CLOUDFLARE, INC. 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. In addition to historical financial information, the following discussion contains forward-looking statements that are based upon current plans, expectations, and beliefs that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including the impact of the COVID-19 pandemic and those other factors discussed in the section titled "Risk Factors" and in other parts of this Quarterly Report on Form 10-Q. Our fiscal year end isDecember 31 . OverviewCloudflare's mission is to help build a better Internet. We have built a global network that delivers a broad range of services to businesses of all sizes and in all geographies-making them more secure, enhancing the performance of their business-critical applications, and eliminating the cost and complexity of managing individual network hardware. Our network serves as a scalable, easy-to-use, unified control plane to deliver security, performance, and reliability across their on-premise, hybrid, cloud, and software-as-a-service (SaaS) applications. Our Business Model Our business model benefits from our ability to serve the needs of all customers ranging from individual developers to the largest enterprises, in a cost-effective manner. Our products are easy to deploy and allow for rapid and efficient onboarding of new customers and expansion of our relationships with customers over time. Given the large customer base we have and the immense amount of Internet traffic that we manage, we are able to negotiate mutually beneficial agreements with Internet Service Providers (ISPs) that allow us to place our equipment directly in their data centers, which drives down our bandwidth and co-location expenses. This symbiotic relationship that we have with ISPs and the efficiency of our serverless network architecture allows us to introduce new products on our network at low marginal cost. We generate revenue primarily from sales to our customers of subscriptions to access our network and products. We offer a variety of plans to our free and paying customers depending on their required features and functionality. •Pay-as-you-go customers. For our pay-as-you-go customers, we offer the ability to purchase our products through our website. We make our pay-as-you-go product solutions available in several configurations. For customers securing and accelerating their Internet properties, we offer Pro and Business subscription plans through our website per registered domain, and it is common for customers to purchase subscriptions to cover multiple Internet properties (e.g., domains, websites, application programming interfaces (APIs), and mobile applications). Our Pro plan provides basic functionality to improve the security, performance, and reliability of applications, such as enhanced web application firewall and image and mobile optimization. Our Business plan includes additional functionality often required by larger organizations, including service level agreements of up to 100% uptime, dynamic content acceleration, and enhanced customer support. For pay-as-you-go customers who need a scalable zero trust solution to secure users and internal resources, we make ourCloudflare for Team products available on a per seat basis. In addition, for developers building serverless applications, we offer ourCloudflare Workers to our pay-as-you-go customers on a usage-based plan that is metered by requests and execution time. Our implementation period for pay-as-you-go customers is extremely short with most customers implementing our services within a matter of minutes. Pay-as-you-go customers can subscribe to more than one solution and purchase add-on products and network functionality we offer to meet their more advanced needs. Our pay-as-you-go customers typically pay with a credit card on a monthly basis. •Contracted customers. Our contracted customers, which consist of customers that enter into contracts for our Enterprise subscription plan, have contracts that range from one to three years and are typically billed on a monthly basis. Our contracted customer sales cycle typically lasts less than one quarter. Our agreements with contracted customers are tailored and priced to meet their varying needs and requirements. Enterprise subscription plan agreements for our contracted customers generally include a base subscription and a smaller portion based on usage. Key elements of our business model include: 39
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•Free customer base. Free customers are an important part of our business. These customers, like our pay-as-you-go customers, sign up for our service through our website and are typically individual developers, early stage startups, hobbyists, and other users. Our free customers create scale, serve as efficient brand marketing, and help us attract developers, customers, and potential employees. These free customers expose us to diverse traffic, threats, and problems, often allowing us to see potential security, performance, and reliability issues at the earliest stage. This knowledge allows us to improve our products and deliver more effective solutions to our paying customers. In addition, the added scale and diversity of this traffic makes us valuable to a diverse set of global ISPs, improving the breadth and economic terms of our interconnections, bandwidth costs, and co-location expenses. Finally, the enthusiastic engagement of our free customer base represents a "virtual quality assurance" function that allows us to maintain a high rate of product innovation, while ensuring our products are extensively tested in real world environments before they are deployed to our paying customers. •Significant investment in ongoing product development. We invest significantly in research and development. Our focus on research and development allows us to continually enhance the capabilities and functionality of our global network with new products that are innovative and powerful and can be quickly adopted by our customers and helps us grow our free and paying customer base, which allows us to serve a greater portion of the world's Internet traffic. That in turn provides us with greater knowledge and insight into the challenges that Internet users face every day. •Investments in our network for growth. We believe that the size, sophistication, and distributed nature of our network provide us with a significant competitive advantage. We intend to continue to make substantial investments in network infrastructure to support the growth of our business. As we invest in our network, we believe the service that we can provide our customers and the insight and knowledge that we can gain will continue to grow. •Efficient go-to-market model. We have built an efficient go-to market model that reflects the flexibility and ease of use our products offers to our customers around the world. This has enabled us to acquire new customers as well as to expand within our existing customer base in a rapid, cost-effective manner. In particular, we have invested heavily in our contracted customer sales efforts. •New customer acquisition. We believe that any person or business that relies on the Internet to deliver products, services, or content can be aCloudflare customer. As such, we are focused on driving an increased number of customers on our infrastructure platform to support our long-term growth. Through our pay-as-you-go offering, a customer can subscribe to one of our many plans and begin using our network within minutes, with minimal technical skill and no professional services. This has allowed us to acquire a large portion of paying customers very rapidly and at significantly lower customer acquisition costs. Additionally, we continue to invest to build our direct sales force and improve the sophistication of our sales operations. •Expansion of our existing customers. We believe that our network enables a large opportunity for growth within our existing customer base given the breadth of products we offer on our infrastructure platform. Our relationships with customers often start with servicing a portion of their overall network needs and expand over time as they realize the significant value we deliver. Once a customer has adopted one product on our network it can easily add additional products with a single click. As we add more products and functionality to our network, we see opportunities to drive upsell as customers seek to consolidate onto one infrastructure platform to meet all of their security, performance, and reliability network requirements. •International reach. Our global network, with a presence in more than 250 cities and over 100 countries worldwide, has helped to foster our strong international growth. International markets represented 47% and 48% of our revenue in the three months endedSeptember 30, 2021 and 2020, respectively, and we intend to continue to invest in our international growth as a strategy to expand our customer base around the world. Opportunities, Challenges, and Risks
We believe that the growth of our business and our future success are dependent upon many factors, including growing our customer base, expanding our relationships with existing paying customers, developing and
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successfully launching new products, expanding into additional market segments,
expanding our base of free customers, and developing and maintaining favorable
peering and co-location relationships. Each of these factors presents
significant opportunities for us, but also poses material challenges and risks
that we must successfully address in order to grow our business and improve our
operating results. We expect that addressing these challenges and risks will
increase our operating expenses significantly over the next several years. The
timing of our future profitability, if we achieve profitability at all, will
depend upon many variables, including the success of our growth strategies and
the timing and size of investments and expenditures that we choose to undertake,
as well as market growth and other factors that are not within our control. In
addition, we must comply with complex, uncertain, and evolving laws, rules, and
regulatory requirements across federal, state, and international jurisdictions.
