,519
Net cash used in operating activities	(7,599)		(16,592)
Cash flows from investing activities:
Purchases of property and equipment	(12,878)		(10,621)
Purchases of short-term investments	(155,936)		(97,118)
Sales of short-term investments	3,496		—
Maturities of short-term investments	155,800		—
Business combinations, net of cash acquired	—		(247)
Net cash used in investing activities	(9,518)		(107,986)
Cash flows from financing activities:
Payments under capital leases	—		(1,336)
Proceeds from issuance of common stock upon exercise of stock options	8,981		9,026
Payments of offering costs	—		(4,399)
Proceeds of issuance of common stock under employee stock purchase plan	5,069		—
Proceeds from initial public offering, net of underwriters’ discounts and commissions	—		164,703
Payments under related party notes receivable	—		(4,344)
Repayments of related party notes receivable	—		5,625
Repurchases of unvested common stock	(70)		(10)
Principal payments on long-term debt	(1,850)		(834)
Payments related to business combination	—		(12,558)
Net cash provided by financing activities	12,130		155,873
Effect of exchange rates on cash and cash equivalents and restricted cash	(416)		(341)
Net (decrease) increase in cash and cash equivalents and restricted cash	(5,403)		30,954
Cash and cash equivalents and restricted cash, beginning of period	70,024		53,363
Cash and cash equivalents and restricted cash, end of period	$	64,621	$	84,317
Supplemental disclosure of non-cash investing and financing activities:
Lapse of restrictions on common stock related to early exercise of stock options	$	365	$	1,751
Property and equipment purchases accrued or in accounts payable	$	3,056	$	367
Deferred offering costs payable or accrued but not paid	$	—	$	210
Property and equipment acquired under capital leases	$	—	$	2,392
Reconciliation of cash and cash equivalents and restricted cash within the unaudited condensed consolidated balance sheets to the amounts shown in the unaudited condensed consolidated statements of cash flows above:
Cash and cash equivalents	$	64,621	$	77,883
Restricted cash, current	—		4,350
Restricted cash, net of current portion	—		2,084
Total cash and cash equivalents and restricted cash	$	64,621	$	84,317

(1) See Note 2. Summary of Significant Accounting Policies and Recent Accounting Pronouncements for a summary of adjustments related to the adoption of Topic 606.

See notes to unaudited condensed consolidated financial statements.

ZUORA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1. Overview and Basis of Presentation

Description of Business

Zuora, Inc. was incorporated in the state of Delaware in 2006 and began operations in 2007. Zuora’s fiscal year ends on January 31. Zuora is headquartered in San Mateo, California.

The Company provides software that enables companies across multiple industries and geographies to launch, manage or transform to a subscription business model. Architected specifically for dynamic, recurring subscription business models, Zuora's cloud-based software functions as an intelligent subscription management hub that automates and orchestrates the entire subscription order-to-revenue process, including billing and revenue recognition. Zuora's solution enables businesses to easily change pricing and packaging for products and services to grow and scale, to efficiently comply with revenue recognition standards, and to build meaningful relationships with their subscribers.

References to Zuora, “Company”, “our”, or “we” in these notes refer to Zuora, Inc. and its subsidiaries on a consolidated basis.

Initial Public Offering

In April 2018, the Company completed an initial public offering (IPO), in which the Company issued and sold an aggregate of 12.7 million shares of its newly authorized Class A common stock at a price to the public of $14.00 per share. The shares sold included 1.7 million shares pursuant to the exercise by the underwriters of an option to purchase additional shares. The Company received aggregate net proceeds of $159.7 million from the IPO after deducting underwriting discounts and commissions and payments of offering costs.

Prior to the completion of the IPO, 30.5 million shares of common stock then outstanding were reclassified as Class B common stock, and all shares of convertible preferred stock outstanding immediately prior to the IPO were converted into 62.0 million shares of Class B common stock on a one-to-one basis.

Basis of Presentation and Principles of Consolidation

Effective February 1, 2019, the Company adopted the requirements of Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606) issued by the Financial Accounting Standards Board (FASB), as Discussed in Note 2. Summary of Significant Accounting Policies and Recent Accounting Pronouncements. Topic 606 also includes Subtopic 340-40, Other Assets and Deferred Costs - Contracts with Customers which requires the deferral of incremental costs of obtaining a contract with a customer. Collectively, the Company refers to Topic 606 and Subtopic 340-40 as "Topic 606" or the "new standard." The Company adopted the standard using the full retrospective adoption method. Consequently, all amounts and disclosures set forth in this Quarterly Report on Form 10-Q, including historical amounts, have been adjusted on a full retrospective basis to comply with the new standard.

The accompanying unaudited condensed consolidated financial statements, which include the accounts of the Company and its wholly owned subsidiaries, have been prepared in conformity with accounting principles generally accepted in the United States (GAAP) and applicable rules and regulations of the Securities and Exchange Commission (SEC) regarding interim financial reporting. All intercompany balances and transactions have been eliminated in consolidation.

The unaudited condensed consolidated balance sheet as of January 31, 2019 included herein was derived from the audited financial statements as of that date, but does not include all disclosures including certain notes required by GAAP on an annual reporting basis. The unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the balance sheets, statements of comprehensive loss, statements of cash flows and statements of stockholders' equity for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full fiscal year ending January 31, 2020 or any future period.

The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2019, filed with the Securities and Exchange Commission (SEC) on April 18, 2019 (Annual Report).

Use of Estimates

The preparation of unaudited condensed consolidated financial statements in conformity with GAAP requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the unaudited condensed consolidated financial statements, as well as reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from those estimates. The Company’s most significant estimates and assumptions are related to revenue recognition with respect to the determination of the standalone selling prices for the Company’s services; estimates of the useful life of benefits of commissions; determination of the fair value of the Company’s common stock for valuation of the Company’s stock-based awards issued prior to the completion of the IPO; valuation of the Company’s stock-based awards; estimates of allowance for doubtful accounts; estimates of the fair value of goodwill, intangible assets and other long-lived assets; and the valuation of deferred income tax assets and contingencies. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Accordingly, actual results may differ materially from these estimates under different assumptions or conditions.

Note 2. Summary of Significant Accounting Policies and Recent Accounting Pronouncements

The Company’s significant accounting policies are discussed in Note 2. Summary of Significant Accounting Policies and Recent Accounting Pronouncements in the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2019, filed with the Securities and Exchange Commission (SEC) on April 18, 2019. There have been no significant changes to these policies during the nine months ended October 31, 2019, except for the accounting policies for revenue recognition and deferred commissions that were updated as a result of adopting Topic 606, as discussed below.

Revenue Recognition

Adoption of Topic 606

Effective February 1, 2019, the Company adopted the provisions and expanded disclosure requirements of Topic 606 using the full retrospective method. Accordingly, the results for the prior comparable period were adjusted to conform to the current period measurement and recognition of results.

The impact of Topic 606 on reported revenue results was not material. Topic 606, however, modified the Company’s revenue recognition policy in the following ways:

•Removal of the limitation on contingent revenue, which can result in revenue for certain multi-element customer contracts being recognized differently during the contract term;

•Allocation of discounts over the entire committed contract period, which have affected transactions where customer commitments increased or where discounts fluctuated over the contract term;

•The treatment of revenue recognition related to on-premise term licenses. The Company has a limited number of on-premise term licenses. Under Topic 606, the Company recognizes the revenue on these licenses when the software is delivered to the customer, which is typically at the beginning of the contract term. In the past the Company recognized revenue for on-premise term licenses ratably over the contract term; and

•Allocation between periods and between subscription revenues and professional services revenues driven by changes mandated by Topic 606 for the treatment of material rights.

Revenue Recognition Policy

The Company generates revenue primarily from two sources: (1) subscription services, which is comprised of revenue from subscription fees from customers accessing the Company’s cloud-based software; and (2) professional services and other revenue.

With the adoption of Topic 606, revenue is recognized upon satisfaction of performance obligations in an amount that reflects the consideration the Company expects to receive in exchange for those products or services.

The Company determines the amount of revenue to be recognized through application of the following steps:

◦Identification of the contract, or contracts with a customer;

◦Identification of the performance obligations in the contract;

◦Determination of the transaction price;

◦Allocation of the transaction price to the performance obligations in the contract; and

◦Recognition of revenue when or as the Company satisfies the performance obligations.

The Company’s subscription service arrangements are typically non-cancelable for a pre-specified subscription term and do not typically contain refund-type provisions.

Subscription Services

Subscription services revenues are primarily comprised of fees that provide customers with access to the Company's cloud-based software during the term of the arrangement. Cloud-based services typically allow customers to use the Company's multi-tenant software without taking possession of the software. Revenue is generally recognized ratably over the contract term beginning on the commencement date of each contract, which is the date the Company’s cloud-based software is made available to customers.

Leeyo Legacy On-Premise Arrangements

The Company acquired Leeyo Software, Inc. (Leeyo) in May 2017 and inherited some legacy on-premise license arrangements. These licenses are primarily term based and bundled with related maintenance (PCS). Revenue for the software license is generally recognized at the beginning of the contract term and the PCS is recognized ratably over the contract term.

Subscription and on-premise license agreements generally have terms ranging from one to three years and are invoiced to customers annually or quarterly in advance upon execution of the contract or subsequent renewals. Amounts that have been invoiced are recorded in accounts receivable and in either deferred revenue or revenue in the Company's consolidated financial statements, depending on whether the underlying performance obligation has been satisfied.

Professional Services and Other Revenue

Professional services and other revenues consists primarily of fees from consultation services to support configuration, data migration, and integration. The Company’s professional services contracts are either on a time and materials or fixed fee basis. The underlying revenues are recognized as the services are rendered for time and materials contracts or on a proportional performance basis for fixed price contracts. Training revenues are recognized as the services are performed.

Contracts with Multiple Performance Obligations

The Company enters into contracts with its customers that often include cloud-based software subscriptions and professional services performance obligations. A performance obligation is a commitment in a contract with a customer to transfer products or services that are distinct. Determining whether products and services are distinct

performance obligations that should be accounted for separately or combined as one unit of accounting may require significant judgment.

The Company's cloud-based software products are distinct as such services are often sold separately. In determining whether professional services are distinct, the Company considers the following factors for each professional services agreement: availability of the services from other vendors, the nature of the professional services, the timing of when the professional services contract was signed in comparison to the cloud-based software, start date and the contractual dependence of the cloud-based software on the customer’s satisfaction with the professional services work. To date, the Company has concluded that all of the professional services included in contracts with multiple performance obligations are distinct.

The Company allocates the transaction price to each performance obligation on a relative standalone selling price (SSP) basis. The SSP is the estimated price at which the Company would sell a promised product or service separately to a customer. Judgment is required to determine the SSP for each distinct performance obligation.

The Company establishes SSP for both its subscription services and professional services elements primarily by considering the actual sales prices of the element when sold on a stand-alone basis or when sold together with other elements.

When the Company is unable to rely on actual observable sales inputs, it determines SSP based on overarching pricing objectives and strategies, taking into consideration market conditions and other factors, including customer size, volume purchased, market and industry conditions, product-specific factors and historical sales of the deliverables.

Deferred commissions

The Company capitalizes sales commission expenses and associated payroll taxes paid to internal sales personnel that are incremental to obtaining customer contracts. These costs are deferred and then amortized over the expected period of benefit, which is estimated to be five years. The Company has determined the period of benefit taking into consideration several factors including the expected subscription term and expected renewals of its customer contracts, the duration of its relationships with its customers, and its technology. Amortization expense is included in Sales and marketing in the accompanying unaudited condensed consolidated statements of comprehensive loss.

Contract Assets

Subscription services revenue is generally recognized ratably over the contract term beginning on the commencement date of each contract. Under Topic 606, the timing and amount of revenue recognition may differ in certain situations from the revenue recognized under previous accounting guidance, which included a contingent revenue rule that limited subscription revenue to the customer invoice amount for the period of service (collectively billings). Under Topic 606, the Company records a contract asset when revenue recognized on a contract exceeds the billings for the period. Contract assets are included in Prepaid expenses and other current assets and Other assets in the Company's unaudited condensed consolidated balance sheets. The total value of the Company's contract assets was $4.5 million as of October 31, 2019 and $4.2 million as of January 31, 2019.

For further detail regarding the Company's remaining performance obligations please refer to Note 10. Deferred Revenue and Performance Obligations.

Recent Accounting Pronouncements—Not Yet Adopted

Under the Jumpstart Our Business Startups Act (JOBS Act), the Company currently qualifies as an “emerging growth company” and has elected to use the extended transition period for complying with new or revised accounting standards under the JOBS Act. However, the Company will no longer qualify as an emerging growth company beginning as of January 31, 2020 and therefore the expected adoption dates for the ASUs discussed below reflect the public business entity effective dates.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which supersedes the guidance in topic ASC 840, Leases. Under the new standard, lessees will be required to record a right-of-use asset and a lease liability for all leases, with certain exceptions, on their balance sheets. The Company expects to adopt ASU 2016-02 using the modified retrospective method beginning with its Annual Report on Form 10-K for the fiscal year ending January 31, 2020, including interim period disclosures within that filing. The Company is currently evaluating its lease portfolio and expects the adoption of this standard to have a material impact on its consolidated balance sheets.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets. The new model uses a forward-looking expected loss method rather than the incurred loss model for recognizing credit losses. Additionally, any expected credit losses are to be reflected as allowances rather than reductions in the amortized cost of available-for-sale debt securities. The Company expects to adopt ASU 2016-13 beginning with its fiscal year ending January 31, 2021, including interim periods within that fiscal year. The Company is currently evaluating the impact of adopting this standard and does not expect its adoption to have a significant impact on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which amends ASC 820, Fair Value Measurement. The standard no longer requires disclosure of the amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but public companies will be required to disclose the range and weighted-average used to develop significant unobservable inputs for Level 3 fair value measurements. The Company expects to adopt ASU 2018-13 beginning with its fiscal year ending January 31, 2021, including interim periods within that fiscal year. The Company is currently evaluating the impact of adopting this standard and does not expect the adoption to have a significant impact on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. This standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The Company expects to adopt ASU 2018-15 beginning with its fiscal year ending January 31, 2021, including interim periods within that fiscal year. The Company is currently evaluating the impact of adopting this standard and does not expect the adoption to have a significant impact on its consolidated financial statements.

Recent Accounting Pronouncements—Adopted

In January 2016, the FASB issued ASU No. 2016-01 (Subtopic 825-10), Financial Instruments—Overall: Recognition and Measurement of Financial Assets and Financial Liabilities, which primarily affects the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the FASB clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The accounting for other financial instruments, such as loans, investments in debt securities, and financial liabilities is largely unchanged. The Company adopted ASU 2016-01 effective February 1, 2019 and the adoption did not have a significant impact on its unaudited condensed consolidated financial statements.

In February 2018, the FASB issued ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. Under existing GAAP, the effects of changes in tax rates and laws on deferred tax balances are recorded as a component of income tax expense in the period in which the law was enacted. When deferred tax balances related to items originally recorded in accumulated other comprehensive income are adjusted, certain tax effects become stranded in accumulated other comprehensive income. The amendments in ASU 2018-02 allow a reclassification from accumulated other comprehensive income to retained earnings (accumulated deficit) for stranded income tax effects resulting from the Tax Cuts and Jobs Act (the Tax Reform Act). The amendments in this ASU also require certain disclosures about stranded income tax effects. The Company’s provisional adjustments recorded in the fiscal year ended January 31, 2018 to account for the impact of the Tax Reform Act did not result in stranded tax effects. The Company adopted ASU 2018-02 effective February 1, 2019, and the adoption of the standard did not have a significant impact on its unaudited condensed consolidated financial statements.

In June 2018, the FASB issued ASU No. 2018-07, Compensation—Stock Compensation (Topic 718) Improvements to Nonemployee Share-Based Payment Accounting. The guidance expands the scope of the topic to include share-based payments granted to non-employees in exchange for goods or services. Upon adoption, the fair value of awards granted to non-employees will be determined as of the grant date, which will be recognized over the service period. Previous guidance required the awards to be remeasured at fair value periodically when determining the related expense. The Company adopted ASU 2018-07 effective February 1, 2019 and the adoption of the standard did not have an impact on its unaudited condensed consolidated financial statements.

In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certain disclosure requirements that have become redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders' equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders' equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. The Company adopted this release effective February 1, 2019.

In May 2014, the Financial Accounting Standards Board (FASB) issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) and has modified the standard thereafter. This standard replaces existing revenue recognition rules with a comprehensive revenue measurement and recognition standard and expanded disclosure requirements. The Company adopted ASU 2014-09 ("Topic 606" or the "new standard"), effective February 1, 2019, using the full retrospective method of transition.

The impacts of adopting Topic 606 on the Company's consolidated financial statements is shown in the tables below. The primary impacts on revenue are an increased number of allocations of arrangement consideration between subscription and professional services and the recognition of discounts evenly across the term for multiple year subscription arrangements. Both of these impacts are primarily due to the elimination of the contingent revenue rule. There was an impact due to a change in the recognition of legacy on-premise term deals inherited during the Company's acquisition of Leeyo which requires more revenue being recognized at the beginning of the license term as opposed to evenly over the term. In addition to impacting the way that the Company recognizes revenue, the new standard also impacts the accounting for incremental commission costs of obtaining contracts. Under the new standard, the Company defers all incremental commission costs to obtain the contract and amortize these costs on a straight-line basis over the period of economic benefit which has been determined to be five years.

The adoption of Topic 606 did not have a significant impact on U.S. taxes due to the full valuation allowance against the deferred tax asset. However, the deferral of incremental commissions for foreign employees increased foreign deferred tax liabilities which will be realized over the period of the deferred commission amortization.

The adoption of Topic 606 required the Company to record a contract asset related to certain transactions acquired as part of the acquisition of Leeyo in the second quarter of fiscal 2018. The creation of this new contract asset affected the valuation of customer relationships intangibles recorded at the time of the acquisition. Consequently, the Company reduced the value of the customer intangible and decreased goodwill in the unaudited adjusted condensed consolidated balance sheet as a result of the adoption of Topic 606.

The following table summarizes the adjustments on affected line items of the unaudited adjusted condensed consolidated balance sheet resulting from the adoption of Topic 606 (in thousands):


	January 31, 2019
	As Reported Under ASC 605		Topic 606 Adjustment		As Adjusted Under Topic 606
Assets
Deferred commissions, current portion	$	—	$	8,616	$	8,616
Prepaid expenses and other current assets¹	10,414		4,218		14,632
Deferred commissions, net of current portion	—		18,664		18,664
Purchased intangibles, net	9,042		(1,646)		7,396
Goodwill	20,861		(3,229)		17,632
Liabilities
Deferred revenue, current portion	90,565		(3,781)		86,784
Deferred revenue, net of current portion	406		(294)		112
Deferred tax liabilities	—		1,877		1,877
Equity
Accumulated deficit	(336,275)		28,821		(307,454)

(1) Prepaid expenses and other current assets includes the impact of contract assets.

The following tables summarize the adjustments on affected line items of the unaudited adjusted condensed consolidated statements of comprehensive loss resulting from the adoption of Topic 606 (in thousands):


	Three Months Ended October 31, 2018
	As Reported Under ASC 605		Topic 606 Adjustment		As Adjusted Under Topic 606
Revenue
Subscription	$	44,485	$	(1,402)	$	43,083
Professional services	17,152		1,121		18,273
Total revenues	61,637		(281)		61,356
Gross profit	31,460		(281)		31,179
Sales and marketing	25,896		(1,047)		24,849
Total operating expenses	49,757		(1,047)		48,710
Loss from operations	(18,297)		766		(17,531)
Loss before income taxes	(17,664)		766		(16,898)
Income tax provision	(225)		(101)		(326)
Net loss	(17,889)		665		(17,224)
Comprehensive loss	(18,600)		665		(17,935)
Net loss per share attributable to common stockholders, basic and diluted	(0.17)		0.01		(0.16)


	Nine Months Ended October 31, 2018
	As Reported Under ASC 605		Topic 606 Adjustment		As Adjusted Under Topic 606
Revenue
Subscription	$	122,069	$	(2,220)	$	119,849
Professional services	49,066		2,736		51,802
Total revenues	171,135		516		171,651
Gross profit	86,293		516		86,809
Sales and marketing	74,162		(3,154)		71,008
Total operating expenses	141,382		(3,154)		138,228
Loss from operations	(55,089)		3,670		(51,419)
Loss before income taxes	(56,307)		3,670		(52,637)
Income tax provision	(616)		(305)		(921)
Net loss	(56,923)		3,365		(53,558)
Comprehensive loss	(57,296)		3,365		(53,931)
Net loss per share attributable to common stockholders, basic and diluted	(0.66)		0.04		(0.62)

Note 3. Investments

The amortized costs, unrealized gains and losses and estimated fair values of the Company’s short-term investments as of October 31, 2019 were as follows (in thousands):


	October 31, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. government securities	$	27,930	$	72	$	—	$	28,002
Corporate bonds	36,908		56		—		36,964
Commercial paper	40,811		—		—		40,811
Total short-term investments	$	105,649	$	128	$	—	$	105,777

The amortized costs, unrealized gains and losses and estimated fair values of the Company’s short-term investments as of January 31, 2019 were as follows (in thousands):


	January 31, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. government securities	$	17,950	$	1	$	—	$	17,951
Corporate bonds	34,296		8		(2)		34,302
Commercial paper	55,655		—		—		55,655
Total short-term investments	$	107,901	$	9	$	(2)	$	107,908

There were no material realized gains or losses from sales of marketable securities that were reclassified out of accumulated other comprehensive income into investment income during the three and nine months ended October 31, 2019 and 2018. The Company does not believe that any unrealized losses represent other-than-temporary impairments based on its evaluation of available evidence. All securities had stated effective maturities of two years or less as of October 31, 2019.

Note 4. Fair Value Measurements

The accounting guidance for fair value measurements establishes a three-tier hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value as follows:


Level input						Input definition

Level 1						Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets

Level 2						Inputs other than quoted prices included within Level 1 that are observable for the asset or liability through corroboration with market data at the measurement date

Level 3						Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date

In general, and where applicable, the Company uses quoted prices in active markets for identical assets or liabilities to determine fair value. If quoted prices in active markets for identical assets or liabilities are not available to determine fair value, then the Company uses quoted prices for similar assets and liabilities or inputs other than the quoted prices that are observable either directly or indirectly.

The following tables summarize the Company’s fair value hierarchy for its financial assets measured at fair value on a recurring basis (in thousands):


	October 31, 2019
	Level 1		Level 2		Level 3		Total
Cash equivalents:
Money market funds	$	53,274	$	—	$	—	$	53,274
Short-term investments:
U.S. government securities	$	—	$	28,002	$	—	$	28,002
Corporate bonds	—		36,964		—		36,964
Commercial paper	—		40,811		—		40,811
Total short-term investments	$	—	$	105,777	$	—	$	105,777


	January 31, 2019
	Level 1		Level 2		Level 3		Total
Cash equivalents:
Money market funds	$	61,201	$	—	$	—	$	61,201
Short-term investments:
U.S. government securities	$	—	$	17,951	$	—	$	17,951
Corporate bonds	—		34,302		—		34,302
Commercial paper	—		55,655		—		55,655
Total short-term investments	$	—	$	107,908	$	—	$	107,908
Restricted cash:
Money market funds	$	2,084	$	—	$	—	$	2,084

The carrying amounts of certain financial instruments, including cash held in bank accounts, accounts receivable, accounts payable, and accrued expenses, approximate fair value due to their relatively short maturities. The carrying amount of debt approximates fair value due to its floating interest rate.

