HUBSPOT, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year endedDecember 31, 2021 filed with theSEC onFebruary 14, 2022 . As discussed in the section titled "Special Note Regarding Forward-Looking Statements," the following discussion and analysis contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled "Risk Factors" included under Part II, Item 1A below. 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, ourSolutions Partners , and our "freemium" model. A Solutions Partner is a service provider that helps businesses with strategy, execution, and implementation of go-to-market activities and technology solutions. Our freemium model attracts customers who begin using our CRM Platform through our free products and then upgrade to our paid products. As ofSeptember 30, 2022 , we had 7,409 full-time employees and 158,905 Customers of varying sizes in more than 120 countries, representing almost every industry. 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 98% of our total revenue for the three and nine months endedSeptember 30, 2022 and 97% of our total revenue for the three and nine months endedSeptember 30, 2021 . We sell multiple product plans at different base prices on a subscription basis, each of which includes our CRM and integrated applications to meet the needs of the various customers we serve. Customers pay additional fees if the number of contacts stored and tracked in the customer's database exceeds specified thresholds. We also generate additional revenue based on the purchase of additional subscriptions and products, and the number of account users and subdomains. Most of our customers' subscriptions are one year or less in duration. 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 2% of total revenue for three and nine months endedSeptember 30, 2022 and 3% of our total revenue for the three and nine months endedSeptember 30, 2021 . 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 22 --------------------------------------------------------------------------------
competition from other providers of marketing, sales, customer service, operations, and content management software and related applications and rapid technological change in our industry.
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 continue to invest in sales and marketing and expand 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 maintain 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 and Other Global Economic Conditions
Our results of operations can be significantly influenced by general
macroeconomic conditions, including, but not limited to, the impact of the
pandemic, foreign currency fluctuations, interest rates, inflation, recession
risks, existing and new domestic and foreign laws and regulations, all of which
are beyond our control. Fluctuations in foreign exchange rates and rising
inflation has had, and may continue to have an adverse impact on our financial
condition and operating results in future periods. As we continue to monitor the
direct and indirect impacts of these circumstances, the broader implications of
these macroeconomic events on our business, results of operations and overall
financial position, particularly in the long term, remain uncertain. See the
section titled "Risk Factors'' included under Part II, Item 1A below for further
discussion of the possible impact of these factors and other risks on our
business.
23--------------------------------------------------------------------------------
Results of Operations for the Three and Nine 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 Nine Months
Ended September 30, Ended September 30,
(dollars in thousands) 2022 2021 2022 2021
Revenues:
Subscription $ 435,030 $ 328,975 $ 1,232,387 $ 899,661
Professional services and other 8,928 10,220 28,926 31,688
Total revenue 443,958 339,195 1,261,313 931,349
Cost of revenues:
Subscription 67,648 57,547 191,466 152,533Professional services and other 14,479 12,059 42,532
34,685
Total cost of revenues 82,127 69,606 233,998 187,218
Gross profit 361,831 269,589 1,027,315 744,131
Operating expenses:
Research and development 114,038 78,473 325,687 218,973
Sales and marketing 229,541 170,016 650,936 468,836
General and administrative 50,465 36,027 146,309 102,883
Total operating expenses 394,044 284,516 1,122,932 790,692
Loss from operations (32,213 ) (14,927 ) (95,617 ) (46,561 )
Other expense:
Interest income 4,658 230 7,222 1,046
Interest expense (923 ) (7,798 ) (2,822 ) (24,376 )
Other (expense) income (1,185 ) 9,877 (583 ) 11,064
Total other income (expense) 2,550 2,309 3,817 (12,266 )
Loss before income tax expense (29,663 ) (12,618 ) (91,800 ) (58,827 )
Income tax expense (1,748 ) (1,117 ) (5,313 ) (2,639 )
Net loss $ (31,411 ) $ (13,735 ) $ (97,113 ) $ (61,466 )
Three Months Nine Months
Ended September 30, Ended September 30,
2022 2021 2022 2021
Revenue:
Subscription 98 % 97 % 98 % 97 %
Professional services and other 2 3 2 3
Total revenue 100 100 100 100
Cost of revenue:
Subscription 15 17 15 16
Professional services and other 3 4 3 4
Total cost of revenue 18 21 19 20
Gross profit 82 79 81 80
Operating expenses:
Research and development 26 23 26 24
Sales and marketing 52 50 52 50
General and administrative 11 11 12 11
Total operating expenses 89 84 89 85
Loss from operations (7 ) (4 ) (8 ) (5 )
Total other income (expense) 1 1 0 (1 )
Loss before income tax expense (7 ) (4 ) (7 ) (6 )
Income tax expense (0 ) (0 ) (0 ) (0 )
Net loss (7 )% (4 )% (8 )% (7 )%
Percentages are based on actual values. Totals may not sum due to rounding.
