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. This 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.
Overview
Cloudflare's mission is to help build a better Internet. We have built a global
cloud platform that delivers a broad range of network 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 platform serves as a
scalable, easy-to-use, unified control plane to deliver security, performance,
and reliability across their on-premise, hybrid, cloud, and SaaS applications.
Our Business Model
Our business model benefits from our ability to serve the needs of all customers
ranging from individual developers to the largest enterprises, in a
cost-effective manner. Our products are easy to deploy and allow for rapid and
efficient onboarding of new customers and expansion of our relationships with
customers over time. Given the large customer base we have and the immense
amount of Internet traffic that we manage, we are able to negotiate mutually
beneficial agreements with Internet Service Providers (ISPs) that allow us to
place our equipment directly in their data centers, which dramatically 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 platform at low marginal cost.
We generate revenue primarily from sales to our customers of subscriptions to access our platform. 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 (and which we
previously referred to as self-serve customers), 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. Our implementation period for
pay-as-you-go customers is extremely short with most customers implementing our
services within a matter of minutes. While our Pro and Business plans offer
significant value to customers, customers can subscribe to add-on products and
platform 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 (and which we
previously referred to as enterprise customers), 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, although our average
customer sales cycle has lengthened since the COVID-19 pandemic began. 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:
•Free customer base. Free customers are an important part of our business. These
customers, like our pay-as-you-go customers, sign up for our service through our
website and are typically individual
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developers, early stage startups, hobbyists, and other users. Our free customers
create scale, serve as efficient brand marketing, and help us attract
developers, customers, and potential employees. These free customers expose us
to diverse traffic, threats, and problems, often allowing us to see potential
security, performance, and reliability issues at the earliest stage. This
knowledge allows us to improve our products and deliver more effective solutions
to our paid 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 enterprise
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 cloud
platform 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 platform offers to our
customers around the world. This has enabled us to acquire new customers as well
as to expand within our existing customer base in a rapid, cost-effective
manner. In particular, we have invested heavily in our contracted customer sales
efforts.
•New customer acquisition. We believe that any person or business that relies on
the Internet to deliver products, services or content can be a Cloudflare
customer. As such, we are focused on driving an increased number of customers on
our 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
platform 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 platform enables a
large opportunity for growth within our existing customer base given the breadth
of products we offer on our 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 platform it can easily add additional products with a
single click. As we add more products and functionality to our platform, we see
opportunities to drive upsell as customers seek to consolidate onto one platform
to meet all of their security, performance, and reliability network
requirements.
•International reach. Our global network, with a presence in more than 200
cities in over 100 countries, has helped to foster our strong international
growth. International markets represented more than 50% of our revenue in the
three months ended June 30, 2020 and 2019, 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
In September 2019 , we completed an Initial Public Offering (IPO) in which we
issued and sold 40,250,000 shares of Class A common stock, which included
5,250,000 shares sold pursuant to the exercise by the underwriters of an option
to purchase additional shares, at the public offering price of $15.00 per share.
We received net proceeds of $565.0 million from sales of our shares in the IPO,
after deducting underwriting discounts and commissions and offering costs. Upon
completion of the IPO, 31,381,152 shares of redeemable convertible preferred
stock were
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automatically converted into an equal number of shares of Class A common stock,
134,276,690 shares of redeemable convertible preferred stock were automatically
converted into an equal number of shares of Class B common stock, outstanding
warrants to purchase shares of redeemable convertible preferred stock were
automatically converted into outstanding warrants to purchase shares of Class B
common stock, and 15,198,587 shares of Class B common stock held by former
employees were automatically converted into an equal number of shares of 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 paid 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
In earlyMarch 2020 , COVID-19, a disease caused by a novel strain of the coronavirus, was characterized as a pandemic by theWorld Health Organization . SinceDecember 2019 , COVID-19 has spread rapidly, with most countries and territories worldwide having confirmed cases of COVID-19, and a high concentration of cases inthe United States and many other countries in which we and our customers, vendors, and partners operate. The rapid spread has resulted in authorities around the world implementing numerous measures to contain the virus, such as travel restrictions and bans, quarantines, shelter-in-place orders, and mandated business closures. The COVID-19 pandemic and these containment measures 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. 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, so the broader implications of the COVID-19 pandemic on our business and operations and our financial results continue to be uncertain. The duration and severity of the economic downturn from the ongoing COVID-19 pandemic may negatively impact our business and operations, results of operations, financial condition, and cash flows. To date, the COVID-19 pandemic has impacted our employees, our network, and our customers in a number of ways, and this impact could worsen if and to the extent the pandemic continues or becomes more severe. •Our Employees. Our top priority during the COVID-19 pandemic is protecting the health and safety of our employees around the world. As the COVID-19 pandemic expanded globally, 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. 