The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our condensed consolidated
financial statements and the related notes thereto included elsewhere in this
Quarterly Report on Form 10-Q and with our Management's Discussion and Analysis
of Financial Condition and Results of Operations and audited consolidated
financial statements in our Annual Report on Form 10-K for the year ended
December 31, 2019, or our Annual Report. As discussed in the section titled
"Note Regarding Forward-Looking Statements," the following discussion and
analysis contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those discussed
below. Factors that could cause or contribute to such differences include, but
are not limited to, those identified below and those discussed in the sections
titled "Risk Factors" under Part II, Item 1A in this Quarterly Report on Form
10-Q and Part I, Item 1A in our Annual Report on Form 10-K for the year ended
December 31, 2019.
Overview
Our mission is to empower people with chronic conditions to live better and
healthier lives. The advancement of technology and data science has transformed
nearly every industry except healthcare to create new, consumer-first
experiences that are both personalized and empowering. Livongo is pioneering a
new category in healthcare, called Applied Health Signals, which is transforming
the management of chronic conditions.
Our platform, which leverages data science and technology, creates a new kind of
personalized experience for people with chronic conditions (our members). This
empowers our members to make sustainable behavior changes that lead to better
outcomes and lower costs. The Livongo experience makes it easier for our members
to stay healthy. We fit into the way our members live, put them in control of
managing their condition, and give them an experience that they don't just like,
but love (evidenced by our average Livongo for Diabetes member Net Promoter
Score, or NPS, of +64 as of December 31, 2019).
We currently offer Livongo for Diabetes, which has historically accounted for a
substantial portion of our revenue, and we expect that to continue for the next
several years, as well as Livongo for Hypertension, Livongo for Prediabetes and
Weight Management, and Livongo for Behavioral Health by myStrength.
Our solutions include a smart, cellular-connected device and related testing
materials, if applicable, that are sent directly to the member, and member
access to a suite of personalized feedback and remote monitoring and coaching
services on our platform. We invoice our clients monthly on a per-member or
per-solution basis, depending on the solution, and may also charge an upfront
fee for the devices. We do not sell member support services separately. As a
result, member enrollment and continued usage drives our revenue and we
primarily generate revenue not through the upfront fee for our devices, but from
the ongoing subscription revenue for our members to access to our integrated
solution.
Our agreements have fixed and variable pricing components based on the number of
members. This results in a highly predictable revenue stream, which helps us
plan for growth and scale. Furthermore, over time, many of our clients make our
solutions available to a greater percentage of their employee population,
allowing us to both increase enrollment within our existing clients, which we
refer to as product intensity, and for the sale of additional solutions to
existing clients, which we refer to as product density. Beginning in 2020, we
introduced pricing options that provide members with access to multiple
solutions in order to enable us to more fully address the health of the whole
person. We typically enter into a higher percentage of agreements with new
clients, as well as renewal agreements with existing clients, in our third and
fourth quarters, which results in higher enrollment launch rates in the first
quarter. We believe that this results in part from the timing of open enrollment
periods of many of our clients.
We sell to companies of all sizes, including employers, from small businesses to
Fortune 500 enterprises, hospital payors government entities, and labor unions.
We currently derive a high concentration of our revenue from sales to clients
that are self-insured employers, with hospital payors, government entities, and
labor unions accounting for a smaller portion of our revenue. As of March 31,
2020 and December 31, 2019, we served 1,252 and 872 clients, respectively. For a
discussion of the methodology used to determine the number of clients, see the
section titled "Key Metrics" below. As of March 31, 2020 and December 31, 2019,
we had approximately 328,500 and 222,700 members, respectively, enrolled in our
Livongo for Diabetes solution. In addition, we have a growing number of members
enrolled in our hypertension, prediabetes and weight management, and behavioral
health solutions. Our client and member base is located in the United States.