24
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Three and Nine Months Ended
Revenue
Three Months Nine Months
Ended September 30 , Ended September 30 ,(dollars in thousands) 2022 2021 $ Change % Change 2022 2021 $ Change % Change Revenues: Subscription$ 435,030 $ 328,975 $ 106,055 32 %$ 1,232,387 $ 899,661 $ 332,726 37 % Professional services and other 8,928 10,220 (1,292 ) (13 )% 28,926 31,688 (2,762 ) (9 )% Total revenue$ 443,958 $ 339,195 $ 104,763 31 %$ 1,261,313 $ 931,349 $ 329,964 35 % Three month change Subscription revenue increased during the three months endedSeptember 30, 2022 compared to the same period in 2021 primarily due to the increase in Customers, which grew from 128,144 as ofSeptember 30, 2021 to 158,905 as ofSeptember 30, 2022 . Average Subscription Revenue per Customer increased from$10,536 for the three months endedSeptember 30, 2021 to$11,233 for the three months endedSeptember 30, 2022 . The growth in Customers was primarily driven by increased demand for our lower priced Starter products. The increase in Average Subscription Revenue per Customer was primarily driven by a continued demand for our Professional and Enterprise products, offset by continued purchases of our lower priced Starter products and the impact of foreign currency translation primarily attributable to the decline in the value of the Euro and British Pound Sterling relative to theU.S. Dollar. Professional services and other revenue decreased during the three months endedSeptember 30, 2022 compared to the same period in 2021 primarily due to lower overall services revenue from onboardings and trainings, and lower fees earned from revenue share arrangements with third parties, partially offset by fees earned from Payments and other revenue streams.
Nine month change
Subscription revenue increased during the three months endedSeptember 30, 2022 compared to the same period in 2021 primarily due to the increase in Customers, which grew from 128,144 as ofSeptember 30, 2021 to 158,905 as ofSeptember 30, 2022 . Average Subscription Revenue per Customer increased from$10,305 for the nine months endedSeptember 30, 2021 to$11,162 for the nine months endedSeptember 30, 2022 . The growth in Customers was primarily driven by our increased demand for our lower priced Starter products. The increase in Average Subscription Revenue per Customer was primarily driven by a continued demand for our Professional and Enterprise products, offset by continued purchases of our lower priced Starter products and the impact of foreign currency translation primarily attributable to the decline in the value of the Euro and British Pound Sterling relative to theU.S. Dollar. Professional services and other revenue decreased during the nine months endedSeptember 30, 2022 compared to the same period in 2021 primarily due to non-recurring advertising revenue generated from our acquisition of the Hustle in the first quarter of 2021, lower overall services revenue from onboardings and trainings, and lower fees earned from revenue share arrangements with third parties, partially offset by fees earned from Payments and other revenue streams.
Cost of Revenue, Gross Profit and Gross Margin Percentage
Three Months Nine Months
Ended September 30, Ended September 30,
(dollars in
thousands) 2022 2021 $ Change % Change 2022 2021 $ Change % Change
Total cost of
revenue $ 82,127 $ 69,606 $ 12,521 18 % $ 233,998 $ 187,218 $ 46,780 25 %
Gross profit $ 361,831 $ 269,589 $ 92,242 34 % $ 1,027,315 $ 744,131 $ 283,184 38 %
Gross margin
percentage 82 % 79 % 81 % 80 %
Total cost of revenue for the three and nine months ended September 30, 2022
increased compared to the same period in 2021 primarily due to an increase in
subscription and hosting costs, employee-related costs, amortization of
capitalized software development costs, and amortization of acquired technology,
offset by a decrease in allocated overhead expenses. Gross margins remained
consistent year-over-year.