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 40 -------------------------------------------------------------------------------- Table of contents 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, including allowing some of our employees to work from our offices located in jurisdictions that permit returns to offices and where we believe such a return to office can occur safely. To the extent current or future measures we implement result in decreased productivity, harm our company culture, or otherwise negatively affect our business, our financial condition, and operating results could be materially and adversely affected. We are continuing our efforts to increase our workforce to support the ongoing growth in our business, which currently is occurring through a virtual hiring and onboarding process. Depending on the length and severity of the COVID-19 pandemic and its effect on our business, however, we may experience difficulties in continuing to expand our workforce or we may determine to slow our hiring. Any delays in expanding our workforce may result in key positions remaining unfilled, which could negatively impact our business, financial condition, or operating results. •Our Network. The change in everyday behavior caused by the COVID-19 pandemic during the six months endedJune 30, 2020 has 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 while the isolation mandates across the globe remain in place 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 location when the isolation mandates are lifted and when more workers begin to 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 adverse impacts on our ability to provision our network co-location facilities, including delays in our ability to obtain servers and other hardware and to ship and install such hardware at our network facilities. While we have been able to lessen these adverse impacts to date through our planning processes and use of alternative vendors, our ability to continue to provision our existing network facilities and expand into new network facilities may become more difficult and more expensive the longer the COVID-19 pandemic continues 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 taken by governments around the world to contain the spread of COVID-19 are materially and adversely impacting many of our current and potential customers, and this impact could negatively impact our business and operations, results of operations, financial condition, and cash flows. During the six months endedJune 30, 2020 , we experienced an increase in the sales cycle for our products with many customers and in the proportion of our pipeline of prospective future customers that was lost, as well as an increase in 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. We also may experience future slowing in our collections of outstanding accounts receivables from some of our customers. We expect these trends and risks to continue while the COVID-19 pandemic persists and they could intensify as the pandemic continues and the financial condition of some of our current and potential customers deteriorates. While we have sought to ameliorate these negative sales impacts 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, there can be no assurance that these efforts will be successful. During this ongoing COVID-19 pandemic, IT organizations are working tirelessly to ensure their teams remain safe and productive, while facing greater network demands, a rapid acceleration in remote work, and a growing risk of cyber threats. In the face of these challenges, we believe our mission of helping to build a better Internet is more important than ever and we have taken a number of steps to increase access to our products for thosewho need them: 41 -------------------------------------------------------------------------------- Table of contents •InMarch 2020 , we announced that ourCloudflare for Teams products will be free untilSeptember 1, 2020 , to ensure our customers and prospective customers have the tools they need to support secure and efficient remote work. We have also removed usage caps for existingCloudflare for Teams users and are also providing onboarding sessions so these groups can continue business in this new normal. •InApril 2020 , we announced that we will provide a free package of services to state and local governments worldwide untilSeptember 1, 2020 , to ensure they have the tools needed to secure their web infrastructure and internal teams.
•We also announced that we will offer
For further discussion of the challenges and risks we confront related to the
COVID-19 pandemic and otherwise, please refer to Part II, Item 1A "Risk Factors"
of this Quarterly Report on Form 10-Q, including the risk factor titled "The
effects of the ongoing COVID-19 pandemic have materially affected how we and our
customers, vendors, and partners are operating our businesses, and the duration
and extent to which this will negatively impact our future business and
operations, results of operations, financial condition and cash flows remain
uncertain."
Non-GAAP Financial Measures and Key Business Metrics
We review a number of financial and operating metrics, including the following
non-GAAP financial measures and key metrics to evaluate our business, measure
our performance, identify trends affecting our business, formulate business
plans, and make strategic decisions.
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
(dollars in thousands)
Gross profit $ 75,557 $ 52,592 $ 145,986 $ 99,959
Gross margin 76 % 78 % 76 % 77 %
Loss from operations $ (24,704) $ (19,771) $ (60,775) $ (36,918)
Non-GAAP loss from operations $ (9,487) $ (18,695) $ (23,880) $ (34,754)
Operating margin (25) % (29) % (32) % (29) %
Non-GAAP operating margin (10) % (28) % (13) % (27) %
Net cash provided by (used in) operating
activities $ 3,987 $ (2,867) $ (10,289) $ (12,557)
Net cash provided by (used in) investing
activities $ (300,769) $ 12,638 $ (309,541) $ 27,847
Net cash provided by (used in) financing
activities $ 501,702 $ (199) $ 497,024 $ 2,049
Free cash flow $ (20,154) $ (16,895) $ (50,757) $ (39,018)
Net cash provided by (used in) operating
activities (as a percentage of revenue) 4 % (4) % (5) % (10) %
Free cash flow margin (20) % (25) % (27) % (30) %
Paying customers 96,178 77,626 96,178 77,626
Paying customers (>$100,000 Annualized
Revenue) 637 387 637 387
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 provided by (used in) operating activities.
