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. This discussion contains forward-looking statements based
upon current plans, expectations, and beliefs that involve risks and
uncertainties. 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" and in other parts of this Quarterly Report
on Form 10-Q. Our fiscal year ends on
Overview
Developers are reinventing the way we live, work, and play online. Yet they repeatedly encounter innovation barriers when delivering modern digital experiences. Expectations for digital experiences are at an all-time high; they must be fast, secure, and highly personalized. If they aren't reliable, end-users simply take their business elsewhere. The challenge today is enabling developers to deliver a modern digital experience while simultaneously providing scale, security, and performance. We built our edge cloud platform to solve this problem. The edge cloud is a new category of Infrastructure as a Service ("IaaS") that enables developers to build, secure, and deliver digital experiences, at the edge of the internet. This service represents the convergence of the Content Delivery Network ("CDN") with functionality that has been traditionally delivered by hardware-centric appliances such as Application Delivery Controllers ("ADC"), Web Application Firewalls ("WAF"), Bot Detection, and Distributed Denial of Service ("DDoS") solutions. It also includes the emergence of a new, but growing, edge computing market which aims to move compute power and logic as close to the end-user as possible. The edge cloud uses the emerging cloud computing, serverless paradigm in which the cloud provider runs the server and dynamically manages the allocation of machine resources. When milliseconds matter, processing at the edge is an ideal way to handle highly dynamic and time-sensitive data. The edge cloud complements data center, central cloud, and hybrid solutions. Our mission is to fuel the next modern digital experience by providing developers with a programmable and reliable edge cloud platform that they adopt as their own. Organizations must keep up with complex and ever-evolving end-user requirements. We help them surpass their end-users' expectations by powering fast, secure, and scalable digital experiences. We built a powerful edge cloud platform, designed from the ground up to be programmable and support agile software development. We believe our platform gives our customers a significant competitive advantage, whether they were born into the digital age or are just embarking on their digital transformation journey. Our platform consists of three key components: a programmable edge, a software-defined modern network, and a philosophy of customer empowerment. Our programmable edge provides developers with real-time visibility and control, where they can write and deploy code to push application logic to the edge. It supports modern application delivery processes, freeing developers to innovate without constraints. Our software-defined modern network is built for the software-defined future. It is powerful, efficient, and flexible, designed to enable us to rapidly scale to meet the needs of the most demanding customers and never be a barrier to their growth. As ofJune 30, 2020 , our 100 terabit software-centric network is located in 72 uniquely designed Points-of-Presence ("POPs") across 55 markets around the world. Finally, being developers ourselves, we empower customers to build great things while supporting their efforts through frictionless tools and a deeply technical support team that facilitates ongoing collaboration. We serve both established enterprises and technology-savvy organizations. Our customers represent a diverse set of organizations across many industries with one thing in common: they are competing by using the power of software to build differentiation at the edge. With our edge cloud platform, our customers are disrupting existing industries and creating new ones. For example, several of our customers have reinvented digital publishing by connecting readers through subscription models to indispensable content, helping people understand the world through deeply reported independent journalism. Our customers' software applications use our edge cloud platform to ensure concert goers can buy tickets to the live events they love, travelers can book flights seamlessly and embark on their next great adventure, and sports fans can stream events in real time, across all devices. The range of applications that developers build with our edge cloud platform continues to surpass our expectations. 33
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We generate substantially all of our revenue from charging our customers based on their usage of our platform. Initially, customers typically choose to become platform customers, for which we charge fees based on their committed or actual use of our platform, as measured in gigabytes and requests. Many of our customers generate billings in excess of their minimum commitment. We also generate revenue from additional products as well as professional and other services, such as implementation. We charge a flat one-time or recurring fee for these additional products and services. We focus our direct selling efforts on medium to large organizations as well as smaller companies that are exhibiting significant growth. We engage with and support these customers with our field sales representatives, account managers, and technical account managers who focus on customer satisfaction and drive expansion of their usage of our platform and products. These teams work with technical and business leaders to help our customers' end-users receive the best possible digital experience, while also lowering our customers' total cost of ownership. Potential customers have the opportunity to