DUOLINGO, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Unaudited Condensed Consolidated Financial Statements and related notes included elsewhere in this Quarterly Report on Form 10-Q, the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K and in Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K. The following discussion contains forward-looking statements, such as those relating to our plans, objectives, expectations, intentions, and beliefs, that involve risks, uncertainties and assumptions. Our actual results could differ materially from these forward-looking statements as a result of many factors, including those discussed in Part II, Item 1A. "Risk Factors," "Special Note Regarding Forward-Looking Statements," and included elsewhere in this Quarterly Report on Form 10-Q, and in in Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K. Our historical results are not necessarily indicative of the results that may be expected for any periods in the future. Amounts reported in millions are rounded based on the amounts in thousands. As a result, the sum of the components reported in millions may not equal the total amount reported in millions due to rounding. In addition, percentages presented are calculated from the underlying numbers in thousands and may not add to their respective totals due to rounding.
Overview
Our flagship app has organically become the world's most popular way to learn languages and the top-grossing Education app in the App Stores, offering courses in over 40 languages to over 56 million monthly active users as ofSeptember 30, 2022 . We believe that we have become the preeminent online destination for language learning due to our beautifully designed products, exceptional user engagement, and demonstrated learning efficacy.
Key Operating Metrics and Non-GAAP Financial Measures
We regularly review a number of key operating metrics and non-GAAP financial
measures to evaluate our business, measure our performance, identify trends,
prepare financial projections and make business decisions. The measures set
forth below should be considered in addition to, not as a substitute for or in
isolation from, our financial results prepared in accordance with GAAP. Monthly
active users (MAUs) and daily active users (DAUs), along with paid subscribers,
are operating metrics that help inform management about the underlying growth in
users of our platform, and are a measure of our monetization efforts. To
calculate the year-over-year change in MAUs and DAUs for a given period, we
subtract the average for the same period in the previous year from the average
for the same period in the current year
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--------------------------------------------------------------------------------and divide the result by the average for the same period in the previous year. Other companies, including companies in our industry, may calculate these measures differently or not at all, which reduces their usefulness as comparative measures.
Three Months Ended September 30,
(Operating metrics are in millions) 2022 2021
Operating Metrics
Monthly active users (MAUs) 56.5 41.7
Daily active users (DAUs) 14.9 9.8
Paid subscribers (at period end) 3.7 2.2
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Operating Metrics
Subscription bookings $ 78,858 $ 55,362 $ 231,520 $ 154,768
Total bookings $ 102,738 $ 73,058 $ 302,259 $ 203,426
Non-GAAP Financial Measures
Net loss (GAAP) $ (18,445) $ (28,970) $ (45,644) $ (42,618)
Adjusted EBITDA $ 2,130 $ (5,968) $ 10,274 $ (1,395)
Net cash provided by operating
activities (GAAP) $ 8,759 $ 4,511 $ 42,048 $ 8,738
Free cash flow $ 6,055 $ 5,184 $ 34,863 $ 11,113
Operating Metrics
Monthly active users (MAUs). MAUs are defined as unique Duolingo users who
engage with our mobile language learning application or the language learning
section of our website each month. MAUs are reported for a measurement period by
taking the average of the MAUs for each calendar month in that measurement
period. MAUs are a measure of the size of our global active user community on
Duolingo .
We had approximately 56.5 million and 41.7 million MAUs for the three months
ended September 30, 2022 and 2021, respectively, representing an increase of 35%
from the prior year period. We grew MAUs through product initiatives designed to
make the app more social and engaging and through marketing, both of which we
believe helped us attract new users, retain existing users, and reengage the
millions of former users who return to our language learning app.
Daily active users (DAUs). DAUs are defined as unique Duolingo users who engage
with our mobile language learning application or the language learning section
of our website each calendar day. DAUs are reported for a measurement period by
taking the average of the DAUs for each day in that measurement period. DAUs are
a measure of the consistent engagement of our global user community on Duolingo .
We had approximately 14.9 million and 9.8 million DAUs for the three months
ended
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--------------------------------------------------------------------------------grew DAUs through many of the same product initiatives as we grew MAUs, such as making the product more fun and engaging, as well as through our marketing efforts.
