You should read the following discussion and analysis along with our consolidated financial statements and the related notes included elsewhere in this quarterly report on Form 10-Q. The statements in this discussion regarding our expectations of our future performance, liquidity and capital resources, and other non-historical statements are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described under "Risk Factors" in our Annual Report on Form 10-K for the fiscal year endedMarch 31, 2020 . Our actual results may differ materially from those contained in or implied by any forward-looking statements. OverviewCommvault is a leading provider of data protection and information management software applications and related services.Commvault was incorporated in 1996 as aDelaware corporation. TheCommvault software platform is an enterprise level, integrated data and information management solution, built from the ground up on a single platform and unified code base. All software functionality share the same back-end technologies to deliver the benefits of a holistic approach to protecting, managing, and accessing data. The software addresses many aspects of data management in the enterprise, while providing scalability and control of data and information. We also sell appliances that integrate theCommvault software with hardware and address a wide-range of business needs and use cases, ranging from support for remote or branch offices with limited IT staff up to large corporate data centers.Commvault also provides customers with a broad range of professional services that are delivered by our worldwide support and field operations. Sources of Revenues We derive a significant portion of our total revenues from sales of licenses of our software applications and related appliance products. We do not customize our software or products for a specific end-user customer. We sell our software applications and products to end-user customers both directly through our sales force and indirectly through our global network of value-added reseller partners, systems integrators, corporate resellers and original equipment manufacturers. Our software and products revenue was 45% and 41% of our total revenues for the nine months endedDecember 31, 2020 and 2019, respectively. Our total software and products revenue in any particular period is, to a certain extent, dependent upon our ability to generate revenues from large customer software and products deals. Larger deals (transactions greater than$0.1 million ) represented 69% and 64% of our total software and products revenue in the nine months endedDecember 31, 2020 and 2019, respectively. Software and products revenue generated through indirect distribution channels accounted for over 90% of total software and products revenue in both the nine months endedDecember 31, 2020 and 2019. Software and products revenue generated through direct distribution channels accounted for less than 10% of total software and products revenue in both the nine months endedDecember 31, 2020 and 2019. The dollar value of software and products revenue generated through indirect distribution channels increased$28.4 million in the nine months endedDecember 31, 2020 compared to the nine months endedDecember 31, 2019 . The dollar value of software and products revenue generated through direct distribution channels increased$0.1 million in the nine months endedDecember 31, 2020 compared to the nine months endedDecember 31, 2019 . Deals initiated by our direct sales force are sometimes transacted through indirect channels based on end-user customer requirements, which are not always in our control and can cause this overall percentage split to vary from period-to-period. As such, there may be fluctuations in the dollars and percentage of software and products revenue generated through our direct distribution channels from time-to-time. We believe that the growth of our software and products revenue, derived from both our indirect channel partners and direct sales force, are key attributes to our long-term growth strategy. We will continue to invest in both our channel relationships and direct sales force in the future, but we continue to expect more revenue to be generated through indirect distribution channels over the long term. The failure of our indirect distribution channels or our direct sales force to effectively sell our software applications could have a material adverse effect on our revenues and results of operations. We also have a non-exclusive distribution agreement covering our North American commercial markets and ourU.S. Federal Government market withArrow Enterprise Computing Solutions, Inc. ("Arrow"), a subsidiary of Arrow Electronics, Inc. Pursuant to this distribution agreement, Arrow's primary role is to enable a more efficient and effective distribution channel for our products and services by managing our reseller partners and leveraging their own industry experience. We generated 36% and 37% of our total revenues through Arrow in the nine months endedDecember 31, 2020 and 2019, respectively. If Arrow were to discontinue or reduce the sales of our products, 17 -------------------------------------------------------------------------------- or if our agreement with Arrow was terminated, and if we were unable to take back the management of our reseller channel or find another North American distributor to replace Arrow, then it would have a material adverse effect on our future business. Our services revenue was 55% of our total revenues for the nine months endedDecember 31, 2020 and 59% of our total revenues for the nine months endedDecember 31, 2019 . Our services revenue is made up of fees from the delivery of customer support and other professional services, which are typically sold in connection with the sale of our software applications. Customer support agreements provide technical support and unspecified software updates on a when-and-if-available basis for an annual fee based on licenses purchased and the level of service subscribed. Other professional services include consulting, assessment and design services, implementation and post-deployment services and training, all of which to date have predominantly been sold in connection with the sale of software applications. Our newly launched software-as-a-service solution, branded Metallic, is also included in services revenue. Revenue from Metallic is recognized ratably over the contract period. Foreign Currency Exchange Rates' Impact on Results of Operations Sales outsidethe United States were 48% of