test our platform for free. If they choose to make use of our platform for live production delivery, they have the ability to sign up online by providing their credit card information and agreeing to a nominal monthly fee. We have established and continue to maintain our position by improving upon our programmable edge platform and software-defined modern network architecture. We continue to focus on empowering our developer community through events and conferences and online digital engagement. The success of these direct selling efforts is reflected by our 304 enterprise customers as ofJune 30, 2020 that generated 88% of our total revenue for the trailing 12 months endedJune 30, 2020 . As our customers become more successful and grow, they typically increase their usage of our platform and adopt additional Fastly products. A meaningful indicator of the increased activity from our existing customer accounts and overall customer satisfaction is our Dollar-Based Net Expansion Rate ("DBNER"), which was 137.4% and 132.3% for the trailing 12 months endedJune 30, 2020 and 2019, respectively. Our Net Retention Rate ("NRR") was 137.8% and 110.9% for the trailing twelve months endedJune 30, 2020 and 2019, respectively. For a more complete description and discussion of DBNER and NRR, refer to the section titled "Key Business Metrics". Customers that have negotiated contracts with us generate a substantial majority of our revenue. These customers typically purchase one or more products, for which we charge a monthly recurring or one-time fee depending on the products selected. Some of these customers also choose to purchase various levels of account management and enhanced customer support for a monthly fee. Typically, the term of these contracts is 12 months and includes a minimum monthly billing commitment in exchange for more favorable pricing terms. The timing of our sales is difficult to predict. The length of our sales cycle, from initial evaluation to payment, can range from several months to well over a year and can vary substantially from customer to customer. Similarly, the onboarding and ramping process with new enterprise customers can take several months. We have achieved significant growth in recent periods. For the three months endedJune 30, 2020 and 2019, our revenue was$74.7 million and$46.2 million , respectively, an increase of 62%. Our 10 largest customers generated an aggregate of 33% and 30% of our revenue in the trailing 12 months endedJune 30, 2020 and 2019, respectively. We incurred a net loss of$14.5 million and$15.6 million in the three months endedJune 30, 2020 and 2019, respectively. Recent Events Follow-on Public Offering OnMay 26, 2020 we completed a follow-on public offering in which we sold 6,900,000 shares of Class A common stock, which included 900,000 shares sold pursuant to the exercise by the underwriters of an option to purchase additional shares, at the public offering price of$41.50 per share. We received net proceeds of$274.9 million , after deducting underwriting discounts and commissions, from sales of our shares in the public offering. Amendment to Amended and Restated Certificate of Incorporation
On
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B common stock voting together as a single class, and the affirmative vote of the holders of a majority of the voting power of the outstanding shares of Class B common stock voting as a separate class.
Further details on the Amendment are described in our Current Report on Form
8-K filed on
Factors Affecting Our Performance Winning New Customers We are focused on continuing to attract new customers. Our customer base includes both large, established enterprises that are undergoing digital transformation and emerging companies spanning a wide array of industries and verticals. In both instances, developers within these companies often use and advocate the adoption of our platform by their companies. We also benefit from word-of-mouth promotion across the broader developer community. We will continue to invest in our developer outreach, leveraging it as a cost-efficient approach to attracting new customers. We also plan to dedicate significant resources to sales and marketing programs, including various online marketing activities as well as targeted account-based advertising. This will require us to dedicate significant resources to further develop the market for our platform and differentiate our platform from competitive products and services. We will also need to expand, retain, and motivate our sales and marketing personnel in order to target our sales efforts at larger enterprises and senior management of these potential customers. Expanding within our Existing Customer Base We emphasize retaining our customers and expanding their usage of our platform and adoption of our other products. Customers often begin with smaller deployments of our programmable edge platform and then expand their usage over time. In addition, our programmable edge platform includes a variety of other offerings, such as load balancing, shielding, web security, and WAF. As our customers mature, we assist them in expanding their use of our platform, including the use of additional offerings beyond edge cloud delivery. As enterprises grow and experience increased traffic, their needs evolve, leading them to find additional use cases for our platform and expand their usage accordingly. In addition, given that customer acquisition costs are incurred largely for acquiring and initial onboarding, we gain operating leverage to the extent that existing customers expand their use of our platform and products. Our ability to retain our customers and expand their usage could be impaired for a variety of reasons, including a customer moving to another provider or reducing usage within the term of their