ZENDESK, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , filed with theSEC onFebruary 15, 2022 . As discussed in the section titled "Special Note Regarding Forward-Looking Statements," the following discussion and analysis contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, impacts on our business and general economic conditions due to the current COVID-19 pandemic, those identified below, and those discussed in the section titled "Risk Factors" included under Part II, Item 1A below. Overview We are a service-first customer relationship management company, built to give organizations of all sizes, in every industry, the ability to deliver a transparent, responsive and empowering customer experience. With solutions designed to address an increasingly broad set of customer interactions,Zendesk allows organizations to deliver omnichannel customer service and customize and build apps across the customer journey.Zendesk has evolved its offerings over time to product and platform solutions that work together to help organizations improve the broader customer journey, manage communications across all channels and engage where and when it's needed most. We believe in developing solutions that serve organizations of all sizes and across all industries. Our flagship product solution is the Zendesk Suite. It provides companies of all sizes everything they need to deliver exceptional, personalized customer experiences at scale. The Suite includes our core support tools ranging from omni-channel messaging to ticket management. Zendesk Support provides organizations with the ability to track, prioritize, and solve customer support tickets across multiple channels, bringing customer information and interactions into one place. Our other widely available product solutions integrate with Support and include Zendesk Chat, Zendesk Talk, andZendesk Guide. Chat is live chat and messaging software that provides a fast and responsive way for organizations to connect with their customers. Talk is cloud-based call center software that facilitates personal and productive voice and short message service support conversations between organizations and their customers. Guide is a self-service destination that organizations can use to provide articles, interactive forums, and a community that help an organization's customers help themselves. We additionally offer Zendesk Sell, sales customer relationship management software that complements our mission in delivering solutions that provide a better customer experience, Zendesk Explore, a solution to provide analytics for organizations to measure and improve the entire customer experience,Zendesk Gather, a product solution that enables companies to provide trusted and transparent support to customers through online community forums,Zendesk Sunshine, a customer relationship management platform which enables organizations to connect and integrate customer data generated through our product solutions, and Zendesk Sunshine Conversations, a messaging platform solution that allows businesses to integrate messaging through social channels and directly interact and transact with customers. We offer a range of subscription account plans for our solutions that vary in price based on functionality, type, and the amount of product support we offer. We also offer a range of additional features that customers can purchase and add to their subscriptions. For the three months endedSeptember 30, 2022 and 2021, our revenue was$417 million and$347 million , respectively, representing a 20% growth rate. For the nine months endedSeptember 30, 2022 and 2021, our revenue was$1,212 million and$963 million , respectively, representing a 26% growth rate. For the three months endedSeptember 30, 2022 and 2021, we derived$205 million , or 49%, and$173 million , or 50%, respectively, of our revenue from customers located outside ofthe United States . For the nine months endedSeptember 30, 2022 and 2021, we derived$593 million , or 49%, and$474 million , or 49%, respectively, of our revenue from customers located outside ofthe United States . We expect that the rate of growth in our revenue will decline as our business scales, even if our revenue continues to grow in absolute terms. For the three months endedSeptember 30, 2022 and 2021, we generated net losses of$59 million and$54 million , respectively. For the nine months endedSeptember 30, 2022 and 2021, we generated net losses of$221 million and$162 million , respectively. 28
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We expect our financial results in future periods to be negatively impacted by ongoing macroeconomic factors including a substantial risk of global recession, persistent high inflation, changing consumer behavior and labor market dynamics that have and may continue to result in substantial employee attrition. In the quarter endedSeptember 30, 2022 , we experienced a decline in gross bookings of 27% and a decline in net bookings of 59% from the quarter endedSeptember 30, 2021 . Due to these results and ongoing changing business conditions, we expect that revenue for the year endingDecember 31, 2022 will grow at a rate less than previously anticipated and that growth rates in subsequent periods may also be impacted. The growth of our business and our future success depend on many factors, including our ability to continue to innovate, further develop our product and platform solutions geared towards the entire customer experience, build brand recognition and scalable solutions for larger organizations, sell to and provide a unified and reliable service to those larger organizations, maintain our leadership in the small and midsized business market, add new customers, generate additional revenue from our existing customer base, and increase our global customer footprint. While these areas