The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and related notes appearing elsewhere in this Quarterly Report on
Form 10-Q and our Annual Report on Form 10-K for the year ended
Company Overview
We provide a cloud-based customer relationship management ("CRM") Platform. Our CRM Platform is comprised of Marketing Hub, Sales Hub, Service Hub, content management system ("CMS") Hub, and Operations Hub as well as other tools, integrations, and a native payment solution that enable companies to attract, engage, and delight customers throughout the customer experience.
At the core of our CRM Platform is our CRM that our customers use which creates a single view of all interactions a prospective or existing customer has with their marketing, sales and customer service teams. The CRM shares data across every application in the CRM Platform, automatically informing more personalized emails, website content, ads, and conversations, and enables more accurate timing cues for our customer's internal teams. Our CRM Platform was built to easily and seamlessly integrate third-party applications to further customize to an individual company's industry or needs. In addition, an end-to-end native payment solution, Payments, is built within our CRM Platform which enables customers to streamline their payment process. Our CRM Platform starts completely free and grows with our customers to meet their needs at different stages in their life-cycles. It supports multiple languages and currencies and offers an array of sophisticated features, including content partitioning at the enterprise level for companies operating in or serving multiple countries.
We focus on selling to mid-market business-to-business, or B2B, companies, which
we define as companies that have between two and 2,000 employees. While our CRM
Platform was built to grow with any company, we focus on selling to mid-market
businesses because we believe we have significant competitive advantages
attracting and serving this market segment. These mid-market businesses seek an
integrated, easy-to-implement and easy-to-use solution to reach customers and
compete with organizations that have larger marketing, sales, and customer
service budgets. We efficiently reach these businesses at scale through our
proven inbound methodology, our
We derive most of our revenue from subscriptions to our cloud-based CRM Platform
and related professional services, which consist of customer on-boarding,
training and consulting services. Subscription revenue accounted for 97% of our
total revenue for the three months ended
Subscriptions are billed in advance on various schedules. Because the mix of billing terms for orders can vary from period to period, the annualized value of the orders we enter into with our customers will not be completely reflected in deferred revenue at any single point in time. Accordingly, we do not believe that change in deferred revenue is an accurate indicator of future revenue.
Many of our customers purchase on-boarding, training, and consulting services,
and utilize other tools and Payments, which are designed to help customers
enhance their ability to attract, engage and delight their customers using our
CRM Platform. Professional services and other revenue accounted for 3% of total
revenue for three months ended
We have focused on rapidly growing our business and plan to continue to make investments to help us address some of the challenges facing us to support this growth, such as demand for our CRM Platform by existing and new customers, significant competition from other providers of marketing, sales, customer service, operations, and content management software and related applications and rapid technological change in our industry.
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We believe that the growth of our business is dependent on many factors, including our ability to expand our customer base, increase adoption of our CRM Platform within existing customers, develop new products and applications to extend the functionality of our CRM Platform and provide a high level of customer service. We expect to increase our investment in sales and marketing as we continue to expand our sales teams, increase our marketing activities and grow our international operations. We also expect to increase our investment in research and development as we continue to introduce new products and applications to extend the functionality of our CRM Platform. We also intend to invest in maintaining a high level of customer service and support which we consider critical for our continued success. We plan to continue investing in our data center infrastructure and services capabilities in order to support continued future customer growth. We also expect to continue to incur additional general and administrative expenses as a result of both our growth and the infrastructure required to be a public company. We expect to use our cash flow from operations and the proceeds from our convertible debt and prior stock offerings to fund these growth strategies and support our business and do not expect to be profitable in the near term.
COVID-19 Update
In
Our focus remains on promoting employee health and safety, serving our customers, complying with regulations, and ensuring business continuity. As we continue to monitor local regulations and restrictions across the globe, the administration of vaccines and the number of new cases, we have reopened all of our offices globally in accordance with local authority guidelines while ensuring that our return to work is thoughtful, prudent, and handled with an abundance of caution with the health of our employees being the top priority.