If we fail to successfully address these challenges, risks, and variables, our
business, operating results, financial condition, and prospects may be adversely
affected.
COVID-19 Update
The rapid spread of the COVID-19 virus and variants, such as the Delta variant,
have resulted in authorities around the world periodically implementing and
relaxing numerous measures to contain the virus, such as travel restrictions and
bans, quarantines, shelter-in-place orders, and mandated business closures. The
COVID-19 pandemic and these containment measures that have been in effect from
time to time in various countries and territories since early 2020 have had, and
are expected to continue to have, a substantial negative impact on businesses
around the world and on global, regional, and national economies. Although
vaccines for COVID-19 have been developed and are being administered in the
United States and other countries around the world, the expansion of
administering these vaccines to additional people within these and other
countries, and the long-term efficacy of these vaccines, and the receptivity of
many people to receiving these vaccines remain uncertain.
We are closely monitoring the impact of the ongoing COVID-19 pandemic on all
aspects of our business. While we believe the COVID-19 pandemic has had certain
impacts on our business that we discuss in further detail below, we do not
believe there has been, nor are we currently anticipating, a material adverse
impact from the effects of the ongoing COVID-19 pandemic on our business and
operations, results of operations, financial condition, and cash flows. However,
the progression of the pandemic is uncertain, rapidly changing, and hard to
predict. For example, after the administration of vaccines began in the first
half of 2021 and infection rates decreased in the summer, many countries began
loosening containment measures, but the rapid spread of variants, such as the
highly transmissible Delta variant, and recent escalation of infection rates, as
well as the ongoing discovery of numerous additional variants and mutations of
the virus around the world, has led, and is expected to continue to lead, to an
increase in containment measures in certain countries and territories. As a
result, the broader implications of the COVID-19 pandemic on our business and
operations and our financial results continue to be uncertain. The duration and
severity of the economic downturn from the ongoing COVID-19 pandemic may
negatively impact our business and operations, results of operations, financial
condition, and cash flows.
To date, the COVID-19 pandemic has impacted our employees, our network, and our
customers in a number of ways, and this impact could worsen if and to the extent
the pandemic continues or becomes more severe.
•Our Employees. Our top priority during the COVID-19 pandemic is protecting the
health and safety of our employees around the world. As the COVID-19 pandemic
expanded globally during the spring of 2020, we activated our business
continuity plan and transitioned our employees to a fully remote working
environment in nearly all of our locations around the world and restricted
almost all business travel. Since that time, we have reopened, to a limited
extent, most of our offices so that those of our employees who have difficult or
challenging remote work circumstances are able to work from one of our offices
located in jurisdictions that permit returns to offices and where we believe
such a return to office can occur safely. In addition, subject to the
availability and receipt of vaccinations by our employees and the existence of
low infection rates in the various jurisdictions where we have offices,
particularly in the face of the expanding prevalence of the Delta variant, we
currently are planning for the reintroduction of our employees to some or all of
our offices in 2022.
Throughout the pandemic, our goal has been to ensure that our employees feel
safe and secure, while having the flexibility and resources necessary to perform
their jobs effectively. These efforts have included providing additional
equipment to employees for working remotely and providing various benefits to
promote our employees' physical and mental well-being. We believe our employees
have been able to remain productive during the COVID-19 pandemic and that our
operations have not been materially impacted by our employees primarily working
on a remote basis, but the continuation of the pandemic will place strains
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on our employees. As the progression of the pandemic continues, we will continue
to monitor and follow guidance from authorities and health officials in the
locations where we operate and modify our working environments around the world
appropriately. To the extent current or future measures we implement result in
decreased productivity, harm our company culture, or otherwise negatively affect
our business, our financial condition, and operating results could be materially
and adversely affected.
We are continuing our efforts to increase our workforce to support the ongoing
growth in our business, which currently is occurring through a virtual hiring
and onboarding process. During the pandemic, to date, we have not experienced
difficulties in continuing to expand our workforce, but depending on the length
and severity of the COVID-19 pandemic and its effect on our business, we may be
unsuccessful in continuing to increase our workforce sufficiently to support the
ongoing growth of our business. Alternatively, we may determine to slow our
hiring. Any delays in expanding our workforce may result in key positions
remaining unfilled, which could negatively impact our business, financial
condition, or operating results.
•Our Network. The initial change in everyday behavior caused by the COVID-19
pandemic resulted in an increased reliance on the Internet, increased Internet
traffic, and a geographic migration of Internet traffic from office-focused
areas (like city centers and business parks) to more residential areas (like
suburbs and outlying towns). We believe that traffic on the Internet, and on our
network that we use to provide our products to our customers around the world,
will remain elevated if and for so long as the isolation mandates across the
globe continue to remain in place or are reinstituted or where significantly
greater numbers of workers continue to work remotely than was the case prior to
the pandemic. Nevertheless, there is uncertainty about the impact on Internet
traffic levels and work locations as the isolation mandates are lifted and as
more workers return to working in office environments instead of remotely.
Our business is dependent on our network providing our customers with secure,
performant, and reliable network services every minute of every day. The
pandemic has resulted not only in greatly increased traffic and strain on our
network, but also slowdowns and shortages in the supply chains for many products
that have adversely impacted our ability to provision our network co-location
facilities, including delays in our ability to obtain servers and other hardware
and to ship and install such hardware at our network facilities. While we have
been able to lessen these adverse impacts to date through our planning processes
and use of alternative vendors, our ability to continue to provision our
existing network facilities and expand into new network facilities may become
more difficult and more expensive the longer the COVID-19 pandemic and the
related supply chain constraints continue to negatively impact the vendors for
our network hardware, which in turn could adversely impact our business and
operations and results of operations.
•Our Customers. The COVID-19 pandemic and the measures periodically taken by
governments and businesses around the world to contain the spread of COVID-19
are materially and adversely impacting some of our current and potential
customers, and this impact could negatively affect our business and operations,
results of operations, financial condition, and cash flows. For example, during
the first quarter of 2020, we experienced an increase in the sales cycle for our
products with many customers. While we believe that increase could have been a
result of a number of factors, it is possible that the pandemic contributed to
the increase and that an increase could happen again in the future during the
ongoing course of the pandemic. We also initially experienced an increase in the
proportion of our pipeline of prospective future customers that was lost, as
well as an increase during the first quarter of 2020 of new and existing
customers requesting concessions in terms of payment amounts and/or timing and
earlier or additional termination rights than was the case prior to the
pandemic. Depending on the future progression of the pandemic, we also may
experience future slowing in our collections of outstanding accounts receivables
from some of our customers. We expect these trends and risks to continue while
the COVID-19 pandemic persists and they could intensify as the pandemic
continues and the financial condition of some of our current and potential
customers deteriorates. Over the course of the pandemic, we have sought to
ameliorate these negative sales impacts in a number of ways, including through
focusing on additional upselling opportunities with existing customers,
concentrating our sales efforts on industries that are more insulated from the
impact of the ongoing COVID-19 pandemic, and shifting our marketing strategy to
better identify sales opportunities in the current environment. As a result of
those efforts, during the pandemic to date, we do not believe the pandemic has
negatively and materially affected our business and operations, results of
operations, financial condition, or cash flows. However, there is no assurance
that these efforts will continue to be successful, and we potentially could
experience these adverse effects in the future if the pandemic worsens,
including in connection with the potential future emergence of new variants and
mutations of the virus.
