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 our existing 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 using our external-facing infrastructure products, 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 using our internal infrastructure products, 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 typically range from one to three years and are typically billed on a monthly basis. 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:
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•Free customer base. Free customers are an important part of our business. These customers are typically individual developers, early stage startups, hobbyists, and other users and, like our pay-as-you-go customers, sign up for our service through our website. 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 offer 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 or to operate its business can be aCloudflare customer. As such, we are focused on driving an increased number of customers onto our network and products 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, increase brand awareness, leverage channel partners, 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. 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. We also intend to continue to invest in market awareness of our new products to improve growth within our existing customers. •International reach. Our global network, with a presence in more than 275 cities and over 100 countries worldwide, has helped to foster our strong international growth. International markets represented 47% and 47% of our revenue in the three months endedSeptember 30, 2022 and 2021, 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 42
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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 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.
Impact of COVID-19 and Macroeconomic Developments
The ongoing COVID-19 pandemic and the resulting 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 number of substantial negative impacts on businesses around the world and on global, regional, and national economies, including widespread disruptions in supply chains for a wide variety of products and resulting increases in the prices of many goods and services. The ongoing emergence and spread of new COVID-19 variants 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 limitations on business activities. Although vaccines for COVID-19 have been developed and are being administered inthe United States and other countries around the world, the expansion of administering these vaccines to additional people within these countries, the long-term efficacy of these vaccines, and the receptivity of many people to receiving these vaccines, remain uncertain. While the negative impacts directly attributable to the COVID-19 pandemic have continued to varying degrees, the Russian invasion ofUkraine in the first quarter of 2022 caused further economic instability and contributed to price increases for a wide variety of goods and services, resulting in significant inflationary pressure inthe United States ,Europe , and other countries around the world. In response to concerns over ongoing inflationary risks, theU.S. Federal Reserve and other central banks began to raise interest rates significantly during the first nine months of 2022 and signaled the expectation of further interest rate increases in the future. In addition, the increase in global economic uncertainty has resulted in theU.S. dollar increasing significantly in value relative to the currencies of many of the countries in which our operations are located, including the British Pound and Euro. Although the COVID-19 pandemic, theRussia -Ukraine conflict, and the resulting impacts on inflation, interest rates, energy prices, and currency exchange rates and resulting macroeconomic uncertainty has not yet had a material adverse impact on our business, financial condition or results of operations to date, we are closely monitoring these global events and macroeconomic developments and how they may impact our and our customers' businesses. During the first half of this year, potentially as a result of these various macroeconomic impacts on our customers, we experienced a lengthening of the sales cycle for our large customers, a slowdown in our pipeline of potential new customers, and a lengthening of the timing of payment from some of our customers. During the third quarter of 2022, the timing of customer payments rebounded and the new customer pipeline improved from last quarter, however, our sales cycle for large customers continued to lengthen. In addition, during the second and third quarters of 2022, we experienced a higher level of churn in our paying customer base due to pay-as-you-go customers converting to our free plans. To the extent macroeconomic uncertainty persists or the COVID-19 pandemic, theRussia -Ukraine conflict, or macroeconomic conditions worsen, we may experience an extension and worsening of these effects as well as additional adverse effects on our business, financial condition, or results of operations in future periods. These effects could include, among others, increased slowness in purchasing decisions by existing and potential new paying customers, additional lengthening of the sales cycle for some of our existing and potential new paying customers, further reduction or delays in purchasing decisions by our paying customers, potential customer requests for concessions or delayed payments, potential losses of paying customers as a result of economic distress or bankruptcy (particularly among our small and medium paying customer base), potential reductions in new non-U.S. customers and expansion of sales to existing non-U.S. paying customers as a result of our products, 43