Paid Subscribers. Paid subscribers are defined as users who pay for access to Super Duolingo (formerly called Duolingo Plus), including subscribers who pay for a family plan, and had an active subscription as of the end of the measurement period. Each unique user account is treated as a single paid subscriber regardless of whether such user purchases multiple subscriptions, and the count of paid subscribers does not include users who are currently on a free trial or who are non-paying members of a family plan. As ofSeptember 30, 2022 and 2021, we had approximately 3.7 million and 2.2 million paid subscribers, respectively, representing an increase of 68% from the prior year period. We grew paid subscribers through product improvements and marketing that increased the size of our free user base, through product improvements, including premium features and better in-app merchandising like purchase page optimization, packaging and pricing that led to higher conversion of free users to paid subscribers, and steady subscriber retention. Subscription Bookings and Total Bookings. Subscription bookings represent the amounts we receive from purchases of a subscription to Super Duolingo. Total bookings represent the amounts we receive from purchases of a subscription to Super Duolingo, a purchase of our English assessment test, the Duolingo English Test, an in-app purchase of a virtual good, and from advertising networks for advertisements served to our users. We believe bookings provide an indication of trends in our operating results, including cash flows, that are not necessarily reflected in our revenues because we recognize subscription revenues ratably over the lifetime of a subscription, which is generally from one to twelve months. For the three months endedSeptember 30, 2022 and 2021 we generated$78.9 million and$55.4 million of subscription bookings, respectively, representing an increase of 42% from the prior year period. For the nine months endedSeptember 30, 2022 and 2021, we generated$231.5 million and$154.8 million of subscription bookings, respectively, representing an increase of 50% from the prior year period. We grew subscription bookings by selling more first-time and renewal subscriptions. Subscription bookings grow when we convert a greater proportion of users to first-time subscribers, and increase renewal rates. For the three months endedSeptember 30, 2022 and 2021 we generated$102.7 million and$73.1 million , of total bookings, respectively, representing an increase of 41% from the prior year period. For the nine months endedSeptember 30, 2022 and 2021, we generated$302.3 million and$203.4 million total bookings, respectively, representing an increase of 49% from the prior year period. We grew total bookings through the growth in subscription bookings noted above, in addition to growth in advertising, the Duolingo English Test, and other bookings.
Non-GAAP Financial Measures
We use certain non-GAAP financial measures to supplement our Unaudited Condensed
Consolidated Financial Statements, which are presented in accordance with GAAP.
These non-GAAP financial measures include Adjusted EBITDA and free cash flow. We
use these non-GAAP financial measures for financial and operational
decision-making and as a means to evaluate period-to-period comparisons. By
excluding certain items that may not be indicative of our recurring core
operating results, we believe that Adjusted EBITDA and free cash flow provide
meaningful supplemental information regarding our performance. Accordingly, we
believe these non-GAAP financial measures are useful to investors and others
because they allow for additional information with respect to financial measures
used by management in its financial and operational decision-making and they may
be used by our institutional investors and the analyst community to help them
analyze the health of our business. However, there are a number of limitations
related to the use of non-GAAP financial measures, and these non-GAAP
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measures should be considered in addition to, not as a substitute for or in
isolation from, our financial results prepared in accordance with GAAP. Other
companies, including companies in our industry, may calculate these non-GAAP
financial measures differently or not at all, which reduces their usefulness as
comparative measures.
Adjusted EBITDA. Adjusted EBITDA is defined as net loss excluding interest
(income) expense, net, income tax provision, depreciation and amortization,
stock-based compensation expenses related to equity awards, IPO and public
company costs, transaction costs related to an acquisition, tender offer-related
costs and other expenses. Adjusted EBITDA is used by management to evaluate the
financial performance of our business and we present Adjusted EBITDA because we
believe it is helpful in highlighting trends in our operating results and that
it is frequently used by analysts, investors and other interested parties to
evaluate companies in our industry. The following table presents a
reconciliation of our net loss, the most directly comparable financial measure
presented in accordance with GAAP, to Adjusted EBITDA.