Additionally, the utility of free cash flow as a measure of our liquidity is
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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
with U.S. GAAP. Investors are encouraged to review the related U.S. GAAP
financial measures and the reconciliation of these non-GAAP financial measures
to their most directly comparable U.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 as U.S.
GAAP loss from operations and U.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
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 Six Months Ended
June 30, June 30,
2020 2019 2020 2019
(dollars in thousands)
Loss from operations $ (24,704) $ (19,771) $ (60,775) $ (36,918)
Add:
Stock-based compensation expense and related
employer payroll taxes 14,568 1,044 29,185 2,101
Amortization of acquired intangible assets 700 32 1,431 63
Acquisition-related and other expenses (51) - 6,279 -
Non-GAAP loss from operations $ (9,487) $
(18,695)
(25) % (29) % (32) % (29) %
Non-GAAP operating margin (non-GAAP loss from
operations as a percentage of revenue) (10) % (28) % (13) % (27) %
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 Six Months Ended
June 30, June 30,
2020 2019 2020 2019
(dollars in thousands)
Net cash provided by (used in) operating
activities $ 3,987 $
(2,867)
(9,954) (30,605) (18,990)
Less: Capitalized internal-use software (4,941) (4,074) (9,863) (7,471)
Free cash flow $ (20,154) $
(16,895)
$ (300,769) $
12,638
$ 501,702 $ (199) $ 497,024 $ 2,049 Net cash provided by (used in) operating activities (as a percentage of revenue) 4 % (4) % (5) % (10) % Less: Purchases of property and equipment (as a percentage of revenue) (19) % (15) % (17) % (15) % Less: Capitalized internal-use software (as a percentage of revenue) (5) % (6) % (5) % (5) % Free cash flow margin (20) % (25) % (27) % (30) % Key Business Metrics In addition to our results determined in accordance withU.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 endedMarch 31, 2020 , we have 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 platform provides a key indicator of growth of our business and our future business opportunities. We define a paying customer as a person or entitywho has generated revenue during the 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 96,178 and 77,626 as ofJune 30, 2020 andJune 30, 2019 , respectively. Paying Customers (>$100,000 Annualized Revenue) While we continue to grow customers across all sizes, over time, our large customers have contributed an increasing share of our revenue. We view the number of customers with Annualized Revenue greater than$100,000 as indicative of our penetration within large enterprise accounts. To measure Annualized Revenue, 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$600 of revenue in the quarter, that customer would account for$2,400 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 44 -------------------------------------------------------------------------------- Table of contents product, and (iii) customers using our consumer applications, such as 1.1.1.1 and Warp, which agreements and customers together represent an insignificant amount of our revenue. Our Annualized Revenue metric also includes any usage charges by a customer during a period, which represents a small portion of our total revenue and may not be recurring. As a result, Annualized Revenue may be higher than actual revenue over the course of the year. The number of paying customers with Annualized Revenue greater than$100,000 was 637 and 387 as ofJune 30, 2020 andJune 30, 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 cloud platform. 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 platform. 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 period, 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 endedJune 30, 2020 andJune 30, 2019 were 115% and 122%, respectively. Components of Our Results of Operations
Revenue
We generate revenue primarily from sales to our customers of subscriptions to
access our platform, 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 cloud platform.
Instead, customers are granted continuous access to our platform 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 platform in a given period
and is recognized as revenue in the period in which the usage occurs.
The typical subscription and support term for our contracted customers is one
year and subscription and support term lengths range from one to three years.
Most of our contracts with contracted customers are non-cancelable over the
contractual term. Customers typically have the right to terminate their
contracts for cause if we fail to perform in accordance with the contractual
terms. For our pay-as-you-go customers, subscription and support terms are
typically monthly.
Cost of Revenue
Cost of revenue consists primarily of expenses that are directly related to
providing our service to our paying customers. These expenses include expenses
related to operating in co-location facilities, network and bandwidth costs,
depreciation of our equipment located in co-location facilities, certificate
authority services costs for paying customers, related overhead costs, the
amortization of our capitalized internal-use software, and the amortization of
acquired developed technologies. Cost of revenue also includes employee-related
costs, including salaries, bonuses, benefits, and stock-based compensation for
employees whose primary responsibilities relate to supporting our paying
customers and delivering paid customer support. 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 cloud platform 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
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economies of scale as our customers increase the use of our global cloud
platform. We intend to continue to invest additional resources in our global
cloud platform 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 cloud platform, 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. We also
incurred a significant increase in sales and marketing expenses from the
stock-based compensation expense related to RSUs. 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 cloud platform. 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 cloud platform. We also incurred a significant
increase in research and development expenses from the stock-based compensation
expense related to RSUs. However, we expect our research and development
expenses to decrease 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. We also incurred a
significant increase in general and administrative expenses from the stock-based
compensation expense related to RSUs. 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.
