AVALARA, INC.
You should read the following discussion and analysis of our financial condition
and results of operations together with the consolidated financial statements
and related notes that are included elsewhere in this Quarterly Report on Form
10-Q and our 2020 Annual Report. This discussion contains forward-looking
statements based upon current expectations that involve risks and uncertainties.
Our actual results may differ materially from those anticipated in these
forward-looking statements as a result of various factors, including those set
forth under "Risk Factors," in Part II, Item 1A of this Quarterly Report on Form
10-Q and our 2020 Annual Report. See "Special Note Regarding Forward-Looking
Statements" above.
Overview
We are a leading provider of tax compliance automation for businesses of all
sizes. The Avalara Compliance Cloud includes calculation, returns, compliance
document management, licensing and registration, fiscal representation, and tax
content and insight solutions. We sell our solutions primarily on a subscription
basis through our sales force, which focuses on selling to qualified leads
provided by our marketing efforts and by partner referrals.
We focus on maintaining and expanding our partner network, which has been and
will continue to be an essential part of our growth. We continue to increase the
available number of partner integrations, which are designed to link the Avalara
Compliance Cloud to a wide variety of business applications, including
accounting, ERP, ecommerce, marketplace, POS, recurring billing, and CRM
systems. Through marketing activities, we generate awareness from many
businesses, both large and small, and enhance communications with our existing
customers.
We make substantial investments by increasing headcount, investing in better
software tools and technologies, and making strategic acquisitions to
continuously improve the Avalara Compliance Cloud. With these investments, we
will continue scaling our platform for continued growth, adding new features and
functionality, supporting new products and content types, and improving the user
experience. We expect to continue to make significant investments, both
organically and through acquisitions, to gain new and relevant content,
technology, and expertise that best serve the transaction tax needs of our
customers.
Our business is impacted by the COVID-19 pandemic, which began during the first
quarter of 2020 and has resulted in authorities implementing numerous
preventative measures to contain or mitigate the extent of the impact, including
travel bans and restrictions, limitations on business activity, quarantines, and
shelter-in-place orders. These measures have caused, and may continue to cause,
business slowdowns or shutdowns in affected areas. Almost all our employees
currently work offsite and we expect these arrangements to continue for the
majority of our workforce for the remainder of 2021. During the second quarter
of 2021, some of the geographic areas we serve and work from began to loosen
travel bans and restrictions, and, where it is safe to do so, we have resumed
some in-person customer activities and events. However, as the COVID-19 pandemic
continues to evolve, the extent and timing of the broader impact of the pandemic
on our results of operations, overall financial performance and operating cash
flows remains uncertain, including the impact on our future revenue growth, the
timing of the resumption of normal operating expenses, and the extent to which
any incremental expenses associated with the preventative and precautionary
measures will be necessary.
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Key Business Metrics
We regularly review several metrics to evaluate growth trends, measure our
performance, formulate financial projections, and make strategic decisions. We
discuss revenue and the components of operating results under the section of
this report titled, "Key Components of Consolidated Statements of Operations,"
and we discuss other key business metrics below.
Jun 30, Mar 31, Dec 31, Sep 30, Jun 30, Mar 31, Dec 31, Sep 30,
2021 2021 2020 2020 2020 2020 2019 (3) 2019 (3)
Number of core
customers
(as of end
of period) -
legacy 16,410 15,580 14,890 14,180 13,560 12,940 12,150 11,400
Number of core
customers
(as of end
of period) -
revised(1) 16,570 15,730 15,020 14,300 13,640 13,000 12,240 11,440 Net revenue retention rate - legacy 110 % 107 % 104 % 108 % 107 % 109 % 111 % 113 % Net revenue retention rate - revised(2) 116 % 113 % 115 % 116 % 114 % 117 % N/A N/A
(1) During the second quarter of 2021, we revised the methodology for calculating core customers to include revenue from SST (see Number of Core Customers below for details). The table above includes the number of core customers using both the legacy and the revised methodologies.
(2) During the second quarter of 2021, we revised the methodology for calculating net revenue retention rate to include revenue from SST. In addition, professional services revenue is no longer included in the revised calculation methodology, as these services tend to be more one-time in nature (see Net Revenue Retention Rate below for details). The table above includes the net revenue retention rate using both the legacy and the revised methodologies. (3) Net revenue retention rate - revised is not presented for the periods endedDecember 31, 2019 andSeptember 30, 2019 due to certain prior period data needed to complete the calculation being unavailable.
Number of Core Customers
We believe core customers is a key indicator of our market penetration, growth, and potential future revenue. The small and mid-market customer segments have been and remain our primary target market segments for marketing and selling our solutions. We use core customers as a metric to focus our customer count reporting on our primary target market segment. During the second quarter of 2021, we revised our core customer calculation methodology to include revenue from our Streamlined Sales Tax solution (SST), which results in additional customers being included in reported core customers. Under the revised calculation methodology, we had as ofJune 30, 2021 andDecember 31, 2020 , approximately 16,570 and 15,020 core customers, respectively.
We define a core customer as:
• a unique account identifier in our primary
companies or divisions within a single consolidated enterprise that each
have a separate unique account identifier are each treated as separate
customers);
• that is active as of the measurement date; and
• for which we have recognized, as of the measurement date, greater than
Currently, our core customer count includes only customers with unique account identifiers in our primaryU.S. billing systems and does not include customers that subscribe to our solutions through our international subsidiaries and certain legacy and acquired billing systems that have not yet been integrated into our primaryU.S. billing systems (e.g., recent acquisitions and our lodging tax compliance solution). As we increase our international operations and sales in future periods, we may add customers billed from our international subsidiaries to the core customer metric. As noted above, we revised our core customer calculation methodology during the second quarter of 2021. Under the prior methodology, revenue from SST was not included in our calculation of total revenue during the previous 12 months. This meant customers that would have otherwise met the definition of a core customer, with inclusion of attributable SST revenue, were excluded 37 -------------------------------------------------------------------------------- from our core customer count as well as our disclosures on the percentage of total revenue attributable to core customers. The revised methodology for core customers includes revenue from SST. We believe these changes improve the usefulness of this key business metric, which is to measure both the growth of existing customers into core customers and the acquisition of new customers of a certain size. We also have a substantial number of customers of various sizes that do not meet the revenue threshold to be considered a core customer. Many of these customers are in the emerging and small business segment of the marketplace, which represents strategic value and a growth opportunity for us. Customers who do not meet the revenue threshold to be considered a core customer provide us with market share and awareness, and we anticipate that some may grow into core customers. In addition, we have numerous enterprise-level customers that only utilize our services for small segments of their business, providing opportunities over time for us to extend our relationship and make them core customers. In addition to customers with whom we have a direct relationship, some of our customers are business application publishers (including ecommerce platforms) that include automated tax determination powered byAvalara . While those platform providers may be core customers toAvalara , their end-user customers generally are not. Net Revenue Retention Rate We believe that our net revenue retention rate provides insight into our ability to retain and grow revenue from our customers, as well as their potential long-term value to us. We also believe it reflects the stability of our revenue base, which is one of our core competitive strengths. We calculate our net revenue retention rate by dividing (a) total subscription and returns revenue in the current quarter from any billing accounts that generated revenue during the corresponding quarter of the prior year by (b) total subscription and returns revenue in such corresponding quarter from those same billing accounts. This calculation includes changes during the period for such billing accounts, such as additional solutions purchased, changes in pricing and transaction volume, and terminations, but does not reflect revenue for new billing accounts added during the one-year period. Currently, our net revenue retention rate includes only customers with unique account identifiers in our primaryU.S. billing systems and does not include customers who subscribe to our solutions through our international subsidiaries or certain legacy billing systems that have not been integrated into our primaryU.S. billing systems. During the second quarter of 2021, we revised our net revenue retention rate calculation methodology. Under the prior methodology, revenue from our SST solution was not included in net revenue retention rate. This means that