contract to their minimum usage commitment. Even if our customers expand their usage of our platform, we cannot guarantee that they will maintain those usage levels for any meaningful period of time or that they will renew their commitments. We also cannot be certain what actions theU.S. or another country's government may take with respect to certain of our customers that may adversely affect our ability to do business with our customers that operate inChina , targetChina as a market or that have strong business ties toChina . ByteDance, the operator of the TikTok application, operates in and has strong business ties toChina and is our top customer, accounting for 13% and 12% of revenue for the three and six months endedJune 30, 2020 , respectively. OnAugust 6, 2020 ,President Trump issued an executive order banning transactions with ByteDance, effective 45 days after the execution of the order. The TikTok application has also been the subject of a ban in other countries. While we are still assessing the impact of these bans, the ban of the TikTok application by theU.S. government, and any other governments, creates uncertainty around our ability to support ByteDance. The loss of this customer's traffic could have a negative impact on our business. For additional details, refer to the section titled "Risk Factors." International Customer Growth We intend to continue expanding our efforts to attract customers outside ofthe United States by augmenting our sales teams and strategically increasing the number of POPs in select international locations. As ofJune 30, 2020 and 2019, 52% and 46% of our customers were headquartered outside ofthe United States , respectively. Our international expansion, including our global sales efforts, will add increased complexity and cost to our business. This will require us to significantly expand our sales and marketing capabilities outside ofthe United States , as well as increase the number of POPs around the world to support our customers. We have limited experience managing the administrative aspects of a global organization, and we have only recently begun to establish and operate offices in foreign countries, which could place a strain on our business and culture. 35
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Investing in Sales and Marketing Our customers have been pivotal in driving brand awareness and broadening our reach. While we continue to leverage our self-service approach to drive adoption by developers, we intend to continue to expand our sales and marketing efforts, with an increased focus on sales to enterprises globally. Utilizing our direct sales force, we have multiple selling points within organizations to acquire new customers and increase usage from our existing customers. We intend to increase our discretionary marketing spend, including account based and brand spend, to drive the effectiveness of our sales teams. As a result, we expect our total operating expenses to increase as we continue to expand. Our investments in our sales and marketing teams are intended to help accelerate our sales, onboarding, and ramp cycles. These efforts will require us to invest significantly in financial and other resources. Furthermore, we believe that there is significant competition for sales personnel with the skills and technical knowledge that we require. Our ability to achieve significant revenue growth will depend, in large part, on our success in recruiting, training, and retaining sufficient numbers of sales personnel to support our growth.Continued Investment in Our Platform and Network Infrastructure We must continue to invest in our platform and network infrastructure to maintain our position in the market. We expect our revenue growth to be dependent on an expanding customer base and continued adoption of our edge cloud platform. In anticipation of winning new customers and staying ahead of our customers' needs, we plan to continue to invest in order to expand the scale and capacity of our software-defined modern network, resulting in increased network service provider fees, which could adversely affect our gross margins if we are unable to offset these costs with revenue from new customers and increase revenue from existing customers. Our customers require constant innovation within their own organizations and expect the same from us. Therefore, we will continue to invest in resources to enhance our development capabilities and introduce new products and features on our platform. We believe that investment in research and development will contribute to our long-term growth but may also negatively impact our short-term profitability. For the three and six months endedJune 30, 2020 , our research and development expenses as a percentage of revenue was 22% and 22%, respectively. Developers use our platform to build custom applications and require a state-of-the-art infrastructure to test and run these applications. We will continue to invest in our network infrastructure by strategically increasing our POPs. We also anticipate making investments in upgrading our technology and hardware to continue providing our customers a fast and secure platform. Our total investment in property and equipment for the three and six months endedJune 30, 2020 was$1.1 million and$14.6 million representing 1% and 11% of our revenue in such periods. We expect our investment in property and equipment to increase on an absolute basis and may increase as a percentage of revenue in future periods. Our gross margins and operating results are impacted by these investments. As ofJune 30, 2020 , we had 72 POPs and are located in 55 markets across 26 countries. In the event that there are errors in software, failures of hardware, damages to a facility or misconfigurations of any of our services-whether caused by our