Zscaler Reports Third Quarter Fiscal 2021 Financial Results

Tuesday, 25. May 2021 22:05

Third Quarter Highlights

  • Revenue grows 60% year-over-year to $176.4 million
  • Calculated billings grows 71% year-over-year to $225.0 million
  • Deferred revenue grows 65% year-over-year to $495.4 million
  • GAAP net loss of $58.5 million compared to GAAP net loss of $19.3 million on a year-over-year basis
  • Non-GAAP net income of $21.4 million compared to non-GAAP net income of $10.3 million on a year-over-year basis

SAN JOSE, Calif., May 25, 2021 (GLOBE NEWSWIRE) -- Zscaler, Inc. (Nasdaq: ZS), the leader in cloud security, today announced financial results for its third quarter of fiscal year 2021, ended April 30, 2021.

"We delivered outstanding results for the third quarter, with revenue growth accelerating to 60% year over year and free cash flow reaching a new record. Our Zero Trust Exchange platform is helping customers realize their digital transformation goals and architect for the new normal of the work-from-anywhere economy," said Jay Chaudhry, Chairman and CEO of Zscaler. "Our strategic position with customers continues to strengthen, and we are executing well on our go-to-market initiatives. With strong business momentum, we are pleased to again increase our fiscal year guidance."

Third Quarter Fiscal 2021 Financial Highlights

  • Revenue: $176.4 million, an increase of 60% year-over-year.
  • Income (loss) from operations: GAAP loss from operations was $43.9 million, or 25% of total revenue, compared to $20.5 million, or 19% of total revenue, in the third quarter of fiscal 2020. Non-GAAP income from operations was $22.9 million, or 13% of total revenue, compared to $9.7 million, or 9% of total revenue, in the third quarter of fiscal 2020.
  • Net income (loss): GAAP net loss was $58.5 million, compared to $19.3 million in the third quarter of fiscal 2020. Non-GAAP net income was $21.4 million, compared to $10.3 million in the third quarter of fiscal 2020.
  • Net income (loss) per share: GAAP net loss per share was $0.43, compared to $0.15 in the third quarter of fiscal 2020. Non-GAAP net income per share was $0.15, compared to $0.07 in the third quarter of fiscal 2020.
  • Cash flow: Cash provided by operations was $73.4 million, or 42% of revenue, compared to $20.8 million, or 19% of revenue, in the third quarter of fiscal 2020. Free cash flow was $55.8 million, or 32% of revenue, compared to $9.1 million, or 8% of revenue, in the third quarter of fiscal 2020.
  • Deferred revenue: $495.4 million as of April 30, 2021, an increase of 65% year-over-year.
  • Cash, cash equivalents and short-term investments: $1,467.6 million as of April 30, 2021, an increase of $97.0 million from July 31, 2020.

Recent Business Highlights

  • Acquired Trustdome, a leading innovator in Cloud Infrastructure Entitlement Management (CIEM), to be integrated with Zscaler’s existing Cloud Security Posture Management (CSPM) platform and provide a comprehensive solution for reducing public cloud attack surfaces and improving security posture. With this acquisition, Zscaler also expands its global footprint with its first development center in Israel, where the company plans to continue investment.        

  • Signed a definitive agreement to acquire Smokescreen Technologies, a leader in active defense and deception technology. Smokescreen's cutting-edge capabilities will be integrated into the Zscaler Zero Trust Exchange™ platform, further building upon Zscaler's ability to detect ransomware, lateral movement attempts, and other sophisticated, highly targeted attacks.

  • Launched security innovations for the Zscaler Zero Trust Exchange platform and new programs designed to secure digital businesses, including new security solutions, resources for IT execs and practitioners, and deployment guides to expedite zero trust adoption which provide digital businesses a holistic approach to IT security and the pragmatic skills and blueprints needed to be competitive.
  • Announced a series of integrations with CrowdStrike to deliver end-to-end security protection from the endpoint to the application. These integrations for joint customers strengthen security by providing an identity-centric and data-centric zero trust approach that encompasses data, people, devices, workloads, and networks.

