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 endedDecember 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 endedDecember 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 ofDecember 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 forBehavioral 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 ofMarch 31, 2020 andDecember 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 ofMarch 31, 2020 andDecember 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 inthe United States . 29
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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 endedMarch 31, 2020 , compared to$32.1 million for the three months endedMarch 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 endedMarch 31, 2020 and 2019, respectively. As ofMarch 31, 2020 , we had an accumulated deficit of$169.8 million . COVID-19 Update InMarch 2020 , theWorld 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 ofDecember 31, 2019 to 1,252 clients as ofMarch 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 30
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and are satisfied with our offering, which is demonstrated with our average Livongo for Diabetes member NPS of +64 as ofDecember 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. 31
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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 theSecurities 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. 32
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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). 33
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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 endedMarch 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 onJanuary 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 forBehavioral 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 forBehavioral 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. 34
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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 effectiveJanuary 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 35
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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 theSEC 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 )
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(1) Includes stock-based compensation expense as follows:
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