revenue expansion from existing customers adopting our SST solution was not included, while revenue contraction from customers replacing one or more ofAvalara's other solutions with SST was included. The revised calculation methodology for net revenue retention rate includes revenue from SST. In addition, professional services revenue is no longer included in the revised calculation methodology, as these services tend to be more one-time in nature. Under the revised calculation methodology, our net revenue retention rate was 116% for the quarter endedJune 30, 2021 and on average has been 115% over the last four quarters endedJune 30, 2021 . Under the legacy calculation methodology, our net revenue retention rate was 110% for the quarter endedJune 30, 2021 and on average has been 107% over the last four quarters endedJune 30, 2021 . Key Components of Consolidated Statements of Operations Revenue We generate revenue from two primary sources: (1) subscription and returns; and (2) professional services. Subscription and returns revenue are driven primarily by the acquisition of customers, customer renewals, and additional service offerings purchased by existing customers. Revenue from subscription and returns comprised approximately 90% of our revenue for the six months endedJune 30, 2021 and 94% of our revenue for the six months endedJune 30, 2020 . Subscription and Returns Revenue. Subscription and returns revenue primarily consist of fees paid by customers to use our solutions. Subscription plan customers select a price plan that includes an allotted maximum number of transactions over the subscription term. Unused transactions are not carried over to the customer's next subscription term, and our customers are not entitled to any refund of fees paid or relief from fees due if they do not use the allotted number of transactions. If a subscription plan customer exceeds the selected maximum transaction level, we will generally upgrade the customer to a higher tier or, in some cases, charge overage fees on a per transaction or return basis. Customers purchase tax return preparation on a subscription basis for an allotted number of returns. Fees paid for subscription services to tax content vary depending on the volume of tax information accessible to the customer. 38 -------------------------------------------------------------------------------- Our standard subscription contracts are generally non-cancelable after the first 60 days of the contract term. Cancellations under our standard subscription contracts are not material, and do not have a significant impact on revenue recognized. We generally invoice our subscription customers for the initial term at contract signing and upon renewal. Our initial terms generally range from 12 to 18 months, and renewal periods are typically one year. Amounts that have been invoiced are initially recorded as deferred revenue or contract liabilities. Subscription revenue is recognized on a straight-line basis over the service term of the arrangement beginning on the date that our solution is made available to the customer and ending at the expiration of the subscription term. Currently a small component of our total revenue, we offer SST services to businesses that are registered to participate in the program. We earn a fee (SST revenue) from participating state and local governments based on a percentage of the sales tax reported and paid, and as a result, we generally provide SST services at no cost to the seller. During the first quarter of 2021, we renewed our agreement with the SST Governing Board to provide SST services at a lower percentage rate than we previously earned. Subscription and returns revenue also include interest income generated on funds held for customers. In order to provide tax remittance services to customers, we hold funds from customers in advance of remittance to tax authorities. These funds are held in trust accounts atFDIC -insured institutions. Prior to remittance, we earn interest on these funds. Professional Services. We generate professional services revenue from providing tax analysis and services, including tax registrations, voluntary disclosure agreements, nexus studies, and back filing services. We also provide configurations, data migrations, integration, and training, for our subscriptions and returns products. Our 2020 acquisitions of TTR and Business Licenses expanded the scope of professional services we offer to include business licenses and registration services and tax refund claims and recovery assistance. We bill for service arrangements on a fixed fee, milestone, or time and materials basis, and we recognize the transaction price allocated to professional services performance obligations as revenue as services are performed and are collectable under the terms of the associated contracts.
Costs and Expenses
Cost of Revenue. Cost of revenue consists of costs related to providing the Avalara Compliance Cloud and supporting our customers and includes employee-related expenses, including salaries, benefits, bonuses, and stock-based compensation and the amortization of capitalized software development costs. In addition, cost of revenue includes direct costs associated with information technology, such as data center and software hosting costs, tax content maintenance, and certain services provided by third parties. Cost of revenue also includes allocated costs for certain information technology and facility expenses, along with depreciation of equipment and amortization of intangibles such as acquired technology from acquisitions. We plan to continue to significantly expand our infrastructure and personnel to support our future growth, including through acquisitions, which we expect to result in higher cost of revenue in absolute dollars. Research and Development. Research and development expenses consist primarily of employee-related expenses for our research and development staff, including salaries, benefits, bonuses, and stock-based compensation, and the cost of third-party developers. Research and development costs, other than software development expenses qualifying for capitalization, are expensed as incurred. Capitalized software development costs, which consist primarily of employee-related costs, are amortized as cost of subscription and returns revenue. Research and development expenses also include allocated costs for certain information technology and facility expenses, along with depreciation of equipment. We devote substantial resources to enhancing and maintaining theAvalara Compliance Cloud, developing new and enhancing existing solutions, conducting quality assurance testing, and improving our core technology. We expect research and development expenses to increase in absolute dollars. Sales and Marketing. Sales and marketing expenses consist primarily of employee-related expenses for our sales and marketing staff, including salaries, benefits, bonuses, sales commissions, and stock-based compensation, integration and referral partner commissions, costs of marketing and promotional events, corporate communications, online marketing, solution marketing, and other brand-building activities. As a result of the current COVID-19 pandemic, we suspended in-person promotional and customer events and converted many of these activities to virtual events, which temporarily reduced these types of marketing expenses. We have begun to resume limited in-person marketing activities in the second half of 2021 where it is safe to do so. Sales and marketing expenses include allocated costs for certain information technology and facility expenses, along with depreciation of equipment and amortization of intangibles such as customer relationships, customer lists, and backlog from acquisitions. We defer the portion of sales commissions that is considered a cost of obtaining a new contract with a customer in accordance with the revenue recognition standard and amortize these deferred costs over the period of benefit, currently six years. We expense the remaining sales commissions as incurred. Sales commissions are earned when a sales order is completed. For most sales orders, 39 -------------------------------------------------------------------------------- deferred revenue is recorded when a sales order is invoiced, and the related revenue is recognized ratably over the subscription term. The rates at which sales commissions are earned varies depending on a variety of factors, including the nature of the sale (new, renewal, or add-on service offering), the type of service or solution sold, and the sales channel. At the beginning of each year, we set group and individual sales targets and update targets during the year as appropriate. Sales commissions are generally earned based on achievement against these targets. We defer the portion of partner commissions costs that are considered a cost of obtaining a contract with a customer in accordance with the revenue recognition standard and amortize these deferred costs over the period of benefit. The period of benefit is separately determined for each partner and is either six years or corresponds with the contract term. We expense the remaining partner commissions costs as incurred. Our partner commission expense has historically been, and will continue to be, impacted by many factors, including the proportion of new and renewal sales, the nature of the partner relationship, and the sales mix among partners during the period. In general, integration partners are paid a higher commission for the initial sale to a new customer and a lower commission for renewal sales. Additionally, we have several types of partners (e.g., integration and referral) that each earn different commission rates. We intend to continue to invest in sales and marketing and expect spending in these areas to increase in absolute dollars as we continue to expand our business. We expect sales and marketing expenses to continue to be among the most significant components of our operating expenses. General and Administrative. General and administrative expenses consist primarily of employee-related expenses for administrative, finance, information technology, legal, and human resources staff, including salaries, benefits, bonuses, and stock-based compensation, professional fees, insurance premiums, and other corporate expenses that are not allocated to the above expense categories. General and administrative expenses include amortization of intangibles such as tradenames and noncompetition agreements from acquisitions.