represent significant opportunities for us, we also face significant risks and challenges that we must successfully address in order to sustain the growth of our business and improve our operating results. We anticipate that we will continue to invest in our operations. The expected expenditures that we anticipate will be necessary to manage our anticipated growth, including personnel costs and expenditures relating to hosting capabilities, will make it more difficult for us to achieve profitability in the near term. Many of these investments will occur in advance of us experiencing any direct benefit and will make it difficult to determine if we are allocating our resources efficiently. We have focused on rapidly growing our business and plan to continue to invest for long-term growth. We expect to continue to develop our hosting capabilities primarily through expenditures for third-party managed hosting services. The amount and timing of these expenditures will vary based on our estimates of projected growth and planned use of hosting resources. Over time, we anticipate that we will continue to gain economies of scale by efficiently utilizing our hosting and personnel resources to support the growth in our number of customers. In addition, we expect to incur third-party license fees to support certain products and amortization expense associated with acquired intangible assets and capitalized internal-use software. As a result, we expect our gross margin to improve in the long-term, although our gross margin may decrease in the near-term and may vary from period to period as our revenue fluctuates and as a result of the timing and amount of such costs. We expect our operating expenses to continue to increase in absolute dollars in future periods. We have invested, and expect to continue to invest, in our software development efforts to broaden the functionality of our existing solutions, to further integrate these solutions and services, and to introduce new solutions. We plan to continue to invest in our sales and marketing organizations, particularly in connection with our efforts to expand our customer base and expand usage of our solutions. We also expect to continue to incur additional general and administrative costs in order to support the growth of our business and the infrastructure required to comply with our obligations as a public company. Proposed Merger OnJune 24, 2022 , we entered into the Merger Agreement to be acquired by an investor group in an all-cash transaction valued at approximately$10.2 billion . Under the terms of this agreement, our stockholders will receive$77.50 per share. The proposed transaction is expected to close in the fourth quarter of 2022 and is subject to customary closing conditions. For a summary of the transaction, see Note 16 of the Notes to our Condensed Consolidated Financial Statements. The foregoing summary of the Merger Agreement and the transactions contemplated thereby does not purport to be complete and is subject to and qualified in its entirety by the full text of the Merger Agreement, which is filed as Exhibit 2.1 of the Company's Current Report on Form 8-K filed onJune 24, 2022 , Film No. 221040943. COVID-19 Update We are continuing to ascertain the long-term impact of the COVID-19 pandemic on our business. We continue to focus on supporting our employees, customers, and community. Our business continuity plans have continued to focus on the health and safety of our employees while continuing to drive innovation in customer experience solutions for our customers. The ongoing global shift to a digital-first world has continued to emphasize the importance of fast time-to-value solutions such as our own and our need to reimagine the way our employees engage with each other and their customers. We continue to evaluate conditions in each region we operate and reassess local restrictions across the globe. We have reopened some of our offices on a staggered, region-to-region basis in accordance with local authority guidelines, while taking into account vaccine administration prevalence and infection rates. 29
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Because we primarily have a subscription-based business model which generally
results in recognition of revenue in subsequent periods originating from
customer contracts executed in prior periods, the effects of the COVID-19
pandemic may continue to have a delayed impact on our results of operations. See
the "Risk Factors" section for further discussion of the possible impact of the
COVID-19 pandemic on our business.
Key Business Metrics
We review a number of operating metrics, including the following key metrics, to
evaluate our business, measure our performance, identify trends affecting our
business, formulate business plans, and make strategic decisions.
Logos. Our number of logos is a consolidation of paid customer accounts across
our solutions, exclusive of our legacy Starter plan, free trials, or other free
services, as of the end of the period. A paid customer account is one individual
billing relationship for subscription to our services. We calculate our logo
number by consolidating paid customer accounts that share common corporate
information as a single organization or customer may have multiple paid customer
accounts across our solutions to service separate subsidiaries, divisions, or
work processes. As of September 30, 2022 , we had 108,100 logos. We do not
currently include in our logo metric logos associated with our legacy analytics
product, our legacy Outbound product, our legacy Starter plan, our Sell product,
Sunshine Conversations, our legacy Smooch product, free trials, or other free
services. We may from time to time refer to "customers" or "brands" in our
publicly-available disclosures, each of which refers to our number of logos.
