DATADOG, INC. 
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10- K. This discussion, particularly information with respect to our future results of operations or financial condition, business strategy and plans and objectives of management for future operations, includes forward-looking statements that involve risks and uncertainties as described under the heading "Special Note Regarding Forward-Looking Statements" in this Annual Report on Form 10-K. You should review the disclosure under the heading "Part I, Item 1A. Risk Factors" in this Annual Report on Form 10-K for a discussion of important factors that could cause our actual results to differ materially from those anticipated in these forward-looking statements.
Overview
Our SaaS platform integrates and automates infrastructure monitoring, application performance monitoring, log management, and security monitoring to provide unified, real-time observability of our customers' entire technology stack.Datadog is used by organizations of all sizes and across a wide range of industries to enable digital transformation and cloud migration, drive collaboration among development, operations and business teams, accelerate time to market for applications, reduce time to problem resolution, understand user behavior and track key business metrics. We generate revenue from the sale of subscriptions to customers using our cloud-based platform. The terms of our subscription agreements are primarily monthly or annual. Customers also have the option to purchase additional products, such as additional containers to monitor, custom metrics packages, anomaly detection and app analytics. Professional services are generally not required for the implementation of our products and revenue from such services has been immaterial to date. We employ a land-and-expand business model centered around offering products that are easy to adopt and have a very short time to value. Our customers can expand their footprint with us on a self-service basis. Our customers often significantly increase their usage of the products they initially buy from us and expand their usage to other products we offer on our platform. We grow with our customers as they expand their workloads in the public and private cloud. As ofDecember 31, 2020 , we had$228.7 million in cash, cash equivalents and restricted cash and$1,292.5 million in marketable securities. We have grown rapidly in recent periods, with revenues for the fiscal years endedDecember 31, 2020 , 2019 and 2018 of$603.5 million ,$362.8 million , and$198.1 million , respectively, representing year-over-year growth of 66% from the fiscal year endedDecember 31, 2019 to the fiscal year endedDecember 31, 2020 and 83% from the fiscal year endedDecember 31, 2018 to the fiscal year endedDecember 31, 2019 . Substantially all of our revenue is from subscription software sales. We expect that the rate of growth in our revenue will continue to decline as our business scales, even if our revenue continues to grow in absolute terms. We have continued to make significant expenditures and investments, including in personnel-related costs, sales and marketing, infrastructure and operations, and have incurred net losses of$(24.5) million ,$(16.7) million and$(10.8) million for the fiscal years endedDecember 31, 2020 , 2019 and 2018, respectively. Our operating cash flow was$109.1 million ,$24.2 million and$10.8 million for the years endedDecember 31, 2020 , 2019 and 2018, respectively. Our free cash flow was$83.2 million ,$0.8 million and$(5.0) million for the years endedDecember 31, 2020 , 2019 and 2018, respectively. See the section titled "-Liquidity and Capital Resources-Non-GAAP Free Cash Flow" below. SinceDecember 2019 , COVID-19 has spread to multiple countries, includingthe United States and other countries in which we and our customers, partners, suppliers, vendors and other parties with whom we do business operate. The extent of the impact of the COVID-19 pandemic on our operational and financial performance depends on certain developments, including the duration and spread of the outbreak, its impact on industry events, and its effect on our customers, partners, suppliers and vendors and other parties with whom we do business, all of which are uncertain and cannot be predicted at this time. To the extent possible, we are conducting business as usual, with necessary or advisable modifications to employee travel and employee work locations, and cancelling or holding virtuallyDatadog marketing events. We are continuing to actively monitor the rapidly evolving situation related to COVID-19 and may take further actions that alter our business operations, including those that may be required by federal, state or local authorities, or that we determine are in the best interests of our employees, customers, partners, suppliers, vendors and stockholders. The extent to which the COVID-19 pandemic may impact our results of operations and financial condition remains uncertain. In addition, due to our subscription model, the effect of the COVID-19 pandemic, if any, may not be fully reflected in our results of operations until future periods. 43
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Factors Affecting Our Performance
Acquiring New Customers
We believe there is substantial opportunity to continue to grow our customer base. We intend to drive new customer acquisition by continuing to invest significantly in sales and marketing to engage our prospective customers, increase brand awareness and drive adoption of our platform and products. We also plan to continue to invest in building brand awareness within the development and operations communities. As ofDecember 31, 2020 , we had approximately 14,170 customers spanning organizations of a broad range of sizes and industries, compared to approximately 10,500 as ofDecember 31, 2019 . Our ability to attract new customers will depend on a number of factors, including the effectiveness and pricing of our products, offerings of our competitors, and the effectiveness of our marketing efforts. We define the number of customers as the number of accounts with a unique account identifier for which we have an active subscription in the period indicated. Users of our free trials or tier are not included in our customer count. A single organization with multiple divisions, segments or subsidiaries is generally counted as a single customer. However, in some cases where they have separate billing terms, we may count separate divisions, segments or subsidiaries as multiple customers.
Expanding Within Our Existing Customer Base
Our base of customers represents a significant opportunity for further sales expansion. As ofDecember 31, 2020 , we had 1,253 customers with annual run-rate revenue, or ARR, of$100,000 or more, representing 78% of our ARR, up from 858 as ofDecember 31, 2019 , representing 75% of our ARR. We monitor our number of customers with ARR of$100,000 or more, and believe it is useful to investors, as an indicator of our ability to grow the number of customers that are exceeding this ARR threshold. We define ARR as the annual run-rate revenue of subscription agreements from all customers at a point in time. We calculate ARR by taking the monthly run-rate revenue, or MRR, and multiplying it by 12. MRR for each month is calculated by aggregating, for all customers during that month, monthly revenue from committed contractual amounts, additional usage and monthly subscriptions. ARR and MRR should be viewed independently of revenue, and do not represent our revenue underU.S. GAAP on a monthly or annualized basis, as they are operating metrics that can be impacted by contract start and end dates and renewal rates. ARR and MRR are not intended to be replacements or forecasts of revenue. A further indication of the propensity of our customer relationships to expand over time is our dollar-based net retention rate, which compares our ARR from the same set of customers in one period, relative to the year-ago period. As of each ofDecember 31, 2020 and 2019, our dollar-based net retention rate was above 130%. We calculate dollar-based net retention rate as of a period end by starting with the ARR from the cohort of all customers as of 12 months prior to such period-end, or the Prior Period ARR. We then calculate the ARR from these same customers as of the current period-end, or the Current Period ARR. Current Period ARR includes any expansion and is net of contraction or attrition over the last 12 months, but excludes ARR from new customers in the current period. We then divide the total Current Period ARR by the total Prior Period ARR to arrive at the point-in-time dollar-based net retention rate. We then calculate the weighted average of the trailing 12-month point-in-time dollar-based net retention rates, to arrive at the dollar-based net retention rate. We believe that our land-and-expand business model allows us to efficiently increase revenue from our existing customer base. Our customers often expand the deployment of our platform across large teams and more broadly within the enterprise as they migrate more workloads to the cloud, find new use cases for our platform, and generally realize the benefits of our platform. We intend to continue to invest in enhancing awareness of our brand and developing more products, features and functionality, which we believe are important factors to achieve widespread adoption of our platform. Our ability to increase sales to existing customers will depend on a number of factors, including our customers' satisfaction with our solution, competition, pricing and overall changes in our customers' spending levels.