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For further discussion of the challenges and risks we confront related to the
COVID-19 pandemic and otherwise, please refer to Part II, Item 1A "Risk Factors"
of this Quarterly Report on Form 10-Q, including the risk factor titled "The
effects of the ongoing COVID-19 pandemic have materially affected how we and our
customers, vendors, and partners are operating our businesses, and the duration
and extent to which this will impact our future business and operations, results
of operations, financial condition and cash flows remain uncertain."
Non-GAAP Financial Measures and Key Business Metrics
We review a number of financial and operating metrics, including the following
non-GAAP financial measures and key metrics to evaluate our business, measure
our performance, identify trends affecting our business, formulate business
plans, and make strategic decisions.
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
(dollars in thousands)
Gross profit $ 134,822 $ 87,157 $ 358,192 $ 233,143
Gross margin 78 % 76 % 77 % 76 %
Loss from operations $ (26,494) $ (21,252) $ (86,620) $ (82,027)
Non-GAAP income (loss) from operations $ 2,230 $ (4,546) $ (9,284) $ (28,426)
Operating margin (15) % (19) % (19) % (27) %
Non-GAAP operating margin 1 % (4) % (2) % (9) %
Net cash provided by (used in) operating
activities $ (6,918) $ 1,973 $ 24,031 $ (8,316)
Net cash used in investing activities $ (444,773) $ (205,153) $ (354,527) $ (514,694)
Net cash provided by financing activities $ 820,183 $ 1,156 $ 837,712 $ 498,180
Free cash flow $ (39,732) $ (17,854) $ (51,726) $ (68,611)
Net cash provided by (used in) operating
activities (as a percentage of revenue) (4) % 2 % 5 % (3) %
Free cash flow margin (23) % (16) % (11) % (22) %
Paying customers 132,390 100,968 132,390 100,968
Paying customers (>$100,000 Annualized
Revenue) 1,260 736 1,260 736
The following table summarizes the revenue by region based on the billing address of customers who use the Company's products:
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
(dollars in thousands)
Percentage Percentage Percentage Percentage
Amount of Revenue Amount of Revenue Amount of Revenue Amount of RevenueUnited States$ 90,734 53 %$ 59,277 52 %$ 241,900 52 %$ 151,970 50 %Europe , Middle East, and Africa 45,264 26 % 27,943 25 % 120,492 26 % 76,961 25 % Asia Pacific 24,519 14 % 19,634 17 % 70,239 15 % 55,827 18 % Other 11,830 7 % 7,308 6 % 30,199 7 % 20,375 7 % Total$ 172,347 100 %$ 114,162 100 %$ 462,830 100 %$ 305,133 100 % Non-GAAP Financial Measures In addition to our results determined in accordance with generally accepted accounting principles inthe United States (U.S. GAAP), we believe the following non-GAAP measures are useful in evaluating our operating performance. We use the following non-GAAP financial information to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that non-GAAP financial information, when taken collectively, may be helpful to investors because it provides consistency and comparability with past financial 43 -------------------------------------------------------------------------------- Table of contents performance. However, non-GAAP financial information is presented for supplemental informational purposes only, has limitations as an analytical tool, and should not be considered in isolation or as a substitute for financial information presented in accordance withU.S. GAAP. In particular, free cash flow is not a substitute for cash provided by (used in) operating activities. Additionally, the utility of free cash flow as a measure of our liquidity is further limited as it does not represent the total increase or decrease in our cash balance for a given period. In addition, other companies, including companies in our industry, may calculate similarly-titled non-GAAP measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measures as tools for comparison. A reconciliation is provided below for each non-GAAP financial measure to the most directly comparable financial measure stated in accordance withU.S. GAAP. Investors are encouraged to review the relatedU.S. GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparableU.S. GAAP financial measures, and not to rely on any single financial measure to evaluate our business. Non-GAAP Income (Loss) from Operations and Non-GAAP Operating Margin We define non-GAAP income (loss) from operations and non-GAAP operating margin asU.S. GAAP loss from operations andU.S. GAAP operating margin, respectively, excluding stock-based compensation expense and its related employer payroll taxes, amortization of acquired intangible assets, and acquisition-related and other expenses. We exclude stock-based compensation expense which is a non-cash expense, from certain of our non-GAAP financial measures because we believe that excluding this item provides meaningful supplemental information regarding operational performance. We exclude employer payroll tax expenses related to stock-based compensation, which is a cash expense, from certain of our non-GAAP financial measures, because such expenses are dependent upon the price of our Class A common stock and other factors that are beyond our control and do not correlate to the operation of our business. We exclude amortization of acquired intangible assets, which is a non-cash expense, related to business combinations from certain of our non-GAAP financial measures because such expenses are related to business combinations and have no direct correlation to the operation of our business. We exclude acquisition-related and other expenses from certain of our non-GAAP financial measures because such expenses are related to business combinations and have no direct correlation to the operation of our business. Acquisition-related and other expenses can be cash or non-cash expenses incurred in connection with the acquisition, and include third-party transaction costs and compensation expense for key acquired personnel. Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 (dollars in thousands) Loss from operations$ (26,494) $ (21,252) $ (86,620) $ (82,027) Add: Stock-based compensation expense and related employer payroll taxes 28,024 16,006 75,236 45,191 Amortization of acquired intangible assets 700 700 2,100 2,131 Acquisition-related and other expenses - - - 6,279 Non-GAAP income (loss) from operations$ 2,230 $ (4,546) $ (9,284) $ (28,426) Operating margin (15) % (19) % (19) % (27) % Non-GAAP operating margin (non-GAAP income (loss) from operations as a percentage of revenue) 1 % (4) % (2) % (9) % Free Cash Flow and Free Cash Flow Margin Free cash flow is a non-GAAP financial measure that we calculate as net cash provided by (used in) operating activities less cash used for purchases of property and equipment and capitalized internal-use software. Free cash flow margin is calculated as free cash flow divided by revenue. We believe that free cash flow and free cash flow margin are useful indicators of liquidity that provide information to management and investors about the amount of cash generated from our operations that, after the investments in property and equipment and capitalized internal-use software, can be used for strategic initiatives, including investing in our business, and strengthening our financial position. We believe that historical and future trends in free cash flow and free cash flow margin, even if negative, provide useful information about the amount of cash generated (or consumed) by our operating activities that is available (or not available) to be used for strategic initiatives. For example, if free cash flow is negative, we 44 -------------------------------------------------------------------------------- Table of contents may need to access cash reserves or other sources of capital to invest in strategic initiatives. One limitation of free cash flow and free cash flow margin is that they do not reflect our future contractual commitments. Additionally, free cash flow does not represent the total increase or decrease in our cash balance for a given period. Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 (dollars in thousands) Net cash provided by (used in) operating activities$ (6,918) $ 1,973
(64,652) (45,962)
Less: Capitalized internal-use software (4,002) (4,470) (11,105) (14,333)
Free cash flow $ (39,732) $ (17,854) $ (51,726) $ (68,611)
Net cash used in investing activities $ (444,773) $ (205,153) $ (354,527) $ (514,694)
Net cash provided by financing activities $ 820,183 $ 1,156 $ 837,712 $ 498,180
Net cash provided by (used in) operating
activities (as a percentage of revenue) (4) % 2 % 5 % (3) %
Less: Purchases of property and equipment (as
a percentage of revenue) (17) % (14) % (14) % (15) %
Less: Capitalized internal-use software (as a
percentage of revenue) (2) % (4) % (2) % (4) %
Free cash flow margin (23) % (16) % (11) % (22) %
Key Business Metrics
In addition to our results determined in accordance with U.S. GAAP and the
non-GAAP measures discussed above, we also review the key business metrics
discussed below to assist us in evaluating our business, measuring performance,
identifying trends, formulating business plans, and making strategic decisions.