Note 5. Deferred Commissions

Deferred commissions, related to incremental costs of obtaining customer contracts, were $27.0 million as of October 31, 2019 and $27.3 million as of January 31, 2019 (as adjusted), respectively. Amortization expense for deferred commissions was $2.4 million and $7.0 million for the three and nine months ended October 31, 2019, respectively, and $2.0 million and $5.8 million for the three and nine months ended October 31, 2018 (as adjusted), respectively. There was no impairment loss in relation to the costs capitalized for the periods presented.

Note 6. Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following (in thousands):


	October 31, 2019		January 31, 2019
			As Adjusted¹
Contract assets	$	4,152	$	4,218
Prepaid software subscriptions	4,037		4,797
Prepaid hosting costs	1,556		1,251
Prepaid insurance	1,342		790
Prepaid rent	1,045		991
Taxes	440		579
Other	3,585		2,006
Total	$	16,157	$	14,632

(1) See Note 2. Summary of Significant Accounting Policies and Recent Accounting Pronouncements for a summary of adjustments related to the adoption of Topic 606.

Note 7. Property and Equipment, Net

Property and equipment, net consisted of the following (in thousands):


	October 31, 2019		January 31, 2019
Servers	$	16,873	$	14,972
Software	13,967		10,770
Leasehold improvements	12,785		5,010
Computer equipment	11,123		10,109
Furniture and fixtures	3,945		2,523
Vehicles	109		109
	58,802		43,493
Less accumulated depreciation and amortization	(30,410)		(23,868)
Total	$	28,392	$	19,625

Depreciation and amortization expense related to property and equipment, which includes amortization of capitalized internal-use software, was $2.8 million and $7.0 million for the three and nine months ended October 31, 2019, respectively, and $1.8 million and $4.9 million for the three and nine months ended October 31, 2018, respectively. Depreciation and amortization expense is included in Operating expenses and Cost of revenue in the accompanying unaudited condensed consolidated statements of comprehensive loss.

As of October 31, 2019 and January 31, 2019, capitalized internal-use software costs were $5.7 million and $4.3 million, respectively. Internal-use software amortization recorded to cost of subscription revenue was $1.0 million and $1.8 million for the three and nine months ended October 31, 2019, respectively, and $0.4 million and $1.0 million for the three and nine months ended October 31, 2018, respectively.

Note 8. Purchased Intangible Assets

The following table summarizes the purchased intangible asset balances (in thousands):


	October 31, 2019
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Developed technology	$	7,697	$	(4,879)	$	2,818
Customer relationships	4,287		(1,657)		2,630
Trade names	909		(314)		595
Total	$	12,893	$	(6,850)	$	6,043


	January 31, 2019
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Developed technology	$	7,697	$	(4,045)	$	3,652
Customer relationships (as adjusted)¹	4,287		(1,236)		3,051
Trade names	909		(216)		693
Total	$	12,893	$	(5,497)	$	7,396

(1) See Note 2. Summary of Significant Accounting Policies and Recent Accounting Pronouncements for a summary of adjustments related to the adoption of Topic 606.

Amortization expense related to purchased intangible assets was approximately $0.4 million and $1.4 million for the three and nine months ended October 31, 2019, respectively, and $0.5 million and $1.7 million for the three and nine months ended October 31, 2018, respectively. Amortization expense related to purchased intangible assets is included in Cost of subscription revenue in the accompanying unaudited condensed consolidated statements of comprehensive loss.

Note 9. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following (in thousands):


	October 31, 2019		January 31, 2019
Accrued outside services and consulting	$	3,443	$	2,089
Accrued goods and services taxes	2,980		3,098
Accrued taxes	1,941		1,651
Accrued hosting and third party license fees	1,919		1,073
Employee early exercised stock options	143		436
Other accrued expenses	6,732		5,863
Total	$	17,158	$	14,210

Note 10. Deferred Revenue and Performance Obligations

Subscription revenue recognized during the three and nine months ended October 31, 2019 that was included in the deferred revenue balances at the beginning of the respective periods was $42.5 million and $73.7 million, respectively, and was $29.2 million and $50.1 million for the three and nine months ended October 31, 2018 (as adjusted), respectively. Professional service and other revenue recognized in the same periods from deferred revenue balances at the beginning of the respective periods was not material.

As of October 31, 2019, total remaining non-cancellable performance obligations under the Company's subscription contracts with customers was approximately $261.6 million and the Company expects to recognize revenue on approximately 61% of these remaining performance obligations over the next 12 months. Revenue from the remaining performance obligations for professional service and other contracts as of October 31, 2019 was not material.

Note 11. Geographical Information

Disaggregation of Revenue

Revenue by country, based on the customer’s address at the time of sale, was as follows (in thousands):


	Three Months Ended October 31,									Nine Months Ended October 31,
	2019			2018			2019			2018
				As Adjusted¹						As Adjusted¹
United States	$	49,437		$	43,630		$	142,039		$	123,267
Others	22,385			17,726			63,625			48,384
Total	$	71,822		$	61,356		$	205,664		$	171,651
Percentage of revenue by geographic area:
United States	69		%	71		%	69		%	72		%
Other	31		%	29		%	31		%	28		%

(1) See Note 2. Summary of Significant Accounting Policies and Recent Accounting Pronouncements for a summary of adjustments related to the adoption of Topic 606.

Other than the United States, no individual country exceeded 10% of total revenue for the three or nine months ended October 31, 2019 and 2018.

Note 12. Debt

In June 2017, the Company and certain of its subsidiaries entered into a loan and security agreement with Silicon Valley Bank that includes a revolving and term loan facility. In October 2018, the agreement was amended (Debt Agreement) to, among other things, increase the revolving loan availability to $30.0 million (from $10 million), lower the borrowing costs under both the revolving and term loans to the prime rate published by the Wall Street Journal (WSJ Prime Rate) minus 1.00%, extend the interest only repayment period under the term loan until June 2019, after which time principal and interest are due in thirty-six (36) equal monthly installments, extend the revolving loan maturity date until October 2021, and extend the latest term loan maturity date until June 2022. The Company accounted for this amendment as a debt modification and will recognize the unamortized fees related to the Debt Agreement over the duration of the term loan.

Revolving Loan. The Debt Agreement allows the Company to borrow up to $30.0 million in revolving loans until October 2021. Advances drawn down under the revolving loan incur interest at the WSJ Prime Rate minus 1.00% which is due monthly on any amounts drawn down, with the principal due at maturity. Any outstanding amounts must be fully repaid on or before October 2021. The Company is required to pay an annual fee of $20,000 on this revolving loan, regardless of any amounts drawn down. As of October 31, 2019, the Company had not drawn down any amounts under this revolving loan.

Term Loan. The Debt Agreement allows the Company to borrow $15.0 million in term loans, which was drawn down in June 2017 to partially finance the acquisition of Leeyo. Any outstanding amounts under the term loan accrue interest at the WSJ Prime rate minus 1.00%. The interest rate was 3.75% as of October 31, 2019. The Company is required to make equal monthly payments of principal and interest over 36 months until the term loan is repaid in June 2022. The Company may prepay all outstanding principal and accrued interest at any time without penalty. The Company will incur a fee of 1.5% of the original principal amount of the term loan, or $225,000, upon the earlier to occur of prepayment or the termination of the facility. As of October 31, 2019, the Company had $11.6 million outstanding under the term loan.

Both the revolving loan and the term loan are subject to a certain financial covenant to maintain an adjusted quick ratio of no less than 1.10:1.00. As of October 31, 2019, the Company was in compliance with this financial covenant. The Debt Agreement also imposes certain limitations with respect to lines of business, mergers, investments and acquisitions, additional indebtedness, distributions, guarantees, liens, and encumbrances. The Company was also in compliance with these restrictions as of October 31, 2019.

The Company incurred transaction costs and fees payable to the lender related to the issuance of the term loan. The amount, net of amortization, is immaterial and reduces the carrying amount of the term loan presented under Debt, current portion and Debt, net of current portion in the Company's unaudited condensed consolidated balance sheets.

The Company’s indebtedness under the Debt Agreement is secured by a lien on substantially all of its assets, including its intellectual property.

Note 13. Income Taxes

The following table reflects the Company's income tax provision, pretax loss and effective tax rate for the periods presented (in thousands, except percentages):


	Three Months Ended October 31,									Nine Months Ended October 31,
	2019			2018			2019			2018
				As Adjusted¹						As Adjusted¹
Loss before income taxes	$	17,816		$	16,898		$	58,922		$	52,637
Income tax provision	$	421		$	326		$	720		$	921
Effective tax rate	(2.4)		%	(1.9)		%	(1.2)		%	(1.7)		%

(1) See Note 2. Summary of Significant Accounting Policies and Recent Accounting Pronouncements for a summary of adjustments related to the adoption of Topic 606.

The effective tax rates differ from the statutory rates primarily as a result of no benefit on pretax losses incurred in the United States, as the Company has determined that the benefit of the losses is not more likely than not to be realized.

Note 14. Stockholders’ Equity

Preferred Stock

As of October 31, 2019, the Company had authorized 10 million shares of preferred stock, each with a par value of $0.0001 per share. As of October 31, 2019, no shares of preferred stock were issued and outstanding.

Common Stock

Prior to the Company's IPO, which was effective in April 2018, all shares of common stock then outstanding were reclassified into Class B common stock. Shares offered and sold in the IPO consisted of newly authorized shares of Class A common stock.

As of October 31, 2019, the Company had authorized 500 million shares of Class A common stock and 500 million shares of Class B common stock, each with a par value of $0.0001 per share. As of October 31, 2019, 93.6 million shares of Class A common stock and 19.5 million shares of Class B common stock were issued and outstanding.

Holders of Class A and Class B common stock are entitled to one vote per share and ten votes per share, respectively, and the shares of Class A common stock and Class B common stock are identical, except for voting and conversion rights.

Accumulated Other Comprehensive Income

Components of accumulated other comprehensive income were as follows (in thousands):


	Foreign Currency Translation Adjustment		Unrealized Gain on Available-for-Sale Securities		Total
Balance, January 31, 2019	$	474	$	7	$	481
Foreign currency translation adjustment	(416)		—		(416)
Unrealized gain on available-for-sale securities	—		121		121
Balance, October 31, 2019	$	58	$	128	$	186

There were no material reclassifications out of accumulated other comprehensive income during the three and nine months ended October 31, 2019. Additionally, there was no material tax impact on the amounts presented.

Note 15. Employee Stock Plans

Equity Incentive Plans

In March 2018, the Company’s Board of Directors adopted and its stockholders approved the 2018 Equity Incentive Plan (2018 Plan). The 2018 Plan authorizes the award of stock options, restricted stock awards, stock appreciation rights, RSUs, performance awards, and stock bonuses. As of October 31, 2019, approximately 16.1 million shares of Class A common stock were reserved and available for issuance under the 2018 Plan. In addition, as of October 31, 2019, 11.6 million stock options and RSUs exercisable or settleable for Class B common stock were outstanding in the aggregate under the Company’s 2006 Stock Plan (2006 Plan) and 2015 Equity Incentive Plan (2015 Plan), which plans were terminated in May 2015 and April 2018, respectively. The 2006 Plan and 2015 Plan continue to govern outstanding equity awards granted thereunder.

Stock Options

The following table summarizes stock option activity and related information (in thousands, except weighted-average exercise price and average remaining contractual term):


	Shares Subject To Outstanding Stock Options	Weighted-Average Exercise Price		Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
Balance as of January 31, 2019	14,784	$	4.81	7.41	$	249,119
Granted	2,646	17.92
Exercised	(2,217)	4.05
Forfeited	(1,115)	7.09
Balance as of October 31, 2019	14,098	7.21		6.99	109,839
Exercisable as of October 31, 2019	11,325	4.64		6.58	108,775
Vested and expected to vest as of October 31, 2019	13,584	7.00		6.91	108,122

The weighted-average grant date fair value per share of options granted during the three and nine months ended October 31, 2019 was $5.55 and $7.10, respectively, and was $10.24 and $6.80 for the three and nine months ended October 31, 2018, respectively. The aggregate intrinsic value of options exercised during the three and nine months ended October 31, 2019 was $4.2 million, and $31.5 million, respectively, and was $13.6 million and $31.5 million for the three and nine months ended October 31, 2018, respectively. As of October 31, 2019, there was $28.9 million of unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a weighted average of 2.6 years.

The Company used the Black-Scholes option-pricing model to estimate the fair value of its stock options granted with the following assumptions:


	Three Months Ended October 31,			Nine Months Ended October 31,
	2019	2018	2019	2018
Fair value of common stock	$13.67 - $14.82	$27.86	$13.67 - $23.64	$12.28 - $27.86
Expected volatility	38.3% - 38.9%	32.4%	35.0% - 39.0%	39.2% - 40.9%
Expected term (years)	5.6 - 6.5	5.9 - 6.0	5.6 - 6.5	5.1 - 6.4
Risk-free interest rate	1.4% - 1.7%	2.8%	1.4% - 2.5%	2.6% - 2.9%
Expected dividend yield	—	—	—	—

Options Subject to Early Exercise

At the discretion of the Company’s Board of Directors, certain options may be exercisable immediately at the date of grant but are subject to a repurchase right, under which the Company may buy back any unvested shares at the lower of their original exercise price or then current fair market value in the event of an employee’s termination prior to vesting. The consideration received for an exercise of an unvested option is considered to be a deposit of the exercise price and the related dollar amount is recorded as a liability. The liabilities are reclassified into equity as the awards vest. As of October 31, 2019 and January 31, 2019, the Company had $0.2 million and $0.7 million, respectively, recorded in accrued expenses and other current liabilities, and other long-term liabilities, related to early exercises of options to acquire approximately 46,000 and 150,000 shares of common stock, respectively.

RSU and Restricted Stock Award Activity

The following table summarizes RSU and restricted stock award activity and related information for the nine months ended October 31, 2019 (in thousands, except weighted-average grant date fair value):


	Number of RSU and Restricted Shares Outstanding	Weighted-Average Grant Date Fair Value
Balance as of January 31, 2019	3,063	$	13.89
Granted	3,117	19.87
Vested	(1,450)	12.15
Forfeited	(524)	19.92
Balance as of October 31, 2019	4,206	18.17

As of October 31, 2019, there was $64.0 million of unrecognized compensation cost related to unvested RSUs and restricted stock awards, which is expected to be recognized over a weighted average of 2.8 years.

2018 Employee Stock Purchase Plan

In March 2018, the Company's Board of Directors adopted and its stockholders approved the 2018 Employee Stock Purchase Plan (ESPP). A total of 2.8 million shares of Class A common stock were reserved and available for issuance under the ESPP as of October 31, 2019. The ESPP provides for 24-month offering periods beginning June 15 and December 15 of each year, and each offering period contains four six-month purchase periods. On each purchase date, ESPP participants will purchase shares of the Company’s Class A common stock at a price per share equal to 85% of the lesser of (1) the fair market value of the Class A common stock on the offering date or (2) the fair market value of the Class A common stock on the purchase date.

As of October 31, 2019, there was approximately $4.4 million of unrecognized stock-based compensation expense related to the ESPP which is expected to be recognized over a weighted average of 0.8 years.

The Company estimated the fair value of ESPP purchase rights using a Black-Scholes option pricing model with the following assumptions:


	Nine Months Ended October 31,
	2019		2018
Fair value of common stock	$	14.73	$	14.00
Expected volatility	36.0% - 42.6%		24.6% - 29.9%
Expected term (in years)	0.5 - 2.0		0.7 - 2.2
Risk-free interest rate	1.9% - 2.2%		2.0% - 2.4%
Expected dividend yield	—		—

Stock-Based Compensation Expense

Stock-based compensation expense was recorded in the following cost and expense categories in the accompanying unaudited condensed consolidated statements of comprehensive loss (in thousands):


	Three Months Ended October 31,						Nine Months Ended October 31,
	2019		2018		2019		2018
Cost of subscription revenue	$	683	$	555	$	1,987	$	1,311
Cost of professional services revenue	1,814		1,685		5,157		4,115
Research and development	4,015		1,902		11,690		4,366
Sales and marketing	3,728		2,205		8,071		5,317
General and administrative	1,598		1,112		4,508		2,613
Total stock-based compensation expense	$	11,838	$	7,459	$	31,413	$	17,722

Note 16. Commitments and Contingencies

(a) Leases

The Company periodically leases facilities and equipment under noncancellable operating and capital leases. The terms of the lease agreements may include graduated rental payments, allowances, rent holidays and escalations. Accordingly, the Company recognizes the related rent expense on a straight-line basis over the entire lease term and records the difference between amounts charged to operations and amounts paid as deferred rent.

In March 2019, the Company entered into a new operating lease agreement for approximately 100,000 square feet of office space located in Redwood Shores, California that will replace its existing headquarters in San Mateo, California. The initial rental rate is $446,460 per month with seven months of free rent in the first year, with annual increases of three percent (3%). The initial lease term is 127 months and commences upon the earlier of the date the Company moves into the space or January 1, 2020, and includes an option to renew for an additional seven years at the then prevailing rental rate. The agreement also includes a reimbursement allowance of up to $10.0 million for tenant improvements made by the Company, of which $5.3 million was reimbursed as of October 31, 2019.

As of October 31, 2019, the Company had operating leases for its offices in the United States and other locations around the world. The initial lease term for these facilities ranged from approximately one to eleven years and includes approximately 270,000 square feet of space. In connection with these leased facilities, the Company had bank issued irrevocable letters of credit on the leases of $5.1 million outstanding as of October 31, 2019.

Deferred rent was $9.2 million and $3.0 million as of October 31, 2019 and January 31, 2019, respectively, and is included in Accrued expenses and other current liabilities and Other long-term liabilities in the accompanying unaudited condensed consolidated balance sheets. Rent expense was $4.0 million and $9.3 million for the three

and nine months ended October 31, 2019, respectively, and $2.8 million and $7.2 million for the three and nine months ended October 31, 2018, respectively.

As of October 31, 2019, the future minimum lease payments under operating leases by fiscal year were as follows (in thousands):


	Operating Leases
Remainder of 2020	$	2,920
2021	9,768
2022	12,722
2023	12,730
2024	10,049
Thereafter	42,525
Total future lease commitments	$	90,714

(b) Legal Proceedings

From time to time, the Company may be subject to legal proceedings, as well as demands, claims and threatened litigation. Other than the matters described below, we are not currently party to any material legal proceedings or claims, nor are we aware of any pending or threatened litigation or claims that could have a material adverse effect on our business, operating results, cash flows, or financial condition should such litigation or claim be resolved unfavorably. The outcomes of our legal proceedings and other contingencies are inherently unpredictable, subject to significant uncertainties, and could be material to our operating results and cash flows for a particular period. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors.

Shareholder Litigation

On June 14, 2019, a securities class action lawsuit was filed in the U.S. District Court for the Northern District of California naming the Company and certain of its officers as defendants. The complaint purports to bring suit on behalf of shareholders who purchased or otherwise acquired the Company’s securities between April 12, 2018 and May 30, 2019. The complaint alleges that defendants made false and misleading statements about the Company’s business, operations and prospects in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (Exchange Act), and seeks unspecified compensatory damages, fees and costs. On September 9, 2019, the district court appointed the lead plaintiff and lead counsel. On November 8, 2019, the lead plaintiff filed a consolidated amended complaint asserting the same claims. The Company believes the plaintiff’s allegations are without merit and intends to defend vigorously against the claims. Given the procedural posture and the nature of this lawsuit, including that the proceedings are in the early stages, the Company is unable to estimate the reasonably possible loss or range of loss, if any, that may result from this matter.

On September 10, 2019, two shareholder derivative lawsuits were filed in the U.S. District Court for the Northern District of California against certain of the Company’s directors and executive officers and naming the Company as a nominal defendant. The derivative actions allege claims based on events similar to those in the securities class action and assert causes of action against the individual defendants for breach of fiduciary duty, unjust enrichment, waste of corporate assets, and for making false and misleading statements about the Company’s business, operations, and prospects in violation of Section 14(a) of the Exchange Act. Plaintiffs seek corporate reforms, unspecified damages and restitution, and fees and costs. On November 5, 2019, the shareholder derivative lawsuits, which are related to the securities class action, were assigned to the same judge who is overseeing the securities class action lawsuit. Given the procedural posture and the nature of the litigation, including that the proceedings are in the early stages, the Company is unable to estimate the reasonably possible loss or range of loss, if any, that may result from these matters.

As of October 31, 2019, the Company had a contractual obligation to make $14.6 million in purchases, primarily for cloud computing services provided by one of its vendors by September 30, 2020.

Note 17. Net Loss Per Share Attributable to Common Stockholders

The following table presents the calculation of basic and diluted net loss per share attributable to common stockholders for the periods presented (in thousands, except per share data):


	Three Months Ended October 31,						Nine Months Ended October 31,
	2019		2018		2019		2018
			As Adjusted¹				As Adjusted¹
Numerator:
Net loss	$	(18,237)	$	(17,224)	$	(59,642)	$	(53,558)
Denominator:
Weighted-average common shares outstanding, basic and diluted	111,835		106,049		110,436		85,820
Net loss per share attributable to common stockholders, basic and diluted	$	(0.16)	$	(0.16)	$	(0.54)	$	(0.62)

(1) See Note 2. Summary of Significant Accounting Policies and Recent Accounting Pronouncements for a summary of adjustments related to the adoption of Topic 606.

Since the Company was in a loss position for all periods presented, basic net loss per share attributable to common stockholders is the same as diluted net loss per share attributable to common stockholders as the inclusion of all potential common shares outstanding would have been anti-dilutive. Potentially dilutive securities that were not included in the diluted per share calculations because they would be anti-dilutive were as follows (in thousands):


	October 31,
	2019	2018
Issued and outstanding stock options	14,098	15,645
Unvested restricted stock issued and outstanding	551	1,495
Unvested RSUs issued and outstanding	3,655	1,566
Shares committed under ESPP	313	398
Total	18,617	19,104

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended January 31, 2019, filed with the SEC on April 18, 2019 (Annual Report). As discussed in the section titled “Special Note Regarding Forward-Looking Statements,” the following discussion and analysis contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those identified below and those discussed in the section titled “Risk Factors” under Part II, Item 1A in this Form 10-Q and in our Annual Report. Our fiscal year ends on January 31.

Overview

Zuora is a leading cloud-based subscription management platform. We provide software that enables companies across multiple industries and geographies to launch, manage or transform to a subscription business model. Architected specifically for dynamic, recurring subscription business models, our cloud-based software functions as an intelligent subscription management hub that automates and orchestrates the entire subscription

order-to-revenue process, including billing and revenue recognition. Our solution enables businesses to easily change pricing and packaging for products and services to grow and scale, to efficiently comply with revenue recognition standards, and to build meaningful relationships with their subscribers.

We believe we are in the early stages of a multi-decade global shift away from product-based business models, characterized by transactional one-time sales, towards recurring subscription-based business models. This trend, which we refer to as the “Subscription Economy,” is visible everywhere you look. In media and entertainment, consumers are adopting video-on-demand services and digital music streaming services. Commuters are taking advantage of automobile subscription programs and subscription-based ride-sharing services. In the technology space, companies are opting for software-as-a-service applications over on-premise installations. In manufacturing, sensors and connectivity have allowed companies to bundle an array of digital services with their physical products. Digital subscriptions have had a positive effect on the newspaper and publishing industries, with readers increasingly subscribing to digital news and information sources. In addition, the retail space features a growing multitude of subscription services including clothing and accessories, cosmetics and personal care, meals and groceries, vitamins and prescriptions, pet care, and many more.

