RINGCENTRAL, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Condensed Consolidated Financial Statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K filed with theSecurities and Exchange Commission (the "SEC") onFebruary 26, 2021 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). As discussed in the section entitled "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 significantly from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and elsewhere in this report, particularly in the section entitled "Risk Factors" included under Part II, Item 1A below. Overview We are a leading provider of cloud communications, video meetings, collaboration, and contact center software-as-a-service ("SaaS") solutions. We believe that our innovative, cloud-based communication and contact center solutions disrupt the large market for business communications and collaboration by providing flexible and cost-effective solutions that support mobile and distributed workforces. We enable convenient and effective communications for organizations across all their locations and employees, enabling them to be more productive and more responsive to their customers. Our cloud-based business communications and collaboration solutions are designed to be easy to use, providing a single user identity across multiple locations and devices, including smartphones, tablets, PCs and desk phones. Our solutions can be deployed rapidly and configured and managed easily. Our cloud-based solutions are location and device independent. Through our platform, we enable third-party developers and customers to integrate our solution with leading business applications to customize their own business workflows. InApril 2020 , we announced RingCentral Video ("RCV"), which is another component offered as part of RingCentral Office. We have a portfolio of cloud-based offerings that are subscription based, made available at different rates varying by the specific functionalities, services, and number of users. We primarily generate revenues from the sale of subscriptions to our offerings. Our subscription plans have monthly, annual, or multi-year contractual terms. We believe that this flexibility in contract duration is important to meet the different needs of our customers. For each of the three and six months endedJune 30, 2021 and 2020, subscriptions revenues accounted for 90% or more of our total revenues. The remainder of our revenues has historically been primarily comprised of product revenues from the sale and rental of pre-configured phones and professional services. We do not develop, manufacture, or otherwise touch the delivery of physical phones and offer it as a convenience for a total solution to our customers in connection with subscriptions to our services. We rely on third-party providers to develop and manufacture these devices and fulfillment partners to successfully serve our customers. We continue to invest in our direct inside sales force while also developing indirect sales channels to market our brand and our subscription offerings. Our indirect sales channels who sell our solutions consist of: • a regional and global network of resellers; •carriers including AT&T, Inc. ("AT&T"),TELUS Communications Company ("TELUS"), BT Group plc ("BT") andVodafone Group Services Limited ("Vodafone"). InMay 2021 , we announced partnerships withVerizon Business ("Verizon") and Deutsche Telekom ("Deutsche"). Under our partnership with Verizon, we launched a co-branded service,RingCentral with Verizon, a seamlessly integrated unified communications as a service ("UCaaS") solution for enterprise businesses. Pursuant to our partnership with Deutsche, customers will be offered a co-branded version of RCV as Deutsche's lead stand-alone video solution, which will deliver video meetings and team messaging based on our Message Video Phone ("MVP") platform; •strategic partners who market and sell our co-branded solutions directly and through their subsidiaries. Such partnerships include Avaya Holdings Corp. ("Avaya"); Atos SE ("Atos") and its subsidiary,Unify Software andSolutions GmbH & CO. KG ("Unify"); and Alcatel-Lucent Enterprise ("ALE"). Our revenue growth has primarily been driven by our flagship RingCentral Office andRingCentral customer engagement solutions product offering, which has resulted in an increased number of customers, increased average subscription revenue per customer, and increased retention of our existing customer and user base. We define a "customer" as any party that purchases or subscribes to our products and services directly or indirectly through our channel partners. As ofJune 30, 2021 , we had customers from a range of industries, including financial services, education, healthcare, legal services, real estate, retail, technology, insurance, construction, hospitality, and state and local government, among others. For each of the three and six months endedJune 30, 2021 and 2020, the vast majority of our total revenues were generated in theU.S. andCanada , 24 -------------------------------------------------------------------------------- Table of Contents although we expect the percentage of our total revenues derived outside of theU.S. andCanada to grow as we continue to expand internationally. The growth of our business and our future success depend on many factors, including our ability to expand our customer base to larger customers, expand our indirect sales channels, continue to innovate, grow revenues from our existing customer base, expand our distribution channels, and scale internationally. The worldwide spread of the COVID-19 pandemic has resulted in authorities implementing numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. The COVID-19 pandemic has created a global slowdown of economic activity which has and will likely continue to decrease demand for a broad variety of goods and services, while also disrupting sales channels and marketing activities