Sustaining Innovation and Technology Leadership
Our success is dependent on our ability to sustain innovation and technology leadership in order to maintain our competitive advantage. We believe that we have built a highly differentiated platform that will position us to further extend the adoption of our platform and products.Datadog is frequently deployed across a customer's entire infrastructure, making it ubiquitous.Datadog is a daily part of the lives of developers, operations engineers and business leaders. We employ a land-and-expand business model centered around offering products that are easy to adopt and have a very short time to value. Our efficient go-to-market model enables us to prioritize significant investment in innovation. We have proven initial success of our platform approach, through expansion beyond our initial infrastructure monitoring solution, to include APM in 2017, logs in 2018, user experience and network performance monitoring in 2019 and security monitoring in 2020. As ofDecember 31, 2020 , approximately 72% of our customers were using more than one product, up from approximately 60% a year earlier. We believe these metrics indicate strong momentum in the uptake of our newer platform products. 44
-------------------------------------------------------------------------------- We intend to continue to invest in building additional products, features and functionality that expand our capabilities and facilitate the extension of our platform to new use cases. We also intend to continue to evaluate strategic acquisitions and investments in businesses and technologies to drive product and market expansion. Our future success is dependent on our ability to successfully develop, market and sell existing and new products to both new and existing customers.
Expanding Internationally
We believe there is a significant opportunity to expand usage of our platform outside ofNorth America . Revenue, as determined based on the billing address of our customers, from regions outside ofNorth America was approximately 25% of our total revenue for the years endedDecember 31, 2020 and 2019. In addition, we have made and plan to continue to make significant investments to expand geographically, particularly in EMEA and APAC. Although these investments may adversely affect our operating results in the near term, we believe that they will contribute to our long-term growth. BeyondNorth America , we now have sales presence internationally, including inDublin ,Paris ,London ,Singapore ,Tokyo ,Seoul ,Sydney andAmsterdam .
Components of Results of Operations
Revenue
We generate revenue from the sale of subscriptions to customers using our cloud-based platform. The terms of our subscription agreements are primarily monthly or annual, with the majority of our revenue coming from annual subscriptions. Our customers can enter into a subscription for a committed contractual amount of usage that is apportioned ratably on a monthly basis over the term of the subscription period, a subscription for a committed contractual amount of usage that is delivered as used, or a monthly subscription based on usage. To the extent that our customers' usage exceeds the committed contracted amounts under their subscriptions, either on a monthly basis in the case of a ratable subscription or once the entire commitment is used in the case of a delivered-as-used subscription, they are charged for their incremental usage. Usage is measured primarily by the number of hosts or by the volume of data indexed. A host is generally defined as a server, either in the cloud or on-premise. Our infrastructure monitoring, APM and network performance monitoring products are priced per host, our logs product is priced primarily per log events indexed and secondarily by events ingested. Customers also have the option to purchase additional products, such as additional container or serverless monitoring, custom metrics packages, anomaly detection, synthetic monitoring and app analytics. In the case of subscriptions for committed contractual amounts of usage, revenue is recognized ratably over the term of the subscription agreement, generally beginning on the date that our platform is made available to a customer. As a result, much of our revenue is generated from subscriptions entered into during previous periods. Consequently, any decreases in new subscriptions or renewals in any one period may not be immediately reflected as a decrease in revenue for that period, but could negatively affect our revenue in future quarters. This also makes it difficult for us to rapidly increase our revenue through the sale of additional subscriptions in any period, as revenue is recognized over the term of the subscription agreement. In the case of a subscription for a committed contractual amount of usage that is delivered as used, a monthly subscription based on usage, or usage in excess of a ratable subscription, we recognize revenue as the product is used, which may lead to fluctuations in our revenue and results of operations. In addition, historically, we have experienced seasonality in new customer bookings, as we typically enter into a higher percentage of subscription agreements with new customers in the fourth quarter of the year.
Due to ease of implementation of our products, professional services generally are not required and revenue from such services has been immaterial to date.
Cost of Revenue
Cost of revenue primarily consists of expenses related to providing our products
to customers, including payments to our third-party cloud infrastructure
providers for hosting our software, personnel-related expenses for operations
and global support, including salaries, benefits, bonuses and stock-based
compensation, payment processing fees, information technology, depreciation and
amortization related to the amortization of acquired intangibles and
internal-use software and other overhead costs such as allocated facilities.
We intend to continue to invest additional resources in our platform
infrastructure and our customer support and success organizations to expand the
capability of our platform and ensure that our customers are realizing the full
benefit of our platform and products. The level, timing and relative investment
in our infrastructure could affect our cost of revenue in the future.
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Gross Profit and Gross Margin
Gross profit represents revenue less cost of revenue. Gross margin is gross profit expressed as a percentage of revenue. Our gross margin may fluctuate from period to period as our revenue fluctuates, and as a result of the timing and amount of investments to expand our products and geographical coverage.
Operating Expenses
Our operating expenses consist of research and development, sales and marketing, and general and administrative expenses. Personnel costs are the most significant component of operating expenses and consist of salaries, benefits, bonuses, stock-based compensation expense and sales commissions. Operating expenses also include overhead costs for facilities and shared IT-related expenses, including depreciation expense.
Research and Development
Research and development expense consists primarily of personnel costs for our engineering, service and design teams. Additionally, research and development expense includes contractor fees, depreciation and amortization and allocated overhead costs. Research and development costs are expensed as incurred. We expect that our research and development expense will increase in absolute dollars as our business grows, particularly as we incur additional costs related to continued investments in our platform.
Sales and Marketing
Sales and marketing expense consists primarily of personnel costs for our sales and marketing organization, costs of general marketing and promotional activities, including the free tier and free introductory trials of our products, travel-related expenses and allocated overhead costs. Sales commissions earned by our sales force are deferred and amortized on a straight-line basis over the expected period of benefit, which we have determined to be four years. We expect that our sales and marketing expense will increase in absolute dollars as we expand our sales and marketing efforts.
