WORKIVA INC. The following discussion and analysis of our financial condition and results of our operations should be read in conjunction with the condensed consolidated financial statements and related notes included elsewhere in this report and in our Annual Report on Form 10-K filed with theSecurities and Exchange Commission onFebruary 22, 2022 . In addition to historical consolidated financial information, this discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to these differences include, but are not limited to, those identified below, and those discussed in "Item 1A. Risk Factors" of our Annual Report on Form 10-K for the year endedDecember 31, 2021 , in "Item 1A. Risk Factors" in Part II of this Quarterly Report on Form 10-Q and in any subsequent filing we make with theSEC .
Overview
Workiva simplifies complex work for thousands of organizations worldwide. We are a leading provider of cloud-based compliance and regulatory reporting solutions that are designed to solve business challenges at the intersection of data, process and people.Workiva changes the way enterprises manage and report business data. Our open, intelligent and intuitive platform is based on single instance, multi-tenant software applications deployed in the cloud. Our platform connects data, documents and teams, which results in improved efficiency, greater transparency and reduced risk of errors. We offer customers controlled collaboration, data linking, data integrations, granular permissions, process management and a full audit trail on our proprietary platform.
Customers use our platform to create, review and publish data-linked documents and reports with greater control, consistency, accuracy and productivity. Customers collaborate in the same document simultaneously, which improves efficiency and version control. Our platform is flexible and scalable, so customers can easily adapt it to define, automate and change their business processes in real time.
Our platform lets our customers connect data from enterprise resource planning
("ERP"), governance, risk and compliance ("GRC"), human capital management
("HCM") and customer relationship management ("CRM") systems, as well as other
third-party cloud and on-premise applications.
While our customers use our platform for dozens of different use cases, our sales and marketing resources are organized into four solution groups: Financial Reporting, Operational Reporting, GRC and Industry Verticals.
We operate our business on a Software-as-a-Service ("SaaS") model. Customers
enter into annual and multi-year subscription contracts to gain access to our
platform. Our subscription fee includes the use of our software and technical
support. Our subscription pricing is based primarily on a solution-based
licensing model. Under this model, operating metrics related to a customer's
expected use of each solution determine the price. We charge customers
additional fees primarily for document setup and XBRL tagging services.
We generate sales primarily through our direct sales force and, to a lesser
extent, our customer success and professional services teams. In addition, we
augment our direct sales channel with partnerships. Our advisory and service
partners offer a wider range of domain and functional expertise that broadens
the capabilities of our platform, bringing scale and support to customers and
prospects. Our technology partners enable more data and process integrations to
help customers connect critical transactional systems directly to our platform.
We continue to invest in the development of our solutions, infrastructure and
sales and marketing to drive long-term growth. Our full-time employee headcount
expanded to 2,446 at September 30, 2022 from 2,014 at September 30, 2021 , an
increase of 21.4%.
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We have achieved significant revenue growth in recent periods. Our revenue grew to$132.8 million and$394.1 million during the three and nine months endedSeptember 30, 2022 , respectively from$112.7 million and$322.5 million during the three and nine months endedSeptember 30, 2021 , respectively. We incurred a net loss of$29.7 million and$77.0 million during the three and nine months endedSeptember 30, 2022 , respectively compared to$6.6 million and$23.4 million during the three and nine months endedSeptember 30, 2021 , respectively. While we continue to see growth in our total revenues, macroeconomic factors have impacted our business and our customers' businesses in ways that are difficult to isolate and quantify. During the course of 2022, we have seen more measured buying behavior from our customers resulting in elongated sales cycles. Slower growth in new business in any given period could negatively affect our revenues or operating margins in future periods, particularly if experienced on a sustained basis. In addition, the expanding international scope of our business and the heightened volatility of global markets, expose us to the risk of fluctuations in foreign currency markets. Foreign currency fluctuations have negatively impacted year over year revenue growth. Recently the United States Dollar has strengthened significantly against certain foreign currencies in the markets in which we operate, particularly against the Euro and British Pound Sterling. If these conditions continue throughout fiscal 2023, they could have a material adverse impact on our near-term results and our ability to accurately predict our future results and earnings. We continue to invest for future growth and are focused on several key drivers, including focusing on multi-solution adoption by new and existing customers, further developing our partner program, accelerating international expansion and our fit-for-purpose solutions. These growth drivers often require a more sophisticated go-to-market approach and, as a result, we may incur additional costs upfront to obtain new customers and expand our relationships with existing customers, including additional sales and marketing expenses.
Recent Business Developments
OnApril 1, 2022 , we acquired all of the issued and outstanding equity interests inParsePort ApS , a leading solution provider for the ESEF financial reporting mandate, which complementsWorkiva's cloud platform. See Note 10 to the condensed consolidated financial statements for more information.