for an unknown period of time until the disease is contained. During the reporting period, we saw contributions from new bookings as more businesses transition toRingCentral in the work-from-anywhere environment. We continue to see more customers opting forRingCentral apps on laptops and mobile devices over traditional desktop phones, which has impacted demand for physical phone devices. At this point, the full extent to which the COVID-19 pandemic may impact our financial condition or results of operations is uncertain. We may experience curtailed customer demand due to reduced customer spend, shortened contract duration, higher churn, lengthened payment terms, credit card declines, potential delays in professional services implementations, and reduction in demand for desktop phones, which could adversely impact our business, results of operations and overall financial performance in future periods. Additionally, the extent of the impact of the COVID-19 pandemic on our operational and financial performance will also depend on certain developments, including the duration and spread of the outbreak, actions taken to contain the virus or its impact, including the availability and widespread acceptance of effective vaccines and the speed at which they are administered to the public, impact on our partners, resellers, employees, vendors and customers, and employee or industry events, all of which are uncertain and cannot be predicted. While our revenues and earnings are relatively predictable as a result of our subscription-based business model, the effect of the COVID-19 pandemic, may not be fully reflected in our results of operations and overall financial performance until future periods. In response to the COVID-19 pandemic, we continue to focus on maintaining business continuity, helping our employees, customers and communities, and preparing for the future and the long-term success of our business. For example, to support the health and well-being of our employees, customers, partners and communities in response to the COVID-19 pandemic, a vast majority of our employees are working remotely and we have shifted some of our customer events to virtual-only experiences, and we may deem it advisable to similarly alter, postpone or cancel entirely additional customer, employee or industry events in the future. The changes we have implemented have not affected and are not expected to affect our ability to maintain operations, including financial reporting systems, internal control over financial reporting, and disclosure controls and procedures. Further discussion of the potential impacts of the COVID-19 pandemic on our business can be found in the section titled "Risk Factors" included in Part II, Item 1A below. Key Business Metrics In addition toUnited States generally accepted accounting principles ("U.S. GAAP") and financial measures such as total revenues, gross margin, and cash flows from operations, we regularly review a number of key business metrics to evaluate growth trends, measure our performance, and make strategic decisions. We discuss revenues and gross margin under "Results of Operations", and cash flow from operations and free cash flows under "Liquidity and Capital Resources." Other key business metrics are discussed below. Annualized Exit Monthly Recurring Subscriptions We believe that our Annualized Exit Monthly Recurring Subscriptions ("ARR") is a leading indicator of our anticipated subscriptions revenues. We believe that trends in revenue are important to understanding the overall health of our business, and we use these trends in order to formulate financial projections and make strategic business decisions. Our ARR equals our Monthly Recurring Subscriptions multiplied by 12. Our Monthly Recurring Subscriptions equals the monthly value 25 -------------------------------------------------------------------------------- Table of Contents of all customer recurring charges at the end of a given month. For example, our Monthly Recurring Subscriptions atJune 30, 2021 was$126.4 million . As such, our ARR atJune 30, 2021 was$1.5 billion . RingCentral Office Annualized Exit Monthly Recurring Subscriptions We calculate our RingCentral Office Annualized Exit Monthly Recurring Subscriptions ("Office ARR") in the same manner as we calculate our ARR, except that primarily customer subscriptions from RingCentral Office andRingCentral customer engagement solutions customers are included when determining Monthly Recurring Subscriptions for the purposes of calculating this key business metric. We believe that trends in revenue with respect to these products are important to the understanding of the overall health of our business, and we use these trends in order to formulate financial projections and make strategic business decisions. Our Office ARR atJune 30, 2021 was$1.4 billion . Net Monthly Subscription Dollar Retention Rate We believe that our Net Monthly Subscription Dollar Retention Rate provides insight into our ability to retain and grow subscriptions revenue, as well as our customers' potential long-term value to us. We believe that our ability to retain our customers and expand their use of our solutions over time is a leading indicator of the stability of our revenue base and we use these trends in order to formulate financial projections and make strategic business decisions. We define our Net Monthly Subscription Dollar Retention Rate as (i) one plus (ii) the quotient of Dollar Net Change divided by Average Monthly Recurring Subscriptions. We define Dollar Net Change as the quotient of (i) the difference of our Monthly Recurring Subscriptions at the end of a period minus our Monthly Recurring Subscriptions at the beginning of a period minus our Monthly Recurring Subscriptions at the end of the period from new customers we added during the period, all divided by (ii) the number of months in the period. We define our Average Monthly Recurring