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MarketScreener Homepage  >  Equities  >  Nasdaq  >  SVMK Inc.    SVMK

SVMK INC.

(SVMK)
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SVMK : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

11/06/2020 | 04:04pm EST
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our unaudited condensed
consolidated financial statements and related notes included elsewhere in this
Quarterly Report on Form 10-Q. As discussed in the section titled
"Forward-Looking Statements,", the following discussion and analysis contains
forward-looking statements that involve risks and uncertainties. Our actual
results could differ materially from those discussed below. Additionally, our
unaudited results for the interim periods presented may not be indicative of the
results to be expected for any full year period. 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" under Part II,
Item 1A in this Quarterly Report on Form 10-Q.

Overview


We were founded in 1999 and are a leading global provider of software solutions
for customer experience, market research and survey feedback that enable
organizations to engage with their key stakeholders, including their customers,
employees, website and app users, and market research respondents. Our mission
is to power curious individuals and organizations to measure, benchmark and act
on the opinions that drive success. Our platform enables conversations at scale
to deliver impactful customer, employee and market insights to our over 17
million active users globally.

Our widely adopted cloud-based SaaS platform helps individuals and organizations
design and distribute surveys across more than 190 countries and territories.
Our products drive actionable insights that allow organizations to solve
mission-critical business problems, including enhancing customer experience and
loyalty, increasing employee productivity and retention and optimizing product
and marketing investments.

Impact of COVID-19

In March 2020, the World Health Organization declared the outbreak of COVID-19
as a pandemic, which continues to spread throughout the U.S. and the world. As a
result of COVID-19, we have modified certain aspects of our business, including
restricting employee travel, requiring employees to work from home,
transitioning our employee onboarding and training processes to remote or online
programs and canceling certain events and meetings, among other modifications.
We will continue to actively monitor and evaluate the situation and may take
further actions that alter our business operations as may be required by
federal, state or local authorities or that we determine are in the best
interests of our employees, customers, partners and stockholders. The effects of
these operational modifications are unknown and may not be realized until
further reporting periods. The full impact from the rapidly changing market and
economic conditions due to the COVID-19 outbreak is uncertain as the businesses
of our customers and partners is disrupted, and we have experienced an increase
in attrition rates, particularly among customers in segments and industries more
severely impacted by the ongoing effects of the COVID-19 pandemic, such as
travel and hospitality. We expect that our business and consolidated results of
operations will be impacted and that our financial condition in the future could
be impacted as well. While we have not incurred significant disruptions thus far
from the COVID-19 outbreak, we are unable to accurately predict the full impact
that COVID-19 will have due to numerous uncertainties, including the severity of
the disease, the duration of the outbreak, actions that may be taken by
governmental authorities, the impact to the businesses of our customers and
partners and other factors identified in Part II, Item 1A "Risk Factors" in this
Quarterly Report on Form 10-Q. Some of our customers may be financially
constrained in their ability to purchase our products, which we expect may
negatively impact our ability to collect payments from existing customers and
partners, acquire new customers or renew subscriptions with or sell additional
subscriptions to our existing customers. We expect such impacts on our revenue
and costs to continue through the duration of this crisis. At this point, the
extent to which the COVID-19 pandemic may materially impact our financial
condition, liquidity or results of operations is uncertain, and the effect of
the COVID-19 pandemic may not be fully reflected in our results of operations
until future periods. We are continuously evaluating the nature and extent of
the impact to our business, consolidated results of operations, and financial
condition.

Our products

We generate substantially all of our revenue from the sale of subscriptions to
our products. In addition to our free basic survey product, we offer multiple
tiers of subscriptions to individual users-Standard, Advantage and

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Premier-that provide a compelling range of functionality and features to power the collection and analysis of feedback.


We also offer team versions of our individual Advantage and Premier subscription
plans. Our SurveyMonkey Teams' versions of such subscription plans are oriented
for smaller groups of users who want to collaborate with others. In addition to
the features available in individual Advantage and Premier subscription plans,
the SurveyMonkey Teams' versions provide collaboration capabilities around
sharing, commenting and analyzing surveys and a shared asset library for team
users.

In addition, we offer an enterprise-grade version of our survey platform, SurveyMonkey Enterprise, which provides managed user accounts, customized company branding, enterprise-grade security, sophisticated collaboration capabilities and deep integrations with a broad set of leading software applications. We also generate revenue from a wide range of purpose-built solutions, including Usabilla, GetFeedback and SurveyMonkey CX for customer experience and feedback, SurveyMonkey Audience for market research and analysis, TechValidate for content marketing and SurveyMonkey Engage for employee engagement. We generate revenue from these purpose-built solutions by subscription or on a transactional basis, depending on the product.