products, third-party error, our own error, natural disasters, or security breaches-we could experience lengthy interruptions in our platform as well as delays and additional expenses in arranging new facilities and services. In addition, there can be no assurance that we are adequately prepared for unexpected increases in bandwidth demands by our customers, particularly when customers experience cyber-attacks. The bandwidth we have contracted to purchase may become unavailable for a variety of reasons, including service outages, payment disputes, network providers going out of business, natural disasters, networks imposing traffic limits, or governments adopting regulations that impact network operations. Uncertainty of Coronavirus (COVID-19) Pandemic The ongoing global COVID-19 pandemic has adversely impacted, and may continue to adversely impact, many aspects of our business. As certain of our customers or potential customers experience downturns or uncertainty in their own business operations and revenue resulting from the spread of COVID-19, they have and may continue to decrease or delay their technology spending, request pricing concessions or payment extensions, or seek renegotiations of their contracts, any of which have resulted in and may continue to result in delayed or decreased revenue for us. We have experienced and may continue to experience customer losses, including due to bankruptcy or our customers ceasing operations, which has resulted in delays and inability to collect receivables from these customers and slow-downs in our sales cycles. In addition, a portion of our revenue is related to usage of our platform in connection with live events, such as sporting events that have been or may be postponed or cancelled. A decline in revenue or the collectability of our receivables could harm our business. The nature and extent of the impact of the COVID-19 pandemic on our customers and our customers' response to the COVID-19 pandemic is difficult to assess or predict, and we may be unable to accurately forecast our revenues or financial results, especially given that the near 36
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and long term impact of the pandemic remains uncertain. We have seen an increase in usage of our platform following the implementation of preventative measures to contain or mitigate the outbreak of COVID-19. However, we cannot predict how long we will see this increased level of usage as these preventative measures, including shelter-in-place orders, school closures, travel bans and restrictions, limitations on business activity, quarantines, and other related measures and community practices, change over time. In addition, there is no assurance that customers will continue to use our platform, or to the same extent, after the COVID-19 pandemic begins to taper or has ended. We may see a decline in customers or usage when shelter-in-place measures are eased or terminated, and individuals are no longer working or attending work or school from home. Our results of operations could be materially above or below our forecasts, which could adversely affect our results of operations, disappoint analysts and investors, and/or cause our stock price to decline.
The COVID-19 pandemic has been declared a national emergency in many countries.
In response to the COVID-19 pandemic, many state, local, and foreign governments
have put in place, and others in the future may put in place, quarantines,
executive orders, shelter-in-place orders, and similar government orders and
restrictions in order to control the spread of the disease. Such orders or
restrictions, or the perception that such orders or restrictions could occur,
have resulted in business closures, work stoppages, slowdowns and delays,
work-from-home policies, travel restrictions, and cancellation or postponement
of events, among other effects that could negatively impact productivity and
disrupt our operations and those of our partners and customers. In
In addition, while the potential impact and duration of the COVID-19 pandemic on the global economy and our business in particular may be difficult to assess or predict, the pandemic has resulted in, and may continue to result in, significant disruption of global financial markets, may reduce our ability to access capital, which could negatively affect our liquidity in the future.
The global impact of COVID-19 continues to rapidly evolve, and we will continue to monitor the situation closely. We have substantially completed business continuity planning to identify and address risks to our business posed by this pandemic, which included, among other things, the elimination of single points of failure among our employees to address the decrease in employee productivity. The ultimate impact of the COVID-19 pandemic or a similar health epidemic is highly uncertain and subject to change. We do not yet know the full extent of potential delays or impacts on our business, operations, or the global economy as a whole. While the spread of COVID-19 may eventually be contained or mitigated, there is no guarantee that a future outbreak of this or any other widespread epidemics will not occur, or that the global economy will recover, either of which could harm our business.
For additional details, refer to the section titled "Risk Factors."
Key Business Metrics We regularly review a number of metrics, including the key metrics presented in the table below, to evaluate our business, measure our performance, identify trends affecting our business, prepare financial projections, and make strategic
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decisions. The calculation of the key metrics and other measures discussed below may differ from other similarly titled metrics used by other companies, securities analysts, or investors.