Subscriptions as the average of the Monthly Recurring Subscriptions at the beginning and end of the measurement period. For example, if our Monthly Recurring Subscriptions were$118 at the end of a quarterly period and$100 at the beginning of the period, and$20 at the end of the period from new customers we added during the period, then the Dollar Net Change would be equal to ($0.67 ), or the amount equal to the difference of$118 minus$100 minus$20 , all divided by three months. Our Average Monthly Recurring Subscriptions would equal$109 , or the sum of$100 plus$118 , divided by two. Our Net Monthly Subscription Dollar Retention Rate would then equal 99.4%, or approximately 99%, or one plus the quotient of the Dollar Net Change divided by the Average Monthly Recurring Subscriptions. Our key business metrics for the five quarterly periods endedJune 30, 2021 were as follows (dollars in millions): December 31, September 30, June 30, 2021 March 31, 2021 2020 2020 June 30, 2020 Net Monthly Subscription Dollar Retention Rate >99% >99% >99% >99%
>99%
Annualized Exit Monthly Recurring Subscriptions$ 1,516.3 $
1,407.4
$ 1,431.0 $
1,322.3
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Results of Operations
The following tables set forth selected consolidated statements of operations
data and such data as a percentage of total revenues. The historical results
presented below are not necessarily indicative of the results that may be
expected for any future period (in thousands):
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
Revenues
Subscriptions $ 351,203 $ 257,038 $ 676,426 $ 500,142
Other 28,070 20,947 55,203 45,355
Total revenues 379,273 277,985 731,629 545,497
Cost of revenues
Subscriptions 79,243 56,721 152,490 109,154
Other 25,680 19,916 49,414 40,927
Total cost of revenues 104,923 76,637 201,904 150,081
Gross profit 274,350 201,348 529,725 395,416
Operating expenses
Research and development 76,161 43,519 138,837 84,429
Sales and marketing 203,398 137,633 382,647 268,945
General and administrative 68,172 49,532 123,633 96,868
Total operating expenses 347,731 230,684 645,117 450,242
Loss from operations (73,381) (29,336) (115,392) (54,826)
Other income (expense), net
Interest expense (15,942) (12,598) (32,220) (20,100)
Other income (expense) (21,223) 42,603 37,320 15,086
Other income (expense), net (37,165) 30,005 5,100 (5,014)
Gain (loss) before income taxes (110,546) 669 (110,292) (59,840)
Provision for income taxes 410 160 850 372
Net income (loss) $ (110,956) $ 509 $ (111,142) $ (60,212)
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Percentage of Total Revenues*
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
Revenues
Subscriptions 93 % 92 % 92 % 92 %
Other 7 8 8 8
Total revenues 100 100 100 100
Cost of revenues
Subscriptions 21 20 21 20
Other 7 7 7 8
Total cost of revenues 28 28 28 28
Gross profit 72 72 72 72
Operating expenses
Research and development 20 16 19 15
Sales and marketing 54 50 52 49
General and administrative 18 18 17 18
Total operating expenses 92 83 88 83
Loss from operations (19) (11) (16) (10)
Other income (expense), net
Interest expense (4) (5) (4) (4)
Other income (expense) (6) 15 5 3
Other income (expense), net (10) 11 1 (1)
Gain (loss) before income taxes (29) - (15) (11)
Provision for income taxes - - - -
Net income (loss) (29) % - % (15) % (11) %
* Percentages may not add up due to rounding.
Comparison of the Three and Six Months Ended
Three Months Ended June 30, Six Months Ended June 30,
(in thousands, except percentages) 2021 2020 $ Change % Change 2021 2020 $ Change % Change
Revenues
Subscriptions $ 351,203 $ 257,038 $ 94,165 37 % $ 676,426 $ 500,142 $ 176,284 35 %
Other 28,070 20,947 7,123 34 % 55,203 45,355 9,848 22 %
Total revenues $ 379,273 $ 277,985 $ 101,288 36 % $ 731,629 $ 545,497 $ 186,132 34 %
Percentage of revenues
Subscriptions 93 % 92 % 92 % 92 %
Other 7 8 8 % 8 %
Total 100 % 100 % 100 % 100 %
Subscriptions revenue. Subscriptions revenue increased by $94.2 million , or 37%,
for the three months ended June 30, 2021 , and $176.3 million , or 35%, for the
six months ended June 30, 2021 , as compared to the respective prior year period.
The increase was primarily a combination of the acquisition of new customers and
upsells of seats and additional offerings to our existing customer base. This
growth was primarily driven by an increase in sales to our mid-market and
enterprise customers as we continue to move up market and increase sales through
our direct and indirect sales channels. Although we expect to continue to add
new customers and for existing customers to increase their usage of our product,
we will continue to monitor the COVID-19 pandemic carefully and its impact on
customer demand, contract duration, churn, payment terms, and credit card
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declines. Fluctuations in foreign currency exchange rates and volatility in the
market, including those resulting from the COVID-19 pandemic, could also cause
variability in our revenue.
Other revenues. Other revenues are primarily comprised of product revenue from
the sale of pre-configured phones, phone rentals, and professional services.
Other revenues increased by $7.1 million , or 34%, for the three months ended
June 30, 2021 , and $9.8 million , or 22%, for the six months ended June 30, 2021 ,
as compared to the respective prior year period, primarily due to the increase
in product sales and professional services resulting from the overall growth in
our business. Due to shelter in place restrictions adopted in many jurisdictions
and continuing office closures in response to the COVID-19 pandemic, we
continued to see a shift towards using RingCentral apps on laptops and mobile
devices over traditional desktop phones which impacted the demand of phones and
timing of professional services. We will continue to monitor the COVID-19
pandemic carefully and its impact on phone and professional services revenue.