  • Announced an alliance partnership with IBM Security to deliver new blueprints for common zero trust use cases. The partnership is critical in helping customers accelerate zero trust deployments and assist organizations with simplifying remote work and network security modernization.

Change in Non-GAAP Measures Presentation

Effective August 1, 2020, the beginning of our fiscal year ending July 31, 2021, we have presented employer payroll taxes related to employee equity award transactions, which is a cash expense, as part of stock-based compensation expense in our non-GAAP results. These payroll taxes have been excluded from our non-GAAP results because they are tied to the timing and size of the exercise or vesting of the underlying equity awards and the price of our common stock at the time of vesting or exercise may vary from period to period independent of the operating performance of our business. Prior periods amounts have been recasted to conform to this presentation.

Financial Outlook

For the fourth quarter of fiscal 2021, we expect:

  • Total revenue of $185 million to $187 million
  • Non-GAAP income from operations of $13.5 million to $14.5 million 
  • Non-GAAP net income per share of approximately $0.08 to $0.09, assuming approximately 146 million common shares outstanding

For the full year fiscal 2021, we expect:

  • Total revenue of $660 million to $664 million
  • Calculated billings of $878 million to $880 million
  • Non-GAAP income from operations of $71 million to $72 million
  • Non-GAAP net income per share of $0.47, assuming approximately 145 million common shares outstanding

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

Guidance for non-GAAP income from operations excludes stock-based compensation expense and related payroll taxes, amortization expense of acquired intangible assets, asset impairment related to facility exit, certain litigation-related expenses, amortization of debt discount and issuance costs and income tax effects generated by intangible assets acquired in business acquisitions. Guidance for non-GAAP net income per share includes the anti-dilutive impact of the capped call transactions entered into in connection with our convertible senior notes issued in June 2020. We have not reconciled our expectations to non-GAAP income from operations and non-GAAP net income per share to their most directly comparable GAAP measures because certain items are out of our control or cannot be reasonably predicted. Accordingly, a reconciliation for the guidance for non-GAAP income from operations and non-GAAP net income per share is not available without unreasonable effort.

Conference Call and Webcast Information

Zscaler will host a conference call for analysts and investors to discuss its third quarter fiscal 2021 earnings results and outlook for its fourth quarter of fiscal 2021 and full year fiscal 2021 today at 1:30 p.m. Pacific time (4:30 p.m. Eastern time).

Date:Tuesday, May 25, 2021
Time:1:30 p.m. PT
Webcast:https://ir.zscaler.com 
Dial-in number:918-922-3018

Upcoming Conferences

Fourth quarter of fiscal 2021 virtual investor conference participation schedule:

  • J.P. Morgan Technology, Media and Communication Conference
    Wednesday, May 26, 2021
  • Bernstein's 37th Annual Strategic Decisions Conference
    Friday, June 4, 2021
  • Bank of America Global Technology Conference
    Tuesday, June 8, 2021
  • Baird's 2021 Global Consumer, Technology & Services Conference
    Thursday, June 10, 2021
  • Mizuho Cybersecurity Summit
    Tuesday, June 15, 2021

Sessions which offer a webcast will be available on the Investor Relations section of the Zscaler website at https://ir.zscaler.com

Forward-Looking Statements

This press release contains forward-looking statements that involve risks and uncertainties, including statements regarding our future financial and operating performance, including our financial outlook for the fourth quarter of fiscal 2021 and full year fiscal 2021. There are a significant number of factors that could cause actual results to differ materially from statements made in this press release, including but not limited to: the duration and global impact of COVID-19 on our business, operations and financial results and the economy in general; our ability as an organization to acquire and integrate other companies, products or technologies in a successful manner; our limited operating history; our ability to identify and effectively implement the necessary changes to address execution challenges; risks associated with managing our rapid growth, including fluctuations from period to period; our limited experience with new product and subscription and support introductions and the risks associated with new products and subscription and support offerings, including the discovery of software bugs; our ability to attract and retain new customers; the failure to timely develop and achieve market acceptance of new products and subscriptions as well as existing products and subscription and support; rapidly evolving technological developments in the market for network security products and subscription and support offerings and our ability to remain competitive; length of sales cycles; and general market, political, economic and business conditions.

