CLOUDFLARE, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. 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 Annual Report on Form 10-K. 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 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:
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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 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 or to operate its business 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. 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 48%, 49% and 50% of our revenue in the years endedDecember 31, 2021 , 2020, and 2019, respectively, and we intend to continue to invest in our international growth as a strategy to expand our customer base around the world. Initial Public Offering InSeptember 2019 , we completed an initial public offering (IPO) in which we issued and sold Class A common stock for net proceeds of$565.0 million , after deducting underwriting discounts and commissions and offering costs. Upon completion of the IPO, all of our outstanding redeemable convertible preferred stock was automatically converted into Class A common stock and Class B common stock. In addition, all of the outstanding warrants to purchase shares of our redeemable convertible preferred stock were automatically converted into outstanding 68 -------------------------------------------------------------------------------- Table of contents warrants to purchase shares of Class B common stock, and all shares of Class B common stock held by former employees were automatically converted into Class A common stock. 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 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 and Omicron 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. 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 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. 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. However, the rapid spread of variants, such as the highly transmissible Delta and Omicron variants, and recent escalation of infection rates, as well as the ongoing discovery of additional variants and mutations of the virus around the world, has led, and may 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 any economic downturns 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 Omicron variant, we currently are planning for the reintroduction of our employees to some or all of our offices in 2022. 69
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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 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 ongoing 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 as needed to
continue to grow our business as planned, 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
planned ongoing growth of our business. Alternatively, we may determine to slow
our hiring. Any delays in expanding our workforce as needed to continue to grow
our business as planned 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 limitations on business activities
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 restrictions 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 and increases in
the prices of this hardware. 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 any 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 variants negatively impact our customers and
their workforces, and these risks could intensify
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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.
For further discussion of the challenges and risks we confront related to the
COVID-19 pandemic and otherwise, please refer to Part I, Item 1A "Risk Factors"
of this Annual Report on Form 10-K, 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."
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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.
Year Ended December 31,
2021 2020 2019
(dollars in thousands)
Gross profit $ 509,292 $ 330,004 $ 223,599
Gross margin 78 % 77 % 78 %
Loss from operations $ (127,684) $ (106,768) $ (107,946)
Non-GAAP loss from operations $ (7,024) $ (33,892) $ (71,194)
Operating margin (19) % (25) % (38) %
Non-GAAP operating margin (1) % (8) % (25) %
Net cash provided by (used in) operating
activities $ 64,648 $ (17,129) $ (38,917)
Net cash used in investing activities $ (709,322) $ (515,273) $ (417,641)
Net cash provided by financing activities $ 847,486 $ 504,912 $ 570,768
Free cash flow $ (43,090) $ (92,091) $ (96,196)
Net cash provided by (used in) operating
activities (as a percentage of revenue) 10 % (4) % (14) %
Free cash flow margin (7) % (21) % (34) %
Paying customers 140,096 111,183 84,154
Paying customers (>$100,000 Annualized Revenue) 1,416 828 526
