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MarketScreener Homepage  >  Equities  >  Nyse  >  RingCentral, Inc.    RNG

RINGCENTRAL, INC.

(RNG)
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RINGCENTRAL : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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05/11/2020 | 09:07am EDT
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 related notes appearing elsewhere in this Quarterly
Report on Form 10-Q and our Annual Report on Form 10-K filed with the SEC on
February 26, 2020 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). As discussed in the section entitled "Special Note Regarding
Forward-Looking Statements," the following discussion and analysis contains
forward-looking statements that involve risks and uncertainties, as well as
assumptions that, if they never materialize or prove incorrect, could cause our
results to differ significantly from those expressed or implied by such
forward-looking statements. Factors that could cause or contribute to these
differences include, but are not limited to, those discussed below and elsewhere
in this report, particularly in the section entitled "Risk Factors" included
under Part II, Item 1A below.
                                    Overview
We are a leading provider of software-as-a-service ("SaaS") solutions that
enable businesses to communicate, collaborate, and connect. We believe that our
innovative, cloud-based approach disrupts the large market for business
communications and collaboration by providing flexible and cost-effective
solutions that support distributed workforces, mobile employees, and the
proliferation of smart phones and tablets. We enable convenient and effective
communications for organizations across all their locations and employees,
enabling them to be more productive and more responsive to their customers.
Our cloud-based business communications and collaboration solutions are designed
to be easy to use, providing a single user identity across multiple locations
and devices, including smartphones, tablets, PCs and desk phones. Our solutions
can be deployed rapidly and configured and managed easily. Through our platform,
we enable third-party developers and customers to integrate our solution with
leading business applications to customize their own business workflows. In
April 2020, we announced RingCentral Video ("RCV"), which is another component
offered as part of RingCentral Office.
We have a portfolio of cloud-based offerings that are subscription based, made
available at different rates varying by the specific functionalities, services,
and number of users. We primarily generate revenues from the sale of
subscriptions to our offerings.
Our subscription plans have monthly, annual, or multi-year contractual terms. We
believe that this flexibility in contract duration is important to meet the
different needs of our customers. For each of the three months ended March 31,
2020 and 2019, subscriptions revenues accounted for 90% or more of our total
revenues. The remainder of our revenues has historically been primarily
comprised of product revenues from the sale of pre-configured phones and
professional services. We do not develop, manufacture, or otherwise touch the
delivery of physical phones and offer it as a convenience for a total solution
to our customers in connection with subscriptions to our services. We rely on
third-party providers to develop and manufacture these devices and fulfillment
partners to successfully serve our customers.
We continue to invest in our direct inside sales force while also developing
indirect sales channels to market our brand and our subscription offerings. Our
indirect sales channel consists of a network of resellers who sell our
solutions. We also sell our solutions through carriers including AT&T, Inc.
("AT&T"), TELUS Communications Company ("TELUS"), and BT Group plc ("BT"). In
October 2019, we entered into a strategic partnership with Avaya Holdings Corp.
("Avaya"), which includes the introduction of a new solution Avaya Cloud Office
by RingCentral ("ACO"), which will be marketed and sold by Avaya and its
subsidiaries. In December 2019, we entered into a strategic partnership with
Atos SE ("Atos"), which includes the introduction of a co-branded Unified
Communications as a Service ("UCaaS") solution. We intend to continue to foster
this network and expand our network with other resellers. We also participate in
more traditional forms of media advertising, such as radio and billboard
advertising.
Since its launch, our revenue growth has primarily been driven by our flagship
RingCentral Office product offering, which has resulted in an increased number
of customers, increased average subscription revenue per customer, and increased
retention of our existing customer and user base. We define a "customer" as one
individual billing relationship for the subscription to our services, which
generally correlates to one company account per customer. As of March 31, 2020,
we had customers from a range of industries, including financial services,
education, healthcare, legal services, real estate, retail, technology,
insurance, construction, hospitality, and state and local government, among
others. For each of the three months ended March 31, 2020 and 2019, the vast
majority of our total revenues were generated in the U.S. and Canada, although
we expect the percentage of our total revenues derived outside of the U.S. and
Canada to grow as we continue to expand internationally.