Additional risks and uncertainties that could affect our financial results are included under the captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” set forth from time to time in our filings and reports with the Security Exchange Commission (SEC), including our Annual Report on Form 10-K for the fiscal year ended July 31, 2020 filed on September 17, 2020, as well as future filings and reports by us, copies of which are available on our website at ir.zscaler.com and on the SEC’s website at www.sec.gov. You should not rely on these forward-looking statements, as actual outcomes and results may differ materially from those contemplated by these forward-looking statements as a result of such risks and uncertainties. Additional information will also be set forth in other filings that we make with the SEC from time to time. All forward-looking statements in this press release are based on information available to us as of the date hereof, and we do not assume any obligation to update the forward-looking statements provided to reflect events that occur or circumstances that exist after the date on which they were made.

Use of Non-GAAP Financial Information

We believe that the presentation of non-GAAP financial information provides important supplemental information to management and investors regarding financial and business trends relating to our financial condition and results of operations. For further information regarding why we believe that these non-GAAP measures provide useful information to investors, the specific manner in which management uses these measures, and some of the limitations associated with the use of these measures, please refer to the “Explanation of Non-GAAP Financial Measures" section of this press release.

About Zscaler

Zscaler (Nasdaq: ZS) accelerates digital transformation so customers can be more agile, efficient, resilient, and secure. The Zscaler Zero Trust Exchange protects thousands of customers from cyberattacks and data loss by securely connecting users, devices, and applications in any location. Distributed across more than 150 data centers globally, the SASE-based Zero Trust Exchange is the world’s largest in-line cloud security platform.

Zscaler™ and the other trademarks listed at https://www.zscaler.com/legal/trademarks are either (i) registered trademarks or service marks or (ii) trademarks or service marks of Zscaler, Inc. in the United States and/or other countries. Any other trademarks are the properties of their respective owners.

Investor Relations Contacts

Bill Choi, CFA
SVP, Investor Relations and Strategic Finance
(408) 816-1478
ir@zscaler.com

Natalia Wodecki
Media Relations Contact
press@zscaler.com

 
ZSCALER, INC.
Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
(unaudited)
        
 Three Months Ended Nine Months Ended
 April 30, April 30,
 2021 2020 2021 2020
Revenue$176,404   $110,524   $476,026   $305,382  
Cost of revenue (1) (2)38,977   24,579   104,839   64,375  
Gross profit137,427   85,945   371,187   241,007  
Operating expenses:       
Sales and marketing (1) (2)115,730   67,727   323,022   188,759  
Research and development (1) (2)40,952   24,117   118,473   65,094  
General and administrative (1) (3) (4)24,595   14,615   70,107   56,223  
Total operating expenses181,277   106,459   511,602   310,076  
Loss from operations(43,850)  (20,514)  (140,415)  (69,069) 
Interest income593   1,528   2,288   5,405  
Interest expense (5) (13,436)     (39,730)    
Other income, net71   70   857   28  
Loss before income taxes(56,622)  (18,916)  (177,000)  (63,636) 
Provision for income taxes1,837   421   4,006   1,931  
Net loss$(58,459)  $(19,337)  $(181,006)  $(65,567) 
Net loss per share, basic and diluted$(0.43)  $(0.15)  $(1.34)  $(0.51) 
Weighted-average shares used in computing net loss per share, basic and diluted 136,385    129,682    134,938    128,538  
                    
(1) Includes stock-based compensation expense and related payroll taxes as follows:
                    
Cost of revenue$3,665   $1,672   $10,239    4,734  
Sales and marketing 34,798    15,795    101,316    39,414  
Research and development 15,033    7,145    47,680    18,479  
General and administrative 11,681    4,470    33,384    11,029  
Total$65,177   $29,082   $192,619   $73,656  
                    