Three Months Nine Months
Ended September 30, Ended September 30,
(dollars in
thousands) 2022 2021 $ Change % Change 2022 2021 $ Change % Change
Subscription cost
of revenue $ 67,648 $ 57,547 $ 10,101 18 % $ 191,466 $ 152,533 $ 38,933 26 %
Percentage of
subscription
revenue 16 % 17 % 16 % 17 %
25-------------------------------------------------------------------------------- The increase in subscription cost of revenue for the three and nine months endedSeptember 30, 2022 compared to the same period in 2021 was primarily due to the following: Change Three Months Nine Months (in thousands) Subscription and hosting costs $ 5,943 $
22,402
Employee-related costs 2,178
9,525
Amortization of capitalized software development costs 2,430
6,903
Amortization of acquired technology 59 212
Allocated overhead expenses (509 ) (109 )
$ 10,101 $ 38,933
Three month change
Subscription and hosting costs increased primarily due to growth in our Customer
base from 128,144 as of September 30, 2021 to 158,905 as of September 30, 2022 .
We also saw higher subscription and hosting costs as we continued to focus on
the security, reliability and performance of our CRM Platform. Employee-related
costs increased as a result of increased headcount as we grew our customer
support organization to support our customer growth and improve service levels
and offerings. Amortization of capitalized software development costs increased
due to the increased number of developers working on our software platform as we
continued to develop new products and increased functionality. 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. Allocated overhead expenses decreased
primarily due to the reduction of our leased space.
Nine month change
Subscription and hosting costs increased primarily due to growth in our Customer base from 128,144 as ofSeptember 30, 2021 to 158,905 as ofSeptember 30, 2022 . We also saw higher subscription and hosting costs as we launched an additional data center in the third quarter of 2021 and continued to focus on the security, reliability and performance of our CRM Platform. Employee-related costs increased as a result of increased headcount as we grew our customer support organization to support our customer growth and improve service levels and offerings. Amortization of capitalized software development costs increased due to the increased number of developers working on our software platform as we continued to develop new products and increased functionality. 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. Allocated overhead expenses decreased primarily due to the reduction of our leased space. Three Months Nine Months Ended September 30, Ended September 30, (dollars in thousands) 2022 2021 $ Change % Change 2022 2021 $ Change % Change Professional services and other cost of revenue$ 14,479 $ 12,059 $ 2,420 20 %$ 42,532 $ 34,685 $ 7,847 23 % Percentage of professional services and other revenue 162 % 118 % 147 % 109 % The increase in professional services and other cost of revenue for three and nine months endedSeptember 30, 2022 compared to the same period in 2021 was primarily due to the following: Change Three Months Nine Months (in thousands) Employee-related costs$ 2,333 $ 7,429 Allocated overhead and other expenses 433 973 Professional fees (346 ) (555 )$ 2,420 $ 7,847 26
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Three month change
Employee-related costs increased as a result of increased headcount as we grew our professional services organization to support our customer growth. Allocated overhead and other expenses increased primarily due to increased costs associated with our service offerings, offset slightly by a decrease in expense from the reduction of our leased space. Professional fees decreased due to a reduction in the use of third-party services and contractors.
Nine month change
Employee-related costs increased as a result of increased headcount as we grew our professional services organization to support our customer growth. Allocated overhead and other expenses increased primarily due to increased costs associated with our service offerings, offset slightly by a decrease in expense from the reduction of our leased space. Professional fees decreased due to a reduction in the use of third-party services and contractors.
Research and Development
Three Months Nine Months
Ended September 30, Ended September 30,
(dollars in
thousands) 2022 2021 $ Change % Change 2022 2021 $ Change % Change
Research and
development $ 114,038 $ 78,473 $ 35,565 45 % $ 325,687 $ 218,973 $ 106,714 49 %
Percentage of
total revenue 26 % 23 % 26 % 24 %
The increase in research and development expense for the three and nine months
ended September 30, 2022 compared to the same period in 2021 was primarily due
to the following:
Change
Three Months Nine Months
(in thousands)
Employee-related costs $ 35,299 $ 108,946
Allocated overhead expenses 266 2,391
Hosting expenses - (4,623 )
$ 35,565 $ 106,714
Three month change
Employee-related costs increased as a result of increased headcount as we
continued to grow our engineering organization to develop new products, increase
functionality and to maintain our existing CRM Platform. 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. 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. As such, there was no change in
hosting expenses.
Nine month change
Employee-related costs increased as a result of increased headcount as we
continued to grow our engineering organization to develop new products, increase
functionality and to maintain our existing CRM Platform. 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 half
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.