There are a number of limitations associated with the use of key business
metrics as analytical tools, however, and we do not rely upon any single key
business metric to evaluate our business. In addition, other companies,
including companies in our industry, may calculate similarly-titled business
metrics differently or may use other measures to evaluate their performance, all
of which could reduce the usefulness of these business metrics as tools for
comparison to such companies.
Beginning with the quarter ended March 31, 2020 , we transitioned the method for
calculating our key business metrics from a billings-based methodology to a
revenue-based methodology. We believe the change in methodology to GAAP-based
metrics provides improved disclosures for our investors by better aligning our
key business metrics with GAAP and our financial statements and will provide a
better representation of these important components of our operating model and
business performance as we continue to grow our business.
Paying Customers
We believe our ability to grow the number of paying customers on our network
provides a key indicator of growth of our business and our future business
opportunities. We define a paying customer at the end of the quarter as a person
or entity who has generated revenue during such quarter, excluding (i) customers
that were not acquired through ordinary sales channels, (ii) customers using
only our registrar product, and (iii) customers using our consumer applications,
such as 1.1.1.1 and Warp, which agreements and customers together represent an
insignificant amount of our revenue. An entity is defined as a company, a
government institution, a non-profit organization, or a distinct business unit
of a large company that has an active contract with us or one of our partners.
The number of paying customers was 132,390 and 100,968 as of September 30, 2021
and September 30, 2020 , respectively.
Paying Customers (>$100,000 Annualized Revenue)
While we continue to grow customers across all sizes, over time, our large
customers have contributed an increasing share of our revenue. We view the
number of customers with Annualized Revenue greater than $100,000 as indicative
of our penetration within large enterprise accounts. To measure Annualized
Revenue at the
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end of a quarter, we take the sum of revenue for each customer in the quarter
and multiply that amount by four. For example, if we signed a new customer that
generated $1,800 of revenue in a quarter, that customer would account for $7,200
of Annualized Revenue for that year. Our Annualized Revenue calculation excludes
(i) agreements that were not entered into through our ordinary sales channels,
(ii) revenue generated from customers using only our registrar product, and
(iii) customers using our consumer applications, such as 1.1.1.1 and Warp, which
agreements and customers together represent an insignificant amount of our
revenue. Our Annualized Revenue metric also includes any usage charges by a
customer during a period, which represents a small portion of our total revenue
and may not be recurring. As a result, Annualized Revenue may be higher than
actual revenue over the course of the year. The number of paying customers with
Annualized Revenue greater than $100,000 was 1,260 and 736 as of September 30,
2021 and September 30, 2020 , respectively. We believe this trend will continue
as customers increasingly adopt cloud technology and we are able to compete with
an increasing share of our customers' legacy hardware solutions by adding new
capabilities to our global network.
Dollar-Based Net Retention Rate
Our ability to maintain long-term revenue growth and achieve profitability is
dependent on our ability to retain and grow revenue generated from our existing
paying customers. We believe that we will achieve these objectives by continuing
to focus on customer loyalty and adding additional products and functionality to
our network. Our dollar-based net retention rate is a key way we measure our
performance in these areas. Dollar-based net retention measures our ability to
retain and expand recurring revenue from existing customers. To calculate
dollar-based net retention for a quarter, we compare the Annualized Revenue from
paying customers four quarters prior to the Annualized Revenue from the same set
of customers in the most recent quarter. Our dollar-based net retention includes
expansion and is net of contraction and attrition, but excludes Annualized
Revenue from new customers in the current period. Our dollar-based net retention
excludes professional services and the benefit of free customers that upgrade to
a paid subscription between the prior and current periods, even though this is
an important source of incremental growth. We believe this provides a more
meaningful representation of our ability to add incremental business from
existing paying customers as they renew and expand their contracts. Our
dollar-based net retention rates for the three months ended September 30, 2021
and September 30, 2020 were 124% and 116%, respectively.
Components of Our Results of OperationsRevenue
We generate revenue primarily from sales to our customers of subscriptions to
access our network and products, together with related support services.
Arrangements with customers generally do not provide the customer with the right
to take possession at any time of our software operating our global network.
Instead, customers are granted continuous access to our network and products
over the contractual period. A time-elapsed output method is used to measure
progress because we transfer control evenly over the contractual period.
Accordingly, the fixed consideration related to subscription and support revenue
is generally recognized on a straight-line basis over the contract term
beginning on the date that the service is made available to the customer.
Usage-based consideration is primarily related to fees charged for our
customer's use of excess bandwidth when accessing our network in a given period
and is recognized as revenue in the period in which the usage occurs.
The typical subscription and support term for our contracted customers is one
year and subscription and support term lengths range from one to three years.
Most of our contracts with contracted customers are non-cancelable over the
contractual term. Customers typically have the right to terminate their
contracts for cause if we fail to perform in accordance with the contractual
terms. For our pay-as-you-go customers, subscription and support terms are
typically monthly.
Cost of Revenue
Cost of revenue consists primarily of expenses that are directly related to
providing our service to our paying customers. These expenses include expenses
related to operating in co-location facilities, network and bandwidth costs,
depreciation of our equipment located in co-location facilities, certificate
authority services costs for paying customers, related overhead costs, the
amortization of our capitalized internal-use software, and the amortization of
acquired developed technologies. Cost of revenue also includes employee-related
costs, including salaries, bonuses, benefits, and stock-based compensation for
employees whose primary responsibilities relate to supporting
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our paying customers. Other costs included in cost of revenue include credit
card fees related to processing customer transactions and allocated overhead
costs.
As our customers expand and increase the use of our global network and products
driven by additional applications and connected devices, we expect that our cost
of revenue will increase due to higher network and bandwidth costs and expenses
related to operating in additional co-location facilities. However, we expect to
continue to benefit from economies of scale as our customers increase the use of
our global network and products. We intend to continue to invest additional
resources in our global network and products and our customer support
organizations as we grow our business. The level and timing of investment in
these areas could affect our cost of revenue in the future.
Gross Profit and Gross Margin
Gross profit is revenue less cost of revenue and gross margin is gross profit as
a percentage of revenue. Our gross profit and gross margin have and are expected
to continue to fluctuate from period to period due to the timing of acquisition
of new customers and our renewals with existing customers, expenses related to
operating in co-location facilities and network and bandwidth costs to operate
and expand our global network, and amortization of costs associated with
capitalized internal-use software. We expect our gross profit to increase in
absolute dollars and our gross margin to remain consistent over the long term,
although our gross margin could fluctuate from period to period depending on the
interplay of all of these factors.