Cost of Revenues and Gross Margin
Three Months Ended June 30, Six Months Ended June 30,
(in thousands, except percentages) 2021 2020 $ Change % Change 2021 2020 $ Change % Change
Cost of revenues
Subscriptions $ 79,243 $ 56,721 $ 22,522 40 % $ 152,490 $ 109,154 $ 43,336 40 %
Other 25,680 19,916 5,764 29 % 49,414 40,927 8,487 21 %
Total cost of revenues $ 104,923 $ 76,637 $ 28,286 37 % $ 201,904 $ 150,081 $ 51,823 35 %
Gross margins
Subscriptions 77 % 78 % 77 % 78 %
Other 9 % 5 % 10 % 10 %
Total gross margin % 72 % 72 % 72 % 72 %
Subscriptions cost of revenues and gross margin. Cost of subscriptions revenues
increased by $22.5 million , or 40%, for the three months ended June 30, 2021 as
compared to the respective prior year period. The primary drivers of the
increase were increases in infrastructure support costs of $8.0 million ,
third-party costs to support our solution offerings of $4.6 million , personnel
and contractor-related costs of $5.5 million , and amortization of acquired
intangible assets of $3.3 million . Personnel and contactor related costs
includes share-based compensation expense of $2.9 million . Gross margin remained
relatively consistent period over period.
Cost of subscriptions revenues increased by $43.3 million , or 40%, for the six
months ended June 30, 2021 , as compared to the respective prior year period. The
primary drivers of the increase were increases in infrastructure support costs
of $15.1 million , third-party costs to support our solution offerings of $11.5
million , personnel and contractor-related costs of $9.1 million , and
amortization of acquired intangibles of $6.2 million . Personnel and contactor
related costs includes share-based compensation expense of $4.2 million . Gross
margin remained relatively consistent period over period.
The increase in expenses was primarily driven by investments in our
infrastructure and capacity to improve the availability of our subscription
offerings, while also supporting the growth in new customers and increased usage
of our subscriptions by our existing customer base. We expect subscription gross
margin to be within a relatively similar range in the future. However,
we continue to monitor the COVID-19 pandemic carefully and its impact on our
customers.
Other cost of revenues and gross margin. Cost of other revenues increased by
$5.8 million , or 29%, for the three months ended June 30, 2021 as compared to
the respective prior year period. This was primarily due to an increase cost of
product sales of $3.0 million , and personnel costs of $2.2 million including
share-based compensation expense. Other revenue gross margin fluctuated based on
timing of completion of professional services projects and transaction price for
product sales.
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Cost of other revenues increased by $8.5 million , or 21%, for the six months
ended June 30, 2021 , as compared to the respective prior year period. This was
primarily due to an increase in personnel costs of $4.5 million including
share-based compensation expense, cost of product sales of $3.4 million , and
professional fees of $1.1 million . Other revenue gross margin remained
relatively consistent period over period.
We continue to monitor the impact of the COVID-19 pandemic on timing of
professional services and transaction price of product sales.
Research and Development
Three Months Ended June 30, Six Months Ended June 30,
(in thousands, except percentages) 2021 2020 $ Change % Change 2021 2020 $ Change % Change
Research and development $ 76,161 $ 43,519 $ 32,642 75 % $ 138,837 $ 84,429 $ 54,408 64 %
Percentage of total revenues 20 % 16 % 19 % 15 %
Research and development expenses increased by $32.6 million , or 75%, for the
three months ended June 30, 2021 as compared to the respective prior year
period, primarily due to $27.4 million increase in personnel and contractor
costs, $3.9 million in overhead costs to support our research and development
efforts, and $1.3 million in professional fees. The increase in personnel and
contractor costs was mainly driven by $15.1 million relating to headcount growth
and $11.4 million to share-based compensation expense primarily driven by equity
awards granted to new and existing employees.
Research and development expenses increased by $54.4 million , or 64%, for the
six months ended June 30, 2021 , as compared to the respective prior year period,
primarily driven by $45.2 million increase in personnel and contractor costs,
$5.8 million in overhead costs to support our research and development efforts,
and $3.5 million in professional fees. The increase in personnel and contractor
costs was mainly driven by $25.8 million relating to headcount growth and $17.1
million to share-based compensation expense primarily driven by equity awards
granted to new and existing employees.
The increases in research and development headcount and other expense categories
were driven by continued investment in current and future software development
projects for our applications. Given the continued emphasis and focus on product
innovation, we expect research and development expenses to continue to increase
in absolute dollars.
Sales and Marketing
Three Months Ended June 30, Six Months Ended June 30,
(in thousands, except percentages) 2021 2020 $ Change % Change 2021 2020 $ Change % Change
Sales and marketing $ 203,398 $ 137,633 $ 65,765 48 % $ 382,647 $ 268,945 $ 113,702 42 %
Percentage of total revenues 54 % 50 % 52 % 49 %
Sales and marketing expenses increased by $65.8 million , or 48%, for the three
months ended June 30, 2021 as compared to the respective prior year period,
primarily due to increases in personnel and contractor costs of $35.3 million ,
third-party commissions of $24.4 million , and amortization of deferred sales
commission costs of $6.9 million . Of the total increase in personnel and
contractor costs, $13.0 million was primarily due to headcount growth and
approximately $20.7 million was due to higher share-based compensation expense
primarily driven by equity awards granted to new and existing employees.