Three Months Ended September 30, Nine Months Ended September 30,
(In thousands) 2022 2021 2022 2021
Net loss $ (18,445) $
(28,970)
(2,260) (4) (2,962) (7)
Provision for income taxes 53 51 222 69
Depreciation and amortization 1,482 733 3,426 1,969
Stock-based compensation expenses 21,123 20,662 54,717 26,120
related to equity awards (1)
IPO and public company costs (2) - 1,560 338 3,253
Transaction costs (3) 177 - 177 -
Tender offer-related costs (4) - - - 5,599
Other expenses (5) - - - 4,220
Adjusted EBITDA $ 2,130 $ (5,968) $ 10,274 $ (1,395)
________________
(1)In addition to stock-compensation expense of $20,488 and $20,662 for the
three months ended September 30, 2022 and 2021, respectively, and $53,188 and
$26,120 for the nine months ended September 30, 2022 and 2021, respectively,
this includes costs incurred related to taxes paid as follows:
Three Months Ended September 30, Nine Months Ended September 30,
(In thousands) 2022 2021 2022 2021
Research and development $ 213 - $ 586 $ -
Sales and marketing 13 - 37 -
General and administrative 409 - 906 -
Total $ 635 $ - $ 1,529 $ -
(2)IPO and public company costs include costs associated with IPO readiness incurred in 2021 and costs associated with the establishment of our public company structure and processes, including consultant costs, a one-time fee associated with the set-up of our initial proxy statement, and fees paid to consultants and Deloitte for work in connection with remediation of the
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--------------------------------------------------------------------------------material weakness disclosed in our Annual Report on Form 10-K. These costs are included our Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss as follows:
Three Months Ended September 30, Nine Months Ended September 30,
(In thousands) 2022 2021 2022 2021
Research and development $ - $ 46 $ - $ 46
Sales and marketing - 139 - 459
General and administrative - 1,375 338 2,748
Total $ - $ 1,560 $ 338 $ 3,253 (3)Represents costs incurred related to an acquisition, including integration costs.
(4)Includes costs related to our tender offer initiated in
Research and Sales and General and
(In thousands) Cost of revenues development marketing administrative Total
Tender offer $ 10 $ 3,302 $ 173 $ 1,790 $ 5,275
Fees and taxes paid on
tender offer - - - 324 324
Total $ 10 $ 3,302 $ 173 $ 2,114 $ 5,599 (5)Represents one-time cash awards to
For the three months endedSeptember 30, 2022 and 2021, we generated Adjusted EBITDA of$2.1 million and an Adjusted EBITDA loss of$6.0 million , respectively. For the nine months endedSeptember 30, 2022 and 2021, we generated Adjusted EBITDA of$10.3 million and an Adjusted EBITDA loss of$1.4 million , respectively. Adjusted EBITDA increased in both periods due to a combination of our growth in revenue, improved gross margin, and reduction in operating expenses as a percentage of revenue as compared to the prior year periods. Free Cash Flow: Free cash flow represents net cash provided by operating activities, reduced by capitalized software development costs and purchases of property and equipment, and increased by IPO and public company costs, transaction costs related to an acquisition, taxes paid related to stock-based compensation equity awards and other costs, as we believe they are not indicative of future liquidity. We believe that free cash flow is a measure of liquidity that provides useful information to our management, 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. The following table presents a reconciliation of net cash provided by operating activities, the most directly comparable financial measure calculated in accordance with GAAP, to free cash flow: 26 -------------------------------------------------------------------------------- Three Months Ended September 30, Nine Months Ended September 30, (In thousands) 2022 2021 2022 2021 Net cash provided by operating activities $ 8,759$ 4,511 $ 42,048$ 8,738 Less: Capitalized software development costs (1,437) (379) (3,959) (2,035) Less: Purchases of property and equipment (2,079) (1,085) (5,270) (3,063) Plus: IPO and public company costs (1) - 1,560 338 3,253 Plus: Transaction costs (2) 177 - 177 - Plus: Taxes paid related to stock-based compensation equity awards (3) 635 - 1,529 - Plus: Other (4) - 577 - 4,220 Free cash flow $ 6,055$ 5,184 $ 34,863$ 11,113 ________________
(1)IPO and public company costs include costs associated with IPO readiness incurred in 2021 and costs associated with the establishment of our public company structure and processes, including consultant costs, a one-time fee associated with the set-up of our initial proxy statement, and fees paid to consultants and Deloitte for work in connection with remediation of the material weakness disclosed in our Annual Report on Form 10-K.
