ALTERYX, INC. You should read the following discussion and analysis of our financial condition and results of operations together with the condensed consolidated financial statements and related notes that are included elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 , or Annual Report, filed with theSecurities and Exchange Commission , or theSEC , onFebruary 14, 2020 . This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, including, but not limited to, risks and uncertainties related to the impact of the COVID-19 pandemic on our business. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under "Risk Factors," set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q. See "Special Note Regarding Forward-Looking Statements" above. Overview We are a leader in Analytic Process Automation, or APA. The Alteryx APA software platform unifies analytics, data science and business process automation in one self-service platform to accelerate digital transformation, deliver high-impact business outcomes, accelerate the democratization of data and rapidly upskill modern workforces. Data workers, regardless of technical acumen, are empowered to be curious and solve problems. With the Alteryx APA software platform, users can automate the full range of analytics, data science and processes, embed intelligent decision-making and actions, and empower their organization to deliver faster and better business outcomes. Our platform includes Alteryx Designer, our data profiling, preparation, blending, and analytics product deployable to the cloud and on premise,Alteryx Server, our secure and scalable server-based product for scheduling, sharing and running analytic processes and applications in a web-based environment,Alteryx Analytics Hub, our next-generation automation and collaboration product,Alteryx Intelligence Suite, our augmented machine learning and text mining product, Alteryx Connect, our collaborative data exploration platform for discovering information assets and sharing recommendations across the enterprise, and Alteryx Promote, our advanced analytics model management product for data scientists and analytics teams to build, manage, monitor and deploy predictive models into real-time production applications. In addition,Alteryx Analytics Gallery , our cloud-based collaboration offering, is a key feature of our platform allowing users to share workflows in a centralized repository, andAlteryx Community allows users to gain valuable insights from one another, collaborate and share their experiences and ideas, and innovate around our platform. Our platform has been adopted by organizations across a wide variety of industries and sizes. As ofJune 30, 2020 , we had over 6,700 customers in more than 90 countries, including over 730 of the Global 2000 companies. We derive a large portion of our revenue from subscriptions for use of our platform. Our software can be licensed for use on a desktop or server, or it can be deployed in the cloud. Subscription periods for our platform generally range from one to three years and the subscription fees are typically billed annually in advance. We also generate revenue from professional services, including training and consulting services. Revenue from subscriptions, including related PCS, represented over 95% of revenue for each of the three and six months endedJune 30, 2020 and 2019, respectively. We employ a "land and expand" business model. Our go-to-market approach often begins with a free trial of Alteryx Designer and is followed by an initial purchase of our platform offerings. As organizations quickly realize the benefits derived from our platform, use frequently spreads across departments, divisions, and geographies through word-of-mouth, collaboration, and standardization and automation of business processes. Over time, many of our customers find that the use of our platform is strategic and collaborative in nature and our platform becomes a fundamental element of their operational, analytical and business processes. We sell our platform primarily through direct sales and marketing channels utilizing a wide range of online and offline sales and marketing activities. In addition, we have cultivated strong relationships with channel partners to help us extend the reach of our sales and marketing efforts, especially internationally. Our channel partners include technology alliances, solution providers, strategic global system integrators, solution partners, and value-added resellers, or VARs. These channel partners also provide solution-based selling, services, and training internationally. 22 -------------------------------------------------------------------------------- COVID-19 Impact InMarch 2020 , theWorld Health Organization declared the outbreak of COVID-19 a pandemic, which continues to spread throughout theU.S. and the world and has resulted in authorities implementing numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. While we are unable to accurately predict the full impact that the COVID-19 pandemic will have on our operating results, financial condition, liquidity and cash flows due to numerous uncertainties, including the duration and severity of the pandemic or any resurgences of the pandemic locally or globally, our compliance with these measures has impacted our day-to-day operations and could continue to disrupt our business and operations, as well as that of certain of our customers whose industries are more severely impacted by these measures, for an indefinite period of time. During the three and six months endedJune 30, 2020 , we continued to experience significant changes in customer buying behavior that began in March as a result of the impact of the COVID-19 pandemic, including decreased customer engagement and delayed sales cycles. Specifically, economic challenges that enterprise customers in certain verticals have experienced, as well as weakness in our commercial segment that targets small- and medium-sized businesses, have adversely impacted the length of the sales cycle and the expansion and new business sales with these customers. As a result of these changes, we experienced a decrease in revenue from the three months endedJune 30, 2020 as compared to the three months endedMarch 31, 2020 and deterioration in near-term demand, and saw key business metrics, including our dollar-based net expansion rate, decrease quarter over quarter. See Key Business Metrics and Results of Operations for further discussion. Further, as a result of the impact of the COVID-19 pandemic on our operating results for the three months endedJune 30, 2020 , we expect our business in fiscal 2020 to continue to perform at levels lower than planned prior to the COVID-19 pandemic. To support the health and well-being of our employees, customers, partners and communities, the majority of our offices worldwide remain temporarily closed and nearly all of our employees continue to work remotely. Our offices will not re-open until local authorities permit us to do so and our own criteria and conditions to ensure employee health and safety are satisfied, including social distancing and enhanced cleaning protocols. While