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We have experienced significant growth since our inception. Our revenue
increased $36.8 million, or 115%, to $68.8 million for the three months ended
March 31, 2020, compared to $32.1 million for the three months ended March 31,
2019. We have made significant investments to grow our business, particularly in
research and development and sales and marketing. As a result, we have incurred
net losses of $5.6 million and $14.4 million for the three months ended March
31, 2020 and 2019, respectively. As of March 31, 2020, we had an accumulated
deficit of $169.8 million.
COVID-19 Update
In March 2020, the World Health Organization declared the 2019 novel
coronavirus, or COVID-19, a global pandemic. We are closely monitoring the
impact of COVID-19 on all aspects of our business. We have taken measures in
response to the COVID-19 pandemic, including temporarily closing our offices and
implementing a work from home policy for our worldwide workforce; suspending
employee travel and in person meetings; and adjusting our supply chain and
inventory levels. We may take further actions that alter our business operations
as may be required by federal, state or local authorities or that we determine
are in the best interests of our employees, clients, members and stockholders.
The effects of these operational modifications are unknown and may not be
realized until further reporting periods.
While the COVID-19 pandemic has not had a material adverse impact on our
financial condition and results of operations to date, the future impact of the
coronavirus outbreak on our operational and financial performance will depend on
certain developments, including the duration and spread of the outbreak, impact
on our clients and our sales cycles, impact on our marketing efforts, and effect
on our suppliers, all of which are uncertain and cannot be predicted. Public and
private sector policies and initiatives to reduce the transmission of COVID-19
and disruptions to our operations and the operations of our third-party
suppliers, along with the related global slowdown in economic activity, may
result in decreased revenues and increased costs, and we expect such impacts on
our revenue and costs to continue through the duration of this crisis. Further,
the economic effects of COVID-19 have financially constrained some of our
prospective and existing clients' healthcare spending, which we expect will
negatively impact our ability to acquire new clients and our ability to renew
subscriptions with or sell additional solutions to our existing clients. We also
expect to experience increased member attrition to the extent our existing
clients' reduce their respective workforces in response to the current economic
conditions. As of the issuance of these financial statements, the extent to
which the coronavirus outbreak may materially impact our financial condition,
liquidity or results of operations is uncertain. However, due to our
subscription-based business model, the effect of the coronavirus outbreak may
not be fully reflected in our revenue until future periods. It is possible that
the COVID-19 pandemic, the measures taken by the governments of countries
affected and the resulting economic impact may materially and adversely affect
our results of operations, cash flows and financial positions as well as our
customers.
Factors Affecting Our Performance
New Client Acquisition. We believe there are significant opportunities for
growth as enterprises and individuals seek better ways to manage chronic
conditions. We believe our ability to add new clients is a key indicator of our
increasing market adoption and future revenue potential. Our client count grew
from 872 as of December 31, 2019 to 1,252 clients as of March 31, 2020,
representing an increase of 44%. For a discussion of the methodology used to
determine the number of clients, see the section titled "Key Metrics" below.
Our channel partners, pharmacy benefit managers, or PBMs, and resellers play an
important role in marketing to and contracting with our clients. They often
speed up the process of contracting and increase our access to clients. Under
our agreements with our channel partners, PBMs and resellers, we are obligated
to pay such third parties an administrative or a marketing fee. While these
relationships carry up-front costs, they significantly expand the distribution
channels through which we may capture new clients and enroll new members. Our
growth and financial results will depend in part on our ability to acquire new
clients, particularly as we pursue Medicare Advantage, Managed Medicare, Fee for
Service Medicare, Medicaid, and other fully-insured employers. We expect our
ability to add new clients may be negatively impacted by current economic
uncertainty in light of the COVID-19 pandemic. Our ability to increase our total
number of clients also increases our future opportunities for product intensity
through expansion of members within an existing client using a solution,
renewals, and product density through sales of additional solutions for other
chronic conditions.
Product Intensity and Enrollment. An important component of our revenue growth
strategy is to retain our existing clients and members, as well as increase
product intensity through growing member enrollment within our client base. We
believe we are well-positioned to continue our relationships with existing
clients due to the quality of our solutions and member satisfaction with our
solutions. However, we expect our ability to retain existing clients and members
and increase product intensity will be negatively impacted by certain of our
clients' financial constraints in light of the COVID-19 pandemic. Members see
real value in our solutions