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which we currently only sell for
As a result, the broader implications of the COVID-19 pandemic, theRussia -Ukraine conflict, and the deterioration of macroeconomic conditions globally and in various countries in which we and our customers operate on our business and operations and our financial results continue to be uncertain. The duration and severity of any economic downturns resulting from the COVID-19 pandemic, theRussia -Ukraine conflict, and other factors may negatively impact our business and operations, results of operations, financial condition, and cash flows. For further discussion of the challenges and risks we confront related to the COVID-19 pandemic, theRussia -Ukraine conflict, macroeconomic conditions 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 ongoing COVID-19 pandemic, theRussia -Ukraine conflict, other areas of geopolitical tension around the world, or the worsening of that conflict or tensions, and the related challenging macroeconomic conditions globally and in various countries in which we and our customers operate may materially adversely affect our customers, vendors, and partners, and the duration and extent to which these factors may impact our future business and operations, results of operations, financial condition, and cash flows remain uncertain." 44
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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,
2022 2021 2022 2021
(dollars in thousands)
Gross profit $ 191,890 $ 134,822 $ 535,719 $ 358,192
Gross margin 76 % 78 % 76 % 77 %
Loss from operations $ (45,947) $ (26,494) $ (150,512) $ (86,620)
Non-GAAP income (loss) from operations $ 14,830 $ 2,230 $ 18,860 $ (9,284)
Operating margin (18) % (15) % (21) % (19) %
Non-GAAP operating margin 6 % 1 % 3 % (2) %
Net cash provided by (used in) operating
activities $ 42,688 $ (6,918) $ 45,472 $ 24,031
Net cash used in investing activities $ (48,887) $ (444,773) $ (215,740) $ (354,527)
Net cash provided by (used in) financing
activities $ 1,439 $ 820,183 $ (1,672) $ 837,712
Free cash flow $ (4,614) $ (39,732) $ (73,429) $ (51,726)
Net cash provided by (used in) operating
activities (as a percentage of revenue) 17 % (4) % 6 % 5 %
Free cash flow margin (2) % (23) % (10) % (11) %
Paying customers 156,000 132,390 156,000 132,390
Paying customers (>$100,000 Annualized
Revenue) 1,908 1,260 1,908 1,260
The following table summarizes the revenue by region based on the billing address of customers who use the Company's products:
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
(dollars in thousands)
Percentage Percentage Percentage Percentage
Amount of Revenue Amount of Revenue Amount of Revenue Amount of RevenueUnited States$ 135,280 53 %$ 90,734 53 %$ 370,889 53 %$ 241,900 52 %Europe , Middle East, and Africa 68,149 27 % 45,264 26 % 185,088 26 % 120,492 26 % Asia Pacific 33,801 13 % 24,519 14 % 96,481 14 % 70,239 15 % Other 16,627 7 % 11,830 7 % 48,083 7 % 30,199 7 % Total$ 253,857 100 %$ 172,347 100 %$ 700,541 100 %$ 462,830 100 % 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 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 45
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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, 2022 2021 2022 2021 (dollars in thousands) Loss from operations$ (45,947) $ (26,494) $ (150,512) $ (86,620) Add: Stock-based compensation expense and related employer payroll taxes 55,888 28,024 155,142 75,236 Amortization of acquired intangible assets 4,889 700 10,283 2,100 Acquisition-related and other expenses - - 3,947 - Non-GAAP income (loss) from operations$ 14,830 $ 2,230 $ 18,860 $ (9,284) Operating margin (18) % (15) % (21) % (19) % Non-GAAP operating margin (non-GAAP income (loss) from operations as a percentage of revenue) 6 % 1 % 3 % (2) %
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 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.
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Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
(dollars in thousands)
Net cash provided by (used in) operating
activities $ 42,688 $ (6,918) $ 45,472 $ 24,031
Less: Purchases of property and equipment (41,896) (28,812) (103,461) (64,652)
Less: Capitalized internal-use software (5,406) (4,002) (15,440) (11,105)
Free cash flow $ (4,614) $ (39,732) $ (73,429) $ (51,726)
Net cash used in investing activities $ (48,887) $ (444,773) $ (215,740) $ (354,527)
Net cash provided by (used in) financing
activities $ 1,439 $ 820,183 $ (1,672) $ 837,712
Net cash provided by (used in) operating
activities (as a percentage of revenue) 17 % (4) % 6 % 5 %
Less: Purchases of property and equipment (as
a percentage of revenue) (17) % (17) % (14) % (14) %
Less: Capitalized internal-use software (as a
percentage of revenue) (2) % (2) % (2) % (2) %
Free cash flow margin (2) % (23) % (10) % (11) %
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.