Our business model


Our self-serve offering underpins a powerful, capital efficient business model
that is fueled by the virality of our products. We believe our brand is
synonymous with high-quality, easy to use products. The strength of our brand
enables us to rapidly and cost-effectively acquire new users through free
organic searches, paid online marketing and word of mouth referrals. Our survey
platform and purpose-built solutions can be used without costly implementation,
professional services or training, and anyone can create a survey in minutes.
Our free basic survey product allows users to design and send simple surveys to
collect and analyze feedback. Users and respondents can access our survey
platform on a broad range of desktop and mobile devices, and surveys can be
distributed through multiple channels, such as email, web, mobile, messaging
apps and social media. Users often share results and collaborate with others,
who are then attracted to our survey platform and frequently sign up as new
users. Every person who takes a survey is a potential future customer, and we
seek to capitalize on that opportunity through end of survey marketing designed
to engage further with respondents and encourage them to create accounts and
become new users. We invest in new features and improvements to our product
functionality as well as targeted marketing campaigns to drive conversion of
unpaid users to paid users. As a result, we have a predictable, high-visibility
revenue model where we generated more than 90% of our revenue from sales of
subscriptions to our products in 2019. We have a broad and diverse customer base
and no customer represented more than 10% of our revenue in any of the periods
presented.

We supplement our self-serve channel with a targeted sales effort to upsell
organizations to SurveyMonkey Enterprise, to expand deployments of SurveyMonkey
Enterprise within organizations and to cross-sell purpose-built solutions within
organizations. We believe our existing user base represents a significant
opportunity to expand our business and increase our revenue. As of September 30,
2020, we had approximately 803,000 paying users within more than 335,000
organizational domains. Within that population of organizational domains, we had
approximately 7,700 customers with organization-level agreements with us and who
purchased through our enterprise sales force as of September 30, 2020. We
believe that paying users within organizational domains represent an opportunity
to significantly increase conversion from individual subscriptions to our
enterprise offerings.

As of September 30, 2020, over 90% of our trailing 12-month bookings were from
organizational domain-based customers, which are customers who register with us
using an email account with an organizational domain name, such as
@surveymonkey.com, but excludes customers with email addresses hosted on widely
used domains such as @gmail, @outlook or @yahoo. As of September 30, 2020, our
dollar-based net retention rate for organizational domain-based customers was
over 100%.

We calculate bookings as the sum of the monthly and annual contract values for
contracts sold during a period for our monthly and annual customers,
respectively. We calculate organizational dollar-based net retention rate as of
a period end by starting with the trailing 12 months of bookings from the cohort
of all domain-based customers as of the 12 months prior to such period end
("Prior Period Bookings"). We then calculate the trailing 12 months of

                                       24



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bookings from these same customers as of the current period end ("Current Period
Bookings"). Current Period Bookings includes any upsells and is net of
contraction or attrition, but excludes bookings from new domain-based customers
in the current period. We then divide the total Current Period Bookings by the
total Prior Period Bookings to arrive at the organizational dollar-based net
retention rate.

Key Business Metrics

We review a number of operating and financial metrics, including the following
key metrics to evaluate our business, measure our performance, identify trends
affecting our business, formulate our business plan and make strategic
decisions.

Paying users

                 As of September 30,
                  2020          2019
Paying users      803,224       713,217




We define a paying user as an individual customer of our survey platform or
form-based application, a seat within a SurveyMonkey Enterprise deployment or a
subscription to one of our purpose-built solutions, in each case as of the end
of a period. One person would count as multiple paying users if the person had
more than one paid license at the end of the period. For example, if an
individual paying user also had a designated seat in a SurveyMonkey Enterprise
deployment, we would count that person as two paying users. Paying users is an
indicator of the scale of our business and an important factor in our ability to
increase our revenue.

Average revenue per paying user


                                                   Three Months Ended September 30,               Nine Months Ended September 30,
                                                    2020                      2019                2020                      2019
Average revenue per paying user ("ARPU")       $           478           $           448     $           480           $           439


We define ARPU as revenue divided by the average number of paying users during
the period. For interim periods, we use annualized revenue which is calculated
by dividing the revenue for the period by the number of days in that period and
multiplying this value by 365 days. We calculate the average number of paying
users by adding the number of paying users as of the end of the prior period to
the number of paying users as of the end of the current period, and then
dividing by two. We consider ARPU to be an important measure because it helps
illustrate underlying trends in our business by showing investors the changes in
per-user revenue, which is a reflection of our ability to successfully upsell or
cross-sell our products and purpose-built solutions. ARPU has limitations as an
analytic tool, and it should not be considered in isolation or as a substitute
for analysis of other GAAP financial measures. Some of the limitations of ARPU
are that it is a calculation that does not reflect expenses that we incurred to
generate revenue that is excluded from revenue.

Non-GAAP Financial Measure

We believe that, in addition to our results determined in accordance with GAAP, free cash flow, a non-GAAP financial measure, is useful in evaluating our business, results of operations and financial condition.