we have developed plans for our employees to begin safely returning to their respective offices, we cannot predict when or how we will begin to lift the work from home requirements for geographic areas that continue to be significantly impacted by the pandemic or certain other actions taken as part of our business continuity plans, including travel restrictions. While the adjustments to our operations may result in inefficiencies, delays and additional costs in our product development, sales, marketing, and customer support efforts, as of the date of this filing, we do not believe our work from home protocol has materially adversely impacted our internal controls, financial reporting systems or our operations. In addition, in certain locations where shutdowns were or continue to be in effect, the construction of certain of our leased facilities has been delayed, which could impact our ability to utilize these facilities in accordance with our original timeline. Although we believe our current facilities will meet our requirements for the foreseeable future, a delay in construction could result in additional costs. In response to the ongoing COVID-19 pandemic, we have implemented plans to manage our costs. We have temporarily limited the addition of new employees and third-party contracted services, curtailed most travel expense except where critical to the business, and acted to limit discretionary spending. To the extent the business disruption continues for an extended period, additional cost management actions may be considered. Although we continue to monitor the situation and may adjust our current policies as more information and public health guidance become available, the ongoing effects of the COVID-19 pandemic and/or the precautionary measures that we have adopted have resulted in, and could continue to result in, customers not purchasing or renewing our products or services, significant delays or lengthening of our sales cycles, and reductions in average transaction sizes, and could negatively affect our customer success and sales and marketing efforts, result in difficulties or changes to our customer support, or create operational or other challenges, any of which could harm our business and operating results. Because our products are offered as subscription-based licenses and a portion of that revenue is recognized over time, the effect of the pandemic may not be fully reflected in our operating results until future periods. Further, the COVID-19 pandemic and its impact on us and the economy has significantly limited our ability to forecast our future operating results, including our ability to predict revenue and expense levels, and plan for and model future operating results. Our competitors could experience similar or different impacts as a result of COVID-19, which could result in changes to our competitive landscape. While we have developed and continue to develop plans to help mitigate the negative impact of the pandemic on our business, these efforts may not be effective and any protracted economic downturn could significantly affect our business and operating results. We will continue to evaluate the nature and extent of the impact of the COVID-19 pandemic to our business. See Part II, Item 1A. Risk Factors of this Quarterly Report on Form 10-Q for further discussion of the possible impact of the COVID-19 pandemic on our business. 23 -------------------------------------------------------------------------------- Key Business Metrics We review the following key business metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans, and make strategic decisions: Number of Customers. We believe that our ability to expand our customer base is a key indicator of our market penetration, the growth of our business, and our future potential business opportunities. We define a customer at the end of any particular period as an entity with a subscription agreement that runs through the current or future period as of the measurement date. Organizations with free trials have not entered into a subscription agreement and are not considered customers. A single organization with separate subsidiaries, segments, or divisions that use our platform may represent multiple customers, as we treat each entity that is invoiced separately as a single customer. In cases where customers subscribe to our platform through our channel partners, each end customer is counted separately. The following table summarizes the number of our customers at each quarter end for the periods indicated: As of Mar. 31, Jun. 30, Sep. 30, Dec. 31, Mar. 31, Jun. 30, 2019 2019 2019 2019 2020 2020 Customers 4,973 5,278 5,613 6,087 6,4436,714 Dollar -Based Net Expansion Rate. Our dollar-based net expansion rate is a trailing four-quarter average of the annual contract value, or ACV, which is defined as the subscription revenue that we would contractually expect to recognize over the term of the contract divided by the term of the contract, in years, from a cohort of customers in a quarter as compared to the same quarter in the prior year. A dollar-based net expansion rate equal to 100% would generally imply that we received the same amount of ACV from our cohort of customers in the current quarter as we did in the same quarter of the prior year. A dollar-based net expansion rate less than 100% would generally imply that we received less ACV from our cohort of customers in the current quarter than we did in the same quarter of the prior year. A dollar-based net expansion rate greater than 100% would generally imply that we received more ACV from our cohort of customers in the current quarter than we did in the same quarter of the prior year. To calculate our dollar-based net expansion rate, we first identify a cohort of customers, or the Base Customers, in a particular quarter, or theBase Quarter . A customer will not be considered a Base Customer unless such customer has an active subscription on the last day of theBase Quarter . We then divide the ACV in the same quarter of the subsequent year attributable to the Base Customers, or theComparison Quarter , including Base Customers from which we no longer derive ACV in theComparison Quarter , by the ACV attributable to those Base Customers in theBase Quarter . Our dollar-based net expansion rate in a particular quarter is then obtained by averaging the result from that particular quarter by the corresponding result from each of the prior three quarters. The dollar-based net expansion rate excludes contract value relating to professional services from that cohort. The following table summarizes our dollar-based net expansion rate for each quarter for the periods indicated: Three Months Ended Mar. 31, Jun. 30, Sep. 30, Dec. 31, Mar. 31, Jun. 30, 2019 2019 2019 2019 2020 2020 Dollar-based net expansion rate 134 % 133 % 132 % 130 % 128 % 126 % 24
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Results of Operations
The following table sets forth our results of operations for the periods
indicated. The period-to-period comparison of financial results is not
necessarily indicative of financial results to be achieved in future periods.