Many of today’s enterprise software systems that businesses use to manage their order-to-revenue processes were built for a product driven economy, and are extremely difficult to re-configure for the dynamic, ongoing nature of subscription services. In traditional business models, order-to-revenue was a linear process—a customer orders a product, is billed for that product, payment is collected, and the revenue recognized. These legacy systems were not specifically designed to handle the complexities and ongoing customer events of recurring relationships and their impact on areas such as billing proration, revenue recognition, and reporting in real-time. Trying to use this software to build a subscription business frequently results in prolonged and complex manual downstream work, hard-coded customizations, a proliferation of stock-keeping units (SKUs), and inefficiency.

These new subscription business models are inherently dynamic, with multiple interactions and constantly-changing relationships and events. The capabilities to launch, price, and bill for products, facilitate and record cash receipts, process and recognize revenue, and produce the data required to close their books and drive key decisions are mission critical and particularly complex for companies with subscription business models. As a result, as companies launch or grow a subscription business, they often conclude that legacy systems are inadequate.

Our mission is to enable all companies in the Subscription Economy to become successful. Our customers include companies of all sizes, ranging from small businesses to some of the world’s largest enterprises. Customers pay for our platform under a subscription-based model, and this model allows us to grow as the Subscription Economy grows.

Fiscal Third Quarter Business Highlights:

In the third quarter of fiscal 2020, we continued to address our previously disclosed sales execution and product integration challenges, which have impacted our revenue growth, as follows:

•During the third quarter, we expanded our sales leadership team with the addition of Robert Traube, our new Chief Revenue Officer, who is leading our field organization and helping scale our business. We have also recently hired James Huang as our new Senior Vice President of Global Alliances who, as a part of Mr. Traube's team, will work to establish deeper relationships with our leading global partners. We also continued implementing our sales execution initiatives that we began in the second quarter, including enhancing our sales approach to more closely align with our prospective customer's needs; refining our sales enablement and training process; and growing and leveraging our relationships with strategic partners including global systems integrators (GSIs) to more effectively increase our sales and the implementation of our solutions.

•With respect to the product integration between our Zuora Billing and Zuora RevPro® products, we have resumed the paused customer implementations and are working to get these customers operationally live on our integrated product. We expect to resume cross-sell activity of our Zuora RevPro product into our existing Zuora Billing customers as we make progress on the existing implementations.

Other business highlights during the three months ended October 31, 2019 compared to the three months ended October 31, 2018 included:

•Customers with ACV exceeding $100,000 totaled 586, an increase of 16%. We expect this metric to increase on a long-term basis, although we may experience fluctuations as we continue to work through the sales execution and product integration challenges we discussed in the first quarter.

•Dollar-based retention rate was 106% as of October 31, 2019. We have seen a recent decline in the dollar-based retention rate primarily due to the lower cross-sell activity of our Zuora RevPro into our existing Zuora Billing customers resulting from product integration challenges and some customers renewing with lower transaction volume in the quarter. We may experience fluctuations, including potentially lower rates, as we continue working to improve our overall sales motion.

•Customer transaction volume through Zuora's billing platform was $11.2 billion, an increase of 29%.

Fiscal Third Quarter Financial Performance Summary:

Our financial performance for the three months ended October 31, 2019 compared to the three months ended October 31, 2018 reflects the following:

•Subscription revenues were $54.0 million, an increase of $11.0 million, or 25%; and total revenues were $71.8 million, an increase of $10.5 million, or 17%.

•Gross profit was $37.5 million, or 52% of total of revenue, compared to $31.2 million, or 51% of total revenue.

•Loss from operations was $19.0 million, or 26% of total revenue, compared to a loss of $17.5 million, or 29% of total revenue.

Key Operational and Financial Metrics

We monitor the following key operational and financial metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans and make strategic decisions:

Customers with Annual Contract Value (ACV) Equal to or Greater than $100,000

We believe our ability to enter into larger contracts is indicative of broader adoption of our solution by larger organizations. It also reflects our ability to expand our revenue footprint within our current customer base. We define ACV as the subscription revenue we would contractually expect to recognize from that customer over the next twelve months, assuming no increases or reductions in their subscriptions. We define the number of customers at the end of any particular period as the number of parties or organizations that have entered into a distinct subscription contract with us for which the term has not ended. Each party with which we have entered into a distinct subscription contract is considered a unique customer, and in some cases, there may be more than one customer within a single organization. We have increased the number of customers with ACV equal to or greater than $100,000 to 586 as of October 31, 2019, as compared to 504 customers as of October 31, 2018.

Dollar-Based Retention Rate

We believe our dollar-based retention rate is a key measure of our ability to retain and expand revenue from our customer base over time. We calculate our dollar-based retention rate as of a period end by starting with the sum of the ACV from all customers as of twelve months prior to such period end, or prior period ACV. We then calculate the sum of the ACV from these same customers as of the current period end, or current period ACV. Current period ACV includes any upsells and also reflects contraction or attrition over the trailing twelve months, but excludes revenue from new customers added in the current period. We then divide the current period ACV by the prior period ACV to arrive at our dollar-based retention rate. Our dollar-based retention rate was 106% as of October 31, 2019, compared to 107% as of July 31, 2019.

Components of Our Results of Operations

Revenue

Subscription revenue. Subscription revenue consists of fees for access to, and use of, our products, as well as customer support. We generate subscription fees pursuant to non-cancelable subscription agreements with terms that typically range from one to three years. Subscription revenue is primarily based on fees to access our services platform over the subscription term. We typically invoice customers in advance in either annual or quarterly installments. Customers can also elect to purchase additional volume blocks or products during the term of the contract. We typically recognize subscription revenue ratably over the term of the subscription period, beginning on the date that access to our platform is provided, which is generally on or about the date the subscription agreement is signed.

Professional services revenue. Professional services revenue consists of fees for services related to helping our customers deploy, configure, and optimize the use of our solutions. These services include system integration, data migration, process enhancement, and training. Professional services projects generally take three to twelve months to complete. Once the contract is signed, we generally invoice for professional services on a time and materials basis, although we occasionally engage in fixed-price service engagements and invoice for those based upon agreed milestone payments. We recognize revenue as services are performed for time and materials engagements and on a proportional performance method as the services are performed for fixed fee engagements.

Topic 606 Adoption. In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), and has modified the standard thereafter. This standard replaces existing revenue recognition rules with a comprehensive revenue measurement and recognition standard and expanded disclosure requirements. We adopted Topic 606 for the fiscal year ending January 31, 2020 (i.e., effective February 1, 2019) using the full retrospective method of adoption. See Note 2. Summary of Significant Accounting Policies and Recent Accounting Pronouncements for more details.

Overhead Allocation and Employee Compensation Costs

We allocate shared costs, such as facilities costs (including rent, utilities, and depreciation on capital expenditures related to facilities shared by multiple departments), information technology costs, and certain administrative personnel costs to all departments based on headcount and location. As such, allocated shared costs are reflected in each cost of revenue and operating expenses category. Employee compensation costs consist of salaries, bonuses, commissions, benefits, and stock-based compensation.

Cost of Revenue, Gross Profit and Gross Margin

Cost of subscription revenue. Cost of subscription revenue consists primarily of costs related to hosting our platform and providing customer support. These costs include data center costs and third-party hosting fees, employee compensation costs associated with our cloud-based infrastructure and our customer support organizations, amortization expense associated with capitalized internal-use software and purchased technology, allocated overhead, software and maintenance costs, and outside services associated with the delivery of our subscription services. We intend to continue to invest in our platform infrastructure, including third-party hosting capacity, and support organizations. However, the level and timing of investment in these areas could fluctuate and affect our cost of subscription revenue in the future.

Cost of professional services revenue. Cost of professional services revenue consists primarily of costs related to the deployment of our platform. These costs include employee compensation costs for our professional services team, allocated overhead, travel costs, and costs of outside services associated with supplementing our internal staff.

Gross profit and gross margin. Our gross profit and gross margin may fluctuate from period to period as our revenue fluctuates, and as a result of the timing and amount of investments to expand hosting capacity, including through third party cloud providers, our continued efforts to build platform support and professional services teams, as well as the amortization expense associated with capitalized internal-use software and acquired technology. We expect our gross profit and gross margin to increase over the long-term.

Operating Expenses

Research and development. Research and development expense consists primarily of employee compensation costs, allocated overhead, and travel costs. We capitalize research and development costs associated with the development of internal-use software and we amortize these costs over a period of three years into cost of subscription revenue. All other research and development costs are expensed as incurred. We believe that continued investment in our platform, product integrations, and other applications is important for our growth, and as such, expect our research and development expense to continue to increase in absolute dollars for the foreseeable future but may vary as a percentage of total revenue in the near term.

Sales and marketing. Sales and marketing expense consists primarily of employee compensation costs, including commissions for our sales personnel, allocated overhead, costs of general marketing and promotional activities, and travel costs. We amortize commissions to sales and marketing expense over a period of benefit of five years. While our sales and marketing expense as a percentage of total revenue has decreased in recent periods, we expect to continue to make significant investments as we expand our customer acquisition and retention efforts and pursue our sales execution initiatives. Therefore, we expect that sales and marketing expense will increase in absolute dollars but may vary as a percentage of total revenue in the near term.

General and administrative. General and administrative expense consists primarily of employee compensation costs, allocated overhead, and travel costs for finance, accounting, legal, human resources, and recruiting personnel. In addition, general and administrative expense includes non-personnel costs, such as accounting fees, legal fees, and all other supporting corporate expenses not allocated to other departments. We expect to incur ongoing costs as a result of operating as a public company, including costs related to compliance and reporting obligations of public companies, and continued investment to support our growing operations. As a result, we expect our general and administrative expense to continue to increase in absolute dollars for the foreseeable future but may vary as a percentage of total revenue in the near term. Over the long-term, we expect general and administrative expense to decline as a percentage of total revenue as we realize efficiencies.

Interest and other income (expense), net

Interest and other income (expense), net primarily consists of interest income from our investment holdings, interest expense associated with our Debt Agreement, and foreign exchange fluctuations.

Income tax provision

Income tax provision consists primarily of income taxes related to foreign and state jurisdictions in which we conduct business. We maintain a full valuation allowance on our federal and state deferred tax assets as we have concluded that it is not more likely than not that the deferred assets will be utilized.

Results of Operations

The following tables set forth our unaudited condensed consolidated results of operations for the periods presented in dollars and as a percentage of our total revenue (in thousands):


	Three Months Ended October 31,						Nine Months Ended October 31,
	2019		2018		2019		2018
			As Adjusted²				As Adjusted²
Revenue:
Subscription	$	54,038	$	43,083	$	151,996	$	119,849
Professional services	17,784		18,273		53,668		51,802
Total revenue	71,822		61,356		205,664		171,651
Cost of revenue:
Subscription¹	13,858		10,987		38,589		31,273
Professional services¹	20,443		19,190		61,445		53,569
Total cost of revenue	34,301		30,177		100,034		84,842
Gross profit	37,521		31,179		105,630		86,809
Operating expenses:
Research and development¹	17,903		14,282		53,662		39,667
Sales and marketing¹	28,027		24,849		80,818		71,008
General and administrative¹	10,597		9,579		32,366		27,553
Total operating expenses	56,527		48,710		166,846		138,228
Loss from operations	(19,006)		(17,531)		(61,216)		(51,419)
Interest and other income (expense), net	1,190		633		2,294		(1,218)
Loss before income taxes	(17,816)		(16,898)		(58,922)		(52,637)
Income tax provision	(421)		(326)		(720)		(921)
Net loss	$	(18,237)	$	(17,224)	$	(59,642)	$	(53,558)

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


	Three Months Ended October 31,						Nine Months Ended October 31,
	2019		2018		2019		2018
Cost of subscription revenue	$	683	$	555	$	1,987	$	1,311
Cost of professional services revenue	1,814		1,685		5,157		4,115
Research and development	4,015		1,902		11,690		4,366
Sales and marketing	3,728		2,205		8,071		5,317
General and administrative	1,598		1,112		4,508		2,613
Total stock-based compensation expense	$	11,838	$	7,459	$	31,413	$	17,722


	Three Months Ended October 31,						Nine Months Ended October 31,
	2019		2018		2019		2018
			As Adjusted²				As Adjusted²
Revenue:
Subscription	75	%	70	%	74	%	70	%
Professional services	25		30		26		30
Total revenue	100		100		100		100
Cost of revenue:
Subscription	19		18		19		18
Professional services	28		31		30		31
Total cost of revenue	48		49		49		49
Gross profit	52		51		51		51
Operating expenses:
Research and development	25		23		26		23
Sales and marketing	39		40		39		41
General and administrative	15		16		16		16
Total operating expenses	79		79		81		81
Loss from operations	(26)		(29)		(30)		(30)
Interest and other income (expense), net	2		1		1		(1)
Loss before income taxes	(25)		(28)		(29)		(31)
Income tax provision	(1)		(1)		—		(1)
Net loss	(25)	%	(28)	%	(29)	%	(31)	%

(2) See Note 2. Summary of Significant Accounting Policies and Recent Accounting Pronouncements for a summary of adjustments related to the adoption of Topic 606.

Comparison of the Three Months Ended October 31, 2019 and 2018

Revenue


	Three Months Ended October 31,
	2019			2018			$ Change		% Change
	(dollars in thousands)
Revenue:
Subscription	$	54,038		$	43,083		$	10,955	25	%
Professional services	17,784			18,273			(489)		(3)	%
Total revenue	$	71,822		$	61,356		$	10,466	17	%
Percentage of revenue:
Subscription	75		%	70		%
Professional services	25			30
Total revenue	100		%	100		%

Subscription revenue increased by $11.0 million, or 25%, for the three months ended October 31, 2019 compared to the three months ended October 31, 2018. The increase was driven by growth in our customer base, including both new and existing customers, and includes a one-time recognition of $1.3 million related to a contract resolution with a customer that will not be recurring in upcoming quarters. New customers contributed approximately $5.6 million of the increase in subscription revenue for the three months ended October 31, 2019 excluding the one-time recognition discussed above, compared to the prior year period, while sales of additional products to our existing customers contributed the remainder. We calculate subscription revenue from new customers during the quarter by adding the revenue recognized from new customers acquired in the 12 months prior to the reporting date.

Professional services revenue decreased by $0.5 million, or 3%, for the three months ended October 31, 2019 compared to the three months ended October 31, 2018. The decrease in professional services revenue was primarily due to the impact of the previously disclosed sales execution challenges.

Cost of Revenue and Gross Margin


	Three Months Ended October 31,
	2019			2018			$ Change		% Change
	(dollars in thousands)
Cost of revenue:
Subscription	$	13,858		$	10,987		$	2,871	26	%
Professional services	20,443			19,190			1,253		7	%
Total cost of revenue	$	34,301		$	30,177		$	4,124	14	%
Gross margin:
Subscription	74		%	74		%
Professional services	(15)			(5)
Total gross margin	52		%	51		%

Cost of subscription revenue increased by $2.9 million, or 26%, for the three months ended October 31, 2019 compared to the three months ended October 31, 2018. The increase in cost of subscription revenue was due to an increase of $2.1 million in data center costs primarily related to third-party cloud hosting as we grow and transition our data center model to the cloud, $0.7 million in amortization of internal-use software costs, and $0.2 million in allocated overhead including facilities expansions. The key drivers of the increase in cost of subscription revenue were the growth in number of customers and cost of building out the infrastructure for migrating our data center to the cloud.

Cost of professional services revenue increased by $1.3 million, or 7%, for the three months ended October 31, 2019 compared to the three months ended October 31, 2018. The increase in cost of professional services revenue was due to an increase of $1.8 million in compensation costs related to increased headcount and $0.7 million in allocated overhead including facilities expansions; partially offset by a decrease of $1.0 million in outside professional services and $0.3 million in travel costs. The key driver of the increase in cost of professional services revenue was additional headcount in anticipation of supporting customer deployments, some of which were not fully utilized due to the previously disclosed sales execution and product integration challenges.

Our gross margin for subscription services was 74% for each of the three months ended October 31, 2019 and 2018, as our cost of subscription revenue increased at approximately the same rate as subscription revenue.

Our gross margin for professional services decreased to (15)% for the three months ended October 31, 2019 compared to (5)% for the three months ended October 31, 2018, primarily due to the previously disclosed sales execution and product integration challenges, which negatively impacted utilization.

Operating Expenses

Research and Development


	Three Months Ended October 31,
	2019			2018			$ Change		% Change
	(dollars in thousands)
Research and development	$	17,903		$	14,282		$	3,621	25	%
Percentage of total revenue	25		%	23		%

Research and development expense increased by $3.6 million, or 25%, for the three months ended October 31, 2019 compared to the three months ended October 31, 2018, primarily due to an increase of $3.7 million in employee compensation costs related to increased headcount, $0.7 million in allocated overhead including facilities

expansions, and $0.2 million in data center costs, partially offset by $0.9 million in higher capitalized software development costs and a decrease of $0.2 million in travel costs. The increase in headcount was driven by our continued investment in technology, innovation, and new products. As a result of our continued investment, research and development expense increased to 25% of total revenue during the three months ended October 31, 2019 from 23% during the three months ended October 31, 2018.

Sales and Marketing


	Three Months Ended October 31,
	2019			2018			$ Change		% Change
	(dollars in thousands)
Sales and marketing	$	28,027		$	24,849		$	3,178	13	%
Percentage of total revenue	39		%	40		%

Sales and marketing expense increased by $3.2 million, or 13%, for the three months ended October 31, 2019 compared to the three months ended October 31, 2018, primarily due to an increase of $4.3 million in employee compensation costs related to increased headcount and hiring of certain executives, $0.4 million in outside professional services, partially offset by a decrease of $0.9 million in marketing and event costs, $0.4 million in travel costs, and $0.2 million in allocated overhead. The increase in headcount was driven by our continued investment to acquire new customers and to grow our revenue from existing customers. Sales and marketing expense decreased to 39% of total revenue during the three months ended October 31, 2019 from 40% during the three months ended October 31, 2018.

General and Administrative


	Three Months Ended October 31,
	2019			2018			$ Change		% Change
	(dollars in thousands)
General and administrative	$	10,597		$	9,579		$	1,018	11	%
Percentage of total revenue	15		%	16		%

General and administrative expense increased by $1.0 million, or 11%, for the three months ended October 31, 2019 compared to the three months ended October 31, 2018, primarily due to an increase of $0.8 million in employee compensation costs related to increased headcount and $0.5 million in allocated overhead including facilities expansions, partially offset by a decrease of $0.2 million in outside professional services costs. General and administrative expense decreased to 15% of total revenue during the three months ended October 31, 2019 from 16% during the three months ended October 31, 2018.

Interest and Other Income (Expense), Net


	Three Months Ended October 31,
	2019		2018		$ Change		% Change
	(dollars in thousands)
Interest and other income (expense), net	$	1,190	$	633	$	557	88	%

Interest and other income (expense), net increased by $0.6 million for the three months ended October 31, 2019 compared to the three months ended October 31, 2018, primarily due to $0.5 million in net gains related to the revaluation of cash, accounts receivable and payables recorded in a foreign currency.

Income Tax Provision


	Three Months Ended October 31,
	2019		2018		$ Change		% Change
	(dollars in thousands)
Income tax provision	$	(421)	$	(326)	$	(95)	29	%

We are subject to federal and state income taxes in the United States and taxes in foreign jurisdictions. For the three months ended October 31, 2019 and 2018, we recorded a tax provision of $0.4 million and $0.3 million, respectively, on losses before income taxes of $17.8 million and $16.9 million, respectively. The effective tax rates for the three months ended October 31, 2019 and 2018 were (2.4)% and (1.9)%, respectively. The effective tax rate differs from the statutory rate primarily as a result of no benefit on pretax losses incurred in the United States. For the three months ended October 31, 2019 and 2018, we maintained a full valuation allowance on our U.S. federal and state net deferred tax assets as it was more likely than not that those deferred tax assets will not be realized.

Comparison of the Nine Months Ended October 31, 2019 and 2018

Revenue


	Nine Months Ended October 31,
	2019			2018			$ Change		% Change
	(dollars in thousands)
Revenue:
Subscription	$	151,996		$	119,849		$	32,147	27	%
Professional services	53,668			51,802			1,866		4	%
Total revenue	$	205,664		$	171,651		$	34,013	20	%
Percentage of revenue:
Subscription	74		%	70		%
Professional services	26			30
Total revenue	100		%	100		%

Subscription revenue increased by $32.1 million, or 27%, for the nine months ended October 31, 2019 compared to the nine months ended October 31, 2018. The increase was driven by growth in our customer base, including both new and existing customers, and includes a one-time recognition of $1.3 million related to a contract resolution with a customer that will not be recurring in upcoming quarters. New customers contributed approximately $15.6 million of the increase in subscription revenue, excluding the one-time recognition discussed above, for the nine months ended October 31, 2019 compared to the prior year period, while sales of additional products to our existing customers contributed the remainder. We calculate subscription revenue from new customers on a year-to-date basis by adding the revenue recognized from new customers acquired in the 12 months prior to each discrete quarter within the year-to-date period.

Professional services revenue increased by $1.9 million, or 4%, for the nine months ended October 31, 2019 compared to the nine months ended October 31, 2018. The growth in professional services revenue was primarily due to increased revenue from customer deployments of our products. This increase was partially offset by the impact of the previously disclosed sales execution challenges.

Cost of Revenue and Gross Margin


	Nine Months Ended October 31,
	2019			2018			$ Change		% Change
	(dollars in thousands)
Cost of revenue:
Subscription	$	38,589		$	31,273		$	7,316	23	%
Professional services	61,445			53,569			7,876		15	%
Total cost of revenue	$	100,034		$	84,842		$	15,192	18	%
Gross margin:
Subscription	75		%	74		%
Professional services	(14)			(3)
Total gross margin	51		%	51		%

Cost of subscription revenue increased by $7.3 million, or 23%, for the nine months ended October 31, 2019 compared to the nine months ended October 31, 2018. The increase in cost of subscription revenue was driven by an increase of $4.9 million in data center costs primarily related to third-party cloud hosting as we grow and transition our data center model to the cloud, $1.6 million in employee compensation costs related to increased headcount, $0.9 million in amortization of internal-use software costs, $0.3 million in allocated overhead including facilities expansions, and $0.3 million in software license costs, partially offset by a decrease of $0.4 million in amortization of purchased technology and $0.2 million in travel costs. The key drivers of the increase in cost of subscription revenue were the growth in number of customers and cost of building out the infrastructure for migrating our data center to the cloud.

Cost of professional services revenue increased by $7.9 million, or 15%, for the nine months ended October 31, 2019 compared to the nine months ended October 31, 2018. The increase in cost of professional services revenue was driven by an increase of $8.0 million in compensation costs related to increased headcount, $2.0 million in allocated overhead including facilities expansions, $0.3 million in events, partially offset by a decrease of $2.1 million in outside professional services and $0.4 million in travel costs. The key driver of the increase in cost of professional services revenue was headcount in anticipation of supporting customer deployments, some of which were not fully utilized due to the previously disclosed sales execution and product integration challenges.

Our gross margin for subscription services increased to 75% for the nine months ended October 31, 2019 from 74% for the nine months ended October 31, 2018, primarily due to a benefit from a one-time recognition of $1.3 million related to a contract resolution with a customer that will not be recurring in upcoming quarters.

Our gross margin for professional services decreased to (14)% for the nine months ended October 31, 2019 compared to (3)% for the nine months ended October 31, 2018, primarily due to the previously disclosed sales execution and product integration challenges, which negatively impacted utilization.