(2)Represents costs incurred related to an acquisition, including integration costs
(3)Includes costs incurred related to taxes paid on equity transactions.
(4)Represents one-time cash awards to
For the three months endedSeptember 30, 2022 and 2021, we generated$6.1 million and$5.2 million of free cash flow, respectively. For the nine months endedSeptember 30, 2022 and 2021, we generated$34.9 million and$11.1 million of free cash flow, respectively. The increase in free cash flow in both periods was mainly attributable to the increase in net cash provided by operating activities.
Impact of COVID-19
To date, the COVID-19 pandemic has not had a significant, negative impact on our operations or financial performance. We believe the pandemic increased adoption of the Duolingo English Test, an online, on-demand assessment of English proficiency, given its online accessibility and increased acceptance of the test by higher education programs around the world. As ofSeptember 30, 2022 , we've seen an increase in the number of accepting programs and we do not expect the Duolingo English Test to revert to pre-pandemic levels because we believe that the vast majority of the schools who have started accepting our test since the start of the pandemic will continue to do so. The extent of the impact of the COVID-19 pandemic on our operational and financial performance, however, depends on certain developments, and future prevention and mitigation measures, as well as the potential for some of these measures to be reinstituted in the event of repeat waves or new variants of the virus. Any such developments may have adverse impacts on global economic conditions and consumer confidence and spending, and could materially adversely affect demand, or subscribers' ability to pay, for our products and services. For additional information, see "Risk Factors-General Risk Factors-Our business and results of operations may be materially adversely affected by the recent COVID-19 pandemic or other similar outbreaks." 27 --------------------------------------------------------------------------------
Results of Operations
Comparison for the three and nine months ended
Revenue
We generate revenues primarily from the sale of subscriptions. The term-length of our subscription agreements are primarily monthly or annual. We began to roll out a family plan during the second half of 2021 and as ofSeptember 30, 2022 offer it exclusively as an annual subscription. We have historically had a six-month subscription plan, but during the fourth quarter of 2020, we began to phase it out. We also generate revenue from advertising, the in-app sale of virtual goods, and the Duolingo English Test.
Cost of Revenues
Cost of revenues predominantly consists of third-party payment processing fees charged by various distribution channels, and also includes hosting fees. To a much lesser extent, cost of revenues includes costs for contractors, wages and stock-based compensation for certain employees in the capacity of customer support, amortization of revenue generating capitalized software, and depreciation of certain property and equipment. We intend to continue to invest additional resources in our infrastructure and our customer support and success organization to expand the capabilities of our platform and ensure that our users are realizing the full benefit of our products. The level, timing, and relative investment in these areas could affect our cost of revenues in the future.
Gross Profit and Gross Margin
Gross profit represents revenues less cost of revenues. Gross margin is gross profit expressed as a percentage of revenues. Our gross profit may fluctuate from period to period as our revenues fluctuate, and also as a result of the timing and amount of investments we make in items related to cost of revenues.
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,
and stock-based compensation expense. Operating expenses also include overhead
costs for facilities, including depreciation expense.
Research and Development. We invest heavily in research and development in order
to drive user engagement and customer satisfaction on our platform, which we
believe helps to drive organic growth of new users. This, in turn, drives
additional growth in, and better lifetime value of, our paid subscribers, as
well as increased advertising revenue from impressions from our free users.