(2) Includes amortization expense of acquired intangible assets as follows:
                    
Cost of revenue$1,503   348   4,510   $758  
Sales and marketing 73    8    219    24  
Research and development     285        1,280  
Total$1,576   $641   $4,729   $2,062  
                    
(3) Includes asset impairment related to facility exit as follows:$   $430   $416   $746  
                    
(4) Includes litigation-related expenses as follows:$   $12   $   $18,353  
                    
(5) Includes amortization of debt discount and issuance costs as follows:$13,077   $   $38,649   $  


 
ZSCALER, INC.
Condensed Consolidated Balance Sheets
(in thousands)
(unaudited)
 April 30, July 31,
 2021 2020
Assets   
Current assets:   
Cash and cash equivalents$106,590   $141,851  
Short-term investments1,361,019   1,228,722  
Accounts receivable, net164,923   147,584  
Deferred contract acquisition costs44,541   32,240  
Prepaid expenses and other current assets28,428   31,396  
Total current assets1,705,501   1,581,793  
Property and equipment, net106,812   75,734  
Operating lease right-of-use assets49,727   36,119  
Deferred contract acquisition costs, noncurrent107,927   77,675  
Acquired intangible assets, net26,495   24,024  
Goodwill53,291   30,059  
Other noncurrent assets12,523   8,054  
Total assets$2,062,276   $1,833,458  
    
Liabilities and Stockholders’ Equity   
Current liabilities:   
Accounts payable$20,172   $5,233  
Accrued expenses and other current liabilities16,622   16,361  
Accrued compensation61,276   49,444  
Deferred revenue445,835   337,263  
Operating lease liabilities20,974   15,600  
Total current liabilities564,879   423,901  
Convertible senior notes, net900,263   861,615  
Deferred revenue, noncurrent49,599   32,504  
Operating lease liabilities, noncurrent35,472   28,023  
Other noncurrent liabilities3,956   2,586  
Total liabilities1,554,169   1,348,629  
Stockholders’ Equity   
Common stock137   133  
Additional paid-in capital1,027,888   823,804  
Accumulated other comprehensive income659   463  
Accumulated deficit(520,577)  (339,571) 
Total stockholders’ equity508,107   484,829  
Total liabilities and stockholders’ equity$2,062,276   $1,833,458  


 
ZSCALER, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 Nine Months Ended
 April 30,
 2021 2020
Cash Flows From Operating Activities   
Net loss$(181,006)  $(65,567) 
Adjustments to reconcile net loss to cash provided by operating activities:   
Depreciation and amortization expense21,401   12,278  
Amortization expense of acquired intangible assets4,729   2,062  
Amortization of deferred contract acquisition costs28,577   17,673  
Amortization of debt discount and issuance costs38,648     
Non-cash operating lease costs15,156   9,649  
Stock-based compensation expense178,538   70,012  
Amortization (accretion) of investments purchased at a premium (discount)8,600   (463) 
Deferred income taxes(1,502)  (555) 
Impairment of assets416   746  
Other3   305  
Changes in operating assets and liabilities, net of effects of business acquisitions   
Accounts receivable(20,128)  (12,218) 
Deferred contract acquisition costs(71,130)  (32,228) 
Prepaid expenses, other current and noncurrent assets1,797   (13,365) 
Accounts payable6,421   1,923  
Accrued expenses, other current and noncurrent liabilities3,008   660  
Accrued compensation11,583   12,671  
Deferred revenue128,414   49,581  
Operating lease liabilities(16,221)  (5,482) 
Net cash provided by operating activities157,304   47,682  
Cash Flows From Investing Activities   
Purchases of property, equipment and other assets(34,215)  (24,793) 
Capitalized internal-use software(7,047)  (6,296) 
Payments for business acquisitions, net of cash acquired(29,420)  (8,918) 
Investments in privately held companies(2,877)    
Purchases of short-term investments(724,472)  (202,764) 
Proceeds from maturities of short-term investments562,744   209,225  
Proceeds from sale of short-term investments22,499   14,084  
Net cash used in investing activities(212,788)  (19,462) 
Cash Flows From Financing Activities   
Proceeds from issuance of common stock upon exercise of stock options13,910   12,554  
Proceeds from issuance of common stock under the employee stock purchase plan8,563   5,334  
Payment of deferred consideration related to a business acquisition(2,250)    
Net cash provided by financing activities20,223   17,888  
Net increase (decrease) in cash, cash equivalents and restricted cash(35,261)  46,108  
Cash, cash equivalents and restricted cash at beginning of period141,851   78,484  
Cash, cash equivalents and restricted cash at end of period$106,590   $124,592  
Reconciliation of cash, cash equivalents and restricted cash to the condensed consolidated balance sheets:   
Cash and cash equivalents$106,590   $124,592  
Restricted cash, current and noncurrent     
Total cash, cash equivalents and restricted cash$106,590   $124,592  