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The growth of our business and our future success depend on many factors,
including our ability to expand our customer base to larger customers, continue
to innovate, grow revenues from our existing customer base, expand our
distribution channels, and scale internationally.
In December 2019, a novel strain of Coronavirus disease ("COVID-19") was
reported and in January 2020, the World Health Organization (the "WHO") declared
the outbreak a "Public Health Emergency of International Concern." In February
2020, the WHO raised the COVID-19 threat level from high to very high at a
global level and in March 2020, the WHO characterized the COVID-19 as a
pandemic. The worldwide spread of COVID-19 has resulted in authorities
implementing numerous measures to contain the virus, including travel bans and
restrictions, quarantines, shelter-in-place orders, and business limitations and
shutdowns.
As of the filing date, the extent to which the COVID-19 pandemic may impact our
financial condition or results of operations remains uncertain. While our
revenues and earnings are relatively predictable as a result of our
subscription-based business model, the effect of the COVID-19 pandemic, may not
be fully reflected in our results of operations and overall financial
performance until future periods. The COVID-19 pandemic has created a global
slowdown of economic activity which has and will likely continue to decrease
demand for a broad variety of goods and services, while also disrupting sales
channels and marketing activities for an unknown period of time until the
disease is contained. We are experiencing elevated churn in certain customer
verticals, and customer requests for extension of payment terms. To address
customer hardships, we are actively working with our customers to provide
greater flexibility to manage challenges they are facing. Due to shelter in
place, we are also observing reduction in demand for desktop phones.
We may continue to experience curtailed customer demand due to reduced customer
spends, shortened contract duration, higher churn, lengthened payment terms,
credit cards declines, potential delays in professional services
implementations, and reduction in demand for desktop phones, which could
adversely impact our business, results of operations and overall financial
performance in future periods.
The extent of the impact of the COVID-19 pandemic on our operational and
financial performance will also depend on certain developments, including the
duration and spread of the outbreak, actions taken to contain the virus or its
impact, impact on our partners, resellers and employees, impact on our customer,
employee or industry events, and effect on our vendors, all of which are
uncertain and cannot be predicted. For example, to support the health and
well-being of our employees, customers, partners and communities in response to
the COVID-19 pandemic, a vast majority of our employees are currently working
remotely and we have shifted some of our customer events to virtual-only
experiences, and we may deem it advisable to similarly alter, postpone or cancel
entirely additional customer, employee or industry events in the future. At this
point, the extent to which the COVID-19 may impact our financial condition or
results of operations is uncertain, but changes we have implemented have not
affected and are not expected to affect our ability to maintain operations,
including financial reporting systems, internal control over financial
reporting, and disclosure controls and procedures.
Further discussion of the potential impacts of the COVID-19 pandemic on our
business can be found in the section titled "Risk Factors" included in Part II,
Item 1A below.
                              Key Business Metrics
In addition to United States generally accepted accounting principles ("U.S.
GAAP") and financial measures such as total revenues, gross margin, and cash
flows from operations, we regularly review a number of key business metrics to
evaluate growth trends, measure our performance, and make strategic decisions.
We discuss revenues and gross margin under "Results of Operations", and cash
flow from operations and free cash flows under "Liquidity and Capital
Resources." Other key business metrics are discussed below.
Annualized Exit Monthly Recurring Subscriptions
We believe that our Annualized Exit Monthly Recurring Subscriptions ("ARR") is a
leading indicator of our anticipated subscriptions revenues. We believe that
trends in revenue are important to understanding the overall health of our
business, and we use these trends in order to formulate financial projections
and make strategic business decisions. Our ARR equals our Monthly Recurring
Subscriptions multiplied by 12. Our Monthly Recurring Subscriptions equals the
monthly value of all customer recurring charges at the end of a given month. For
example, our Monthly Recurring Subscriptions at March 31, 2020 was $85.8
million. As such, our ARR at March 31, 2020 was $1.0 billion.