our total revenue for the nine months endedDecember 31, 2020 and 49% of our total revenue for the nine months endedDecember 31, 2019 . The results of our non-U.S. operations are translated intoU.S. dollars at the average exchange rates for each applicable month in a period. To the extent theU.S. dollar weakens against foreign currencies, the translation of these foreign currency denominated transactions generally results in increased revenue, operating expenses and income from operations for our non-U.S. operations. Similarly, our revenue, operating expenses and net income will generally decrease for our non-U.S. operations if theU.S. dollar strengthens against foreign currencies. Using the average foreign currency exchange rates from the three months endedDecember 31, 2019 , our software and products revenue would have been lower by$2.8 million , our services revenue would have been lower by$2.5 million , our cost of sales would have been lower by$0.6 million and our operating expenses would have been lower by$1.7 million from non-U.S. operations for the three months endedDecember 31, 2020 . Using the average foreign currency exchange rates for the nine months endedDecember 31, 2019 , our software and products revenue would have been lower by$3.5 million , our services revenue would have been lower by$2.9 million , our cost of sales would have been lower by$0.8 million and our operating expenses would have been lower by$1.5 million from non-U.S. operations for the nine months endedDecember 31, 2020 . In addition, we are exposed to risks of foreign currency fluctuation primarily from cash balances, accounts receivables and intercompany accounts denominated in foreign currencies and are subject to the resulting transaction gains and losses, which are recorded as a component of General and administrative expenses. We recognized net foreign currency transaction losses of$0.5 million and$1.7 million for the three and nine months endedDecember 31, 2020 , respectively. We recognized net foreign currency transaction losses of$0.1 million and$0.2 million for the three and nine months endedDecember 31, 2019 , respectively. 18 -------------------------------------------------------------------------------- Critical Accounting Policies Our condensed consolidated financial statements are prepared in accordance withU.S. GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. In many instances, we could have reasonably used different accounting estimates, and in other instances changes in the accounting estimates are reasonably likely to occur from period-to-period. Accordingly, actual results could differ significantly from the estimates made by our management. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management's judgment in its application, while in other cases, significant judgment is required in selecting among available alternative accounting standards that allow different accounting treatment for similar transactions. We consider these policies requiring significant management judgment to be critical accounting policies. These critical accounting policies are: •Revenue Recognition; •Accounting for Income Taxes •Goodwill and Purchased Intangible Assets There have been no significant changes in our critical accounting policies during the nine months endedDecember 31, 2020 as compared to the critical accounting policies and estimates disclosed in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies" included in our Annual Report on Form 10-K for the year endedMarch 31, 2020 . 19 -------------------------------------------------------------------------------- Results of Operations Three months endedDecember 31, 2020 compared to three months endedDecember 31, 2019 Revenues (in millions) [[Image Removed: cvlt-20201231_g1.jpg]][[Image Removed: cvlt-20201231_g2.jpg]][[Image Removed: cvlt-20201231_g3.jpg]] -Total revenues increased$11.6 million , or 7%. •Software and products revenue represented 47% of our total revenue in the three months endedDecember 31, 2020 and 43% of our total revenue in the three months endedDecember 31, 2019 . •Larger deal revenue (deals greater than$0.1 million ) represented 68% of our software and products revenue in the three months endedDecember 31, 2020 and 66% of our software and products revenue in the three months endedDecember 31, 2019 . -Software and products revenue increased$12.0 million , or 16%, as a result of the following: •An increase of$9.5 million , or 19%, in larger deal revenue. •An increase of 3% in the volume of larger deal revenue transactions from 182 deals for the three months endedDecember 31, 2019 to 187 deals for the three months endedDecember 31, 2020 . •The average dollar amount of larger deal revenue transactions was approximately$322 thousand and$279 thousand for the three months endedDecember 31, 2020 and 2019, representing a 15% increase respectively. •An increase of$2.5 million in transactions less than$0.1 million . -Services revenue represented 53% of our total revenue in the three months endedDecember 31, 2020 and 57% of our total revenue in the three months endedDecember 31, 2019 . Services revenue decreased$0.3 million primarily due to the following: •A decrease of$0.8 million in revenue from customer support agreements. •Partially offset by an increase of$0.5 million of revenue from Metallic, our SaaS based offering We track software and products revenue on a geographic basis. The geographic regions that are tracked are theAmericas (United States ,Canada ,Latin America ), EMEA (Europe ,Middle East ,Africa ) and APJ (Australia ,New Zealand ,Southeast Asia ,China ,Japan ).Americas , EMEA and APJ represented 49%, 38% and 13% of total software and products revenue, respectively, for the three months endedDecember 31, 2020 . Software and products revenue increased year over year by 8% in theAmericas , 15% in EMEA and 61% in APJ. ?The increase inAmericas software and products revenue was primarily the result of a 10% increase in larger deal transactions revenue driven by an increase in the volume of larger deal transactions. ?EMEA software and products revenue increased as a result of a 23% increase in revenue on deals under$0.1 million . Using exchange rates from the prior year, the increase in software and products revenue would have been 8%. ?The increase in APJ was the result of larger deal transactions increasing more than two times over the prior year period, partially offset by a decrease in deals under$0.1 million . Using exchange rates from the prior year, the increase in software and products revenue would have been 52%.