Operating Expenses
Sales and Marketing
Sales and marketing expenses consist primarily of employee-related costs,
including salaries, benefits, and stock-based compensation expense, sales
commissions that are recognized as expenses over the period of benefit,
marketing programs, certificate authority services costs for free customers,
travel-related expenses, bandwidth and co-location costs for free customers, and
allocated overhead costs. Sales commissions earned by our sales force and the
associated payroll taxes that are direct and incremental to the acquisition of
channel partner and direct customer contracts are deferred and amortized over an
estimated period of benefit of three years for the initial acquisition of a
contract and over the contractual term of the renewals for renewal contracts. We
plan to continue to invest in sales and marketing to grow our customer base and
increase our brand awareness, including marketing efforts to continue to drive
our pay-as-you-go business model. As a result, we expect our sales and marketing
expenses to increase in absolute dollars for the foreseeable future. However, we
expect our sales and marketing expenses to decrease as a percentage of our
revenue over the long term, although our sales and marketing expenses may
fluctuate as a percentage of our revenue from period to period due to the timing
and extent of these expenses.
Research and Development
Research and development costs consist primarily of employee-related costs,
including salaries, benefits, and stock-based compensation expense, consulting
costs, depreciation of equipment used in research and development, and allocated
overhead costs. Research and development costs support our efforts to add new
features to our existing offerings and to ensure the security, performance, and
reliability of our global network. We expect our research and development
expenses to increase in absolute dollars for the foreseeable future as we
continue to invest in research and development efforts to enhance the
functionality of our global network and products. We expect our research and
development expenses to remain generally consistent as a percentage of our
revenue over the long term, although our research and development expenses may
fluctuate as a percentage of our revenue from period to period due to the timing
and extent of these expenses.
General and Administrative
General and administrative expenses consist primarily of employee-related costs,
including salaries, benefits, and stock-based compensation expense for our
finance, legal, human resources, and other administrative personnel,
professional fees for external legal services, accounting, and other consulting
services, bad debt expense, and allocated overhead costs. We expect our general
and administrative expenses to continue to increase in absolute dollars for the
foreseeable future to support our growth as well as due to additional costs
associated with legal, accounting, compliance, insurance, investor relations,
and other costs as a result of operating as a public company.
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However, we expect our general and administrative expenses to decrease as a
percentage of our revenue over the long term, although our general and
administrative expenses may fluctuate as a percentage of our revenue from period
to period due to the timing and extent of these expenses.
Non-Operating Income (Expense)
Interest Income
Interest income consists primarily of interest earned on our cash, cash
equivalents, and our investment holdings.
Interest Expense
Interest expense consists primarily of contractual interest expense and
amortization of the discount and debt issuance costs on our $575.0 million
aggregate principal amount of 0.75% Convertible Senior Notes due 2025 (the 2025
Notes) and $1,293.8 million aggregate principal amount of 0% Convertible Senior
Notes due 2026 (the 2026 Notes, and together with the 2025 Notes, the Notes).
Loss on Extinguishment of Debt
Loss on extinguishment of debt consists of loss recognized from
privately-negotiated exchange agreements with certain holders of the 2025 Notes
to exchange approximately $400.0 million in aggregate principal amount of the
2025 Notes for an aggregate of $400.7 million in cash (including accrued
interest) and approximately 7.6 million shares of our Class A common stock (the
2025 Notes Exchange).
Other Income, Net
Other income, net consists primarily of gain on sale of property and equipment
and foreign currency transaction gains and losses.
Provision for (benefit from) Income Taxes
Provision for (benefit from) income taxes consists primarily of income taxes in
certain foreign jurisdictions in which we conduct business, as well as state
income taxes in the United States . We maintain a full valuation allowance on our
federal and state deferred tax assets as we have concluded that it is more
likely than not that the deferred tax assets will not be realized.
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Results of Operations
The following tables set forth our condensed consolidated results of operations
for the periods presented in dollars and as a percentage of our revenue for
those periods:
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
(dollars in thousands)
Revenue $ 172,347 $ 114,162 $ 462,830 $ 305,133
Cost of revenue(1) 37,525 27,005 104,638 71,990
Gross profit 134,822 87,157 358,192 233,143
Operating expenses:
Sales and marketing(1) 85,877 55,982 231,846 154,323
Research and development(1) 46,770 30,902 127,646 92,387
General and administrative(1) 28,669 21,525 85,320 68,460
Total operating expenses 161,316 108,409 444,812 315,170
Loss from operations (26,494) (21,252) (86,620) (82,027)
Non-operating income (expense):
Interest income 385 1,316 1,302 5,742
Interest expense (12,448) (9,828) (33,126) (14,902)
Loss on extinguishment of debt (72,234) - (72,234) -
Other income (expense), net 361 (208) (368) 58
Total non-operating income (expense), net (83,936) (8,720) (104,426) (9,102)
Loss before income taxes (110,430) (29,972) (191,046) (91,129)
Benefit from income taxes (3,095) (3,504) (8,238) (5,780)
Net loss $ (107,335) $ (26,468) $ (182,808) $ (85,349)
_______________(1) Includes stock-based compensation expense as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
(dollars in thousands)
Cost of revenue $ 672 $ 311 $ 1,665 $ 858
Sales and marketing 6,983 4,406 19,236 11,177
Research and development 11,389 6,749 29,262 18,213
General and administrative 4,005 3,279
11,475 9,843
Total stock-based compensation expense
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Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Percentage of Revenue Data:
Revenue 100 % 100 % 100 % 100 %
Cost of revenue 22 24 23 24
Gross margin 78 76 77 76
Operating expenses:
Sales and marketing 50 49 50 51
Research and development 27 27 28 30
General and administrative 16 19 18 22
Total operating expenses 93 95 96 103
Loss from operations (15) (19) (19) (27)
Non-operating income (expense):
Interest income - 1 - 2
Interest expense (7) (8) (7) (5)
Loss on extinguishment of debt (42) - (15) -
Other income (expense), net - - - -
Total non-operating income, net (49) (7) (22) (3)
Loss before income taxes (64) (26) (41) (30)
Benefit from income taxes (2) (3) (2) (2)
Net loss (62) % (23) % (39) % (28) %
Comparison of Three and Nine Months Ended
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
2021 2020 $ % 2021 2020 $ %
(dollars in thousands)
Revenue $ 172,347 $ 114,162 $ 58,185 51 % $ 462,830 $ 305,133 $ 157,697 52 %
Revenue increased by $58.2 million , or 51%, for the three months ended
September 30, 2021 , compared to the three months ended September 30, 2020 . The
increase in revenue was primarily due to the addition of new paying customers,
as our number of paying customers increased by 31% for the three months ended
September 30, 2021 compared to the three months ended September 30, 2020 , as
well as the expansion within our existing paying customers, which was reflected
by our dollar-based net retention rate of 124% for the three months ended
September 30, 2021 .