46
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Non-Operating Income (Expense)
Interest Income
Interest income consists primarily of interest earned on our cash, cash
equivalents, and our investment holdings.
Interest Expense
Interest expense consists primarily of contractual interest expense and
amortization of the discount and debt issuance costs on our $575.0 million
aggregate principal amount of 0.75% Convertible Senior Notes due May 2025 (the
Notes) which were issued in May 2020 . Previously, interest expense consisted
primarily of interest related to our built-to-suit lease financing obligation
and interest on our notes payable.
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 three and six
months ended June 30, 2019 also included expenses resulting from the revaluation
of our redeemable convertible preferred stock warrant liability.
Provision for (Benefit from) Income Taxes
Provision for (benefit from) income taxes consists primarily of income taxes in
certain foreign jurisdictions in which we conduct business, as well as state
income taxes in the United States . We maintain a full valuation allowance on our
federal and state deferred tax assets as we have concluded that it is more
likely than not that the deferred tax assets will not be realized.
47--------------------------------------------------------------------------------
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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 Six Months Ended
June 30, June 30,
2020 2019 2020 2019
(dollars in thousands)
Revenue $ 99,721 $ 67,424 $ 190,971 $ 129,151
Cost of revenue(1) 24,164 14,832 44,985 29,192
Gross profit 75,557 52,592 145,986 99,959
Operating expenses:
Sales and marketing(1) 51,376 35,836 98,341 66,653
Research and development(1) 28,131 18,868 61,485 36,517
General and administrative(1) 20,754 17,659 46,935 33,707
Total operating expenses 100,261 72,363 206,761 136,877
Loss from operations (24,704) (19,771) (60,775) (36,918)
Non-operating income (expense):
Interest income 1,857 830 4,426 1,743
Interest expense (5,007) (290) (5,074) (563)
Other income (expense), net (219) (86) 266 (379)
Total non-operating income (expense), net (3,369) 454 (382) 801
Loss before income taxes (28,073) (19,317) (61,157) (36,117)
Provision for (benefit from) income taxes (1,938) 389 (2,276) 703
Net loss $ (26,135) $ (19,706) $ (58,881) $ (36,820)
_______________(1) Includes stock-based compensation expense as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
(dollars in thousands)
Cost of revenue $ 280 $ 34 $ 547 $ 66
Sales and marketing 3,608 275 6,771 554
Research and development 5,374 406 11,464 823
General and administrative 3,187 329 6,564 658
Total stock-based compensation expense
$ 25,346 $ 2,101 48
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Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
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 52 53 51 52
Research and development 28 28 32 28
General and administrative 21 26 25 26
Total operating expenses 101 107 108 106
Loss from operations (25) (29) (32) (29)
Non-operating income (expense):
Interest income 2 1 2 1
Interest expense (5) - (2) -
Other income (expense), net - - - -
Total non-operating income, net (3) 1 - 1
Loss before income taxes (28) (28) (32) (28)
Provision for (benefit from) income taxes (2) 1 (1) 1
Net loss (26) % (29) % (31) % (29) %
Comparison of Three and Six Months Ended June 30, 2020 and 2019
Revenue
Three Months Ended Six Months Ended
June 30, Change June 30, Change
2020 2019 $ % 2020 2019 $ %
(dollars in thousands)
Revenue $ 99,721 $ 67,424 $ 32,297 48 % $ 190,971 $ 129,151 $ 61,820 48 %
Revenue increased by $32.3 million , or 48%, for the three months ended June 30,
2020 compared to the three months ended June 30, 2019 . The increase in revenue
was primarily due to the addition of new paying customers, as our number of
paying customers increased by 24% for the three months ended June 30, 2020
compared to the three months ended June 30, 2019 , as well as the expansion
within our existing paying customers, which was reflected by our dollar-based
net retention rate of 115% for the three months ended June 30, 2020 .
Revenue increased by $61.8 million , or 48%, for the six months ended June 30,
2020 compared to the six months ended June 30, 2019 . The increase in revenue was
primarily due to the addition of new paying customers, as our number of paying
customers increased by 24% as of June 30, 2020 compared to the prior period
ended June 30, 2019 , as well as the expansion within our existing paying
customers, as reflected by our dollar-based net retention rate of 115% for the
three months ended June 30, 2020 .