The following table summarizes the revenue by region based on the billing address of customers who use the Company's products:
Year Ended December 31,
2021 2020 2019
(dollars in thousands)
Percentage Percentage Percentage
Amount of Revenue Amount of Revenue Amount of Revenue
United States $ 342,578 52 % $ 218,191 51 % $ 144,575 50 %
Europe , Middle East , and
Africa 172,129 26 % 109,274 25 % 68,418 24 %
Asia Pacific 96,537 15 % 76,177 18 % 55,131 19 %
Other 45,182 7 % 27,417 6 % 18,898 7 %
Total $ 656,426 100 % $ 431,059 100 % $ 287,022 100 %
Non-GAAP Financial Measures
In addition to our results determined in accordance with generally accepted
accounting principles in the 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 with U.S. GAAP. In particular, free cash
flow is not a substitute for cash
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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 Loss from Operations and Non-GAAP Operating Margin
We define non-GAAP 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. Year Ended December 31, 2021 2020 2019 (dollars in thousands) Loss from operations$ (127,684) $ (106,768) $ (107,946) Add: Stock-based compensation expense and related employer payroll taxes 117,334 63,516 36,627 Amortization of acquired intangible assets 2,946 3,081 125 Acquisition-related and other expenses 380 6,279 - Non-GAAP loss from operations$ (7,024) $ (33,892) $ (71,194) Operating margin (19) % (25) % (38) %
Non-GAAP operating margin (non-GAAP loss from operations as a percentage of revenue)
(1) % (8) % (25) %
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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Year Ended December 31,
2021 2020 2019
(dollars in thousands)
Net cash provided by (used in) operating
activities $ 64,648 $ (17,129) $ (38,917)
Less: Purchases of property and equipment (92,986) (56,375) (43,289)
Less: Capitalized internal-use software (14,752) (18,587) (13,990)
Free cash flow $ (43,090) $ (92,091) $ (96,196)
Net cash used in investing activities $ (709,322) $ (515,273) $ (417,641)
Net cash provided by financing activities $ 847,486 $ 504,912 $ 570,768
Net cash provided by (used in) operating
activities (as a percentage of revenue) 10 % (4) % (14) %
Less: Purchases of property and equipment (as a
percentage of revenue) (14) % (13) % (15) %
Less: Capitalized internal-use software (as a
percentage of revenue) (2) % (4) % (5) %
Free cash flow margin (7) % (21) % (34) %
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 140,096, 111,183, and 84,154 for the three months endedDecember 31, 2021 , 2020, and 2019, 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 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 74 -------------------------------------------------------------------------------- Table of contents 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 1,416, 828, and 526 for the three months endedDecember 31, 2021 , 2020, and 2019, 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 endedDecember 31, 2021 , 2020, and 2019 were 125%, 119%, and 119%, 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 75
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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 discount and 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).
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 (Expense), Net Other income (expense), net consists primarily of gain on sale of property and equipment and foreign currency transaction gains and losses. The year endedDecember 31, 2019 also included expenses resulting from the revaluation of our redeemable convertible preferred stock warrant liability and its conversion into Class B common stock upon completion of the IPO.
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, andU.K. deferred tax assets as we have concluded that it is more likely than not that the deferred tax assets will not be realized. 77
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Results of Operations
The following tables set forth our consolidated results of operations for the
periods presented in dollars and as a percentage of our revenue for those
periods:
Year Ended December 31,
2021 2020 2019
(in thousands)
Revenue $ 656,426 $ 431,059 $ 287,022
Cost of revenue(1) 147,134 101,055 63,423
Gross profit 509,292 330,004 223,599
Operating expenses:
Sales and marketing(1) 328,065 217,875 159,298
Research and development(1) 189,408 127,144 90,669
General and administrative(1) 119,503 91,753 81,578
Total operating expenses 636,976 436,772 331,545
Loss from operations (127,684) (106,768) (107,946)
Non-operating income (expense):
Interest income 1,970 6,588 5,787
Interest expense (49,234) (24,964)
(1,112)
Loss on extinguishment of debt (72,234) -
-
Other income (expense), net (794) 171
(1,442)
Total non-operating income (expense), net (120,292) (18,205)
3,233