 
ZSCALER, INC.
Reconciliation of GAAP to Non-GAAP Financial Measures
(in thousands)
(unaudited)
        
 Three Months Ended Nine Months Ended
 April 30, April 30,
 2021 2020 2021 2020
        
Revenue$176,404   $110,524   $476,026   $305,382  
        
Non-GAAP Gross Profit and Non-GAAP Gross Margin       
GAAP gross profit$137,427   $85,945   $371,187   $241,007  
Add:       
Stock-based compensation expense and related payroll taxes3,665   1,672   10,239   4,734  
Amortization expense of acquired intangible assets1,503   348   4,510   758  
Non-GAAP gross profit$142,595   $87,965   $385,936   $246,499  
GAAP gross margin78 % 78 % 78 % 79 %
Non-GAAP gross margin81 % 80 % 81 % 81 %
        
Non-GAAP Income from Operations and Non-GAAP Operating Margin       
GAAP loss from operations$(43,850)  $(20,514)  $(140,415)  $(69,069) 
Add:       
Stock-based compensation expense and related payroll taxes65,177   29,082   192,619   73,656  
Litigation-related expenses   12      18,353  
Amortization expense of acquired intangible assets1,576   641   4,729   2,062  
Asset impairment related to facility exit (1)   430   416   746  
Non-GAAP income from operations$22,903   $9,651   $57,349   $25,748  
GAAP operating margin(25)% (19)% (29)% (23)%
Non-GAAP operating margin13 % 9 % 12 % 8 %

___________

(1) Consists of asset impairment charges related to the relocation of our corporate headquarters.

 
ZSCALER, INC.
Reconciliation of GAAP to Non-GAAP Financial Measures
(in thousands, except per share amounts)
(unaudited)
        
 Three Months Ended Nine Months Ended
 April 30, April 30,
 2021 2020 2021 2020
Non-GAAP Net Income per Share, Diluted       
GAAP net loss$(58,459)  $(19,337)  $(181,006)  $(65,567) 
Stock-based compensation expense and related payroll taxes65,177   29,082   192,619   73,656  
Litigation-related expenses   12      18,353  
Amortization of debt discount and issuance costs13,077      38,649     
Amortization expense of acquired intangible assets1,576   641   4,729   2,062  
Asset impairment related to facility exit (1)   430   416   746  
Provision for income taxes (2)   (490)     (490) 
Non-GAAP net income$21,371   $10,338   $55,407   $28,760  
        
GAAP net loss per share, diluted$(0.43)  $(0.15)  $(1.34)  $(0.51) 
Stock-based compensation expense and related payroll taxes0.45   0.21   1.33   0.54  
Litigation-related expenses         0.13  
Amortization of debt discount and issuance costs0.09      0.27     
Amortization expense of acquired intangible assets0.01      0.03   0.02  
Asset impairment related to facility exit (1)         0.01  
Provision for income taxes (2)           
Adjustment to total fully diluted earnings per share (3)0.03   0.01   0.09   0.02  
Non-GAAP net income per share, diluted$0.15   $0.07   $0.38   $0.21  
        