Sales and marketing expenses increased by $113.7 million , or 42%, for the six
months ended June 30, 2021 , as compared to the respective prior year period,
primarily due to increases in personnel and contractor costs of $59.9 million ,
third-party commissions of $44.2 million , and amortization of deferred sales
commission costs of $12.7 million . Of the total increase in personnel and
contractor costs, $28.1 million was primarily due to headcount growth
and approximately $30.7 million was due to higher share-based compensation
expense primarily driven by equity awards granted to new and existing employees.
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The increases in sales and marketing headcount and other expense categories were
necessary to support our growth strategy to acquire new customers with a focus
on larger customers, and to establish brand recognition to achieve greater
penetration into the North America and international markets. Additionally, we
expect sales and marketing expenses to continue to increase in absolute dollars
as we continue to expand our presence in North America and international
markets.
General and Administrative
Three Months Ended June 30, Six Months Ended June 30,
(in thousands, except percentages) 2021 2020 $ Change % Change 2021 2020 $ Change % Change
General and administrative $ 68,172 $ 49,532 $ 18,640 38 % $ 123,633 $ 96,868 $ 26,765 28 %
Percentage of total revenues 18 % 18 % 17 % 18 %
General and administrative expenses increased by $18.6 million , or 38%, for the
three months ended June 30, 2021 as compared to the respective prior year
period, primarily due to increases in personnel and contractor costs of $13.5
million , overhead costs of $3.3 million , and business fees and taxes of $1.0
million . Of the total increase in personnel and contractor costs, $10.2 million
was mainly due to higher share-based compensation expense driven by equity
awards granted to new and existing employees.
General and administrative expenses increased by $26.8 million , or 28%, for the
six months ended June 30, 2021 , as compared to the respective prior year period,
primarily due to increases in personnel and contractor costs of $16.7 million ,
overhead costs of $6.5 million , and business fees and taxes of $2.9 million . Of
the total increase in personnel and contractor costs, $10.8 million was mainly
due to higher share-based compensation expense primarily by equity awards
granted to new and existing employees.
We expect general and administrative expenses to continue to increase in
absolute dollars as we continue to make additional investments in processes,
systems, and personnel to support our anticipated revenue growth.
Other Income (Expense), Net
Three Months Ended June 30, Six Months Ended June 30,
(in thousands, except percentages) 2021 2020 $ Change % Change 2021 2020 $ Change % Change
Interest expense $ (15,942) $ (12,598) $ (3,344) nm $ (32,220) $ (20,100) $ (12,120) nm
Other income (expense) (21,223) 42,603 (63,826) nm 37,320 15,086 22,234 nm
Other income (expense), net $ (37,165) $ 30,005 $ (67,170) nm $ 5,100 $ (5,014) $ 10,114 nm
nm - not meaningful
Other income (expense), net decreased by $67.2 million for the three months
ended June 30, 2021 , as compared to the respective prior year period. Interest
expense was higher by $3.3 million mainly due to increase in the amortization of
debt discount and issuance costs from our 2026 Notes issued in the third quarter
of 2020. Other expense, net was higher by $63.8 million , primarily due to an
increase of $61.6 million in net unrealized loss recognized on our long-term
investments, which was driven by change in the investee's stock price and $1.1
million loss on the redemption of our 2023 Notes.
Other income (expense), net increased by $10.1 million for the six months ended
June 30, 2021 , as compared to the respective prior year period. Interest expense
was higher by $12.1 million mainly due to increase in the amortization of debt
discount and issuance costs from our 2025 and 2026 Notes issued in the first and
third quarter of 2020. Other income, net was higher by $22.2 million , due to an
increase of $18.1 million net unrealized gain recognized on our long-term
investments, which fluctuates due to volatility in investee's stock price, lower
loss of $5.5 million on the partial repurchase and redemption of our 2023 Notes,
partially offset by a $1.4 million decrease in interest income on our
investments as a result of a reduction in interest rates.
We expect the gain or loss on our long-term investments to continue to fluctuate
due to changes in the investee's stock price.
We expect interest income to further reduce in the future due to interest rate
volatility in the current macroeconomic environment and reduction of our
investments in money market funds.
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Net Income (Loss)
Net loss increased by $111.5 million for the three months ended June 30, 2021 ,
as compared to the respective prior year period, mainly due to non-cash items
including an increase of $61.6 million unrealized net loss recognized from our
long-term investments primarily driven by change in the investee's stock price,
$46.1 million higher share-based compensation expense primarily driven by equity
awards granted to new and existing employees, and $3.4 million increase in
amortization of acquired intangible assets.