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RingCentral Office Annualized Exit Monthly Recurring Subscriptions
We calculate our RingCentral Office Annualized Exit Monthly Recurring
Subscriptions ("Office ARR") in the same manner as we calculate our ARR, except
that only customer subscriptions from RingCentral Office and RingCentral
customer engagement solutions customers are included when determining Monthly
Recurring Subscriptions for the purposes of calculating this key business
metric. We believe that trends in revenue with respect to these products are
important to the understanding of the overall health of our business, and we use
these trends in order to formulate financial projections and make strategic
business decisions. Our Office ARR at March 31, 2020 was $0.9 billion.
Net Monthly Subscription Dollar Retention Rate
We believe that our Net Monthly Subscription Dollar Retention Rate provides
insight into our ability to retain and grow subscriptions revenue, as well as
our customers' potential long-term value to us. We believe that our ability to
retain our customers and expand their use of our solutions over time is a
leading indicator of the stability of our revenue base and we use these trends
in order to formulate financial projections and make strategic business
decisions. We define our Net Monthly Subscription Dollar Retention Rate as
(i) one plus (ii) the quotient of Dollar Net Change divided by Average Monthly
Recurring Subscriptions.
We define Dollar Net Change as the quotient of (i) the difference of our Monthly
Recurring Subscriptions at the end of a period minus our Monthly Recurring
Subscriptions at the beginning of a period minus our Monthly Recurring
Subscriptions at the end of the period from new customers we added during the
period, all divided by (ii) the number of months in the period. We define our
Average Monthly Recurring Subscriptions as the average of the Monthly Recurring
Subscriptions at the beginning and end of the measurement period.
For example, if our Monthly Recurring Subscriptions were $118 at the end of a
quarterly period and $100 at the beginning of the period, and $20 at the end of
the period from new customers we added during the period, then the Dollar Net
Change would be equal to ($0.67), or the amount equal to the difference of $118
minus $100 minus $20, all divided by three months. Our Average Monthly Recurring
Subscriptions would equal $109, or the sum of $100 plus $118, divided by two.
Our Net Monthly Subscription Dollar Retention Rate would then equal 99.4%, or
approximately 99%, or one plus the quotient of the Dollar Net Change divided by
the Average Monthly Recurring Subscriptions.
Our key business metrics for the five quarterly periods ended March 31, 2020
were as follows (dollars in millions):
                                  March 31,
                                     2020         December 31, 2019      September 30, 2019       June 30, 2019       March 31, 2019
Net Monthly Subscription Dollar
Retention Rate                         >99%                    >99%                    >99%                >99%                 >99%
Annualized Exit Monthly
Recurring Subscriptions          $  1,029.7     $             960.1     $             881.4     $         830.8     $          776.7
RingCentral Office Annualized
Exit Monthly Recurring
Subscriptions                    $    943.3     $             876.8     $             800.3     $         749.2     $          694.0



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Results of Operations
The following tables set forth selected condensed consolidated statements of
operations data and such data as a percentage of total revenues. The historical
results presented below are not necessarily indicative of the results that may
be expected for any future period (in thousands):
                                              Three Months Ended March 31,
                                                2020                 2019
Revenues
Subscriptions                             $      243,104$      182,708
Other                                             24,408               18,781
Total revenues                                   267,512              201,489
Cost of revenues
Subscriptions                                     52,433               35,334
Other                                             21,011               15,501
Total cost of revenues                            73,444               50,835
Gross profit                                     194,068              150,654
Operating expenses
Research and development                          40,910               29,787
Sales and marketing                              131,312               99,551
General and administrative                        47,336               28,779
Total operating expenses                         219,558              158,117
Loss from operations                             (25,490 )             (7,463 )
Other income (expense), net
Interest expense                                  (7,502 )             (5,032 )
Other (expense) income, net                      (27,517 )              3,051
Other expense, net                               (35,019 )             (1,981 )
Loss before income taxes                         (60,509 )             (9,444 )
Provision for (benefit from) income taxes            212               (3,086 )
Net loss                                  $      (60,721 )$       (6,358 )



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Percentage of Total Revenues *

                                             Three Months Ended March 31,
                                               2020                2019
Revenues
Subscriptions                                   91  %               91  %
Other                                            9                   9
Total revenues                                 100                 100
Cost of revenues
Subscriptions                                   20                  17
Other                                            8                   8
Total cost of revenues                          27                  25
Gross profit                                    73                  75
Operating expenses
Research and development                        15                  15
Sales and marketing                             49                  49
General and administrative                      18                  14
Total operating expenses                        82                  78
Loss from operations                           (10 )                (4 )
Other income (expense), net
Interest expense                                (3 )                (3 )
Other (expense) income, net                    (10 )                 2
Other expense, net                             (13 )                (1 )
Loss before income taxes                       (23 )                (5 )
Provision for (benefit from) income taxes        -                  (2 )
Net loss                                       (23 )%               (3 )%