General and Administrative
General and administrative expense consists primarily of personnel costs and contractor fees for finance, legal, human resources, information technology and other administrative functions. In addition, general and administrative expense includes non-personnel costs, such as legal, accounting and other professional fees, hardware and software costs, certain tax, license and insurance-related expenses and allocated overhead costs. We have incurred, and expect to continue to incur, additional expenses as a result of operating as a public company, including costs to comply with the rules and regulations applicable to companies listed on a national securities exchange, costs related to compliance and reporting obligations, and increased expenses for insurance, investor relations and professional services. We expect that our general and administrative expense will increase in absolute dollars as our business grows. However, we expect that our general and administrative expense will decrease as a percentage of our revenue as our revenue grows over the longer term. Other (Expense) Income, Net Other (expense) income, net consists primarily of interest expense due on the 2025 Notes, and amortization of premiums on our marketable securities, partially offset by interest income, primarily due to income earned on money market funds included in cash and cash equivalents and on marketable securities.
Provision for Income Taxes
Provision for income taxes consists ofU.S. federal and state income taxes and income taxes in certain foreign jurisdictions in which we conduct business. We recorded a full valuation allowance on our federal and state deferred tax assets as we have concluded that it is not more likely than not that the deferred tax assets will be realized. 46
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Results of Operations
The following table sets forth our consolidated statements of operations data
for the periods indicated:
Years Ended December 31,
2020 2019 2018
(in thousands)
Revenue $ 603,466 $ 362,780 $ 198,077
Cost of revenue (1)(2)(4) 130,197 88,949 46,529
Gross profit 473,269 273,831 151,548
Operating expenses
Research and development (1)(3)(4) 210,626 111,425
55,176
Sales and marketing (1)(3)(4) 213,660 146,657 88,849
General and administrative (1)(3)(4) 62,756 35,889
18,556
Total operating expenses 487,042 293,971 162,581
Operating loss (13,773 ) (20,140 ) (11,033 )
Other (expense) income, net:
Interest expense (5) (30,434 ) (32 ) -
Interest income and other income, net 21,985 4,196 793
Other (expense) income, net (8,449 ) 4,164 793
Loss before provision for income taxes (22,222 ) (15,976 ) (10,240 )
Provision for income taxes (2,325 ) (734 )
(522 )
Net loss $ (24,547 ) $ (16,710 ) $ (10,762 )
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(1) Includes stock-based compensation expense as follows:
Years Ended December 31,
2020 2019 2018
(in thousands)
Cost of revenue $ 1,794 $ 582 $ 287
Research and development 38,008 7,972 1,641
Sales and marketing 20,467 5,538 1,910
General and administrative 14,105 4,942 1,406
Total $ 74,374 $ 19,034 $ 5,244
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(2) Includes amortization of acquired intangibles expense as follows:
Years Ended December 31,
2020 2019 2018
(in thousands)
Cost of revenue $ 943 $ 752 $ 511 (3) Includes non-cash benefit related to tax adjustment as follows:
Years Ended December 31,
2020 2019 2018
(in thousands)
Research and development $ (2,729 ) $ (2,344 ) $ -
Sales and marketing (449 ) (397 ) -
General and administrative (2,383 ) (2,266 ) -
Total $ (5,561 ) $ (5,007 ) $ -
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(4) Includes employer payroll taxes on employee stock transactions as follows:
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Years Ended December 31,
2020 2019 2018
(in thousands)
Cost of revenue $ 187 $ - $ -
Research and development 2,836 1,157 -
Sales and marketing 3,756 284 -
General and administrative 839 19 -
Total $ 7,618 $ 1,460 $ -
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(5) Includes amortization of debt discount and issuance costs as follows:
Years Ended December 31,
2020 2019 2018
(in thousands)
Interest expense $ 18,727 $ - $ -
The following table sets forth our consolidated statements of operations data expressed as a percentage of revenue for the periods indicated:
Years Ended December 31,
2020 2019 2018
(as a percentage of total revenue(1))
Revenue 100 % 100 % 100 %
Cost of revenue 22 25 23
Gross profit 78 75 77
Operating expenses
Research and development 35 31 28
Sales and marketing 35 40 45
General and administrative 10 10 9
Total operating expenses 81 81 82
Operating loss (2 ) (6 ) (5 )
Other (expense) income, net:
Interest expense (5 ) 0 0
Interest income and other income, net 4 1 1
Other (expense) income, net (1 ) 1 1
Loss before provision for income taxes (4 ) (5 ) (4 )
Provision for income taxes (0 ) (0 ) (1 )
Net loss (4 )% (5 )% (5 )%
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(1) Certain items may not total due to rounding.
Comparison of the Years Ended
Revenue
Years Ended December 31,
2020 2019 Change % Change
(dollars in thousands)
Revenue $ 603,466 $ 362,780 $ 240,686 66 %
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-------------------------------------------------------------------------------- Revenue increased by$240.7 million , or 66%, for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 . Approximately 59% of the increase in revenue was attributable to growth from existing customers, and the remaining 41% was attributable to growth from new customers.
Cost of Revenue and Gross Margin
Years Ended December 31,
2020 2019 Change % Change
(dollars in thousands)
Cost of revenue $ 130,197 $ 88,949 $ 41,248 46 %
Gross margin 78 % 75 % 3 %
Cost of revenue increased by $41.2 million , or 46%, for the year ended
December 31, 2020 compared to the year ended December 31, 2019 . This increase
was primarily due to an increase of $34.7 million in third-party cloud
infrastructure hosting and software costs, an increase of $4.9 million in
personnel expenses as a result of increased headcount, and an increase of $1.6
million of depreciation and amortization, credit card processing fees and other
fees, and allocated overhead costs as a result of an increase in overall costs
necessary to support the growth of the business and related infrastructure.
Our gross margin increased by 3% for the year ended December 31, 2020 compared
to the year ended December 31, 2019 , primarily as a result of increased revenue
and cost savings from our third-party cloud infrastructure providers.
Research and Development
Years Ended December 31,
2020 2019 Change % Change
(dollars in thousands)
Research and development $ 210,626 $ 111,425 $ 99,201 89 %
Percentage of revenue 35 % 31 %
Research and development expense increased by $99.2 million , or 89%, for the
year ended December 31, 2020 compared to the year ended December 31, 2019 . This
increase was primarily due to an increase of $82.1 million in personnel costs
for our engineering, product and design teams as a result of increased
headcount, an increase of $12.9 million in cloud infrastructure related
investments, an increase of $3.3 million in allocated overhead costs necessary
for supporting the growth of the business and an increase of $0.9 million in
other research and development costs.