Free cash flow

                                                  Three Months Ended             Nine Months Ended
                                                     September 30,                 September 30,
(in thousands)                                   2020            2019          2020            2019
Free cash flow                                 $  16,213$  19,764$  36,164$  33,614




We define free cash flow as GAAP net cash provided by operating activities less
purchases of property and equipment, and capitalized internal-use software. We
consider free cash flow to be an important measure because it measures our
liquidity after deducting capital expenditures for purchases of property and
equipment and

                                       25


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capitalized software development costs, which we believe provides a more
accurate view of our cash generation and cash available to grow our business. We
expect to generate positive free cash flow over the long term. Free cash flow
has limitations as an analytical tool, and it should not be considered in
isolation or as a substitute for analysis of other GAAP financial measures, such
as net cash provided by operating activities. Some of the limitations of free
cash flow are that free cash flow does not reflect our future contractual
commitments and may be calculated differently by other companies in our
industry, limiting its usefulness as a comparative measure.

The following is a reconciliation of free cash flow to the most comparable GAAP measure, net cash provided by operating activities:



                                                  Three Months Ended             Nine Months Ended
                                                     September 30,                 September 30,
(in thousands)                                   2020            2019          2020            2019

Net cash provided by operating activities $ 17,892$ 23,521

  $  43,987$  45,233
Purchases of property and equipment                    -            (691 )        (772 )        (2,026 )
Capitalized internal-use software                 (1,679 )        (3,066 )      (7,051 )        (9,593 )
Free cash flow                                 $  16,213$  19,764$  36,164$  33,614




Free cash flow is presented for supplemental informational purposes only and
should not be considered a substitute for financial information presented in
accordance with GAAP.

Components of Results of Operations

Revenue

We derive revenue primarily from sales of subscriptions to our products.


We recognize revenue ratably over the subscription term, generally ranging from
one month to one year, as long as all other revenue recognition criteria have
been met. Our contracts are generally non-cancellable and do not contain refund
provisions. Subscription fees are collected primarily from credit cards through
our website at the beginning of the subscription period.

We also generate a small portion of revenue from one of our purpose-built solutions that we sell on a transactional basis.

No customer represented more than 10% of our revenue in any of the periods presented.

Cost of Revenue and Operating Expenses


We allocate shared costs, such as depreciation on equipment shared by all
departments, facilities (including rent and utilities), employee benefit costs
and information technology costs to all departments based on headcount. As such,
allocated shared costs are reflected in each cost of revenue and operating
expense category, other than restructuring.

Cost of Revenue. Our cost of revenue consists primarily of expenses associated
with the delivery and distribution of our products to our users. These expenses
generally consist of infrastructure costs, personnel costs and other related
costs. Infrastructure costs generally include expenses related to the operation
of our data centers, such as data center equipment depreciation, facility costs
(such as co-location rentals), amortization of capitalized software, payment
processing fees, website hosting costs, external sample costs and charitable
donations associated with our SurveyMonkey Audience solution. Personnel costs
include salaries, bonuses, stock-based compensation, other employee benefits and
travel-related expenses for employees whose primary responsibilities relate to
supporting our infrastructure and delivering user support. Other related costs
include amortization of acquired developed technology intangible assets and
allocated overhead. We plan to continue investing in additional resources to
enhance the capability and reliability of our infrastructure to support user
growth and increased use of our products. We expect that cost of revenue will
increase in absolute dollars in future periods and vary from period to period as
a percentage of revenue in the near term. We expect that cost of revenue will
decrease as a percentage of revenue in the long term.

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Research and Development. Research and development expenses primarily include
personnel costs, costs for third-party consultants, depreciation of equipment
used in research and development activities and allocated overhead. Personnel
costs for our research and development organization include salaries, bonuses,
stock-based compensation, other employee benefits and travel-related expenses.
Our research and development efforts focus on maintaining and enhancing existing
products and adding new products. Except for costs associated with the
application development phase of internal-use software, research and development
costs are expensed as incurred. We expect that research and development expenses
will increase in absolute dollars in future periods and vary from period to
period as a percentage of revenue in the near term. We expect that research and
development expenses will remain relatively constant as a percentage of revenue
in the long term.

Sales and Marketing. Sales and marketing expenses primarily include personnel
costs, costs related to brand campaigns, paid marketing, amortization of
acquired trade name and customer relationship intangible assets and allocated
overhead. Personnel costs for our sales and marketing organization include
salaries, bonuses, sales commissions, stock-based compensation, other employee
benefits and travel-related expenses. Sales commissions earned by our sales
personnel, including any related payroll taxes, that are considered to be
incremental and recoverable costs of obtaining a customer contract are deferred
and amortized over an estimated period of benefit of generally four years. We
expect that sales and marketing expenses will increase in absolute dollars in
future periods and increase as a percentage of revenue in the near term. We
expect that sales and marketing expenses will vary from period to period in the
long term.

General and Administrative. General and administrative expenses primarily
include personnel costs for legal, finance, human resources and other
administrative functions, as well as certain executives. Personnel costs for our
general and administrative staff include salaries, bonuses, stock-based
compensation, other employee benefits and travel-related expenses. In addition,
general and administrative expenses include outside legal, accounting and other
professional fees, non-income-based taxes and allocated overhead. We expect that
general and administrative expense will increase in absolute dollars in future
periods and vary from period to period as a percentage of revenue in the near
term. We expect that general and administrative expenses will decrease as a
percentage of revenue in the long term.