Three Months Ended June 30, Six Months Ended June
30,
2020 2019 2020 2019
(in thousands)
Revenue:
Subscription-based software license$ 34,646 $ 36,841 $ 85,390 $ 71,649 PCS and services 61,587 45,202 119,674 86,414 Total revenue 96,233 82,043 205,064 158,063 Cost of revenue: Subscription-based software license 946 1,073 2,927 1,848 PCS and services 8,689 8,222 19,755 15,447 Total cost of revenue(1) 9,635 9,295 22,682 17,295 Gross profit 86,598 72,748 182,382 140,768 Operating expenses: Research and development(1) 23,256 16,381 49,437 30,453 Sales and marketing(1) 57,941 48,185 123,106 86,635 General and administrative(1) 23,195 16,470 47,738 36,370 Total operating expenses 104,392 81,036 220,281 153,458 Loss from operations (17,794) (8,288) (37,899) (12,690) Interest expense (9,496) (3,098) (18,799) (6,084) Other income, net 4,530 847 2,068 3,676 Loss before provision for (benefit of) income taxes (22,760) (10,539) (54,630) (15,098) Provision for (benefit of) income taxes 12,533 (7,320) (3,864) (17,793) Net income (loss)$ (35,293) $ (3,219) $ (50,766) $ 2,695
(1) Amounts include stock-based compensation expense as follows:
Six Months Ended June
Three Months Ended June 30, 30,
2020 2019 2020 2019
(in thousands)
Cost of revenue $ 597 $ 410 $ 1,033 $ 717
Research and development 2,992 1,516 6,619 2,355
Sales and marketing 7,610 3,152 12,759 5,351
General and administrative 5,724 2,946 10,176 4,936
Total $ 16,923 $ 8,024 $ 30,587 $ 13,359
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The following table sets forth selected historical financial data for the periods indicated, expressed as a percentage of revenue:
Six Months Ended
Three Months Ended June 30, June 30,
2020 2019 2020 2019
Revenue:
Subscription-based software license 36.0 % 44.9 % 41.6 % 45.3 %
PCS and services 64.0 55.1 58.4 54.7
Total revenue 100.0 100.0 100.0 100.0
Cost of revenue:
Subscription-based software license 1.0 1.3 1.4 1.1
PCS and services 9.0 10.0 9.6 9.8
Total cost of revenue 10.0 11.3 11.0 10.9
Gross profit 90.0 88.7 89.0 89.1
Operating expenses:
Research and development 24.2 20.0 24.1 19.3
Sales and marketing 60.2 58.7 60.0 54.8
General and administrative 24.1 20.1 23.3 23.0
Total operating expenses 108.5 98.8 107.4 97.1
Loss from operations (18.5) (10.1) (18.4) (8.0)
Interest expense (9.9) (3.8) (9.2) (3.8)
Other income, net 4.7 1.0 1.0 2.3
Loss before provision for (benefit of) income taxes (23.7) (12.9) (26.6) (9.5)
Provision for (benefit of) income taxes 13.0 (8.9) (1.9) (11.3)
Net income (loss) (36.7) % (4.0) % (24.7) % 1.8 %
Comparison of the Three and Six Months Ended June 30, 2020 and 2019
Revenue
Three Months Ended Six Months Ended
June 30, Change June 30, Change
2020 2019 Amount % 2020 2019 Amount %
(in thousands, except percentages)
Subscription-based
software license $ 34,646 $ 36,841 $ (2,195) (6.0) % $ 85,390 $ 71,649 $ 13,741 19.2 %
PCS and services 61,587 45,202 16,385 36.2 119,674 86,414 33,260 38.5
Total revenue $ 96,233 $ 82,043 $ 14,190 17.3 % $ 205,064 $ 158,063 $ 47,001 29.7 %
The decrease in subscription-based software license revenue for the three months
ended June 30, 2020 as compared to the three months ended June 30, 2019 was
primarily due to a decrease in sales to new and existing customers and average
transaction size as customers have slowed or delayed purchases due to the impact
of the ongoing COVID-19 pandemic. Although our growth and expansion rates have
decreased during the three months ended June 30, 2020 , our total number of
customers increased from 5,278 as of June 30, 2019 to 6,714 as of June 30, 2020 ,
and our customer base expanded its use of our platform as shown by our
dollar-based net expansion rate of 126%.