Denominator:       
Weighted-average shares used in computing GAAP net loss per share, diluted136,385   129,682   134,938   128,538  
Potentially diluted shares10,220   8,191   10,389   8,680  
Antidilutive impact of capped call transactions (4)(1,692)     (844)    
Weighted-average shares used in computing non-GAAP net income per share, diluted144,913   137,873   144,483   137,218  

___________
(1) Consists of asset impairment charges related to the relocation of our corporate headquarters.

(2) We use our GAAP provision for income taxes for purposes of determining our non-GAAP income tax expense. The difference between our GAAP and non-GAAP income tax expense represents the effects of stock-based compensation expense recognized in foreign jurisdictions and any income tax benefits associated with business combinations. The income tax benefit related to stock-based compensation expense included in the GAAP provision for income taxes was not material for all periods presented. In the fiscal quarter ended April 30, 2020, we recorded a tax benefit of $0.5 million, associated with intangible assets recognized as a result of our acquisition of Cloudneeti Corporation.

(3) The sum of the fully diluted earnings per share impact of individual reconciling items may not total to fully diluted Non-GAAP net income per share due to the weighted-average shares used in computing the GAAP net loss per share differs from the weighted-average shares used in computing the Non-GAAP net income per share and due to rounding of the individual reconciling items. The GAAP net loss per share calculation uses a lower share count as it excludes potentially dilutive shares, which are included in calculating the non-GAAP net income per share.

(4) We exclude the in-the-money portion of our convertible senior notes for non-GAAP weighted-average diluted shares as they are covered by our capped call transactions. Our outstanding capped call transactions are antidilutive under GAAP but are expected to mitigate the dilutive effect of our convertible notes and therefore are included in the calculations of non-GAAP diluted shares outstanding.

 
ZSCALER, INC.
Reconciliation of GAAP to Non-GAAP Financial Measures
(in thousands)
(unaudited)
        
 Three Months Ended Nine Months Ended
 April 30, April 30,
 2021 2020 2021 2020
Calculated Billings       
Revenue$176,404   $110,524   $476,026   $305,382  
Add: Total deferred revenue, end of period495,434   300,791   495,434   300,791  
Less: Total deferred revenue, beginning of period(446,817)  (280,022)  (369,767)  (251,202) 
Calculated billings$225,021   $131,293   $601,693   $354,971  
        
Free Cash Flow       
Net cash provided by operating activities$73,368   $20,822   $157,304   $47,682  
Less: Purchases of property, equipment and other assets(14,812)  (9,694)  (34,215)  (24,793) 
Less: Capitalized internal-use software(2,775)  (2,023)  (7,047)  (6,296) 
Free cash flow$55,781   $9,105   $116,042   $16,593  
As a percentage of revenue:       
Net cash provided by operating activities42 % 19 % 33 % 15 %
Less: Purchases of property, equipment and other assets(8)% (9)% (7)% (8)%
Less: Capitalized internal-use software(2)% (2)% (2)% (2)%
Free cash flow margin32 % 8 % 24 % 5 %
 

ZSCALER, INC.
Explanation of Non-GAAP Financial Measures

In addition to our results determined in accordance with generally accepted accounting principles in the United States of America (GAAP), we believe the following non-GAAP measures are useful in evaluating our operating performance. We use the following non-GAAP financial information to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that non-GAAP financial information, when taken collectively, may be helpful to investors because it provides consistency and comparability with past financial performance. However, non-GAAP financial information is presented for supplemental informational purposes only, has limitations as an analytical tool and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP. In particular, free cash flow is not a substitute for cash used in operating activities. Additionally, the utility of free cash flow as a measure of our liquidity is further limited as it does not represent the total increase or decrease in our cash balance for a given period. In addition, other companies, including companies in our industry, may calculate similarly-titled non-GAAP measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measures as tools for comparison. A reconciliation of our historical non-GAAP financial measures to their most directly comparable financial measures stated in accordance with GAAP has been included in this press release. Investors are cautioned that there are a number of limitations associated with the use of non-GAAP financial measures and key metrics as analytical tools. Investors are encouraged to review these reconciliations, and not to rely on any single financial measure to evaluate our business.