Impact of COVID-19
Although the COVD-19 pandemic persists, we do not believe that it has adversely affected our business. We have been able to maintain business continuity and have experienced no pandemic-related employee furloughs or layoffs. We have remote-work options available for most employees, while permitting in-person collaboration at our various offices for employees. We continue to monitor and update our practices in response to changes in the COVID-19 workplace safety and health standards established by theOccupational Safety and Health Administration ("OSHA") and guidance provided by theCenters for Disease Control and Prevention ("CDC"). COVID-19 variants continue to develop and spread, and there is therefore the possibility of future disruption toWorkiva's operations. The impact of any disruption is dependent upon a number of factors including the duration and severity of any COVID-19 resurgence, its impact on the overall economy and specific industry sectors, vaccination rates and the longer-term efficacy of vaccinations. We will continue to evaluate and refine our return-to-work and related policies in accordance withOSHA andCDC guidance. 24
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Effects of Volatility in the IPO/SPAC Markets
Inthe United States , volatility in the public markets has led to a decrease in the number of initial public offerings ("IPOs") and special-purpose acquisition companies ("SPACs") in 2022. New sales of ourSEC and capital markets solutions were adversely affected by this decline in the IPO and SPAC markets. We expect reduced valuation multiples caused by higher interest rates, inflation, and geopolitical instability to continue to negatively impact the number of IPOs and SPACs in the fourth quarter of 2022. We expect this volatility to continue to apply pressure to new sales of ourSEC and capital markets solutions. Whether and to what extent the IPO and SPAC markets will moderate cannot be accurately predicted.
Key Factors Affecting Our Performance
Generate Growth From Existing Customers. TheWorkiva platform can exhibit a powerful network effect within an enterprise, meaning that the usefulness of our platform attracts additional users. Since solution-based licensing offers our customers an unlimited number of seats for each solution purchased, we expect customers to add more seats over time. As more employees in an enterprise use our platform, additional opportunities for collaboration and automation drive demand among their colleagues for additional solutions. Pursue New Customers. We sell to organizations that manage large, complex processes with distributed teams of contributors and disparate sets of business data. We market our platform to professionals and executives in the areas of financial and non-financial reporting, including regulatory, multi-entity and performance reporting. In addition, we market to teams responsible for environmental, social and governance reporting, and governance, risk and compliance programs.We intend to continue to build our sales and marketing organization and leverage our brand equity to attract new customers. Offer More Solutions. We intend to introduce new solutions to continue to meet growing demand for our platform. Our close and trusted relationships with our customers are a source for new use cases, features and solutions. We have a disciplined process for tracking, developing and releasing new solutions that are designed to have immediate, broad applicability; a strong value proposition; and a high return on investment for bothWorkiva and our customers. Our advance planning team assesses customer needs, conducts industry-based research and defines new markets. This vetting process involves our sales, product marketing, customer success, professional services, research and development, finance and senior management teams.Expand Across Enterprises . Our success in delivering multiple solutions has created demand from customers for a broader-based, enterprise-wideWorkiva platform. In response, we have been improving our technology and realigning sales and marketing to capitalize on our growing enterprise-wide opportunities. We believe this expansion will add seats and revenue and continue to support our high revenue retention rates. However, we expect that enterprise-wide deals will be larger and more complex, which tend to lengthen the sales cycle.Add Partners . We continue to expand and deepen our relationships with global and regional partners, including consulting firms, system integrators, large and mid-sized independent software vendors, and implementation partners. Our advisory and service partners offer a wider range of domain and functional expertise that broadens our platform's capabilities and promotesWorkiva as part of the digital transformation projects they drive for their customers. Our technology partners enable powerful data and process integrations to help customers connect critical transactional systems directly to our platform, with powerful linking, auditability and control features. We believe that our partner ecosystem extends our global reach, accelerates the usage and adoption of our platform, and enables more efficient delivery of professional services. 25
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Investment in growth. We plan to continue to invest in the development of our platform, fit-for-purpose solutions and application marketplace to enhance our current offerings and build new features. In addition, we expect to continue to invest in our sales, marketing, professional services and customer success organizations to drive additional revenue and support the needs of our growing customer base and to take advantage of opportunities that we have identified in EMEA and APAC. Seasonality. Our revenue from professional services has some degree of seasonality. Many of our customers employ our professional services just before they file their Form 10-K, often in the first calendar quarter. With the exception ofSeptember 2020 andSeptember 2021 when we transitioned to a virtual event, sales and marketing expense has historically been higher in the third quarter due to our annual user conference in September, which was held as a hybrid in-person/virtual event in 2022. In addition, the timing of the payments of cash bonuses to employees during the first and fourth calendar quarters may result in some seasonality in operating cash flow.