We expect our general and administrative expenses to increase in absolute
dollars as we continue to expand our operations, hire and train additional
personnel, evaluate and integrate acquisitions, and incur costs as a public
company. Specifically, we expect to continue to incur increased expenses related
to accounting, tax and auditing activities, legal, insurance, acquisition
evaluation and execution,
Total Other (Income) Expense, Net
Total other (income) expense, net consists of interest income on cash and cash
equivalents, quarterly remeasurement of earnout liabilities for acquisitions
accounted for as business combinations, foreign currency gains and losses, and
other nonoperating gains and losses.
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Results of Operations
The following sets forth our results of operations for the periods presented and
as a percentage of our total revenue for those periods. The period-to-period
comparison of financial results is not necessarily indicative of financial
results to be achieved in future periods.
The comparability of periods covered by our financial statements is impacted by
recent acquisitions. In the fourth quarter of 2020, we acquired the outstanding
equity of TTR, substantially all the assets of Business Licenses, and the
outstanding equity of Impendulo. During the second quarter of 2021, we acquired
substantially all the assets of Davo and the outstanding equity of Inposia (See
Note 5 in the Notes to Consolidated Financial Statements).
For the Three Months Ended June 30,
2021 2020
(in thousands)
Revenue:
Subscription and returns $ 152,442 $ 108,519
Professional services 16,625 7,968
Total revenue 169,067 116,487
Cost of revenue:
Subscription and returns 40,983 28,779
Professional services 7,692 4,551
Total cost of revenue(1) 48,675 33,330
Gross profit 120,392 83,157
Operating expenses:
Research and development(1) 40,111 26,844
Sales and marketing(1) 71,897 46,040
General and administrative(1) 35,244 20,322
Total operating expenses 147,252 93,206
Operating loss (26,860 ) (10,049 )
Other (income) expense, net 938 (46 )
Loss before income taxes (27,798 ) (10,003 )
(Benefit from) provision for income taxes (148 ) 137
Net loss $ (27,650 ) $ (10,140 )
(1) The stock-based compensation expense included above was as follows:
For the Three Months Ended June 30,
2021 2020
(in thousands)
Cost of revenue $ 2,444 $ 1,477
Research and development 6,069 3,080
Sales and marketing 5,201 2,956
General and administrative 9,521 4,734
Total stock-based compensation $ 23,235 $ 12,247
The amortization of acquired intangibles included above was as follows:
For the Three Months Ended June 30,
2021 2020
(in thousands)
Cost of revenue $ 2,394 $ 1,065
Research and development - -
Sales and marketing 2,905 549
General and administrative 894 4
Total amortization of acquired intangibles $ 6,193 $ 1,618
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For the Six Months Ended June 30,
2021 2020
(in thousands)
Revenue:
Subscription and returns $ 291,760 $ 214,065
Professional services 30,908 13,865
Total revenue 322,668 227,930
Cost of revenue:
Subscription and returns 79,146 58,296
Professional services 14,200 9,288
Total cost of revenue(1) 93,346 67,584
Gross profit 229,322 160,346
Operating expenses:
Research and development(1) 79,267 52,691
Sales and marketing(1) 136,201 95,674
General and administrative(1) 66,095 41,710
Total operating expenses 281,563 190,075
Operating loss (52,241 ) (29,729 )
Other (income) expense, net 3,188 (4,860 )
Loss before income taxes (55,429 ) (24,869 )
Provision for income taxes 2,209 554
Net loss $ (57,638 ) $ (25,423 ) (1) The stock-based compensation expense included above was as follows:
For the Six Months Ended June 30,
2021 2020
(in thousands)
Cost of revenue $ 4,651 $ 2,673
Research and development 11,355 5,474
Sales and marketing 9,467 5,771
General and administrative 16,539 8,060
Total stock-based compensation $ 42,012 $ 21,978
The amortization of acquired intangibles included above was as follows:
For the Six Months Ended June 30,
2021 2020
(in thousands)
Cost of revenue $ 4,414 $ 2,295
Research and development - -
Sales and marketing 4,445 1,156
General and administrative 1,755 8Total amortization of acquired intangibles $ 10,614 $
3,459
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The following sets forth our results of operations for the periods presented as a percentage of our total revenue for those periods:
For the Three Months Ended June 30,
2021 2020
Revenue:
Subscription and returns 90 % 93 %
Professional services 10 % 7 %
Total revenue 100 % 100 %
Cost of revenue:
Subscription and returns 24 % 25 %
Professional services 5 % 4 %
Total cost of revenue 29 % 29 %
Gross profit 71 % 71 %
Operating expenses:
Research and development 24 % 23 %
Sales and marketing 43 % 40 %
General and administrative 21 % 17 %
Total operating expenses 87 % 80 %
Operating loss (16 )% (9 )%
Other (income) expense, net 1 % 0 %
Loss before income taxes (16 )% (9 )%
(Benefit from) provision for income taxes 0 % 0 %
Net loss (16 )% (9 )%
For the Six Months Ended June 30,
2021 2020
Revenue:
Subscription and returns 90 % 94 %
Professional services 10 % 6 %
Total revenue 100 % 100 %
Cost of revenue:
Subscription and returns 25 % 26 %
Professional services 4 % 4 %
Total cost of revenue 29 % 30 %
Gross profit 71 % 70 %
Operating expenses:
Research and development 25 % 23 %
Sales and marketing 42 % 42 %
General and administrative 20 % 18 %
Total operating expenses 87 % 83 %
Operating loss (16 )% (13 )%
Other (income) expense, net 1 % (2 )%
Loss before income taxes (17 )% (11 )%
Provision for income taxes 1 % 0 %
Net loss (18 )% (11 )%
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-------------------------------------------------------------------------------- Three Months EndedJune 30, 2021 Compared to Three Months EndedJune 30, 2020 Revenue For the Three Months Ended June 30, Change 2021 2020 Amount Percentage (dollars in thousands) Revenue: Subscription and returns$ 152,442 $ 108,519 $ 43,923 40 % Professional services 16,625 7,968 8,657 109 % Total revenue$ 169,067 $ 116,487 $ 52,580 45 % Total revenue for the three months endedJune 30, 2021 increased by$52.6 million , or 45%, compared to the three months endedJune 30, 2020 . Subscription and returns revenue for the three months endedJune 30, 2021 increased by$43.9 million , or 40%, compared to the three months endedJune 30, 2020 . Professional services revenue for the three months endedJune 30, 2021 increased by$8.7 million , or 109%, compared to the three months endedJune 30, 2020 . Growth in total revenue was due primarily to increased demand for our services from new and existing customers and recent acquisitions. The increase in total revenue for the three months endedJune 30, 2021 compared to the same period in 2020, was due primarily to$15.7 million from newU.S. customers,$15.4 million from recent acquisitions,$11.6 million from existingU.S. customers,$4.9 million from SST revenue growth, and$4.8 million from revenue growth in our international operations. Excluding recent acquisitions, total revenue for the three months endedJune 30, 2021 increased by$37.1 million , or 32%, compared to the three months endedJune 30, 2020 . Of the growth from recent acquisitions,$8.3 million was generated from subscriptions and returns and$7.1 million from professional services. Despite lower transaction rates for the three months endedJune 30, 2021 , SST revenue increased from the prior period due to higher transaction volume. Cost of Revenue For the Three Months Ended June 30, Change 2021 2020 Amount Percentage (dollars in thousands) Cost of revenue Subscription and returns$ 40,983 $ 28,779