The pandemic has not had a material adverse financial impact on our business to date, the broader implications of the pandemic on our results of operations and overall financial performance will depend on future developments and conditions. See the section titled "Risk Factors" included under Part II, Item 1A below for further discussion of the possible impact of the pandemic on our business.
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Results of Operations for the Three Months Ended
The following tables set forth our results of operations for the periods presented and as a percentage of our total revenue for those periods. The data has been derived from the unaudited consolidated financial statements contained in this Quarterly Report on Form 10-Q which include, in our opinion, all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair statement of the financial position and results of operations for the interim periods presented. The period-to-period comparison of financial results is not necessarily indicative of financial results to be achieved in future periods.
Three Months Ended March 31, (dollars in thousands) 2022 2021 Revenues: Subscription$ 384,956 $ 270,263
Professional services and other 10,643 11,102 Total revenue
395,599 281,365 Cost of revenues: Subscription 59,384 43,853 Professional services and other 13,552 10,881 Total cost of revenues 72,936 54,734 Gross profit 322,663 226,631 Operating expenses: Research and development 92,736 68,396 Sales and marketing 197,134 141,017 General and administrative 43,947 32,250 Total operating expenses 333,817 241,663 Loss from operations (11,154 ) (15,032 ) Other expense: Interest income 515 475 Interest expense (950 ) (9,399 ) Other income 3,692 660 Total other income (expense) 3,257 (8,264 ) Loss before income tax expense (7,897 ) (23,296 ) Income tax (expense) benefit (1,444 ) 137 Net loss$ (9,341 ) $ (23,159 ) Three Months Ended March 31, 2022 2021 Revenue: Subscription 97 % 96 % Professional services and other 3 4 Total revenue 100 100 Cost of revenue: Subscription 15 16 Professional services and other 3 4 Total cost of revenue 18 19 Gross profit 82 81 Operating expenses: Research and development 23 24 Sales and marketing 50 50 General and administrative 11 11 Total operating expenses 84 86 Loss from operations (3 ) (5 ) Total other income (expense) 1 (3 )
Loss before income tax expense (2 ) (8 ) Income tax (expense) benefit
(0 ) 0 Net loss (2 )% (8 )%
Percentages are based on actual values. Totals may not sum due to rounding.
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Three Months EndedMarch 31, 2022 Compared to the Three Months EndedMarch 31, 2021 Revenue Three Months Ended March 31, (dollars in thousands) 2022 2021 $ Change % Change Revenues: Subscription$ 384,956 $ 270,263 $ 114,693 42 % Professional services and other 10,643 11,102 (459 ) (4 )% Total revenue$ 395,599 $ 281,365 $ 114,234 41 %
Subscription revenue increased during the three months ended
Professional services and other revenue decreased during the three months ended
Cost of Revenue, Gross Profit and Gross Margin Percentage
Three Months Ended March 31, (dollars in thousands) 2022 2021 $ Change % Change Total cost of revenue$ 72,936 $ 54,734 $ 18,202 33 % Gross profit$ 322,663 $ 226,631 $ 96,032 42 % Gross margin percentage 82 % 81 %
Total cost of revenue for the three months ended
Three Months Ended March 31, (dollars in thousands) 2022 2021 $ Change % Change Subscription cost of revenue$ 59,384 $ 43,853 $ 15,531 35 %
Percentage of subscription revenue 15 % 16 %
The increase in subscription cost of revenue for the three months ended
Change Three Months (in thousands) Subscription and hosting costs $ 9,155 Employee-related costs 3,925 Amortization of capitalized software development costs 2,191 Allocated overhead expenses 177 Amortization of acquired technology 83$ 15,531
Subscription and hosting costs increased primarily due to growth in our Total
Customer base from 113,925 as of
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increased number of developers working on our software platform as we continue to develop new products and increased functionality. Allocated overhead expenses increased due to an increase in shared company expenses associated with our systems and infrastructure as we continued to grow our business and expand headcount. Amortization of acquired technology increased due to certain acquired technology being amortized using a method reflective of the expected economic benefit consumption over the expected useful life of the asset.