Loss before income taxes (247,976) (124,973)
(104,713)
Provision for (benefit from) income taxes 12,333 (5,603)
1,115
Net loss $ (260,309) $ (119,370) $ (105,828)
_______________(1)Includes stock-based compensation expense as follows:
Year Ended December 31,
2021 2020 2019
(in thousands)
Cost of revenue $ 2,583 $ 1,225 $ 716
Sales and marketing 27,277 16,019 8,709
Research and development 44,196 26,090 13,037
General and administrative 16,081 13,000 14,165
Total stock-based compensation expense
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Year Ended December 31,
2021 2020 2019
Percentage of Revenue Data:
Revenue 100 % 100 % 100 %
Cost of revenue 22 23 22
Gross margin 78 77 78
Operating expenses:
Sales and marketing 50 51 56
Research and development 29 30 32
General and administrative 18 21 28
Total operating expenses 97 102 116
Loss from operations (19) (25) (38)
Non-operating income (expense):
Interest income - 2 2
Interest expense (8) (6) -
Loss on extinguishment of debt (11) - -
Other income (expense), net - - (1)
Total non-operating income (expense), net (19) (4) 1
Loss before income taxes (38) (29) (37)
Provision for (benefit from) income taxes 2 (1) -
Net loss (40) % (28) % (37) %
Comparison of the Years Ended December 31, 2021 and 2020
Revenue
Year Ended December 31, Change
2021 2020 $ %
(dollars in thousands)
Revenue $ 656,426 $ 431,059 $ 225,367 52 %
Revenue increased by $225.4 million , or 52%, for the year ended December 31,
2021 compared to the year ended December 31, 2020 . The increase in revenue was
primarily due to the addition of new paying customers, which increased by 26%
during the year ended December 31, 2021 , as well as expansion within our
existing paying customers, which was reflected by our dollar-based net retention
rates ranging from 123% to 125% during the four quarters ended December 31,
2021 .
Cost of Revenue and Gross Margin
Year Ended December 31, Change
2021 2020 $ %
(dollars in thousands)
Cost of revenue $ 147,134 $ 101,055 $ 46,079 46 %
Gross margin 78 % 77 %
Cost of revenue increased by
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network for our expanded customer base, as well as increased capacity to support our growth, an increase of$9.6 million in employee-related costs due to a 55% increase in headcount in our customer support and technical operations organizations, an increase of$8.0 million in depreciation expense related to purchases of equipment located in co-location facilities, and an increase of$5.0 million related to the amortization of capitalized internal-use software costs. The remainder of the increase was primarily due to$4.4 million of increased third-party technology services costs, registry fees, and payment processing fees.
Gross margin did not significantly fluctuate during the year ended
Operating Expenses
Sales and Marketing
Year Ended December 31, Change
2021 2020 $ %
(dollars in thousands)
Sales and marketing $ 328,065 $ 217,875 $ 110,190 51 %
Sales and marketing expenses increased by $110.2 million , or 51%, for the year
ended December 31, 2021 compared to the year ended December 31, 2020 . The
increase was primarily driven by $65.7 million in increased employee-related
costs due to a 28% increase in headcount in our sales and marketing
organization, including an increase of $11.3 million in stock-based compensation
expense. The remainder of the increase was primarily due to an increase of $14.9
million in co-location and bandwidth expenses for free customers, an increase of
$12.8 million in expenses for marketing programs due to investments in brand
awareness advertising, third-party industry events, and digital performance
marketing, an increase of $7.3 million related to consulting services, an
increase of $4.5 million in allocated overhead costs, and an increase of $3.8
million in subscriptions.
Research and Development
Year Ended December 31, Change
2021 2020 $ %
(dollars in thousands)
Research and development $ 189,408 $ 127,144 $ 62,264 49 %
Research and development expenses increased by $62.3 million , or 49%, for the
year ended December 31, 2021 compared to the year ended December 31, 2020 . The
increase was primarily driven by $52.3 million in increased employee-related
costs due to a 37% increase in headcount in our research and development
organization, including an increase of $17.9 million in stock-based compensation
expense and an increase of $1.8 million in allocated overhead costs. The
increases in employee-related costs were partially offset by a decrease of $5.7
million in compensation-related payments to former employees of S2 Systems
Corporation (S2), which was recognized in the three months ended March 31, 2020 .
The remainder of the increase was primarily a result of decreased capitalized
internal-use software development costs of $5.4 million .