Net loss increased by $50.9 million for the six months ended June 30, 2021 , as
compared to the respective prior year period, mainly due to non-cash items
including $64.5 million higher share-based compensation expense primarily driven
by equity awards granted to new and existing employees, and $12.1 million
increase in interest expense from the amortization of debt discount and issuance
costs from our convertible senior notes, partially offset by $18.1 million
unrealized net gain recognized from our long-term investments primarily driven
by change in the investee's stock price, and $5.5 million lower loss due to the
partial repurchase and redemption of our convertible senior notes.
Liquidity and Capital Resources
Liquidity is a measure of our ability to access sufficient cash flows to meet
the short-term and long-term cash requirements of our business operations.
We finance our operations primarily through sales to our customers, which could
be billed either monthly or annually one year in advance. For customers with
annual or multi-year contracts and those who opt for annual invoicing, we
generally invoice only one annual period in advance and revenue is deferred for
such advanced billings. We also finance our operations from proceeds from
issuance of convertible senior notes and proceeds from issuance of stock under
our stock plans.
As of June 30, 2021 and December 31, 2020 , we had cash and cash equivalents of
$325.3 million and $639.9 million , respectively. In March 2021 , we delivered a
notice of full redemption to redeem the remaining $41.2 million aggregate
principal of our 2023 Notes. During the three months ended June 30, 2021 , we
settled the redemption by paying $160.1 million in cash. The outstanding capped
call transaction relating to the 2023 Notes can be settled for cash proceeds of
up to $210 million , which will be an additional source of cash. For additional
details, refer to Note 6, Convertible Senior Notes, to the Condensed
Consolidated Financial Statements included in Part I, Item 1 of this Quarterly
Report on Form 10-Q. We are in compliance with all covenants under the 2026 and
2025 Notes as of June 30, 2021 .
In March 2021 , we paid approximately $8.6 million to purchase certain intangible
assets.
We believe that our operations, existing liquidity sources as well as capital
resources and ability to raise cash through additional financing will satisfy
our future cash requirements and obligations for at least the next 12 months.
Our future capital requirements will depend on many factors, including revenue
growth and costs incurred to support customer growth, acquisitions and
expansions, sales and marketing, research and development, increased general and
administrative expenses to support the anticipated growth in our operations, and
capital equipment required to support our growing headcount and in support of
our co-location data center facilities, as well as the extent of the COVID-19
pandemic and its effect on our business. Our capital expenditures in future
periods are expected to grow in line with our business. We continually evaluate
our capital needs and may decide to raise additional capital to fund the growth
of our business for general corporate purposes through public or private equity
offerings or through additional debt financing. In the future, we may also make
investments in or acquire businesses or technologies that could require us to
seek additional equity or debt financing. Access to additional capital may not
be available or on favorable terms. The uncertainty created by the changing
markets and economic conditions related to the COVID-19 pandemic may also impact
our customers' ability to pay on a timely basis, which could negatively impact
our operating cash flows.
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The table below provides selected cash flow information (in thousands):
Six Months Ended June 30,
2021 2020
Net cash provided by operating activities $ 61,471 $ 40,109
Net cash used in investing activities (43,608) (32,602)
Net cash provided by (used in) financing activities (332,236) 423,079
Effect of exchange rate changes (183) (436)
Net increase (decrease) in cash and cash equivalents $ (314,556) $ 430,150
Net Cash Provided By Operating Activities
Cash used in or provided by operating activities is driven by the timing of
customer collections, as well as the amount and timing of disbursements to our
vendors, the amount of cash we invest in personnel, marketing, and
infrastructure costs to support the anticipated growth of our business, payments
under strategic arrangements, and amounts attributable to repayment of
convertible notes.
Net cash provided by operating activities was $61.5 million for the six months
ended June 30, 2021 . The cash flow from operating activities was driven by
timing of cash receipts from customers and carriers, offset by cash payments for
personnel related costs and to vendors.
Net cash provided by operating activities for the six months ended June 30,
2021 , increased by $21.4 million as compared to the respective prior year
period. This change reflects working capital impacts resulting from the timing
of payments and collections, and also redemption of our 2023 Notes related to
interest.
Net Cash Used In Investing Activities
Our primary investing activities have consisted of our purchase of capital
expenditures and internal-use software, and intangible assets and long-term
investments. As our business grows, we expect our capital expenditures to
continue to increase.
Net cash used in investing activities was $43.6 million for the six months ended
June 30, 2021 , primarily due to capital expenditures including personnel-related
costs associated with development of internal-use software of $34.0 million and
our acquisition of intellectual property of $9.3 million in the first half of
2021 to complement and support our product development and enhancement
initiatives.
Net cash used in investing activities for the six months ended June 30, 2021
increased by $11.0 million as compared to the respective prior year period. The
increase was primarily due to our acquisition of intellectual property of $9.3
million in the first half of 2021, and increased investment in capital
expenditures and internal-use software development of $1.4 million .