$ 12,204 42 % Professional services 7,692 4,551 3,141 69 % Total cost of revenue$ 48,675 $ 33,330 $ 15,345 46 % Cost of revenue for the three months endedJune 30, 2021 increased by$15.3 million , or 46%, compared to the three months endedJune 30, 2020 . The increase in cost of revenue was due primarily to an increase of$10.7 million in employee-related costs from higher headcount, an increase of$1.5 million in software hosting costs, an increase of$1.3 million in amortization expense, an increase of$1.3 million in allocated overhead cost, and an increase of$0.5 million in depreciation expense. Cost of revenue headcount increased approximately 48% from the second quarter of 2020 to the second quarter of 2021. Excluding the impact of recent acquisitions, cost of revenue headcount increased approximately 29% due to our continued growth to support our solutions. Employee-related costs increased due primarily to a$7.5 million increase in salaries and benefits (including$4.5 million from recent acquisitions),$1.4 million increase in compensation expense related to our bonus plans, a$1.0 million increase in stock-based compensation expense, and a$0.8 million increase in contract and temporary employee costs. Software hosting costs increased due primarily to higher transaction volumes and incremental investment in data management and reporting tools. Amortization expense increased due primarily to acquired intangible assets from our recent acquisitions. Allocated overhead consists primarily of facility expenses and shared information technology expenses. Shared information technology expenses are higher compared to the prior period due primarily to higher headcount throughout our operations. Depreciation expense increased due primarily to an increase in capitalized software costs for projects placed into service in 2020. 44
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Gross Profit
For the Three Months Ended June 30, Change
2021 2020 Amount Percentage
(dollars in thousands)
Gross profit
Subscription and returns $ 111,459 $ 79,740 $ 31,719 40 %
Professional services 8,933 3,417 5,516 161 %
Total gross profit $ 120,392 $ 83,157 $ 37,235 45 %
Gross margin
Subscription and returns 73 % 73 %
Professional services 54 % 43 %
Total gross margin 71 % 71 %
Total gross profit for the three months ended June 30, 2021 increased by $37.2
million , or 45% compared to the three months ended June 30, 2020 . Total gross
margin was 71% for both the three months ended June 30, 2021 and the same period
of 2020.
Research and Development
For the Three Months Ended June
30, Change
2021 2020 Amount Percentage
(dollars in thousands)
Research and development $ 40,111 $ 26,844 $ 13,267 49 %
Research and development expenses for the three months ended June 30, 2021
increased by $13.3 million , or 49%, compared to the three months ended June 30,
2020 . The increase was due primarily to an increase of $11.1 million in
employee-related costs from higher headcount, an increase of $1.3 million in
third-party purchased software costs, and an increase of $0.7 million in outside
professional services expense.
Research and development headcount increased approximately 41% from the second
quarter of 2020 to the second quarter of 2021. Excluding the impact of recent
acquisitions, research and development headcount increased approximately 31%.
Employee-related costs increased due primarily to a $6.0 million increase in
salaries and benefits (including $1.9 million from recent acquisitions), a $3.0
million increase in stock-based compensation expense, including $0.8 million of
new PSU grants for executives, and a $2.1 million increase in compensation
expense related to our bonus plans.
Software costs increased due primarily to additional investment in information
technology security and reporting tools for product analysis, development, and
testing activities. Outside professional services expense increased due
primarily to an increase in third-party information technology security services
and third-party developer services for product integrations maintenance and
support.
Sales and Marketing
For the Three Months Ended June
30, Change
2021 2020 Amount Percentage
(dollars in thousands)
Sales and marketing $ 71,897 $ 46,040 $ 25,857 56 % Sales and marketing expenses for the three months endedJune 30, 2021 increased by$25.9 million , or 56%, compared to the three months endedJune 30, 2020 . The increase was due primarily to an increase of$14.1 million in employee-related costs, an increase of$4.8 million in marketing campaign expenses, an increase of$2.6 million for partner commission expense, an increase of$2.4 million in amortization expense, an increase of$1.2 million in allocated overhead cost, and an increase of$0.4 million in third-party purchased software costs. Sales and marketing headcount increased approximately 41% from the second quarter of 2020 to the second quarter of 2021. Excluding the impact of recent acquisitions, sales and marketing headcount increased approximately 33%. Employee-related costs increased due primarily to a$7.4 million increase in salaries and benefits (including$1.7 million from recent acquisitions), a$2.2 million increase in stock-based compensation expense, a$1.8 million increase in sales commission expense, a$1.3 million increase in contract and temporary employee costs, and a$1.3 million increase in compensation expense related to our bonus plans. 45
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Marketing campaign expenses increased due primarily to increased spending on
market research, brand awareness, online advertising and outbound direct mail
advertising. Partner commission expense increased due primarily to higher
revenues. Amortization expense increased due primarily to acquired intangible
assets from our recent acquisitions. Third-party purchased software costs
increased due primarily to additional investment in lead generation technology.
General and Administrative
For the Three Months Ended June
30, Change
2021 2020 Amount Percentage
(dollars in thousands)
General and administrative $ 35,244 $ 20,322 $ 14,922 73 % General and administrative expenses for the three months endedJune 30, 2021 increased by$14.9 million , or 73%, compared to the three months endedJune 30, 2020 . The increase was due primarily to an increase of$9.5 million in employee-related costs, an increase of$3.0 million in outside professional services expense, an increase of$0.9 million in amortization expense, an increase of$0.5 million in third-party purchased software costs, and an increase of$0.5 million in insurance, partially offset by a decrease of$0.7 million in non-income tax expense. General and administrative headcount increased approximately 36% from the second quarter of 2020 to the second quarter of 2021. Excluding the impact of recent acquisitions, general and administrative headcount increased approximately 29%. Employee-related costs increased due primarily to a$2.8 million increase in salaries and benefits (including$0.9 million from recent acquisitions), a$4.8 million increase in stock-based compensation expense, including$3.4 million of PSU grants for executives,$1.5 million increase in compensation expense related to our bonus plans, and a$0.4 million increase in contract and temporary employee costs. Outside professional services expenses increased due primarily to increased investment in employee engagement, principally satisfaction surveys, recruiting services, and training programs and, to a lesser extent, acquisition related costs. Amortization increased due to acquired intangibles from our recent acquisitions. Software costs increased due primarily to an increase in the number of licenses purchased and higher subscription fees for key financial and human resources information system applications. Insurance expenses increased due to higher insurance premiums in the current year. Non-income tax expense decreased due primarily to lower state indirect taxes.