Sales and Marketing
Years Ended December 31,
2020 2019 Change % Change
(dollars in thousands)
Sales and marketing $ 213,660 $ 146,657 $ 67,003 46 %
Percentage of revenue 35 % 40 %
Sales and marketing expense increased by $67.0 million , or 46%, for the year
ended December 31, 2020 compared to the year ended December 31, 2019 . This
increase was primarily due to an increase of $60.5 million in personnel costs
for our sales and marketing organization as a result of increased headcount and
increased variable compensation for our sales personnel, an increase of $4.4
million in marketing and promotional activities, and an increase of $2.1 million
of allocated overhead costs necessary to support the growth of the business and
related infrastructure.
General and Administrative
Years Ended December 31,
2020 2019 Change % Change
(dollars in thousands)
General and administrative $ 62,756 $ 35,889 $ 26,867 75 %
Percentage of revenue 10 % 10 %
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-------------------------------------------------------------------------------- General and administrative expense increased by$26.9 million , or 75%, for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 . This increase was primarily due to an increase of$16.4 million in personnel expenses as a result of increased headcount, an increase of$4.3 million related to outside professional fees primarily related to insurance, finance and legal fees, an increase of$4.1 related to other costs and allocated overhead costs to support the growing business and an increase of$2.1 million related to bad debt expense. Other (Expense) Income, Net Years Ended December 31, 2020 2019 Change % Change (dollars in thousands) Other (expense) income, net$ (8,449 ) $ 4,164 $ (12,613 ) (303 %) Percentage of revenue -1 % 1 % Other (expense) income, net decreased by$12.6 million for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 . For the year endedDecember 31, 2020 , other expense included$19.3 million interest expense related to our 2025 Notes and$11.1 million amortization of premiums on our marketable securities. These amounts were partially offset by an increase of$17.8 million in interest income, mainly due to income earned from investments in marketable securities and money market funds.
Comparison of the Years Ended
Revenue
Years Ended December 31,
2019 2018 Change % Change
(dollars in thousands)
Revenue $ 362,780 $ 198,077 $ 164,703 83 %
Revenue increased by $164.7 million , or 83%, for the year ended December 31,
2019 compared to the year ended December 31, 2018 . Approximately 60% of the
increase in revenue was attributable to growth from existing customers, and the
remaining 40% was attributable to growth from new customers.
Cost of Revenue and Gross Margin
Years Ended December 31,
2019 2018 Change % Change
(dollars in thousands)
Cost of revenue $ 88,949 $ 46,529 $ 42,420 91 %
Gross margin 75 % 77 % -2 %
Cost of revenue increased by $42.4 million , or 91%, for the year ended
December 31, 2019 compared to the year ended December 31, 2018 . This increase
was primarily due to an increase of $35.2 million in third-party cloud
infrastructure hosting and software costs, an increase of $3.2 million in
personnel expenses as a result of increased headcount, an increase of $2.5
million of depreciation and amortization expense, an increase of $0.8 million in
credit card processing fees and other fees, and an increase of $0.7 million in
allocated overhead costs as a result of an increase in overall costs necessary
to support the growth of the business and related infrastructure.
Our gross margin declined by 2% for the year ended
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Research and Development
Years Ended December 31,
2019 2018 Change % Change
(dollars in thousands)
Research and development $ 111,425 $ 55,176 $ 56,249 102 %
Percentage of revenue 31 % 28 %
Research and development expense increased by $56.2 million , or 102%, for the
year ended December 31, 2019 compared to the year ended December 31, 2018 . This
increase was primarily due to an increase of $38.5 million in personnel costs
for our engineering, product and design teams as a result of increased
headcount, and an increase of $17.7 million in cloud infrastructure related
investments and in allocated overhead costs necessary for supporting the growth
of the business.
Sales and Marketing
Years Ended December 31,
2019 2018 Change % Change
(dollars in thousands)
Sales and marketing $ 146,657 $ 88,849 $ 57,808 65 %
Percentage of revenue 40 % 45 %
Sales and marketing expense increased by $57.8 million , or 65%, for the year
ended December 31, 2019 compared to the year ended December 31, 2018 . This
increase was primarily due to an increase of $39.6 million in personnel costs
for our sales and marketing organization as a result of increased headcount and
increased variable compensation for our sales personnel, an increase of $10.4
million in allocated overhead costs as a result of an increase in overall costs
necessary to support the growth of the business and related infrastructure, and
an increase of $7.8 million in marketing and promotional activities.
General and Administrative
Years Ended December 31,
2019 2018 Change % Change
(dollars in thousands)
General and administrative $ 35,889 $ 18,556 $ 17,333 93 %
Percentage of revenue 10 % 9 %
General and administrative expense increased by $17.3 million , or 93%, for the
year ended December 31, 2019 compared to the year ended December 31, 2018 . This
increase was primarily due to an increase of $8.6 million in personnel expenses
as a result of increased headcount, an increase of $6.9 million related to
outside professional fees primarily related to legal and accounting services, an
increase of $1.8 million in allocated overhead expenses related to an increase
in overall costs necessary to support the growth of the business and related
infrastructure.
Other (Expense) Income, Net
Years Ended December 31,
2019 2018 Change % Change
(dollars in thousands)
Other income, net $ 4,164 $ 793 $ 3,371 425 %
Percentage of revenue 1 % 1 %
Other (expense) income, net increased by $3.4 million , or 425%, for the year
ended December 31, 2019 compared to the year ended December 31, 2018 . This
increase was primarily due to interest income earned from investments in money
market funds and marketable securities.