Key Performance Indicators
Three months ended September 30, Nine months ended September 30,
2022 2021 2022 2021
(dollars in thousands)
Financial metrics
Total revenue $ 132,849 $ 112,693 $ 394,072 $ 322,502
Percentage increase in total 17.9 % 27.9 % 22.2 % 25.1 %
revenue
Subscription and support revenue $ 118,591 $ 98,912 $ 339,064 $ 275,053
Percentage increase in subscription 19.9 % 30.4 % 23.3 % 28.0 %
and support revenue
Subscription and support as a 89.3 % 87.8 % 86.0 % 85.3 %
percent of total revenue
As of September 30,
2022 2021
Operating metrics
Number of customers 5,541 4,146
Subscription and support revenue retention rate 98.1% 96.5%
Subscription and support revenue retention rate 107.0% 111.1%
including add-ons
Number of customers with annual contract value $100k+ 1,257 1,043
Number of customers with annual contract value $150k+ 676 541
Number of customers with annual contract value $300k+ 214 177
Total customers. We believe total number of customers is a key indicator of our
financial success and future revenue potential. We define a customer as an
entity with an active subscription contract as of the measurement date. Our
customer is typically a parent company or, in a few cases, a significant
subsidiary that works with us directly. Companies with publicly-listed
securities account for a substantial majority of our customers. As of
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Subscription and support revenue retention rate. We calculate our subscription
and support revenue retention rate based on all customers that were active at
the end of the same calendar quarter of the prior year ("base customers"). We
begin by annualizing the subscription and support revenue recorded in the same
calendar quarter of the prior year for those base customers who are still active
at the end of the current quarter. We divide the result by the annualized
subscription and support revenue in the same quarter of the prior year for all
base customers.
Our subscription and support revenue retention rate was 98.1% as of
September 30, 2022 , up from 96.5% as of September 30, 2021 . We believe that our
success in maintaining a high rate of revenue retention is attributable
primarily to our robust technology platform and strong customer service.
Customers whose securities were deregistered due to merger or acquisition or
financial distress accounted for just over half of our revenue attrition in the
latest quarter. Our subscription and support revenue retention rate as of
September 30, 2022 does not include ParsePort due to lack of comparable data in
the prior year.
Subscription and support revenue retention rate including add-ons. Add-on
revenue includes the change in both solutions and pricing for existing
customers. We calculate our subscription and support revenue retention rate
including add-ons by annualizing the subscription and support revenue recorded
in the current quarter for our base customers that were active at the end of the
current quarter. We divide the result by the annualized subscription and support
revenue in the same quarter of the prior year for all base customers.
Our subscription and support revenue retention rate including add-ons was 107.0%
as of the quarter ended September 30, 2022 , down from 111.1% as of September 30,
2021 . There has been downward pressure on this key performance indicator as the
IPO/SPAC market has slowed in 2022 and customers that purchased higher priced
capital markets solutions throughout 2021 have transitioned to more moderately
priced ongoing solutions in 2022. Our subscription and support revenue retention
rate including add-ons as of September 30, 2022 does not include ParsePort due
to lack of comparable data in the prior year.
Annual contract value. Our annual contract value ("ACV") for each customer is
calculated by annualizing the subscription and support revenue recognized during
each quarter. We believe the increase in the number of larger contracts shows
our progress in expanding our customers' adoption of our platform. Our ACV
metrics as of September 30, 2022 include information related to ParsePort.
Components of Results of Operations
Revenue
We generate revenue through the sale of subscriptions to our cloud-based software and the delivery of professional services. We serve a wide range of customers in many industries, and our revenue is not concentrated with any single customer or small group of customers. For the nine months endedSeptember 30, 2022 and 2021, no single customer represented more than 1% of our revenue, and our largest 10 customers accounted for less than 6% of our revenue in the aggregate.
We generate sales directly through our sales force and partners. We also identify some sales opportunities with existing customers through our customer success and professional services teams.
Our customer contracts typically range in length from twelve to 36 months. We
typically invoice our customers for subscription fees annually in advance. For
contracts with a two or three year term, customers sometimes elect to pay the
entire multi-year subscription term in advance. Our arrangements do not contain
general rights of return.
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Subscription and Support Revenue. We recognize subscription and support revenue on a ratable basis over the contract term beginning on the date that our service is made available to the customer. Amounts that are invoiced are initially recorded as deferred revenue. Professional Services Revenue. We believe our professional services facilitate the sale of our subscription service to certain customers. To date, most of our professional services have consisted of document set up, XBRL tagging, and consulting to help our customers with business processes and best practices for using our platform. Our professional services are not required for customers to utilize our solution. We recognize revenue for document set ups when the service is complete and control has transferred to the customer. Revenues from XBRL tagging and consulting services are recognized as the services are performed.
Cost of Revenue
Cost of revenue consists primarily of personnel and related costs directly associated with our professional services, customer success teams and training personnel, including salaries, benefits, bonuses, and stock-based compensation; the costs of contracted third-party vendors; the costs of server usage by our customers; information technology costs; and facility costs. Costs of server usage are comprised primarily of fees paid toAmazon Web Services .