Revenue increased by $157.7 million , or 52%, for the nine months ended
September 30, 2021 compared to the nine months ended September 30, 2020 . The
increase in revenue was primarily due to the addition of new paying customers,
as our number of paying customers increased by 31% as of September 30, 2021
compared to the prior period ended September 30, 2020 , as well as the expansion
within our existing paying customers, as reflected by our dollar-based net
retention rate of 124% for the three months ended September 30, 2021 .
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Cost of Revenue and Gross Margin
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
2021 2020 $ % 2021 2020 $ %
(dollars in thousands)
Cost of revenue $ 37,525 $ 27,005 $ 10,520 39 % $ 104,638 $ 71,990 $ 32,648 45 %
Gross margin 78 % 76 % 77 % 76 %
Cost of revenue increased by $10.5 million , or 39%, for the three months ended
September 30, 2021 compared to the three months ended September 30, 2020 . The
increase in the cost of revenue was primarily due to an increase of $3.7 million
in expenses related to operating in co-location facilities and network and
bandwidth costs for operating our infrastructure platform for our expanded
customer base as well as increased capacity to support our growth, an increase
of $2.4 million in employee-related costs due to a 54% increase in headcount in
our customer support and technical operations organizations, and an increase of
$1.8 million in depreciation expense related to purchases of equipment located
in co-location facilities.
Cost of revenue increased by $32.6 million , or 45%, for the nine months ended
September 30, 2021 compared to the nine months ended September 30, 2020 . The
increase in the cost of revenue was primarily due to an increase of $11.1
million in expenses related to operating in co-location facilities and network
and bandwidth costs for operating our global cloud platform for our expanded
customer base as well as increased capacity to support our growth, an increase
of $5.9 million in employee-related costs due to a 54% increase in headcount in
our customer support and technical operations organizations, an increase of $5.0
million in depreciation expense related to purchases of equipment located in
co-location facilities, an increase of $4.3 million related to the amortization
of capitalized internal-use software costs, and $3.3 million related to
third-party technology service costs, registry fees, and payment processing
fees.
Gross margin did not significantly fluctuate during the three and nine months
ended September 30, 2021 as compared to the three and nine months ended
September 30, 2020 .
Operating Expenses
Sales and Marketing
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
2021 2020 $ % 2021 2020 $ %
(dollars in thousands)
Sales and marketing $ 85,877 $ 55,982 $ 29,895 53 % $ 231,846 $ 154,323 $ 77,523 50 %
Sales and marketing expenses increased by $29.9 million , or 53%, for the three
months ended September 30, 2021 compared to the three months ended September 30,
2020 . The increase was primarily driven by $14.4 million in increased
employee-related costs due to a 24% increase in headcount in our sales and
marketing organization, including an increase of $2.6 million in stock-based
compensation expense. The remainder of the increase was primarily due to an
increase of $4.5 million in co-location and bandwidth expenses for free
customers, an increase of $4.0 million in expenses for marketing programs due to
investments in brand awareness advertising, third-party industry events, and
digital performance marketing, a $3.8 million increase in consulting and
subscription services, and a $1.0 million increase in technology service costs,
registry fees, and payment processing fees.
Sales and marketing expenses increased by $77.5 million , or 50%, for the nine
months ended September 30, 2021 compared to the nine months ended September 30,
2020 . The increase was primarily driven by $47.6 million in increased
employee-related costs due to a 24% increase in headcount our sales and
marketing organization from September 30, 2020 to September 30, 2021 , including
an increase of $8.1 million in stock-based compensation expense. The remainder
of the increase was primarily due to an increase of $10.6 million in co-location
and bandwidth expenses for free customers, an increase of $8.5 million in
expenses for marketing programs due to investments in brand awareness
advertising, third-party industry events, and digital performance marketing, an
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increase of $7.8 million in consulting and subscription expenses, and an
increase of $2.6 million in allocated overhead costs, partially offset by a
decrease of $1.1 million in travel-related costs due to the COVID-19 pandemic.
Research and Development
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
2021 2020 $ % 2021 2020 $ %
(dollars in thousands)
Research and development
51 % $ 127,646 $ 92,387 $ 35,259 38 %
Research and development expenses increased by$15.9 million , or 51%, for the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 . The increase was primarily driven by$12.4 million in increased employee-related costs due to a 34% increase in headcount in our research and development organization fromSeptember 30, 2020 toSeptember 30, 2021 , including an increase of$4.5 million in stock-based compensation expense. The remainder of the increase was primarily a result of decreased capitalized internal-use software development costs of$1.4 million . Research and development expenses increased by$35.3 million , or 38%, for the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 . The increase was primarily driven by$28.1 million in increased employee-related costs, including an increase of$10.8 million in stock-based compensation expense. These increases in employee-related costs were partially offset by a decrease of$5.7 million in compensation-related payments to former employees ofS2 Systems Corporation (S2), which was recognized in the three months endedMarch 31, 2020 . The remainder of the increase was primarily a result of decreased capitalized internal-use software development costs of$5.1 million . General and Administrative Three Months Ended Nine Months Ended September 30, Change September 30, Change 2021 2020 $ % 2021 2020 $ % (dollars in thousands) General and administrative$ 28,669 $ 21,525 $ 7,144 33 %$ 85,320 $ 68,460 $ 16,860 25 % General and administrative expenses increased by$7.1 million , or 33%, for the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 . The increase was primarily due to$4.7 million in increased employee-related costs, driven by a 47% increase in headcount in our general and administrative organization and an increase of$1.4 million in professional fees for third-party accounting, consulting, and legal services. General and administrative expenses increased by$16.9 million , or 25%, for the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 . The increase was primarily driven by$13.6 million in increased employee-related costs and$4.2 million of increased expenses for third-party accounting, consulting, and legal services. These increases were partially offset by$3.6 million of decreased allocated overhead costs. Non-Operating Income (Expense) Interest Income Three Months Ended Nine Months Ended September 30, Change September 30, Change 2021 2020 $ % 2021 2020 $ % (dollars in thousands) Interest income$ 385 $ 1,316 $ (931) (71) %$ 1,302 $ 5,742 $ (4,440) (77) % Interest income decreased by$0.9 million and$4.4 million , or 71% and 77%, for the three and nine months endedSeptember 30, 2021 compared to the three and nine months endedSeptember 30, 2020 . The decrease was primarily driven by decreased interest rates on our investment portfolio. 52 --------------------------------------------------------------------------------
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Interest Expense
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
2021 2020 $ % 2021 2020 $ %
(dollars in thousands)
Interest expense
______________ * Not meaningful Interest expense increased by$2.6 million , or 27%, for the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 . The change was primarily driven by the increased contractual interest expense and amortization of the discount and debt issuance costs on the 2026 Notes, partly offset by the decreased interest expense and amortization of the discount and debt issuance costs as a result of the 2025 Notes Exchange. For further detail, refer to Note 7 to the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. Interest expense increased by$18.2 million for the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 . The increase was primarily driven by the contractual interest expense and amortization of the discount and debt issuance costs on the Notes. For further detail, refer to Note 7 to the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. Loss on Extinguishment of Debt Three Months Ended Nine Months Ended September 30, Change September 30, Change 2021 2020 $ % 2021 2020 $ % (dollars in thousands) Loss on extinguishment of debt$ (72,234) $ -$ (72,234) *$ (72,234) $ -$ (72,234) * Loss on extinguishment of debt increased by$72.2 million for the three and nine months endedSeptember 30, 2021 compared to the three and nine months endedSeptember 30, 2020 . The increase was driven by the loss on extinguishment of debt we recognized in connection with the 2025 Notes Exchange. For further detail, refer to Note 7 to the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. Other Income, net Three Months Ended Nine Months Ended September 30, Change September 30, Change 2021 2020 $ % 2021 2020 $ % (dollars in thousands)
Other income (expense), net$ 361 $ (208) $ 569 *$ (368) $ 58 $ (426) * ______________ * Not meaningful Other income, net did not significantly fluctuate during the three months endedSeptember 30, 2021 , as compared to the three months endedSeptember 30, 2020 . 53 --------------------------------------------------------------------------------
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Benefit from Income Taxes
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
2021 2020 $ % 2021 2020 $ %
(dollars in thousands)
Benefit from income taxes $ (3,095) $ (3,504) $ 409 * $ (8,238) $ (5,780) $ (2,458) *
_______________
* Not meaningful
The net change in income taxes for the three months ended September 30, 2021
compared to the three months ended September 30, 2020 is $0.4 million . The
benefit from income taxes of $3.1 million for the three months ended
September 30, 2021 was primarily related to the excess tax benefits from
stock-based compensation deductions in the United Kingdom , offset by withholding
taxes in the U.S. and income tax expense from profitable foreign jurisdictions.