Expenses are primarily made up of costs incurred for the development of new and
improved products and features in our applications. Such expenses include
employee-related compensation, including stock-based compensation, of engineers,
designers, and product managers, in addition to materials, travel and direct
costs associated with the design and required testing of our platform. We expect
engineers, designers, and product managers to represent a significant portion of
our employees for the foreseeable future. We regularly test product improvements
with our users. Many of these tests start by making small changes in the product
that affect small numbers of users. As the tests evolve, they can require
increasing investment and can impact more users. This process of constant
testing is how we implement many of our new products and improvements to our
platform and, in total, require large investments and involve substantial time
and risks to develop and launch. Some of these products and product improvements
may not be well received
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-------------------------------------------------------------------------------- or may take a long time for users to adopt. As a result, the benefits of our research and development investments may be difficult to forecast. We expect to continue to spend a significant portion of our revenues on research and development in the future. Sales and Marketing. Sales and marketing expenses are expensed as incurred and consists primarily of brand advertising, marketing, digital and social media spend, field marketing, travel, trade show sponsorships and events, conferences, and employee-related compensation, including stock-based compensation for personnel engaged in sales and marketing functions, and amortization of non-revenue generating capitalized software used to promoteDuolingo . We expect our sales and marketing expenses will decline as a percentage of revenues over the long-term. General and Administrative. General and administrative expenses primarily consist of employee-related compensation, including stock-based compensation, for management and administrative functions, including our finance and accounting, legal, and people teams. General and administrative expenses also include certain professional services fees, general corporate and director and officer insurance, our facilities costs, and other general overhead costs that support our operations. We expect to incur additional general and administrative expenses as a result of operating as a public company, including expenses to comply with the rules and regulations of theSEC and the Listing Rules of the Nasdaq Global Select Market, as well as higher expenses for corporate insurance, director and officer insurance, investor relations, and professional services. We expect that our general and administrative expenses will increase in absolute dollars as our business grows. However, we expect that our general and administrative expenses will remain steady or decrease as a percentage of our revenues as our revenues grow faster than these expenses over the long-term.
Other Income (Expense), Net
Other income (expense), net consists primarily of foreign currency exchange gains and losses, and income earned on our money market funds included in cash and cash equivalents and on our marketable securities.
Provision for Income Taxes
The provision for income taxes represents the income tax expense associated with our operations based on the tax laws of the jurisdictions in which we operate. These foreign jurisdictions have different statutory tax rates thanthe United States . Our effective tax rates will vary depending on the relative proportion of foreign to domestic income, changes in the valuation of our deferred tax assets and liabilities, and changes in tax laws. 29 -------------------------------------------------------------------------------- The following table sets forth our Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss data, including year-over-year change, for the periods indicated: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2022 2021 % Change 2022 2021 % Change Revenues$ 96,065 $ 63,595 51 %$ 265,671 $ 177,758 49 % Cost of revenues (1) (2) 26,302 18,078 45 71,661 49,234 46 Gross profit 69,763 45,517 53 194,010 128,524 51 Operating expenses: Research and development (1) 41,976 29,345 43 105,974 73,814 44 Sales and marketing (1) (2) 17,721 15,267 16 47,938 44,659 7 General and administrative (1) 30,228 29,605 2 87,141 52,643 66 Total operating expenses 89,925 74,217 21 241,053 171,116 41 Loss from operations (20,162) (28,700) (30) (47,043) (42,592) 10 Other income (expense), net 1,770 (219) (908) 1,621 43 3,670 Loss before provision for income taxes (18,392) (28,919) (36) (45,422) (42,549) 7 Provision for income taxes 53 51 4 222 69 222 Net loss and comprehensive loss$ (18,445) $ (28,970) (36) %$ (45,644) $ (42,618) 7 % ________________
(1)Includes stock-based compensation expenses as follows:
Three Months Ended September 30, Nine Months Ended September 30,
(In thousands) 2022 2021 2022 2021
Cost of revenues $ 11 $ 6 $ 27 $ 8
Research and development 8,030 3,533 17,435 5,749
Sales and marketing 786 408 1,729 548
General and administrative 11,661 16,715 33,997 19,815
Total $ 20,488 $ 20,662 $ 53,188 $ 26,120 (2)Includes amortization of capitalized software as follows:
Three Months Ended September 30, Nine Months Ended September 30,
(In thousands) 2022 2021 2022 2021
Cost of revenues (a) $ 274 $ - $ 547 $ -
Sales and marketing (a) 208 188 626 484
Total $ 482 $ 188 $ 1,173 $ 484
________________(a) Amortization of capitalized software is recorded to Cost of revenue and Sales and marketing for revenue and non-revenue generating capitalized software, respectively.