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of personnel and related costs, including salaries, benefits, bonuses, commissions, travel, and stock-based compensation. Other costs included in this expense are marketing and promotional events, our annual user conference, online marketing, product marketing, information technology costs, and facility costs. We pay sales commissions for initial contracts and expansions of existing customer contracts. When the relevant amortization period is one year or less, we expense sales commissions as incurred. All other sales commissions are considered incremental costs of obtaining a contract with a customer and are deferred and amortized on a straight-line basis over a period of benefit that we have determined to be three years.
Research and Development Expenses
Research and development expenses consist primarily of personnel and related costs, including salaries, benefits, bonuses, and stock-based compensation; costs of server usage by our developers; information technology costs; and facility costs.
General and Administrative Expenses
General and administrative expenses consist primarily of personnel and related
costs for our executive, finance and accounting, legal, human resources, and
administrative personnel, including salaries, benefits, bonuses, and stock-based
compensation; legal, accounting, and other professional service fees; other
corporate expenses; information technology costs; and facility costs.
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Results of Operations
The following table sets forth selected consolidated statement of operations data for each of the periods indicated:
Three months ended September 30, Nine months ended September 30,
2022 2021 2022 2021
(in thousands)
Revenue
Subscription and support $ 118,591 $ 98,912 $ 339,064 $ 275,053
Professional services 14,258 13,781 55,008 47,449
Total revenue 132,849 112,693 394,072 322,502
Cost of revenue
Subscription and support(1) 19,235 15,606 56,683 42,906
Professional services(1) 13,184 10,799 38,846 31,766
Total cost of revenue 32,419 26,405 95,529 74,672
Gross profit 100,430 86,288 298,543 247,830
Operating expenses
Research and development(1) 38,583 29,841 113,644 84,305
Sales and marketing(1) 64,560 46,026 184,879 128,586
General and administrative(1) 27,405 18,390 75,507 52,795
Total operating expenses 130,548 94,257 374,030 265,686
Loss from operations (30,118) (7,969) (75,487) (17,856)
Interest income 1,440 219 2,325 834
Interest expense (1,510) (3,508) (4,540) (10,495)
Other income, net 964 3,805 1,467 3,265
Loss before provision for income taxes (29,224) (7,453) (76,235) (24,252)
Provision (benefit) for income taxes 467 (885) 810 (846)
Net loss $ (29,691) $ (6,568) $ (77,045) $ (23,406)
(1) Stock-based compensation expense included in these line items was as
follows:
Three months ended September 30, Nine months ended September 30,
2022 2021 2022 2021
(in thousands)
Cost of revenue
Subscription and support $ 855 $ 731 $ 2,557 $ 1,824
Professional services 533 407 1,578 1,183
Operating expenses
Research and development 3,399 2,347 9,272 7,195
Sales and marketing 4,657 4,095 14,388 10,481
General and administrative 10,853 5,107 26,258 14,679
Total stock-based compensation
expense $ 20,297 $ 12,687 $ 54,053 $ 35,362
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The following table sets forth our consolidated statement of operations data as a percentage of revenue for each of the periods indicated:
Three months ended September 30, Nine months ended September 30,
2022 2021 2022 2021
Revenue
Subscription and support 89.3 % 87.8 % 86.0 % 85.3 %
Professional services 10.7 12.2 14.0 14.7
Total revenue 100.0 100.0 100.0 100.0
Cost of revenue
Subscription and support 14.5 13.8 14.4 13.3
Professional services 9.9 9.6 9.9 9.8
Total cost of revenue 24.4 23.4 24.3 23.1
Gross profit 75.6 76.6 75.7 76.9
Operating expenses
Research and development 29.0 26.5 28.8 26.1
Sales and marketing 48.6 40.8 46.9 39.9
General and administrative 20.6 16.3 19.2 16.4
Total operating expenses 98.2 83.6 94.9 82.4
Loss from operations (22.6) (7.0) (19.2) (5.5)
Interest income 1.1 0.2 0.6 0.3
Interest expense (1.1) (3.1) (1.2) (3.3)
Other income, net 0.7 3.4 0.4 1.0
Loss before provision for income
taxes (21.9) (6.5) (19.4) (7.5)
Provision (benefit) for income
taxes 0.4 (0.8) 0.2 (0.3)
Net loss (22.3) % (5.7) % (19.6) % (7.2) %
Comparison of Three and Nine Months Ended
Revenue
Three months ended September 30, Nine months ended September 30,
2022 2021 % Change 2022 2021 % Change
(dollars in thousands)
Revenue
Subscription and support $ 118,591 $ 98,912 19.9% $ 339,064 $ 275,053 23.3%
Professional services 14,258 13,781 3.5% 55,008 47,449 15.9%
Total revenue $ 132,849 $ 112,693 17.9% $ 394,072 $ 322,502 22.2%
Total revenue increased $20.2 million for the three months ended September 30,
2022 compared to the same quarter a year ago due primarily to a $19.7 million
increase in subscription and support revenue. Growth in subscription and support
revenue in the third quarter was attributable mainly to strong demand and
continued solution expansion across our customer base. Professional services
revenue increased $0.5 million for the three months ended September 30, 2022
compared to the same quarter a
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year ago due primarily to growth in revenue from XBRL professional services.