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and are satisfied with our offering, which is demonstrated with our average
Livongo for Diabetes member NPS of +64 as of December 31, 2019. We work to
continually improve our enrollment rate through the use of our AI+AI engine,
which provides feedback on successful outreach and engagement strategies. The
ability to enroll additional members with chronic conditions represents a
significant opportunity for us within our existing clients. Once a client is
onboarded, we leverage our AI+AI engine to target and engage with potential new
members in an informed manner that drives rapid enrollment and increases our
product intensity in these new clients.
Product Density. While Livongo for Diabetes was our first solution, there is
significant overlap in the target members for each of our solutions and we see
significant cross-selling opportunities. We currently offer solutions focused on
diabetes, hypertension, prediabetes and weight management and behavioral health.
We are continuing to invest in expanding our solutions, as well as developing
solutions that address other chronic conditions. As we continue to add solutions
that address additional chronic conditions to our platform and deepen our
product density, we see increased sales opportunities as members often
experience multiple chronic conditions simultaneously and could benefit from
access to multiple Livongo solutions. Additionally, we see significant
opportunities to add new clients and members to our platform as we offer an
increasing number of solutions. Beginning in 2020, we introduced pricing options
that provide members with access to multiple solutions in order to enable us to
more fully address the health of the whole person.
Enhancing and Extending Our Platform. We offer web and mobile resources,
empowering members to be active participants in their journey to becoming and
staying physically and mentally healthy. Our AI+AI engine constantly assesses
which approaches are most effective in helping our members, and we will continue
to add to our repertoire as we receive further data and feedback. We expect to
continue to invest in research and development to enhance our platform by
improving our existing solutions and furthering product density by expanding
into solutions for other chronic conditions. Our platform is highly scalable and
is built to treat the whole person. We believe our platform can be expanded to
address a range of chronic conditions, and we are constantly reviewing areas of
improvement and potential density expansion. We are continuing to evaluate other
chronic conditions, as well as solutions that are compatible with other payors
such as government programs, including Medicare Advantage, Managed Medicaid, Fee
for Service Medicare, and Medicaid. In addition to our ongoing investment in
research and development, we may also pursue acquisitions of businesses,
technologies and assets that complement and expand the functionality of our
solutions to other chronic conditions, add to our technology or security
expertise, or bolster our leadership position by gaining access to new clients
or markets.
Investing in Growth. We expect to continue to focus on long-term revenue growth
through investments in sales and marketing and research and development. While
we offer our own devices that are compatible with our solutions, we are also
working to enhance our offering to integrate existing health monitoring devices
and incorporate new technology. We also believe our solutions are well suited
for people living with chronic conditions around the globe, and we view
international expansion as a longer-term opportunity. In addition, we expect our
general and administrative expenses to increase in absolute dollars for the
foreseeable future to support our growth. We plan to balance these investments
in future growth with a continued focus on managing our expenditures and
investing judiciously. Accordingly, in the short term we expect these activities
to increase our net losses, but in the long term we anticipate that these
investments will positively impact our business and results of operations.
Timing of Sales. While we sell to and implement our solutions to clients
year-round, we experience some seasonality in terms of when we enter into
agreements with our clients and when we launch our solutions to members. We
typically enter into a higher percentage of agreements with new clients, as well
as renewal agreements with existing clients, in our third and fourth quarters,
which coincide with typical employee benefit enrollment periods, with higher
implementation rates in the first quarter. Regardless of when the agreement is
entered into, we can typically complete client implementation in an average of
approximately three months. Any downturn in sales, however, may negatively
affect our revenue in future periods. Further, the COVID-19 pandemic may
negatively impact the timing of our sales cycle. Accordingly, the effect of
downturns in sales and potential changes in our rate of renewals may not be
fully reflected in our results of operations until future periods.

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Key Metrics
We monitor the following key metrics to help us evaluate our business, identify
trends affecting our business, formulate business plans and make strategic
decisions. We believe the following metrics are useful in evaluating our
business:
                                       Three Months Ended March 31,
                                             2020                  2019
                                          (dollars in thousands)
Clients(1)                                 1,252                      709
Enrolled Diabetes Members                328,510                  164,168
Estimated Value of Agreements(2) $        89,009                 $ 48,063

(1) First quarter of 2019 has been updated to conform to current methodology as

described further below.

(2) Previously referred to as total contract value.