Operating Expenses

Research and Development


	Nine Months Ended October 31,
	2019			2018			$ Change		% Change
	(dollars in thousands)
Research and development	$	53,662		$	39,667		$	13,995	35	%
Percentage of total revenue	26		%	23		%

Research and development expense increased by $14.0 million, or 35%, for the nine months ended October 31, 2019 compared to the nine months ended October 31, 2018, primarily due to an increase of $13.5 million in employee compensation costs due to increased headcount, $1.2 million in allocated overhead including facilities expansions, $0.6 million in data center costs, and $0.2 million in software license costs, partially offset by $1.3

million in higher capitalized software development costs and a decrease of $0.2 million in travel costs. The increase in headcount was driven by our continued investment in technology, innovation, and new products. As a result of our continued investment, research and development expense increased to 26% of total revenue during the nine months ended October 31, 2019 from 23% during the nine months ended October 31, 2018.

Sales and Marketing


	Nine Months Ended October 31,
	2019			2018			$ Change		% Change
	(dollars in thousands)
Sales and marketing	$	80,818		$	71,008		$	9,810	14	%
Percentage of total revenue	39		%	41		%

Sales and marketing expense increased by $9.8 million, or 14%, for the nine months ended October 31, 2019 compared to the nine months ended October 31, 2018, primarily due to an increase of $11.1 million in employee compensation costs related to increased headcount and hiring of certain executives, $0.6 million in allocated overhead including facilities expansions, $0.6 million in outside professional services, and $0.3 million in software license costs, partially offset by a decrease of $1.9 million in marketing and event costs and $0.6 million in travel costs. The increase in headcount was driven by our continued investment to acquire new customers and to grow our revenue from existing customers. Sales and marketing expense decreased to 39% of total revenue during the nine months ended October 31, 2019 from 41% during the nine months ended October 31, 2018.

General and Administrative


	Nine Months Ended October 31,
	2019			2018			$ Change		% Change
	(dollars in thousands)
General and administrative	$	32,366		$	27,553		$	4,813	17	%
Percentage of total revenue	16		%	16		%

General and administrative expense increased by $4.8 million, or 17%, for the nine months ended October 31, 2019 compared to the nine months ended October 31, 2018, primarily due to an increase of $4.9 million in employee compensation costs related to increased headcount, $0.8 million in allocated overhead including facilities expansions, and $0.2 million in software license costs, partially offset by a decrease of $0.8 million in costs related to our IPO. General and administrative expense remained at 16% of total revenue during the nine months ended October 31, 2019 and 2018.

Interest and Other Income (Expense), Net


	Nine Months Ended October 31,
	2019		2018		$ Change		% Change
	(dollars in thousands)
Interest and other income (expense), net	$	2,294	$	(1,218)	$	3,512	288	%

Interest and other income (expense), net increased by $3.5 million for the nine months ended October 31, 2019 compared to the nine months ended October 31, 2018, primarily due to an increase of $1.3 million in income from invested cash balances, a $1.7 million reduction in losses related to revaluing cash, accounts receivable and payables held in a foreign currency, and a decrease of $0.3 million in interest expense. We began investing our proceeds from the IPO in the second half of fiscal year 2019.

Income Tax Provision


	Nine Months Ended October 31,
	2019		2018		$ Change		% Change
	(dollars in thousands)
Income tax provision	$	(720)	$	(921)	$	201	22	%

We are subject to federal and state income taxes in the United States and taxes in foreign jurisdictions. For the nine months ended October 31, 2019 and 2018, we recorded a tax provision of $0.7 million and $0.9 million, respectively, on losses before income taxes of $58.9 million and $52.6 million, respectively. The effective tax rates for the nine months ended October 31, 2019 and 2018 were (1.2)% and (1.7)%, respectively. The effective tax rate differs from the statutory rate primarily as a result of no benefit on pretax losses incurred in the United States. For the nine months ended October 31, 2019 and 2018, we maintained a full valuation allowance on our U.S. federal and state net deferred tax assets as it was more likely than not that those deferred tax assets will not be realized.

Liquidity and Capital Resources

As of October 31, 2019, we had cash and cash equivalents and short-term investments of $170.4 million. Since inception, we have financed our operations primarily through the net proceeds we received through private sales of equity securities, payments received from customers for subscription and professional services, and borrowings from our Debt Agreement. Additionally, in April 2018 we completed our IPO in which we issued and sold an aggregate of 12.7 million shares of newly authorized Class A common stock at a price of $14.00 per share. We received aggregate net proceeds of $159.7 million from the IPO, after deducting underwriting discounts and commissions and payments of offering costs.

We believe our existing cash and cash equivalents and short-term investment balances, funds available under our Debt Agreement, and cash provided by subscriptions to our platform and related professional services will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months. Our future capital requirements will depend on many factors, including the rate of our revenue growth, the timing and extent of spending on research and development efforts and other business initiatives, the expansion of sales and marketing activities, the introduction of new and enhanced product offerings, and the continuing market adoption of our platform. We may in the future enter into arrangements to acquire or invest in complementary businesses, services, and technologies, including intellectual property rights. We may elect to or may be required to seek additional equity or debt financing. Sales of additional equity could result in dilution to our stockholders. In the event that additional financing is required from outside sources, we may not be able to raise it 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 new technologies, it could reduce our ability to compete successfully and harm our results of operations.

Debt Agreement

See Note 12. Debt to our unaudited condensed consolidated financial statements included in this Form 10-Q for more information about our Debt Agreement.

Cash Flows

The following table summarizes our cash flows for the periods indicated (in thousands):


	Nine Months Ended October 31,
	2019		2018
Net cash used in operating activities	$	(7,599)	$	(16,592)
Net cash used in investing activities	(9,518)		(107,986)
Net cash provided by financing activities	12,130		155,873
Effect of exchange rates on cash and cash equivalents and restricted cash	(416)		(341)
Net (decrease) increase in cash and cash equivalents and restricted cash	$	(5,403)	$	30,954

Operating Activities

Our largest source of operating cash is cash collections from our customers for subscription and professional services. Our primary uses of cash from operating activities are for employee-related expenditures, marketing expenses, third-party consulting expenses, facilities costs, and third-party hosting costs.

For the nine months ended October 31, 2019, net cash used in operating activities was $7.6 million, which consisted of a net loss of $59.6 million adjusted for non-cash charges of $48.8 million and net cash inflows of $3.2 million from changes in our operating assets and liabilities. Non-cash charges, which primarily consisted of stock-based compensation, depreciation and amortization of property and equipment and intangible assets and amortization of deferred commissions, increased compared to the same period last year primarily as a result of growth in our business operations.

For the nine months ended October 31, 2018, net cash used in operating activities was $16.6 million, which consisted of a net loss of $53.6 million adjusted for non-cash charges of $34.7 million and net cash inflows of $2.3 million provided by changes in our operating assets and liabilities. Non-cash charges primarily consisted of stock-based compensation, depreciation and amortization of property and equipment and intangible assets, amortization of deferred commissions and provision for doubtful accounts.

Investing Activities

Net cash used in investing activities for the nine months ended October 31, 2019 of $9.5 million was primarily due to $12.9 million in purchases of property and equipment and capitalized internal-use software, partially offset by 3.5 million provided by sales of short-term investments.

Net cash used in investing activities for the nine months ended October 31, 2018 of $108.0 million was primarily due to $97.1 million in purchases of short-term investments and $10.6 million in purchases of property and equipment and capitalized internal-use software.

Financing Activities

Cash provided by financing activities for the nine months ended October 31, 2019 of $12.1 million was primarily due to $9.0 million of stock option exercise proceeds and $5.1 million in proceeds from issuance of common stock under the ESPP, partially offset by $1.9 million of debt principal payments.

Cash provided by financing activities for the nine months ended October 31, 2018 of $155.9 million was primarily due to $160.3 million in net IPO proceeds, $9.0 million in proceeds from the issuance of common stock upon exercise of employee stock options, and $1.3 million in net proceeds from related party loans, partially offset by $12.6 million in payments to investors related to our acquisition of Leeyo, $1.3 million in payments made on leased equipment, and $0.8 million of debt payments.

Off-Balance Sheet Arrangements

As of October 31, 2019, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Obligations and Other Commitments

Our principal commitments consist of obligations under our operating leases for office space, our Debt Agreement and obligation to purchase cloud hosting services. The following table summarizes our contractual obligations as of October 31, 2019 (in thousands):


	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Operating lease obligations¹	$	90,714	$	9,866	$	25,914	$	17,257	$	37,677
Debt principal and interest²	12,244		4,785		7,459		—		—
Other contractual obligations³	14,588		14,588		—		—		—
	$	117,546	$	29,239	$	33,373	$	17,257	$	37,677

_________________________________

(1) We lease our facilities under long-term operating leases which expire on varying dates through June 2030. The lease agreements often contain provisions which require us to pay taxes, insurance, and maintenance costs.

(2) Debt principal and interest includes amounts owed under our Debt Agreement with Silicon Valley Bank including principal, interest and a $0.2 million facility fee on the term loan. Interest payments were calculated using the applicable rate as of October 31, 2019. See Note 12. Debt of the notes to our unaudited condensed consolidated financial statements included in this Form 10-Q for more information.

(3) Represents contractual obligations to make purchases, primarily related to cloud computing services from one of our vendors by September 30, 2020.

In March 2019, we entered into a new operating lease agreement for approximately 100,000 square feet of office space located in Redwood Shores, California that will replace our existing headquarters in San Mateo, CA. The initial rental rate is $446,460 per month with seven months of free rent in the first year, with annual increases of three percent (3%). The initial lease term is 127 months and commences upon the earlier of the date we move into the space or January 1, 2020, and includes an option to renew for an additional seven years at the then prevailing rental rate. The agreement also includes a reimbursement allowance of up to $10.0 million for tenant improvements made by the Company, of which $5.3 million was reimbursed as of October 31, 2019.

In the ordinary course of business, we enter into agreements of varying scope and terms pursuant to which we agree to indemnify customers, vendors, lessors, business partners, and other parties with respect to certain matters, including, but not limited to, losses arising out of the breach of such agreements, services to be provided by us, or from data breaches or intellectual property infringement claims made by third parties. In addition, we have entered into indemnification agreements with our directors and certain officers and employees that will require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers, or employees. As of October 31, 2019, no demands had been made upon us to provide indemnification under such agreements and there were no claims that we are aware of that could have a material effect on our consolidated balance sheets, consolidated statements of operations and comprehensive loss, or consolidated statements of cash flows.

As of October 31, 2019, we had accrued liabilities related to uncertain tax positions, which are reflected in our unaudited condensed consolidated balance sheets. These accrued liabilities are not reflected in the table above since it is unclear when these liabilities will be repaid.

Critical Accounting Policies and Estimates

We prepare our unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States (GAAP). In the preparation of these unaudited condensed consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations would be affected. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We refer to accounting estimates of this type as critical accounting policies and estimates.

Our significant accounting policies are discussed in Note 2. Summary of Significant Accounting Policies and Recent Accounting Pronouncements in our Annual Report on Form 10-K for the fiscal year ended January 31, 2019,

filed with the Securities and Exchange Commission (SEC) on April 18, 2019. There have been no significant changes to these policies during the nine months ended October 31, 2019, except as described in Note 2.Summary of Significant Accounting Policies and Recent Accounting Pronouncements to our condensed consolidated financial statements.

Non-GAAP Financial Measures

To supplement our condensed consolidated financial statements presented in accordance with U.S. GAAP, we monitor and consider non-GAAP loss from operations, free cash flow and Growth Efficiency Index (GEI). We believe our non-GAAP measures are useful in evaluating our operating performance. We use non-GAAP financial measures in conjunction with GAAP measures as part of our overall assessment of our performance, including the preparation of our annual operating budget and quarterly forecasts, to evaluate the effectiveness of our business strategies and to communicate with our board of directors concerning our financial performance. We believe our non-GAAP financial measures provide investors consistency and comparability with our past financial performance and facilitate period-to-period comparisons of our operating results. We also believe our non-GAAP financial measures are useful in evaluating our operating performance compared to that of other companies in our industry, as they generally eliminate the effects of certain items that may vary for different companies for reasons unrelated to overall operating performance.

Investors are cautioned that there are material limitations associated with the use of non-GAAP financial measures as an analytical tool. The non-GAAP financial measures we use may be different from non-GAAP financial measures used by other companies, limiting their usefulness for comparison purposes. We compensate for these limitations by providing specific information regarding the GAAP items excluded from our non-GAAP financial measures. The presentation of these non-GAAP financial measures is not intended to be considered in isolation or as a substitute for, or superior to, financial information prepared and presented in accordance with GAAP. Reconciliations of our non-GAAP financial measures to the nearest respective GAAP measures are provided below.

Non-GAAP Loss from Operations

We define non-GAAP loss from operations as GAAP operating loss adjusted to exclude stock-based compensation expense, amortization of acquired intangibles, and capitalization and amortization of internal-use software. We exclude the following items from non-GAAP loss from operations:

•Stock-based compensation expense. We exclude stock-based compensation expense, which is a non-cash expense, because we believe that excluding this item provides meaningful supplemental information regarding operational performance. In particular, stock-based compensation expense is not comparable across companies given it is calculated using a variety of valuation methodologies and subjective assumptions.

•Amortization of acquired intangible assets. We exclude amortization of acquired intangible assets, which is a non-cash expense. We exclude these amortization expenses because we do not believe these expenses have a direct correlation to the operation of our business.

•Internal-use software. We exclude non-cash adjustments for capitalization and the subsequent amortization of internal-use software, including any impairment charges, from certain of our non-GAAP measures. We capitalize certain costs incurred for the development of computer software for internal use and then amortize those costs over the estimated useful life. Capitalization and amortization of software development costs can vary significantly depending on the timing of products reaching technological feasibility and being made generally available. Moreover, because of the variety of approaches taken and the subjective assumptions made by other companies in this area, we believe that excluding the effects of capitalized software costs allows investors to make more meaningful comparisons between our operating results and those of other companies.


	Three Months Ended October 31,						Nine Months Ended October 31,
	2019		2018		2019		2018
GAAP loss from operations	$	(19,006)	$	(17,531)	$	(61,216)	$	(51,419)
Add:
Stock-based compensation expense	11,838		7,459		31,413		17,722
Amortization of acquired intangibles	423		503		1,353		1,747
Internal-use software	(529)		(273)		(1,376)		(969)
Non-GAAP loss from operations	$	(7,274)	$	(9,842)	$	(29,826)	$	(32,919)

Free Cash Flow

We define free cash flow as net cash used in operating activities, less cash used for purchases of property and equipment. We exclude purchases of property and equipment from our free cash flow because we consider these capital expenditures to be a necessary component of our ongoing operations. We consider free cash flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated by the business that can possibly be used for investing in our business and strengthening our balance sheet, but it is not intended to represent the residual cash flow available for discretionary expenditures.


	Three Months Ended October 31,						Nine Months Ended October 31,
	2019		2018		2019		2018
Net cash provided by (used in) operating activities	$	3,509	$	(6,370)	$	(7,599)	$	(16,592)
Less:
Purchases of property and equipment	(8,636)		(3,931)		(12,878)		(10,621)
Free cash flow	$	(5,127)	$	(10,301)	$	(20,477)	$	(27,213)
Net cash used in investing activities	$	3,901	$	(101,049)	$	(9,518)	$	(107,986)
Net cash provided by financing activities	$	801	$	6,566	$	12,130	$	155,873

Growth Efficiency Index

We define Growth Efficiency Index (GEI) as the trailing 12-months sales and marketing expense, excluding trailing 12-months stock-based compensation expense, divided by the year-over-year increase in the trailing 12-month subscription revenue. We consider GEI as a metric of our operational efficiencies and believe GEI provides useful information to management and investors about how much sales and marketing expense we incur to attain new revenue. A lower GEI indicates lower sales and marketing spending to acquire incremental revenue and reflects increased operational efficiencies. Our GEI was 2.2 as of October 31, 2019. We expect to experience fluctuations in GEI as we grow and scale our business.

The following table includes the information needed to reconcile GEI:


	October 31, 2019
	As Adjusted¹
GAAP sales and marketing expense	$	104,979
Less:
Stock-based compensation expense	(10,138)
Non-GAAP sales and marketing expense	$	94,841
Change in GAAP subscription revenue	$	43,117
GEI	2.2

(1) Financial information presented above has been adjusted to reflect the adoption of ASC 606.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Foreign Currency Exchange Risk

The functional currencies of our foreign subsidiaries are the respective local currencies. Our sales are typically denominated in the local currency of the country in which the customer resides. The majority of our sales are made in the United States and those sales are denominated in U.S. dollars. Therefore, the portion of our revenue that is subject to significant foreign currency risk is limited. Our operating expenses are denominated in the currencies of the countries in which our operations are located, which are primarily in the United States, Europe, China, India, Japan, and Australia. Our results of operations and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates and may be adversely affected in the future due to changes in foreign exchange rates. To date, we have not entered into any hedging arrangements with respect to foreign currency risk or other derivative financial instruments. For the nine months ended October 31, 2019, a hypothetical 10% change in foreign currency exchange rates applicable to our business would not have had a material impact on our accompanying unaudited condensed consolidated financial statements.

Interest Rate Risk

We had cash and cash equivalents and short-term investments of $170.4 million as of October 31, 2019. Our cash and cash equivalents and short-term investments are held for working capital purposes. We do not make investments for trading or speculative purposes.

Our cash equivalents and short-term investments are subject to market risk due to changes in interest rates. Fixed rate securities may have their market value adversely affected due to a rise in interest rates. Due in part to these factors, our future investment income may fall short of our expectations due to changes in interest rates or we may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates. However, because we classify our short-term investments as “available for sale,” no realized gains or losses are recognized due to changes in interest rates unless such securities are sold prior to maturity or decreases in fair value are determined to be other-than-temporary.

Under our Debt Agreement, we pay interest on any outstanding balances based on a variable market rate. A significant change in these market rates may adversely affect our operating results.

As of October 31, 2019, a hypothetical 10% relative change in interest rates would not have had a material impact on the value of our cash equivalents and short-term investments. Fluctuations in the value of our cash equivalents and short-term investments caused by a change in interest rates (gains or losses on the carrying value) are recorded in other comprehensive income, and are realized only if we sell the underlying securities prior to maturity. In addition, a hypothetical 10% relative change in interest rates would not have had a material impact on our operating results for the nine months ended October 31, 2019.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of October 31, 2019. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of October 31, 2019, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding its required disclosure.

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. Accordingly, our disclosure controls and procedures provide reasonable assurance of achieving their objectives.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we may be subject to legal proceedings, as well as demands, claims and threatened litigation. Other than the matters described in Note 16. Commitments and Contingencies in the notes to our condensed consolidated financial statements, we are not currently party to any material legal proceedings or claims, nor are we aware of any pending or threatened litigation or claims that could have a material adverse effect on our business, operating results, cash flows, or financial condition should such litigation or claim be resolved unfavorably. The outcomes of our legal proceedings and other contingencies are inherently unpredictable, subject to significant uncertainties, and could be material to our operating results and cash flows for a particular period. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors.

Item 1A. Risk Factors

A description of the risks and uncertainties associated with our business is set forth below. You should carefully consider the risks and uncertainties described below, as well as the other information in this Form 10-Q, including our accompanying unaudited condensed consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The occurrence of any of the events or developments described below, or of additional risks and uncertainties not presently known to us or that we currently deem immaterial, could materially and adversely affect our business, results of operations, financial condition and growth prospects. In such an event, the market price of our Class A common stock could decline and you could lose all or part of your investment.

We have a history of net losses, anticipate increasing our operating expenses in the future, and may not achieve or sustain profitability.

We have incurred net losses in each fiscal year since inception, including net losses of $77.6 million, $47.2 million, and $39.1 million in fiscal 2019, fiscal 2018 and fiscal 2017, respectively. We expect to incur net losses for the foreseeable future. As of October 31, 2019, we had an accumulated deficit of $367.1 million to make significant future expenditures related to the development and expansion of our business, including increasing our overall customer base, expanding relationships with existing customers, entering new vertical markets, expanding our global footprint, leveraging our strategic partners including GSIs to accelerate our growth, optimizing pricing and packaging, and expanding our operations and infrastructure, both domestically and internationally, and in connection with legal, accounting, and other administrative expenses related to operating as a public company. These efforts may prove more expensive than we currently anticipate, and we may not succeed in increasing our revenue sufficiently, or at all, to offset these increased expenses. While our revenue has grown in recent years, if our revenue declines or fails to grow at a rate faster than these increases in our operating expenses, we will not be able to achieve and maintain profitability in future periods. As a result, we may continue to generate losses. We cannot assure you that we will achieve profitability in the future or that, if we do become profitable, we will be able to sustain profitability.

If the shift by companies to subscription business models, including consumer adoption of products and services that are provided through such models, and, in particular, the market for subscription management software, develops slower than we expect, our growth may slow or stall, and our operating results could be adversely affected.

Our success depends on companies shifting to subscription business models and consumers choosing to consume products and services through such models. Many companies may be unwilling or unable to offer their solutions using a subscription business model, especially if they do not believe that the consumers of their products and services would be receptive to such offerings. Our success will also depend, to a large extent, on the willingness of medium and large businesses that have adopted subscription business models utilizing cloud-based products and services to manage billings and financial accounting relating to their subscriptions. The adoption of these models is still relatively new, and enterprises may not choose to shift their business model or, if they do, they may decide that they do not need a solution that offers the range of functionalities that we offer. Many companies have invested substantial effort and financial resources to develop custom-built applications or integrate traditional enterprise software into their businesses as they shift to subscription or subscription business models and may be reluctant or unwilling to switch to different applications. Accordingly, it is difficult to predict customer adoption rates

and demand for our solution, the future growth rate and size of the market for subscription management software, or the entry of competitive solutions. Factors that may affect market acceptance of our products and services include:

•the number of companies shifting to subscription business models;

•the number of consumers and businesses adopting new, flexible ways to consume products and services;

•the security capabilities, reliability, and availability of cloud-based services;

•customer concerns with entrusting a third party to store and manage their data, especially transaction-critical, confidential, or sensitive data;

•our ability to minimize the time and resources required to deploy our solution;

•our ability to achieve and maintain high levels of customer satisfaction;

•our ability to deploy upgrades and other changes to our solution without disruption to our customers;

•the level of customization or configuration we offer; and

•the price, performance, and availability of competing products and services.

The markets for subscription products and services and for subscription management software may not develop further or may develop slower than we expect. If companies do not shift to subscription business models and subscription management software does not achieve widespread adoption, or if there is a reduction in demand for subscription products and services or subscription management software caused by technological challenges, weakening economic conditions, security or privacy concerns, decreases in corporate spending, a lack of customer acceptance, or otherwise, our business could be materially and adversely affected. In addition, our subscription agreements with our customers generally provide for a minimum subscription platform fee and usage-based fees, which depend on the total dollar amount that is invoiced or managed on our solution. Because a portion of our revenue depends on the volume of transactions that our customers process through our solution, if our customers do not adopt our solution throughout their business, if their businesses decline or fail, or if they are unable to successfully shift to subscription business models, our revenue could decline and our operation results could be adversely impacted.

We have experienced rapid growth and expect to invest in our growth for the foreseeable future. If we fail to manage our growth effectively, our business, operating results, and financial condition could be adversely affected.

We have experienced rapid growth in our operations and personnel in recent years. The growth and expansion of our business has placed and continues to place a significant strain on our management, operations, financial infrastructure, and corporate culture. In the event of further growth of our operations or in the number of our third-party relationships, our information technology systems and our internal controls and procedures may not be adequate to support our operations.