Total revenue increased$71.6 million for the nine months endedSeptember 30, 2022 compared to the same period a year ago due primarily to a$64.0 million increase in subscription and support revenue. This growth in subscription and support revenue was attributable mainly to strong demand and better pricing for a broad range of use cases. Additionally, professional services revenue increased$7.6 million due primarily to growth in revenue from XBRL professional services. Cost of Revenue Three months ended September Nine months ended September 30, 30, 2022 2021 % Change 2022 2021 % Change (dollars in thousands) Cost of revenue Subscription and support$ 19,235 $ 15,606 23.3%$ 56,683 $ 42,906 32.1% Professional services 13,184 10,799 22.1% 38,846 31,766 22.3% Total cost of revenue$ 32,419 $ 26,405 22.8%$ 95,529 $ 74,672 27.9% Cost of revenue increased$6.0 million in the three months endedSeptember 30, 2022 compared to the same quarter a year ago due primarily to$3.4 million in higher cash-based compensation and benefits costs due in part to increased headcount, a$0.6 million increase in travel expense, a$0.6 million increase in information technology and facility costs in support of our employees, and a$1.1 million increase in the cost of cloud infrastructure services. The increases in headcount, cloud infrastructure services, and professional service fees resulted primarily from our continued investment in and support of our platform and solutions. The increase in travel expense was due to a return to travel as travel restrictions and company policies originally implemented in response to the COVID-19 pandemic ease. Cost of revenue increased$20.9 million during the nine months endedSeptember 30, 2022 compared to the same period a year ago due primarily to$14.6 million in higher cash-based compensation and benefits costs due in part to increased headcount, a$1.1 million increase in travel expense,$1.1 million of additional stock-based compensation, a$2.3 million increase in the cost of cloud infrastructure services, a$0.5 million increase in outsourced service fees, and a$1.2 million increase in information technology and facility costs in support of our employees. The increases in headcount, cloud infrastructure services, and outsourced service fees resulted primarily from our continued investment in and support of our platform and solutions. The increase in travel expense was due to a return to travel as travel restrictions and company policies originally implemented in response to the COVID-19 pandemic ease. Operating Expenses Three months ended September 30, Nine months ended September 30, 2022 2021 % Change 2022 2021 % Change (dollars in thousands) Operating expenses Research and development$ 38,583 $ 29,841 29.3%$ 113,644 $ 84,305 34.8% Sales and marketing 64,560 46,026 40.3% 184,879 128,586 43.8% General and administrative 27,405 18,390 49.0% 75,507 52,795 43.0% Total operating expenses$ 130,548 $ 94,257 38.5%$ 374,030 $ 265,686 40.8% 31
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Research and Development
Research and development expenses increased$8.7 million in the three months endedSeptember 30, 2022 compared to the same quarter a year ago due primarily to$5.6 million in higher cash-based compensation and benefits,$1.1 million of additional stock-based compensation, a$0.5 million increase in the cost of cloud infrastructure services, a$0.6 million increase related to the amortization of acquisition-related intangible assets, and a$0.4 million increase in information technology and facility costs in support of our research and development organization. The increase in compensation was due to an increase in employee headcount compared to the same quarter a year ago. The increase in cloud infrastructure services was the result of our continued investment in and support of our platform and solutions. Research and development expenses increased$29.3 million in the nine months endedSeptember 30, 2022 compared to the same period a year ago due primarily to higher cash-based compensation and benefits of$17.5 million , a$2.5 million increase in travel expense,$2.1 million of additional stock-based compensation, a$2.5 million increase in the cost of cloud infrastructure services, a$1.4 million increase related to consulting fees, a$1.4 million increase in information technology and facility costs in support of our research and development organization, and a$2.0 million increase related to the amortization of acquisition-related intangible assets. The increase in compensation was due primarily to an increase in employee headcount compared to the period a year ago. The increase in cloud infrastructure services was the result of our continued investment in and support of our platform and solutions. The increase in travel expense was due to a return to travel as travel restrictions and company policies originally implemented in response to the COVID-19 pandemic ease.