* Percentages may not add up due to rounding. Comparison of the Three Months Ended March 31, 2020 and 2019 Revenues

                                                Three Months Ended March 

31,

(in thousands, except percentages) 2020 2019 $ Change

   % Change
Revenues
Subscriptions                        $ 243,104$ 182,708$  60,396        33 %
Other                                   24,408        18,781         5,627        30 %
Total revenues                       $ 267,512$ 201,489$  66,023        33 %
Percentage of revenues
Subscriptions                               91 %          91 %
Other                                        9             9
Total                                      100 %         100 %


Subscriptions revenue. Subscriptions revenue increased by $60.4 million, or 33%,
for the three months ended March 31, 2020 as compared to the respective prior
year period. The increase was primarily a combination of the acquisition of new
customers and upsells of seats and additional offerings to our existing customer
base. This growth was primarily driven by an increase in sales to our mid-market
and enterprise customers as we continue to move up market and increased sales
through our channel partners. Although we expect to continue to add new
customers and existing customers to increase their usage of our product, we will
continue to monitor the COVID-19 pandemic carefully and its impact on customer
demand, contract duration, churn, payment

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terms, and credit card declines. Fluctuations in foreign currency exchange rates
and volatility in the market, including those resulting from the COVID-19
pandemic, could also cause variability in our revenue.
Other revenues. Other revenues are primarily comprised of product revenue from
the sale of pre-configured phones, phone rentals, and professional services.
Other revenues increased by $5.6 million, or 30%, for the three months ended
March 31, 2020 as compared to the respective prior year period, primarily due to
the increase in product sales and professional services resulting from the
overall growth in our business. Due to shelter in place, we may continue to see
a reduction in demand for desktop phones. Also, the timing of professional
services revenue could fluctuate due to dependency on onsite implementation for
some customers. We will continue to monitor the COVID-19 pandemic carefully and
its impact on phone and professional services revenue.
Cost of Revenues and Gross Margin
                                               Three Months Ended March 31,

(in thousands, except percentages) 2020 2019 $ Change

 % Change
Cost of revenues
Subscriptions                        $ 52,433$ 35,334$  17,099        48 %
Other                                  21,011       15,501         5,510        36 %
Total cost of revenues               $ 73,444$ 50,835$  22,609        44 %
Gross margins
Subscriptions                              78 %         81 %
Other                                      14 %         17 %
Total gross margin %                       73 %         75 %


Subscriptions cost revenues and gross margin. Cost of subscriptions revenues
increased by $17.1 million, or 48%, for the three months ended March 31, 2020 as
compared to the respective prior year period. The primary drivers of the
increase were increases in infrastructure support costs of $9.5 million
including amortization expense from acquired intangible assets, third-party
costs to support our solution offerings of $5.4 million, and headcount and
personnel and contractor-related costs of $2.2 million including share-based
compensation expense. These factors resulted in a decrease in gross margin.
The increase in headcount and other expense categories described herein was
driven primarily by investments in our infrastructure and capacity to improve
the availability of our subscription offerings, while also supporting the growth
in new customers and increased usage of our subscriptions by our existing
customer base. We expect subscription gross margin to be within a relatively
similar range in the future. However, we continue to monitor the
COVID-19 pandemic carefully and its impact on our customers.
Other cost of revenues and gross margin. Cost of other revenues increased by
$5.5 million, or 36%, for the three months ended March 31, 2020 as compared to
the respective prior year period. This was primarily due to an increase in cost
of product sales of $2.6 million and personnel costs of $2.5 million including
share-based compensation expense. Other revenues gross margin fluctuates based
on timing of completion of professional services projects and transaction price
of product sales. We continue to monitor the impact of COVID-19 on timing of
professional services and transaction price of product sales.
Research and Development
                                               Three Months Ended March 31,

(in thousands, except percentages) 2020 2019 $ Change

 % Change
Research and development             $ 40,910$ 29,787$  11,123        37 %
Percentage of total revenues               15 %         15 %

Research and development expenses increased by $11.1 million, or 37%, for the three months ended March 31, 2020 as compared to the respective prior year period, primarily driven by $9.8 million increase in personnel costs due to higher headcount growth of $6.9 million and higher share-based compensation expense of $3.2 million.