The increase in subscription-based software license revenue for the six months
ended June 30, 2020 as compared to the six months ended June 30, 2019 was
primarily from additional sales to existing and new customers during the three
months ended March 31, 2020 , prior to the impact of the COVID-19 pandemic noted
above, as our customer base continued to expand its use of our platform. The
increase in our revenue is also related to an increase in the number of
multi-year deals.
26
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PCS and services revenue is primarily recognized ratably over the subscription
term while our subscription-based software license revenue is recognized at a
point in time when the platform is first made available to the customer, or the
beginning of the subscription term, if later. Therefore, despite decreases in
our subscription-based software license revenue for the three months ended June
30, 2020 as compared to June 30, 2019 , PCS and services revenue increased during
the same periods due to the ratable recognition of this revenue with respect to
sales to customers in prior periods and the growth in our customer base between
June 30, 2019 and June 30, 2020 . Our product pricing was not a significant
driver of the increase in subscription-based software license or PCS and
services revenue for the periods presented.
The disaggregation of revenue by region was as follows (in thousands):
Three Months Ended Six Months Ended
June 30, Change June 30, Change
2020 2019 Amount % 2020 2019 Amount %
(in thousands, except percentages)
United States $ 65,969 $ 57,782 $ 8,187 14.2 % $ 146,504 $ 110,678 $ 35,826 32.4 %
International 30,264 24,261 6,003 24.7 58,560 47,385 11,175 23.6
Total $ 96,233 $ 82,043 $ 14,190 17.3 % $ 205,064 $ 158,063 $ 47,001 29.7 %
Cost of Revenue and Gross Margin
Three Months Ended Six Months Ended
June 30, Change June 30, Change
2020 2019 Amount % 2020 2019 Amount %
(in thousands, except percentages)
Subscription-based
software license $ 946 $ 1,073 $ (127) (11.8) % $ 2,927 $ 1,848 $ 1,079 58.4 %
PCS and services 8,689 8,222 467 5.7 19,755 15,447 4,308 27.9
Total cost of revenue $ 9,635 $ 9,295 $ 340 3.7 % $ 22,682 $ 17,295 $ 5,387 31.1 %
% of revenue 10.0 % 11.3 % 11.0 % 10.9 %
Gross margin 90.0 % 88.7 % 89.0 % 89.1 %
The increase in cost of revenue for the three months ended June 30, 2020 as
compared to the three months ended June 30, 2019 was primarily due to an
increase in employee-related costs, including stock-based compensation, of $0.3
million and an increase in royalty costs of $0.3 million due to increased use of
third-party syndicated data by our customers. These increases were partially
offset by a decrease in amortization of intangible assets of $0.3 million due to
a non-cash impairment charge during the three months ended March 31, 2020
related to certain developed technology assets as a result of our strategic
decision to discontinue further investment and enhancements in the standalone
existing technology.
The increase in cost of revenue for the six months ended June 30, 2020 as
compared to the six months ended June 30, 2019 was primarily due to an increase
in employee-related costs, including stock-based compensation, of $1.6 million ,
an increase in royalty costs of $1.0 million , an increase of IT expenses of $0.4
million , an increase in amortization of intangible assets of $0.4 million due to
our acquisition of Clearstory Data, and an increase of $2.0 million due to a
non-cash impairment charge related to certain developed technology assets as a
result of our strategic decision to discontinue further investment and
enhancements in the standalone existing technology.
As of June 30, 2020 , we had 99 cost of revenue personnel as compared to 88 as of
June 30, 2019 .