Three Months Ended March 31, (dollars in thousands) 2022 2021 $ Change % Change
Professional services and other cost
of revenue$ 13,552 $ 10,881 $ 2,671 25 %
Percentage of professional services
and other revenue 127 % 98 % The increase in professional services and other cost of revenue for three months endedMarch 31, 2022 compared to the same period in 2021 was primarily due to the following: Change Three Months (in thousands) Employee-related costs $ 2,505 Allocated overhead expenses 166 $ 2,671
Employee-related costs increased as a result of increased headcount as we continue to grow our professional services organization to support our customer growth. Allocated overhead expenses increased due to an increase in shared company expenses associated with our systems and infrastructure as we continued to grow our business and expand headcount.
Research and Development Three Months Ended March 31, (dollars in thousands) 2022 2021 $ Change % Change Research and development$ 92,736 $ 68,396 $ 24,340 36 %
Percentage of total revenue 23 % 24 %
The increase in research and development expense for the three months endedMarch 31, 2022 compared to the same period in 2021 was primarily due to the following: Change Three Months (in thousands) Employee-related costs$ 25,997 Professional services 424 Allocated overhead expenses 431 Hosting expenses (2,512 )$ 24,340
Employee-related costs increased as a result of increased headcount as we continue to grow our engineering organization to develop new products, increase functionality and to maintain our existing CRM Platform. Professional services increased due to an increase in the use of third-party services and contractors as we continued to grow our engineering organization. Allocated overhead expenses increased due to an increase in shared company expenses associated with our systems and infrastructure as we continued to grow our business and expand headcount. Hosting expense decreased due to incremental spend in the first quarter of 2021 associated with product development infrastructure that is unrelated to the hosting of our CRM Platform for paying Customers. In July of 2021, we launched a new data center and the ongoing expenses related to the hosting of our CRM Platform on that data center are classified as subscription cost of revenue.
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Sales and Marketing Three Months Ended March 31, (dollars in thousands) 2022 2021 $ Change % Change Sales and marketing$ 197,134 $ 141,017 $ 56,117 40 % Percentage of total revenue 50 % 50 %
The increase in sales and marketing expense for the three months ended
Change Three Months (in thousands) Employee-related costs$ 39,267 Solutions Partner commissions 7,325 Marketing programs 6,148 Allocated overhead expenses 2,130 Professional services 1,247$ 56,117
Employee-related costs increased as a result of increased headcount as we
continue to expand our selling and marketing organizations to grow our customer
base. Solutions Partner commissions increased as a result of increased revenue
generated through our
General and Administrative
Three Months EndedMarch 31 ,
(dollars in thousands) 2022 2021 $ Change % Change
General and administrative
36 %
Percentage of total revenue 11 % 11 %
The increase in general and administrative expense for the three months endedMarch 31, 2022 compared to the same period in 2021 was primarily due to the following: Change Three Months (in thousands) Employee-related costs $ 8,580 Allocated overhead expenses 1,227 Customer credit card fees 1,890$ 11,697
Employee-related costs increased as a result of increased headcount as we continue to grow our business and require additional personnel to support our expanded operations. Allocated overhead expenses increased due to an increase in shared company expenses associated with our systems and infrastructure as we continued to grow our business and expand headcount. Customer credit card fees increased due to increased customer transactions as we continue to grow our business.