General and Administrative
Year Ended December 31, Change
2021 2020 $ %
(dollars in thousands)
General and administrative $ 119,503 $ 91,753 $ 27,750 30 %
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General and administrative expenses increased by$27.8 million , or 30%, for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . The increase was primarily driven by$21.2 million in increased employee-related costs due to a 49% increase in headcount in our general and administrative organization, an increase of$6.0 million in third-party accounting, consulting, and legal services, and an increase of$5.9 million in rent and office related costs, primarily driven by our new office space inAustin, Texas . These increases were partially offset by$8.0 million of decreased allocated overhead costs.
Non-Operating Income (Expense)
Interest Income
Year Ended December 31, Change
2021 2020 $ %
(dollars in thousands)
Interest income $ 1,970 $ 6,588 $ (4,618) (70) %
Interest income decreased by
Interest Expense
Year Ended December 31, Change
2021 2020 $ %
(dollars in thousands)
Interest expense $ (49,234) $ (24,964) $ (24,270) 97 %
Interest expense increased by $24.3 million during the year ended December 31,
2021 as compared to the year ended December 31, 2020 . The increase was primarily
driven by the contractual interest expense and amortization of the discount and
debt issuance costs on the Notes. Refer to Note 7 to our consolidated financial
statements in Part II, Item 8 of this Annual Report on Form 10-K for more
information regarding the Notes.
Loss on Extinguishment of Debt
Year Ended December 31, Change
2021 2020 $ %
(dollars in thousands)
Loss on extinguishment of debt $ (72,234) $ - $ (72,234) *
______________
* Not meaningful
Loss on extinguishment of debt increased by $72.2 million for the year ended
December 31, 2021 as compared to the year ended December 31, 2020 . The increase
was driven by the loss on extinguishment of debt we recognized in connection
with the 2025 Notes Exchange. Refer to Note 7 to our consolidated financial
statements in Part II, Item 8 of this Annual Report on Form 10-K for more
information regarding the Notes.
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Other Income (Expense), net
Year Ended December 31, Change
2021 2020 $ %
(dollars in thousands)
Other income (expense), net $ (794) $ 171 $ (965) *
______________
* Not meaningful
Other income, net did not significantly fluctuate during the year ended
Provision for (Benefit from) Income Taxes
Year Ended December 31, Change
2021 2020 $ %
(dollars in thousands)
Provision for (benefit from) income taxes $ 12,333 $ (5,603) $ 17,936 *
______________
* Not meaningful
We recorded an income tax expense of $12.3 million during the year ended
December 31, 2021 as compared to an income tax benefit of $5.6 million for the
year ended December 31, 2020 . The change was primarily driven by the recording
of a valuation allowance on the Company's U.K. deferred tax assets and income
tax expense related to an acquisition.
Comparison of the Years Ended December 31, 2020 and 2019
Revenue
Year Ended December 31, Change
2020 2019 $ %
(dollars in thousands)
Revenue $ 431,059 $ 287,022 $ 144,037 50 %
Revenue increased by $144.0 million , or 50%, for the year ended December 31,
2020 compared to the year ended December 31, 2019 . The increase in revenue was
primarily due to the addition of new paying customers, as our number of paying
customers increased by 32% during the year ended December 31, 2020 as well as
expansion within our existing paying customers, which was reflected by our
dollar-based net retention rates ranging from 115% to 119% during the four
quarters for the year ended December 31, 2020 .
Cost of Revenue and Gross Margin
Year Ended December 31, Change
2020 2019 $ %
(dollars in thousands)
Cost of revenue $ 101,055 $ 63,423 $ 37,632 59 %
Gross margin 77 % 78 %
Cost of revenue increased by
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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$5.7 million related to the amortization of capitalized internal-use software costs and$3.0 million related to the amortization of acquired developed technology, an increase of$7.3 million in depreciation expense related to purchases of equipment located in co-location facilities, and an increase of$3.7 million in employee-related costs due to a 55% increase in headcount in our customer support and technical operations organizations. The remainder of the increase was primarily due to$3.7 million of increased third-party technology services costs, registry fees, and payment processing fees.