Our software and products revenue in EMEA and APJ is subject to changes in foreign exchange rates as more fully discussed above in the "Foreign Currency Exchange Rates' Impact on Results of Operations" section.
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Cost of Revenues and Gross Margin ($ in millions)
[[Image Removed: cvlt-20201231_g4.jpg]][[Image Removed: cvlt-20201231_g5.jpg]][[Image Removed: cvlt-20201231_g6.jpg]] [[Image Removed: cvlt-20201231_g7.jpg]][[Image Removed: cvlt-20201231_g8.jpg]][[Image Removed: cvlt-20201231_g9.jpg]] -Total cost of revenues decreased$2.1 million , and represented 15% of our total revenues for the three months endedDecember 31, 2020 compared to 17% for the three months endedDecember 31, 2019 . -Cost of software and products revenue decreased$1.2 million , and represented 8% of our total software and products revenue for the three months endedDecember 31, 2020 compared to 11% for the three months endedDecember 31, 2019 . The decrease is the result of reduced sales of hardware associated with our appliance as well as reduced software royalties associated with sales of HyperScale appliances and software. Beginning with the launch of HyperScale X, we will transition to a software only model. HyperScale X also has reduced software royalties relative to prior versions of HyperScale. -Cost of services revenue decreased$0.9 million , representing 22% of our total services revenue for the three months endedDecember 31, 2020 compared to 23% for the three months endedDecember 31, 2019 . The decline in cost of services revenue is primarily related to a decrease in employee-related expenses attributable to our restructuring and reorganization initiatives. 21
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Operating Expenses ($ in millions) [[Image Removed: cvlt-20201231_g10.jpg]][[Image Removed: cvlt-20201231_g11.jpg]][[Image Removed: cvlt-20201231_g12.jpg]]
[[Image Removed: cvlt-20201231_g13.jpg]][[Image Removed: cvlt-20201231_g14.jpg]][[Image Removed: cvlt-20201231_g15.jpg]] - Sales and marketing expenses remained relatively flat with a slight decrease of$0.1 million driven by: •Decrease in travel and related expenses as a result of COVID-19, partially offset by an increase in variable compensation associated with increased revenue. - Research and development expenses increased$5.2 million , or 17%, as a result of an increase in employee compensation and related expenses attributable to the expansion of our engineering group. •Stock-based compensation increased$1.2 million compared to prior year. •Investing in research and development has been a priority forCommvault , and we anticipate continued spending related to the development of our data and information management software applications. - General and administrative expenses decreased$1.2 million , or 5%, primarily due to the following: •Reduction related to non-recurring prior year expenses associated withHedvig acquisition costs. - Restructuring: Our restructuring plan is intended to increase efficiency in our sales, marketing and distribution functions as well as reduce costs across all functional areas. Restructuring expenses were$11.6 million and$2.0 million in the three months endedDecember 31, 2020 and 2019, respectively. These restructuring charges relate primarily to severance and related costs associated with headcount reductions as well as lease abandonment charges related to the closure of one office in the third quarter of fiscal year 2021 and two offices in the third quarter of fiscal 2020. These charges include$1.2 million and$0.7 million in the three months endedDecember 31, 2020 and 2019, respectively, of stock-based compensation related to modifications of existing awards granted to certain employees included in the restructuring. We cannot guarantee the restructuring program will achieve its intended result. Risks