Interest income Three Months Ended March 31, (dollars in thousands) 2022 2021 $ Change % Change Interest income$ 515 $ 475 $ 40 8 % Percentage of total revenue * * * not meaningful 26
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Interest income primarily consists of interest earned on invested cash and cash
equivalents balances and investments. The increase during the three months ended
Interest expense Three Months Ended March 31, (dollars in thousands) 2022 2021 $ Change % Change Interest expense$ (950 ) $ (9,399 ) $ (8,449 ) (90 )% Percentage of total revenue * (3 )% * not meaningful
The change in interest expense for the three months ended
Change Three Months (in thousands)
Amortization of the debt discount and issuance costs and
contractual interest expense related to our Notes Loss on early extinguishment of 2022 Convertible Notes
(2,405 )$ (8,449 ) Interest expense primarily consists of amortization of the debt discount and issuance costs and contractual interest expense related to our Notes, and the loss on early extinguishment of our 2022 Notes. The decrease in interest expense related to the Notes is primarily due to the adoption of the new convertible debt guidance. Other income Three Months Ended March 31, (dollars in thousands) 2022 2021 $ Change % Change Other income$ 3,692 $ 660 $ 3,032 459 % Percentage of total revenue 1 % * * not meaningful
The change in other income during the three months ended
Change Three Months (in thousands)
Foreign currency gains and losses
4,221 $ 3,032 Other income primarily consists of the impact of foreign currency transaction gains and losses associated with monetary assets and liabilities and any gains or losses on our strategic investments. The gain on investments is due to an adjustment to the fair value of an investment as a result of an observable price change. Income tax expense Three Months Ended March 31, (dollars in thousands) 2022 2021 $ Change % Change Income tax (expense) benefit$ (1,444 ) $ 137 $ 1,581 1154 % Effective tax rate 18 % (1 )%
Income tax (expense) benefit consists of current and deferred taxes for
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tax perspective in the three months ended
Liquidity and Capital Resources
Our principal sources of liquidity to date have been cash and cash equivalents, net accounts receivable, our common stock offerings, and our convertible notes offerings.
The following table shows cash and cash equivalents, working capital, net cash and cash equivalents provided by operating activities, net cash and cash equivalents used in investing activities, and net cash and cash equivalents provided by financing activities for the three months endedMarch 31, 2022 and 2021. Three Months ended March 31, 2022 2021 (in thousands) Cash and cash equivalents$ 408,433 $ 397,498 Working capital 829,110 885,986 Net cash and cash equivalents provided by operating activities 82,226 62,700 Net cash and cash equivalents used in investing activities (55,036 ) (17,646 ) Net cash and cash equivalents provided by (used in) financing activities 5,879 (21,802 )
Our cash and cash equivalents at
Cash from operations could be affected by various risks and uncertainties, including, but not limited to, the effects of the pandemic and other risks detailed in the section titled "Risk Factors" included under Part II, Item 1A. However, based on our current business plan and revenue prospects, we believe that our existing cash, cash equivalents and investment balances, and our anticipated cash flows from operations will be sufficient to meet our working capital and operating resource expenditure requirements for the next twelve months.
Net cash and cash equivalents provided by operating activities consists primarily of net loss adjusted for certain non-cash items, including stock-based compensation, depreciation and amortization and other non-cash charges, net.
Net cash and cash equivalents provided by operating activities during the three
months ended
Net cash and cash equivalents provided by operating activities during the three
months ended
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Our investing activities have consisted primarily of purchases and maturities of investments, property and equipment purchases, an acquisition of a business, purchases of strategic investments, an equity method investment and capitalization of software development costs. Capitalized software development costs are related to new products or improvements to our existing software platform that expands the functionality for our customers.
Net cash and cash equivalents used in investing activities during the three
months ended
Net cash and cash equivalents used in investing activities during the three
months ended
Our financing activities have consisted primarily of the various components of our 2022 Notes repayment, repayment of our 2025 Notes, the issuance of common stock under our stock plans, and payments of employee taxes related to the net share settlement of stock-based awards,.
For the three months ended
For the three months ended
Critical Accounting Policies and Estimates
There have been no significant changes in our critical accounting policies and
estimates during the three months ended
Contractual Obligations and Commitments
Contractual obligations are cash that we are obligated to pay as part of certain contracts that we have entered during our course of business. Our contractual obligations consist of operating lease liabilities that are included in our consolidated balance sheet and vendor commitments associated with agreements that are legally binding. See Note 10 for all obligations the Company is committed to in the notes to the consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.
Recent Accounting Pronouncements
For information on recent accounting pronouncements, see Recent Accounting Pronouncements in the notes to the consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.
Off-Balance Sheet Arrangements
As of
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