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Quarterly Results of Operations
The following tables summarize our selected unaudited quarterly consolidated statements of operations data for each of the eight quarters in the period endedDecember 31, 2020 . The information for each of these quarters has been prepared on the same basis as our audited annual consolidated financial statements and reflect, in the opinion of management, all adjustments of a normal, recurring nature that are necessary for the fair statement of the results of operations for these periods. This data should be read in conjunction with our audited consolidated financial statements included in "Part II, Item 8. Financial Statements" of this Annual Report on Form 10-K. Historical results are not necessarily indicative of the results that may be expected for the full fiscal year or any other period. Three Months Ended December 31, September 30, June 30, March 31, December 31, September 30, June 30, March 31, 2020 2020 2020 2020 2019 2019 2019 2019 (in thousands, except per share data; unaudited) Revenue$ 177,531 $ 154,675 $ 140,012 $ 131,248 $ 113,644 $ 95,864 $ 83,222 $ 70,050 Cost of revenue (1)(2)(4) 40,856 33,984 28,878 26,479 25,724 23,297 20,978 18,950 Gross profit 136,675 120,691 111,134 104,769 87,920 72,567 62,244 51,100 Operating expenses: Research and development (1)(3)(4) 67,698 56,440 45,664 40,824 35,894 28,684 24,032 22,815 Sales and marketing (1)(3)(4) 60,034 57,142 51,269 45,215 41,596 38,836 36,118 30,107 General and administrative (1)(3)(4) 17,881 16,376 13,547 14,952 12,696 9,265 6,088 7,840 Total operating expenses(3) 145,613 129,958 110,480 100,991 90,186 76,785 66,238 60,762 Operating (loss) income (8,938 ) (9,267 ) 654 3,778 (2,266 ) (4,218 ) (3,994 ) (9,662 ) Other (expense) income: Interest expense (5) (13,010 ) (12,423 ) (4,294 ) (707 ) (32 ) - - - Interest income and other income, net 6,781 7,135 4,466 3,603 3,550 90 326 230 Other (expense) income, net (6,229 ) (5,288 ) 172 2,896 3,518 90 326 230 (Loss) income before income taxes (15,167 ) (14,555 ) 826 6,674 1,252 (4,128 ) (3,668 ) (9,432 ) Provision for income taxes (993 ) (595 ) (542 ) (195 ) (361 ) (33 ) (281 ) (59 ) Net (loss) income$ (16,160 ) $ (15,150 ) $ 284 $ 6,479 $ 891$ (4,161 ) $ (3,949 ) $ (9,491 ) Net (loss) income per share, basic$ (0.05 ) $ (0.05 )$ 0.00 $ 0.02 $ 0.00 $ (0.04 )$ (0.05 ) $ (0.12 ) Net (loss) income per share, diluted$ (0.05 ) $ (0.05 )$ 0.00 $ 0.02 $ 0.00 $ (0.04 )$ (0.05 ) $ (0.12 ) Weighted average shares used in calculating basic net (loss) income per share 304,057 302,554 299,267 295,455 294,515 103,876 82,043 77,061 Weighted average shares used in calculating diluted net (loss) income per share 304,057 302,554 330,847 327,801 327,333 103,876 82,043 77,061
(1) Includes stock-based compensation expense as follows:
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Three Months Ended
December 31, September 30, June 30, March 31, December 31, September 30, June 30, March 31,
2020 2020 2020 2020 2019 2019 2019 2019
(in thousands)
Cost of revenue $ 627 $ 529 $ 407 $ 231 $ 210 $ 161 $ 112 $ 99
Research and development 13,285 10,173 8,703 5,847 4,263 1,934 989 786
Sales and marketing 6,784 6,068 4,541 3,074 2,262 1,540 1,007 729
General and administrative 4,068 3,946 3,183 2,908 2,283 1,042 786 831
Stock-based compensation
expense$ 24,764 $ 20,716 $ 16,834 $ 12,060 $ 9,018 $ 4,677$ 2,894 $ 2,445
(2) Includes amortization of acquired intangibles expense as follows:
Three Months Ended
December 31, September 30, June 30, March 31, December 31, September 30, June 30, March 31,
2020 2020 2020 2020 2019 2019 2019 2019
(in thousands)
Cost of revenue $ 275 $ 274 $ 147 $ 247 $ 221 $ 179 $ 177 $ 175 (3) Includes non-cash benefit related to tax adjustment as follows:
Three Months Ended
December 31, September 30, June 30, March 31, December 31, September 30, June 30, March 31,
2020 2020 2020 2020 2019 2019 2019 2019
(in thousands)
Research and development - - $ (2,729 ) - - $ (2,344 ) -
Sales and marketing - - (449 ) - - (397 ) -
General and administrative - - (2,383 ) - - (2,266 ) -
Total $ - $ - $ (5,561 ) $ - $ - $ - $ (5,007 ) $ -
(4) Includes employer payroll taxes on employee stock transactions as follows:
Three Months Ended
December 31, September 30, June 30, March 31, December 31, September 30, June 30, March 31,
2020 2020 2020 2020 2019 2019 2019 2019
(in thousands)
Cost of revenue $ 33 $ 32 $ 121 $ 1 $ - $ - $ 0 $ 0
Research and development 959 418 1,423 36 896 - 262 0
Sales and marketing 742 1,354 1,508 152 5 88 191 0
General and administrative 287 282 212 58 - - 7 12
Total $ 2,021 $ 2,086 $ 3,264 $ 247 $ 901 $ 88 $ 460 $ 12 (5) Includes amortization of debt discount and issuance costs as follows:
Three Months Ended
December 31, September 30, June 30, March 31, December 31, September 30, June 30, March 31,
2020 2020 2020 2020 2019 2019 2019 2019
(in thousands)
Interest expense $ 8,181 $ 8,062 $ 2,484 $ - $ - $ - $ - $ -
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The following table sets forth our consolidated statements of operations data expressed as a percentage of revenue for the periods indicated:
Three Months Ended
December 31, September 30, June 30, March 31, December 31, September 30, June 30, March 31,
2020 2020 2020 2020 2019 2019 2019 2019
(as a percentage of total revenue(1))Revenue 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % Cost of revenue 23 22 21 20 23 24 25 27 Gross profit 77 78 79 80 77 76 75 73 Operating expenses: Research and development 38 36 33 31 32 30 29 33 Sales and marketing 34 37 36 35 36 41 43 43 General and administrative 10 11 10 11 11 10 7 11 Total operating expenses 82 84 79 77 79 81 79 87 Operating (loss) income (5 ) (6 ) 0 3 (2 ) (4 ) (4 ) (14 ) Other (expense) income: Interest expense (7 ) (8 ) (3 ) 0 0 0 0 0 Interest income and other income, net 4 5 3 2 3 0 0 1 Other (expense) income, net (4 ) (3 ) 0 2 3 0 0 1 (Loss) income before income taxes (9 ) (9 ) 0 5 1 (4 ) (4 ) (13 ) Provision for income taxes (1 ) 0 0 (1 ) 0 (1 ) (1 ) (1 ) Net (loss) income (9 )% (10 )% 0 % 4 % 1 % (5 )% (5 )% (14 )%
(1) Certain items may not total due to rounding.
Quarterly Revenue Trends Total revenue increased sequentially in each of the quarters presented primarily due to the growth from existing customers and the addition of new customers. We recognize revenue ratably over the terms of our subscription contracts. As a result, a substantial portion of the revenue we report in a period is attributable to orders we received during prior periods. Therefore, increases or decreases in new sales, customer expansion or renewals in a period may not be immediately reflected in revenue for the period.
Quarterly Cost of Revenue Trends
Our quarterly cost of revenue has generally increased quarter-over-quarter in each period presented above primarily as a result of third-party cloud infrastructure hosting and software costs, as well as increase headcount, which resulted in increased personnel expenses.