Research and Development
Three Months Ended Six Months Ended
June 30, Change June 30, Change
2020 2019 Amount % 2020 2019 Amount %
(in thousands, except percentages)
Research and development $ 23,256 $ 16,381 $ 6,875 42.0 % $ 49,437 $ 30,453 $ 18,984 62.3 %
% of revenue 24.2 % 20.0 % 24.1 % 19.3 %
27-------------------------------------------------------------------------------- The increase in research and development expense for the three months endedJune 30, 2020 as compared to the three months endedJune 30, 2019 was primarily due to an increase in employee-related costs, including stock-based compensation, of$5.0 million due to an increase in headcount partly attributable to the acquisitions ofClearStory Data and Feature Labs, Inc. , orFeature Labs , as well as additional stock awards provided to employees acquired as part of theClearStory Data and Feature Labs acquisitions. In addition, there was an increase of$1.3 million in information technology and overhead costs to support the additional headcount. The increase in research and development expense for the six months endedJune 30, 2020 as compared to the six months endedJune 30, 2019 was primarily due to an increase in employee-related costs, including stock-based compensation, of$14.6 million due to an increase in headcount partly attributable to theClearStory Data and Feature Labs acquisitions. The increase in employee-related costs is also impacted by the timing within the period, and the market in which the headcount was added, and retention bonuses and stock awards provided to the employees acquired in theClearStory Data and Feature Labs acquisitions. In addition, there was an increase in consulting and outsourced labor of$0.7 million to assist in certain development projects, and an increase of$3.5 million in information technology and overhead costs to support the additional headcount. As ofJune 30, 2020 , we had 360 research and development personnel as compared to 263 as ofJune 30, 2019 . Sales and Marketing Three Months Ended Six Months Ended June 30, Change June 30, Change 2020 2019 Amount % 2020 2019 Amount % (in thousands, except percentages) Sales and marketing$ 57,941 $ 48,185 $ 9,756 20.2 %$ 123,106 $ 86,635 $ 36,471 42.1 % % of revenue 60.2 % 58.7 % 60.0 % 54.8 % The increase in sales and marketing expense for the three months endedJune 30, 2020 as compared to the three months endedJune 30, 2019 was primarily due to an increase in employee-related costs, including stock-based compensation, of$13.0 million due to an increase in headcount, with such amount including the effect of a decrease in travel and entertainment expense of$3.0 million as a result of travel restrictions caused by the COVID-19 pandemic, an increase in consulting and professional fees of$0.4 million as we continued to expand the reach of our virtual marketing programs, including through the expansion of our international marketing teams, and an increase of$1.5 million in information technology and overhead costs to support the additional headcount. These increases were partially offset by a decrease of$5.6 million in marketing programs primarily due to the cancellation of our annual Analyticon user conferences and other in-person marketing events. The increase in sales and marketing expense for the six months endedJune 30, 2020 as compared to the six months endedJune 30, 2019 was primarily due to an increase in employee-related costs, including stock-based compensation, of$33.5 million due to an increase in headcount, an increase in consulting and professional fees of$1.4 million as we continued to expand the reach of our virtual marketing programs, and an increase of$4.2 million in information technology and overhead costs to support the additional headcount. These increases were partially offset by a decrease of$3.2 million in marketing programs primarily due to the cancellation of our annual Analyticon user conferences and other in-person marketing events, with such decrease partially offset in part by an increase in our digital marketing programs. As ofJune 30, 2020 , we had 812 sales and marketing personnel as compared to 546 as ofJune 30, 2019 . General and Administrative Three Months Ended Six Months Ended June 30, Change June 30, Change 2020 2019 Amount % 2020 2019 Amount % (in thousands, except percentages) General and administrative$ 23,195 $ 16,470 $ 6,725 40.8 %$ 47,738 $ 36,370 $ 11,368 31.3 % % of revenue 24.1 % 20.1 % 23.3 % 23.0 % 28
-------------------------------------------------------------------------------- The increase in general and administrative expense for the three months endedJune 30, 2020 as compared to the three months endedJune 30, 2019 was primarily due to an increase in employee-related costs, including stock-based compensation, of$5.2 million due to an increase in headcount, an increase of$0.5 million in consulting and professional fees, and an increase of$0.6 million in information technology and overhead costs to support the additional headcount. The increase in general and administrative expense for the six months endedJune 30, 2020 as compared to the six months endedJune 30, 2019 was primarily due to an increase in employee-related costs, including stock-based compensation, of$12.3 million due to an increase in headcount, an increase of$0.9 million in allowance for doubtful accounts and credit losses, primarily related to the additional expected credit losses associated with the