Total Other (Income) Expense, Net
For the Three Months Ended June 30, Change
2021 2020 Amount
(dollars in thousands)
Other (income) expense, net
Interest income $ (23 ) $ (168 ) $ 145
Other (income) expense, net 961 122 839
Total other (income) expense, net $ 938 $ (46 ) $ 984
Total other (income) expense, net for the three months ended June 30, 2021 was
$0.9 million of expense compared to approximately breakeven for the three months
ended June 30, 2020 . Interest income decreased due primarily to a decline in the
interest rate earned on our cash and cash equivalents. Other (income) expense,
net was $1.0 million other expense for the three months ended June 30, 2021
compared to $0.1 million other expense for the three months ended June 30, 2020 ,
due primarily to changes to our earnout liabilities. We estimate the fair value
of earnout liabilities related to business combinations quarterly. During the
three months ended June 30, 2021 , the adjustments to fair value increased the
carrying value of the earnout liability for our acquisitions of TTR and Business
Licenses, resulting in other expense of $1.2 million . During the three months
ended June 30, 2020 , the adjustments to fair value increased the carrying value
of the earnout liability for our acquisition of Portway, resulting in other
expense of $0.2 million .
46
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(Benefit from) Provision for Income Taxes
For the Three Months Ended June 30, Change
2021 2020 Amount
(dollars in thousands)
(Benefit from) provision for income taxes $ (148 ) $ 137 $ (285 )
The benefit from income taxes for the three months ended June 30, 2021 was $0.1
million compared to a provision for income taxes of $0.1 million for the three
months ended June 30, 2020 . The effective income tax rate was 0.5% for the three
months ended June 30, 2021 compared to (1.4)% for the three months ended June
30, 2020 . The effective tax rate in both quarters differ from the U.S. Federal
statutory rate due primarily to providing a valuation allowance on deferred tax
assets. The decrease in expense and increase in effective rate is due primarily
to 2021 tax benefits resulting from the Inposia acquisition (see Note 5 in the
Notes to Consolidated Financial Statements).
We have assessed our ability to realize our deferred tax assets and have
recorded a valuation allowance against such assets to the extent that, based on
the weight of all available evidence, it is more likely than not that all or a
portion of the deferred tax assets will not be realized. In assessing the
likelihood of future realization of our deferred tax assets, we placed
significant weight on our history of generating tax losses in the U.S. , U.K , and
Brazil , including in the first half of 2021. As a result, we have a full
valuation allowance against our net deferred tax assets, including net operating
loss carryforwards, and research and development tax credits. We expect to
maintain a full valuation allowance for the foreseeable future.
Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020
Revenue
For the Six Months Ended June 30, Change
2021 2020 Amount Percentage
(dollars in thousands)
Revenue:
Subscription and returns $ 291,760 $ 214,065 $ 77,695 36 %
Professional services 30,908 13,865 17,043 123 %
Total revenue $ 322,668 $ 227,930 $ 94,738 42 %
Total revenue for the six months ended June 30, 2021 increased by $94.7 million
or 42%, compared to the six months ended June 30, 2020 . Subscription and returns
revenue for the six months ended June 30, 2021 increased by $77.7 million , or
36%, compared to the six months ended June 30, 2020 . Professional services
revenue for the six months ended June 30, 2021 increased by $17.0 million , or
123%, compared to the six months ended June 30, 2020 .
Growth in total revenue was due primarily to increased demand for our services
from new and existing customers and recent acquisitions. The increase in total
revenue for the six months ended June 30, 2021 compared to the same period in
2020, was due primarily to $26.7 million from new U.S. customers, $26.0 million
from recent acquisitions, $23.3 million from existing U.S. customers, $10.9
million from SST revenue growth, and $8.2 million attributable to revenue growth
in our international operations. Excluding recent acquisitions, total revenue
for the six months ended June 30, 2021 increased by $68.9 million , or 30%,
compared to the six months ended June 30, 2020 . Of the growth from recent
acquisitions, $14.0 million was generated from subscriptions and returns and
$12.0 million from professional services. Despite lower transaction rates for
the six months ended June 30, 2021 , SST revenue increased from the prior period
due to higher transaction volume.
Cost of Revenue
For the Six Months Ended June 30, Change
2021 2020 Amount Percentage
(dollars in thousands)
Cost of revenue
Subscription and returns $ 79,146 $ 58,296 $ 20,850 36 %
Professional services 14,200 9,288 4,912 53 %
Total cost of revenue $ 93,346 $ 67,584 $ 25,762 38 %
47
-------------------------------------------------------------------------------- Cost of revenue for the six months endedJune 30, 2021 increased by$25.8 million , or 38%, compared to the six months endedJune 30, 2020 . The increase in cost of revenue in absolute dollars was due primarily to an increase of$20.2 million in employee-related costs from higher headcount, an increase of$2.1 million in amortization expense, an increase of$1.9 million in allocated overhead cost, an increase of$0.9 million in depreciation expense, and an increase of$0.7 million in software hosting costs. Cost of revenue headcount increased approximately 48% from the second quarter of 2020 to the second quarter of 2021. Excluding the impact of recent acquisitions, cost of revenue headcount increased approximately 29% due to continued growth to support our solutions. Employee-related costs increased due primarily to a$14.9 million increase in salaries and benefits (including$8.0 million from recent acquisitions),$2.4 million increase in compensation expense related to our bonus plans, a$2.0 million increase in stock-based compensation expense, and a$1.4 million increase in contract and temporary employee costs. Amortization expense increased due primarily to acquired intangible assets from our recent acquisitions. Allocated overhead consists primarily of facility expenses and shared information technology expenses. Shared information technology expenses are higher compared to the prior period due primarily to higher headcount throughout our operations. Depreciation expense increased due primarily to an increase in capitalized software costs for projects placed into service in 2020. Software hosting costs increased due primarily to higher transaction volumes and incremental investment in data management and reporting tools. Gross Profit For the Six Months Ended June 30, Change 2021 2020 Amount Percentage (dollars in thousands) Gross profit Subscription and returns$ 212,614 $ 155,769 $ 56,845 36 % Professional services 16,708 4,577 12,131 265 % Total gross profit$ 229,322 $ 160,346 $ 68,976 43 % Gross margin Subscription and returns 73 % 73 % Professional services 54 % 33 % Total gross margin 71 % 70 % Total gross profit for the six months endedJune 30, 2021 increased$69.0 million , or 43% compared to the six months endedJune 30, 2020 . Total gross margin was 71% for the six months endedJune 30, 2021 compared to 70% for the same period of 2020. This increase in gross margin was due primarily to improved service delivery and efficiency inU.S. professional services. Research and Development For the Six Months Ended June 30, Change 2021 2020 Amount Percentage (dollars in thousands) Research and development $ 79,267 $ 52,691$ 26,576 50 % Research and development expenses for the six months endedJune 30, 2021 increased by$26.6 million , or 50%, compared to the six months endedJune 30, 2020 . The increase was due primarily to an increase of$22.3 million in employee-related costs from higher headcount, an increase of$3.4 million in third-party purchased software costs, and an increase of$0.9 million in outside professional services expense. Research and development headcount increased approximately 41% from the second quarter of 2020 to the second quarter of 2021. Excluding the impact of recent acquisitions, research and development headcount increased approximately 31%. Employee-related costs increased due primarily to a$13.0 million increase in salaries and benefits (including$2.9 million from recent acquisitions), a$5.9 million increase in stock-based compensation expense, including$1.3 million of PSU grants for executives, and a$3.7 million increase in compensation expense related to our bonus plans. Software costs increased due primarily to additional investment in information technology security and reporting tools for product analysis, development, and testing activities. Outside professional services expense increased due primarily to an increase in third-party information technology security services and third-party developer services for product integrations maintenance and support. 48
--------------------------------------------------------------------------------
Sales and Marketing
For the Six Months Ended June 30, Change
2021 2020 Amount Percentage
(dollars in thousands)
Sales and marketing $ 136,201 $ 95,674 $ 40,527 42 %
Sales and marketing expenses for the six months ended June 30, 2021 increased by
$40.5 million , or 42%, compared to the six months ended June 30, 2020 . The
increase was due primarily to an increase of $22.9 million in employee-related
costs, an increase of $6.6 million in marketing campaign expenses, an increase
of $4.1 million for partner commission expense, an increase of $3.3 million in
amortization expense, an increase of $1.9 million in allocated overhead cost, an
increase of $1.0 million in outside professional services expense, and an
increase of $0.8 million in third-party purchased software costs.