Interest Expense


Interest expense consists of interest on our credit facilities. For additional
information regarding our credit facilities, see Note 10 of the notes to
condensed consolidated financial statements included elsewhere in this Quarterly
Report on Form 10-Q.

Other Non-Operating (Income) Expense, Net


Other non-operating (income) expense, net consists primarily of interest income,
net foreign currency exchange gains and losses, gain on sale of private company
investments and other gains and losses.

Provision for (Benefit from) Income Taxes


Provision for (benefit from) income taxes consists of U.S. federal and state
income taxes and income taxes in certain foreign jurisdictions in which we
conduct business. We maintain a valuation allowance on our U.S. federal, U.S.
state and Irish deferred tax assets that we have determined are not realizable
on a more likely than not basis. For additional information regarding our income
taxes, see Note 11 of the notes to condensed consolidated financial statements
included elsewhere in this Quarterly Report on Form 10-Q.

                                       27



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Results of Operations

The following tables set forth our results of operations for the periods presented and as a percentage of our revenue for those periods. Percentages presented in the following tables may not sum due to rounding.



                                                Three Months Ended               Nine Months Ended
                                                   September 30,                   September 30,
(in thousands)                                 2020             2019           2020             2019
Revenue                                     $   95,429$   79,317$  274,635$  223,097
Cost of revenue(1)(2)                           21,899           19,626         62,852           56,203
Gross profit                                    73,530           59,691        211,783          166,894
Operating expenses:
Research and development(1)                     30,068           22,718         83,196           65,931
Sales and marketing (1)(2)                      43,875           30,926        128,544           86,665
General and administrative(1)                   22,181           20,992         65,452           61,294
Restructuring                                        -                -              -              (66 )
Total operating expenses                        96,124           74,636        277,192          213,824
Loss from operations                           (22,594 )        (14,945 )      (65,409 )        (46,930 )
Interest expense                                 2,379            3,572          7,887           10,878
Other non-operating income, net                   (143 )           (887 )       (1,277 )         (3,441 )
Loss before income taxes                       (24,830 )        (17,630 )      (72,019 )        (54,367 )
Provision for (benefit from) income taxes        1,289           (1,320 )        1,274           (1,802 )
Net loss                                    $  (26,119 )$  (16,310 )$  (73,293 )$  (52,565 )




(1) Includes stock-based compensation, net of amounts capitalized as follows:




                                             Three Months Ended September 30,           Nine Months Ended September 30,
(in thousands)                                  2020                  2019                2020                  2019
Cost of revenue                            $         1,222       $           718     $         3,229       $         2,805
Research and development                             8,322                 5,468              22,275                15,863
Sales and marketing                                  5,912                 2,918              15,096                 8,714
General and administrative                           6,150                 5,678              17,979                17,665
Stock-based compensation, net of amounts
capitalized                                $        21,606$        14,782$        58,579$        45,047

(2) Includes amortization of acquisition intangible assets as follows:




                                                    Three Months Ended September 30,               Nine Months Ended September 30,
(in thousands)                                        2020                     2019                 2020                     2019
Cost of revenue                                 $          1,800         $          1,557     $          5,813         $          3,448
Sales and marketing                                        1,270                      964                3,983                    2,267

Amortization of acquisition intangible assets $ 3,070 $

        2,521     $          9,796         $          5,715


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                                               Three Months Ended September 30,            Nine Months Ended September 30,
                                                2020                     2019               2020                     2019
Revenue                                               100 %                    100 %              100 %                    100 %
Cost of revenue                                        23 %                     25 %               23 %                     25 %
Gross profit                                           77 %                     75 %               77 %                     75 %
Operating expenses:
Research and development                               32 %                     29 %               30 %                     30 %
Sales and marketing                                    46 %                     39 %               47 %                     39 %
General and administrative                             23 %                     26 %               24 %                     27 %
Restructuring                                           - %                      - %                - %                      - %
Total operating expenses                              101 %                     94 %              101 %                     96 %
Loss from operations                                  (24 )%                   (19 )%             (24 )%                   (21 )%
Interest expense                                        2 %                      5 %                3 %                      5 %
Other non-operating income, net                         - %                     (1 )%               - %                     (2 )%
Loss before income taxes                              (26 )%                   (22 )%             (26 )%                   (24 )%
Provision for (benefit from) income taxes               1 %                     (2 )%               - %                     (1 )%
Net loss                                              (27 )%                   (21 )%             (27 )%                   (24 )%





Comparison of the Three Months Ended September 30, 2020 and 2019

Revenue and cost of revenue

                           Three Months Ended September 30,
(dollars in thousands)        2020                  2019           $ Change       % Change
Revenue                  $        95,429$        79,317$  16,112             20 %
Cost of revenue                   21,899                19,626         2,273             12 %
Gross profit             $        73,530$        59,691$  13,839             23 %
Gross margin                          77 %                  75 %




Revenue increased for the three months ended September 30, 2020 compared to the
three months ended September 30, 2019. Paying users increased 13% from
approximately 713,000 as of September 30, 2019 to approximately 803,000 as of
September 30, 2020 and ARPU increased 7% from $448 for the three months ended
September 30, 2019 to $478 for the three months ended September 30, 2020.