Sales and Marketing
Sales and marketing expenses increased$18.5 million during the three months endedSeptember 30, 2022 compared to the three months endedSeptember 30, 2021 due primarily to$9.9 million in higher cash-based compensation and benefits, a$2.1 million increase in travel expense,$0.6 million of additional stock-based compensation, a$3.7 million increase in the cost of marketing programs, a$0.6 million increase related to the amortization of acquisition-related intangible assets, and$1.4 million in information technology and facility costs in support of sales and marketing. In the third quarter of 2022, we recognized an additional$0.5 million in stock-based compensation pursuant to certain severance obligations. The increase in compensation was due to an increase in employee headcount. The increase in the cost of marketing programs is due primarily to costs related to our annual user conference. The increase in travel expense was due to a return to travel as travel restrictions and company policies originally implemented in response to the COVID-19 pandemic ease. Sales and marketing expenses increased$56.3 million during the nine months endedSeptember 30, 2022 compared to the same period a year ago due primarily to$37.2 million in higher cash-based compensation and benefits, a$4.5 million increase in travel expense,$3.9 million of additional stock-based compensation, a$5.0 million increase in the cost of marketing programs, a$1.4 million increase related to the amortization of acquisition-related intangible assets, a$3.1 million increase in information technology and facility costs in support of sales and marketing, and a$0.6 million increase related to consulting fees. The increase in compensation was due to an increase in employee headcount. During 2022, we recognized an additional$1.3 million in stock-based compensation pursuant to certain severance obligations. The increase in the cost of marketing programs is due to increased in-person events as well as costs related to our annual user conference. The increase in travel expense was due to a return to travel as travel restrictions and company policies originally implemented in response to the COVID-19 pandemic ease. 32
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General and Administrative
General and administrative expenses increased$9.0 million during the three months endedSeptember 30, 2022 compared to the three months endedSeptember 30, 2021 due primarily to$1.0 million in higher cash-based compensation and benefits, a$0.5 million increase in travel expense,$5.6 million of additional stock-based compensation, and a$1.2 million increase related to consulting, recruiting and professional service fees. The increase in cash-based compensation was due to increased headcount compared to the same quarter a year ago partially offset by a reduction in our annual bonus accrual. During the third quarter of 2022, we recognized an additional$3.5 million in stock-based compensation pursuant to certain severance agreements. The remaining increase in stock-based compensation was due to increased headcount in addition to the issuance of performance-based stock units to our executives. The increase in travel expense was due to a return to travel as travel restrictions and company policies originally implemented in response to the COVID-19 pandemic ease. General and administrative expenses increased$22.7 million during the nine months endedSeptember 30, 2022 compared to the same period a year ago. This increase was due primarily to$3.0 million in higher cash-based compensation and benefits, a$1.6 million increase in travel expense,$11.5 million of additional stock-based compensation, a$0.7 million increase in software expense, a$0.5 million increase in rent expense, and a$4.2 million increase related to consulting, recruiting and professional service fees. The increase in cash-based compensation was due to increased headcount compared to the same quarter a year ago partially offset by a reduction in our annual bonus accrual. During 2022, we recognized an additional$3.8 million in stock-based compensation pursuant to certain severance agreements. The remaining increase in stock-based compensation was due to increased headcount in addition to the issuance of performance-based stock units to our executives. The increases in software and rent expenses were the result of our continued investment in and support of our platform and solutions. The increase in travel expense was due to a return to travel as travel restrictions and company policies originally implemented in response to the COVID-19 pandemic ease.
Non-Operating Income (Expenses)
Three months ended September
30, Nine months ended September 30,
2022 2021 % Change 2022 2021 % Change
(dollars in thousands)
Interest income $ 1,440 $ 219 557.5% $ 2,325 $ 834 178.8%
Interest expense (1,510) (3,508) (57.0)% (4,540) (10,495) (56.7)%
Other income, net 964 3,805 * 1,467 3,265 *
(*) Percentage is not meaningful.
Interest Income, Interest Expense and Other Expense, Net
During the three months endedSeptember 30, 2022 , interest income increased$1.2 million compared to the same period a year ago due primarily to higher interest rates on investments. Interest expense decreased$2.0 million during the three months endedSeptember 30, 2022 compared to the same period a year ago due primarily to our adoption of ASU 2020-06 in 2022 which resulted in the reduction of non-cash interest expense. Other income, net decreased$2.8 million compared to the same period a year ago due primarily to losses on foreign currency transactions. 33
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During the nine months endedSeptember 30, 2022 , interest income increased$1.5 million compared to the same period in the prior year due primarily to higher interest rates on investments. Interest expense decreased$6.0 million during the nine months endedSeptember 30, 2022 compared to the same period a year ago due primarily to our adoption of ASU 2020-06 in 2022 which resulted in the reduction of non-cash interest expense. Other income, net decreased$1.8 million compared to the same period a year ago due primarily to losses on foreign currency transactions.
Results of Operations for Fiscal 2021 Compared to 2020
For a comparison of our results of operations for the fiscal years endedDecember 31, 2021 and 2020, see "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our annual report on Form 10-K for the fiscal year endedDecember 31, 2021 , filed with theSEC onFebruary 22, 2022 .