To manage growth in our operations and personnel, we will need to continue to improve our operational, financial, and management controls and our reporting systems and procedures, as well as training and experience oversight. Failure to manage growth effectively could result in difficulty or delays in deploying customers, declines in quality or customer satisfaction, increases in costs, difficulties in introducing new products and services or enhancing existing products and services, loss of customers, or other operational difficulties in executing sales strategies, any of which could adversely affect our business performance and operating results.

Our revenue growth and ability to achieve and sustain profitability will depend, in part on being able to expand our direct sales force and increase the productivity of our sales force.

To date, most of our revenue has been attributable to the efforts of our direct sales force. In order to increase our revenue and achieve and sustain profitability, we must increase the size of our direct sales force, both in the United States and internationally, to generate additional revenue from new and existing customers.

There is significant competition for sales personnel with the skills and technical knowledge that we require. Because our solution is often sold to large enterprises and involves long sales cycle and complex customer requirements, it is more difficult to find sales personnel with the specific skills and technical knowledge needed to sell our solution and, even if we are able to hire qualified personnel, doing so may be expensive. Our ability to achieve significant revenue growth will depend, in large part, on our success in recruiting, training, and retaining sufficient numbers of direct sales personnel to support our growth. Due to the complexities of our customer needs, new sales personnel require significant training and can take a number of months to achieve full productivity. Our recent hires and planned hires may not become productive as quickly as we expect and if our new sales employees do not become fully productive on the timelines that we have projected or at all, our revenue will not increase at anticipated levels and our ability to achieve long-term projections may be negatively impacted.

We may also be unable to hire or retain sufficient numbers of qualified individuals in the markets where we do business or plan to do business. Furthermore, hiring sales personnel in new countries requires additional set up and upfront costs that we may not recover if the sales personnel fail to achieve full productivity. In addition, as we continue to grow, a larger percentage of our sales force will be new to our company and our solution, which may adversely affect our sales if we cannot train our sales force quickly or effectively. Attrition rates may increase, and we may also face integration challenges as we continue to seek to expand our sales force. If we are unable to hire and train sufficient numbers of effective sales personnel, if attrition increases, or if the sales personnel are not successful in obtaining new customers or increasing sales to our existing customer base, our business will be adversely affected.

We periodically change and make adjustments to our sales organization in response to market opportunities, competitive threats, management changes, product and service introductions or enhancements, acquisitions, sales performance, increases in sales headcount, cost levels, and other internal and external considerations. For example, in late October 2019, Robert Traube joined Zuora as our new Chief Revenue Officer leading the sales organization and, in November 2019, James Huang joined the sales team as Senior Vice President of Global Alliances. These and future changes in our sales organization may result in a temporary reduction of productivity, which could negatively affect our rate of growth. In addition, any significant change to the way we structure our compensation of our sales organization may be disruptive and may affect our revenue growth.

If we are unable to attract new customers and expand sales to existing customers our revenue growth could be slower than we expect, and our business may be adversely affected.

Our ability to achieve significant growth in revenue in the future will depend, in large part, upon our ability to attract new customers. This may be particularly challenging where an organization has already invested substantial personnel and financial resources to integrate billings and other business and financial management tools, including custom-built solutions, into its business, as such an organization may be reluctant or unwilling to invest in new products and services. As a result, selling our solution often requires sophisticated and costly sales efforts that are targeted at senior management. During the nine months ended October 31, 2019, sales and marketing expenses represented approximately 39% of our total revenue. If we fail to attract new customers and fail to maintain and expand new customer relationships, our revenue may grow more slowly than we expect and our business may be adversely affected.

Our future revenue growth also depends upon expanding sales and renewals of subscriptions to our solution with existing customers. If our existing customers do not expand their use of our solution over time or do not renew their subscriptions, our revenue may grow more slowly than expected, may not grow at all, or may decline. Our success, in part, is dependent on our ability to cross-sell Zuora RevPro products into our existing Zuora Billing customers. If we experience delays in integration or implementation of these products, revenue from cross-selling may grow more slowly or may not grow at all. In the three months ended April 30, 2019, we temporarily slowed down implementations between our Zuora RevPro and Zuora Billing customers due to product integration challenges. This temporary slowdown resulted in lower than expected total revenues for such quarter and resulted in us lowering our financial projections. We have resumed the paused customer implementations and are working to get these customers operationally live on our integrated product.

We plan to continue expanding our sales efforts, both domestically and internationally, but we may be unable to hire qualified sales personnel, may be unable to successfully train those sales personnel that we are able to hire, and sales personnel may not become fully productive on the timelines that we have projected or at all. Additionally, although we dedicate significant resources to sales and marketing programs, including our Subscribed events, these sales and marketing programs may not have the desired effect and may not expand sales. We cannot assure

you that our efforts would result in increased sales to existing customers, and additional revenue. If our efforts to expand sales and renewals to existing customers are not successful, our business and operating results could be adversely affected.

Our customers generally enter into subscription agreements with one- to three-year subscription terms and have no obligation to renew their subscriptions after the expiration of their initial subscription period. Moreover, our customers that do renew their subscriptions may renew for lower subscription or usage amounts or for shorter subscription periods. In addition, in the first year of a subscription, customers often purchase an increased level of professional services (such as training and deployment services) than they do in renewal years. Costs associated with maintaining a professional services department are relatively fixed in the short-term, while professional services revenue is dependent on the amount of billable work actually performed for customers in a period, the combination of which may result in variability in, and have a negative impact on, our gross profit. Customer renewals may decline or fluctuate as a result of a number of factors, including the breadth of early deployment, reductions in our customers’ spending levels, higher volumes of usage purchased upfront relative to actual usage during the subscription term, changes in customers’ business models and use cases, our customers’ satisfaction or dissatisfaction with our solution, our pricing or pricing structure, the pricing or capabilities of products or services offered by our competitors, or the effects of economic conditions. If our customers do not renew their agreements with us, or renew on terms less favorable to us, our revenue may decline.

If our security measures are breached, if unauthorized access to customer data, our data, or our solution is otherwise obtained, or if our solution is perceived as not being secure, customers may reduce the use of or stop using our solution, and we may incur significant liabilities.

Security breaches and other security incidents could result in the loss of information, disruption of services, litigation, indemnity obligations, penalties, and other liability. If our security measures or those of our service providers are breached, or are perceived to have been breached, as a result of third-party action, including cyber-attacks or other intentional misconduct by computer hackers, employee error, malfeasance, or otherwise, and someone obtains unauthorized access to our data or other data we or our service providers maintain, including sensitive customer data, personal information, intellectual property, and other confidential business information, we could face loss of business, lawsuits or claims, regulatory investigations, or orders, and our reputation could be severely damaged.

We have in the past experienced infrequent security breaches and may in the future experience additional security breaches. Although the security breaches that we have experienced to date have not had a material effect on our business, there is no assurance that our security systems or processes will prevent or mitigate more serious break-ins, tampering, security breaches or other cyber-attacks that could occur in the future. In late November 2019, we observed an increase in credit card authorization attempts by third parties made through our payment functionality embedded in certain of our customers’ websites. We are currently not aware of any material impact to our business from this matter, and we are working on remediation measures to prevent any such further activity.

If we experience a security breach or incident, we could be required to expend significant capital and other resources to alleviate the problem, as well as incur significant costs and liabilities, including due to litigation, indemnity obligations, damages for contract breach, penalties for violation of applicable laws or regulations, and costs for remediation and other incentives offered to affected parties, including customers, other business partners and employees, in an effort to maintain business relationships after a breach or other incident. Moreover, if our solution is perceived as not being secure, regardless of whether our security measures are actually breached, we could suffer harm to our reputation, and our operating results could be negatively impacted.

We cannot assure you that any limitations of liability provisions in our contracts would be enforceable or adequate or would otherwise protect us from any liabilities or damages with respect to any particular claim relating to a security breach or other security-related matters. We also cannot be sure that our existing insurance coverage will continue to be available on acceptable terms or will be available in sufficient scope or amounts to cover one or more large claims related to a security incident or breach, or that the insurer will not deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceed available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, including our financial condition, operating results, and reputation.

Cyber-attacks and other malicious Internet-based activities continue to increase generally. Because the techniques used to obtain unauthorized access to or sabotage systems change frequently and generally are not identified until they are launched against a target, we and our service providers may be unable to anticipate these techniques or to implement adequate preventative measures. In addition, third parties may attempt to fraudulently induce employees, contractors, or users to disclose information to gain access to our data or our customers’ data. We could suffer significant damage to our brand and reputation if a cyber-attack or other security incident were to allow unauthorized access to or modification of our customers’ data, other external data, or our own data or our IT systems or if the services we provide to our customers were disrupted, or if our solution is perceived as having security vulnerabilities. Customers could lose confidence in the security and reliability of our solution and perceive them to be not secure. This could lead to fewer customers using our products and services and result in reduced revenue and earnings. The costs we would incur to address and respond to these security incidents, and to prevent them thereafter, would increase our expenses. These types of security incidents could also lead to lawsuits, regulatory investigations and claims, and increased legal liability, including in some cases costs related to notification of the incident and fraud monitoring.

Our success depends in large part on a limited number of products. If these products fail to gain or lose market acceptance, our business will suffer.

We derive substantially all of our revenue and cash flows from sales of subscriptions and associated deployment of our Zuora Central platform and our Zuora Billing and Zuora RevPro products. As such, the continued growth in market demand for these products is critical to our success. Demand for our solution is affected by a number of factors, many of which are beyond our control, including the growth or contraction of the Subscription Economy, continued market acceptance of our solution by customers for existing and new use cases, the timing of development and release of new products and services, features, and functionality introduced by our competitors, changes in accounting standards, policies, guidelines, interpretations, or principles that would impact the functionality and use of our solution, and technological change. We expect that an increasing transition to disaggregated solutions that focus on addressing specific customer use cases would continue to disrupt the enterprise software space, enabling new competitors to emerge. We cannot assure you that our solutions and future enhancements to our solution will be able to address future advances in technology or the requirements of enterprise customers. If we are unable to meet customer demands in creating a flexible solution designed to address all these needs or otherwise achieve more widespread market acceptance of our solution, our business, operating results, financial condition, and growth prospects would be adversely affected.

Our operating results may fluctuate from quarter to quarter, which makes our future results difficult to predict.

Our quarterly operating results have fluctuated in the past and may fluctuate in the future. Additionally, we have a limited operating history with the current scale of our business, which makes it difficult to forecast our future results and subjects us to a number of uncertainties, including our ability to plan for and anticipate future growth. As a result, you should not rely upon our past quarterly operating results as indicators of future performance. We have encountered, and will continue to encounter, risks and uncertainties frequently experienced by growing companies in rapidly evolving markets, such as the risks and uncertainties described herein. Our operating results in any given quarter can be influenced by numerous factors, many of which are unpredictable or are outside of our control, including:

•our ability to maintain and grow our customer base;

•our ability to retain and increase revenue from existing customers;

•our ability to introduce new products and services and enhance existing products and services;

•our ability to integrate or implement our existing products and services on a timely basis or at all;

•our ability to deploy our products successfully within our customers' information technology ecosystems;

•our ability to enter into larger contracts;

•increases or decreases in subscriptions to our platform;

•our ability to sell to large enterprise customers;

•the transaction volume that our customers processes through our system;

•our ability to respond to competitive developments, including pricing changes and the introduction of new products and services by our competitors;

•the productivity of our sales force;

•our ability to grow our relationships with strategic partners such as GSIs and their effectiveness in increasing our sales and implementing our products;

•changes in the mix of products and services that our customers use;

•the length and complexity of our sales cycles;

•cost to develop and upgrade our solution to incorporate new technologies;

•seasonal purchasing patterns of our customers;

•impact of outages of our solution and reputational harm;

•costs related to the acquisition of businesses, talent, technologies, or intellectual property, including potentially significant amortization costs and possible write-downs;

•failures or breaches of security or privacy, and the costs associated with responding to and addressing any such failures or breaches;

•foreign exchange fluctuations;

•changes to financial accounting standards and the interpretation of those standards that may affect the way we recognize and report our financial results, including changes in accounting rules governing recognition of revenue;

•the impact of changes to financial accounting standards;

•general economic and political conditions and government regulations in the countries where we currently operate or plan to expand;

•decisions by us to incur additional expenses, such as increases in sales and marketing or research and development;

•the timing of stock-based compensation expense; and

•potential costs to attract, onboard, retain, and motivate qualified personnel.

The impact of one or more of the foregoing and other factors may cause our operating results to vary significantly. As such, we believe that quarter-to-quarter comparisons of our operating results may not be meaningful and should not be relied upon as an indication of future performance. If we fail to meet or exceed the expectations of investors or securities analysts, then the trading price of our Class A common stock could fall substantially, and we could face costly lawsuits, including shareholder litigation.

A customer’s failure to deploy our solution after it enters into a subscription agreement with us, or the incorrect or improper deployment or use of our solution could result in customer dissatisfaction and negatively affect our business, operating results, financial condition, and growth prospects.

Our solution is deployed in a wide variety of technology environments and into a broad range of complex workflows. We believe our future success will depend in part on our ability to increase both the speed and success of our deployments, by improving our deployment methodology, hiring and training qualified professionals,

deepening relationships with deployment partners, and increasing our ability to integrate into large-scale, complex technology environments. We often assist our customers in deploying our solution. In other cases, customers rely on third-party partners to complete the deployment. In some cases, customers initially engage us to deploy our solution, but, for a variety of reasons, including strategic decisions not to utilize subscription business models, fail to ultimately deploy our solution. If we or our third-party partners are unable to deploy our solution successfully, or unable to do so in a timely manner and, as a result, customers do not utilize our solution, we would not be able to generate future revenue from such customers based on transaction or revenue volume and the upsell of additional products and services, and our future operating results could be adversely impacted. In addition, customers may also seek refunds of their initial subscription fee. Moreover, customer perceptions of our solution may be impaired, our reputation and brand may suffer, and customers may choose not to renew or expand their use of our solution.

If we are not able to develop and release new products and services, or successful enhancements, new features, and modifications to our existing products and services, our business could be adversely affected.

The market for our solution, including our billing and revenue recognition offerings, is characterized by rapid technological change, frequent new product and service introductions and enhancements, changing customer demands, and evolving industry standards. The introduction of products and services embodying new technologies can quickly make existing products and services obsolete and unmarketable. Additionally, because we provide billing and finance solutions to help our customers with compliance and financial reporting, changes in law, regulations, and accounting standards could impact the usefulness of our products and services and could necessitate changes or modifications to our products and services to accommodate such changes. Subscription management products and services, including our billing and revenue recognition offerings, are inherently complex, and our ability to develop and release new products and services or enhancements, new features and modifications to our existing products and services depends on several factors, including timely completion, competitive pricing, adequate quality testing, integration with new and existing technologies and our solution, and overall market acceptance. We cannot be sure that we will succeed in developing, marketing, and delivering on a timely and cost-effective basis enhancements or improvements to our platform or any new products and services that respond to continued changes in subscription management practices or new customer requirements, nor can we be sure that any enhancements or improvements to our platform or any new products and services will achieve market acceptance. Since developing our solution is complex, the timetable for the release of new products and enhancements to existing products is difficult to predict, and we may not offer new products and updates as rapidly as our customers require or expect. Any new products or services that we develop may not be introduced in a timely or cost-effective manner, may contain errors or defects, or may not achieve the broad market acceptance necessary to generate sufficient revenue. Moreover, even if we introduce new products and services, we may experience a decline in revenue of our existing products and services that is not offset by revenue from the new products or services. For example, customers may delay making purchases of new products and services to permit them to make a more thorough evaluation of these products and services or until industry and marketplace reviews become widely available. Some customers may hesitate to migrate to a new product or service due to concerns regarding the complexity of migration or performance of the new product or service. In addition, we may lose existing customers who choose a competitor’s products and services or choose to utilize internally developed applications instead of our products and services. This could result in a temporary or permanent revenue shortfall and adversely affect our business.

In addition, because our products and services are designed to interoperate with a variety of other internal or third-party software products and business systems applications, we will need to continuously modify and enhance our products and services to keep pace with changes in application programming interfaces (APIs), and other software and database technologies. We may not be successful in either developing these new products and services, modifications, and enhancements or in bringing them to market in a timely fashion. There is no assurance that we will successfully resolve such issues in a timely and cost-effective manner. Furthermore, modifications to existing platforms or technologies, including any APIs with which we interoperate, will increase our research and development expenses. Any failure of our products and services to operate effectively with each other or with other platforms and technologies could reduce the demand for our products and services, result in customer dissatisfaction, and adversely affect our business.

Our business depends largely on our ability to attract and retain talented employees, including senior management. If we lose the services of Tien Tzuo, our founder, Chairman, and Chief Executive Officer, or other critical talent across our executive team and in other key roles, we may not be able to execute on our business strategy.

Our future success depends on our continuing ability to attract, train, assimilate, and retain highly skilled personnel, including software engineers, sales personnel, and professional services personnel. We face intense competition for qualified individuals from numerous software and other technology companies. In addition, competition for qualified personnel, particularly software engineers, is particularly intense in the San Francisco Bay Area, where our headquarters is located. We may not be able to retain our current key employees or attract, train, assimilate, or retain other highly skilled personnel in the future. We may incur significant costs to attract and retain highly skilled personnel, and we may lose new employees to our competitors or other technology companies before we realize the benefit of our investment in recruiting and training them. As we move into new geographies, we will need to attract and recruit skilled personnel in those areas. If we are unable to attract and retain suitably qualified individuals who are capable of meeting our growing technical, operational, and managerial requirements, on a timely basis or at all, our business may be adversely affected.

Our future success also depends in large part on the continued services of senior management and other key personnel. In particular, we are highly dependent on the services of Tien Tzuo, our founder, Chairman and Chief Executive Officer, who is critical to the development of our technology, platform, future vision, and strategic direction. We rely on our leadership team in the areas of operations, security, marketing, sales, support, and general and administrative functions, and on individual contributors on our research and development team. Our senior management and other key personnel are all employed on an at-will basis, which means that they could terminate their employment with us at any time, for any reason, and without notice. We do not currently maintain key-person life insurance policies on any of our officers or employees. If we lose the services of senior management or other key personnel, or if we are unable to attract, train, assimilate, and retain the highly skilled personnel we need, our business, operating results, and financial condition could be adversely affected.

Volatility or lack of appreciation in our stock price may also affect our ability to attract and retain our key employees. Many of our senior personnel and other key employees have become, or will soon become, vested in a substantial amount of stock or stock options. Employees may be more likely to leave us if the shares they own or the shares underlying their vested options have significantly appreciated in value relative to the original purchase price of the shares or the exercise price of the options, or conversely, if the exercise price of the options that they hold are significantly above the market price of our Class A common stock. If we are unable to retain our employees, or if we need to increase our compensation expenses to retain our employees, our business, results of operations, financial condition, and cash flows could be adversely affected.

The market in which we participate is competitive, and our operating results could be harmed if we do not compete effectively.

The market for subscription management products and services, including our billing and revenue recognition offerings, is highly competitive, rapidly evolving, and fragmented, and subject to changing technology, shifting customer needs, and frequent introductions of new products and services. Our main competitors fall into the following categories:

•providers of traditional ERP software, such as Oracle Corporation and SAP AG;

•traditional order-to-cash solutions that address individual elements of the subscription order-to-cash process such as traditional CPQ management, billing, collections, revenue recognition, or e-commerce software;

•telecommunications billing systems and other niche systems, such as Amdocs Limited; and

•in-house custom systems.

Many of our current and potential competitors have longer operating histories, significantly greater financial, technical, marketing, distribution or professional services experience, or other resources or greater name recognition than we do. In addition, many of our current and potential competitors supply a wide variety of products to, and have strong and well-established relationships with, current and potential customers. As a result, our current and potential competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards, or customer requirements or devote greater resources than we can to the development, promotion, and sale of their products and services. In addition, some current and potential competitors may offer products or services that address one or a limited number of functions at lower prices or with greater depth than our solution, or integrate or bundle such products and services with their other product offerings.

Potential customers may prefer to purchase from their existing suppliers rather than from a new supplier. Our current and potential competitors may develop and market new technologies with comparable functionality to our solution. In addition, because our products and services are integral to our customers’ ability to accurately maintain books and records and prepare financial statements, our potential customers may prefer to purchase applications that are critical to their business from one of our larger, more established competitors, or leverage the software that they have already purchased from our competitors for their billing and accounting needs, or control such infrastructure internally. We may experience fewer customer orders, reduced gross margins, longer sales cycles, and loss of market share. This could lead us to decrease prices, implement alternative pricing structures, or introduce products and services available for free or a nominal price in order to remain competitive. We may not be able to compete successfully against current and future competitors, and our business, operating results, and financial condition will be adversely impacted if we fail to meet these competitive pressures.

Our ability to compete successfully in our market depends on a number of factors, both within and outside of our control. Some of these factors include: ease of use; subscription-based product features and functionality; ability to support the specific needs of companies with subscription business models; ability to integrate with other technology infrastructures and third-party applications; enterprise-grade performance and features such as system scalability, security, performance, and resiliency; vision for the market and product innovation; relationships with strategic partners including GSIs, management consulting firms, and resellers; total cost of ownership; strength of sales and marketing efforts; brand awareness and reputation; and customer experience, including support and professional services. Any failure by us to compete successfully in any one of these or other areas may reduce the demand for our solution, as well as adversely affect our business, operating results, and financial condition.

Moreover, current and future competitors may also make strategic acquisitions or establish cooperative relationships among themselves or with others, including our current or future technology partners. By doing so, these competitors may increase their ability to meet the needs of our customers or potential customers. These developments could limit our ability to obtain revenue from existing and new customers. If we are unable to compete successfully against current and future competitors, our business, operating results, and financial condition could be adversely impacted.

Errors, defects, or disruptions in our solution could diminish demand, harm our financial results, and subject us to liability.

Our customers use our products for important aspects of their businesses, and any errors, defects, or disruptions to our solution, or other performance problems with our solution could harm our brand and reputation and may damage our customers’ businesses. We are also reliant on third-party software and infrastructure, including the infrastructure of the Internet, to provide our products and services. Any failure of or disruption to this software and infrastructure could also make our solution unavailable to our customers. Our solution is constantly changing with new software releases, which may contain undetected errors when first introduced or released. Any errors, defects, disruptions in service, or other performance problems with our solution could result in negative publicity, loss of or delay in market acceptance of our products, loss of competitive position, delay of payment to us, lower renewal rates, or claims by customers for losses sustained by them. In such an event, we may be required, or may choose, for customer relations or other reasons, to expend additional resources in order to help correct the problem. Accordingly, any errors, defects, or disruptions to our solution could adversely impact our brand and reputation, revenue, and operating results.

In addition, because our products and services are designed to interoperate with a variety of internal and third-party systems and infrastructures, we need to continuously modify and enhance our products and services to keep pace with changes in software technologies. We may not be successful in either developing these modifications and enhancements or resolving interoperability issues in a timely and cost-effective manner. Any failure of our products and services to continue to operate effectively with internal or third-party infrastructures and technologies could reduce the demand for our products and services, resulting in dissatisfaction of our customers, and may materially and adversely affect our business.

Because we typically recognize subscription revenue over the term of the applicable agreement, a lack of subscription renewals or new subscription agreements may not be reflected immediately in our operating results and may be difficult to discern.

We generally recognize subscription revenue from customers ratably over the terms of their contracts, which typically vary between one and three years. As a result, most of the subscription revenue we report in each quarter

is derived from the recognition of unearned revenue relating to subscriptions entered into during previous quarters. Consequently, a decline in new or renewed subscriptions in any particular quarter would likely have a minor impact on our revenue results for that quarter, but could negatively affect our revenue in future quarters. Accordingly, the effect of significant downturns in sales and market acceptance of our solution, and potential changes in our pricing policies or rate of renewals, may not be fully reflected in our operating results until future periods. Moreover, our subscription model makes it difficult for us to rapidly increase our revenue through additional sales in any period, as revenue from new customers must be recognized over the applicable subscription term.