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--------------------------------------------------------------------------------The following table sets forth the components of our Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for each of the periods presented as a percentage of revenue.
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Revenues 100 % 100 % 100 % 100 %
Cost of revenues 27 28 27 28
Gross profit 73 72 73 72
Operating expenses:
Research and development 44 46 40 42
Sales and marketing 18 24 18 25
General and administrative 31 47 33 30
Total operating expenses 94 117 91 97
Loss from operations (21) (45) (18) (24)
Other income (expense), net 2 - 1 -
Loss before provision for income taxes (19) - (17) (24)
Provision for income taxes - - - -
Net loss and comprehensive loss (19) % (46) % (17) % (24) %
Revenues
Revenues increased $32.5 million , or 51%, to $96.1 million during the three
months ended September 30, 2022 , from revenues of $63.6 million during the three
months ended September 30, 2021 . Revenues also increased $87.9 million , or 49%,
to $265.7 million during the nine months ended September 30, 2022 , from revenues
of $177.8 million during the nine months ended September 30, 2021 . The main
drivers of the increase for both periods were:
•Subscription revenue increased $26.1 million during the three months ended
September 30, 2022 and $65.8 million during the nine months ended September 30,
2022 , primarily due to an increase in the average number of paid subscribers
during the periods presented;
•Advertising revenue increased $1.6 million during the three months ended
September 30, 2022 and $6.2 million during the nine months ended September 30,
2022 . These increases were driven by the increase in DAUs, which resulted in
increased advertisements served, but partially offset by advertising pricing
declines during the periods presented;
•Duolingo English Test revenue increased by $1.5 million during the three months
ended September 30, 2022 and $7.7 million during the nine months ended September
30, 2022 due to an increase in the number of international students taking the
Duolingo English Test, driven in part by new marketing efforts; and
•Other revenue increased
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--------------------------------------------------------------------------------The following table provides the changes in revenues by product type:
Three Months Ended September
30, Nine Months Ended September 30,
(in thousands) 2022 2021 Change % Change 2022 2021 Change % Change
Subscription $ 72,172 $ 46,030 $ 26,142 57 % $ 195,376 $ 129,587 $ 65,789 51 %
Advertising 10,619 9,029 1,590 18 33,585 27,360 6,225 23
Duolingo English Test 8,192 6,695 1,497 22 24,308 16,563 7,745 47
Other 5,082 1,841 3,241 176 12,402 4,248 8,154 192
Total revenues $ 96,065 $ 63,595 $ 32,470 51 % $ 265,671 $ 177,758 $ 87,913 49 %
Cost of Revenues and Gross Margin. Total gross margin increased to 72.6% and
73.0% during the three and nine months ended September 30, 2022 , respectively
from 71.6% and 72.3% during the three and nine months ended September 30, 2021 ,
respectively. This increase in both periods is mainly due to increased
subscription margins from both improved retention and reduction in fees charged
by the Google Play store. Offsetting this increase was a decline in Advertising
margins, which was primarily due to decreases in average advertising revenue per
DAU.
The following table provides the change in cost of revenues, along with related
gross margins:
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
(in thousands) Costs Gross Margin Costs Gross Margin Costs Gross Margin Costs Gross Margin
Total cost of revenues $ 26,302 72.6 % $ 18,078 71.6 % $ 71,661 73.0 % $ 49,234 72.3 %
Operating Expenses
Research and Development. Research and development expense increased
$12.6 million , or 43%, to $42.0 million during the three months ended September
30, 2022 from $29.3 million during the three months ended September 30, 2021 ,
respectively. The increase was mainly due to:
•Increased employee costs from headcount growth of $11.7 million during the
three months ended September 30, 2022 . This increase was partially offset by a
prior year cost of $1.3 million in stock-based compensation expense from
restricted stock units (RSUs) where the performance based vesting condition was
satisfied upon the IPO, which did not occur again in the current year,
•Increased web services and technology costs of
•Increased travel and meal costs of
•Increased other costs of
Research and development expense increased
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•Increased employee costs from headcount growth of $28.1 million during the nine
months ended September 30, 2022 . This increase was partially offset by costs
incurred in the nine months ended September 30, 2021 which did not occur again
in the current year related to:
•$3.3 million of costs incurred in the prior year related to the tender offer, and
•$1.3 million in stock-based compensation expense from restricted stock units (RSUs) as mentioned above.