associated with this restructuring program also include additional unexpected costs, adverse effects on employee morale and the failure to meet operational and growth targets due to the loss of key employees, any of which may impair our ability to achieve anticipated results of operations or otherwise harm our business. -Depreciation and amortization expense decreased$3.1 million , from$5.4 million in the three months endedDecember 31, 2019 to$2.3 million in the three months endedDecember 31, 2020 , driven by the reduced amortization of intangible assets related toHedvig due to their impairment in the second quarter of fiscal 2021. 22 -------------------------------------------------------------------------------- Income Tax Expense Income tax expense was$1.2 million in the three months endedDecember 31, 2020 compared to expense of$1.0 million in the three months endedDecember 31, 2019 . The income tax expense for the three months endedDecember 31, 2020 relates primarily to current federal and foreign taxes. Nine months endedDecember 31, 2020 compared to nine months endedDecember 31, 2019 Revenues (in millions) [[Image Removed: cvlt-20201231_g16.jpg]][[Image Removed: cvlt-20201231_g17.jpg]][[Image Removed: cvlt-20201231_g18.jpg]] -Total revenues increased$26.0 million , or 5%. •Software and products revenue represented 45% of our total revenue in the nine months endedDecember 31, 2020 and 41% of our total revenue in the nine months endedDecember 31, 2019 . •Larger deal revenue (deals greater than$0.1 million ) represented approximately 69% of our software and products revenue in the nine months endedDecember 31, 2020 and 64% of our software and products revenue in the nine months endedDecember 31, 2019 . -Software and products revenue increased$28.6 million , or 14%, as a result of the following: •An increase of$29.3 million , or 22%, in larger deal revenue. •An increase of 6% in the number of larger deal revenue transactions and an increase of 15% in the average dollar amount of such transactions. •The average dollar amount of larger deal revenue transactions was approximately$344 thousand and$299 thousand for the nine months endedDecember 31, 2020 and 2019, respectively. -Services revenue represented 55% of our total revenue in the nine months endedDecember 31, 2020 and 59% of our total revenue in the nine months endedDecember 31, 2019 . Services revenue decreased$2.6 million , or 1%, primarily due to the following: •A decrease of$2.2 million in revenue from customer support agreements. • A decrease of$0.4 million in training and consulting services. We track software and products revenue on a geographic basis. The geographic regions that are tracked are theAmericas (United States ,Canada ,Latin America ), EMEA (Europe ,Middle East ,Africa ) and APJ (Australia ,New Zealand ,Southeast Asia ,China ,Japan ).Americas , EMEA and APJ represented 56%, 31% and 13% of total software and products revenue, respectively, for the nine months endedDecember 31, 2020 . Software and products revenue increased year over year by 24% in theAmericas and 3% in EMEA; whereas APJ remained flat. ?The increase inAmericas software and products revenue was primarily the result of a 32% increase in revenue from larger deal transactions compared to the nine months endedDecember 31, 2019 . ?EMEA software and products revenue increased as a result of a 6% increase in revenue on deals under$0.1 million . ?Revenue from larger deal transactions in APJ increased by$2.9 million ; whereas transactions under$0.1 million decreased by$2.7 million resulting in nominal growth. 23 --------------------------------------------------------------------------------
Our software and products revenue in EMEA and APJ is subject to changes in foreign exchange rates as more fully discussed above in the "Foreign Currency Exchange Rates' Impact on Results of Operations" section.