Quarterly Gross Margin Trends
Our quarterly gross margins have fluctuated between 73% and 80% in each period presented. Our gross margins decreased in the last three quarters endedDecember 31, 2020 as a result of an increase in our third-party cloud infrastructure hosting and software costs as well as increased headcount.
Quarterly Operating Expense Trends
Operating expenses have fluctuated between 77% and 87% of revenue in each period
presented above, with increases primarily due to the increased headcount,
infrastructure and related costs to support our growth. We intend to continue to
make significant investments in research and development as we add features and
enhance our platform. We also intend to invest in our sales and marketing
organization to drive future revenue growth.
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Quarterly Other (Expense) Income, Net Trends
Other (expense) income, net consisted primary of interest expense related to our 2025 Notes and of amortization of premiums on our marketable securities. We issued the 2025 Notes inJune 2020 and increased our investments in marketable securities, which both led to an increase in the interest expenses incurred during the 12 months endedDecember 31, 2020 . Other income consisted primarily of interest income earned from investments in money market funds and marketable securities, which was increased due to the increase in the investment in marketable securities.
Liquidity and Capital Resources
Since inception, we have financed operations primarily through sales of subscriptions and the net proceeds we have received from issuance of equity and debt securities.
InJune 2020 , we issued$747.5 million aggregate principal amount of the 2025 Notes in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act. The total net proceeds from the sale of the 2025 Notes, after deducting the initial purchasers' discounts and debt issuance costs, were approximately$730.2 million .
As of
We believe that our existing cash and cash equivalents, marketable securities and cash flow from operations will be sufficient to support working capital and capital expenditure requirements for at least the next 12 months. Our future capital requirements will depend on many factors, including our subscription growth rate, subscription renewal activity, including the timing and the amount of cash received from customers, the expansion of sales and marketing activities, the timing and extent of spending to support development efforts, the introduction of new and enhanced products, and the continuing market adoption of our platform. We may, in the future, enter into arrangements to acquire or invest in complementary businesses, products, and technologies. We may be required to seek additional equity or debt financing. In the event that we require additional financing, we may not be able to raise such financing on terms acceptable to us or at all. If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in continued innovation, we may not be able to compete successfully, which would harm our business, operations and financial condition. A substantial source of our cash from operations is from our deferred revenue, which is included in the liabilities section of our consolidated balance sheet. Deferred revenue consists of the unearned portion of customer billings, which is recognized as revenue in accordance with our revenue recognition policy. As ofDecember 31, 2020 , we had deferred revenue of$208.3 million , of which$204.8 million was recorded as a current liability and expected to be recognized as revenue in the next 12 months, provided all other revenue recognition criteria have been met. The following table shows a summary of our cash flows for the periods presented: Years Ended December 31, 2020 2019 2018 (in thousands)
Cash provided by operating activities
Cash used in investing activities (1,152,624 ) (202,220 )
(17,456 )
Cash provided by financing activities 670,276 714,216 7,782
Operating Activities
Our largest source of operating cash is cash collection from sales of
subscriptions to our customers. Our primary uses of cash from operating
activities are for personnel expenses, marketing expenses, hosting expenses and
overhead expenses. We have generated positive cash flows and have supplemented
working capital requirements through net proceeds from the sale of equity
securities.
Cash provided by operating activities for the fiscal year ended December 31,
2020 of $109.1 million was primarily related to our net loss of $24.5 million ,
adjusted for non-cash charges of $146.1 million and net cash outflows of $12.5
million provided by changes in our operating assets and liabilities. Non-cash
charges primarily consisted of stock-based compensation, amortization of debt
discount and issuance costs related to our 2025 Notes, depreciation and
amortization of property and equipment, amortization of capitalized software,
amortization of acquired intangibles and amortization of deferred contract
costs. The main drivers of the changes in operating assets and liabilities were
related to a $69.8 million increase in deferred revenue, resulting primarily
from increased
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-------------------------------------------------------------------------------- billings for subscriptions, a$6.5 million increase in accounts payable, a$4.0 million increase in accrued expenses and other liabilities, and a$1.0 million decrease in other assets. These amounts were offset by a$64.2 million increase in accounts receivable, net, due to increases in sales, a$25.1 million increase in deferred contract costs related to commissions paid on new bookings, a$4.5 million increase in prepaid expenses and other current assets, primarily driven by prepaid hosting services. Cash provided by operating activities for the fiscal year endedDecember 31, 2019 of$24.2 million was primarily related to our net loss of$16.7 million , adjusted for non-cash charges of$50.5 million and net cash outflows of$9.5 million provided by changes in our operating assets and liabilities. Non-cash charges primarily consisted of stock-based compensation, depreciation and amortization of property and equipment, amortization of capitalized software, amortization of acquired intangibles and amortization of deferred contract costs. The main drivers of the changes in operating assets and liabilities were related to a$67.8 million increase in deferred revenue, resulting primarily from increased billings for subscriptions, a$6.4 million increase in accrued expenses and other liabilities, and a$2.5 million increase in accounts payable. These amounts were partially offset by a$47.5 million increase in accounts receivable, net, due to increases in sales, a$20.1 million increase in deferred contract costs related to commissions paid on new bookings, a$10.0 million increase in prepaid expenses and other current assets, primarily driven by prepaid hosting services, and a$8.5 million increase in other assets. Cash provided by operating activities for the fiscal year endedDecember 31, 2018 of$10.8 million was primarily related to our net loss of$10.8 million , adjusted for non-cash charges of$14.4 million and net cash inflows of$7.2 million provided by changes in our operating assets and liabilities. Non-cash charges primarily consisted of stock-based compensation, net of amounts capitalized, depreciation and amortization of property and equipment, amortization of capitalized software, and amortization of acquired intangibles. The main drivers of the changes in operating assets and liabilities were related to a$31.6 million increase in deferred revenue, resulting primarily from increased billings for subscriptions, a$7.2 million increase in accounts payable, and a$10.9 million increase in accrued expenses and other liabilities, due to an increase in headcount. These amounts were partially offset by a$25.3 million increase in accounts receivable, net, due to increases in sales, a$1.3 million increase in prepaid expenses and other current assets, primarily driven by prepaid hosting services, an$8.9 million increase in deferred contract costs related to commissions paid on new bookings, and a$7.0 million increase in other assets.
Investing Activities
Cash used in investing activities for the year endedDecember 31, 2020 , was$1,152.6 million , and was primarily the result of investment in marketable securities of$1,794.6 million , a$20.4 million increase in capitalization of software development costs, a$5.4 million increase in capital expenditures to purchase property and equipment to support office space and site operations, and$2.4 million paid for an acquisition. These amounts were partially offset by proceeds of$506.6 million and$163.6 million from maturities and sales of marketable securities, respectively. Cash used in investing activities for the years endedDecember 31, 2019 and 2018 was$202.2 million and$17.5 million , respectively, and was primarily the result of investment in marketable securities, increases in capital expenditures to purchase property and equipment to support additional office space and site operations, increases in capitalization of software development costs and increases in acquired intangibles.