Gross margin did not significantly fluctuate during the year ended
Operating Expenses
Sales and Marketing
Year Ended December 31, Change
2020 2019 $ %
(dollars in thousands)
Sales and marketing $ 217,875 $ 159,298 $ 58,577 37 %
Sales and marketing expenses increased by $58.6 million , or 37%, for the year
ended December 31, 2020 compared to the year ended December 31, 2019 . The
increase was primarily driven by $48.2 million in increased employee-related
costs due to a 46% increase in headcount in our sales and marketing
organization, including an increase of $7.3 million in stock-based compensation
expense. The remainder of the increase was primarily due to an increase of $7.4
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 co-location and bandwidth expenses for free
customers, an increase of $1.9 million in third-party technology services, and
increased expenses of $1.8 million related to consulting and subscriptions,
partially offset by a decrease of $5.2 million in travel-related costs due to
the COVID-19 pandemic.
Research and Development
Year Ended December 31, Change
2020 2019 $ %
(dollars in thousands)
Research and development $ 127,144 $ 90,669 $ 36,475 40 %
Research and development expenses increased by $36.5 million , or 40%, for the
year ended December 31, 2020 compared to the year ended December 31, 2019 . The
increase was primarily driven by $45.6 million in increased employee-related
costs due to a 35% increase in headcount in our research and development
organization, including an increase of $14.1 million in stock-based compensation
expense and an increase of $5.7 million due to compensation-related payments to
former S2 employees in connection with the acquisition. The increase was
partially offset by decreased expenses of $6.5 million as a result of increased
capitalized internal-use software development costs and $2.5 million of
decreased travel-related costs due to the COVID-19 pandemic.
General and Administrative
Year Ended December 31, Change
2020 2019 $ %
(dollars in thousands)
General and administrative $ 91,753 $ 81,578 $ 10,175 12 %
General and administrative expenses increased by $10.2 million , or 12%, for the
year ended December 31, 2020 compared to the year ended December 31, 2019 . The
increase was primarily driven by $11.3 million in increased
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employee-related costs due to a 42% increase in headcount in our general and administrative organization, including a decrease of$1.1 million in stock-based compensation expense,$5.9 million of increased expenses for insurance, fees, and taxes, and an increase of$1.7 million in third-party technology services costs. These increases were partially offset by$6.8 million of decreased professional fees for third-party accounting, consulting, and legal services and$1.0 million of decreased travel-related costs due to the COVID-19 pandemic.
Non-Operating Income (Expense)
Interest Income
Year Ended December 31, Change
2020 2019 $ %
(dollars in thousands)
Interest income $ 6,588 $ 5,787 $ 801 14 %
Interest income increased by $0.8 million , or 14%, for the year ended
December 31, 2020 compared to the year ended December 31, 2019 . The increases
were primarily driven by a higher invested balance in cash and cash equivalents
and available-for-sale securities.
Interest Expense
Year Ended December 31, Change
2020 2019 $ %
(dollars in thousands)
Interest expense $ (24,964) $ (1,112) $ (23,852) *
______________
* Not meaningful
Interest expense increased by $23.9 million during the year ended December 31,
2020 as compared to the year ended December 31, 2019 . The increase was primarily
driven by the amortization of the discount, contractual interest expense, and
amortization of debt issuance costs on the 2025 Notes.