As a substantial portion of our sales efforts are increasingly targeted at large enterprise customers, our sales cycle may become increasingly lengthy and more expensive, we may encounter still greater pricing pressure and deployment and customization challenges, and we may have to delay revenue recognition for more complicated transactions, all of which could adversely impact our business and operating results.

As a substantial portion of our sales efforts are increasingly targeted at large enterprise customers, we face greater costs, longer sales cycles, and less predictability in the completion of some of our sales. In this market segment, the customer’s decision to use our solution may be an enterprise-wide decision, in which case these types of sales frequently require approvals by multiple departments and executive-level personnel and require us to provide greater levels of customer education regarding the uses and benefits of our solution, as well as education regarding security, privacy, and scalability of our solution, especially for those large “business to consumer” customers or those with extensive international operations. These large enterprise transactions might also be part of a customer’s broader business model or business systems transformation project, which are frequently subject to budget constraints, multiple approvals, and unplanned administrative, processing, security review, and other delays that could further lengthen the sales cycle. Larger enterprises typically have longer decision-making and deployment cycles, may have greater resources to develop and maintain customized tools and applications, demand more customization, require greater functionality and scalability, expect a broader range of services, demand that vendors take on a larger share of risks, demand increased levels of customer service and support, require acceptance provisions that can lead to a delay in revenue recognition, and expect greater payment flexibility from vendors. We are often required to spend time and resources to better familiarize potential customers with the value proposition of our solution. As a result of these factors, sales opportunities with large enterprises may require us to devote greater sales and administrative support and professional services resources to individual customers, which could increase our costs, lengthen our sales cycle, and divert our own sales and professional services resources to a smaller number of larger customers. We may spend substantial time, effort, and money in our sales efforts without being successful in producing any sales. All these factors can add further risk to business conducted with these customers. In addition, if sales expected from a large customer for a particular quarter are not realized in that quarter or at all, our business, operating results, and financial condition could be materially and adversely affected.

Our growth forecasts we have provided publicly may prove to be inaccurate, and even if the markets in which we compete achieve the forecasted growth, we cannot assure that our business will grow at similar rates, if at all.

Growth forecasts are subject to significant uncertainty and are based on assumptions and estimates that may not prove to be accurate. The forecasts we have provided publicly relating to the expected growth in the subscription billing and revenue recognition industry and ERP software market may prove to be inaccurate. Even if these markets experience the forecasted growth, we may not grow our business at similar rates, or at all. Our growth is subject to many factors, including our success in executing our business strategy, which is subject to many risks and uncertainties. Accordingly, the forecasts of market growth we have provided publicly should not be taken as indicative of our future growth.

The market for our revenue recognition automation software product, Zuora RevPro, is rapidly evolving as a result of the effectiveness of Topic 606, which makes it difficult to forecast adoption rates and demand for this product, and could have a material adverse effect on our business and operating results.

We began selling Zuora RevPro following our acquisition of Leeyo in May 2017. We have less experience marketing, determining pricing for, and selling Zuora RevPro, and we are still determining how to best market, price, and support adoption of this offering. We have directed, and intend to continue to direct, a significant portion of our financial and operating resources to develop and grow Zuora RevPro. The market for Zuora RevPro is rapidly evolving as a result of the effectiveness of Topic 606, the revenue recognition accounting standard that took effect

for most public companies in January 2018. While we have seen a significant number of Zuora RevPro deployments associated with the effectiveness of Topic 606, it is uncertain whether Zuora RevPro will achieve and sustain high levels of demand and market acceptance. For example, during the nine months ended July 31, 2019, we experienced a decline in total revenues due to a decrease in the number of customers adopting Topic 606. Our future success depends in part upon growth in this market and the ability of our Zuora RevPro product to meet the demand for revenue recognition automation solutions. We have limited experience with respect to determining the optimal prices for this solution. Companies may choose to purchase our Zuora RevPro product to comply with Topic 606 in the short-term but may develop proprietary solutions in-house or migrate toward other solutions developed by our competitors in the future. Customers may purchase Zuora RevPro as a standalone product and not purchase other core Zuora products. The rapidly evolving nature of this market, as well as other factors that are beyond our control, reduces our ability to accurately evaluate our long-term outlook and forecast annual performance. A reduction or slowdown in demand for revenue recognition automation software, caused by shifts in the marketplace, regulatory requirements, accounting standards, lack of acceptance, technological challenges, and competing solutions, could have a material adverse effect on our business, future growth, operating results, and financial condition. Moreover, in the three months ended April 30, 2019, we temporarily slowed down implementations between our Zuora RevPro and Zuora Billing customers due to product integration challenges. This temporary slowdown resulted in lower than expected total revenues for such quarter and resulted in us lowering our financial projections. We have resumed the paused customer implementations and are working to get these customers operationally live on our integrated product.

Our long-term success depends, in part, on our ability to expand the sales of our solution to customers located outside of the United States. Our current international operations, and any further expansion of those operations, expose us to risks that could have a material adverse effect on our business, operating results, and financial condition.

We have been recognizing increased revenue from international sales, and we conduct our business activities in various foreign countries. We currently have operations in North America, Europe, Asia, and Australia. During the nine months ended October 31, 2019 we derived approximately 31% of our total revenue from customers located outside the United States. Our ability to manage our business and conduct our operations internationally requires considerable management attention and resources and is subject to the particular challenges of supporting a rapidly growing business in an environment of multiple cultures, customs, legal systems, regulatory systems, and commercial infrastructures. International expansion will require us to invest significant funds and other resources. Our operations in international markets may not develop at a rate that supports our level of investment. Expanding internationally may subject us to new risks that we have not faced before or increase risks that we currently face, including risks associated with:

•recruiting and retaining talented and capable employees in foreign countries;

•providing our solution to customers from different cultures, which may require us to adapt to sales practices, modify our solution, and provide features necessary to effectively serve the local market;

•compliance with multiple, conflicting, ambiguous or evolving governmental laws and regulations, including those relating to employment matters, e-invoicing, consumer protection, privacy, data protection, information security, and encryption;

•longer sales cycles in some countries;

•increased third-party costs relating to data centers outside of the United States;

•generally longer payment cycles and greater difficulty in collecting accounts receivable;

•credit risk and higher levels of payment fraud;

•weaker privacy and intellectual property protection in some countries, including China and India;

•compliance with anti-bribery laws, such as the U.S. Foreign Corrupt Practices Act of 1977, as amended (FCPA), and the UK Bribery Act 2010 (UK Bribery Act);

•currency exchange rate fluctuations;

•tariffs, export and import restrictions, restrictions on foreign investments, sanctions, and other trade barriers or protection measures;

•foreign exchange controls that might prevent us from repatriating cash earned outside the United States;

•economic or political instability in countries where we may operate;

•corporate espionage;

•compliance with the laws of numerous taxing jurisdictions, both foreign and domestic, in which we conduct business, potential double taxation of our international earnings, and potentially adverse tax consequences due to changes in applicable U.S. and foreign tax laws;

•continuing uncertainty regarding social, political, immigration, and tax and trade policies in the U.S. and abroad. For example, the anticipated departure of the United Kingdom from the European Union could lead to disruptions to our business in the United Kingdom and Europe, including our relationships with our existing and prospective customers, partners, and employees, and adversely affect expansion of our international operations;

•increased costs to establish and maintain effective controls at foreign locations; and

•overall higher costs of doing business internationally.

If we fail to offer high-quality customer support, our business and reputation will suffer.

Once our solution is deployed to our customers, our customers rely on our support services to resolve any related issues. High-quality customer education and customer support is important for the successful marketing and sale of our products and for the renewal of existing customers. The importance of high-quality customer support will increase as we expand our business and pursue new enterprises. If we do not help our customers quickly resolve post-deployment issues and provide effective ongoing customer support, our ability to upsell additional products to existing customers could suffer and our reputation with existing or potential customers could be harmed.

We typically provide service level commitments under our customer contracts. If we fail to meet these contractual commitments, we could be obligated to provide credits or refunds for prepaid amounts related to unused subscription services or face contract terminations, which could adversely affect our operating results.

Our customer contracts typically provide for service level commitments, which relate to service uptime, response times, and escalation procedures. If we are unable to meet the stated service level commitments or suffer extended periods of unavailability for our solution, we may be contractually obligated to provide these customers with service credits, refunds for prepaid amounts related to unused subscription services, or other remedies, or we could face contract terminations. In addition, we could face legal claims for breach of contract, product liability, tort, or breach of warranty. Although we have contractual protections, such as warranty disclaimers and limitation of liability provisions, in our customer agreements, they may not fully or effectively protect us from claims by customers, commercial relationships, or other third parties. We may not be fully indemnified by our vendors for service interruptions beyond our control, and any insurance coverage we may have may not adequately cover all claims asserted against us, or cover only a portion of such claims. In addition, even claims that ultimately are unsuccessful could result in our expenditure of funds in litigation and divert management’s time and other resources. Thus, our revenue could be harmed if we fail to meet our service level commitments under our agreements with our customers, including, but not limited to, maintenance response times and service outages. Typically, we have not been required to provide customers with service credits that have been material to our operating results, but we cannot assure you that we will not incur material costs associated with providing service credits to our customers in the future.

Additionally, any failure to meet our service level commitments could adversely impact our reputation, business, operating results, and financial condition.

If we are unable to grow our sales channels and our relationships with strategic partners, such as GSIs, management consulting firms, and resellers, sales of our products and services may suffer and our growth could be slower than we project.

In addition to our direct sales force, we use strategic partners, such as GSIs, management consulting firms, and resellers, to market and sell our solution. Historically, we have used these strategic partners to a limited degree, but we anticipate that these partners will become an increasingly important aspect of our business, particularly with regard to enterprise and international sales where these partners may have more expertise and established business relationships than we do. Our relationships with these strategic partners are at an early stage of development. We have generated limited revenue through these relationships to date, and we cannot assure you that these partners will be successful in marketing and selling our solution. Identifying these partners, negotiating and supporting relationships with them, and maintaining these relationships requires significant commitment of time and resources that may not yield a significant return on our investment in these relationships. Our future growth in revenue and ability to achieve and sustain profitability depends in part on our ability to identify, establish, and retain successful strategic partner relationships in the United States and internationally, which will take significant time and resources and involve significant risk. If we are unable to establish and maintain our relationships with these partners, or otherwise develop and expand our indirect distribution channel, our business, operating results, financial condition, or cash flows could be adversely affected.

We also cannot be certain that we will be able to maintain successful relationships with any strategic partners and, to the extent that our strategic partners are unsuccessful in marketing our solution, our ability to sell our solution and our business, operating results, and financial condition could be adversely affected. Our strategic partners may market to our customers the products and services of several different companies, including products and services that compete with our solution. Because our strategic partners do not have an exclusive relationship with us, we cannot be certain that they will prioritize or provide adequate resources to marketing our solution. Moreover, divergence in strategy by any of these partners may materially adversely affect our ability to develop, market, sell, or support our solution. We cannot assure you that our strategic partners will continue to cooperate with us. In addition, actions taken or omitted to be taken by such parties may adversely affect us. We are unable to control the quantity or quality of resources that our systems integrator partners commit to deploying our products and services, or the quality or timeliness of such deployment. If our partners do not commit sufficient or qualified resources to these activities, our customers will be less satisfied, be less supportive with references, or may require the investment of our resources at discounted rates. These, and other failures by our partners to successfully deploy our products and services, may have an adverse effect on our business and our operating results.

Any disruption of service at our third-party data centers or Amazon Web Services could interrupt or delay our ability to deliver our services to our customers.

We currently host our solution, serve our customers, and support our operations in the United States primarily from a third-party Las Vegas-based data center and using Amazon Web Services (AWS), a provider of cloud infrastructure services. As part of our current disaster recovery arrangements, our customer data in the Las Vegas-based data center production environment is replicated to a third-party data center located in the San Francisco Bay Area. Additionally, in Europe, we host our solution using AWS. We are also in the process of transitioning the hosting of a portion of our U.S. solution infrastructure to AWS, which may be more expensive than our current data center providers. Despite precautions, we may also experience planned and unplanned costs, interruptions, delays, and outages in service or other performance problems in connection with such transition. We also do not have control over the operations of the facilities of our data center providers or AWS. These facilities are vulnerable to damage or interruption from earthquakes, hurricanes, floods, fires, cyber security attacks, terrorist attacks, power losses, telecommunications failures, and similar events. The occurrence of a natural disaster or an act of terrorism, a decision to close the facilities without adequate notice, or other unanticipated problems could result in lengthy interruptions in our solution. In particular, the California-based data facilities are located in an area known for seismic activity, increasing our susceptibility to the risk that an earthquake could significantly harm the operations of these facilities. The facilities also could be subject to break-ins, computer viruses, sabotage, intentional acts of vandalism, and other misconduct.

Our solution’s continuing and uninterrupted performance is critical to our success. Because our products and services are used by our customers for billing and financial accounting purposes, it is critical that our solution be accessible without interruption or degradation of performance, and we typically provide our customers with service level commitments with respect to service uptime. Customers may become dissatisfied by any system failure that interrupts our ability to provide our solution to them. Outages could lead to the triggering of our service level agreements and the issuance of credits to our customers, in which case, we may not be fully indemnified for such losses pursuant to our agreement with AWS. We may not be able to easily switch our AWS operations to another cloud provider if there are disruptions or interference with our use of AWS. Sustained or repeated system failures would reduce the attractiveness of our solution to customers and result in contract terminations, thereby reducing revenue. Moreover, negative publicity arising from these types of disruptions could damage our reputation and may adversely impact use of our solution. We may not carry sufficient business interruption insurance to compensate us for losses that may occur as a result of any events that cause interruptions in our service.

Neither our third-party data center providers nor AWS have an obligation to renew their agreements with us on commercially reasonable terms, or at all. If we are unable to renew our agreements with these providers on commercially reasonable terms, if our agreements with our providers are prematurely terminated, or if in the future we add additional data center providers, we may experience additional costs or service downtime in connection with the transfer to, or the addition of, new data center providers. If these providers were to increase the cost of their services, we may have to increase the price of our solution, and our operating results may be adversely impacted.

Our customers and third-party partners often need training in the proper use of our solution to maximize its potential. If our solution is not deployed or used correctly or as intended, inadequate performance may result.

Because our customers rely on our solution to manage a wide range of subscription management operations, the incorrect or improper deployment or use of our solution, our failure to train customers on how to efficiently and effectively use our solution, or our failure to provide adequate support to our customers, may result in customers not renewing their subscriptions, customers reducing their use of our solution, negative publicity, or legal claims against us. Also, as we continue to expand our customer base, any failure by us to properly provide these services will likely result in lost opportunities for additional subscriptions to our solution.

Future changes in market conditions or customer demand could require changes to our prices or pricing model, which could adversely affect our business, operating results, and financial condition.

We generally charge our customers a flat fee for their use of our platform and a variable fee based on the amount of transaction volume they process through our system. If our customers do not increase their transaction volume, or an economic downturn reduces their transaction volume, our revenue may be adversely impacted by customers reducing their contracted transaction volume. We have limited experience with respect to determining the optimal prices for our platform, and, as a result, we have in the past needed to and expect in the future to need to change our pricing model from time to time. As the market for our platform matures, or as new competitors introduce new products or services that compete with ours, we may be unable to attract new customers at the same price or based on the same pricing models as we have used historically. We may experience pressure to change our pricing model to defer fees until our customers have fully deployed our solution. Moreover, larger organizations which comprise a large and growing component of our sales efforts, may demand substantial price concessions. As a result, in the future we may be required to reduce our prices or change our pricing model, which could adversely affect our revenue, gross margin, profitability, financial position, and cash flow.

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

Our solution must integrate with a variety of network, hardware, and software platforms, and we need to continuously modify and enhance our solution to adapt to changes in cloud-enabled hardware, software, networking, browser, and database technologies. We have developed our solution to be able to integrate with third-party software-as-a-service (SaaS) applications, including the applications of software providers that compete with us, through the use of APIs. For example, Zuora CPQ integrates with certain capabilities of Salesforce using publicly available APIs. In general, we rely on the fact that the providers of such software systems, including Salesforce, continue to allow us access to their APIs to enable these integrations. To date, we have not relied on a long-term written contract to govern our integration relationship with Salesforce. Instead, we are subject to the

standard terms and conditions for application developers of Salesforce, which govern the distribution, operation, and fees of applications on the Salesforce platform, and which are subject to change by Salesforce from time to time. We also integrate certain aspects of our solution with other platform providers. Any deterioration in our relationship with any platform provider may adversely impact our business and operating results.

Our business may be adversely impacted if any platform provider:

•discontinues or limits access to its APIs by us;

•terminates or does not allow us to renew or replace our contractual relationship;

•modifies its terms of service or other policies, including fees charged to, or other restrictions on, us or other application developers, or changes how customer information is accessed by us or our customers;

•establishes more favorable relationships with one or more of our competitors, or acquires one or more of our competitors and offers competing services to us; or

•otherwise develops its own competitive offerings.

In addition, we have benefited from these platform providers’ brand recognition, reputations, and customer bases. Any losses or shifts in the market position of these platform providers in general, in relation to one another or to new competitors or new technologies could lead to losses in our relationships or customers, or to our need to identify or transition to alternative channels for marketing our solutions. Such changes could consume substantial resources and may not be effective. If we are unable to respond to changes in a cost-effective manner, our solution may become less marketable, less competitive, or obsolete and our operating results may be negatively impacted.

If we fail to develop, maintain, and enhance our brand and reputation cost-effectively, our business and financial condition may be adversely affected.

We believe that developing, maintaining, and enhancing awareness and integrity of our brand and reputation in a cost-effective manner are important to achieving widespread acceptance of our solution and are important elements in attracting new customers and maintaining existing customers. We believe that the importance of our brand and reputation will increase as competition in our market further intensifies. Successful promotion of our brand and the Subscription Economy concept will depend on the effectiveness of our marketing efforts, our ability to provide a reliable and useful solution at competitive prices, the perceived value of our solution, and our ability to provide quality customer support. In addition, the promotion of our brand requires us to make substantial expenditures, and we anticipate that the expenditures will increase as our market becomes more competitive, as we expand into new markets, and as more sales are generated through our strategic partners. Brand promotion activities may not yield increased revenue, and even if they do, the increased revenue may not offset the expenses we incur in building and maintaining our brand and reputation. We also rely on our customer base and community of end-users in a variety of ways, including to give us feedback on our solution and to provide user-based support to our other customers. If we fail to promote and maintain our brand successfully or to maintain loyalty among our customers, or if we incur substantial expenses in an unsuccessful attempt to promote and maintain our brand, we may fail to attract new customers and partners or retain our existing customers and partners and our business and financial condition may be adversely affected. Any negative publicity relating to our customers, employees, partners, or others associated with these parties, may also tarnish our own reputation simply by association and may reduce the value of our brand. Damage to our brand and reputation may result in reduced demand for our solution and increased risk of losing market share to our competitors. Any efforts to restore the value of our brand and rebuild our reputation may be costly and may not be successful.

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

We typically enter into non-cancelable agreements with our customers with a term of one to three years. If customers fail to pay us under the terms of our agreements, we may be adversely affected both from the inability to collect amounts due and the cost of enforcing the terms of our contracts, including litigation. The risk of such negative effects increases with the term length of our customer arrangements. Furthermore, some of our customers

may seek bankruptcy protection or other similar relief and fail to pay amounts due to us, or pay those amounts more slowly, either of which could adversely affect our operating results, financial position, and cash flow.

Adverse litigation judgments or settlements resulting from legal proceedings in which we may be involved could expose us to monetary damages or limit our ability to operate our business.

We are currently involved in shareholder litigation and have in the past and may in the future become involved in other class actions, derivative actions, private actions, collective actions, investigations, and various other legal proceedings by stockholders, clients, employees, suppliers, competitors, government agencies, or others. The results of any such litigation, investigations, and other legal proceedings are inherently unpredictable and expensive. Any claims against us, whether meritorious or not, could be time consuming, result in costly litigation, damage our reputation, require significant amounts of management time, and divert significant resources. If any of these legal proceedings were to be determined adversely to us, or we were to enter into a settlement arrangement, we could be exposed to monetary damages or limits on our ability to operate our business, which could have an adverse effect on our business, financial condition, and operating results.

Failure to protect our intellectual property could adversely affect our business.

Our success depends in large part on our proprietary technology. We rely on various intellectual property rights, including patents, copyrights, trademarks, and trade secrets, as well as confidentiality provisions and contractual arrangements, to protect our proprietary rights. If we do not protect and enforce our intellectual property rights successfully, our competitive position may suffer, which could adversely impact our operating results.

Our pending patent or trademark applications may not be allowed, or competitors may challenge the validity, enforceability or scope of our patents, copyrights, trademarks or the trade secret status of our proprietary information. There can be no assurance that additional patents will be issued or that any patents that are issued will provide significant protection for our intellectual property. There is also no assurance that we will be able to register trademarks that are critical to our business. In addition, our patents, copyrights, trademarks, trade secrets, and other intellectual property rights may not provide us a significant competitive advantage. There is no assurance that the particular forms of intellectual property protection that we seek, including business decisions about when to file patents and when to maintain trade secrets, will be adequate to protect our business.

Moreover, recent amendments to U.S. patent law, developing jurisprudence regarding U.S. patent law, and possible future changes to U.S. or foreign patent laws and regulations may affect our ability to protect and enforce our intellectual property rights. In addition, the laws of some countries do not provide the same level of protection of our intellectual property as do the laws of the United States. As we expand our international activities, our exposure to unauthorized copying and use of our solution and proprietary information will likely increase. Despite our precautions, our intellectual property is vulnerable to unauthorized access through employee error or actions, theft, and cybersecurity incidents, and other security breaches. It may be possible for third parties to infringe upon or misappropriate our intellectual property, to copy our solution, and to use information that we regard as proprietary to create products and services that compete with ours. Effective intellectual property protection may not be available to us in every country in which our solution is available. For example, some foreign countries have compulsory licensing laws under which a patent owner must grant licenses to third parties. In addition, many countries limit the enforceability of patents against certain third parties, including government agencies or government contractors. In these countries, patents may provide limited or no benefit. We may need to expend additional resources to defend our intellectual property rights domestically or internationally, which could impair our business or adversely affect our domestic or international expansion. Moreover, we may not pursue or file patent applications or apply for registration of copyrights or trademarks in the United States and foreign jurisdictions in which we operate with respect to our potentially patentable inventions, works of authorship, marks and logos for a variety of reasons, including the cost of procuring such rights and the uncertainty involved in obtaining adequate protection from such applications and registrations. If we cannot adequately protect and defend our intellectual property, we may not remain competitive, and our business, operating results, and financial condition may be adversely affected.

We enter into confidentiality and invention assignment agreements with our employees and consultants and enter into confidentiality agreements with other parties. We cannot assure you that these agreements will be effective in controlling access to, use of, and distribution of our proprietary information or in effectively securing exclusive ownership of intellectual property developed by our current or former employees and consultants. Further, these agreements may not prevent other parties from independently developing technologies that are substantially equivalent or superior to our solution.