Financing Activities
Cash provided by financing activities for the year endedDecember 31, 2020 was$670.3 million and was primarily attributable to proceeds from the issuance of the 2025 Notes in the amount of$730.2 million , net of issuance costs, proceeds from the exercise of stock options in the amount of$15.9 million , and proceeds from the issuance of common stock under the employee stock purchase plan, or "ESPP", in the amount of$15.2 million . These amounts were partially offset by an$89.6 million purchase of the capped call in connection with the issuance of the 2025 Notes,$1.0 million of taxes paid in connection with the ESPP and$0.4 million of initial public offering, or IPO, costs. Cash provided by financing activities for the year endedDecember 31, 2019 was$714.2 million and was primarily the result of aggregate net proceeds from our IPO in the amount of$706.3 million and proceeds from the exercise of stock options in the amount of$7.9 million . Cash provided by financing activities for the fiscal year endedDecember 31, 2018 was$7.8 million and was primarily the result of proceeds from the exercise of stock options. 56
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Non-GAAP Free Cash Flow
We report our financial results in accordance withU.S. GAAP. To supplement our consolidated financial statements, we provide investors with the amount of free cash flow, which is a non-GAAP financial measure. Free cash flow represents net cash used in operating activities, reduced by capital expenditures and capitalized software development costs, if any. Free cash flow is a measure used by management to understand and evaluate our liquidity and to generate future operating plans. The reduction of capital expenditures and amounts capitalized for software development facilitates comparisons of our liquidity on a period-to-period basis and excludes items that we do not consider to be indicative of our liquidity. We believe that free cash flow is a measure of liquidity that provides useful information to our management, board of directors, investors and others in understanding and evaluating the strength of our liquidity and future ability to generate cash that can be used for strategic opportunities or investing in our business. Nevertheless, our use of free cash flow has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under GAAP. Further, our definition of free cash flow may differ from the definitions used by other companies and therefore comparability may be limited. You should consider free cash flow alongside our other GAAP-based financial performance measures, such as net cash used in operating activities, and our other GAAP financial results. The following table presents our cash flows for the periods presented and a reconciliation of free cash flow to net cash provided by operating activities, the most directly comparable financial measure calculated in accordance with GAAP: Years Ended December 31, 2020 2019 2018 (in thousands) Net cash provided by operating activities$ 109,091 $ 24,234 $ 10,829 Less: Purchases of property and equipment (5,415 ) (13,315 ) (9,662 ) Less: Capitalized software development costs (20,468 ) (10,128 ) (6,176 ) Free cash flow$ 83,208 $ 791 $ (5,009 )
Contractual Obligations and Commitments
The following table summarizes our contractual obligations as ofDecember 31, 2020 : Payments Due By Period Less than 1 More than 5 Total Year 1-3 Years 3-5 Years Years (in thousands) Operating lease commitments$ 94,618 $ 19,808 $ 43,030 $ 10,142 $ 21,638 Purchase commitments 184,167 96,143 88,004 20 - Total$ 278,785 $ 115,951 $ 131,034 $ 10,162 $ 21,638 The commitment amounts in the table above are associated with contracts that are enforceable and legally binding and that specify all significant terms, including fixed or minimum services to be used, fixed, minimum or variable price provisions, and the approximate timing of the actions under the contracts. Our operating lease commitments relate primarily to our office space. The significant operating lease obligations relate to leases for ourNew York ,Boston ,Paris andDublin office spaces. Purchase commitments relate mainly to hosting agreements as well as computer software used to facilitate our operations at the enterprise level. We have also excluded unrecognized tax benefits from the contractual obligations table above. A variety of factors could affect the timing of payments for the liabilities related to unrecognized tax benefits. Therefore, we cannot reasonably estimate the timing of such payments. We believe that these matters will likely not be resolved in the next 12 months and accordingly we have classified the estimated liability as non-current in the consolidated balance sheet. For further information see Note 15 in our Notes to Consolidated Financial Statements included in "Part II, Item 8. Financial Statements" of this Annual Report on Form 10-K.
Off-Balance Sheet Arrangements
As ofDecember 31, 2020 , we did not have any off-balance sheet financing arrangements or any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities, that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. 57
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Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates. We believe that the accounting policies described below involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations.
Revenue Recognition
We generate revenue from the sale of subscriptions to customers using our cloud-based platform. The terms of our subscription agreements are primarily monthly or annual, with the majority of our revenue coming from annual subscriptions. Our customers can enter into a subscription for a committed contractual amount of usage that is apportioned ratably on a monthly basis over the term of the subscription period, a subscription for a committed contractual amount of usage that is delivered as used, or a monthly subscription based on usage. To the extent that our customers' usage exceeds the committed contracted amounts under their subscriptions, either on a monthly basis in the case of a ratable subscription or once the entire commitment is used in the case of a delivered-as-used subscription, they are charged for their incremental usage.
We account for revenue contracts with customers through the following steps:
(1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price;
(4) allocate the transaction price to the performance obligations in the
contract; and
(5) recognize revenue when or as we satisfy a performance obligation.
Our subscriptions are generally non-cancellable. Once we have determined the
transaction price, the total transaction price is allocated to each performance
obligation in the contract on a relative stand-alone selling price basis, or
SSP. The determination of a relative stand-alone SSP for each distinct
performance obligation requires judgment. We determine SSP for performance
obligations based on overall pricing objectives, which take into consideration
market conditions and customer-specific factors. This includes a review of
internal discounting tables, the service(s) being sold, and customer
demographics.
Revenue is recognized when control of these services is transferred to
customers, in an amount that reflects the consideration we expect to be entitled
to receive in exchange for those services. We determine an output method to be
the most appropriate measure of progress because it most faithfully represents
when the value of the services is simultaneously received and consumed by the
customer, and control is transferred.
For committed contractual amounts of usage, revenue is recognized ratably over
the term of the subscription agreement generally beginning on the date that the
platform is made available to a customer. For committed contractual amount of
usage that is delivered as used, a monthly subscription based on usage, or usage
in excess of a ratable subscription, we recognize revenue as the services are
rendered.