Expenses Excluded from Non-GAAP Measures

Stock-based compensation expense is excluded primarily because they are non-cash expenses that management believes are not reflective of our ongoing operational performance. Effective August 1, 2020, the beginning of our fiscal year ending July 31, 2021, we have presented employer payroll taxes related to employee equity award transactions, which is a cash expense, as part of stock-based compensation expense in our non-GAAP results. These payroll taxes have been excluded from our non-GAAP results as these are tied to the timing and size of the exercise or vesting of the underlying equity awards and the price of our common stock at the time of vesting or exercise, which may vary from period to period independent of the operating performance of our business. Prior period amounts have been recasted to conform to this presentation. Amortization expense of acquired intangible assets is excluded because these are considered by management to be outside of our core business operating performance. Asset impairments related to facility exit costs are excluded because such charges are not reflective of our ongoing operational performance. Amortization of debt discount and issuance costs from our convertible senior notes are excluded because they are non-cash expenses and are not reflective of our ongoing operational performance. We also exclude certain litigation-related expenses consisting of professional fees and related costs incurred by us in defending against significant claims that we deem not to be in the ordinary course of our business and, if applicable, actual losses and accruals related to estimated losses in connection with these claims. There are many uncertainties and potential outcomes associated with any litigation, including the expense of litigation, timing of such expenses, court rulings, unforeseen developments, complications and delays, each of which may affect our results of operations from period to period, as well as the unknown magnitude of the potential loss relating to any lawsuit, all of which are inherently subject to change, difficult to predict and could adversely affect our results of operations. We estimate the tax effect of these items on our non-GAAP results and may adjust our GAAP provision for income taxes, if such effects have a material impact to our non-GAAP results.

Non-GAAP Financial Measures

Non-GAAP Gross Profit and Non-GAAP Gross Margin. We define non-GAAP gross profit as GAAP gross profit excluding stock-based compensation expense and related payroll taxes and amortization expense of acquired intangible assets. We define non-GAAP gross margin as non-GAAP gross profit as a percentage of revenue.

Non-GAAP Income from Operations and Non-GAAP Operating Margin. We define non-GAAP income from operations as GAAP loss from operations excluding stock-based compensation expense and related payroll taxes, amortization expense of acquired intangible assets, asset impairment related to facility exit and certain litigation-related expenses. We define non-GAAP operating margin as non-GAAP income from operations as a percentage of revenue.

Non-GAAP Net Income per Share, Diluted. We define non-GAAP net income as GAAP net loss plus stock-based compensation expense and related payroll taxes, amortization expense of acquired intangible assets, asset impairment related to facility exit, amortization of debt discount and issuance costs, certain litigation-related expenses, income tax effects generated by the effects of stock-based compensation expense recognized in foreign jurisdictions and any income tax benefits associated with business combinations. We define non-GAAP net income per share, diluted, as non-GAAP net income divided by the weighted-average diluted shares outstanding, which includes the dilutive effect of potentially diluted common stock equivalents outstanding during the period and the antidilutive impact of the capped call transactions entered into in connection with our convertible senior notes issued in June 2020.

Free Cash Flow and Free Cash Flow Margin. We define free cash flow as net cash provided by operating activities less purchases of property, equipment and other assets and capitalized internal-use software. We define free cash flow margin as free cash flow divided by revenue. We believe that free cash flow and free cash flow margin are meaningful indicators of liquidity information to management and investors about the amount of cash generated from our operations that, after the investments in property, equipment and other assets and capitalized internal-use software, can be used for strategic initiatives.

Calculated Billings. We define calculated billings as total revenue plus the change in deferred revenue in a period. Calculated billings in any particular period aims to reflect amounts invoiced for subscriptions to access our cloud platform, together with related support services related to our new and existing customers. We typically invoice our customers annually in advance, and to a lesser extent quarterly in advance, monthly in advance or multi-year in advance.


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