•Increased contractor costs of
•Increased web services and technology costs of
•Increased travel and meal costs of
•Increased other costs of
Research and development continues to be our largest operating expense as we invest heavily in it in order to drive user engagement with and customer satisfaction in our platform. This engagement and satisfaction, we believe, helps to drive organic growth in MAUs and DAUs, growth in, and better retention of, paid subscribers, as well as increased advertising opportunities with free users. Sales and Marketing. Sales and marketing expense increased$2.5 million , or 16%, to$17.7 million during the three months endedSeptember 30, 2022 from$15.3 million during the three months endedSeptember 30, 2021 . The increase is due to growth in sales and marketing headcount resulting in an increase in employee costs of$1.5 million and increased direct marketing and other expenses of$1.2 million . These increases were offset by$0.2 million incurred related to RSU expense recorded upon the IPO, which did not occur again in the current year. Sales and marketing expense increased$3.3 million , or 7%, to$47.9 million during the nine months endedSeptember 30, 2022 from$44.7 million during the nine months endedSeptember 30, 2021 . This increase was mainly due to increase in employee costs of$4.5 million due to the growth in headcount in addition to increased direct marketing and other expenses of$3.4 million . These increases were partially offset by$4.2 million of costs incurred during the prior year related to the awards paid as part of phasing out our volunteer contributor program,$0.2 million related to RSUs expense mentioned above, and$0.2 million related to tender offer costs, neither of which occurred again in the current year. Direct marketing spend and other expenses as a percentage of revenue decreased for both periods presented as a result of applying learnings from 2021 which enabled us to spend marketing expenses more efficiently. General and Administrative. General and administrative expense increased$0.6 million , or 2%, to$30.2 million during the three months endedSeptember 30, 2022 from$29.6 million during the three months endedSeptember 30, 2021 . The main drivers of this increase were related to increased headcount and travel, facilities costs as we increase our footprint, contractor expense, professional fees, transaction costs and sales and VAT taxes, which resulted in an increase of$3.7 million . These increases were offset by a net decline in employee related expenses of$3.1 million related to: •Decrease in stock-based compensation expense of$4.6 million , mainly due to$6.1 million of costs incurred upon the IPO related to the acceleration of founder stock options and RSU expense during the three months endedSeptember 30, 2021 , which did not occur again in the current year, offset by increased stock-based compensation expense of$1.5 million due to increased headcount, and 33 --------------------------------------------------------------------------------
•Increased other employee related costs of
General and administrative expense increased
•Increased stock-based compensation expenses of$15.1 million , which was the net impact of increases due to both$15.4 million related to founder awards which were granted upon the IPO during the nine months endedSeptember 30, 2021 , and$5.8 million of costs from increased headcount. These increases were partially offset by costs incurred upon the IPO of$6.1 million related to increased stock-based compensation expense for the acceleration of founder stock options and RSUs, which did not occur again in the current year, •Increased net employee related costs of$5.3 million , due to an increase of$7.1 million from increased headcount, offset by$1.8 million in one-time costs related to the tender offer which occurred in the nine months endedSeptember 30, 2021 and did not occur again in the current year,
•Increased travel and meals expenses due to the easing of restrictions related
to COVID-19 of
•Increased costs incurred to expand to our facilities footprint of
•Increased insurance costs associated with being a public company of
•Other net increases of
Other Income (Expense), Net
Other income (expense), net increased$2.0 million and$1.6 million , during the three and nine months endedSeptember 30, 2022 , respectively, mainly due to an increase in interest income earned on our money market funds, partially offset by the impact from changes in foreign currency rates.