Net Cash Provided By (Used In) Financing Activities
Our primary financing activities have consisted of our partial conversions and
redemption of our 2023 Notes, partially offset by raising proceeds through the
issuance of stock under our stock plans.
Net cash used in financing activities was $332.2 million for the six months
ended June 30, 2021 . This was primarily due to cash paid of $333.6 million for
conversion requests and redemption of our 2023 Notes in the first half of 2021,
$11.6 million for net taxes paid in connection with our stock plans, and $3.6
million settlement of our contingent consideration in connection with prior
business acquisition, partially offset by $18.9 million proceeds from issuance
of stock in connection with our stock plans.
Net cash used in financing activities for the six months ended June 30, 2021
increased by $755.3 million as compared to the respective prior year period
primarily due to proceeds from both our 2026 Notes and 2025 Notes issued in
2020, offset by conversion requests and settlement of the 2023 Notes. Refer to
Note 6, Convertible Senior Notes, in the accompanying notes to the Condensed
Consolidated Financial Statements included in Part I, Item 1 of this Quarterly
Report on Form 10-Q.
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Non-GAAP Free Cash Flow
To supplement our statements of cash flows presented on a GAAP basis, we use
non-GAAP measures of cash flows to analyze cash flow generated from our
operations. We define free cash flow, a non-GAAP financial measure, as GAAP net
cash provided by (used in) operating activities plus cash paid for strategic
partnerships and repayments of convertible senior notes attributable to debt
discount, reduced by purchases of property and equipment and capitalized
internal-use software. We believe information regarding free cash flow provides
useful information to management and investors in understanding the strength of
liquidity and available cash. A limitation of the use of free cash flow is that
it does not represent the total increase or decrease in our cash balance for the
period. Free cash flow should not be considered in isolation or as an
alternative to cash flows from operations, and should be considered alongside
our other GAAP-based financial liquidity performance measures, such as net cash
provided by operating activities and our other GAAP financial results.
The following table presents a reconciliation of free cash flow to net cash
provided by operating activities, the most directly comparable GAAP measure, for
each of the periods presented (in thousands):
Six
Months Ended
2021 2020
Net cash provided by operating activities $
61,471
Repayment of convertible senior notes attributable to debt discount
10,131 14,230
Non-GAAP net cash provided by operating activities 71,602 54,339
Purchases of property and equipment (14,385) (15,581)
Capitalized internal-use software (19,600) (17,021)
Non-GAAP free cash flow $ 37,617 $ 21,737
Backlog
We have generally signed new customers contracts with varying length, from
month-to-month to multi-year terms for our subscription services. At any point
in the contract term, there can be amounts allocated to services that we have
not yet contractually performed, which constitute a backlog. Until we meet our
performance obligations, we do not recognize them as revenues in our condensed
consolidated financial statements. Given the variability in our contract length,
we believe that backlog is not a reliable indicator of future revenues and we do
not utilize backlog as a key management metric internally.
Deferred Revenue
Deferred revenue primarily consists of the unearned portion of monthly or annual
invoiced fees for our subscriptions, which we recognize as revenue in accordance
with our revenue recognition policy. For customers with multi-year contracts, we
generally invoice for only one monthly or annual subscription period in
advance. Therefore, our deferred revenue balance does not capture the full
contract value of multi-year contracts. Accordingly, we believe that deferred
revenue is not a reliable indicator of future revenues and we do not utilize
deferred revenue as a key management metric internally.
Contractual Obligations and Commitments
Except as set forth below, and in Notes 3, 6, 7 and 8 in the accompanying notes
to the Condensed Consolidated Financial Statements included in Part I, Item 1 of
this Quarterly Report on Form 10-Q, there were no significant changes in our
commitments under contractual obligations, as disclosed in our Annual Report on
Form 10-K for the year ended December 31, 2020 .
Contingencies
We are and may be in the future subject to certain legal proceedings and from
time to time may be involved in a variety of claims, lawsuits, investigations,
and proceedings relating to contractual disputes, intellectual property rights,
employment matters, regulatory compliance matters, and other matters relating to
various claims that arise in the normal course of business. We record a
provision for a liability when we believe that it is both probable that a
liability has been incurred, and the amount can be reasonably estimated.
Significant judgment is required to determine both probability and the estimated
amount of loss. Such legal proceedings are inherently unpredictable and subject
to significant uncertainties, some of which are beyond our control. Should any
of these estimates and assumptions change or prove to be incorrect, it could
have a significant impact on our results of operations, financial position, and
cash flows.
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Off-balance Sheet Arrangements
During the six months ended June 30, 2021 and 2020, we did not have any
relationships with unconsolidated organizations or financial partnerships, such
as structured finance or special purpose entities that would have been
established for the purpose of facilitating off-balance sheet arrangements or
other contractually narrow or limited purposes.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk in the ordinary course of our business. Market
risk represents the risk of loss that may impact our financial position due to
adverse changes in financial market prices and rates. Our market risk exposure
is primarily a result of fluctuations in foreign currency exchange rates and
interest rates. We do not hold or issue financial instruments for trading
purposes.