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 and has an active contract with us or one of our partners 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. An active contract is defined as a customer relationship for which we have provided services during the quarter. The number of paying customers was 156,000 and 132,390 as ofSeptember 30, 2022 andSeptember 30, 2021 , respectively.
Paying Customers (>
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 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 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 47
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the year. The number of paying customers with Annualized Revenue greater than$100,000 was 1,908 and 1,260 as ofSeptember 30, 2022 andSeptember 30, 2021 , 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 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 endedSeptember 30, 2022 andSeptember 30, 2021 were 124% and 124%, respectively. Components of Our Results of Operations
Revenue
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 may 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 term contracts 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 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
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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. 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)
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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 debt issuance costs on our 0.75% Convertible Senior Notes due 2025 (the 2025 Notes) and 0% Convertible Senior Notes due 2026 (the 2026 Notes, and together with the 2025 Notes, the Notes). Upon adoption of the Accounting Standards Update (ASU) 2020-06, the Company is no longer recording the conversion feature of its convertible senior notes in equity. Instead, the Company combined the previously separated equity component with the liability component, which together is now classified as debt, thereby eliminating the subsequent amortization of the debt discount as interest expense.
Other Income (Expense), Net
Other income (expense), 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 inthe United States . We have a full valuation allowance on ourU.S. federal,U.S. state, andUnited Kingdom deferred tax assets as we have concluded that it is more likely than not that the deferred tax assets will not be realized. 50
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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,
2022 2021 2022 2021
(dollars in thousands)
Revenue $ 253,857 $ 172,347 $ 700,541 $ 462,830
Cost of revenue(1) 61,967 37,525 164,822 104,638
Gross profit 191,890 134,822 535,719 358,192
Operating expenses:
Sales and marketing(1) 116,033 85,877 333,712 231,846
Research and development(1) 76,432 46,770 218,600 127,646
General and administrative(1) 45,372 28,669 133,919 85,320
Total operating expenses 237,837 161,316 686,231 444,812
Loss from operations (45,947) (26,494) (150,512) (86,620)
Non-operating income (expense):
Interest income 3,852 385 6,554 1,302
Interest expense (1,512) (12,448) (4,109) (33,126)
Loss on extinguishment of debt - (72,234) - (72,234)
Other income (expense), net 2,433 361 2,179 (368)
Total non-operating income (expense), net 4,773 (83,936) 4,624 (104,426)
Loss before income taxes (41,174) (110,430) (145,888) (191,046)
Provision for (benefit from) income taxes 1,372 (3,095) 1,576 (8,238)
Net loss $ (42,546) $ (107,335) $ (147,464) $ (182,808)
_______________
(1) Includes stock-based compensation expense as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
(dollars in thousands)
Cost of revenue $ 2,046 $ 672 $ 5,012 $ 1,665
Sales and marketing 11,266 6,983 32,401 19,236
Research and development 28,984 11,389 74,472 29,262
General and administrative 11,469 4,005
30,660 11,475
Total stock-based compensation expense
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Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Percentage of Revenue Data:
Revenue 100 % 100 % 100 % 100 %
Cost of revenue 24 22 24 23
Gross margin 76 78 76 77
Operating expenses:
Sales and marketing 46 50 47 50
Research and development 30 27 31 28
General and administrative 18 16 19 18
Total operating expenses 94 93 97 96
Loss from operations (18) (15) (21) (19)
Non-operating income (expense):
Interest income 2 - 1 -
Interest expense (1) (7) (1) (7)
Loss on extinguishment of debt - (42) - (15)
Other income (expense), net 1 - - -
Total non-operating income (expense), net 2 (49) - (22)
Loss before income taxes (16) (64) (21) (41)
Provision for (benefit from) income taxes 1 (2) - (2)
Net loss (17) % (62) % (21) % (39) %
Comparison of Three and Nine Months Ended September 30, 2022 and 2021Revenue
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
2022 2021 $ % 2022 2021 $ %
(dollars in thousands)
Revenue $ 253,857 $ 172,347 $ 81,510 47 % $ 700,541 $ 462,830 $ 237,711 51 %
Revenue increased by $81.5 million , or 47%, for the three months ended
September 30, 2022 , compared to the three months ended September 30, 2021 . The
increase in revenue was primarily due to the addition of new paying customers,
as our number of paying customers increased by 18% for the three months ended
September 30, 2022 compared to the three months ended September 30, 2021 , 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, 2022 .