Sales and marketing headcount increased approximately 41% from the second
quarter of 2020 to the second quarter of 2021. Excluding the impact of recent
acquisitions, sales and marketing headcount increased approximately 33%.
Employee-related costs increased due primarily to a $13.8 million increase in
salaries and benefits (including $2.7 million from recent acquisitions), a $3.9
million increase in sales commission expense, a $3.7 million increase in
stock-based compensation expense, a $2.4 million increase in contract and
temporary employee costs, and a $2.0 million increase in compensation expense
related to our bonus plans, partially offset by a $2.9 million decrease in
travel costs. Travel costs decreased due primarily to cancelling all in-person
customer activities and events beginning in March of 2020 because of the
COVID-19 pandemic. During the second half of 2021, we expect to gradually resume
in-person customer activities and events, where it is safe to do so, which will
increase travel costs that were suspended during the COVID-19 pandemic.
Marketing campaign expenses increased due primarily to increased spending on
market research, brand awareness, online advertising, and outbound direct mail
advertising. Partner commission expense increased due primarily to higher
revenues. Amortization expense increased due primarily to acquired intangible
assets from our recent acquisitions. Outside professional services expenses
increased due primarily to increased third-party consulting services to improve
the customer experience during onboarding, to develop prospective customer data,
to produce brand recognition and positioning studies, and services to integrate
websites of recent acquisitions. Third-party purchased software costs increased
due primarily to increased investment in lead generation technology.
General and Administrative
For the Six Months Ended June 30, Change
2021 2020 Amount Percentage
(dollars in thousands)
General and administrative $ 66,095 $ 41,710 $ 24,385 58 %
General and administrative expenses for the six months ended June 30, 2021
increased by $24.4 million , or 58%, compared to the six months ended June 30,
2020 . The increase was due primarily to an increase of $17.2 million in
employee-related costs, an increase of $3.6 million in outside professional
services expense, an increase of $1.7 million in amortization expense, and a
$0.9 million increase in insurance, partially offset by a $1.2 million decrease
in non-income tax expense and a $0.7 million expense to settle a contract
dispute in the prior year period.
General and administrative headcount increased approximately 36% from the second
quarter of 2020 to the second quarter of 2021. Excluding the impact of recent
acquisitions, general and administrative headcount increased approximately 29%.
Employee-related costs increased due primarily to a $6.3 million increase in
salaries and benefits (including $1.8 million from recent acquisitions), a $8.5
million increase in stock-based compensation expense, including $5.7 million of
PSU grants for executives, a $2.5 million increase in compensation expense
related to our bonus plans, and a $0.6 million increase in contract and
temporary employee costs, partially offset by a $0.6 million decrease in travel
costs.
Outside professional services expenses increased due primarily to increased
investment in employee engagement, principally satisfaction surveys, support
services, recruiting services, training programs and, to a lesser extent,
acquisition related costs. Amortization increased due to acquired intangibles
from our recent acquisitions. Insurance expenses increased due to higher
insurance premiums in the current year. Non-income tax expense decreased due
primarily to lower state and foreign indirect taxes. During the six months ended
June 30, 2020 , we agreed to settle a contract dispute, with no comparable costs
in the current period.
49
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Total Other (Income) Expense, Net
For the Six Months Ended June 30, Change
2021 2020 Amount
(dollars in thousands)
Other (income) expense, net
Interest income $ (47 ) $ (1,610 ) $ 1,563
Other (income) expense, net 3,235 (3,250 ) 6,485
Total other (income) expense, net $ 3,188 $ (4,860 ) $ 8,048
Total other income (expense), net for the six months ended June 30, 2021 was
$3.2 million of expense compared to $4.9 million of income for the six months
ended June 30, 2020 . Interest income decreased due to a decline in the interest
rate earned on our cash and cash equivalents. Other income (expense), net was
$3.2 million of expense for the six months ended June 30, 2021 compared to $3.3
million of income for the six months ended June 30, 2020 , due primarily to
changes to our earnout liabilities. We estimate the fair value of earnout
liabilities related to business combinations quarterly. During the first half of
2021, the adjustments to fair value increased the carrying value of the earnout
liability for our acquisitions of TTR and Business Licenses, resulting in other
expense of $2.5 million . During the first half of 2020, the adjustments to fair
value decreased the carrying value of the earnout liability for our acquisition
of Portway, resulting in other income of $2.3 million .
Provision for Income Taxes
For the Six Months Ended June 30, Change
2021 2020 Amount
(dollars in thousands)
Provision for income taxes $ 2,209 $ 554 $ 1,655
The provision for income taxes for the six months ended June 30, 2021 was $2.2
million compared to a provision for income taxes of $0.6 million for the six
months ended June 30, 2020 . The effective income tax rate was (4.0)% for the six
months ended June 30, 2021 compared to (2.2)% for the six months ended June 30,
2020 . The effective tax rate in both quarters differs from the U.S. Federal
statutory rate due primarily to providing a valuation allowance on deferred tax
assets. The increase in tax expense and increase in effective rate is due
primarily to measurement period adjustments related to the 2020 acquisition of
TTR recorded during the first quarter of 2021 (see Note 5 in the Notes to
Consolidated Financial Statements).
We have assessed our ability to realize our deferred tax assets and have
recorded a valuation allowance against such assets to the extent that, based on
the weight of all available evidence, it is more likely than not that all or a
portion of the deferred tax assets will not be realized. In assessing the
likelihood of future realization of our deferred tax assets, we placed
significant weight on our history of generating tax losses in the U.S. , U.K , and
Brazil , including in the first half of 2021. As a result, we have a full
valuation allowance against our net deferred tax assets, including net operating
loss carryforwards, and research and development tax credits. We expect to
maintain a full valuation allowance for the foreseeable future.