Revenue growth was driven primarily by an increase of $9.5 million, or 53%, in
our Enterprise sales channel. Enterprise sales accounted for 29% and 23% of
revenue for the three months ended September 30, 2020 and 2019, respectively.
Revenue for the three months ended September 30, 2020 also included incremental
revenue contributions from our acquisition of GetFeedback. In addition, revenue
from our self-serve channel grew $6.7 million, or 11%, driven by a combination
of demand arising from COVID-related use cases as well as ongoing refinement of
our paywalls that has driven an increase in customers upgrading into paid
plans.

Cost of revenue increased for the three months ended September 30, 2020 compared
to the three months ended September 30, 2019, primarily due to a $1.3 million
increase in web hosting costs and payment processing fees, a $0.8 million
increase in external sample costs and charitable donations associated with our
SurveyMonkey Audience all due to increased sales, and a $0.2 million increase in
amortization of intangible assets due to our prior acquisitions, partially
offset by a $0.4 million decrease in capitalized software amortization.

Our gross margin increased for the three months ended September 30, 2020 as compared to the three months ended September 30, 2019 primarily due to the increase in revenue.



                                       29


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Research and development

                                             Three Months Ended September 30,
(dollars in thousands)                          2020                  2019            $ Change       % Change
Research and development                   $        30,068$        22,718$    7,350              32 %




Research and development expenses increased for the three months ended September
30, 2020 compared to the three months ended September 30, 2019, primarily due to
a $5.5 million increase in personnel related costs due to headcount growth and a
decrease in the software development costs that qualified for capitalization of
$2.3 million, offset by decreases in travel expenses due to suspension of all
business-related travel in response to the COVID-19 pandemic.

Sales and marketing


                           Three Months Ended September 30,
(dollars in thousands)        2020                  2019           $ Change 

% Change Sales and marketing $ 43,875$ 30,926$ 12,949

             42 %




Sales and marketing expenses increased for the three months ended September 30,
2020 compared to the three months ended September 30, 2019, primarily due to a
$8.2 million increase in personnel related costs due to headcount growth, an
increase of $3.4 million in costs related to brand campaigns and paid marketing
and a $0.3 million increase in amortization of intangible assets due to our
prior acquisitions. In addition, there were increases in our facilities, IT
costs and other expenses, offset by decreases in travel expenses due to
suspension of all business-related travel in response to the COVID-19 pandemic.

General and administrative

                                             Three Months Ended September 30,
(dollars in thousands)                          2020                  2019            $ Change        % Change
General and administrative                 $        22,181$        20,992$    1,189                6 %




General and administrative expenses increased for the three months ended
September 30, 2020 compared to the three months ended September 30, 2019,
primarily due to a $1.6 million increase in personnel related costs, offset by a
$0.4 million decrease in travel expenses due to suspension of all
business-related travel in response to the COVID-19 pandemic, and decreases in
outside legal, accounting and other professional fees.

Interest expense

                                               Three Months Ended September 30,
(dollars in thousands)                           2020                     2019            $ Change       % Change
Interest expense                           $          2,379         $          3,572     $   (1,193 )          (33 )%




Interest expense decreased for the three months ended September 30, 2020
compared to the three months ended September 30, 2019 primarily due to lower
interest rates and lower average debt balances from our repayment of principal.
For additional information regarding our credit facilities, see Note 10 of the
notes to our condensed consolidated financial statements included elsewhere in
this Quarterly Report on Form 10-Q.







                                       30


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Other non-operating income, net


                                              Three Months Ended September 

30,

(dollars in thousands)                          2020                    2019            $ Change       % Change
Other non-operating income, net            $          (143 )       $          (887 )   $      744            (84 )%




Other non-operating income, net for the three months ended September 30, 2020
decreased compared to the three months ended September 30, 2019 primarily due to
a decrease in interest income of $0.7 million resulting from lower interest
rates.

Provision for (benefit from) income taxes


                                              Three Months Ended September 

30,

(dollars in thousands)                          2020                   2019            $ Change       % Change
Provision for (benefit from) income taxes   $       1,289$        (1,320 )$    2,609           (198 )%
Effective tax rate                                     (5 )%                    7 %




The provision for income taxes increased for the three months ended September
30, 2020 compared to the three months ended September 30, 2019, primarily due to
taxes incurred in connection with a taxable sale of intangible assets and the
one-time partial release of the valuation allowance in the third quarter of 2019
as a result of the GetFeedback acquisition.