Revenue increased by $237.7 million , or 51%, for the nine months ended
September 30, 2022 compared to the nine months ended September 30, 2021 . The
increase in revenue was primarily due to the addition of new paying customers,
as our number of paying customers increased by 18% as of September 30, 2022
compared to the three months ended September 30, 2021 , 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, 2022 .
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Cost of Revenue and Gross Margin
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
2022 2021 $ % 2022 2021 $ %
(dollars in thousands)
Cost of revenue $ 61,967 $ 37,525 $ 24,442 65 % $ 164,822 $ 104,638 $ 60,184 58 %
Gross margin 76 % 78 % 76 % 77 %
Cost of revenue increased by $24.4 million , or 65%, for the three months ended
September 30, 2022 compared to the three months ended September 30, 2021 . The
increase in the cost of revenue was primarily due to an increase of $8.5 million
in expenses related to operating in co-location facilities and network and
bandwidth costs for operating our global network for our expanded customer base,
as well as increased capacity to support our growth, an increase of $4.2 million
in employee-related costs due to a 42% increase in headcount in our customer
support and technical operations organizations, an increase of $4.2 million of
amortization expense of acquired developed technology and capitalized
internal-use software, and an increase of $3.8 million in depreciation expense
related to purchases of equipment located in co-location facilities. The
remainder of the increase was primarily due to $3.3 million of increased
third-party technology services costs, registry fees, and payment processing
fees.
Gross margin did not significantly fluctuate during the three months ended
Cost of revenue increased by$60.2 million , or 58%, for the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 . The increase in the cost of revenue was primarily due to an increase of$23.3 million in expenses related to operating in co-location facilities and network and bandwidth costs for operating our global network for our expanded customer base, as well as increased capacity to support our growth, an increase of$12.5 million in employee-related costs due to a 42% increase in headcount in our customer support and technical operations organizations, an increase of$10.9 million in depreciation expense related to purchases of equipment located in co-location facilities, and an increase of$8.4 million of amortization expense of acquired developed technology and capitalized internal-use software. The remainder of the increase was primarily due to$7.4 million of increased third-party technology services costs, registry fees, and payment processing fees.
Gross margin did not significantly fluctuate during the nine months ended
Operating Expenses
Sales and Marketing
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
2022 2021 $ % 2022 2021 $ %
(dollars in thousands)
Sales and marketing $ 116,033 $ 85,877 $ 30,156 35 % $ 333,712 $ 231,846 $ 101,866 44 %
Sales and marketing expenses increased by $30.2 million , or 35%, for the three
months ended September 30, 2022 compared to the three months ended September 30,
2021 . The increase was primarily driven by $23.7 million in increased
employee-related costs due to a 43% increase in headcount in our sales and
marketing organization, including an increase of $4.3 million in stock-based
compensation expense. The remainder of the increase was primarily due to an
increase of $4.1 million in co-location and bandwidth expenses for free
customers, an increase of $2.2 million in expenses for marketing programs due to
investments in brand awareness advertising, third-party industry events, and
digital performance marketing, and an increase of $1.4 million in travel-related
expenses, partially offset by a decrease of $3.1 million in consulting expenses.