Cost of Revenues and Gross Margin ($ in millions)
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-Total cost of revenues decreased$10.6 million , and represented 15% of our total revenues for the nine months endedDecember 31, 2020 compared to 18% for the nine months endedDecember 31, 2019 . Temporary salary cuts during the first half of fiscal year 2021 related to COVID-19 resulted in savings of$1.1 million in cost of revenues. The remaining decrease is primarily due to a decrease in employee-related expenses attributable to our restructuring and reorganization initiatives and a decrease in cost of sales associated with our appliance. -Cost of software and products revenue decreased$2.2 million , and represented 9% of our total software and products revenue for the nine months endedDecember 31, 2020 compared to 11% for the nine months endedDecember 31, 2019 . The decrease is the result of lower cost of sales associated with our appliance compared to the same period in the prior year. -Cost of services revenue decreased$8.4 million , representing 20% of our total services revenue for the nine months endedDecember 31, 2020 compared to 23% for the nine months endedDecember 31, 2019 . The decline in cost of services revenue is primarily related to a decrease in employee-related expenses attributable to our restructuring and reorganization initiatives. Additionally, there was a decrease in expenses associated with the delivery of professional services revenue as well as temporary salary cuts during the first half of fiscal year 2021 related to COVID-19. 24
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Operating Expenses ($ in millions) [[Image Removed: cvlt-20201231_g25.jpg]][[Image Removed: cvlt-20201231_g26.jpg]][[Image Removed: cvlt-20201231_g27.jpg]]
[[Image Removed: cvlt-20201231_g28.jpg]][[Image Removed: cvlt-20201231_g29.jpg]][[Image Removed: cvlt-20201231_g30.jpg]] - Sales and marketing expenses decreased$7.6 million , or 3%, primarily due to the following: •Decreases related to the decline of travel and related expenses as a result of COVID-19. •Temporary salary cuts during the first half of fiscal year 2021 related to COVID-19 •These declines were partially offset by an increase in variable compensation associated with increased revenue. - Research and development expenses increased$20.5 million , or 27%, as a result of an increase in employee compensation and related expenses attributable to the expansion of our engineering group. •The increase is the result of additional headcount related to the acquisition ofHedvig including the stock-based compensation issued in connection with the transaction.Hedvig was acquired inOctober 2019 ; therefore, the prior year period includes only three months of such expenses compared to nine months during this period. •Additionally, certainHedvig shareholders will receive cash payments totaling$14.1 million over the course of the 30 months following the date of acquisition, subject to their continued employment with the Company. While these payments are proportionate to these shareholders' ownership ofHedvig , under GAAP they are accounted for as compensation expense over the course of the 30 month service period. Research and development expenses in the nine months endedDecember 31, 2020 includes$4.2 million of expense related to this arrangement compared to$1.4 million in the nine months endedDecember 31, 2019 . •These increases were partially offset by$1.7 million in savings related to temporary pay cuts in the first half of fiscal year 2021. •Investing in research and development has been a priority forCommvault , and we anticipate continued spending related to the development of our data and information management software applications. - General and administrative expenses decreased$2.1 million , or 3%, primarily due to the following: •Reduction of non-recurring prior year expenses associated with a non-routine shareholder matter andHedvig acquisition costs. •Temporary salary cuts during the first half of fiscal year 2021 related to COVID-19. 25 -------------------------------------------------------------------------------- •Partially offset by increases in legal expenses for intellectual property associated with ongoing litigation and foreign currency losses due to the weakening of the US dollar. - Restructuring: Our restructuring plan is intended to increase efficiency in our sales, marketing and distribution functions as well as reduce costs across all functional areas. Restructuring expenses were$19.7 million and$19.0 million in the nine months endedDecember 31, 2020 and 2019, respectively. These restructuring charges relate primarily to severance and related costs associated with headcount reductions as well as lease abandonment charges related to the closure of six offices for the nine months endedDecember 31, 2020 and five offices in the nine months endedDecember 31, 2019 . These charges include$1.9 million for the nine months endedDecember 31, 2020 and$1.7 million for the nine months endedDecember 31, 2019 of stock-based compensation related to modifications of existing awards granted to certain employees included in the restructuring. We cannot guarantee the restructuring program will achieve its intended result. Risks associated with this restructuring program also include additional unexpected costs, adverse effects on employee morale and the failure to meet operational and growth targets due to the loss of key employees, any of which may impair our ability to achieve anticipated results of operations or otherwise harm our business. -Impairment of intangible assets: In the second quarter of fiscal year 2021, we recorded non-cash impairment charges of$40.7 million on the intangible assets (developed technology and customer relationships) acquired in connection withHedvig, Inc. The charges were the result of a moderated view of acquisition assumptions. -Depreciation and amortization expense increased$1.7 million , from$10.7 million in the nine months endedDecember 31, 2019 to$12.4 million in the nine months endedDecember 31, 2020 , driven by the amortization of intangible assets acquired as a result of theHedvig business combination inOctober 2019 . The current year includes six months of amortization of these intangible assets as they were impaired in the second quarter of fiscal 2021; whereas