anticipated impact of COVID-19, and an increase of$1.2 million in information technology and overhead costs to support the additional headcount. These increases were partially offset by a decrease of$3.8 million in consulting and professional fees due to the completion of scheduled infrastructure projects as ofDecember 31, 2019 and additional costs incurred due to the implementation of certain new accounting standards and our change in independent registered public accounting firm during the six months endedJune 30, 2019 . As ofJune 30, 2020 , we had 244 general and administrative personnel as compared to 179 as ofJune 30, 2019 . Interest Expense Three Months Ended Six Months Ended June 30, Change June 30, Change 2020 2019 Amount % 2020 2019 Amount % (in thousands, except percentages) Interest expense$ (9,496) $ (3,098) $ (6,398) 207 %$ (18,799) $ (6,084) $ (12,715) 209 % Interest expense is primarily attributable to our 2023 Notes and 2024 & 2026 Notes issued during the three months endedJune 30, 2018 andSeptember 30, 2019 , respectively. The increase in interest expense is due to the issuance of the 2024 & 2026 Notes, resulting in higher aggregate interest expense in the three and six months endedJune 30, 2020 as compared to the three and six months endedJune 30, 2019 . Other Income, Net Three Months Ended Six Months Ended June 30, Change June 30, Change 2020 2019 Amount % 2020 2019 Amount % (in thousands, except percentages) Other income, net$ 4,530 $ 847 $ 3,683 *$ 2,068 $ 3,676 $ (1,608) * * Not meaningful Other income, net consists primarily of gains and losses on foreign currency remeasurement and transactions and interest income from our available-for-sale securities. The increase in other income, net for the three months endedJune 30, 2020 as compared to the three months endedJune 30, 2019 was primarily attributable to an increase in gains on foreign currency remeasurement, primarily related to intercompany loans, due to the strengthening of foreign currencies relative to theU.S. dollar fromMarch 31, 2020 and 2019, respectively, in addition to an increase in interest income due to an increase in balances of available-for-sale securities. The decrease in other income, net for the six months endedJune 30, 2020 as compared to the six months endedJune 30, 2019 was primarily attributable to an increase in losses on foreign currency remeasurement, primarily related to intercompany loans, due to the weakening of foreign currencies relative to theU.S. dollar fromDecember 31, 2019 and 2018, respectively, offset in part by an increase in interest income due to an increase in balances of available-for-sale securities. 29 --------------------------------------------------------------------------------
Provision for (Benefit of) Income Taxes
Three Months Ended Six Months Ended
June 30, Change June 30, Change
2020 2019 Amount % 2020 2019 Amount %
(in thousands, except percentages)
Provision for
(benefit of) income
taxes $ 12,533 $ (7,320) $ 19,853 * $ (3,864) $ (17,793) $ 13,929 *
* Not meaningful
The increase in provision for income taxes for the three months ended June 30,
2020 as compared to the three months ended June 30, 2019 was primarily due to a
$15.6 million impact from establishing a valuation allowance against our U.S.
deferred tax assets, and the reversal of discrete tax benefits related to excess
tax deductions from exercises of stock options and RSU settlements because of
the valuation allowance established, during the three months ended June 30,
2020 , and a $4.6 million reduction of discrete tax benefits related to excess
tax deductions from exercises of stock options and RSU settlements recognized
during the three months ended June 30, 2019 .
The decrease in benefit of income taxes for the six months ended June 30, 2020
as compared to the six months ended June 30, 2019 was primarily due to a $14.8
million impact from establishing a valuation allowance against our U.S. deferred
tax assets and the reversal of discrete tax benefits related to excess tax
deductions from exercises of stock options and RSU settlements because of the
valuation allowance established during the six months ended June 30, 2020 .
Liquidity and Capital Resources
We had $974.4 million and $974.9 million of cash and cash equivalents and
short-term and long-term investments in marketable securities as of June 30,
2020 and December 31, 2019 , respectively.
Our principal uses of cash are funding our operations and other working capital
requirements.
We believe that our existing cash and cash equivalents and short-term
investments and any positive cash flows from operations will be sufficient to
support our working capital and capital expenditure requirements for at least
the next 12 months. To the extent existing cash and cash equivalents and
short-term investments and cash from operations are not sufficient to fund
future activities, we may need to raise additional funds. We may seek to raise
additional funds through equity, equity-linked, or debt financings. If we raise
additional funds through the incurrence of indebtedness, such indebtedness may
have rights that are senior to holders of our equity securities and could
contain covenants that restrict operations. Any additional equity or convertible
debt financing may be dilutive to stockholders. If we are unable to raise
additional capital when desired, our business, operating results, and financial
condition could be adversely affected.