Sales and marketing expenses increased by $101.9 million , or 44% for the nine
months ended September 30, 2022 compared to the nine months ended September 30,
2021 . The increase was primarily driven by $66.5 million in increased
employee-related costs due to a 43% increase in headcount in our sales and
marketing organization,
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including an increase of$13.2 million in stock-based compensation expense. The remainder of the increase was primarily due to an increase of$15.5 million in co-location and bandwidth expenses for free customers, an increase of$10.3 million in expenses for marketing programs due to investments in brand awareness advertising, third-party industry events, and digital performance marketing, an increase of$4.4 million in travel-related expenses, an increase of$2.5 million in subscriptions, and an increase of$2.4 million in allocated overhead costs. Research and Development Three Months Ended Nine Months Ended September 30, Change September 30, Change 2022 2021 $ % 2022 2021 $ % (dollars in thousands)
Research and development
63 % $ 218,600 $ 127,646 $ 90,954 71 %
Research and development expenses increased by $29.7 million , or 63%, for the
three months ended September 30, 2022 compared to the three months ended
September 30, 2021 . The increase was primarily driven by $31.5 million in
increased employee-related costs due to a 44% increase in headcount in our
research and development organization, including an increase of $18.1 million in
stock-based compensation expense. These increases were partially offset by
increased capitalized internal-use software development costs of $2.0 million .
Research and development expenses increased by $91.0 million , or 71%, for the
nine months ended September 30, 2022 compared to the nine months ended
September 30, 2021 . The increase was primarily driven by $92.5 million in
increased employee-related costs due to a 44% increase in headcount in our
research and development organization, including an increase of $46.9 million in
stock-based compensation expense. The remainder of the increase was primarily
due to an increase of $2.9 million in allocated overhead costs, partially offset
by an increased capitalized internal-use software development costs of $6.3
million .
General and Administrative
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
2022 2021 $ % 2022 2021 $ %
(dollars in thousands)
General and administrative $ 45,372 $ 28,669 $ 16,703 58 % $ 133,919 $ 85,320 $ 48,599 57 %
General and administrative expenses increased by $16.7 million , or 58%, for the
three months ended September 30, 2022 compared to the three months ended
September 30, 2021 . The increase was primarily driven by $13.3 million in
increased employee-related costs due to a 35% increase in headcount in our
general and administrative organization, and an increase of $2.0 million in
travel-related expenses. These increases were partially offset by $1.6 million
of decreased allocated overhead costs.
General and administrative expenses increased by $48.6 million , or 57%, for the
nine months ended September 30, 2022 compared to the nine months ended
September 30, 2021 . The increase was primarily driven by $37.2 million in
increased employee-related costs due to a 35% increase in headcount in our
general and administrative organization, an increase of $5.9 million in rent and
office related costs, primarily driven by the new Austin lease that commenced in
the three months ended September 30, 2021 , an increase of $5.3 million in
travel-related expenses, an increase of $2.9 million in professional fees for
third-party accounting, consulting, and legal services, and an increase of $2.2
million in software subscription costs, cloud computing services, and payment
processing fees. These increases were partially offset by $7.5 million of
decreased allocated overhead costs.
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Non-Operating Income (Expense)
Interest Income
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
2022 2021 $ % 2022 2021 $ %
(dollars in thousands)
Interest income $ 3,852 $ 385 $ 3,467 * $ 6,554 $ 1,302 $ 5,252 *
Interest income increased by $3.5 million and $5.3 million , for the three and
nine months ended September 30, 2022 compared to the three and nine months ended
September 30, 2021 . The increase was primarily driven by an increase in interest
rates.
______________
* Not meaningful
Interest Expense
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
2022 2021 $ % 2022 2021 $ %
(dollars inthousands)
Interest expense
Interest expense decreased by$10.9 million and$29.0 million , or 88% and 88%, for the three and nine months endedSeptember 30, 2022 compared to the three and nine months endedSeptember 30, 2021 . The decrease was primarily driven by the adoption of ASU 2020-06. Upon adoption of the ASU, the Company is no longer recording the conversion feature of its convertible senior notes in equity. Instead, the Company combined the previously separated equity component with the liability component, which together is now classified as debt, thereby eliminating the subsequent amortization of the debt discount as interest expense. The remainder of the decrease was due to the decrease in the debt principal as a result of the 2025 Notes Exchange. Refer to Note 7 to these condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for more information regarding the 2025 Notes Exchange. Other Income (Expense), net Three Months Ended Nine Months Ended September 30, Change September 30, Change 2022 2021 $ % 2022 2021 $ % (dollars in thousands) Other income (expense), net$ 2,433 $ 361 $ 2,072 *$ 2,179 $ (368) $ 2,547 * ______________ * Not meaningful Other income (expense), net did not significantly fluctuate during the three and nine months endedSeptember 30, 2022 , as compared to the three and nine months endedSeptember 30, 2021 .