Liquidity and Capital Resources
Overview of Sources and Uses of Cash
As ofSeptember 30, 2022 , our principal sources of liquidity were cash, cash equivalents and marketable securities totaling$433.0 million , which were held for working capital purposes. We have financed our operations primarily through the proceeds of offerings of equity, convertible debt, and cash from operating activities. We have generated significant operating losses and negative cash flows from operating activities as reflected in our accumulated deficit and consolidated statements of cash flows. While we expect to continue to incur operating losses and may incur negative cash flows from operations in the future, we believe that current cash and cash equivalents and cash flows from operating activities will be sufficient to fund our operations for at least the next twelve months. Convertible Debt InAugust 2019 , we issued$345.0 million aggregate principal amount of 1.125% convertible senior notes due 2026 (the "Notes"). The Notes are senior, unsecured obligations and bear interest at a fixed rate of 1.125% per annum, payable semi-annually in arrears onFebruary 15 andAugust 15 of each year, commencing onFebruary 15, 2020 . Proceeds from the issuance of the Notes totaled$335.9 million , net of initial purchaser discounts and issuance costs. 34
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Cash Flows
Three months ended September 30, Nine months ended September 30,
2022 2021 2022 2021
(in thousands)
Cash flow provided by operating activities $ 4,855 $ 16,313 $ 12,602 $ 40,576
Cash flow used in investing activities (2,632) (38,536) (79,246) (64,899)
Cash flow provided by (used in) financing 3,471 (8,441) (143) (7,304)
activities
Net increase (decrease) in cash and cash equivalents, net of impact of exchange$ 3,244 $ (31,069) $ (70,889) $ (31,706) rates Operating Activities For the three months endedSeptember 30, 2022 , cash provided by operating activities was$4.9 million . The primary factors affecting our operating cash flows during the period were our net loss of$29.7 million , adjusted for non-cash charges of$2.7 million for depreciation and amortization of our property and equipment and intangible assets,$20.3 million of stock-based compensation expense and a$11.0 million net change in operating assets and liabilities. The primary drivers of the changes in operating assets and liabilities were a$7.9 million increase in accounts receivable, a$1.4 million increase in deferred costs, and a$1.1 million increase in other assets offset by a$3.6 million decrease in prepaid expenses, a$3.9 million increase in accounts payable and a$14.8 million increase in deferred revenue. Deferred costs increased primarily due to payments made to our sales force related to the direct and incremental costs of obtaining a customer contract. Customer growth accounted for most of the increase in deferred revenue. The increases in accounts receivable, other assets, and accounts payable as well as the decrease in prepaid expenses were attributable primarily to the timing of our billings, cash collections, and cash payments. For the three months endedSeptember 30, 2021 , cash provided by operating activities was$16.3 million . The primary factors affecting our operating cash flows during the period were our net loss of$6.6 million , adjusted for non-cash charges of$1.4 million for depreciation and amortization of our property and equipment and intangible assets,$12.7 million of stock-based compensation expense,$2.3 million for the amortization of our debt discount and issuance costs and a$10.3 million net change in operating assets and liabilities partially offset by a gain on the settlement of equity securities of$3.7 million . The primary drivers of the changes in operating assets and liabilities were a$2.2 million increase in accrued expenses and other liabilities, a$9.9 million increase in deferred revenue, a$0.5 million increase in accounts payable and a$2.1 million decrease in accounts receivable partially offset by a$2.0 million increase in deferred costs, a$0.6 million increase in other receivables and a$1.0 million increase in prepaid expenses. Deferred costs increased due primarily to payments made to our sales force related to the direct and incremental costs of obtaining a customer contract. Customer growth as well as the prior year impact of the COVID-19 pandemic accounted for most of the increase in deferred revenue. The increases in accounts payable, prepaid expenses and accrued expenses and other liabilities as well as the decrease in accounts receivable were attributable primarily to the timing of our billings, cash collections, and cash payments. For the nine months endedSeptember 30, 2022 , cash provided by operating activities was$12.6 million . The primary factors affecting our operating cash flows during the period were our net loss of$77.0 million , adjusted for non-cash charges of$7.4 million for depreciation and amortization of our property and equipment and intangible assets,$54.1 million of stock-based compensation expense,$1.0 million for the amortization of our debt discount and issuance costs,$1.2 million for the amortization of 35
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premiums and discounts on marketable securities, and a$26.0 million net change in operating assets and liabilities. The primary drivers of the changes in operating assets and liabilities were a$6.2 million increase in accounts receivable, a$2.7 million increase in deferred costs, and a$1.1 million increase in other assets offset by a$0.9 million decrease in prepaid expenses, a$6.0 million increase in accounts payable, and a$28.6 million increase in deferred revenue. Deferred costs increased due primarily to payments made to our sales force related to the direct and incremental costs of obtaining a customer contract. Customer growth accounted for most of the increase in deferred revenue. The increases in accounts receivable, other assets, and accounts payable as well as the decrease in prepaid expenses were attributable primarily to the timing of our billings, cash collections, and cash payments. For the nine months endedSeptember 30, 2021 , cash provided by operating activities was$40.6 million . The primary factors affecting our operating cash flows during the period were our net loss of$23.4 million , adjusted for non-cash charges of$3.6 million for depreciation and amortization of our property and equipment and intangible assets,$35.4 million of stock-based compensation expense,$6.9 million for the amortization of our debt discount and issuance costs and a$20.8 million net change in operating assets and liabilities partially offset by a gain on the settlement of equity securities of$3.7 million . The primary drivers of the changes in operating assets and liabilities were a$10.3 million increase in accrued expenses and other liabilities, a$22.0 million increase in deferred revenue, a$1.2 million increase in accounts payable and a$5.2 million decrease in accounts receivable partially offset by a$4.0 million increase in prepaid expenses, a$1.2 million increase in other assets and a$12.1 million increase in deferred costs. Deferred costs increased due primarily to payments made to our sales force related to the direct and incremental costs of obtaining a customer contract. Customer growth as well as the prior year impact of the COVID-19 pandemic accounted for most of the increase in deferred revenue. The increase in accounts payable and accrued expenses and other liabilities as well as the decrease in accounts receivable were attributable primarily to the timing of our billings, cash collections, and cash payments. The increase in prepaid expenses was due primarily to the timing of payments relating to annual subscriptions. The increase in other assets was primarily due to increases in deposits and tax credits receivable.