Cost of Revenue and Gross Margin
Three Months Ended Six Months Ended
June 30, Change June 30, Change
2020 2019 $ % 2020 2019 $ %
(dollars in thousands)
Cost of revenue $ 24,164 $ 14,832 $ 9,332 63 % $ 44,985 $ 29,192 $ 15,793 54 %
Gross margin 76 % 78 % 76 % 77 %
49-------------------------------------------------------------------------------- Table of contents Cost of revenue increased by$9.3 million , or 63%, for the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 . The increase in the cost of revenue was primarily due to an increase of$3.8 million in expenses related to operating in co-location facilities and network and bandwidth costs for operating our global cloud platform for our expanded customer base as well as increased capacity to support our growth, an increase of$2.2 million in depreciation expense related to purchases of equipment located in co-location facilities, an increase of$1.3 million related to the amortization of capitalized internal-use software costs and$0.7 million related to the amortization of acquired developed technology, an increase of$0.9 million in employee-related costs due to a 38% increase in headcount in our customer support and technical operations organizations, and an increase of$0.4 million in third-party technology services. Cost of revenue increased by$15.8 million , or 54%, for the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 . The increase in the cost of revenue was primarily due to an increase of$6.2 million in expenses related to operating in co-location facilities and network and bandwidth costs for operating our global cloud platform for our expanded customer base as well as increased capacity to support our growth, an increase of$3.8 million in depreciation expense related to purchases of equipment located in co-location facilities, an increase of$2.5 million related to the amortization of capitalized internal-use software costs and$1.4 million related to the amortization of acquired developed technology, and an increase of$1.9 million in employee-related costs due to a 38% increase in headcount in our customer support and technical operations organizations. Gross margin did not significantly fluctuate during the three and six months endedJune 30, 2020 as compared to the three and six months endedJune 30, 2019 . Operating Expenses Sales and Marketing Three Months Ended Six Months Ended June 30, Change June 30, Change 2020 2019 $ % 2020 2019 $ % (dollars in thousands) Sales and marketing$ 51,376 $ 35,836 $ 15,540
43 %
48 %
Sales and marketing expenses increased by$15.5 million , or 43%, for the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 . The increase was primarily driven by$13.0 million in increased employee-related costs due to a 53% increase in headcount in our sales and marketing organization fromJune 30, 2019 toJune 30, 2020 , including an increase of$3.3 million in stock-based compensation expense. The remainder of the increase was primarily due to an increase of$1.4 million in expenses for marketing programs due to investments in brand awareness advertising, third-party industry events, and digital performance marketing, an increase of$1.3 million in co-location and bandwidth expenses for free customers, increased expenses of$1.0 million related to allocated overhead costs and increased third-party technology services, partially offset by a decrease of$1.5 million in travel-related costs due to the COVID-19 pandemic. Sales and marketing expenses increased by$31.7 million , or 48%, for the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 . The increase was primarily driven by$24.6 million in increased employee-related costs due to a 53% increase in headcount in our sales and marketing organization fromJune 30, 2019 toJune 30, 2020 , including an increase of$6.2 million in stock-based compensation expense. The remainder of the increase was primarily due to an increase of$2.9 million in expenses for marketing programs due to investments in brand awareness advertising, third-party industry events, and digital performance marketing, increased expenses of$2.5 million related to allocated overhead costs and increased third-party technology services, and an increase of$2.3 million in co-location and bandwidth expenses for free customers, partially offset by a decrease of$1.1 million in travel-related costs due to the COVID-19 pandemic. 50 -------------------------------------------------------------------------------- Table of contents Research and Development Three Months Ended Six Months Ended June 30, Change June 30, Change 2020 2019 $ % 2020 2019 $ % (dollars in thousands)
Research and development
49 %
68 % Research and development expenses increased by$9.3 million , or 49%, for the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 . The increase was primarily driven by$12.2 million in increased employee-related costs due to a 31% increase in headcount in our research and development organization fromJune 30, 2019 toJune 30, 2020 , including an increase of$6.0 million in stock-based compensation expense. The increases were partially offset by decreased expenses of$2.2 million as a result of increased capitalized internal-use software development costs and a decrease of$0.7 million in travel-related costs due to the COVID-19 pandemic. Research and development expenses increased by$25.0 million , or 68%, for the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 . The increase was primarily driven by$29.6 million in increased employee-related costs due to a 31% increase in headcount in our research and development organization fromJune 30, 2019 toJune 30, 2020 , including an increase of$12.1 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 remainder of the increase was primarily due to$0.6 million of increased allocated overhead costs. These increases were partially offset by decreased expenses of$4.3 million as a result of increased capitalized internal-use software development costs and$0.8 million of decreased travel-related costs due to the COVID-19 pandemic. General and Administrative Three Months Ended Six Months Ended June 30, Change June 30, Change 2020 2019 $ % 2020 2019 $ % (dollars in thousands)