Loss on Extinguishment of Debt
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
2022 2021 $ % 2022 2021 $ %
(dollars in thousands)
Loss on extinguishment of debt $ - $ (72,234) $ 72,234 * $ - $ (72,234) $ 72,234 *
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Loss on extinguishment of debt decreased by$72.2 million for the three and nine months endedSeptember 30, 2022 , compared to the three and nine months endedSeptember 30, 2021 . The decrease 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 these condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
_______________
* Not meaningful
Provision for (Benefit from) Income Taxes
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
2022 2021 $ % 2022 2021 $ %
(dollars in thousands)
Provision for (benefit
from) income taxes $ 1,372 $ (3,095) $ 4,467 * $ 1,576 $ (8,238) $ 9,814 *
_______________
* Not meaningful
The net change in income taxes for the three months ended September 30, 2022
compared to the three months ended September 30, 2021 is $4.5 million . The
provision for income taxes of $1.4 million for the three months ended
September 30, 2022 was primarily related to withholding taxes in the U.S. and
income tax expense from profitable foreign jurisdictions. The benefit from
income taxes of $3.1 million for the three months ended September 30, 2021 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, 2022
compared to the nine months ended September 30, 2021 is $9.8 million . The
provision for income taxes of $1.6 million for the nine months ended September
30, 2022 was primarily related to withholding taxes in the U.S. and income tax
expense from profitable foreign jurisdictions, offset by the partial release of
the U.S. valuation allowance in connection with acquisitions. The benefit from
income taxes of $8.2 million for the nine months ended September 30, 2021 was
primarily related to 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.
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, and we expect to
continue to finance our operations using the same sources for the foreseeable
future. 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
proceeds, net of initial purchaser discounts and commissions 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 proceeds, net of initial purchaser discounts and
commissions and debt issuance costs of $1,274.0 million . Concurrently with the
completion of the offering of the 2026 Notes, 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, 2022 , we had cash and cash equivalents of $137.8 million ,
including $8.6 million held by our foreign subsidiaries. Our cash and cash
equivalents primarily consist of cash and highly liquid money market funds. We
also had available-for-sale securities of $1,498.4 million consisting of U.S.
treasury securities, commercial paper, and corporate bonds. As of September 30,
2022 , 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
$794.0 million as of September 30, 2022 . We expect to continue to incur
operating losses and cash flow from operations that may fluctuate between
positive and negative
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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. For the period beyond the next 12 months, we believe we will be able to meet our working capital and capital expenditure needs from our existing cash, cash equivalents, and available-for-sale-securities, the cash flows from our operating activities and, if necessary, proceeds from potential equity or debt financings. Our assessments of the period of time through which our existing financial resources will be adequate to support our operations and our expected sources of capital for the future operation of our business after such period of time are forward-looking statements and involve 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 and other macroeconomic conditions 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, and such acquisitions and investments could increase our need for additional capital. 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 from time to time in the future. 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. As ofSeptember 30, 2022 , our material cash requirements include contractual obligations from the Notes, purchase commitments and lease obligations. Refer to Notes 6, 7, and 8 to these condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information regarding these material cash requirements. In addition to the contractual obligations described above, as ofSeptember 30, 2022 , we had$11.2 million recognized as total restricted cash on our consolidated balance sheets which mainly consisted of$10.5 million of indemnity holdback consideration associated with business combinations.