Clients. We define our clients as business entities that have at least one
active paid contract with us at the end of a particular period. Entities that
access our platform through our channel partners, such as PBMs and resellers,
are counted as individual clients. Historically, we have treated our
partnerships with health plans as a single client, though multiple employers may
contract for our services through a single health plan, because of the
relatively small number of employers who enrolled under those plans. Because of
the increase in the number of employers who are enrolling through health plans
instead of other channels, beginning with the first quarter of 2020 we believe
that it is more appropriate to treat health plans in the same manner as we treat
our channel partners, such as PBMs and resellers, and include entities who
enroll in our platform through a health plan as separate clients. The historical
information presented has been revised to include such entities as individual
clients. We do not count our channel partners, such as PBMs, health plans, or
resellers as clients, unless they also separately have active paid contracts for
our solutions. If business units or subsidiaries of the same entity enter into
separate agreements with us, they are counted as separate clients. However,
entities that have purchased multiple solutions through different contracts are
treated as a single client.
Enrolled Diabetes Members. We believe our ability to grow the number of enrolled
diabetes members is an indicator of penetration of our flagship solution,
Livongo for Diabetes. We define our enrolled diabetes members as all individuals
that are enrolled in Livongo for Diabetes at the end of a given period. This
number excludes: (i) employees or dependents of a client that has ceased using
our solution, (ii) employees who no longer have an employment relationship with
an active client, and their dependents, and (iii) employees and dependents who
have not been active on or used our solution for a period of time as specified
in the applicable client's agreement, which is typically between four and six
months.
Estimated Value of Agreements. This represents the estimated value of
agreements, signed in the relevant period and was previously referred to as the
Total Contract Value, or TCV, in certain of Livongo's previous filings with the
Securities and Exchange Commission. Estimated Value of Agreements includes
agreements entered into with new clients or expansions entered into with
existing clients. Estimated Value of Agreements is helpful in evaluating our
business because it provides some visibility into future revenue. Our new client
subscriptions typically have a term of one to three years, and we generally
invoice our clients in monthly installments at the end of each month in the
subscription period based on the number of members in such month who were active
on or used our solution within a certain period of time, as specified in the
applicable client's agreement. We define Estimated Value of Agreements as
contractually committed orders to be invoiced under agreements initially entered
into during the relevant period. Agreements are only counted in Estimated Value
of Agreements in the period in which they are entered into, and for purposes of
this calculation, we assume an average member enrollment rate. Our estimates
include assumptions regarding the total recruitable individuals at a client,
commencement of enrollment period, enrollment method, starting enrollment rates,
monthly increases to enrollment rates over time, contract length, and client
size and industry. Estimates also assume the agreement will not be terminated
early and will be serviced for the full term, there are no changes to the total
recruitable individuals at a client during the relevant period, and no changes
to the per participant per month fee during the relevant period. Until such time
as these amounts are invoiced, which occurs at the end of each month of service,
they are not recorded in revenue, deferred revenue, or elsewhere in our
condensed consolidated financial statements.
Non-GAAP Financial Measures
We believe that, in addition to our financial results determined in accordance
with GAAP, adjusted gross profit, adjusted gross margin, and adjusted EBITDA,
all of which are non-GAAP financial measures, are useful in evaluating our
business, results of operations, and financial condition.

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Adjusted Gross Profit and Adjusted Gross Margin Adjusted gross profit and adjusted gross margin are key performance measures that our management uses to assess our overall performance. We define adjusted gross profit as GAAP gross profit, excluding stock-based compensation expense and amortization of intangible assets. We define adjusted gross margin as our adjusted gross profit divided by our revenue. We believe adjusted gross profit and adjusted gross margin provide our management and investors consistency and comparability with our past financial performance and facilitate period-to-period comparisons of operations, as these metrics eliminate the effects of stock-based compensation and amortization of intangible assets from period-to-period as factors unrelated to overall operating performance. The following table presents a reconciliation of adjusted gross profit from the most comparable GAAP measure, gross profit, for the periods presented:


                                                      Three Months Ended March 31,
                                                         2020               2019
                                                         (dollars in thousands)
Gross profit                                       $      50,715       $      22,204
Add:
Stock-based compensation expense                              92                   6
Amortization of intangible assets                            420                 327
Adjusted gross profit                              $      51,227       $      22,537
Adjusted gross margin (as a percentage of revenue)          74.4 %              70.3 %