prior year includes three months. Income Tax Expense Income tax expense was$5.4 million in the nine months endedDecember 31, 2020 compared to expense of$3.5 million in the nine months endedDecember 31, 2019 . In the fourth quarter of fiscal 2020, we recorded a current tax benefit of approximately$10.0 million which represented our estimate of the net operating loss carryback resulting from the CARES Act. In the first quarter of fiscal 2021, we recorded an adjustment of$3.2 million to reduce the current benefit of the net operating loss carryback benefit we will realize from the CARES Act. Liquidity and Capital Resources As ofDecember 31, 2020 , our cash and cash equivalents balance of$377.6 million primarily consisted of cash. In addition, we have approximately$10.8 million of short-term investments invested inU.S. Treasury Bills. In recent fiscal years, our principal source of liquidity has been cash provided by operations. As ofDecember 31, 2020 , the amount of cash and cash equivalents held outside ofthe United States by our foreign legal entities was approximately$176.5 million . These balances are dispersed across many international locations around the world. We believe that such dispersion meets the current and anticipated future liquidity needs of our foreign legal entities. In the event we needed to repatriate funds from outside ofthe United States , such repatriation would likely be subject to restrictions by local laws and/or tax consequences including foreign withholding taxes. During the nine months endedDecember 31, 2020 , we repurchased$33.1 million shares of our common stock under our share repurchase program. Under our stock repurchase program, repurchased shares are constructively retired and returned to unissued status. Our stock repurchase program has been funded by our existing cash and cash equivalent balances as well as cash flows provided by our operations. Our Board has approved, and we intend to execute, a capital allocation policy that provides for the repurchase of$200 million of our common stock for the period fromFebruary 1, 2021 through the end of our 2022 fiscal year, plus the use of approximately 75% of our free cash flow for additional repurchases during fiscal year 2022. 26 -------------------------------------------------------------------------------- Our future stock repurchase activity is subject to the business judgment of our management and Board of Directors, taking into consideration our historical and projected results of operations, financial condition, cash flows and other anticipated capital requirements or investment alternatives. Our stock repurchase program reduces the dilutive impact on our common shares outstanding associated with stock option exercises and our previous public and private stock offerings through the repurchase of common stock. Our summarized cash flow information is as follows (in thousands):
Nine Months Ended
2020 2019 Net cash provided by operating activities$ 59,247 $ 56,008 Net cash provided by (used in) investing activities 26,806 (94,056) Net cash used in financing activities (26,129) (9,082) Effects of exchange rate-changes in cash 21,563 (837) Net increase (decrease) in cash, cash equivalents and restricted cash$ 81,487 $ (47,967)
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- Net cash provided by operating activities was impacted by net loss adjusted for the impact of non-cash charges, an increase in deferred revenue and partially offset by an increase in accounts receivable. - Net cash provided by investing activities was related to net proceeds from the maturity of short-term investments of$32.8 million partially offset by$6.0 million of capital expenditures. - Net cash used in financing activities was the result of$33.1 million of repurchases of common shares partially offset by$7.0 million of proceeds from the exercise of stock options and purchases of our stock under the Employee Stock Purchase Plan. Working capital increased$62.1 million from$185.1 million as ofMarch 31, 2020 to$247.2 million as ofDecember 31, 2020 . The net increase in working capital is primarily the result of cash flow from operations. We believe that our existing cash, cash equivalents and our cash from operations will be sufficient to meet our anticipated cash needs for working capital, income taxes, capital expenditures and potential stock repurchases for at least the next twelve months. We may seek additional funding through public or private financings or other arrangements during this period. Adequate funds may not be available when needed or may not be available on terms favorable to us, or at all. If additional funds are raised by issuing equity securities, dilution to existing stockholders will result. If we raise additional funds by obtaining loans from third parties, the terms of those financing arrangements may include negative covenants or other restrictions on our business that could impair our operational flexibility, and would also require us to fund additional interest expense. If funding is insufficient at any time in the future, we may be unable to develop or enhance our products or services, take advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse effect on our business, financial condition and results of operations. 27
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Off-Balance Sheet Arrangements As ofDecember 31, 2020 , we did not have off-balance sheet financing arrangements, including any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities. Indemnifications Certain of our software licensing agreements contain certain provisions that indemnify our customers from any claim, suit or proceeding arising from alleged or actual intellectual property infringement. These provisions continue in perpetuity along with our software licensing agreements. We have never incurred a liability relating to one of these indemnification provisions in the past and we believe that the likelihood of any future payout relating to these provisions is remote. Therefore, we have not recorded a liability during any period related to these indemnification provisions. Impact of Recently Issued Accounting Standards See Note 2 of the unaudited consolidated financial statements for a discussion of the impact of recently issued accounting standards.
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