June 30, 2020 2019 Number of customers (as of end of period) 1,951 1,627 Number of enterprise customers (as of end of period) 304 262 DBNER (trailing 12 months) 137.4 % 132.3 % NRR 137.8 % 110.9 % Number of Customers We believe that the number of customers is an important indicator of the adoption of our platform. Our definition of a customer consists of identifiable operating entities with which we have a billing relationship in good standing, from which we recognized revenue during the period, and are active as of the end of the period. In addition to our paying customers, we also have trial, developer, nonprofit and open source program, and other non-paying accounts that are excluded from our customer count metric. As ofJune 30, 2020 and 2019, we had 1,951 and 1,627 customers, respectively. Number of Enterprise Customers Historically our revenue has been driven primarily by a subset of customers who have leveraged our platform substantially from a usage standpoint. These enterprise customers are defined as customers with revenue in excess of$100,000 over the previous 12-month period. As ofJune 30, 2020 , we had 304 enterprise customers which generated 88% of our revenue for the trailing 12 months endedJune 30, 2020 . As ofJune 30, 2019 , we had 262 enterprise customers which generated 86% of our revenue for the trailing 12 months endedJune 30, 2019 . We believe the recruitment and cultivation of enterprise customers is critical to our long-term success. Dollar Based Net Expansion Rate ("DBNER") Our ability to generate and increase our revenue is dependent upon our ability to increase the number of new customers and usage of our platform and increase the purchase of additional products by our existing customers. We track our performance in this area by measuring our DBNER. Our DBNER increases when customers increase their usage of our platform or purchase additional products, and declines when they reduce their usage, benefit from lower pricing on their existing usage, or curtail their purchases of additional products. We believe DBNER is a key metric in measuring the long-term value of our customer relationships and our ability to grow our revenue through increased usage of our platform and purchase of additional products by our existing customers. However, our calculation of DBNER indicates only expansion among continuing customers and does not indicate any decrease in revenue attributable to former customers, which may differ from similar metrics of other companies. We calculate DBNER by dividing the revenue for a given period from customers who remained customers as of the last day of the given period ("current period") by the revenue from the same customers for the same period measured one year prior ("base period"). The revenue included in the current period excludes revenue from (i) customers that churned after the end of the base period and (ii) new customers that entered into a customer agreement after the end of the base period. For example, to calculate our DBNER for the trailing 12 months endedJune 30, 2020 , we divide (i) revenue, for the trailing 12 months endedJune 30, 2020 , from customers that entered into a customer agreement on or beforeJune 30, 2019 , and that remained customers as ofJune 30, 2020 , by (ii) revenue, for the trailing 12 months endedJune 30, 2019 , from the same set of customers. For the trailing 12 months endedJune 30, 2020 and 2019 our DBNER was 137.4% and 132.3%, respectively. We believe that an annual cohort analysis of our customers demonstrates our success in customer expansion. Once a customer begins to generate revenue for us, they tend to increase their usage of our platform, in particular in their second year. Customer accounts acquired in 2017, 2018, and 2019 are referred to as the 2017 Cohort, 2018 Cohort, and 2019 Cohort, respectively. As described above, our customers tend to increase their usage of our platform in their second year, which is typically followed by more modest increases in usage, if any, in ensuing years. For example, the DBNER for the 2017 Cohort was 305.5% for the year endedDecember 31, 2018 . However, the DBNER for the 2017 Cohort was 144.3% for the year endedDecember 31, 2019 , which generally represents their third year as a customer, depending on when they entered into a customer agreement. While DBNER may fluctuate from quarter to quarter based on, among other things, the timing associated with new customer accounts, 38
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we expect our DBNER to continue to decrease as customers that have used our platform for more than two years become a larger portion of both our overall customer base and the revenue that we use to calculate DBNER. Net Retention Rate ("NRR") Our ability to generate and increase our revenue is also dependent upon our ability to retain our existing customers. In addition to measuring expansion using DBNER, NRR allows us to track customer retention which demonstrates the stickiness of our edge cloud platform. Our NRR measures the net change in monthly revenue from existing customers in the last month of the period (the "current" period month) compared to the last month of the same period one year prior (the "prior" period month), and includes revenue contraction due to billing decreases or customer churn, revenue expansion due to billing increases, but excludes revenue from new customers. We calculate Net Retention Rate by dividing the revenue from the current period month by the revenue in the prior period month. For the last month of the quarters endedJune 30, 2020 and 2019 our NRR was 137.8% and 110.9%, respectively. Key Components of Statement of Operations Revenue We derive our revenue primarily from usage-based fees earned from customers using our platform. We also earn flat fees from certain products and services. Customers are generally invoiced in arrears on a monthly basis. Many customers have tiered usage pricing which reflects discounted rates as usage increases. Usage charges are determined on a monthly basis based on actual usage within the month and do not impact usage charges within any other month. Our larger customers often enter into contracts that contain minimum billing commitments and reflect discounted pricing associated with such usage levels. We defineU.S. revenue as revenue from customers that have