General and administrative
18 %$ 46,935 $ 33,707 $ 13,228 39 % General and administrative expenses increased by$3.1 million , or 18%, for the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 . The increase was primarily driven by$5.7 million in increased employee-related costs due to a 48% increase in headcount in our general and administrative organization fromJune 30, 2019 toJune 30, 2020 , including an increase of$2.9 million in stock-based compensation expense, and$1.8 million of increased expenses for insurance, fees, and taxes. The remainder of the increase was primarily due to$0.6 million of increased depreciation expense and third-party technology services costs. These increases were partially offset by$4.0 million of decreased professional fees for third-party accounting, consulting, and legal services and$0.6 million of decreased allocated overhead costs. General and administrative expenses increased by$13.2 million , or 39%, for the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 . The increase was primarily driven by$11.9 million in increased employee-related costs due to a 48% increase in headcount in our general and administrative organization fromJune 30, 2019 toJune 30, 2020 , including an increase of$5.9 million in stock-based compensation expense,$4.4 million of increased expenses for insurance, fees, and taxes, and an increase of$2.0 million in bad debt expense primarily due to impacts related to COVID-19. The remainder of the increase was primarily due to$1.6 million of increased depreciation expense and third-party technology services costs. These increases were partially offset by$5.0 million of decreased professional fees for third-party accounting, consulting, and legal services and$2.2 million of decreased allocated overhead costs. 51 -------------------------------------------------------------------------------- Table of contents Non-Operating Income (Expense) Interest Income Three Months Ended Six Months Ended June 30, Change June 30, Change 2020 2019 $ % 2020 2019 $ % (dollars in thousands) Interest income$ 1,857 $ 830 $ 1,027 124 %$ 4,426 $ 1,743 $ 2,683
154 %
Interest income increased by$1.0 million and$2.7 million , or 124% and 154%, for the three and six months endedJune 30, 2020 , respectively, compared to the three and six months endedJune 30, 2019 . The increases were primarily driven by a higher invested balance in cash and cash equivalents and available-for-sale securities. Interest Expense Three Months Ended Six Months Ended June 30, Change June 30, Change 2020 2019 $ % 2020 2019 $ % (dollars in thousands) Interest expense$ (5,007) $ (290) $ (4,717)
1627 %
801 %
Interest expense increased by$4.7 million and$4.5 million for the three and six months endedJune 30, 2020 , respectively, compared to the three and six months endedJune 30, 2019 . The increases were primarily driven by the contractual interest expense and amortization of the discount and debt issuance costs on our Notes, which were issued inMay 2020 . Other Income (Expense), net Three Months Ended Six Months Ended June 30, Change June 30, Change 2020 2019 $ % 2020 2019 $ % (dollars in thousands)
Other income (expense), net$ (219) $ (86) $ (133) 155 %$ 266 $ (379) $ 645 * ______________ * Not meaningful Other income (expense), net decreased by$0.1 million , for the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 . The decrease was primarily driven by higher expense of$0.2 million as a result of fluctuations in foreign currency transaction gains and losses,$0.1 million loss on sale of property and equipment, offset by$0.3 million of Jobs Support Scheme funding received from theSingapore government in connection with its COVID-19 impact relief efforts. Other income (expense), net increased by$0.6 million for the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 . The increase was primarily driven by$0.3 million of Jobs Support Scheme funding received from theSingapore government in connection with its COVID-19 impact relief efforts and$0.4 million benefit from a tax credit in theUnited Kingdom . Provision for (Benefit from) Income Taxes Three Months Ended Six Months Ended June 30, Change June 30, Change 2020 2019 $ % 2020 2019 $ % (dollars in thousands) Provision for (benefit from) income taxes$ (1,938) $ 389 $ (2,327)
*$ (2,276) $ 703 $ (2,979) * _______________ * Not meaningful 52
-------------------------------------------------------------------------------- Table of contents The provision for (benefit from) income taxes decreased by$2.3 million for the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 . The decrease was primarily driven by excess tax benefits from stock-based compensation deductions in theUnited Kingdom , offset by withholding taxes in theU.S. and income tax expense from profitable foreign jurisdictions. The provision for (benefit from) income taxes decreased by$3.0 million for the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 . The decrease was primarily driven by the partial release of theU.S. valuation allowance in connection with the acquisition of S2 and excess tax benefits from stock-based compensation deductions in theUnited Kingdom , offset by withholding taxes in theU.