Adjusted EBITDA
Adjusted EBITDA is a key performance measure that our management uses to assess
our operating performance. Because adjusted EBITDA facilitates internal
comparisons of our historical operating performance on a more consistent basis,
we use this measure for business planning purposes and in evaluating acquisition
opportunities.
We calculate adjusted EBITDA as net loss adjusted to exclude (i) depreciation
and amortization, (ii) amortization of intangible assets, (iii) stock-based
compensation expense, (iv) lock-up related payroll taxes, (v)
acquisition-related expenses, (vi) change in fair value of contingent
consideration, (vii) other income, net, and (viii) provision for (benefit from)
income taxes.
The following table presents a reconciliation of adjusted EBITDA from the most
comparable GAAP measure, net loss, for the periods presented:
                                                     Three Months Ended March 31,
                                                       2020                2019
                                                            (in thousands)
Net loss                                         $      (5,573 )     $      (14,371 )
Add:
Depreciation and amortization(1)                         1,180                  696
Amortization of intangible assets                          696                  564
Stock-based compensation expense                         8,063                5,510
Lock-up related payroll taxes(2)                           600                    -
Acquisition-related expenses(3)                              -                  207
Change in fair value of contingent consideration            84                  674
Other income, net(4)                                    (1,315 )               (462 )
Provision for (benefit from) income taxes                   21               (1,388 )
Adjusted EBITDA                                  $       3,756       $       (8,570 )

______________

(1) Depreciation and amortization includes depreciation of property and

equipment, amortization of debt discount, and amortization of capitalized

internal-use software costs.

(2) Lock-up related payroll taxes represent the employer portion of payroll taxes

paid in connection with the stock releases upon the expiration of the lock-up

agreement related to the IPO.

(3) Acquisition-related expenses consist primarily of transaction and transition

related fees and expenses, including legal, accounting, and other

professional fees.

(4) Other income, net includes interest income, interest expense, and other


    income (expense).



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Some of the limitations of adjusted EBITDA include (i) adjusted EBITDA does not
properly reflect capital commitments to be paid in the future, and (ii) although
depreciation and amortization are non-cash charges, the underlying assets may
need to be replaced and adjusted EBITDA does not reflect these capital
expenditures. Our adjusted EBITDA may not be comparable to similarly titled
measures of other companies because they may not calculate adjusted EBITDA in
the same manner as we calculate the measure, limiting its usefulness as a
comparative measure. In evaluating adjusted EBITDA, you should be aware that in
the future we will incur expenses similar to the adjustments in this
presentation. Our presentation of adjusted EBITDA should not be construed as an
inference that our future results will be unaffected by these expenses or any
unusual or non-recurring items. When evaluating our performance, you should
consider adjusted EBITDA alongside other financial performance measures,
including our net loss and other GAAP results.
Components of Statements of Operations
The financial results of operations for the three months ended March 31, 2019 in
this Management's Discussion and Analysis of Financial Condition and Results of
Operations reflect the effects of the revisions to reflect the adoption of ASC
606 on January 1, 2019 and to correct prior period errors as discussed in Note 2
of Part I, Item 1 of this Quarterly Report on Form 10-Q.
Revenue
The substantial majority of our revenue is derived from monthly subscription
fees that are charged based on a per participant per month basis, which is
determined based on number of active enrolled members each month. Our Livongo
for Diabetes, Livongo for Prediabetes and Weight Management, and Livongo for
Behavioral Health solutions incorporate the integration of devices used to
monitor members' chronic conditions, supplies and services, including access to
our platform. The contract term is generally one to three years, with one year
auto-renewal terms. There is usually a six-month minimum enrollment period
within our contracts.
Many of our customers can stop their monthly recurring subscription but will be
required to pay an early termination fee if the termination occurs during the
minimum enrollment period. Additionally, certain of our contracts are subject to
pricing adjustments based on various performance metrics including member
satisfaction scores, cost savings guarantees and health outcome guarantees.
In most agreements associated with our Livongo for Diabetes, Livongo for
Hypertension, and Livongo for Prediabetes and Weight Management solutions,
clients primarily pay monthly subscription fees based on a per participant per
month model, based on the number of active enrolled members each month. In
addition, clients can choose to pay an upfront amount with a lower per
participant per month fee. We have determined that access to our solution is a
single continuous service comprised of a series of distinct services that are
substantially the same and have the same pattern of transfer (i.e. distinct days
of service). These services are consumed as they are received and we recognize
revenue each month using the variable consideration allocation exception. We
apply this exception because we concluded that the nature of our obligations and
the variability of the payment being based on the number of active members are
aligned.
In most agreements associated with our Livongo for Behavioral Health by
myStrength solution, clients either pay a fixed upfront fee or a monthly fee
based on the number of members to whom the solution is available. The contract
term is generally one to three years, with one year auto-renewal terms. We have
determined that access to our solution is a single continuous service comprised
of a series of distinct services that are substantially the same and have the
same pattern of transfer (i.e. distinct days of service). These services are
consumed as they are received and we recognize revenue each month using the
variable consideration allocation exception. We apply this exception because we
concluded that the nature of our obligations and the variability of the payment
terms based on the number of available members are aligned and uncertainty
related to the consideration is resolved on a monthly basis as we satisfy our
obligations. For certain arrangements where the per-member fee varies as the
number of available members changes, we estimate the expected transaction price
based on the number of expected members over the term of the arrangement.
In certain legacy arrangements, we derive revenue from the sale of our
cellular-connected weight scale and access to the Livongo for Prediabetes and
Weight Management solution through the Retrofit platform. When an agreement
contains multiple performance obligations, we allocate the transaction price to
each performance obligation based on the relative standalone selling price, or
SSP. The determination of SSP is judgmental and is based on the price an entity
charges for the same good or service, sold separately in a standalone sale, and
sold to similar clients in similar circumstances. We typically price the devices
and services within a narrow range to represent SSP. Amounts allocated to the
connected device are recognized at a point in time upon delivery of the device.
Amounts allocated to the services are recognized as the service is performed.