Investing Activities
Cash used in investing activities of$2.6 million for the three months endedSeptember 30, 2022 was due primarily to$41.6 million in purchases of marketable securities and$1.0 million in purchases of fixed assets partially offset by$40.1 million from maturities of marketable securities. Our capital expenditures were associated primarily with computer equipment in support of expanding our infrastructure and workforce. Cash used in investing activities of$38.5 million for the three months endedSeptember 30, 2021 was due primarily to$35.1 million for the acquisition of OneCloud and$48.2 million in purchases of marketable securities partially offset by$45.6 million from maturities of marketable securities. Cash used in investing activities of$79.2 million for the nine months endedSeptember 30, 2022 was due primarily to$99.2 million for the acquisition of ParsePort,$99.6 million in purchases of marketable securities, and$2.2 million in purchases of fixed assets partially offset by$106.9 million from maturities of marketable securities as well as$15.0 million from the sale of marketable securities. Our capital expenditures were associated primarily with computer equipment in support of expanding our infrastructure and workforce. 36
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Cash used in investing activities of$64.9 million for the nine months endedSeptember 30, 2021 was due primarily to$35.1 million for the acquisition of OneCloud,$143.1 million in purchases of marketable securities,$2.4 million in purchases of fixed assets partially offset by$116.4 million from maturities of marketable securities. Our capital expenditures were associated primarily with computer equipment in support of expanding our infrastructure and workforce.
Financing Activities
Cash provided by financing activities of$3.5 million for the three months endedSeptember 30, 2022 was due primarily to$0.6 million in proceeds from option exercises and$4.0 million in proceeds from shares issued in connection with our employee stock purchase plan partially offset by$0.7 million in taxes paid related to net share settlements of stock-based compensation awards. Cash used in financing activities of$8.4 million for the three months endedSeptember 30, 2021 was due primarily to$3.2 million in proceeds from option exercises and$4.6 million in proceeds from shares issued in connection with our employee stock purchase plan partially offset by$15.8 million in taxes paid related to net share settlements of stock-based compensation awards. Cash used in financing activities of$0.1 million for the nine months endedSeptember 30, 2022 was due primarily to$10.7 million in taxes paid related to net share settlements of stock-based compensation awards and$1.3 million in principal payments on finance lease obligations partially offset by$2.6 million in proceeds from option exercises and$9.3 million in proceeds from shares issued in connection with our employee stock purchase plan. Cash used in financing activities of$7.3 million for the nine months endedSeptember 30, 2021 was due primarily to$8.8 million in proceeds from option exercises and$8.9 million in proceeds from shares issued in connection with our employee stock purchase plan partially offset by$23.7 million in taxes paid related to net share settlements of stock-based compensation awards and$1.3 million in principal payments on finance lease obligations.
Contractual Obligations and Commitments
There were no material changes in our contractual obligations and commitments
from those disclosed in the Annual Report on Form 10-K for the year ended
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted inthe United States . The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, income taxes and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions. During the nine months endedSeptember 30, 2022 , there were no significant changes to our critical accounting policies and estimates as described in the financial statements contained in the Annual Report on Form 10-K for the year endedDecember 31, 2021 filed with theSEC onFebruary 22, 2022 , other than what is set forth immediately below. 37
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Acquisitions
We account for acquisitions under Accounting Standards Codification 805, Business Combinations. In general, the acquisition method of accounting requires companies to record assets acquired and liabilities assumed at their respective fair market values at the date of acquisition. We primarily estimate fair value of identified intangible assets using discounted cash flow analyses based on market participant based inputs. Any amount of the purchase price paid that is in excess of the estimated fair values of net assets acquired is recorded as goodwill in our condensed consolidated balance sheets. Transaction costs, as well as costs to reorganize acquired companies, are expensed as incurred in our condensed consolidated statement of operations.
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