The benefit from income taxes of $3.5 million for the three months ended
September 30, 2020 was primarily related to excess tax benefits from stock-based
compensation deductions in the United Kingdom , offset by withholding taxes in
the U.S. and income tax expense from profitable foreign jurisdictions.
The net change in income taxes for the nine months ended September 30, 2021
compared to the nine months ended September 30, 2020 is $2.5 million . The
benefit from income taxes of $8.2 million for the nine months ended
September 30, 2021 was primarily related to the excess tax benefits from
stock-based compensation deductions and the remeasurement of deferred tax assets
from an enacted tax rate change in the United Kingdom , offset by withholding
taxes in the U.S. and income tax expense from profitable foreign jurisdictions.
The benefit from income taxes of $5.8 million for the nine months ended
September 30, 2020 was primarily related to the partial release of the U.S.
valuation allowance in connection with the acquisition of S2 and excess tax
benefit from stock-based compensation deductions in the United Kingdom , offset
by withholding taxes in the U.S. and income tax expense from profitable foreign
jurisdictions.
Liquidity and Capital Resources
Since our inception, we have financed our operations primarily through net
proceeds from the sale of our equity and debt securities, as well as payments
received from customers using our global network and products. In September
2019 , we completed our initial public offering (IPO) in which we issued and sold
40,250,000 shares of Class A common stock at a price per share to the public of
$15.00 . We received net proceeds of $565.0 million from sales of our shares in
the IPO, net of underwriters' discounts and commissions. In May 2020 , we issued
$575.0 million aggregate principal amount of the 2025 Notes in a private
offering to qualified institutional buyers pursuant to Rule 144A promulgated
under the Securities Act, from which we received total net proceeds, after
deducting initial purchaser discounts and debt issuance costs, of $562.5
million . In August 2021 , we issued $1,293.8 million aggregate principal amount
of the 2026 Notes in a private offering to qualified institutional buyers
pursuant to Rule 144A promulgated under the Securities Act, from which we
received total net proceeds, after deducting initial purchaser discounts and
debt issuance costs, of $1,274.0 million . In August 2021 , we also entered into
privately-negotiated exchange agreements with certain holders of the 2025 Notes
to exchange approximately $400 million in aggregate principal amount of the 2025
Notes for an aggregate of $400.7 million in cash (including accrued interest)
and approximately 7.6 million shares of our Class A common stock.
As of September 30, 2021 , we had cash and cash equivalents of $618.2 million ,
including $11.2 million held by our foreign subsidiaries. Our cash and cash
equivalents primarily consist of cash, highly liquid money market funds, and
commercial paper. We also had available-for-sale securities of $1,195.6 million
consisting of U.S. treasury securities, U.S. government agency securities,
commercial paper, and corporate bonds. As of September 30, 2021 , the Company's
investment portfolio consisted of investment grade securities with an average
credit rating of AA. We have generated significant operating losses from our
operations as reflected in our accumulated deficit of $603.3 million as of
September 30, 2021 and negative annual cash flows from operations. We expect to
continue to incur operating losses and generate negative cash flows from
operations for the foreseeable future due to the investments we intend to make
in our business, and as a result we may require additional capital resources to
execute on our strategic initiatives to grow our business.
We believe that our existing cash, cash equivalents, and available-for-sale
securities will be sufficient to meet our working capital and capital
expenditure needs for at least the next 12 months. Our assessment of the period
of time through which our financial resources will be adequate to support our
operations is a forward-looking statement and
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involves risks and uncertainties. Our actual results could vary as a result of,
and our near- and long-term future capital requirements will depend on, many
factors, including our growth rate, subscription renewal activity, the timing
and extent of spending to support our infrastructure and research and
development efforts, the expansion of sales and marketing activities, the timing
of new introductions of products or features, the continuing market adoption of
our global network and products, and the impact of the ongoing COVID-19 pandemic
to our and our customers', vendors', and partners' businesses. We may in the
future enter into arrangements to acquire or invest in complementary businesses,
services and technologies, including intellectual property rights. We have based
our estimates on assumptions that may prove to be wrong, and we could use our
available capital resources sooner than we currently expect. Additionally, some
of the factors that may influence our operations are not within our control,
such as general economic conditions and the length and severity of the COVID-19
pandemic. We may be required to seek additional equity or debt financing. In the
event that additional financing is required from outside sources, we may not be
able to raise it on terms acceptable to us or at all. If we are unable to raise
additional capital when desired, or if we cannot expand our operations or
otherwise capitalize on our business opportunities because we lack sufficient
capital, our business, operating results, and financial condition would be
adversely affected.