Other Income (Expense), net
Year Ended December 31, Change
2020 2019 $ %
(dollars in thousands)
Other income (expense), net $ 171 $ (1,442) $ 1,613 (112) %
Other expense, net decreased by$1.6 million , or 112%, for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 . The increase was primarily driven by$1.3 million of decreased expense due to reclassification of redeemable convertible preferred stock warrant liability to additional paid-in capital upon the IPO during the year endedDecember 31, 2019 , and by an increased income of$1.0 million mainly due to recognition of a research and development tax credit in theUnited Kingdom . 84
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Provision for (Benefit from) Income Taxes
Year Ended December 31, Change
2020 2019 $ %
(dollars in thousands)
Provision for (benefit from) income taxes $ (5,603) $ 1,115 $ (6,718) *
______________
* Not meaningful
We recorded an income tax benefit of $5.6 million during the year ended
December 31, 2020 as compared to an income tax provision of $1.1 million for the
year ended December 31, 2019 . The change was primarily driven by the partial
release of the U.S. valuation allowance in connection with the acquisition of S2
and excess tax benefits from stock-based compensation deductions in the United
Kingdom , offset by withholding taxes in the United States 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 September 2019 , we completed our 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 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 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 December 31, 2021 , we had cash and cash equivalents of $313.8 million ,
including $13.4 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 $1,508.1 million consisting of U.S.
treasury securities, commercial paper, and corporate bonds. As of December 31,
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
$680.8 million as of December 31, 2021 . We expect to continue to incur operating
losses and cash flow from operations that may fluctuate between positive and
negative 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
to our and our customers', vendors', and
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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 ofDecember 31, 2021 , our material cash requirements include contractual obligations from the Notes, purchase commitments and lease obligations. Refer to Notes 6, 7, and 8 to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for more information regarding these material cash requirements. In addition to the contractual obligations described above, as ofDecember 31, 2021 , we had$7.2 million recognized as total restricted cash on our 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. Cash Flows
The following table summarizes our cash flows for the periods presented:
Year Ended December 31,
2021 2020 2019
(in thousands)
Net cash provided by (used) in operating activities $ 64,648 $ (17,129) $ (38,917)
Net cash used in investing activities $ (709,322) $ (515,273) $ (417,641)
Net cash provided by financing activities $ 847,486 $
504,912
Operating Activities
Net cash provided by operating activities during the year endedDecember 31, 2021 was$64.6 million , which resulted from a net loss of$260.3 million , adjusted for non-cash charges of$321.6 million and net cash inflow of$3.4 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of$90.1 million for stock-based compensation expense,$72.2 million for loss on extinguishment of debt,$66.6 million for depreciation and amortization expense,$46.2 million for amortization of convertible note discount and issuance costs,$29.3 million for amortization of deferred contract acquisition costs,$25.1 million for non-cash operating lease costs,$8.7 million for deferred income taxes,$8.4 million for net accretion of discounts and amortization premiums on available-for-sale securities,$3.8 million for provision for bad debt, partially offset by$29.4 million of exchange of convertible senior notes attributable to the accreted interest related to debt discount. The net cash inflow from changes in operating assets and liabilities was primarily the result of a$64.4 million increase in deferred revenue, a$58.9 million increase in accrued expenses and other current liabilities, partially offset by a$55.4 million increase in deferred contract acquisition costs due to increased sales commissions from the addition of new customers, a$35.8 million increase in accounts receivable, net, which increased due to our growing customer base and timing of collections from our customers, a$23.1 million decrease in operating lease liabilities, and a$4.6 million decrease in other noncurrent liabilities. Net cash used in operating activities during the year endedDecember 31, 2020 was$17.1 million , which resulted from a net loss of$119.4 million , adjusted for non-cash charges of$163.3 million and net cash outflow of$61.1 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of$56.3 million for stock-based compensation expense,$49.4 million for depreciation and amortization expense,$21.6 million for amortization of convertible note discount and issuance costs,$19.8 million for non-cash operating lease costs,$17.3 million for amortization of deferred contract acquisition costs,$3.4 million for provision for bad debt, partially offset by$6.1 million of deferred income taxes. The net cash outflow from changes in operating assets and liabilities was primarily the result of a$36.3 million increase in deferred contract acquisition costs due to increased sales commissions from the addition of new customers, a$33.0 million increase in accounts receivable, net, which 86