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The increases in research and development headcount and other expense categories
were driven by continued investment in current and future software development
projects for our applications. Given the continued emphasis and focus on product
innovation, we expect research and development expenses to continue to increase
in absolute dollars.
Sales and Marketing
                                                Three Months Ended March 31,

(in thousands, except percentages) 2020 2019 $ Change

  % Change
Sales and marketing                  $ 131,312$ 99,551$  31,761        32 %
Percentage of total revenues                49 %         49 %


Sales and marketing expenses increased by $31.8 million, or 32%, for the three
months ended March 31, 2020 as compared to the respective prior year period,
primarily due to increases in personnel and contractor costs of $14.2 million,
third-party commissions of $9.2 million, advertising and marketing costs of $5.3
million, and amortization of deferred sales commission costs of $3.6 million. Of
the total increase in personnel and contractor costs, $10.0 million was
primarily due to headcount growth and approximately $3.7 million was due to
higher share-based compensation expense.
The increases in sales and marketing headcount and other expense categories were
necessary to support our growth strategy to acquire new customers with a focus
on larger customers, and to establish brand recognition to achieve greater
penetration into the North America and international markets. Additionally, we
expect sales and marketing expenses to continue to increase in absolute dollars
as we continue to expand our presence in North America and international
markets.
General and Administrative
                                               Three Months Ended March 31,

(in thousands, except percentages) 2020 2019 $ Change

 % Change
General and administrative           $ 47,336$ 28,779$  18,557        64 %
Percentage of total revenues               18 %         14 %


General and administrative expenses increased by $18.6 million, or 64%, for the
three months ended March 31, 2020 as compared to the respective prior year
period, primarily due to increases in personnel and contractor costs of $13.9
million, including $9.2 million due to higher share-based compensation expense
and a net increase of $4.7 million primarily driven by headcount growth,
professional fees of $2.2 million, and increased allowance for doubtful accounts
of $1.2 million, partly driven by customer collection concerns stemming from
COVID-19.
We expect general and administrative expenses to continue to increase in
absolute dollars as we continue to make additional investments in processes,
systems, and personnel to support our anticipated revenue growth.
Other Income (Expense), Net
                                               Three Months Ended March 31,

(in thousands, except percentages) 2020 2019 $ Change

  % Change
Interest expense                     $  (7,502 )$ (5,032 )$  (2,470 )      nm
Other (expense) income, net            (27,517 )      3,051       (30,568 )      nm
Other expense, net                   $ (35,019 )$ (1,981 )$ (33,038 )      nm


nm - not meaningful
Other expense, net increased by $33.0 million for the three months ended
March 31, 2020 as compared to the respective prior year period, primarily due to
a $23.2 million loss recognized on long-term investments, $7.3 million from the
partial repurchase of our convertible senior notes, and $2.5 million increase in
interest expense from the amortization of the debt discount and issuance costs
due to the issuance of our new convertible notes. Interest income on our
investments declined by $2.0 million as a result of reduction in Federal Funds
rate in response to COVID-19. We expect interest income to further reduce in the
future due to interest rate volatility in the current macroeconomic environment.