Cash Flows
The following table summarizes our cash flows for the periods presented:
Nine Months Ended September 30,
2022 2021
(in thousands)
Net cash provided by operating activities $ 45,472 $ 24,031
Net cash used in investing activities $ (215,740) $ (354,527)
Net cash provided by (used in) financing activities $ (1,672) $ 837,712
Operating Activities
Net cash provided by operating activities during the nine months ended
September 30, 2022 was $45.5 million , which resulted from a net loss of $147.5
million , adjusted for non-cash charges of $283.5 million and net cash outflow of
$90.6 million from changes in operating assets and liabilities. Non-cash charges
primarily consisted of $142.5 million for stock-based compensation expense,
$72.7 million for depreciation and amortization expense, $32.0 million for
amortization of deferred contract acquisition costs, $27.0 million for non-cash
operating lease costs, $3.7 million for net accretion of discounts and
amortization of premiums on available-for-sale securities, $3.5 million for
amortization of convertible note issuance costs, and $3.1 million for provision
of bad debt, which were partially offset by $1.6 million for deferred income
taxes. The net cash outflow from changes in operating assets and liabilities
were primarily the result of a $49.0 million increase in deferred contract
acquisition costs due to the
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addition of new customers, a$32.8 million increase in accounts receivable, net, which increased due to our growing customer base and timing of collections from our customers, a$31.3 million decrease in operating lease liabilities, a$23.6 million decrease in accrued expenses and other current liabilities, a$7.4 million increase in prepaid expenses and other assets, and a$1.1 million increase in contract assets, which were partially offset by a$51.9 million increase in deferred revenue and a$1.4 million increase in other noncurrent assets. 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 convertible note 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, and$2.9 million for provision of bad debt, which were 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, and a$3.4 million decrease in other noncurrent liabilities, which were 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.
Investing Activities
Net cash used in investing activities during the nine months endedSeptember 30, 2022 of$215.7 million resulted primarily from the purchases of available-for-sale securities of$755.1 million , capital expenditures of$103.5 million , cash paid for acquisitions, net of cash acquired of$88.2 million , and capitalization of internal-use software development costs of$15.4 million , which were partially offset by the maturities of available-for-sale securities of$746.4 million . 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 , and the capitalization of internal-use software development costs of$11.1 million , which were partially offset by maturities of available-for-sale securities of$766.3 million and sales of available-for-sale securities of$15.8 million . Financing Activities Net cash used in financing activities of$1.7 million during the nine months endedSeptember 30, 2022 was primarily due to$16.6 million of repayments of convertible senior notes, and$2.0 million payment of tax withholding on RSU settlements, which were partially offset by$8.7 million of proceeds from the issuance of common stock under the 2019 Employee Stock Purchase Plan (ESPP), and$8.2 million of proceeds from the exercise of vested and unvested stock options. 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 common stock pursuant to the ESPP, which were partially offset by$370.6 million of cash consideration paid in the 2025 Notes Exchange,$86.3 million purchases of capped calls related to the 2026 Notes,$18.8 million of 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. Off-Balance Sheet Arrangements As ofSeptember 30, 2022 , 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. 58
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Critical Accounting Estimates
Our condensed consolidated financial statements are prepared in accordance with
U.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. Such
estimates include, but are not limited to, allowance for doubtful accounts,
deferred contract acquisitions costs, the period of benefit generated from the
deferred contract acquisition costs, the capitalization and estimated useful
life of internal-use software, the assessment of recoverability of intangible
assets and their estimated useful lives, useful lives of property and equipment,
the determination of the incremental borrowing rate used for operating lease
liabilities, the valuation and recognition of stock-based compensation expense,
uncertain tax positions, and the recognition and measurement of current and
deferred income tax assets and liabilities. None of these estimates are critical
accounting estimates for the preparation of our consolidated financial
statements. 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 in part to the
ongoing COVID-19 pandemic and other geopolitical conditions, 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 of November 3, 2022 , 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 ended December 31, 2021 . There have been no significant changes to these
policies for the nine months ended September 30, 2022 .
Recently Issued Accounting Pronouncements
Refer to Note 2 to these 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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