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Although we are in the early stages of selling our newer solutions, we are
experiencing client demand to broaden their relationship with Livongo and are
seeing add-on orders as well as contracts being executed with multiple
solutions.
Our contracts are negotiated directly with the customer or through a partner. We
are the principal that controls the transfer of promised goods and services to
members with respect to the contracts originated through partners, we have
latitude in establishing pricing, and we have inventory risk. In these
situations, revenue is recognized on a gross basis and fees paid to partners are
recorded as commission expenses as a component of sales and marketing expenses.
Cost of Revenue
Cost of revenue consists of expenses that are closely correlated or directly
related to delivery of our solutions and monthly subscription fees, including
product costs, data center costs, client support costs, credit card processing
fees, allocated overhead costs, amortization of developed technology, and
amortization of deferred costs. In light of COVID-19, we are in the process of
evaluating changes to our supply chain to protect against current market
uncertainty. For our Livongo for Diabetes, Hypertension and Weight Management
solutions, which offer the cellular-connected devices, device costs are deferred
and amortized over the shorter of the expected member enrollment period or the
expected device life. Certain personnel expenses associated with supporting
these functions, such as salaries, bonuses, stock-based compensation expense and
benefits, including allocated overhead expenses for facilities, information
technology and depreciation expense, are included in cost of revenue. We expect
cost of revenue to increase in the foreseeable future in absolute dollars, but
decrease as a percentage of revenue over the long term.
Gross Profit and Gross Margin
Gross profit and gross margin, or gross profit as a percentage of revenue, has
been and will continue to be affected by various factors, including the timing
of our acquisition of new clients, renewals of our existing agreements, sales of
additional solutions to our existing clients, our product life cycle as we
transition into new products, our introduction of new solutions for other
chronic conditions, including the costs associated with bringing such new
solutions to market, the extent to which we expand our coaching and monitoring
features, and the extent to which we can increase the efficiency of our
technology through ongoing improvements, cost reduction, and operational
efficiency. We expect our gross margin to increase over the long term, although
it could fluctuate from period to period depending on the interplay of these and
other factors.
Operating Expenses
Our operating expenses primarily consist of sales and marketing, research and
development and general and administrative expenses. For each of these
categories, personnel costs are the most significant component, which include
salaries, bonuses, stock-based compensation expense and benefits. Operating
expenses also include overhead costs for facilities, information technology, and
depreciation expense.
As a result of stock-based compensation expense related to stock awards, we
expect our research and development, sales and marketing, and general and
administrative expenses to increase significantly in absolute dollars.
Research and Development. Our research and development expenses support our
efforts to add new features to our existing solutions and to ensure the
reliability and scalability of our existing solutions. Research and development
expenses consist of personnel expenses, including salaries, bonuses, stock-based
compensation expense and benefits for employees and contractors for our
engineering, product, and design teams, and allocated overhead costs. We have
expensed our research and development costs as they were incurred, except those
costs that have been capitalized as software development costs.
We plan to hire employees for our engineering team to support our research and
development efforts. We expect that research and development expenses will
increase on an absolute dollar basis in the foreseeable future as we continue to
increase investments in our technology architecture. However, we expect our
research and development expenses to decrease as a percentage of revenue over
the long term, although our research and development expenses may fluctuate as a
percentage of revenue from period to period due to the timing and amount of
these expenses.
Sales and Marketing. Sales and marketing expenses consist of personnel expenses,
sales commissions for our direct sales force and our channel partners'
commission expenses, as well as communication, promotional, client conferences,
public relations, other marketing events, and allocated overhead costs.
Personnel expenses include salaries, bonuses, stock-based compensation expense
and benefits for employees and contractors. Upon our adoption of ASC 606
effective January 1, 2019, incremental sales commissions and stock-based
compensation associated with costs to acquire clients are amortized to sales and
marketing expense over the estimated period of benefit. We intend to continue to
make significant investment in our sales and marketing organization to increase
our brand awareness, drive additional revenue and expand into new markets.
However, we anticipate sales and marketing