We also believe that our current financial resources will allow us to manage the
anticipated impact of COVID-19 on our business operations for the foreseeable
future, which could include reductions in revenue and delays in payments from
customers and partners. The challenges posed by COVID-19 on our business are
expected to evolve over time. Consequently, we will continue to evaluate our
financial position in light of future developments, particularly those relating
to COVID-19. In addition to the uncertainties caused by COVID-19, our future
capital requirements and the adequacy of available funds will depend on many
factors, including the rate of our revenue growth, the timing and extent of our
spending on research and development efforts and other business initiatives, the
expansion of our sales and marketing activities, the timing of new product and
service introductions, market acceptance of our platform, and overall economic
conditions.
30
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Cash Flows
The following table sets forth cash flows for the periods indicated:
Six Months Ended June 30,
2020 2019
(in thousands)
Net cash provided by operating activities $ 6,614 $ 6,673
Net cash provided by (used in) investing activities (288,085) 104
Net cash provided by financing activities 162 11,579
Operating Activities
Net cash provided by operating activities was $6.6 million for the six months
ended June 30, 2020 . Net cash provided by operating activities primarily
reflected a net loss of $50.8 million , offset by net non-cash activity of $57.5
million and a change in operating assets and liabilities of $0.1 million .
Net cash provided by operating activities was $6.7 million for the six months
ended June 30, 2019 . Net cash provided by operating activities primarily
reflected net income of $2.7 million and net non-cash activity of $4.9 million ,
offset by a change in operating assets and liabilities of $0.9 million .
Changes in operating assets and liabilities is primarily driven by the
seasonality of our sales cycle. The fourth quarter of each fiscal year has
historically been our strongest quarter for new business and renewals and,
correspondingly, the first quarter of the subsequent fiscal year has
historically been the strongest for cash collections on accounts receivable and
highest for payments of sales commissions. As a result of this seasonality, our
accounts receivable decreased during each of the six months ended June 30, 2019
and 2020 compared to the year ended December 31, 2018 and 2019, respectively.
These decreases were offset in part by a decrease to accrued payroll and
payroll-related liability balances and a net increase in deferred commission,
contract asset, and deferred revenue balances during each respective period. In
addition to the sales cycle, our cash flow from operations is also impacted by
the payment of our annual cash incentive bonuses to our non-commissioned
employees in the first quarter of the fiscal year and the timing of obligations
on accounts payable.
Investing Activities
Net cash used in investing activities for the six months ended June 30, 2020 was
$288.1 million , consisting of $277.7 million of purchases of investments, net of
maturities and sales, and $10.4 million of purchases of property and equipment.
Net cash provided by investing activities for the six months ended June 30, 2019
was $0.1 million , consisting primarily of $20.3 million of net maturities and
sales of marketable securities, offset in part by $16.6 million in net cash paid
in connection with our acquisition of ClearStory Data.
Financing Activities
Net cash provided by financing activities for the six months ended June 30, 2020
was $0.2 million , consisting primarily of proceeds from stock option exercises
of $14.8 million , offset by the minimum tax withholding paid on behalf of
employees for RSU settlements of $14.1 million .
Net cash provided by financing activities for the six months ended June 30, 2019
was $11.6 million , consisting primarily of proceeds from stock option exercises
and taxes withheld of $13.2 million , and proceeds of $4.9 million from the
disgorgement by a stockholder of certain profits under Section 16(b) of the
Securities Exchange Act of 1934, as amended, or the Exchange Act. This was
offset in part by the minimum tax withholding paid on behalf of employees for
RSU settlements of $5.3 million .
The timing and number of stock option exercises and employee stock purchases and
the amount of proceeds we receive from these equity awards is not within our
control. As it is now our general practice to issue principally RSUs to our
employees, cash paid on behalf of employees for minimum statutory withholding
taxes on RSU settlements will likely increase.
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Contractual Obligations and Commitments
There were no material changes in our contractual obligations and commitments
during the six months ended June 30, 2020 from the contractual obligations and
commitments disclosed in the Annual Report. See Note 8, Convertible Senior
Notes, Note 10, Leases, and Note 11, Contingencies, of the notes to our
condensed consolidated financial statements included in Part 1, Item 1 of this
Quarterly Report on Form 10-Q for additional information regarding contractual
obligations and commitments.
Off-Balance Sheet Arrangements
As of
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements and the related notes have been
prepared in accordance with U.S. GAAP. The preparation of our condensed
consolidated financial statements requires us to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenue, costs and
operating expenses, provision for income taxes, and related disclosures.
Generally, we base our estimates on historical experience and on various other
assumptions in accordance with U.S. GAAP that we believe to be reasonable under
the circumstances. Actual results may differ from these estimates. To the extent
that there are material differences between these estimates and our actual
results, our future financial statements will be affected.