a billing address inthe United States , and we define international revenue as revenue from customers that have a billing address outside ofthe United States . Our revenue has been and will continue to be impacted by new and existing customers' usage of our products, international expansion, and the success of our sales efforts. Cost of Revenue and Gross Margin Cost of revenue consists primarily of fees paid for bandwidth, peering, and colocation. Cost of revenue also includes personnel costs, such as salaries, benefits, bonuses, and stock-based compensation for our customer support and infrastructure employees, and non-personnel costs, such as amortization of capitalized internal-use software development costs and depreciation of our network equipment. Our arrangements with network service providers require us to pay fees based on bandwidth use, in some cases subject to minimum commitments, which may be underutilized. We expect our cost of revenue to continue to increase on an absolute basis and may increase as a percentage of revenue, including as a result of depreciation and amortization associated with capital expenditures in future periods. Our gross margin has been and will continue to be affected by a number of factors, including the timing and extent of our investments in our operations, our ability to manage our network service providers and cloud infrastructure-related fees, the timing of amortization of capitalized software development costs, depreciation of our network equipment, and the extent to which we periodically choose to pass on our cost savings from network optimization efforts to our customers in the form of lower usage rates. Research and Development Research and development expenses consist primarily of personnel costs, including salaries, benefits, bonuses, and stock-based compensation. Research and development expenses also include cloud infrastructure fees for development and testing, amortization of capitalized internal-use software development costs, and an allocation of our general overhead expenses. We capitalize the portion of our software development costs that meet the criteria for capitalization. We continue to focus our research and development efforts on adding new features and products including new use cases, improving the efficiency and performance of our network, and increasing the functionality of our existing products. We expect our research and development expenses to continue to increase in absolute dollars as we continue to invest in efforts to 39
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enhance the functionality of our platform and develop new products and features to produce next-generation edge computing solutions. Over the long term we expect our research and development expenses to decrease as a percentage of our revenue. However, our research and development expenses may fluctuate as a percentage of our revenue from period to period due to the timing and extent of these expenses. Sales and Marketing Sales and marketing expenses consist primarily of personnel costs, including commissions for our sales employees, salaries, benefits, bonuses, and stock-based compensation. Sales and marketing expenses also include expenditures related to advertising, marketing, our brand awareness activities, costs related to our company sponsored events, professional services fees, and an allocation of our general overhead expenses. We focus our sales and marketing efforts on generating awareness of our company, platform and products, creating sales leads, and establishing and promoting our brand, both domestically and internationally. We plan to increase our investment in sales and marketing by hiring additional sales and marketing personnel, expanding our sales channels, driving our go-to-market strategies, building our brand awareness, and sponsoring additional marketing events. As a result, we expect our sales and marketing expenses to continue to increase in absolute dollars and may increase as a percentage of revenue in the foreseeable future. Over the long term, we expect our sales and marketing expenses to decrease as a percentage of our revenue. However, our sales and marketing expenses may fluctuate as a percentage of our revenue from period to period due to the timing and extent of these expenses. General and Administrative General and administrative expenses consist primarily of personnel costs, including salaries, benefits bonuses, and stock-based compensation for our accounting, finance, legal, human resources and administrative support personnel, and executives. General and administrative expenses also include costs related to legal and other professional services fees, sales and other taxes, depreciation and amortization, an allocation of our general overhead expenses, and bad debt expense. We expect that we will incur costs associated with supporting the growth of our business, our operation as a public company, and to meet the increased compliance requirements associated with our international expansion. Our general and administrative expenses include a significant amount of sales and other taxes to which we are subject based on the manner we sell and deliver our products. Historically, we have not collected such taxes from our customers and have therefore recorded such taxes as general and administrative expenses. We expect that these expenses will decline in future years as we continue to implement our sales tax collection mechanisms and start collecting these taxes from our customers. We expect our general and administrative expenses to continue to increase in absolute dollars and as a percentage of revenue in the foreseeable future. Over the long term, we expect our general and administrative expenses to decrease as a percentage of our revenue. However, our general and administrative expenses may fluctuate as a percentage of our revenue from period to period due to the timing and extent of these expenses. Income Taxes Our income tax expense consists primarily of income taxes in certain foreign jurisdictions where we conduct business and state minimum income taxes inthe United States . We have a full valuation allowance on ourU.S. Federal and state deferred tax assets. We expect to maintain this valuation allowance for the foreseeable future. 40
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