Sales and Marketing
Three Months Nine Months
Ended September 30, Ended September 30,
(dollars in
thousands) 2022 2021 $ Change % Change 2022 2021 $ Change % Change
Sales and
marketing $ 229,541 $ 170,016 $ 59,525 35 % $ 650,936 $ 468,836 $ 182,100 39 %
Percentage of
total revenue 52 % 50 % 52 % 50 %
27-------------------------------------------------------------------------------- The increase in sales and marketing expense for the three and nine months endedSeptember 30, 2022 compared to the same period in 2021 was primarily due to the following: Change Three Months Nine Months (in thousands) Employee-related costs$ 48,348 $ 139,765 Solutions Partner commissions 5,850 19,999 Marketing programs 3,828 13,111 Allocated overhead expenses 1,145 8,544 Amortization of intangible asset 354 681$ 59,525 $ 182,100 Three month change Employee-related costs increased as a result of increased headcount as we expanded our selling and marketing organizations to grow our customer base. Solutions Partner commissions increased as a result of increased revenue generated through ourSolutions Partners . Marketing programs increased due to the timing and size of certain marketing efforts as we made investments in attracting new customers. 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, offset slightly by a decrease in expense from the reduction of our leased space. Amortization of intangible assets increased primarily due to the purchase of a domain name in the second quarter of 2022. Nine month change Employee-related costs increased as a result of increased headcount as we expanded our selling and marketing organizations to grow our customer base. Solutions Partner commissions increased as a result of increased revenue generated through ourSolutions Partners . Marketing programs increased due to the timing and size of certain marketing efforts as we continue to make investments in attracting new customers. 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, offset slightly by a decrease in expense from the reduction of our leased space. Amortization of intangible assets increased primarily due to the purchase of a domain name in the second quarter of 2022.
General and Administrative
Three Months Nine Months
Ended September 30, Ended September 30,
(dollars in
thousands) 2022 2021 $ Change % Change 2022 2021 $ Change % Change
General and
administrative $ 50,465 $ 36,027 $ 14,438 40 % $ 146,309 $ 102,883 $ 43,426 42 %
Percentage of
total revenue 11 % 11 % 12 % 11 %
The increase in general and administrative expense for the three and nine months
ended September 30, 2022 compared to the same period in 2021 was primarily due
to the following:
Change
Three Months Nine Months
(in thousands)
Employee-related costs $ 11,842 $ 35,862
Customer credit card fees 1,969 5,697
Allocated overhead expenses 627 1,867
$ 14,438 $ 43,426
Three month change
Employee-related costs increased as a result of increased headcount as we grew
our business and required additional personnel to support our expanded
operations. Customer credit card fees increased due to increased customer
transactions as we continue to grow our business. 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.
Nine month change
28
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Employee-related costs increased as a result of increased headcount as we grew
our business and required additional personnel to support our expanded
operations. Customer credit card fees increased due to increased customer
transactions as we continue to grow our business. 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.
Interest income
Three Months Nine Months
Ended September 30, Ended September 30,
(dollars in
thousands) 2022 2021 $ Change % Change 2022 2021 $ Change % Change
Interest income $ 4,658 $ 230 $ 4,428 1925 % $ 7,222 $ 1,046 $ 6,176 590 %
Percentage of
total revenue 1 % * 1 % *
* not meaningful
Interest income primarily consists of interest earned on invested cash and cash
equivalents balances and investments. The increase during the three and nine
months ended September 30, 2022 is due to an increase in yields on our
investment balances.
Interest expense
Three Months Nine Months
Ended September 30, Ended September 30,
(dollars in
thousands) 2022 2021 $ Change % Change 2022 2021 $ Change % Change
Interest expense $ (923 ) $ (7,798 ) $ (6,875 ) (88 )% $ (2,822 ) $ (24,376 ) $ (21,554 ) (88 )%
Percentage of
total revenue * (2 )% * (3 )%
* not meaningful
The change in interest expense for the three and nine months ended
Change
Three Months Nine Months
(in thousands)
Amortization of the debt discount and issuance
(16,731 )
costs and
contractual interest expense related to our
Notes
Loss on early extinguishment of 2022 Convertible
Notes (1,736 ) (4,823 )
$ (6,875 ) $ (21,554 )
Three month change
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 and loss on extinguishment is primarily due to the adoption
of the new convertible debt guidance.