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 cloud platform. InSeptember 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 net proceeds of$565.0 million from sales of our shares in the IPO, net of underwriters' discounts and commissions, after deducting offering costs of$5.5 million . InMay 2020 , we issued$575.0 million aggregate principal amount of 0.75% Convertible Senior Notes dueMay 2025 (the Notes) in a private offering to qualified institutional buyers pursuant to Rule 144A promulgated under the Securities Act, from which we received total net proceeds, after deducting initial purchaser discounts and debt issuance costs, of$562.5 million . As ofJune 30, 2020 , we had cash and cash equivalents of$314.0 million , including$4.2 million held by our foreign subsidiaries. We do not expect to incur material taxes in the event we repatriate any of these amounts. Our cash and cash equivalents primarily consist of cash, highly liquid money market funds, and commercial paper. We also had available-for-sale securities of$755.1 million consisting ofU.S. treasury securities,U.S. government agency securities, commercial paper, and corporate bonds. As ofJune 30, 2020 , 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$360.0 million as ofJune 30, 2020 and negative cash flows from operations. We expect to continue to incur operating losses and generate negative cash flows from operations for the foreseeable future due to the investments we intend to make in our business, and as a result we may require additional capital resources to execute on our strategic initiatives to grow our business. We believe that our existing cash, cash equivalents, and available-for-sale securities will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months. Our assessment of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties. Our actual results could vary as a result of, and our near- and long-term future capital requirements will depend on, many factors, including our growth rate, subscription renewal activity, the timing and extent of spending to support our infrastructure and research and development efforts, the expansion of sales and marketing activities, the timing of new introductions of products or features, and the continuing market adoption of our global cloud platform, and the impact of the ongoing COVID-19 pandemic to our and our customers', vendors', and partners' businesses. We may in the future enter into arrangements to acquire or invest in complementary businesses, services and technologies, including intellectual property rights. We have based our estimates on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. Additionally, some of the factors that may influence our operations are not within our control, such as general economic conditions and the length and severity of the COVID-19 pandemic. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, or if we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, operating results, and financial condition would be adversely affected. Cash Flows The following table summarizes our cash flows for the periods presented: 53
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Six Months Ended June 30,
2020 2019
(in thousands)
Net cash used in operating activities $ (10,289) $ (12,557)
Net cash provided by (used in) investing activities $ (309,541) $ 27,847
Net cash provided by financing activities $ 497,024 Operating Activities Net cash used in operating activities during the six months endedJune 30, 2020 was$10.3 million , which resulted from a net loss of$58.9 million , adjusted for non-cash charges of$68.0 million and net cash outflow of$19.4 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of$25.3 million for stock-based compensation expense,$22.1 million for depreciation and amortization expense,$9.3 million for non-cash operating lease costs,$7.5 million for amortization of deferred contract acquisition costs, and$4.3 million for amortization of debt discount and issuance costs related to the Notes. The net cash outflow from changes in operating assets and liabilities was primarily the result of a$16.2 million increase in deferred contract acquisition costs due to increased sales commissions from the addition of new customers, a$12.3 million increase in accounts receivable, net, which increased due to our growing customer base and timing of collections from our customers, a$10.2 million decrease in operating lease liabilities, a$1.4 million decrease in other noncurrent liabilities, and a$1.1 million increase in prepaid expenses and other assets, partially offset by a$13.4 million increase in deferred revenue, a$4.3 million increase in accounts payable, and$4.2 million increase in accrued expenses and other current liabilities. Net cash used in operating activities during the six months endedJune 30, 2019 was$12.6 million , which resulted from a net loss of$36.8 million , adjusted for non-cash charges of$20.1 million and net cash inflow of$4.1 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of$13.2 million for depreciation and amortization expense,$4.9 million for amortization of deferred contract acquisition costs, and$2.1 million for stock-based compensation expense. The net cash inflow from changes in operating assets and liabilities was primarily the result of a$10.7 million increase in deferred revenue, and an$8.9 million increase in accounts payable, accrued expenses, and other liabilities, partially offset by an$8.4 million increase in deferred contract acquisition costs due to increased sales commissions from the addition of new customers, a$5.2 million increase in accounts receivable, net, which increased due to our growing customer base and timing of collections from our customers, and a$1.7 million increase in prepaid expenses and other assets. Investing Activities Net cash used in investing activities during the six months endedJune 30, 2020 of$309.5 million resulted primarily from the purchases of available-for-sale securities of$579.4 million , capital expenditures of$30.6 million , cash payments related to acquisition of S2 of$13.7 million , and the capitalization of internal-use software development costs of$9.9 million . These activities were partially offset by proceeds from maturities of available-for-sale securities of$323.8 million . Net cash provided by investing activities during the six months endedJune 30, 2019 of$27.8 million resulted primarily from proceeds from the sales and maturities of available-for-sale securities of$99.4 million . This was offset by the purchases of available-for-sale securities of$45.1 million , capital expenditures of$19.0 million , and the capitalization of internal-use software development costs of$7.5 million . Financing Activities Net cash provided by financing activities of$497.0 million during the six months endedJune 30, 2020 was primarily due to$575.0 million gross proceeds from issuance of the Notes,$5.4 million proceeds from issuance of common stock for employee stock purchase plan,$4.4 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 Notes,$12.5 million cash paid for issuance costs on the Notes,$7.3 million payment of tax withholding on RSU settlements, and$0.4 million of payments of tax withholding on common stock issued under employee stock purchase plan. 54 -------------------------------------------------------------------------------- Table of contents Net cash provided by financing activities of$2.0 million during the six months endedJune 30, 2019 was primarily due to$3.2 million of proceeds from the exercise of vested and unvested stock options, offset by$1.0 million of payments of deferred offering costs and$0.2 million of payments on the note payable related to the Installment Purchase Agreements (IPA) entered into in 2015. Contractual Obligations and Commitments
The following table summarizes our contractual obligations as of
Payments Due by Period as of
Less than 1 More than 5
Total Year 1-3 Years 3-5 Years Years
(in thousands)
Non-cancelable:
Open purchase agreements(1) $ 16,242 $ 2,695
31,689 8,673 16,947 4,768 1,301
Operating lease obligations(3) 70,727 9,227 34,436 14,836 12,228
0.75% Convertible Senior Notes Due May 2025 575,000 - - 575,000 -
Interest obligations(4) 21,011 2,156 8,625 8,625 1,605
Other commitments(5) 2,188 - 2,188 - -
Total $ 716,857 $ 22,751 $ 68,683 $ 605,261 $ 20,162
(1)Open purchase commitments are for the purchase of services under
non-cancelable contracts. They were not recorded as liabilities on the condensed
consolidated balance sheet as of June 30, 2020 as we had not yet received the
related services.
(2)Long-term commitments for bandwidth usage and other co-location related
commitments with various networks and Internet service providers. The costs for
services not yet received were not recorded as liabilities on the condensed
consolidated balance sheet as of June 30, 2020 .
(3)Office space, equipment, and co-location agreements under non-cancelable
operating leases, primarily due to our headquarters in San Francisco, California
and for our offices in Austin, Texas ; San Jose, California ; London, United
Kingdom ; and Singapore . Total payments listed represent total minimum future
lease payments.
(4)Represents aggregate interest obligations for our outstanding convertible
senior notes that are payable in cash, excluding non-cash amortization of debt
issuance costs. For further details on our debt, refer to Note 7 to the
condensed consolidated financial statements included in this Quarterly Report on
Form 10-Q.
(5)Indemnity holdback consideration associated with the S2 acquisition. For
further details on the S2 acquisition, refer to Note 14 to the condensed
consolidated financial statements included in this Quarterly Report on Form
10-Q.
The contractual commitment amounts in the table above are associated with
agreements that are enforceable and legally binding. Obligations under contracts
that we can cancel without a significant penalty are not included in the tables
above. Purchase orders issued in the ordinary course of business are not
included in the tables above, as our purchase orders represent authorizations to
purchase rather than binding agreements.
In addition to the contractual obligations set forth above, as of June 30, 2020 ,
we had $8.8 million recognized as long-term restricted cash on our condensed
consolidated balance sheets which consisted of $6.6 million in letters of credit
outstanding in favor of certain landlords for office space and $2.2 million in
cash related to a payment obligation in connection with the acquisition of S2.
The letters of credit renew annually and expire on various dates through 2028.
For further details on our leases and other commitments, refer to Note 8 to the
condensed consolidated financial statements included elsewhere in this Quarterly
Report on Form 10-Q.
Off-Balance Sheet Arrangements
As of June 30, 2020 , 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.
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Critical Accounting Policies, Significant Judgments and Use of 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. 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 August 10, 2020 ,
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, 2019 . There have been no significant changes to these
policies for the six months ended June 30, 2020 , except as described in Note 2
to our condensed consolidated financial statements included elsewhere in this
Quarterly Report on Form 10-Q.
JOBS Act Accounting Election
We meet the definition of an emerging growth company under the JOBS Act, which
permits us to take advantage of an extended transition period to comply with new
or revised accounting standards applicable to public companies. We have elected
to use this extended transition period until we are no longer an emerging growth
company or until we affirmatively and irrevocably opt out of the extended
transition period. As a result, our condensed consolidated financial statements
may not be comparable to companies that comply with new or revised accounting
pronouncements applicable to public companies. Based on our aggregate worldwide
market value of voting and non-voting common equity held by non-affiliates as of
June 30, 2020 , we expect that we will become a "large accelerated filer" and
lose emerging growth status beginning with our Annual Report on Form 10-K for
the year ended December 31, 2020 .
Recently Issued Accounting PronouncementsRefer to Note 2 to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for more information regarding recently issued accounting pronouncements.
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