Foreign Currency Risk
The majority of our sales and contracts are denominated in U.S. dollars, and
therefore our net revenue is not currently subject to significant foreign
currency risk. As part of our international operations, we charge customers in
British Pounds, European Union ("EU") Euro, Canadian Dollars and Australian
Dollars, among others. Fluctuations in foreign currency exchange rates and
volatility in the market, including those resulting from the COVID-19 pandemic,
will cause variability in our revenue. However, this impact has not been
significant during the three and six months ended June 30, 2021 . Our operating
expenses are generally denominated in the currencies of the countries in which
our operations are located, which are primarily in the U.S. , and to a lesser
extent in Canada , Europe , and Asia-Pacific . The functional currency of our
foreign subsidiaries is generally the local currency. Our consolidated results
of operations and cash flows are, therefore, subject to fluctuations due to
changes in foreign currency exchange rates and may be adversely affected in the
future due to changes in foreign currency exchange rates. To date, we have not
entered into any hedging arrangements with respect to foreign currency risk.
During the three and six months ended June 30, 2021 , a hypothetical 10% change
in foreign currency exchange rates applicable to our business would not have had
a material impact on our condensed consolidated financial statements. As our
international operations continue to expand, risks associated with fluctuating
foreign currency rates may increase. We will continue to reassess our approach
to managing these risks.
Interest Rate Risk
As of June 30, 2021 , we had cash and cash equivalents of $325.3 million . We
invest our cash and cash equivalents in short-term money market funds. We have
experienced a decline in the interest rates associated with money market funds
over the last several quarters. Declines in interest rates would reduce future
interest income. For the three and six months ended June 30, 2021 , a
hypothetical 10% increase or decrease in overall interest rates would not have
had a material impact on our interest income. The carrying amount of our cash
equivalents reasonably approximates fair values. Due to the short-term nature of
our money-market funds, we believe that exposure to changes in interest rates
will not have a material impact on the fair value of our cash equivalents.
Interest income may further reduce in the future due to interest rate volatility
in the current macroeconomic environment.
As of June 30, 2021 , we had $844.2 million and $522.3 million outstanding from
our 2025 Notes and 2026 Notes (collectively the "Notes"), respectively. We carry
the Notes at face value less unamortized discount on our balance sheet, and we
present the fair value for required disclosure purposes only. The Notes have a
zero percent fixed annual interest rate and, therefore, we have no economic
exposure to changes in interest rates. The fair value of the Notes is exposed to
interest rate risk. Generally, the fair value of our fixed interest rate Notes
will increase as interest rates decline and decrease as interest rates increase.
In addition, the fair values of the Notes are affected by our stock price. The
fair value of the Notes will generally increase as our common stock price
increases and will generally decrease as our common stock price decrease in
value.
Market Risk
As of June 30, 2021 , we had long-term investments in convertible and redeemable
preferred stock of $247.5 million . These equity investments are subject to
market related risks that could decrease or increase the fair value of our
holdings. These equity investments are adjusted to fair value based on market
inputs at the balance sheet date, which are subject to market-related risks that
could decrease or increase the fair value of our holdings, including the
potential impacts from COVID-19. A fluctuation in the investee's stock price,
volatility or a combination of both could have an adverse impact on the fair
value of our
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investment. A hypothetical adverse stock price or volatility change of 10% could
have resulted in a potential decrease of up to $19.8 million in the fair-value
of our investment as of June 30, 2021 .
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our
Chief Financial Officer, evaluated the effectiveness of our disclosure controls
and procedures as of June 30, 2021 . The term "disclosure controls and
procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act,
means controls and other procedures of a company that are designed to ensure
that information required to be disclosed by a company in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by a
company in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the company's management, including its
principal executive and principal financial officers, as appropriate to allow
timely decisions regarding required disclosure. Based on the evaluation of our
disclosure controls and procedures as of June 30, 2021 , our Chief Executive
Officer and Chief Financial Officer concluded that, as of such date, our
disclosure controls and procedures were effective at the reasonable assurance
level.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting that
occurred during the period covered by this Quarterly Report on Form 10-Q that
has significantly affected, or is reasonably likely to significantly affect, our
internal control over financial reporting.
We have not experienced any material impact to our internal controls over
financial reporting although since March 2020 most of our employees and extended
workforce are now working remotely due to the COVID-19 pandemic. We are
continually monitoring and assessing the impact of the COVID-19 pandemic on our
internal controls to address impacts to their design, implementation and
operating effectiveness.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating our disclosure controls and procedures, management
recognizes that any disclosure controls and procedures, no matter how well
designed and operated, can provide only reasonable, not absolute, assurance of
achieving the desired control objectives. In addition, the design of disclosure
controls and procedures must reflect the fact that there are resource
constraints and that management is required to apply its judgment in evaluating
the benefits of possible controls and procedures relative to their costs.
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