Nine month change
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 and loss on extinguishment is primarily due to the adoption of the new convertible debt guidance.
Other (expense) income
Three Months Nine Months
Ended September 30, Ended September 30,
(dollars in
thousands) 2022 2021 $ Change % Change 2022 2021 $ Change % Change
Other (expense)
income $ (1,185 ) $ 9,877 $ (11,062 ) (112 )% $ (583 ) $ 11,064 $ (11,647 ) (105 )%
Percentage of
total revenue * 2 % * 1 %
* not meaningful
29--------------------------------------------------------------------------------
The change in other income during the three and nine months ended
Change
Three Months Nine Months
(in thousands)
Foreign currency transaction gains and losses $ (345 ) $ (4,108 )
Gain on strategic investments (10,717 ) (7,539 )
$ (11,062 ) $ (11,647 )
Three month change
Other (expense) 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 increase in foreign
currency transaction losses is primarily attributable to the decline in the
value of the Euro and British Pound Sterling relative to the U.S. Dollar. The
decrease in gain on investments is due to an adjustment to the fair value of an
investment as a result of an observable price change in the three months ended
September 30, 2021 , whereas no gain was recognized in the three months ended
September 30, 2022 .
Nine month change
Other (expense) 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 increase in foreign
currency transaction losses is primarily attributable to the decline in the
value of the Euro and British Pound Sterling relative to the U.S. Dollar. The
decrease in gain on investments is due to an adjustment to the fair value of an
investment as a result of an observable price change of $4.2 million in the nine
months ended September 30, 2022 compared to $11.7 million in the nine months
ended September 30, 2021 .
Income tax expense
Three Months Nine Months
Ended September 30, Ended September 30,
(dollars in
thousands) 2022 2021 $ Change % Change 2022 2021 $ Change % Change
Income tax
expense $ (1,748 ) $ (1,117 ) $ (631 ) 56 % $ (5,313 ) $ (2,639 ) $ (2,674 ) 101 %
Effective tax
rate 6 % 9 % 6 % 4 %
Three month change
Income tax expense consists of current and deferred taxes for U.S. and foreign
income taxes. The increase in income tax expense was primarily driven by
increased income in jurisdictions outside of the U.S. that are profitable from a
tax perspective, the state tax effect of a U.S. federal tax law change in effect
from January 1, 2022 that requires the capitalization of research and
experimental costs, and lower-than-expected tax benefits associated with
stock-based compensation.
Nine month change
Income tax expense consists of current and deferred taxes forU.S. and foreign income taxes. The increase in income tax expense was primarily driven by increased income in jurisdictions outside of theU.S. that are profitable from a tax perspective, the state tax effect of aU.S. federal tax law change in effect fromJanuary 1, 2022 that requires the capitalization of research and experimental costs, and lower-than-expected tax benefits associated with stock-based compensation, partially offset by a non-recurring income tax benefit recognized in 2021 relating to the release of a portion of the Company's valuation allowance. The release was due to recording net deferred tax liabilities related to the Hustle acquisition, which are a source of income to support the realizability of the Company's pre-existingU.S. deferred tax assets.