Cash Flows
The following table summarizes our cash flows for the periods presented:
Nine Months Ended September 30,
2021 2020
(in thousands)
Net cash provided by (used in) operating activities $ 24,031 $ (8,316)
Net cash provided used in investing activities $ (354,527) $ (514,694)
Net cash provided by financing activities $
837,712
Operating Activities Net cash provided by operating activities during the nine months endedSeptember 30, 2021 was$24.0 million , which resulted from a net loss of$182.8 million , adjusted for non-cash charges of$249.4 million , the 2025 Notes Exchange attributable to the accreted interest related to debt discount of$29.4 million , and net cash outflow of$13.2 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of$72.2 million for loss on extinguishment of debt,$61.6 million for stock-based compensation expense,$48.3 million for depreciation and amortization expense,$30.5 million for amortization of debt discount and issuance costs,$20.7 million for amortization of deferred contract acquisition costs,$17.7 million for non-cash operating lease costs,$6.0 million for net accretion of discounts and amortization of premiums on available-for-sale securities,$2.9 million for provision of bad debt, partially offset by$10.7 million for deferred income taxes. The net cash outflow from changes in operating assets and liabilities were primarily the result of a$38.1 million increase in deferred contract acquisition costs due to the addition of new customers, a$24.1 million increase in accounts receivable, net, which increased due to our growing customer base and timing of collections from our customers, a$16.3 million decrease in operating lease liabilities, a$3.4 million decrease in other noncurrent liabilities, partially offset by a$40.1 million increase in deferred revenue, a$22.1 million increase in accrued expenses and other current liabilities, and a$5.8 million increase in accounts payable. Net cash used in operating activities during the nine months endedSeptember 30, 2020 was$8.3 million , which resulted from a net loss of$85.3 million , adjusted for non-cash charges of$110.4 million and net cash outflow of$33.3 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of$40.1 million for stock-based compensation expense,$35.0 million for depreciation and amortization expense,$14.1 million for non-cash operating lease costs,$12.9 million for amortization of convertible note discount and issuance costs,$12.1 million for amortization of deferred contract acquisition costs,$2.8 million for provision of bad debt, partially offset by$6.8 million for deferred income taxes. The net cash outflow from changes in operating assets and liabilities was primarily the result of a$24.6 million increase in deferred contract acquisition costs due to increased sales commissions from the addition of new customers, a$17.7 million increase in accounts receivable, net, which increased due to our growing customer base and timing of collections from our customers, a$15.1 million decrease in operating lease liabilities,$7.1 million increase in prepaid expenses and other assets,$4.6 million decrease in accounts payable, partially offset by an$18.4 million increase in deferred revenue, and$8.5 million increase in accrued expenses and other current liabilities. 55 -------------------------------------------------------------------------------- Table of contents Investing Activities Net cash used in investing activities during the nine months endedSeptember 30, 2021 of$354.5 million resulted primarily from the purchases of available-for-sale securities of$1,060.9 million , capital expenditures of$64.7 million , capitalization of internal-use software development costs of$11.1 million , which was partially offset by the maturities of available-for-sale securities of$766.3 million and sales of available-for-sale securities of$15.8 million . Net cash used in investing activities during the nine months endedSeptember 30, 2020 of$514.7 million resulted primarily from the purchases of available-for-sale securities of$956.1 million , capital expenditures of$46.0 million , capitalization of internal-use software development costs of$14.3 million , and cash payments related to acquisition of S2 of$13.7 million . These activities were partially offset by proceeds from maturities of available-for-sale securities of$515.0 million . Financing Activities Net cash provided by financing activities of$837.7 million during the nine months endedSeptember 30, 2021 was primarily due to$1,293.8 million of gross proceeds from issuance of the 2026 Notes,$16.9 million of proceeds from the exercise of vested and unvested stock options and$7.2 million of proceeds from the issuance of Class A common stock pursuant to the 2019 Employee Stock Purchase Plan (ESPP), partially offset by$370.6 million cash consideration paid in the 2025 Notes Exchange,$86.3 million purchases of capped calls related to the 2026 Notes,$18.8 million cash paid for issuance costs on convertible senior notes,$2.2 million payment of the S2 indemnity holdback, and$2.0 million payment of tax withholding on RSU settlements. Net cash provided by financing activities of$498.2 million during the nine months endedSeptember 30, 2020 was primarily due to$575.0 million gross proceeds from issuance of the 2025 Notes,$5.9 million of proceeds from the exercise of vested and unvested stock options,$5.4 million proceeds from issuance of Class A common stock pursuant to the ESPP, partially offset by$67.3 million cash paid for the purchase of the capped calls related to the 2025 Notes,$12.5 million cash paid for issuance costs on the 2025 Notes,$7.6 million payment of tax withholding on RSU settlements, and$0.4 million of payments of tax withholding on Class A common stock issued under the ESPP. Contractual Obligations and Commitments
The following table summarizes our contractual obligations as of
Payments
Due by Period as of
Less than 1 More than 5
Total Year 1-3 Years 3-5 Years Years
(in thousands)
Non-cancelable:
Open purchase agreements(1) $ 25,394 $ 5,219
52,677 6,738 31,118 10,009 4,812
Operating lease obligations(3) 147,717 7,521 48,874 39,038 52,284
Long term debt(4) 1,468,750 - 175,000 1,293,750 -
Interest obligations(5) 4,755 328 3,938 489 -
Total $ 1,699,293 $ 19,806 $ 272,703 $ 1,345,412 $ 61,372
(1)Open purchase commitments are for the purchase of services under
non-cancelable contracts. They were not recorded as liabilities on the condensed
consolidated balance sheet as of September 30, 2021 as we had not yet received
the related services.
(2)Long-term commitments for bandwidth usage and co-location with various
networks and Internet service providers. The costs for services not yet received
were not recorded as liabilities on the condensed consolidated balance sheet as
of September 30, 2021 .
(3)Office space and equipment under non-cancelable operating leases, primarily
due to our headquarters in San Francisco, California and for our offices in
Austin, Texas ; San Jose, California ; London, United Kingdom ; Lisbon, Portugal ;
and Singapore . Total payments listed represent total minimum future lease
payments.
(4)Includes the principal related to the Notes. For further details on our debt,
refer to Note 7 to the condensed consolidated financial statements included
elsewhere in this Quarterly Report on Form 10-Q.
(5)Represents aggregate interest obligations for the 2025 Notes that are payable
in cash, excluding non-cash amortization of debt issuance costs. For further
details on our debt, refer to Note 7 to the condensed consolidated financial
statements included elsewhere in this Quarterly Report on Form 10-Q.
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The contractual commitment amounts in the table above are associated with agreements that are enforceable and legally binding. Obligations under contracts that we can cancel without a significant penalty are not included in the tables above. Purchase orders issued in the ordinary course of business are not included in the tables above, as our purchase orders represent authorizations to purchase rather than binding agreements. In addition to the contractual obligations set forth above, as ofSeptember 30, 2021 , we had$7.1 million recognized as total restricted cash on our condensed consolidated balance sheets which consisted of$6.7 million in letters of credit outstanding in favor of certain landlords for office space and$0.5 million in short-term restricted cash. The letters of credit renew annually and expire on various dates through 2028. For additional discussion on our leases and other commitments, refer to Note 8 to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. Off-Balance Sheet Arrangements As ofSeptember 30, 2021 , we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Critical Accounting Policies, Significant Judgments and Use of Estimates Our condensed consolidated financial statements are prepared in accordance withU.S. GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances, and we evaluate our estimates and assumptions on an ongoing basis. Due to the ongoing COVID-19 pandemic, there is ongoing uncertainty and significant disruption in the global economy and financial markets. We are not aware of any specific event or circumstance that would require an update to our estimates or assumptions or a revision of the carrying value of assets or liabilities as ofNovember 5, 2021 , the date of issuance of this Quarterly Report on Form 10-Q. These estimates and assumptions may change in the future, however, as new events occur and additional information is obtained. Our actual results could differ from these estimates. Our significant accounting policies are discussed in Note 2 to our consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 . There have been no significant changes to these policies for the nine months endedSeptember 30, 2021 , except as described in Note 2 to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. Recently Issued Accounting Pronouncements
Refer to Note 2 to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for more information regarding recently issued accounting pronouncements.
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