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expenses to decrease in the near-term due to restrictions on travel,
entertainment, and other events in response to the COVID-19 pandemic. Despite
the impact of COVID-19, we expect our sales and marketing expenses to continue
to increase in absolute dollars in the foreseeable future. However, we expect
our sales and marketing expenses to decrease as a percentage of revenue over the
long term, although our sales and marketing expenses may fluctuate as a
percentage of revenue from period to period due to the timing and amount of
these expenses.
General and Administrative. General and administrative expenses consist of
personnel expenses and related expenses for our executive, finance, human
resources and legal organizations. In addition, general and administrative
expenses include external legal, accounting and other professional fees, and
allocated overhead costs. We expect our general and administrative expenses to
increase in absolute dollars in the foreseeable future. However, we anticipate
general and administrative expenses to decrease as a percentage of revenue over
the long term, although they may fluctuate as a percentage of revenue from
period to period due to the timing and amount of these expenses.
In addition, we expect to incur additional general and administrative expenses
as a result of operating as a public company, including expenses related to
compliance with the rules and regulations of the SEC and the listing standards
of Nasdaq, additional corporate and director and officer insurance expenses,
greater investor relations expenses and increased legal, audit and consulting
fees.
Other Income, Net
Other income, net primarily consists of interest income earned from our cash,
cash equivalents and short-term investments.
Provision for (Benefit from) Income Taxes
The income tax provision and benefit were primarily due to state and foreign
income tax expense, and benefit related to release of the valuation allowance as
a result of our acquisitions.
Deferred tax assets are reduced by a valuation allowance to the extent
management believes it is not more likely than not to be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income. Management makes estimates and judgments about future taxable
income based on assumptions that are consistent with our plans and estimates.
Results of Operations
The following tables set forth consolidated statements of operations for the
periods indicated and such data as a percentage of revenue for the periods
indicated:
                                                     Three Months Ended March 31,
                                                       2020                2019
                                                            (in thousands)
Revenue                                          $      68,823       $       32,067
Cost of revenue(1)(2)                                   18,108                9,863
Gross profit                                            50,715               22,204
Operating expenses:
Research and development(1)                             13,997                8,994
Sales and marketing(1)(2)                               27,655               14,643
General and administrative(1)(3)                        15,846               14,114
Change in fair value of contingent consideration            84                  674
Total operating expenses                                57,582               38,425
Loss from operations                                    (6,867 )            (16,221 )
Other income, net                                        1,315                  462
Loss before provision for income taxes                  (5,552 )            (15,759 )
Provision for (benefit from) income taxes                   21               (1,388 )
Net loss                                         $      (5,573 )     $      (14,371 )

______________

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





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