We may need to spend significant resources securing and monitoring our intellectual property rights, and we may or may not be able to detect infringement by third parties. Our competitive position may be harmed if we cannot detect infringement and enforce our intellectual property rights quickly or at all. In some circumstances, we may choose to not pursue enforcement because an infringer has a dominant intellectual property position or for other business reasons. In addition, competitors might avoid infringement by designing around our intellectual property rights or by developing non-infringing competing technologies. Litigation may be necessary in the future to enforce our intellectual property rights and to protect our trade secrets. Litigation brought to protect and enforce our intellectual property rights could be costly, time-consuming, and distracting to management, and could result in the impairment or loss of portions of our intellectual property. Further, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims attacking the scope, validity, and enforceability of our intellectual property rights, or with counterclaims and countersuits asserting infringement by our products and services of third-party intellectual property rights. Our failure to secure, protect, and enforce our intellectual property rights could seriously adversely affect our brand and our business.

Additionally, the United States Patent and Trademark Office and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment, and other similar provisions in order to complete the patent application process and to maintain issued patents. There are situations in which noncompliance or non-payment can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. If this occurs, it could have a material adverse effect on our business operations and financial condition.

We are vulnerable to intellectual property infringement claims brought against us by others.

There has been considerable activity in our industry to develop and enforce intellectual property rights. Successful intellectual property infringement claims against us or our resellers or customers could result in monetary liability or a material disruption in the conduct of our business. We cannot be certain that our products and services, content, and brand names do not or will not infringe valid patents, trademarks, copyrights, or other intellectual property rights held by third parties. We may be subject to legal proceedings and claims from time to time relating to the intellectual property of others in the ordinary course of our business. Any intellectual property litigation to which we might become a party, or for which we are required to provide indemnification, may require us to cease selling or using solutions that incorporate the intellectual property that we allegedly infringe, make substantial payments for legal fees, settlement payments, or other costs or damages, obtain a license, which may not be available on reasonable terms or at all, to sell or use the relevant technology, or redesign the allegedly infringing solutions to avoid infringement, which could be costly, time-consuming, or impossible. Any claims or litigation, regardless of merit, could cause us to incur significant expenses and, if successfully asserted against us, could require that we pay substantial damages or ongoing royalty payments, prevent us from offering our products and services, or require that we comply with other unfavorable terms. We do not have a significant patent portfolio, which could prevent us from deterring patent infringement claims through our own patent portfolio, and our competitors and others may now and in the future have significantly larger and more mature patent portfolios than we have. We may also be obligated to indemnify our customers or strategic partners in connection with such infringement claims, or to obtain licenses from third parties or modify our solution, and each such obligation could further exhaust our resources. Some of our IP infringement indemnification obligations are contractually capped at a very high amount or not capped at all.

Even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and adversely affect our business and operating results. We expect that the occurrence of infringement claims is likely to grow as the market for subscription management products and services grows. Accordingly, our exposure to damages resulting from infringement claims could increase and this could further exhaust our financial and management resources.

We employ third-party licensed software for use in or with our software, and the inability to maintain these licenses or errors in the software we license could result in increased costs or reduced service levels, which could adversely affect our business.

Our software incorporates certain third-party software obtained under licenses from other companies. We anticipate that we will continue to rely on such third-party software and development tools from third parties in the future. Although we believe that there are commercially reasonable alternatives to the third-party software we currently license, including open source software, this may not always be the case, or it may be difficult or costly to migrate to other third-party software. Our use of additional or alternative third-party software would require us to

enter into license agreements with third parties. In addition, integration of our software with new third-party software may require significant work and require substantial investment of our time and resources. Also, any undetected errors or defects in third-party software could prevent the deployment or impair the functionality of our software, present security risks, delay new updates or enhancements to our solution, result in a failure of our solution, and injure our reputation.

Our solution contains open source software components, and failure to comply with the terms of the underlying licenses could restrict our ability to sell our solution.

Our solution incorporates certain open source software. An open source license typically permits the use, modification, and distribution of software in source code form subject to certain conditions. Some open source licenses contain conditions that any person who distributes or uses a modification or derivative work of software that was subject to an open source license make the modified version subject to the same open source license. Distributing or using software that is subject to this kind of open source license can lead to a requirement that certain aspects of our solution be distributed or made available in source code form. Although we do not believe that we have used open source software in a manner that might condition its use on our distribution of any portion of our solution in source code form, the interpretation of open source licenses is legally complex and, despite our efforts, it is possible that we may be liable for copyright infringement, breach of contract, or other claims if our use of open source software is adjudged to not comply with the applicable open source licenses.

Moreover, we cannot assure you that our processes for controlling our use of open source software in our solution will be effective. If we have not complied with the terms of an applicable open source software license, we may need to seek licenses from third parties to continue offering our solution on terms that are not economically feasible, to re-engineer our solution to remove or replace the open source software, to discontinue the sale of our solution if re-engineering could not be accomplished on a timely basis, to pay monetary damages, or to make available the source code for aspects of our proprietary technology, any of which could adversely affect our business, operating results, and financial condition.

In addition to risks related to license requirements, use of open source software can involve greater risks than those associated with use of third-party commercial software, as open source licensors generally do not provide warranties, assurances of title, performance, non-infringement, or controls on the origin of the software. There is typically no support available for open source software, and we cannot assure you that the authors of such open source software will not abandon further development and maintenance. Open source software may contain security vulnerabilities, and we may be subject to additional security risk by using open source software. Many of the risks associated with the use of open source software, such as the lack of warranties or assurances of title or performance, cannot be eliminated, and could, if not properly addressed, negatively affect our business. We have established processes to help alleviate these risks, including a review process for screening requests from our development organizations for the use of open source software, but we cannot be sure that all open source software is identified or submitted for approval prior to use in our solution.

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

Our business strategy may, from time to time, include acquiring other complementary products, technologies, or businesses. For example, in May 2017, we acquired Leeyo. An acquisition, investment, or business relationship may result in unforeseen operating difficulties and expenditures. In particular, we may encounter difficulties assimilating or integrating the businesses, technologies, products, personnel, or operations of the acquired companies, particularly if the key personnel of the acquired companies choose not to work for us, if an acquired company’s software is not easily adapted to work with ours, or if we have difficulty retaining the customers of any acquired business due to changes in management or otherwise. For example, during the three months ended April 30, 2019, we experienced product integration challenges and consequently temporarily slowed down our implementations in that period between our Zuora Billing and Zuora RevPro customers. We have resumed the paused customer implementations and are working to get these customers operationally live on our integrated product.

Acquisitions may also disrupt our business, divert our resources, and require significant management attention that would otherwise be available for development of our business. Moreover, the anticipated benefits of any

acquisition, investment, or business relationship may not be realized or we may be exposed to unknown liabilities. We may in the future seek to acquire or invest in additional businesses, products, technologies, or other assets. We also may enter into relationships with other businesses to expand our products and services or our ability to provide our products and services in foreign jurisdictions, which could involve preferred or exclusive licenses, additional channels of distribution, discount pricing, or investments in other companies. Negotiating these transactions can be time consuming, difficult, and expensive, and our ability to close these transactions may often be subject to approvals that are beyond our control. Consequently, these transactions, even if undertaken and announced, may not close. For one or more of those transactions, we may:

•issue additional equity securities that would dilute our stockholders;

•use cash that we may need in the future to operate our business;

•incur debt on terms unfavorable to us or that we are unable to repay;

•incur large charges or substantial liabilities;

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

•become subject to adverse tax consequences, substantial depreciation, or deferred compensation charges.

Any of these risks could adversely impact our business and operating results.

If we are not able to satisfy data protection, security, privacy, and other government- and industry-specific requirements, our growth could be harmed.

There are a number of data protection, security, privacy, and other government- and industry-specific requirements, including those that require companies to notify individuals of data security and privacy incidents involving certain types of personal data. Security and privacy compromises experienced by us or our service providers may lead to public disclosures, which could harm our reputation, erode customer confidence in the effectiveness of our security and privacy measures, negatively impact our ability to attract new customers, cause existing customers to elect not to renew their subscriptions with us, or negatively impact our employee relationships or impair our ability to attract new employees. In addition, some of the industries we serve have industry-specific requirements relating to compliance with certain security, privacy and regulatory standards, such as those required by the Health Insurance Portability and Accountability Act. We also maintain compliance with the Payment Card Industry Data Security Standard, which is critical to the financial services and insurance industries. As we expand into new verticals and regions, we will likely need to comply with these and other requirements to compete effectively. If we cannot comply or if we incur a violation in one or more of these requirements, our growth could be adversely impacted, and we could incur significant liability.

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

Our customers can use our solution to collect, use, and store personal or identifying information regarding their customers. National and local governments and agencies in the countries in which we operate and in which our customers operate have adopted, are considering adopting, or may adopt laws and regulations regarding the collection, use, storage, data residency, processing, and disclosure of information obtained from consumers and other individuals, which could impact our ability to offer our products and services in certain jurisdictions or our customers’ ability to deploy our solution globally. Laws and regulations relating to the collection, use, disclosure, security, and other processing of individuals’ information can vary significantly from jurisdiction to jurisdiction. The European Union and many countries, including China and India, as well as states within the United States, such as California, have in place or are enacting stricter laws and regulations relating to privacy and data collection. We also may be bound by contractual obligations and other obligations relating to privacy, data protection, and information security that are more stringent than applicable laws and regulations. The costs of compliance with, and other burdens imposed by, laws, regulations, standards, and other obligations relating to privacy, data protection, and information security are significant. In addition, some companies, particularly larger or global enterprises, often will not contract with vendors that do not meet these rigorous standards and often seek contract terms to ensure we are

financially liable for any breach of laws or regulations. Accordingly, our failure, or perceived inability, to comply with these laws, regulations, standards, and other obligations may limit the use and adoption of our solution, reduce overall demand for our solution, lead to regulatory investigations, litigation, and significant fines, penalties, or liabilities for actual or alleged noncompliance, or slow the pace at which we close sales transactions, any of which could harm our business. Moreover, if we or any of our employees or contractors fail or are believed to fail to adhere to appropriate practices regarding our customers’ data, it may damage our reputation and brand.

Additionally, we expect that existing laws, regulations, standards, and other obligations may be interpreted in new and differing manners in the future, and may be inconsistent among jurisdictions. Future laws, regulations, standards, and other obligations, and changes in the interpretation of existing laws, regulations, standards, and other obligations could result in increased regulation, increased costs of compliance and penalties for non-compliance, and limitations on data collection, use, disclosure, and transfer for us and our customers. The European Union and United States agreed in 2016 to a framework for data transferred from the European Union to the United States, called the Privacy Shield, but this framework has been challenged by private parties and may face additional challenges by national regulators or additional private parties. Additionally, the GDPR became effective in May 2018. The GDPR establishes, and the pending European Union ePrivacy Regulation is expected to establish, new requirements applicable to the handling of personal data and imposes penalties for non-compliance of up to the greater of €20 million or 4% of worldwide revenue. Additionally, in June 2018, California passed the California Consumer Privacy Act (CCPA) which provides new data privacy rights for consumers and new operational requirements for companies effective in 2020. The costs of compliance with, and other burdens imposed by, the GDPR, CCPA and other U.S., European Union, China (including the Cybersecurity Law of China) and foreign laws may limit the use and adoption of our products and services and could have an adverse impact on our business.

The costs of compliance with, and other burdens imposed by, laws and regulations relating to privacy, data protection, and information security that are applicable to the businesses of our customers may adversely affect our customers’ ability and willingness to process, handle, store, use, and transmit certain types of information, such as demographic and other personal information, of their customers using our solution, which could limit the use, effectiveness, and adoption of our solution and reduce overall demand. In addition, the other bases on which we and our customers rely for the transfer of personal data across national borders, such as the Standard Contractual Clauses promulgated by the EU Commission Decision 2010/87/EU, commonly referred to as the Model Clauses, continue to be subjected to regulatory and judicial scrutiny. If the United Kingdom departs from the European Union, the ability to conduct business and transfer personal data between the United Kingdom, the European Union and other countries may be negatively impacted due to uncertainty and the time and costs to put in place new bases on which we and our customers can rely for the transfer of personal data. If we or our customers are unable to transfer data between and among countries and regions in which we operate, it could decrease demand for our solution, require us to modify or restrict our solution, products, services, or operations, and impair our ability to maintain and grow our customer base and increase our revenue. With respect to any changes we consider necessary or appropriate to make to our solution, products, services, or practices in an effort to comply, or allow our customers to comply, with laws, regulations, or other obligations relating to privacy, data protection, or information security, we may be unable to make those changes in a commercially reasonable manner, in a timely fashion, or at all. Even the perception of privacy concerns, whether or not valid, may inhibit the adoption, effectiveness, or use of our solution.

In addition to government activity, privacy advocacy groups, the technology industry, and other industries have established or may establish various new, additional, or different self-regulatory standards that may place additional burdens on us. Our customers may expect us to meet voluntary certifications or adhere to other standards established by them or third parties, and we may be required or otherwise find it advisable to obtain these certifications or adhere to these standards. If we are unable to maintain these certifications or meet these standards, it could reduce demand for our solution and adversely affect our business.

Failure to comply with anti-corruption and anti-money laundering laws, including the FCPA and similar laws associated with our activities outside of the United States, could subject us to penalties and other adverse consequences.

We are subject to the FCPA, the U.S. domestic bribery statute contained in 18 U.S.C. § 201, the U.S. Travel Act, the USA PATRIOT Act, the UK Bribery Act, and possibly other anti-bribery and anti-money laundering laws in countries in which we conduct activities. We face significant risks if we fail to comply with the FCPA and other anti-corruption laws that prohibit companies and their employees and third-party intermediaries from promising, authorizing, offering, or providing, directly or indirectly, improper payments or benefits to foreign government officials, political parties, and private-sector recipients for the purpose of obtaining or retaining business, directing

business to any person, or securing any advantage. In many foreign countries, particularly in countries with developing economies, it may be a local custom that businesses engage in practices that are prohibited by the FCPA or other applicable laws and regulations. In addition, we use various third parties to sell our solution and conduct our business abroad. We or our third-party intermediaries may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities and we can be held liable for the corrupt or other illegal activities of these third-party intermediaries, our employees, representatives, contractors, partners, and agents, even if we do not explicitly authorize such activities. We have implemented an anti-corruption compliance program but cannot assure you that all of our employees and agents, as well as those companies to which we outsource certain of our business operations, will not take actions in violation of our policies and applicable law, for which we may be ultimately held responsible.

Any violation of the FCPA, other applicable anti-corruption laws, and anti-money laundering laws could result in whistleblower complaints, adverse media coverage, investigations, loss of export privileges, or severe criminal or civil sanctions, which could have a materially adverse effect on our reputation, business, operating results, and prospects. In addition, responding to any enforcement action may result in a significant diversion of management’s attention and resources, significant defense costs, and other professional fees.

We are required to comply with governmental export control laws and regulations. Our failure to comply with these laws and regulations could have an adverse effect on our business and operating results.

Our solution is subject to governmental, including United States and European Union, export control laws and import regulations, and as a U.S. company we are covered by the U.S. sanctions regulations. U.S. export control and economic sanctions laws and regulations prohibit the shipment of certain products and services to U.S. embargoed or sanctioned countries, governments, entities and persons, and complying with export control and sanctions regulations for a particular sale may be time-consuming and may result in the delay or loss of sales opportunities. While we take precautions to prevent our solution from being exported in violation of these laws or engaging in any other activities that are subject to these regulations, if we were to fail to comply with U.S. export laws, U.S. Customs regulations and import regulations, U.S. economic sanctions, and other countries’ import and export laws, we could be subject to substantial civil and criminal penalties, including fines for the company, incarceration for responsible employees and managers, and the possible loss of export or import privileges as well as incur reputational harm.

We incorporate encryption technology into certain of our products and certain encryption products may be exported outside of the United States only by a license or a license exception. In addition, various countries regulate the import of certain encryption technology, including import permitting and licensing requirements, and have enacted laws that could limit our ability to distribute our products or could limit our customers’ ability to deploy our products in those countries. Although we take precautions to prevent our products from being provided in violation of such laws, we cannot assure you that inadvertent violations of such laws have not occurred or will not occur in connection with the distribution of our products despite the precautions we take. Governmental regulation of encryption technology and regulation of imports or exports, or our failure to obtain required import or export approval for our products, could harm our international sales and adversely affect our operating results.

Further, if our partners, including suppliers, fail to obtain required import, export, or re-export licenses or permits, we may also be harmed, become the subject of government investigations or penalties, and incur reputational harm. Changes in our solution or changes in export and import regulations may create delays in the introduction of our solution in international markets, prevent our customers with international operations from deploying our solution globally or, in some cases, prevent the export or import of our solution to certain countries, governments, or persons altogether. Any change in export or import laws or regulations, economic sanctions, or related legislation, shift in the enforcement or scope of existing laws and regulations, or change in the countries, governments, persons, or technologies targeted by such laws and regulations, could result in decreased use of our solution by, or in our decreased ability to export or sell our solution to, existing or potential customers such as customers with international operations or customers who are added to the restricted entities list published by the U.S. Office of Foreign Assets Control (OFAC). Any decreased use of our solution or limitation on our ability to export or sell our solution would likely harm our business, financial condition, and operating results.

Our ability to use our net operating losses to offset future taxable income may be subject to certain limitations which could subject our business to increased tax liability.

Under the Tax Cuts and Jobs Act (Tax Reform Act), although the treatment of tax losses generated in taxable years ending on or before December 31, 2017 has generally not changed, tax losses generated in taxable years beginning after December 31, 2017 may be utilized to offset no more than 80% of taxable income annually. This change may require us to pay more federal income taxes in future years than we would have had to pay under pre-existing law. In addition, the Tax Reform Act's new "base erosion and anti-abuse tax" or "BEAT" may require us to pay additional federal income taxes even in years when we are not profitable.

The applicability of sales, use and other tax laws or regulations on our business is uncertain. Adverse tax laws or regulations could be enacted or existing laws could be applied to us or our customers, which could subject us to additional tax liability and related interest and penalties, increase the costs of our services and adversely impact our business.

The application of federal, state, local, and non-U.S. tax laws to services provided electronically is evolving. New income, sales, use, value-added, or other tax laws, statutes, rules, regulations, or ordinances could be enacted at any time (possibly with retroactive effect), and could be applied solely or disproportionately to services provided over the Internet or could otherwise materially affect our financial position and results of operations. Many countries in the European Union, as well as a number of other countries and organizations such as the Organization for Economic Cooperation and Development, have recently proposed or recommended changes to existing tax laws or have enacted new laws that could impact our tax obligations.

In addition, state, local, and foreign tax jurisdictions have differing rules and regulations governing sales, use, value-added, and other taxes, and these rules and regulations can be complex and are subject to varying interpretations that may change over time. For example, a U.S. Supreme Court ruling in June 2018 could result in more states requiring us to collect sales or use tax on sales we make to their residents. Existing tax laws, statutes, rules, regulations, or ordinances could be interpreted, changed, modified, or applied adversely to us (possibly with retroactive effect), which could require us or our customers to pay additional tax amounts on prior sales and going forward, as well as require us or our customers to pay fines or penalties and interest for past amounts. Although our customer contracts typically provide that our customers must pay all applicable sales and similar taxes, our customers may be reluctant to pay back taxes and associated interest or penalties, or we may determine that it would not be commercially feasible to seek reimbursement. If we are required to collect and pay back taxes and associated interest and penalties, or we are unsuccessful in collecting such amounts from our customers, we could incur potentially substantial unplanned expenses, thereby adversely impacting our operating results and cash flows. Imposition of such taxes on our services going forward could also adversely affect our sales activity and have a negative impact on our operating results and cash flows.

Our results of operations and financial condition could be materially affected by the enactment of legislation implementing changes in the U.S. or foreign taxation of international business activities or the adoption of other tax reform policies.

The Tax Reform Act enacted, contains significant changes to U.S. tax law, including, but not limited to, a reduction in the corporate tax rate and a new system of taxation on income earned by foreign subsidiaries. The primary impact of the new legislation on our provision for income taxes was a reduction of the future tax benefits of our deferred tax assets as a result of the reduction in the corporate tax rate. However, since we have recorded a full valuation allowance against our deferred tax assets, we do not currently anticipate that these changes will have a material impact on our accompanying consolidated financial statements. The impact of the Tax Reform Act will likely be subject to ongoing technical guidance and accounting interpretation, which we will continue to monitor and assess. As we expand the scale of our international business activities, any changes in the U.S. or foreign taxation of such activities may increase our worldwide effective tax rate and harm our business, results of operations, and financial condition.

Political developments, economic uncertainty or downturns, particularly as it impacts particular industries, could adversely affect our business and operating results.

Political developments impacting government spending and international trade, including government shutdowns in the United States, continued uncertainty surrounding the United Kingdom's departure from the European Union and trade disputes and tariffs, may negatively impact markets and cause weaker macroeconomic conditions. The effects of these events may continue due to potential additional U.S. government shutdowns, instability in the United Kingdom and the European Union as the terms of Brexit remain under negotiation and the prolonging of the United States’ trade disputes with China and other countries. The continuing effect of any or all of

these events could adversely impact demand for our products, harm our operations and weaken our financial results.

In recent years, the United States and other significant markets have experienced cyclical downturns and worldwide economic conditions remain uncertain. Economic uncertainty and associated macroeconomic conditions make it extremely difficult for our customers and us to accurately forecast and plan future business activities, and could cause our customers to slow spending on our solution, which could delay and lengthen sales cycles. Furthermore, during uncertain economic times our customers may face issues gaining timely access to sufficient credit, which could result in an impairment of their ability to make timely payments to us. If that were to occur, we may be required to increase our allowance for doubtful accounts and our results could be negatively impacted.

Furthermore, we have customers in a variety of different industries. A significant downturn in the economic activity attributable to any particular industry, including, but not limited to, the retail and financial industries, may cause organizations to react by reducing their capital and operating expenditures in general or by specifically reducing their spending on information technology. In addition, our customers may delay or cancel information technology projects or seek to lower their costs by renegotiating vendor contracts. To the extent purchases of our solution are perceived by customers and potential customers to be discretionary, our revenue may be disproportionately affected by delays or reductions in general information technology spending. Also, customers may choose to develop in-house software or modify their legacy business software as an alternative to using our solution. Moreover, competitors may respond to challenging market conditions by lowering prices and attempting to lure away our customers.

We cannot predict the timing, strength, or duration of any economic slowdown or any subsequent recovery generally, or any industry in particular. If the conditions in the general economy and the markets in which we operate worsen from present levels, our business, financial condition, and operating results could be materially adversely affected.

If currency exchange rates fluctuate substantially in the future, the results of our operations, which are reported in U.S. dollars, could be adversely affected.

As we continue to expand our international operations, we become more exposed to the effects of fluctuations in currency exchange rates. Although we expect an increasing number of sales contracts to be denominated in currencies other than the U.S. dollar in the future, the majority of our sales contracts have historically been denominated in U.S. dollars, and therefore, most of our revenue has not been subject to foreign currency risk. However, a strengthening of the U.S. dollar could increase the real cost of our solution to our customers outside of the United States, which could adversely affect our business, operating results, financial condition, and cash flows. In addition, we incur expenses for employee compensation and other operating expenses at our non-U.S. locations in the local currency. Fluctuations in the exchange rates between the U.S. dollar and other currencies could result in the dollar equivalent of such expenses being higher. This could have a negative impact on our operating results. Although we may in the future decide to undertake foreign exchange hedging transactions to cover a portion of our foreign currency exchange exposure, we currently do not hedge our exposure to foreign currency exchange risks.

Our reported financial results may be adversely affected by changes in accounting principles generally accepted in the United States.

GAAP is subject to interpretation by the Financial Accounting Standards Board (FASB), the SEC, and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before the announcement of a change. Any difficulties in implementing these pronouncements could cause us to fail to meet our financial reporting obligations, which could result in regulatory discipline and harm investors' confidence in us.