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
30
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for the nine months ended
Nine Months ended September 30,
2022 2021
(in thousands)
Cash and cash equivalents $ 331,659 $ 288,334
Working capital 892,884 861,244
Net cash and cash equivalents provided by
operating activities 183,209 143,544
Net cash and cash equivalents used in investing activities (211,121 ) (169,704 ) Net cash and cash equivalents used in financing activities (1,179 )
(57,303 )
Our cash and cash equivalents atSeptember 30, 2022 were held for working capital purposes. AtSeptember 30, 2022 ,$111.2 million of our cash and cash equivalents was held in accounts outsidethe United States . We do not assert indefinite reinvestment of our foreign earnings because these earnings have been subject to United States Federal tax. While we have concluded that any incremental tax incurred upon ultimate distribution of these earnings to be immaterial, our current plans do not demonstrate a need to repatriate undistributed earnings to fund ourU.S. operations. Cash from operations could be affected by various risks and uncertainties 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 nine months endedSeptember 30, 2022 primarily reflected our net loss of$97.1 million , benefit from deferred income taxes of$0.6 million ,$3.3 million accretion of bond discounts, and gains on strategic investments of$4.2 million , offset by non-cash expenses that included$42.6 million of depreciation and amortization,$199.1 million in stock-based compensation, and$1.5 million of amortization of debt discount and issuance costs. Working capital sources of cash and cash equivalents primarily included a$63.7 million increase in deferred revenue primarily resulting from the growth in the number of customers invoiced during the period, a$19.6 million increase in right-of-use asset, a$10.7 million increase in accounts payable related to timing of bill payments, and$16.5 million increase in accrued expenses and other liabilities. These sources of cash and cash equivalents were offset by a$8.9 million increase in prepaid expenses and other assets, a$14.6 million decrease in operating lease liabilities, a$22.2 million increase in deferred commissions, and a$20.1 million increase in accounts receivable as a result of increased billings to customers. Net cash and cash equivalents provided by operating activities during the nine months endedSeptember 30, 2021 primarily reflected our net loss of$61.5 million , the portion of the repayment of the 2022 Notes attributable to the debt discount of$24.5 million , benefit from deferred income taxes of$1.3 million , a gain on termination of operating leases of$4.3 million , and aggregate gains on strategic investments of$11.7 million , offset by non-cash expenses that included$33.2 million of depreciation and amortization,$120.8 million in stock-based compensation,$2.9 million amortization of bond discounts,$18.1 million of amortization of debt discount and issuance costs, loss on disposal of fixed assets of$6.5 million , and$4.8 million of loss on early extinguishment of 2022 Notes. Working capital sources of cash and cash equivalents primarily included a$66.8 million increase in deferred revenue primarily resulting from the growth in the number of customers invoiced during the period, a$26.9 million increase in right-of-use asset, and$38.2 million increase in accrued expenses and other liabilities. These sources of cash and cash equivalents were offset by a$12.0 million increase in accounts payable related to timing of bill payments, a$7.1 million increase in prepaid expenses and other assets, a$26.4 million decrease in operating lease liabilities, a$24.4 million increase in deferred commissions, and a$2.2 million increase in accounts receivable as a result of increased billings to customers consistent with the overall growth of the business.
Our investing activities have consisted primarily of purchases and maturities of investments, sale of investments, property and equipment purchases, an acquisition of a business, purchase of intangible assets, 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 nine months endedSeptember 30, 2022 consisted primarily of$1.3 billion purchases of investments,$31.4 million of purchased property and equipment,$19.9 million of purchases of strategic 31 -------------------------------------------------------------------------------- investments,$31.4 million of capitalized software development costs, and a$10.0 million purchase of intangible assets. These uses of cash were offset by$1.0 billion received related to the maturity of investments and$125.0 million received for sale of investments. Net cash and cash equivalents used in investing activities during the nine months endedSeptember 30, 2021 consisted primarily of$1.0 billion purchases of investments,$17.4 million of purchased property and equipment, a$16.8 million business acquisition,$10.2 million of purchases of strategic investments,$3.1 million in an equity method investment and$25.6 million of capitalized software development costs. These uses of cash were offset by$940.8 million received related to the maturity of investments.
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 nine months endedSeptember 30, 2022 cash used in financing activities consisted of$1.6 million used for the repayment of the 2025 Notes attributable to the principal,$79.8 million payment for settlement of the 2022 Notes, and$10.0 million used for payment of employee taxes related to the net share settlement of stock-based awards, offset by$29.7 million of proceeds related to issuance of common stock under stock plans and$60.5 million of proceeds from settlement of the Convertible Note Hedges. For the nine months endedSeptember 30, 2021 cash used in financing activities consisted of$80.4 million used for repayment of the 2022 Notes attributable to the principal and$11.7 million used for payment of employee taxes related to the net share settlement of stock-based awards, offset by$0.7 million of proceeds from the settlement of the Convertible Note Hedges related to the 2022 Notes and$34.1 million of proceeds related to issuance of common stock under stock plans.
Critical Accounting Policies and Estimates
There have been no significant changes in our critical accounting policies and estimates during the nine months endedSeptember 30, 2022 as compared to the critical accounting policies and estimates disclosed in our Annual Report on Form 10-K for the year endedDecember 31, 2021 .
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 the date of this report, we are committed to contribute additional capital of$6.3 million to theBlack Economic Development Fund . There were no other material off-balance sheet arrangements exclusive of operating leases and indemnifications of officers, directors and employees for certain events or occurrences while the officer, director or employee is, or was, serving at our request in such capacity.
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