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Net loss
Net loss increased by $54.4 million for the three months ended March 31, 2020 as
compared to the respective prior year period, mainly due to non-cash items that
include $20.1 million from our long-term investments, $17.2 million higher
share-based compensation expense, $7.3 million from the partial repurchase of
our convertible senior notes, and $6.7 million increase in amortization of
acquired intangibles.
Liquidity and Capital Resources
Liquidity is a measure of our ability to access sufficient cash flows to meet
the short-term and long-term cash requirements of our business operations.
As of March 31, 2020 and December 31, 2019, we had cash and cash equivalents of
$762.1 million and $343.6 million, respectively. We finance our operations
primarily through sales to our customers and the majority of our customers are
billed monthly. For customers with annual or multi-year contracts and those who
opt for annual invoicing, we generally invoice only one annual period in
advance. Revenue is deferred for such advanced billings. We also finance our
operations from proceeds from issuance of convertible senior notes and proceeds
from issuance of stock under our stock plans. We believe that our operations and
existing liquidity sources as well as capital resources will satisfy our future
cash requirements for at least the next 12 months.
In March 2020, we issued $1.0 billion aggregate principal of 0% convertible
senior notes due 2025 (the "2025 Notes") in a private placement. As of March 31,
2020, the carrying value of our 2025 Notes totaled $796.9 million. Our 2025
Notes contain customary financial covenants. In connection with the offering of
the 2025 Notes, we used part of the net proceeds from the offering to repurchase
a portion of the 2023 Notes. For additional details, refer to Note 6,
Convertible Senior Notes, to the Condensed Consolidated Financial Statements
included in Part I, Item 1 of this Quarterly Report on Form 10-Q. We are in
compliance with all covenants under both the 2025 and 2023 Notes as of March 31,
2020.
Our future capital requirements will depend on many factors, including revenue
growth and costs incurred to support customer growth, acquisitions and
expansions, sales and marketing, research and development, increased general and
administrative expenses to support the anticipated growth in our operations, and
capital equipment required to support our growing headcount and in support of
our co-location data center facilities, as well as the extent of the COVID-19
pandemic and its effect on our business. Our capital expenditures in future
periods are expected to grow in line with our business. We continually evaluate
our capital needs and may decide to raise additional capital to fund the growth
of our business for general corporate purposes through public or private equity
offerings or through additional debt financing. We also may in the future make
investments in or acquire businesses or technologies that could require us to
seek additional equity or debt financing. Access to additional capital may not
be available, or on favorable terms. The uncertainty created by the changing
markets and economic conditions related to the COVID-19 pandemic may also impact
our customers' ability to pay on a timely basis, which could negatively impact
our operating cash flows.
The table below, for the periods indicated, provides selected cash flow
information (in thousands):
                                                                Three Months Ended March 31,
                                                                  2020                 2019
Net cash provided by operating activities                   $       13,069$       20,197
Net cash used in investing activities                              (14,250 )            (38,275 )
Net cash provided by financing activities                          420,296                  732
Effect of exchange rate changes                                       (657 )                 47

Net increase (decrease) in cash and cash equivalents $ 418,458

$ (17,299 )



Net Cash Provided by Operating Activities
Cash provided by operating activities is influenced by our net loss, the timing
of customer collections, as well as the amount and timing of disbursements to
our vendors, the amount of cash we invest in personnel, marketing, and
infrastructure costs to support the anticipated growth of our business, and the
increase in the number of customers.
Net cash provided by operating activities was $13.1 million for the three months
ended March 31, 2020. This was driven by a net loss of $60.7 million adjusted
for impacts of non-cash adjustments of $106.2 million, partially offset by net
cash used for

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working capital of $18.5 million and $13.9 million attributable to debt discount
on a portion of the 2023 senior convertible notes that was repaid. The working
capital changes were driven primarily by the timing of cash payments to vendors
and cash receipts and prepayments from customers and carriers.
The non-cash adjustments resulted primarily from $36.6 million of share-based
compensation, $23.2 million for loss on investments, $16.5 million of
depreciation and amortization, $14.7 million of amortization of debt discount
and issuance costs related to our convertible notes along with the loss on early
extinguishment of debt, and $9.8 million of amortization of deferred sales
commission costs.
Net cash provided by operating activities for the three months ended March 31,
2020, decreased by $7.1 million as compared to the respective prior year period.
This change reflects working capital impacts resulting from the timing of
payments and collections and payment of a portion of the 2023 Notes related to
interest.
Net Cash Used in Investing Activities
Our primary investing activities have consisted of our long-term investments,
business acquisitions and purchase of intellectual properties, and capital
expenditures and internal-use software. As our business grows, we expect our
capital expenditures to continue to increase.
Net cash used in investing activities was $14.3 million for the three months
ended March 31, 2020, primarily due to capital expenditures including
personnel-related costs associated with development of internal-use software.
Net cash used in investing activities for the three months ended March 31, 2020
decreased by $24.0 million as compared to the respective prior year period. The
decrease was primarily due to cash used for business acquisitions in 2019
partially offset by higher capital expenditures.
Net Cash Provided by Financing Activities
Our primary financing activities have consisted of raising proceeds through the
issuance of stock under our stock plans and issuance of our 2025 Notes, offset
by partial repurchase of 2023 Notes.
Net cash provided by financing activities was $420.3 million for the three
months ended March 31, 2020, primarily due from $986.5 million in proceeds from
the issuance of our 2025 Notes, net of issuance costs, partially offset by cash
paid for the partial repurchase for our 2023 Notes of $495.7 million, $60.9
million payments for capped calls transactions and costs, and payments for taxes
paid in connection with our stock plans of $10.4 million.
Non-GAAP Free Cash Flow
To supplement our statements of cash flows presented on a GAAP basis, we use
non-GAAP measures of cash flows to analyze cash flow generated from our
operations. We define free cash flow, a non-GAAP financial measure, as GAAP net
cash provided by (used in) operating activities plus cash paid for repayments of
convertible senior notes attributable to debt discount, reduced by purchases of
property and equipment and capitalized internal-use software. We believe
information regarding free cash flow provides useful information to management
and investors in understanding the strength of liquidity and available cash. A
limitation of the use of free cash flow is that it does not represent the total
increase or decrease in our cash balance for the period. Free cash flow should
not be considered in isolation or as an alternative to cash flows from
operations, and should be considered alongside our other GAAP-based financial
performance measures, such as net cash used in operating activities and our
other GAAP financial results.
The following table presents a reconciliation of free cash flow to net cash
provided by operating activities, the most directly comparable GAAP measure, for
each of the periods presented (in thousands):