Dollar-Based Net Expansion Rate. Our ability to generate revenue is dependent
upon our ability to maintain our relationships with our customers and to
increase their utilization of our solutions. We believe we can achieve this by
focusing on delivering value and functionality that retains our existing
customers, expands the number of authorized agents associated with an existing
logo, and results in upgrades to higher-priced subscription plans and the
purchase of additional products. Maintaining customer relationships allows us to
sustain and increase revenue to the extent customers maintain or increase the
number of authorized agents licensed to use our products. We assess our
performance in this area by measuring our dollar-based net expansion rate. Our
dollar-based net expansion rate provides a measurement of our ability to
increase revenue across our existing customer base through expansion of
authorized agents associated with a logo, upgrades in subscription plans, and
the purchase of additional products as offset by contraction and churn in
authorized agents associated with a logo, and downgrades in subscription plans.
We do not currently incorporate operating metrics associated with our legacy
analytics product, our legacy Outbound product, our legacy Starter plan, our
Sell product, Sunshine Conversations, our legacy Smooch product, free trials, or
other free services into our measurement of dollar-based net expansion rate.
Our dollar-based net expansion rate is based upon our annual recurring revenue
for a set of logos on our products. Annual recurring revenue is determined by
multiplying monthly recurring revenue by 12. Monthly recurring revenue is a
legal and contractual determination made by assessing the contractual terms, as
of the date of determination, as to the revenue we expect to generate in the
next monthly period, assuming no changes to the subscription and without taking
into account any usage above the subscription base, if any, that may be
applicable to such subscription. We exclude the impact of revenue that we expect
to generate from fixed-term contracts that are each associated with an existing
account, are solely for additional temporary agents, and are not contemplated to
last for the duration of the primary contract for the existing account from our
determination of monthly recurring revenue. We additionally exclude the impact
of accounts that are free-trial accounts that did not result in paid
subscriptions, and temporary coupons, such as short-term discounts that were
applied to certain accounts due to the COVID-19 pandemic, from our annual
recurring revenue. Monthly recurring revenue is not determined by reference to
historical revenue, deferred revenue, or any other GAAP financial measure over
any period.
We calculate our dollar-based net expansion rate by dividing our retained
revenue net of contraction and churn by our base revenue. We define our base
revenue as the aggregate annual recurring revenue across our products from logos
as of the date one year prior to the date of calculation. We define our retained
revenue net of contraction and churn as the aggregate annual recurring revenue
across our products from the same customer base included in our measure of base
revenue at the end of the annual period being measured.
Our dollar-based net expansion rate was 111% as of September 30, 2022 . We expect
that, among other factors, our continued focus on adding larger logos at the
time of addition and the growth in our revenue will result in an overall decline
in our dollar-based net expansion rate over time as our aggregate annual
recurring revenue grows.
Components of Results of OperationsRevenue
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We derive substantially all of our revenue from subscription services, which are comprised of subscription fees from customer accounts on the Zendesk Suite, Support, and, to a lesser extent, Chat, Talk, Guide, Sell, Explore, Gather and Sunshine and includes related support services. Each subscription may have multiple authorized users, and we refer to each user as an "agent." The number of agents ranges from one to thousands for various customer accounts. Our pricing is generally established on a per agent basis. We offer a range of subscription account plans for our solutions that vary in price based on functionality, type, and the amount of support we offer. We also offer a range of additional features that customers can purchase and add to their subscriptions. Certain arrangements provide for incremental fees above a fixed maximum number of monthly agents during the subscription term. Additionally, certain customers have arrangements that provide for unlimited users during the subscription term for a fixed fee. We sell subscription services under contractual agreements that vary in length, ranging between one month and multiple years, with the majority of subscriptions having a term of either one month or one year. Subscription fees are generally non-refundable regardless of the actual use of the service. Subscription revenue is typically affected by the number of customer accounts, number of agents, and the type of plan purchased by our customers, and is recognized ratably over the term of the arrangement beginning on the date that our services are made available to our customers. Subscription services purchased online are typically paid for via a credit card on the date of purchase while subscription services purchased through our internal sales organization are generally billed with monthly, quarterly, or annual payment frequencies. Due to our mixed contract lengths and billing frequencies, the annualized value of the arrangements we enter into with our customers may not be fully reflected in deferred revenue at any single point in time. Accordingly, we do not believe that the change in deferred revenue for any period provides sufficient context to accurately predict our future revenue for a given period of time. We also derive revenue from implementation and training services, for which we recognize revenue based on proportional performance, and Talk usage, for which we recognize revenue based on usage.