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increased due to our growing customer base and timing of collections from our customers, a$20.7 million decrease in operating lease liabilities, a$13.9 million increase in prepaid expenses and other assets, partially offset by a$25.2 million increase in deferred revenue, and a$17.1 million increase in accrued expenses and other current liabilities. Net cash used in operating activities during the year endedDecember 31, 2019 was$38.9 million , which resulted from a net loss of$105.8 million , adjusted for non-cash charges of$79.8 million and net cash outflow of$12.9 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of$36.6 million for stock-based compensation expense,$29.5 million for depreciation and amortization expense, and$10.8 million for amortization of deferred contract acquisition costs. The net cash outflow from changes in operating assets and liabilities was primarily the result of a$14.6 million increase in deferred revenue, and a$13.5 million increase in accounts payable, accrued expenses, and other liabilities, partially offset by a$20.1 million increase in deferred contract acquisition costs due to increased sales commissions from the addition of new customers, an$11.2 million increase in accounts receivable, net, which increased due to our growing customer base and timing of collections from our customers, and a$9.2 million increase in prepaid expenses and other assets. Investing Activities Net cash used in investing activities during the year endedDecember 31, 2021 of$709.3 million resulted primarily from the purchases of available-for-sale securities of$1,589.3 million , capital expenditures of$93.0 million , capitalization of internal-use software development costs of$14.8 million and cash paid for acquisitions, net of cash acquired of$5.6 million . These activities were partially offset by the maturities of available-for-sale securities of$967.5 million and sales of available-for-sale securities of$25.7 million . Net cash used in investing activities during the year endedDecember 31, 2020 of$515.3 million resulted primarily from the purchases of available-for-sale securities of$1,267.0 million , capital expenditures of$56.4 million , and the capitalization of internal-use software development costs of$18.6 million and cash paid for acquisitions, net of cash acquired of$13.9 million . These activities were partially offset by proceeds from maturities of available-for-sale securities of$840.2 million . Net cash used in investing activities during the year endedDecember 31, 2019 of$417.6 million resulted primarily from the purchases of available-for-sale securities of$537.4 million , capital expenditures of$43.3 million , and the capitalization of internal-use software development costs of$14.0 million . These activities were offset by proceeds from the sales and maturities of available-for-sale securities of$177.0 million .
Financing Activities
Net cash provided by financing activities of$847.5 million during the year endedDecember 31, 2021 was primarily due to$1,293.8 million of gross proceeds from issuance of the 2026 Notes,$21.5 million of proceeds from the exercise of vested and unvested stock options, and$15.0 million proceeds from the issuance of Class A common stock pursuant to the 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,$19.8 million cash paid for issuance costs on the 2026 Notes,$3.6 million payment of tax withholding on restricted stock unit (RSU) settlements, and$2.2 million payment of the S2 indemnity holdback. Net cash provided by financing activities of$504.9 million during the year endedDecember 31, 2020 was primarily due to$575.0 million gross proceeds from issuance of the 2025 Notes,$10.9 million proceeds from issuance of Class A common stock pursuant to the ESPP, and$7.7 million of proceeds from the exercise of vested and unvested stock options, 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,$8.1 million payment of tax withholding on RSU settlements, and$0.4 million of payments of tax withholding on Class A common stock issued pursuant to the ESPP. Net cash provided by financing activities of$570.8 million during the year endedDecember 31, 2019 was primarily due to$570.5 million in net proceeds from the IPO, after deducting underwriting discounts and commissions, and$6.0 million of proceeds from the exercise of vested and unvested stock options, partially offset by$5.3 million of payments of deferred offering costs. 87
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Off-Balance Sheet Arrangements
As of December 31, 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 Estimates
Our consolidated financial statements are prepared in accordance with U.S. GAAP.
The preparation of these 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, liability
and equity allocation of convertible senior notes, 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 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 of March 1, 2022 , the date of
issuance of this Annual Report on Form 10-K. 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.
Recent Accounting Pronouncements
Refer to Note 2 to our consolidated financial statements in Part II, Item 8 of
this Annual Report on Form 10-K for more information regarding recently issued
accounting pronouncements.
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