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                                                               Three Months Ended March 31,
                                                                  2020               2019
Net cash provided by operating activities                          13,069   

20,197

Purchases of property and equipment                                (6,861 )           (6,862 )
Capitalized internal-use software                                  (7,389 )           (3,543 )
Repayment of convertible senior notes attributable to debt
discount                                                           13,894                  -
Non-GAAP free cash flow                                            12,713              9,792


Backlog
We have generally signed new customers to contracts that vary in length, from
month-to-month to multi-year terms for our subscriptions. The timing of
invoicing to our customers is a negotiated term and thus varies among our
subscription contracts. Payment terms are generally billed either monthly or on
an annual basis. At any point in the contract term, there can be amounts that we
have not yet been contractually able to invoice, which constitute backlog. Until
such time as these amounts are invoiced, we do not recognize them as revenues,
unearned revenues or elsewhere in our condensed consolidated financial
statements. Given the variability in our contract length, we believe that
backlog is not a reliable indicator of future revenues and we do not utilize
backlog as a key management metric internally.
Deferred Revenue
Deferred revenue primarily consists of the unearned portion of invoiced fees for
our subscriptions, which we recognize as revenue in accordance with our revenue
recognition policy. Customers with annual or multi-year contracts may opt for
annual invoicing. For these customers, we generally invoice only one annual
subscription period in advance. Therefore, our deferred revenue balance does not
capture the full contract value of such multi-year contracts. Accordingly, we
believe that deferred revenue is not a reliable indicator of future revenues and
we do not utilize deferred revenue as a key management metric internally.
Contractual Obligations and Commitments
Except as set forth below, and in Notes 6, 7 and 8 in the accompanying notes to
the Condensed Consolidated Financial Statements included in Part I, Item 1 of
this Quarterly Report on Form 10-Q, there were no significant changes in our
commitments under contractual obligations, as disclosed in our Annual Report on
Form 10-K for the year ended December 31, 2019.
Contingencies
We are and may be in the future subject to certain legal proceedings and from
time to time may be involved in a variety of claims, lawsuits, investigations,
and proceedings relating to contractual disputes, intellectual property rights,
employment matters, regulatory compliance matters, and other matters relating to
various claims that arise in the normal course of business. We record a
provision for a liability when we believe that it is both probable that a
liability has been incurred, and the amount can be reasonably estimated.
Significant judgment is required to determine both probability and the estimated
amount of loss. Such legal proceedings are inherently unpredictable and subject
to significant uncertainties, some of which are beyond our control. Should any
of these estimates and assumptions change or prove to be incorrect, it could
have a significant impact on our results of operations, financial position, and
cash flows.
Off-balance Sheet Arrangements
During the three months ended March 31, 2020 and 2019, we did not have any
relationships with unconsolidated organizations or financial partnerships, such
as structured finance or special purpose entities that would have been
established for the purpose of facilitating off-balance sheet arrangements or
other contractually narrow or limited purposes.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk in the ordinary course of our business. Market
risk represents the risk of loss that may impact our financial position due to
adverse changes in financial market prices and rates. Our market risk exposure
is primarily a result of fluctuations in foreign currency exchange rates and
interest rates. We do not hold or issue financial instruments for trading
purposes.