Cost of Revenue, Gross Margin, and Operating Expenses
Cost of Revenue. Cost of revenue consists primarily of personnel costs (primarily including salaries, share-based compensation, and benefits) for employees associated with our infrastructure, product support, and professional service organizations and partners, and expenses for hosting capabilities, primarily for third-party managed hosting services located inNorth America ,Europe ,Asia andAustralia . Cost of revenue also includes third-party license fees, payment processing fees, amortization expense associated with acquired intangible assets, amortization expense associated with capitalized internal-use software, and allocated shared costs. We allocate shared costs such as facilities, information technology, and security costs to all departments based on headcount. As such, allocated shared costs are reflected in cost of revenue and each operating expense category. We intend to continue to invest additional resources in our infrastructure, professional service partners, and product support organically and through acquisitions. We expect that recent and future business acquisitions will result in increased amortization expense of intangible assets such as acquired technology. As we continue to invest in technology innovation, we expect to continue to incur capitalized internal-use software costs and related amortization. We expect these investments in technology to not only expand the capabilities of our solutions but also to increase the efficiency of how we deliver these services, enabling us to improve our gross margin over time, although our gross margin may decrease in the near-term and may vary from period to period as our revenue fluctuates and as a result of the timing and amount of these investments. To the extent that we continue to rely on third-party technology to provide certain functionality within our solutions or for certain subscription plans or integrations, we expect third-party license fees for technology that is incorporated in such solutions and subscription plans to remain significant over time. Gross Margin. Gross margin is gross profit expressed as a percentage of revenue. Our gross margin may fluctuate from period to period as our revenue fluctuates and as a result of the timing and amount of usage of third-party managed hosting resources and related personnel, investments in our product support and professional services teams, as well as the amortization of certain acquired intangible assets, costs associated with capitalized internal-use software, and third-party license fees. Research and Development. Research and development expenses consist primarily of personnel costs (primarily including salaries, share-based compensation, and benefits) for employees associated with our research and development organization and allocated shared costs. We focus our research and development efforts on the continued development of our solutions, including the development and deployment of new features and functionality and enhancements to our software architecture and integration across our solutions. We expect that, in the future, research and development expenses will increase in absolute dollars. However, we expect our research and development expenses to decrease as a percentage of our revenue in the long-term, 31
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although this may fluctuate from period to period depending on fluctuations in revenue and the timing and the extent of our research and development expenses.
Sales and Marketing. Sales and marketing expenses consist of personnel costs (primarily including salaries, share-based compensation, sales commissions, and benefits) for employees associated with our sales and marketing organizations, costs of marketing activities, and allocated shared costs. Marketing activities include online and offline marketing initiatives, including digital advertising, such as search engine, paid social, e-mail and product marketing, content marketing, user events, conferences, corporate communications, web marketing and optimization, and outbound list and contact generation. Sales commissions are considered incremental costs of obtaining customer contracts and are capitalized and amortized on a straight-line basis over their anticipated period of benefit, which we have determined to be three years. We focus our sales and marketing efforts on generating awareness of our solutions, establishing and promoting our brand, and cultivating a community of successful and vocal customers. We plan to continue investing in sales and marketing by increasing the number of sales employees, developing our marketing teams, improving our demand generation strategies, and building brand awareness, which we believe will enable us to add new customers and increase penetration within our existing customer base. Because we do not have a long history of undertaking or growing many of these activities, we cannot predict whether, or to what extent, our revenue will increase as we invest in these strategies. We expect our sales and marketing expenses to continue to increase in absolute dollars and continue to be our largest operating expense category for the foreseeable future. Our sales and marketing expenses as a percentage of our revenue over time may fluctuate from period to period depending on fluctuations in revenue and the timing and extent of our sales and marketing expenses. General and Administrative. General and administrative expenses consist primarily of personnel costs (primarily including salaries, share-based compensation, and benefits) for our executive, finance, legal, human resources, and other administrative employees. In addition, general and administrative expenses include fees for third-party professional services, including legal, accounting, and tax related services, allowance for credit losses on accounts receivable, other corporate expenses, and allocated shared costs. We expect to incur incremental costs associated with supporting the growth of our business, both in terms of size and geographic expansion. As a result, we expect our general and administrative expenses to continue to increase in absolute dollars in the long-term. Our general and administrative expenses as a percentage of our revenue over time may fluctuate from period to period depending on fluctuations in revenue and the timing and extent of our general and administrative expenses. Other Income (Expense), Net Other income (expense), net consists primarily of interest income from marketable securities, strategic investment gains and losses, foreign currency gains and losses, and interest expense from our convertible senior notes. Interest expense includes amortization of the debt discount, amortization of issuance costs, and contractual interest expense.