Comparison of the Nine Months Ended September 30, 2020 and 2019

Revenue and cost of revenue

                             Nine Months Ended September 30,
(dollars in thousands)         2020                   2019            Change       % Change
Revenue                  $        274,635$        223,097$ 51,538             23 %
Cost of revenue                    62,852                 56,203        6,649             12 %
Gross profit             $        211,783$        166,894$ 44,889             27 %
Gross margin                           77 %                   75 %




Revenue increased for the nine months ended September 30, 2020 compared to the
nine months ended September 30, 2019. Paying users increased 13% from
approximately 713,000 as of September 30, 2019 to approximately 803,000 as of
September 30, 2020 and ARPU increased 9% from $439 for the nine months ended
September 30, 2019 to $480 for the nine months ended September 30, 2020.



Revenue growth was driven primarily by an increase of $34.1 million, or 77%, in
our Enterprise sales channel. Enterprise sales accounted for 28% and 20% of
revenue for the nine months ended September 30, 2020 and 2019, respectively.
Revenue for the nine months ended September 30, 2020 also included approximately
$2.1 million of non-recurring revenue from a one-time Audience customer and
incremental revenue contributions from our acquisition of GetFeedback and
Usabilla. In addition, revenue from our self-serve channel grew $17.5 million,
or 10%, driven by a combination of demand arising from COVID-related use cases
as well as ongoing refinement of our paywalls that has driven an increase in
customers upgrading into paid plans.



Cost of revenue increased for the nine months ended September 30, 2020 compared
to the nine months ended September 30, 2019, primarily due to a $3.6 million
increase in web hosting costs and payment processing fees, a $1.3 million
increase in external sample costs and charitable donations associated with our
SurveyMonkey Audience solution all due to increased sales, and a $2.4 million
increase in amortization of intangible assets due to our prior acquisitions,
partially offset by a $0.6 million decrease in capitalized software amortization
and decreases in travel expenses due to suspension of all business-related
travel in response to the COVID-19 pandemic.

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Our gross margin increased for the nine months ended September 30, 2020 as
compared to the nine months ended September 30, 2019 primarily due to the
increase in revenue.



Research and development

                              Nine Months Ended September 30,
(dollars in thousands)          2020                  2019            Change       % Change
Research and development   $        83,196$        65,931$ 17,265             26 %




Research and development expenses increased for the nine months ended September
30, 2020 compared to the nine months ended September 30, 2019, primarily due to
a $14.7 million increase in personnel related costs due to headcount growth and
a decrease in the software development costs that qualified for capitalization
of $3.7 million, offset by decreases in travel expenses due to suspension of all
business-related travel in response to the COVID-19 pandemic.



Sales and marketing

                            Nine Months Ended September 30,
(dollars in thousands)         2020                  2019           Change       % Change
Sales and marketing      $        128,544$       86,665$ 41,879             48 %




Sales and marketing expenses increased for the nine months ended September 30,
2020 compared to the nine months ended September 30, 2019, primarily due to a
$25.2 million increase in personnel related costs due to headcount growth, an
increase of $10.4 million in costs related to brand campaigns and paid marketing
and a $1.7 million increase in amortization of intangible assets due to our
prior acquisitions. In addition, there were also increases in our facilities, IT
costs and other expenses, offset by decreases in travel expenses due to
suspension of all business-related travel in response to the COVID-19 pandemic.



General and administrative

                                Nine Months Ended September 30,
(dollars in thousands)            2020                  2019           Change      % Change
General and administrative   $        65,452$        61,294$ 4,158             7 %




General and administrative expenses increased for the nine months ended
September 30, 2020 compared to the nine months ended September 30, 2019,
primarily due to a $4.8 million increase in personnel related costs, offset by a
$0.9 million decrease in travel expenses due to suspension of all
business-related travel in response to the COVID-19 pandemic, and decreases in
outside legal, accounting and other professional fees.



Interest expense

                                             Nine Months Ended September 30,
(dollars in thousands)                          2020                  2019          Change        % Change
Interest expense                           $         7,887         $    10,878$  (2,991 )          (27 )%




Interest expense decreased for the nine months ended September 30, 2020 compared
to the nine months ended September 30, 2019 primarily due to lower interest
rates and lower average debt balances from our repayment of principal. For
additional information regarding our credit facilities, see Note 10 of the notes
to our condensed consolidated financial statements included elsewhere in this
Quarterly Report on Form 10-Q.





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Other non-operating income, net


                                              Nine Months Ended September 

30,

(dollars in thousands)                          2020                  2019            Change        % Change
Other non-operating income, net            $        (1,277 )$        (3,441 )$   2,164            (63 )%




Other non-operating income, net for the nine months ended September 30, 2020
decreased compared to the nine months ended September 30, 2019, primarily due to
a decrease in interest income of $1.9 million resulting from lower interest
rates.