Provision for Income Taxes
Provision for income taxes remained flat during the three months endedSeptember 30, 2022 and increased$0.2 million , during the nine months endedSeptember 30, 2022 , primarily attributable to estimated foreign and US state tax expenses for the current year. The provision for current period was also impacted by a discrete item recorded during the nine months endedSeptember 30, 2022 .
Liquidity and Capital Resources
Since inception, we have financed operations primarily through revenues and the net proceeds we have received from the issuance of equity and debt securities.
As ofSeptember 30, 2022 , we had$600.0 million in cash and cash equivalents. Our cash and cash equivalents primarily consist of bank deposits and money market funds. Our marketable securities consist of US government treasury and agency securities. We believe that our existing cash and cash equivalents, 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 and renewal activity, the timing of cash received from our payment processing platforms, the expansion of our sales and marketing activities, the introduction of new products and the enhancements to existing products, and the current uncertainty in the global markets. We may be required to seek additional equity. If we are 34 -------------------------------------------------------------------------------- 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 comes from deferred revenue, which is included in the liabilities section of our Unaudited Condensed Consolidated Balance Sheet. Deferred revenues consists of the unearned portion of customer billings, which is recognized as revenue in accordance with our revenue recognition policy. As ofSeptember 30, 2022 , we had deferred revenues of$134.9 million , which is 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 summarizes our cash flows for the periods presented:
Nine Months Ended September 30,
(in thousands) 2022 2021
Net cash provided by operating activities $ 42,048 $ 8,738
Net cash used for investing activities (9,229) (5,098)
Net cash provided by financing activities 13,226 425,310
Net increase in cash and cash equivalents $ 46,045 $ 428,950
Operating Activities
Cash flows from operating activities can fluctuate significantly from period to
period due to timing of payments and cash collections. Our largest source of
operating cash is cash collection from sales of subscriptions to our users. Our
primary uses of cash from operating activities are for personnel expenses,
marketing expenses, hosting expenses and overhead expenses.
Cash provided by operating activities for the nine months ended
Investing Activities
Cash used in investing activities increased$4.1 million , or 81%, to$9.2 million for the nine months endedSeptember 30, 2022 , from$5.1 million for the nine months endedSeptember 30, 2021 . The increase was due to increased costs from capitalization of software development and capital expenditures to purchase property and equipment to support office space and site operations.
Financing Activities
Cash provided by financing activities for the nine months endedSeptember 30, 2022 was$13.2 million , which was due to proceeds from exercises of stock options. Cash used for financing activities for the nine months endedSeptember 30, 2021 was$425.3 million and was driven by the net proceeds from the IPO of$431.1 million , less costs of$4.9 million and to proceeds from exercises of stock options of$7.3 million . These increases were partially offset by cash paid for the tender offer of$8.2 million .
Critical Accounting Policies and Estimates
Our Unaudited Condensed Consolidated Financial Statements and the related notes
thereto included elsewhere in this Quarterly Report on Form 10-Q are prepared in
accordance with GAAP. The preparation of condensed consolidated financial
statements also requires us to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenue, costs and expenses, and
related disclosures. We base our estimates on historical experience and on
various other assumptions that we believe to be
35
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reasonable under the circumstances. Actual results could differ significantly
from the estimates made by management. To the extent that there are differences
between our estimates and actual results, our future financial statement
presentation, financial condition, results of operations, and cash flows will be
affected.
There have been no material changes to our critical accounting policies and estimates as compared to those described in "Management's Discussion and Analysis of Financial Condition and Results of Operations" set forth in our Annual Report on Form 10-K.
Recent Accounting Pronouncements
See Note 2, Basis of Presentation and Summary of Significant Accounting Policies in the notes to our Unaudited Condensed Consolidated Financial Statements included in Part I, Item I of this Quarterly Report on Form 10-Q for a discussion of Recent Accounting Pronouncements.
Emerging Growth Company Status
We are an "emerging growth company" as defined under the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards would otherwise apply to private companies. While we have not historically delayed the adoption of new or revised accounting standards until such time as those standards would apply to private companies, we have elected to take advantage of this extended transition period and, as a result, our operating results and financial statements in the future may not be comparable to the operating results and financial statements of companies who have adopted the new or revised accounting standards.
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