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Foreign Currency Risk
The majority of our sales and contracts are denominated in U.S. dollars, and
therefore our net revenue is not currently subject to significant foreign
currency risk. As part of our international operations, we charge customers in
British Pounds, European Union ("EU") Euro, Canadian Dollars and Australian
Dollars, among others. Fluctuations in foreign currency exchange rates and
volatility in the market, including those resulting from the COVID-19 pandemic,
will cause variability in our revenue. However, this impact has not been
significant during the three months ended March 31, 2020. Our operating expenses
are generally denominated in the currencies of the countries in which our
operations are located, which are primarily in the U.S., and to a lesser extent
in Canada, Europe, and Asia-Pacific. The functional currency of our foreign
subsidiaries is generally the local currency. Our consolidated results of
operations and cash flows are, therefore, subject to fluctuations due to changes
in foreign currency exchange rates and may be adversely affected in the future
due to changes in foreign currency exchange rates. To date, we have not entered
into any hedging arrangements with respect to foreign currency risk. During the
three months ended March 31, 2020, a hypothetical 10% change in foreign currency
exchange rates applicable to our business would not have had a material impact
on our condensed consolidated financial statements. As our international
operations continue to expand, risks associated with fluctuating foreign
currency rates may increase. We will continue to reassess our approach to
managing these risks.
Interest Rate Risk
As of March 31, 2020, we had cash and cash equivalents of $762.1 million. We
hold our cash and cash equivalents for working capital purposes. Declines in
interest rates would reduce future interest income. For the three months ended
March 31, 2020, a hypothetical 10% increase or decrease in overall interest
rates would not have had a material on impact our interest income. The carrying
amount of our cash equivalents reasonably approximates fair values. Due to the
short-term nature of our money-market funds, we believe that exposure to changes
in interest rates will not have a material impact on the fair value of our cash
equivalents. We continue to observe lower interest income on our investments as
a result of reduction in Federal Funds rate in response to COVID-19. We expect
interest income to further reduce in the future due to interest rate volatility
in the current macroeconomic environment.
As of March 31, 2020, we had $245.1 million and $796.9 million outstanding from
both the 2023 Notes and 2025 Notes (collectively the "Notes"), respectively. We
carry the Notes at face value less unamortized discount on our balance sheet,
and we present the fair value for required disclosure purposes only. The Notes
have a zero percent fixed annual interest rate and, therefore, we have no
economic exposure to changes in interest rates. The fair value of the Notes is
exposed to interest rate risk. Generally, the fair value of our fixed interest
rate Notes will increase as interest rates decline and decrease as interest
rates increase. In addition, the fair values of the Notes are affected by our
stock price. The fair value of the Notes will generally increase as our common
stock price increases and will generally decrease as our common stock price
decrease in value.
Market Risk
As of March 31, 2020, we had long-term investments in convertible and redeemable
preferred stock of $109.9 million. These equity investments are subject to
market related risks that could decrease or increase the fair value of our
holdings. These equity investments are adjusted to fair value based on market
inputs at the balance sheet date, which are subject to market-related risks that
could decrease or increase the fair value of our holdings, including the
potential impacts from COVID-19. A fluctuation in the investee's stock price,
volatility or combination of both could have an adverse impact on the fair value
of our investment. A hypothetical adverse stock price or volatility change of
10% could have resulted in a potential decrease of up to $8.1 million in the
fair-value of our investment as of March 31, 2020.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our
Chief Financial Officer, evaluated the effectiveness of our disclosure controls
and procedures as of March 31, 2020. The term "disclosure controls and
procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act,
means controls and other procedures of a company that are designed to ensure
that information required to be disclosed by a company in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by a
company in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the company's management, including its
principal executive and principal financial officers, as appropriate to allow
timely decisions

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regarding required disclosure. Based on the evaluation of our disclosure
controls and procedures as of March 31, 2020, our Chief Executive Officer and
Chief Financial Officer concluded that, as of such date, our disclosure controls
and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting that
occurred during the period covered by this Quarterly Report on Form 10-Q that
has significantly affected, or is reasonably likely to significantly affect, our
internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating our disclosure controls and procedures, management
recognizes that any disclosure controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives. In addition, the design of disclosure controls and
procedures must reflect the fact that there are resource constraints and that
management is required to apply its judgment in evaluating the benefits of
possible controls and procedures relative to their costs.

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