Provision for (benefit from) income taxes


                                               Nine Months Ended September 

30,

(dollars in thousands)                          2020                   2019            Change        % Change
Provision for (benefit from) income taxes   $       1,274$        (1,802 )$   3,076           (171 )%
Effective tax rate                                     (2 )%                    3 %




The provision for income taxes increased for the nine months ended September 30,
2020 compared to the nine months ended September 30, 2019 primarily due to taxes
incurred in connection with a taxable sale of intangible assets and the one-time
partial release of the valuation allowance in 2019 as a result of our
acquisitions.

Seasonality


We have historically experienced seasonality in terms of when we enter into
subscription agreements with customers. We typically enter into a lower
percentage of agreements with new customers, as well as renewal agreements with
existing customers, during the summer months and during the holiday season in
the second and fourth quarter of each year.

Liquidity and Capital Resources

As of September 30, 2020 and December 31, 2019, our principal sources of liquidity were cash and cash equivalents totaling $206.3 million and $131.0 million, respectively, all of which were bank deposits as well as cash to be received from customers and cash available under our credit facilities.


Since our inception, we have financed our operations primarily through payments
received from our customers, borrowings under credit facilities and lines of
credit, and our initial public offering in 2018.

We believe our existing cash and cash equivalents, our credit facilities and
cash provided by sales of our products will be sufficient to meet our working
capital and capital expenditure needs for at least the next 12 months. Our
future capital requirements will depend on many factors, including the timing
and amount of cash received from customers, the timing and extent of spending to
support research and development efforts, the expansion of sales and marketing
activities, the introduction of new and enhanced product offerings and the
continuing market adoption of our products. We may in the future enter into
arrangements to acquire or invest in complementary businesses, services and
technologies, including intellectual property rights. We may be required to seek
additional equity or debt financing. In the event that additional financing is
required from outside sources, we may not be able to raise it on terms
acceptable to us or at all. If we are unable to raise additional capital or
generate cash flows necessary to expand our operations and invest in new
technologies, this could reduce our ability to compete successfully and harm our
results of operations. Additionally, we believe that our financial resources
will allow us to manage the potential impacts of COVID-19 on our business
operations for the foreseeable future, which could include reductions in revenue
and delays in payments from customers and partners. We will continue to assess
our liquidity needs as the impact of the COVID-19 pandemic on the economy and
our operations continues to evolve. Ongoing worldwide business and economic
disruptions could materially affect our future access to our sources of
liquidity, particularly our cash flows from operations, financial condition,
capitalization, and capital investments. In

                                       33



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the event of a sustained market deterioration, we may need additional liquidity,
which would require us to evaluate available alternatives and take appropriate
actions.

A significant majority of our customers pay in advance for annual subscriptions,
which is a substantial source of cash. Deferred revenue consists of the unearned
portion of billed fees for our subscriptions, which we recognized as revenue in
accordance with our revenue recognition policy. As of September 30, 2020 and
December 31, 2019, we had deferred revenue of $165.1 million and $141.0 million,
respectively, a substantial majority of which we expect to record as revenue in
the next 12 months, provided all other revenue recognition criteria have been
met.

Cash Flows

The following table summarizes our cash flows for the periods indicated:



                                                        Nine Months Ended September 30,
(in thousands)                                            2020                  2019
Net cash provided by operating activities            $       43,987       $ 

45,233

Net cash used in investing activities                        (6,728 )              (125,221 )
Net cash provided by financing activities                    38,733         

42,858

Effects of exchange rate changes on cash                       (957 )                  (435 )
Net increase in cash, cash equivalents and
restricted cash                                      $       75,035       $         (37,565 )



Cash Flows from Operating Activities


Our largest source of operating cash is cash collections from our customers for
subscriptions to our products. Our primary uses of cash in operating activities
are for employee-related expenditures, marketing expenses and third-party
hosting costs. Historically, we have generated positive cash flows from
operating activities. Net cash provided by operating activities is impacted by
our net loss adjusted for certain non-cash items, including depreciation and
amortization expenses, stock-based compensation, deferred income taxes, as well
as the effect of changes in operating assets and liabilities.

During the nine months ended September 30, 2020, cash provided by operating
activities was $44.0 million, primarily due to our net loss of $73.3 million,
adjusted for non-cash charges of $107.5 million and net cash inflows of $9.8
million provided by changes in our operating assets and liabilities. Non-cash
charges primarily consisted of depreciation and amortization, stock-based
compensation, non-cash lease expense, provision for doubtful accounts and
deferred income taxes. The primary drivers of the changes in operating assets
and liabilities related to cash provided by a $24.2 million increase in deferred
revenue, a $1.7 million increase in accrued compensation and a $5.8 million
increase in accounts payable and accrued liabilities, offset by cash used for
operating leases of $11.1 million, prepaid expenses and other assets of $6.9
million, and an increase in accounts receivable of $3.9 million.