Stock-Based Compensation
We account for stock-based compensation expense related to stock-based awards
based on the estimated fair value of the award on the grant date. We
historically issued options to purchase shares of our common stock under our
2012 equity incentive plan, or the 2012 Plan. Following the IPO, we ceased
granting awards under the 2012 Plan, and all shares that remained available for
issuance under the 2012 Plan at that time were transferred to our 2019 equity
incentive plan, or the 2019 Plan. Under the 2019 Plan, we may grant stock
options, stock appreciation rights, restricted stock awards, restricted stock
units, or RSUs, and performance-based and other awards, each valued or based on
our Class A common stock, to our employees, directors, consultants, and
advisors. Through December 31, 2019 , we have only issued stock options and RSUs
in connection with the 2012 Plan and 2019 Plan. For further information see Note
11 in our Notes to Consolidated Financial Statements included in "Part II, Item
8. Financial Statements" of this Annual Report on Form 10-K.
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Compensation expense related to stock-based transactions, including employee,
consultant, and non-employee director stock option awards, is measured and
recognized in the consolidated financial statements based on fair value. The
fair value of each option award is estimated on the grant date using the Black
Scholes option-pricing model. Expense is recognized on a straight-line basis
over the vesting period of the award. Forfeitures are accounted for in the
period in which the awards are forfeited.
Our option-pricing model requires the input of highly subjective assumptions,
including the fair value of the underlying common stock, the expected term of
the option, the expected volatility of the price of our common stock, risk-free
interest rates, and the expected dividend yield of our common stock. The
assumptions used in our option-pricing model represent management's best
estimates. These estimates involve inherent uncertainties and the application of
management's judgment. If factors change and different assumptions are used, our
stock-based compensation expense could be materially different in the future.
These assumptions are estimated as follows:
• Fair value. Prior to our IPO, the fair value of common stock underlying
the stock options had historically been determined by our Board of
Directors, with input from our management. Our Board of Directors
previously determined the fair value of the common stock at the time ofgrant of the options by considering a number of objective and subjective
factors, including the results of contemporaneous independent third-party
valuations of our common stock, the prices, rights, preferences, and
privileges of our redeemable convertible Preferred Stock relative tothose of our common stock, the prices of common or convertible preferred
stock sold to third-party investors by us and in secondary transactions
or repurchased by us in arm's-length transactions, the lack of
marketability of our common stock, actual operating and financial
results, current business conditions and projections, the likelihood of
achieving a liquidity event, such as an initial public offering or a
merger or acquisition of our company given prevailing market conditions.
Subsequent to our IPO, the fair value of the underlying common stock is
determined by the closing price, on the date of grant, of our Class A
common stock, as reported by the Nasdaq.
• Expected volatility. Expected volatility is a measure of the amount by
which the stock price is expected to fluctuate. Since we do not have
sufficient trading history of our common stock, we estimate the expected
volatility of our stock options at the grant date by taking the average
historical volatility of a group of comparable publicly traded companies
over a period equal to the expected life of the options.
• Expected term. We determine the expected term based on the average period
the stock options are expected to remain outstanding using the simplified
method, generally calculated as the midpoint of the stock options'
vesting term and contractual expiration period, as we do not have
sufficient historical information to develop reasonable expectations
about future exercise patterns and post-vesting employment termination
behavior.
• Risk-free rate. We use the
rate that corresponds with the expected term.
• Expected dividend yield. We utilize a dividend yield of zero, as we do
not currently issue dividends, nor do we expect to do so in the future.
The following assumptions were used to calculate the fair value of stock options
granted to employees:
Year Ended December 31,
2020 2019 2018
Expected dividend yield - - -
Expected volatility 38.9 % 38.9% - 39.5% 38.4% - 39.0%
Expected term (years) 6.1 5.2 - 6.3 5.8 - 6.1
Risk-free interest rate 1.7 % 1.4% -2.6% 2.6% - 3.0%
Assumptions used in valuing non-employee stock options are generally consistent
with those used for employee stock options with the exception that the expected
term is over the contractual life, or 10 years.
We adopted ASU No. 2016-09, Compensation-Stock Compensation (Topic 718),
effective January 1, 2018 , and elected to account for forfeitures as they occur,
rather than estimating expected forfeitures over the course of a vesting period.
We recognized a cumulative effect of $0.8 million to accumulated deficit as of
January 1, 2018 upon adoption. For further information see Note 2 in our Notes
to Consolidated Financial Statements included in "Part II, Item 8. Financial
Statements" of this Annual Report on Form 10-K.
We will continue to use judgment in evaluating the assumptions related to our
stock-based compensation on a prospective basis. As we continue to accumulate
additional data related to our common stock, we may have refinements to our
estimates, which could materially impact our future stock-based compensation
expense.
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Internal Use Software Development Costs
We capitalize certain costs related to the development of our platform and other software applications for internal use. In accordance with authoritative guidance, we begin to capitalize our costs to develop software when preliminary development efforts are successfully completed, management has authorized and committed project funding, and it is probable that the project will be completed and the software will be used as intended. We stop capitalizing these costs when the software is substantially complete and ready for its intended use, including the completion of all significant testing. These costs are amortized on a straight-line basis over the estimated useful life of the related asset, generally estimated to be two years. We also capitalize costs related to specific upgrades and enhancements when it is probable the expenditure will result in additional functionality and expense costs incurred for maintenance and minor upgrades and enhancements. Costs incurred prior to meeting these criteria together with costs incurred for training and maintenance are expensed as incurred and recorded within research and development expenses in our consolidated statements of operations. We exercise judgment in determining the point at which various projects may be capitalized, in assessing the ongoing value of the capitalized costs and in determining the estimated useful lives over which the costs are amortized. To the extent that we change the manner in which we develop and test new features and functionalities related to our platform, assess the ongoing value of capitalized assets or determine the estimated useful lives over which the costs are amortized, the amount of internal-use software development costs we capitalize and amortize could change in future periods.
Convertible Senior Notes
In accounting for the issuance of the Company's 2025 Notes, the 2025 Notes were separated into liability and equity components. The carrying amounts of the liability component was calculated by measuring the fair value of similar liabilities that do not have associated convertible features. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the respective 2025 Notes. This difference represents the debt discount that is amortized to interest expense over the contractual terms of the 2025 Notes using the effective interest rate method. The equity component was recorded in additional paid-in capital and is not remeasured as long as it continues to meet the conditions for equity classification. In accounting for the debt issuance costs related to the 2025 Notes, the Company allocated the total amount incurred to the liability and equity components of the 2025 Notes based on their relative values. Issuance costs attributable to the liability component are being amortized to interest expense over the contractual terms of the 2025 Notes. The issuance costs attributable to the equity component were netted against the equity component in additional paid-in capital.
Recently Adopted Accounting Pronouncements
See Note 2, in our Notes to Consolidated Financial Statements included in "Part II, Item 8. Financial Statements and Supplementary Data" of this Annual Report on Form 10-K for a discussion of recent accounting pronouncements.
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