Liquidity and Capital Resources
We require cash to fund our operations, including outlays for infrastructure
growth, acquisitions, geographic expansion, expanding our sales and marketing
activities, research and development efforts, and working capital for our
growth. We have financed our operations primarily through cash received from
customers for our solutions and public offerings of our common stock. As of June
30, 2021 , we had $639.5 million of cash and cash equivalents, most of which was
held in money market accounts.
Borrowings
As of
Future Cash Requirements
As ofJune 30, 2021 , our cash and cash equivalents included proceeds from our previous public offerings of common stock. We intend to continue to increase our operating expenses and capital expenditures to support the growth in our business and operations. We expect to also use our cash and cash equivalents to acquire complementary businesses, products, services, technologies, or other assets. We believe that our existing cash and cash equivalents of$639.5 million as ofJune 30, 2021 will be sufficient to meet our anticipated cash needs for at least the next 12 months. Our financial position and liquidity are, and will be, influenced by a variety of 50
-------------------------------------------------------------------------------- factors, including our growth rate, the timing and extent of spending to support research and development efforts, the continued expansion of sales and marketing spending, the introduction of new and enhanced solutions, the cash paid for any acquisitions, and the continued market acceptance of our solutions.
The following table shows our cash flows from operating activities, investing activities, and financing activities for the stated periods:
For the Six Months Ended June 30,
2021 2020
(in thousands)
Cash provided by (used in):
Operating Activities $ (2,697 ) $ (16,974 )
Investing Activities (34,532 ) (3,556 )
Financing Activities (1,331 ) 25,333
Operating Activities
Our largest source of operating cash is cash collections from our customers for
subscriptions and returns services. Our primary uses of cash from operating
activities are for employee-related expenditures, commissions paid to our
partners, marketing expenses, technology costs such as software hosting costs,
and facilities expenses. Cash used in operating activities is comprised of our
net loss adjusted for certain non-cash items, including stock-based
compensation, depreciation and amortization, other non-cash income and expense
items, and net changes in operating assets and liabilities.
For the six months ended June 30, 2021 , net cash used in operating activities
was $2.7 million compared to net cash used of $17.0 million for the six months
ended June 30, 2020 . The decrease in cash used in operations of $14.3 million
was due primarily to an increase in cash collected from customers as demand for
our subscription services continued to grow and to extended payment terms in the
prior year that were provided to some of our customers at the onset of the
COVID-19 pandemic.
Investing Activities
Our investing activities primarily include cash outflows related to purchases of property and equipment, additions of capitalized software, and from time to-time, cash paid for asset and business acquisitions.
For the six months endedJune 30, 2021 , cash used in investing activities was$34.5 million , compared to cash used of$3.6 million for the six months endedJune 30, 2020 . The increase in cash used in investing activities of$31.0 million was due primarily to an increase in cash paid for acquisitions of businesses of$24.0 million , an increase in additions of capitalized software of$4.4 million , an increase in cash paid for acquired intangible assets of$1.5 million , and an increase in capital expenditures of$1.1 million . In the first half of 2021, we acquired Inposia and Davo for total cash consideration, net of cash acquired of$22.1 million and paid$1.9 million of additional purchase price to finalize net working capital and other adjustments related to the 2020 acquisitions of TTR and Impendulo.
Financing Activities
Our financing activities primarily include cash inflows and outflows from issuance and repurchases of capital stock, our employee stock purchase plan, deferred cash payments made in connections with acquisitions of businesses, and changes in customer fund obligations. For the six months endedJune 30, 2021 , cash used in financing activities was$1.3 million compared to cash provided of$25.3 million for the six months endedJune 30, 2020 . This increase in cash used in financing activities of$26.6 million was due primarily to$20.8 million cash paid in the six months endedJune 30, 2021 for purchase price holdbacks related to the 2020 acquisition of TTR and the 2019 acquisition ofPortway International Inc. , a$15.2 million decrease in cash proceeds from exercise of stock options, and a$0.6 million increase in deferred cash payments related to asset acquisition earnouts. These cash outflows were partially offset by a$4.9 million increase in net cash flows related to customer fund obligations in the first half of 2021 compared to the prior period, a$3.8 million decrease in deferred cash payments related to business combination earnouts, and a$1.4 million increase in cash proceeds from common stock purchased under our employee stock purchase plan.
Funds Held from Customers and Customer Fund Obligations
We maintain trust accounts withFDIC -insured financial institutions, which allows our customers to outsource their tax remittance functions to us. We have legal ownership over the accounts utilized for this purpose. Funds held from customers are not commingled with our operating funds but are typically deposited with funds also held on behalf of our other customers. Funds held from customers 51
-------------------------------------------------------------------------------- represents restricted cash equivalents that, based upon our intent, are restricted solely for satisfying the obligations to remit funds relating to our tax remittance services. Changes in customer funds assets account that relate to activities paying for the trust operations, such as banking fees, are included as cash flows from operating activities.
Customer funds obligations represent our contractual obligations to remit collected funds to satisfy customer tax payments. Customer funds obligations are reported as a current liability on the consolidated balance sheets, as the obligations are expected to be settled within one year. Changes in customer funds obligations liability are presented as cash flows from financing activities.
Contractual Obligations and Commitments
During the first half of 2021, our purchase commitments increased approximately
$51.2 million compared to December 31, 2020 , primarily related to software
hosting and software license subscriptions that extend up to three years beyond
June 30, 2021 . There were no other material changes to our contractual
obligations as of June 30, 2021 compared to December 31, 2020 .
Use and Reconciliation of Non-GAAP Financial Measures
In addition to our results determined in accordance with GAAP, we have disclosed
non-GAAP cost of revenue, non-GAAP gross profit, non-GAAP gross margin, non-GAAP
research and development expense, non-GAAP sales and marketing expense, non-GAAP
general and administrative expense, non-GAAP operating income (loss), non-GAAP
net income (loss), free cash flow, and calculated billings, which are all
non-GAAP financial measures. We have provided tabular reconciliations of each
non-GAAP financial measure to its most directly comparable GAAP financial
measure.
• We calculate non-GAAP cost of revenue, non-GAAP research and development
expense, non-GAAP sales and marketing expense, and non-GAAP general and
administrative expense as GAAP cost of revenue, GAAP research and
development expense, GAAP sales and marketing expense, and GAAP general and
administrative expense before stock-based compensation expense and the
amortization of acquired intangible assets included in each of the expense
categories.
• We calculate non-GAAP gross profit as GAAP gross profit before thestock-based compensation expense and amortization of acquired intangibles
included in cost of revenue. We calculate non-GAAP gross margin as GAAP
gross margin before the impact of stock-based compensation expense and the
amortization of acquired intangibles included in cost of revenue as a
percentage of revenue.
• We calculate non-GAAP operating income (loss) as GAAP operating loss before
stock-based compensation expense, amortization of acquired intangibles, and
goodwill impairments. We calculate non-GAAP net income (loss) as GAAP net
loss before stock-based compensation expense, amortization of acquired
intangibles, and goodwill impairments.
• We define free cash flow as net cash used in operating activities less cash
used for the purchases of property and equipment and capitalized software
development costs.