During the nine months ended September 30, 2019, cash provided by operating
activities was $45.2 million, primarily due to our net loss of $52.6 million,
adjusted for non-cash charges of $84.3 million and net cash inflows of $13.5
million provided by changes in our operating assets and liabilities. Non-cash
charges primarily consisted of depreciation and amortization, stock-based
compensation, non-cash lease expense, provision for doubtful accounts and
deferred income taxes. The primary drivers of the changes in operating assets
and liabilities related to cash provided by an $23.5 million increase in
deferred revenue and a $5.9 million increase in accounts payable and accrued
liabilities, partially offset by cash used for prepaid expenses and other assets
of $2.9 million, accrued compensation of $1.4 million and operating lease
liabilities of $10.2 million, and a decrease in accounts receivable of $1.4
million.

Cash Flows from Investing Activities


Our primary investing activities have consisted of capital expenditures to
purchase equipment necessary to support our data center facilities and our
network and other operations and capitalization of internal-use software
necessary to deliver significant new features and functionality in our survey
platform which provides value to our customers. As our business grows, we expect
our capital expenditures to continue to increase.

                                       34



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Net cash used in investing activities during the nine months ended September 30,
2020 of $6.7 million was primarily attributable to cash used for the development
of internal-use software $7.0 million that is capitalized and purchases of
property and equipment of $0.8 million, which was partially offset by proceeds
from the sales of investment in privately-held company and other property of
$1.1 million.

Net cash used in investing activities during the nine months ended September 30,
2019 of $125.2 million was primarily attributable to the net cash paid for the
acquisitions of $114.6 million, purchases of property and equipment of $2.0
million to support additional office space and headcount, and cash used for the
development of internal-use software $9.6 million that is capitalized, which was
partially offset by proceeds from the sales of investment in privately-held
company and other property of $1.0 million.

Cash Flows from Financing Activities


Cash provided by financing activities during the nine months ended September 30,
2020 of $38.7 million was primarily attributable to proceeds from the exercise
of stock options of $37.3 million and shares purchased under our employee stock
purchase plan of $3.1 million, partially offset by the principal payments on our
credit facilities of $1.7 million.

Cash provided by financing activities during the nine months ended September 30,
2019 of $42.8 million was primarily attributable to proceeds from the exercise
of stock options of $41.8 million and proceeds from our employee stock purchase
plan, of $2.7 million, partially offset by the principal payments on our credit
facilities of $1.7 million.

Contractual Obligations

Our principal commitments consist of obligations under our credit facilities and operating leases for office space. As of September 30, 2020, the future non-cancelable minimum payments under these commitments were as follows:



                                                             Payments Due by Period
                                       Remainder of
(in thousands)             Total           2020           2021         2022         2023         2024        Thereafter
Credit facilities(1)     $ 215,600$        550$  2,200$  2,200$  2,200$  2,200$    206,250
Interest payments on
credit facilities(1)        41,408            2,127        8,384        8,298        8,211        8,148            6,240
Operating leases(2)        114,144            3,493       14,151       14,015       13,516       13,245           55,724
Purchase
commitments(3)              26,450            3,187        8,472        7,401        5,275        2,115                -
Total contractual
obligations              $ 397,602$      9,357$ 33,207$ 31,914$ 29,202$ 25,708$    268,214

(1) Represents the principal balances and related interest payments to be paid in

connection with our 2018 Credit Facility. Interest payments on our 2018

Credit Facility are based upon the applicable interest rates as of September

30, 2020 and are subject to change in future periods. For additional

information regarding our credit facilities, see Note 10 of the notes to

    condensed consolidated financial statements included elsewhere in this
    Quarterly Report on Form 10-Q.



(2) Primarily consists of future non-cancelable minimum rental payments under

operating leases for our corporate headquarters and our other facilities. The

amounts above exclude expected sublease payments to be received of

approximately $7.7 million. For additional information regarding our

operating lease obligations, see Note 8 of the notes to condensed

consolidated financial statements included elsewhere in this Quarterly Report

    on Form 10-Q.



(3) Primarily consists of open non-cancellable purchase orders for data center

hosting services and the procurement of goods and services in the ordinary

    course of business.



Off-Balance Sheet Arrangements


As of September 30, 2020, we did not have any relationships with unconsolidated
organizations or financial partnerships, such as structured finance or special
purpose entities, which would have been established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes.

                                       35


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Critical Accounting Policies and Estimates


We prepare our condensed consolidated financial statements in accordance with
GAAP. In the preparation of these condensed consolidated financial statements,
we are required to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenue, costs and expenses, and related
disclosures. To the extent that there are material differences between these
estimates and actual results, our financial condition or results of operations
would be affected. We base our estimates on past experience and other
assumptions that we believe are reasonable under the circumstances, and we
evaluate these estimates on an ongoing basis. We refer to accounting estimates
of this type as critical accounting policies and estimates, which we discuss
below. There have been no material changes to our critical accounting policies
and estimates for the three months ended September 30, 2020, as compared to
those disclosed in our Annual Report on Form 10-K for the year ended December
31, 2019.

Recent Accounting Pronouncements


See Note 2 of the notes to condensed consolidated financial statements included
elsewhere in this Quarterly Report on Form 10-Q for discussion of recently
adopted accounting pronouncements and recently issued accounting pronouncements
not yet adopted.



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