There have been no changes to our critical accounting policies disclosed in our
Annual Report other than the changes to our significant accounting policies
discussed in Note 2, Significant Accounting Policies, of the notes to our
condensed consolidated financial statements in Part I, Item 1 of this Quarterly
Report on Form 10-Q.
Recent Accounting Pronouncements
See Note 2, Significant Accounting Policies, of the notes to our condensed
consolidated financial statements in Part I, Item 1 of this Quarterly Report on
Form 10-Q for a description of recent accounting pronouncements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Foreign Currency Exchange Risk
Due to our international operations, we have foreign currency risks related to
revenue and operating expenses denominated in currencies other than the U.S.
dollar, primarily the British Pound and Euro. Our sales contracts are primarily
denominated in the local currency of the customer making the purchase. In
addition, a portion of our operating expenses are incurred outside the United
States and are denominated in foreign currencies where our operations are
located. We are also exposed to certain foreign exchange rate risks related to
our foreign subsidiaries, including as a result of intercompany loans
denominated in non-functional currencies. Increases in the relative value of the
U.S. dollar to other currencies may negatively affect revenue and other
operating results as expressed in U.S. dollars. We do not believe that an
immediate 10% increase or decrease in the relative value of the U.S. dollar to
other currencies would have a material effect on our operating results.
We have experienced and will continue to experience fluctuations in net income
(loss) as a result of transaction gains or losses related to remeasuring certain
asset and liability balances that are denominated in currencies other than the
functional currency of the entities in which they are recorded. Volatile market
conditions arising from the COVID-19 pandemic may result in significant changes
in exchange rates, and, in particular, a weakening of foreign currencies
relative to the U.S. dollar may negatively affect our revenue and net income
(loss) as expressed in U.S. dollars. To date, we have not entered into
derivatives or hedging transactions, as our exposure to foreign currency
exchange rates has historically been partially hedged by our U.S. dollar
denominated inflows covering our U.S. dollar denominated expenses and our
foreign currency denominated inflows covering our foreign currency denominated
expenses. However, we may enter into derivative or hedging transactions in the
future if our exposure to foreign currency should become more significant.
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Interest Rate and Market Risk
We had cash and cash equivalents and short-term and long-term investments of
$974.4 million as of June 30, 2020 . The primary objective of our investment
activities is the preservation of capital, and we do not enter into investments
for trading or speculative purposes. A hypothetical 10% increase in interest
rates during the six months ended June 30, 2020 would not have had a material
impact on our condensed consolidated financial statements. We do not have
material exposure to market risk with respect to short-term and long-term
investments, as any investments we enter into are primarily highly liquid
investments.
Each series of our Notes bear a fixed interest rate, and therefore, are not
subject to interest rate risk. We have not utilized derivative financial
instruments, derivative commodity instruments or other market risk sensitive
instruments, positions or transactions in any material fashion, except for the
privately negotiated capped call transactions entered into in May and June 2018
related to the issuance of our 2023 Notes and August 2019 related to the
issuance of our 2024 & 2026 Notes.
Inflation Risk
We do not believe that inflation has had a material effect on our business,
financial condition, or operating results.
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, 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 June 30, 2020 . Our disclosure controls and procedures are designed to provide
reasonable assurance that information we are required to disclose in the reports
we file or submit under the Exchange Act is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate to allow timely decisions regarding required disclosures, and is
recorded, processed, summarized, and reported within the time periods specified
in the SEC's rules and forms. Based on this evaluation, our Chief Executive
Officer and Chief Financial Officer concluded as of June 30, 2020 that our
disclosure controls and procedures were effective at the reasonable assurance
level.
Changes in Internal Control over Financial Reporting
We continue to monitor the effect of the COVID-19 pandemic on our internal
controls to minimize the impact on their design and operating effectiveness.
There was no change in our internal control over financial reporting that
occurred during the quarter ended June 30, 2020 that has materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting.
Limitations on the Effectiveness of Disclosure Controls and Procedures
Our management, including our Chief Executive Officer and Chief Financial
Officer, does not expect that our disclosure controls and procedures or internal
control over financial reporting will prevent all errors and all fraud. A
control system, no matter how well designed and implemented, can provide only
reasonable, not absolute, assurance that the control system's objectives will be
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 within a company are detected. The inherent limitations include
the realities that judgments in decision-making can be faulty and that
breakdowns can occur because of simple errors or mistakes. Controls can also be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the controls. Because of the inherent
limitations in a cost-effective control system, misstatements due to error or
fraud may occur and may not be detected. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions or that the degree of compliance
with the policies or procedures may deteriorate.
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