We adopted the requirements of Topic 606, effective February 1, 2019, using the full retrospective transition method. The adoption of the new standard is expected to have an impact on revenue and commissions expense for all periods presented. The primary impacts on revenue are an increased number of allocations of arrangement consideration between subscription and professional services and the recognition of discounts evenly across the term for multiple year subscription arrangements. Both of these impacts are primarily due to the elimination of the contingent revenue rule. We also expect an impact due to a change in the recognition of legacy on-premise term deals inherited during our acquisition of Leeyo, which will require more revenue being recognized at the beginning

of the license term as opposed to evenly over the term. In addition to impacting the way that we recognize revenue, the new standard will also impact the accounting for incremental commission costs of obtaining subscription contracts. Under the new standard, we defer all incremental commission costs to obtain the contract. We expect to amortize these costs on a straight-line basis over the period of economic benefit which has been determined to be five years.

In addition, in February 2019, the FASB issued Accounting Standards Update (ASU) 2016-02, Leases (Topic 842). Under the new standard, lessees will be required to recognize lease assets and liabilities for all leases, with certain exceptions, on their balance sheets. We expect to adopt ASU 2016-02 for the fiscal year ending January 31, 2020, including interim period disclosures within that fiscal year. We are currently evaluating our lease portfolio and expect the adoption of this standard to have a material impact on our consolidated balance sheet.

Any difficulties in implementing new accounting pronouncements, including ASU 2016-02 and other pronouncements that we have not yet adopted, could cause us to fail to meet our financial reporting obligations, which could result in regulatory discipline and harm investors’ confidence in us. Such recent accounting pronouncements are described in Note 2. Summary of Significant Accounting Policies and Recent Accounting Pronouncements of our Notes to Unaudited Condensed Consolidated Financial Statements included in this Form 10-Q.

Certain of our operating results and financial metrics may be difficult to predict as a result of seasonality.

Although we have not historically experienced significant seasonality with respect to our subscription revenue throughout the year, we have seen seasonality in our sales cycle as a large percentage of our customers make their purchases in the third month of any given quarter. In addition, our fourth quarter has historically been our strongest quarter. We believe that this results in part from the procurement, budgeting, and deployment cycles of many of our customers. We generally expect a relative increase in sales in the second half of each year as budgets of our customers for annual capital purchases are being fully utilized. We may be affected by seasonal trends in the future, particularly as our business matures. Such seasonality may result from a number of factors, including a slowdown in our customers’ procurement process during certain times of the year, both domestically and internationally, and customers choosing to spend remaining budgets shortly before the end of their fiscal years. These effects may become more pronounced as we target larger organizations and their larger budgets for sales of our solution. Additionally, this seasonality may be reflected to a much lesser extent, and sometimes may not be immediately apparent, in our revenue, due to the fact that we recognize subscription revenue over the term of the applicable subscription agreement. In addition, our ability to record professional services revenue can potentially vary based on the number of billable days in the given quarter, which is impacted by holidays and vacations. To the extent we experience this seasonality, it may cause fluctuations in our operating results and financial metrics and make forecasting our future operating results and financial metrics more difficult.

We may need to raise additional capital required to grow our business, and we may not be able to raise capital on terms acceptable to us or at all.

In order to support our growth and respond to business challenges, such as developing new features or enhancements to our solution to stay competitive, acquiring new technologies, and improving our infrastructure, we have made significant financial investments in our business, and we intend to continue to make such investments. As a result, to provide the funds required for these investments and other business endeavors, we may need to engage in equity or debt financings, in addition to any indebtedness we may have under our then current debt arrangements. If we raise additional funds through equity or convertible debt issuances, our existing stockholders may suffer significant dilution, and these securities could have rights, preferences, and privileges that are superior to that of holders of our common stock. If we obtain additional funds through debt financing, we may not be able to obtain such financing on terms favorable to us. Such terms may involve additional restrictive covenants making it difficult to engage in capital raising activities and pursue business opportunities, including potential acquisitions. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly impaired and our business may be adversely affected, requiring us to delay, reduce, or eliminate some or all of our operations.

The requirements of being a public company may strain our resources, divert management’s attention, and affect our ability to attract and retain additional executive management and qualified board members.

As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley Act), the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the listing requirements of the New York Stock Exchange, and other applicable securities rules and regulations. We expect compliance with these rules and regulations will continue to increase our legal and financial compliance costs, make some activities more difficult, time-consuming, or costly, and increase demand on our systems and resources, particularly beginning on January 31, 2020 when we will no longer qualify as an emerging growth company. The Exchange Act requires, among other things, that we file annual, quarterly, and current reports with respect to our business and operating results. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. In order to maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight may be required. As a result, management’s attention may be diverted from other business concerns, which could adversely affect our business and operating results. Although we have already hired additional employees and outside consultants to comply with these requirements, we may need to add additional resources, which would increase our costs and expenses.

In addition, changing laws, regulations, and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs, and making some activities more time consuming. These laws, regulations, and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations, and standards, and this investment may result in increased costs and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations, and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us, and our business may be adversely affected.

The rules and regulations applicable to public companies make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee and compensation committee, and qualified executive officers.

As a result of disclosure of information in filings required of a public company, our business and financial condition has become more visible, which we believe may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and operating results could be adversely affected, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and adversely affect our business and operating results.

In addition, as a result of our disclosure obligations as a public company, we have reduced flexibility and are under pressure to focus on short-term results, which may adversely affect our ability to achieve long-term profitability.

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

The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are continuing to develop and refine our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file with the SEC is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that information required to be disclosed in reports under the Exchange Act is accumulated and communicated to our principal executive and financial officers. We are also continuing to improve our internal control over financial reporting. For example, we have worked to improve the controls around our key accounting processes and our quarterly close process, we have implemented a number of new systems as part of our control environment, and we have hired additional accounting and finance personnel to help us implement these processes and controls. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, we have expended, and anticipate that we will continue to

expend, significant resources, including accounting-related costs and significant management oversight. If any of these new or improved controls and systems do not perform as expected, we may experience material weaknesses in our controls.

Our current controls and any new controls that we develop may become inadequate because of changes in conditions in our business. Further, weaknesses in our disclosure controls and internal control over financial reporting may be discovered in the future. Any failure to develop or maintain effective controls or any difficulties encountered in their implementation or improvement could harm our operating results or cause us to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior periods. Any failure to implement and maintain effective internal control over financial reporting also could adversely affect the results of periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting that we will eventually be required to include in our periodic reports that are filed with the SEC. Ineffective disclosure controls and procedures and internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the trading price of our Class A common stock. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on the New York Stock Exchange. Prior to our IPO, we were not required to comply with the SEC rules that we implement Section 404 of the Sarbanes-Oxley Act and were therefore not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. As a public company, we will be required to provide an annual management report on the effectiveness of our internal control over financial reporting commencing with our second annual report on Form 10-K.

Our independent registered public accounting firm is not required to formally attest to the effectiveness of our internal control over financial reporting while we are an emerging growth company. We will no longer qualify as an emerging growth company beginning on January 31, 2020, and therefore our independent registered public accounting firm will be required to provide this attestation beginning with our Annual Report on Form 10-K for our fiscal year ending January 31, 2020, which will require increased costs, expenses, and management resources. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our internal control over financial reporting is documented, designed, or operating. Any failure to maintain effective disclosure controls and internal control over financial reporting could adversely affect our business and operating results and could cause a decline in the price of our Class A common stock.

Our management team has limited experience managing a public company.

Most members of our management team have limited experience managing a publicly traded company, interacting with public company investors, and complying with the increasingly complex laws pertaining to public companies. Our management team may not successfully or efficiently manage our transition to being a public company subject to significant regulatory oversight and reporting obligations under the federal securities laws and the continuous scrutiny of securities analysts and investors. These new obligations and constituents will require significant attention from our senior management and could divert their attention away from the day-to-day management of our business, which could adversely affect our business, financial condition, and operating results.

Our corporate “ZEO” culture has contributed to our success, and if we cannot maintain this culture as we grow, we could lose the innovation, creativity, and teamwork fostered by our culture, and our business may be harmed.

We believe that our entrepreneurial corporate culture has been a key contributor to our success. We have worked to develop what we call our “ZEO” culture, which is based on the idea that each employee is the CEO of their job and career, and we strive to empower every employee to make and own their decisions and contributions to the company. If we do not continue to develop our corporate culture as we grow and evolve, including maintaining a culture that encourages individual entrepreneurship by our employees, it could harm our ability to foster the innovation, creativity, and teamwork we believe that we need to support our growth. We expect to continue to hire as we expand. As our organization grows and we are required to implement more complex organizational structures, we may find it increasingly difficult to maintain the beneficial aspects of our corporate culture, which could negatively impact our future success. In addition, potential liquidity events could create disparities of wealth among our employees, which could adversely impact relations among employees and our corporate culture in general. Our anticipated headcount growth and our transition from a private company to a public company may result in a change to our corporate culture, which could harm our business.

Our Debt Agreement provides our lender with a first-priority lien against substantially all of our assets, including our intellectual property, and contains financial covenants and other restrictions on our actions, which could limit our operational flexibility and otherwise adversely affect our financial condition.

Our Debt Agreement restricts our ability to, among other things:

•use our accounts receivable, inventory, trademarks, and most of our other assets as security in other borrowings or transactions;

•incur additional indebtedness;

•sell certain assets;

•declare dividends or make certain distributions; and

•undergo a merger or consolidation or other transactions.

Our Debt Agreement also prohibits us from exceeding an adjusted quick ratio. Our ability to comply with this and other covenants is dependent upon a number of factors, some of which are beyond our control.

Our failure to comply with the covenants or payment requirements, or the occurrence of other events specified in our Debt Agreement could result in an event of default under the Debt Agreement which would give our lender the right to terminate their commitments to provide additional loans under the Debt Agreement and to declare all borrowings outstanding, together with accrued and unpaid interest and fees, to be immediately due and payable. In addition, we have granted our lender first-priority liens against substantially all of our assets, including our intellectual property, as collateral. Failure to comply with the covenants or other restrictions in the Debt Agreement could result in a default. If the debt under our Debt Agreement was to be accelerated, we may not have sufficient cash on hand or be able to sell sufficient collateral to repay it, which would have an immediate adverse effect on our business and operating results.

We are currently an emerging growth company, and we cannot be certain that the reduced disclosure requirements applicable to emerging growth companies will not make our Class A common stock less attractive to investors.

As an emerging growth company, we have elected to use certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. In addition, pursuant to Section 107 of the JOBS Act, as an emerging growth company, we have elected to take advantage of the extended transition period for complying with new or revised accounting standards until those standards would otherwise apply to private companies.

We cannot predict if investors will find our Class A common stock less attractive or our company less comparable to certain other public companies because we will rely on these exemptions and elections. For example, if we do not adopt a new or revised accounting standard, our future operating results and financial statements may not be as comparable to the operating results and financial statements of certain other companies in our industry that adopted such standards. If some investors find our Class A common stock less attractive as a result, there may be a less active trading market for our Class A common stock and our stock price may be more volatile. We will no longer qualify as an emerging growth company beginning on January 31, 2020, and at that time, we will no longer be permitted to use these reporting exemptions.

We may be adversely affected by natural disasters and other catastrophic events, and by man-made problems such as terrorism, that could disrupt our business operations and our business continuity and disaster recovery plans may not adequately protect us from a serious disaster.

Natural disasters or other catastrophic events may also cause damage or disruption to our operations, international commerce, and the global economy, and could have an adverse effect on our business, operating

results, and financial condition. Our business operations are subject to interruption by natural disasters, fire, power shortages, pandemics, and other events beyond our control. In addition, acts of terrorism and other geopolitical unrest could cause disruptions in our business or the businesses of our partners or the economy as a whole. In the event of a natural disaster, including a major earthquake, blizzard, or hurricane, or a catastrophic event such as a fire, power loss, or telecommunications failure, we may be unable to continue our operations and may endure system interruptions, reputational harm, delays in development of our solution, lengthy interruptions in service, breaches of data security, and loss of critical data, all of which could have an adverse effect on our future operating results. For example, our corporate headquarters is located in California, a state that frequently experiences earthquakes. Additionally, all of the aforementioned risks may be further increased if we do not implement a disaster recovery plan or the disaster recovery plans put in place by Zuora or our partners prove to be inadequate.

The stock price of our Class A common stock has been and may continue to be volatile, and you could lose all or part of your investment.

The market price of our Class A common stock has been and may continue to be volatile. Since shares of our Class A were sold in our IPO in April 2018 at a price of $14.00 per share, the reported low and high sales prices of our common stock has ranged from $13.04 to $37.78, through December 13, 2019. We experienced a significant decline in our stock price following our announcement of earnings for the quarter ended April 30, 2019. In addition to factors discussed in this Form 10-Q, the market price of our Class A common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:

•overall performance of the equity markets;

•actual or anticipated fluctuations in our revenue and other operating results;

•changes in the financial projections we may provide to the public or our failure to meet these projections;

•failure of securities analysts to initiate or maintain coverage of us, changes in financial estimates by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;

•recruitment or departure of key personnel;

•the economy as a whole and market conditions in our industry;

•negative publicity related to the real or perceived quality of our solution, as well as the failure to timely launch new products and services that gain market acceptance;

•growth of the Subscription Economy;

•rumors and market speculation involving us or other companies in our industry;

•announcements by us or our competitors of new products, commercial relationships, or significant technical innovations;

•acquisitions, strategic partnerships, joint ventures, or capital commitments;

•new laws or regulations or new interpretations of existing laws or regulations applicable to our business;

•lawsuits threatened or filed against us, litigation involving our industry, or both;

•developments or disputes concerning our or other parties’ products, services, or intellectual property rights;

•changes in accounting standards, policies, guidelines, interpretations, or principles;

•other events or factors, including those resulting from war, incidents of terrorism, or responses to these events;

•the expiration of contractual lock-up or market stand-off agreements; and

•sales of shares of our Class A common stock by us or our stockholders.

In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. Stock prices of many companies, and technology companies in particular, have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have instituted shareholder litigation following periods of market volatility. We are currently subject to shareholder litigation, which is described in Note 16. Commitments and Contingencies in the notes to our condensed consolidated financial statements. This or any future shareholder litigation could subject us to substantial costs, divert resources and the attention of management from our business, and adversely affect our business.

Sales of a substantial number of shares of our Class A common stock in the public market, particularly sales by our directors, executive officers, and significant stockholders, or the perception that these sales could occur, could cause the market price of our Class A common stock to decline and may make it more difficult for you to sell your Class A common stock at a time and price that you deem appropriate.

The market price of our Class A common stock could decline as a result of sales of a large number of shares of our Class A common stock in the market. The perception that these sales might occur may also cause the market price of our Class A common stock to decline. As of October 31, 2019, we had outstanding a total of 93.6 million shares of Class A common stock and 19.5 million shares of Class B common stock.

In addition, as of October 31, 2019, we had outstanding stock options and restricted stock units (RSUs) that could result in the issuance of 17.8 million shares of Class A common stock. Subject to the satisfaction of applicable vesting requirements, the shares issued upon exercise of outstanding stock options or settlement of outstanding RSUs will be available for immediate resale in the open market.

Moreover, certain holders of our common stock have rights, subject to some conditions, to require us to file registration statements for the public resale of such shares or to include such shares in registration statements that we may file for us or other stockholders.

We may also issue our shares of common stock or securities convertible into shares of our common stock from time to time in connection with a financing, acquisition, investments, or otherwise. We also expect to grant equity awards to employees, directors, and consultants under our 2018 Equity Incentive Plan (2018 Plan) and rights to purchase our Class A common stock under our ESPP. Any such issuances could result in substantial dilution to our existing stockholders and cause the market price of our Class A common stock to decline.

The dual class structure of our common stock has the effect of concentrating voting control with holders of our Class B common stock, including our directors, executive officers, and significant stockholders, which limits or precludes your ability to influence corporate matters, including the election of directors and the approval of any change of control transaction.

Our Class B common stock has ten votes per share, and our Class A common stock has one vote per share. As of October 31, 2019, our directors, executive officers, and holders of more than 5% of our common stock, and their respective affiliates, held a majority of the voting power of our capital stock. Because of the ten-to-one voting ratio between our Class B and Class A common stock, the holders of our Class B common stock collectively will continue to control a majority of the combined voting power of our common stock and therefore are able to control all matters submitted to our stockholders for approval until the earlier of (i) the date specified by a vote of the holders of 66 2/3% of the outstanding shares of Class B common stock, (ii) April 16, 2028, and (iii) the date the shares of Class B common stock cease to represent at least 5% of all outstanding shares of our common stock. This concentrated control limits or precludes your ability to influence corporate matters for the foreseeable future, including the election of directors, amendments of our organizational documents, and any merger, consolidation, sale of all or substantially all of our assets, or other major corporate transaction requiring stockholder approval. In addition, this may prevent or discourage unsolicited acquisition proposals or offers for our capital stock that you may feel are in your best interest as one of our stockholders.

Future transfers by holders of Class B common stock will generally result in those shares converting to Class A common stock, subject to limited exceptions, such as certain permitted transfers effected for estate planning

purposes. The conversion of Class B common stock to Class A common stock will have the effect, over time, of increasing the relative voting power of those holders of Class B common stock who retain their shares in the long term.

The dual class structure of our common stock may adversely affect the trading market for our Class A common stock.

Stock index providers, such as S&P Dow Jones and FTSE Russell, exclude public companies with multiple classes of shares of common stock from being added to certain indices, including the S&P 500. In addition, several shareholder advisory firms have announced their opposition to the use of multiple class structures. As a result, the dual class structure of our common stock may prevent the inclusion of our Class A common stock in such indices and may cause shareholder advisory firms to publish negative commentary about our corporate governance practices or otherwise seek to cause us to change our capital structure. Any such exclusion from indices could result in a less active trading market for our Class A common stock. Any actions or publications by shareholder advisory firms critical of our corporate governance practices or capital structure could also adversely affect the value of our Class A common stock.

If securities or industry analysts do not publish research, or publish inaccurate or unfavorable research, about our business, the price of our Class A common stock and trading volume could decline.

The trading market for our Class A common stock depends in part on the research and reports that securities or industry analysts publish about us or our business. If few securities analysts commence coverage of us, or if industry analysts cease coverage of us, the trading price for our Class A common stock could be negatively affected. If one or more of the analysts who cover us downgrade our Class A common stock or publish inaccurate or unfavorable research about our business, the price of our Class A common stock would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, demand for our Class A common stock could decrease, which might cause our Class A common stock price and trading volume to decline.

Even if our stock is actively covered by analysts, we do not have any control over the analysts or the measures that analysts or investors may rely upon to forecast our future results. For example, in order to assess our business activity in a given period, analysts and investors may look at the combination of revenue and changes in deferred revenue in a given period (sometimes referred to as “billings”). Over-reliance on billings or similar measures may result in analyst or investor forecasts that differ significantly from our own for a variety of reasons, including:

•a relatively large number of transactions occur at the end of the quarter. Invoicing of those transactions may or may not occur before the end of the quarter based on a number of factors including receipt of information from the customer, volume of transactions, and holidays. A shift of a few days has little economic impact on our business, but will shift deferred revenue from one period into the next;

•a shift in billing frequency (i.e. from monthly to quarterly or from quarterly to annually), which may distort trends;

•subscriptions that have deferred start dates; and

•services that are invoiced upon delivery.

In addition, the new revenue recognition standard, Topic 606, has introduced new and significant disclosure requirements. These disclosure obligations are prepared on the basis of estimates that can change over time and on the basis of events over which we have no control. It is possible that analysts and investors may misinterpret our disclosure or that our methods for estimating this disclosure may differ significantly from others, which could lead to inaccurate or unfavorable forecasts by analysts and investors.

We do not intend to pay dividends for the foreseeable future.

We have never declared or paid any cash dividends on our common stock and do not intend to pay any cash dividends in the foreseeable future. Additionally, our ability to pay dividends on our common stock is limited by restrictions under the terms of our Debt Agreement. We anticipate that for the foreseeable future we will retain all of our future earnings for use in the development of our business and for general corporate purposes. Any determination to pay dividends in the future will be at the discretion of our board of directors. Accordingly, investors

must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investments.

Provisions in our charter documents and under Delaware law could make an acquisition of our company more difficult, limit attempts by our stockholders to replace or remove our current management, limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees, and limit the market price of our Class A common stock.

Provisions in our restated certificate of incorporation and restated bylaws may have the effect of delaying or preventing a change of control or changes in our management. Our restated certificate of incorporation and restated bylaws include provisions that:

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

•permit the board of directors to establish the number of directors and fill any vacancies and newly-created directorships;

•require supermajority voting to amend some provisions in our restated certificate of incorporation and restated bylaws;

•authorize the issuance of “blank check” preferred stock that our board of directors could use to implement a stockholder rights plan;

•provide that only the chairman of our board of directors, our chief executive officer, lead independent director, or a majority of our board of directors will be authorized to call a special meeting of stockholders;

•provide for a dual class common stock structure in which holders of our Class B common stock may have the ability to control the outcome of matters requiring stockholder approval, even if they own significantly less than a majority of the outstanding shares of our common stock, including the election of directors and significant corporate transactions, such as a merger or other sale of our company or its assets;

•prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;

•provide that the board of directors is expressly authorized to make, alter, or repeal our bylaws; and

•establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon by stockholders at annual stockholder meetings.

In addition, our restated certificate of incorporation provides that, to the fullest extent permitted by law, the Court of Chancery of the State of Delaware is the exclusive forum for: any derivative action or proceeding brought on our behalf; any action asserting a breach of fiduciary duty; any action asserting a claim against us arising pursuant to the Delaware General Corporation Law, or DGCL, our restated certificate of incorporation, or our restated bylaws; or any action asserting a claim against us that is governed by the internal affairs doctrine. This choice of forum provision does not apply to claims that are vested in the exclusive jurisdiction of a court or forum other than the Court of Chancery of the State of Delaware, or for which the Court of Chancery of the State of Delaware does not have subject matter jurisdiction.

Section 27 of the Exchange Act creates exclusive federal jurisdiction over all claims brought to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder. Section 22 of the Securities Act of 1933, as amended (the Securities Act), creates concurrent jurisdiction for federal and state courts over all claims brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. The exclusive forum provision will not apply to suits brought to enforce any duty or liability created by the Exchange Act or the Securities Act. Accordingly, actions by our stockholders to enforce any duty or liability created by (i) the Exchange Act or the rules and regulations thereunder must be brought in federal court and (ii) the Securities Act or

the rules and regulations thereunder can be brought in either federal or state court. Our stockholders will not be deemed to have waived our compliance with the federal securities laws and the regulations promulgated thereunder

Moreover, Section 203 of the DGCL may discourage, delay, or prevent a change of control of our company. Section 203 imposes certain restrictions on mergers, business combinations, and other transactions between us and holders of 15% or more of our common stock.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities

None.

Use of Proceeds

None.

Item 6. Exhibits.

Exhibit

Number

Incorporated By Reference

Filed or
Furnished
Herewith

Exhibit Description

Form

File No.

Exhibit

Filing
Date

10.1*

Form of Change in Control and Severance Agreement

31.1

Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Exchange Ac t

31.2

Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Exchange Act

32.1**

Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2**

Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS

Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

101.SCH

Inline XBRL Taxonomy Extension Schema Document

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

* Indicates a management contract or compensatory plan or arrangement in which directors or executive officers are eligible to participate.

** The certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Form 10-Q and are not deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, nor shall they be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

ZUORA, INC.

Date: December 16, 2019

By:

/s/ Tyler Sloat

Tyler Sloat

Chief Financial Officer

(Principal Accounting and Financial Officer)