• We define calculated billings as total revenue plus the changes in deferred
revenue and contract liabilities in the period, excluding the acquisition
date impact of deferred revenue and contract liabilities assumed in a
business combination. Because we generally recognize subscription revenue
ratably over the subscription term, calculated billings can be used to
measure our subscription sales activity for a particular period, to compare
subscription sales activity across particular periods, and as a potential
indicator of future subscription revenue, the actual timing of which will be
affected by several factors, including subscription start date and duration.
Management uses these non-GAAP financial measures to understand and compare operating results across accounting periods, for internal budgeting and forecasting purposes, and to evaluate financial performance and liquidity. We believe that non-GAAP financial measures provide useful information to investors and others in understanding and evaluating our results, prospects, and liquidity period-over-period without the impact of certain items that do not directly correlate to our performance and that may vary significantly from period to period for reasons unrelated to our operating performance, as well as when comparing our financial results to those of other companies. Our definitions of these non-GAAP financial measures may differ from the definitions used by other companies and therefore comparability may be limited. In addition, other companies may not publish these or similar metrics. Thus, our non-GAAP financial measures should be considered in addition to, not as a substitute for, or in isolation from, measures prepared in accordance with GAAP.
We encourage investors and others to review our financial information in its entirety, not to rely on any single financial measure and to view non-GAAP financial measures in conjunction with the related GAAP financial measure.
52
--------------------------------------------------------------------------------The following schedules reflect our non-GAAP financial measures and reconcile our non-GAAP financial measures to the related GAAP financial measures:
For the Three Months Ended June 30, For the Six Months Ended June 30,
2021 2020 2021 2020
Reconciliation of Non-GAAP Cost of Revenue:
Cost of revenue $ 48,675 $ 33,330 $ 93,346 $ 67,584
Stock-based compensation expense (2,444 ) (1,477 ) (4,651 ) (2,673 )
Amortization of acquired intangibles (2,394 ) (1,065 ) (4,414 ) (2,295 )
Non-GAAP Cost of Revenue $ 43,837 $ 30,788 $ 84,281 $ 62,616
Reconciliation of Non-GAAP Gross Profit:
Gross Profit $ 120,392 $ 83,157 $ 229,322 $ 160,346
Stock-based compensation expense 2,444 1,477 4,651 2,673
Amortization of acquired intangibles 2,394 1,065 4,414 2,295
Non-GAAP Gross Profit $ 125,230 $ 85,699 $ 238,387 $ 165,314
Reconciliation of Non-GAAP Gross Margin:
Gross margin 71 % 71 % 71 % 70 %
Stock-based compensation expense as a
percentage of revenue 1 % 1 % 1 % 1 %
Amortization of acquired intangibles as a
percentage of revenue 1 % 1 % 1 % 1 %
Non-GAAP Gross Margin 74 % 74 % 74 % 73 %
Reconciliation of Non-GAAP Research and
Development Expense:
Research and development $ 40,111 $ 26,844 $ 79,267 $ 52,691
Stock-based compensation expense (6,069 ) (3,080 ) (11,355 ) (5,474 )
Amortization of acquired intangibles - - - -
Non-GAAP Research and Development Expense $ 34,042 $ 23,764 $ 67,912 $ 47,217
Reconciliation of Non-GAAP Sales and
Marketing Expense:
Sales and marketing $ 71,897 $ 46,040 $ 136,201 $ 95,674
Stock-based compensation expense (5,201 ) (2,956 ) (9,467 ) (5,771 )
Amortization of acquired intangibles (2,905 ) (549 ) (4,445 ) (1,156 )
Non-GAAP Sales and Marketing Expense $ 63,791 $ 42,535 $ 122,289 $ 88,747
Reconciliation of Non-GAAP General and
Administrative Expense:
General and administrative $ 35,244 $ 20,322 $ 66,095 $ 41,710
Stock-based compensation expense (9,521 ) (4,734 ) (16,539 ) (8,060 )
Amortization of acquired intangibles (894 ) (4 ) (1,755 ) (8 )
Non-GAAP General and Administrative Expense $ 24,829 $ 15,584 $ 47,801 $ 33,642
Reconciliation of Non-GAAP Operating Income
(Loss):
Operating loss $ (26,860 ) $ (10,049 ) $ (52,241 ) $ (29,729 )
Stock-based compensation expense 23,235 12,247 42,012 21,978
Amortization of acquired intangibles 6,193 1,618 10,614 3,459
Non-GAAP Operating Income (Loss) $ 2,568 $ 3,816 $ 385 $ (4,292 )
Reconciliation of Non-GAAP Net Income
(Loss):
Net loss $ (27,650 ) $ (10,140 ) $ (57,638 ) $ (25,423 )
Stock-based compensation expense 23,235 12,247 42,012 21,978
Amortization of acquired intangibles 6,193 1,618 10,614 3,459
Non-GAAP Net Income (Loss) $ 1,778 $ 3,725 $ (5,012 ) $ 14
Free cash flow:
Net cash provided by (used in) operating
activities(1) $ 25,550 $ 7,497 $ (2,697 ) $ (16,974 )
Less: Purchases of property and
equipment(2) (1,704 ) (1,109 ) (3,070 ) (1,992 )
Less: Capitalized software development
costs(2) (3,642 ) (847 ) (5,953 ) (1,564 )
Free cash flow $ 20,204 $ 5,541 $ (11,720 ) $ (20,530 ) (1)We have presented corrected net cash used in operating activities for the three and six months ended
53
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The following table reflects calculated billings and reconciles to GAAP
revenues. In addition to the defined reconciling items for calculated billings,
the second quarter of 2021 and the fourth quarter of 2020 include reconciling
adjustments to exclude the acquisition-date fair value of deferred revenue
assumed in business combinations.
Three Months Ended
Jun 30, Mar 31, Dec 31, Sep 30, Jun 30, Mar 31, Dec 31, Sep 30,
2021 2021 2020 2020 2020 2020 2019 2019
(in thousands)
Total revenue $ 169,067 $ 153,601 $ 144,760 $ 127,879 $ 116,487 $ 111,443 $ 107,627 $ 98,525
Add:
Deferred revenue
(end of period) 239,395 225,531 209,690 180,640 167,719 165,369 161,241 148,466
Contract liabilities
(end of period) 11,406 12,466 10,134 7,673 6,195 6,330 5,197 4,843
Less:
Deferred revenue
(beginning of
period) (225,531 ) (209,690 ) (180,640 ) (167,719 ) (165,369 ) (161,241 ) (148,466 ) (138,811 )
Contract liabilities
(beginning of
period) (12,466 ) (10,134 ) (7,673 ) (6,195 ) (6,330 ) (5,197 ) (4,843 ) (4,508 )
Deferred revenue
assumed in
business
combinations (886 ) - (9,194 ) - - - - -
Calculated billings $ 180,985 $ 171,774 $ 167,077 $ 142,278 $ 118,702 $ 116,704 $ 120,756 $ 108,515 Critical Accounting Policies and Estimates
There have been no material updates or changes to our critical accounting policies and estimates compared to the critical accounting policies and estimates described in our 2020 Annual Report.
Recent Accounting Pronouncements
For further information on recent accounting pronouncements, refer to Note 2 in the consolidated financial statements contained within this Quarterly Report on Form 10-Q.
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