Provision for (Benefit from) Income Taxes
Provision for (benefit from) income taxes consists of federal and state income
taxes in
Results of OperationsThe following tables set forth our results of operations for the periods presented in dollars and as a percentage of our revenue (in thousands, except percentages):
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Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Revenue $ 416,861 $ 346,974 $ 1,212,396 $ 963,238
Cost of revenue (1) 79,462 70,226 237,930 197,863
Gross profit 337,399 276,748 974,466 765,375
Operating expenses (1):
Research and development 105,203 92,112 323,819 248,721
Sales and marketing 211,593 172,828 622,413 495,596
General and administrative 76,030 50,716 236,778 139,667
Total operating expenses 392,826 315,656 1,183,010 883,984
Operating loss (55,427) (38,908) (208,544) (118,609)
Other income (expense), net:
Interest expense (3,131) (14,762) (9,373) (43,768) Interest and other income (expense), net 2,913 2,386 5,845 8,430 Total other income (expense), net (218) (12,376) (3,528) (35,338) Loss before provision for income taxes (55,645) (51,284) (212,072) (153,947) Provision for income taxes 3,448 3,133 9,049 7,842 Net loss$ (59,093) $ (54,417) $ (221,121) $ (161,789)
(1) Includes share-based compensation expense as follows (in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Cost of revenue $ 7,053 $ 5,343 $ 20,212 $ 15,047
Research and development 22,885 17,189 62,654 49,886
Sales and marketing 35,014 24,915 92,934 72,648
General and administrative 15,007 12,086 41,456 31,020
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Revenue 100.0 % 100.0 % 100.0 % 100.0 %
Cost of revenue (1) 19.1 20.2 19.6 20.5
Gross profit 80.9 79.8 80.4 79.5
Operating expenses (1):
Research and development 25.2 26.5 26.7 25.8
Sales and marketing 50.8 49.8 51.3 51.5
General and administrative 18.2 14.6 19.5 14.5
Total operating expenses 94.2 90.9 97.5 91.8
Operating loss (13.3) (11.1) (17.1) (12.3)
Other income (expense), net:
Interest expense (0.8) (4.3) (0.8) (4.5)
Interest and other income (expense), net 0.7 0.7 0.5 0.9
Total other income (expense), net (0.1) (3.6) (0.3) (3.6)
Loss before provision for income taxes (13.4) (14.7) (17.4) (15.9)
Provision for income taxes 0.8 0.9 0.7 0.8
Net loss (14.2) % (15.6) % (18.1) % (16.7) %
(1) Includes share-based compensation expense as follows:
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Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Cost of revenue 1.7 % 1.5 % 1.7 % 1.6 %
Research and development 5.5 5.0 5.2 5.2
Sales and marketing 8.4 7.2 7.7 7.5
General and administrative 3.6 3.5 3.4 3.2
Revenue
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 % Change 2022 2021 % Change
(In thousands, except percentages)
Revenue $ 416,861 $ 346,974 20 % $ 1,212,396 $ 963,238 26 %
Revenue increased $70 million , or 20%, in the three months ended September 30,
2022 compared to the same period in 2021. Approximately half of the total
increase in revenue was attributable to expansions from existing accounts as of
September 30, 2021 and the remainder was attributable to revenue from new
accounts acquired thereafter. Revenue increased $249 million , or 26%, in the
nine months ended September 30, 2022 compared to the same period in 2021. The
total increase in revenue was primarily attributable to expansions from existing
accounts and the remainder was attributable to revenue from new accounts.
Revenue from new accounts on a year-to-date basis reflects the revenue
recognized from new customers acquired in the 12 months prior for each discrete
quarter within the year-to-date period.
Cost of Revenue and Gross Margin
Three Months Ended September
30, Nine Months Ended September 30,
2022 2021 % Change 2022 2021 % Change
(In thousands, except percentages)
Cost of revenue $ 79,462 $ 70,226 13 % $ 237,930 $ 197,863 20 %
Gross margin 80.9 % 79.8 % 80.4 % 79.5 %
Cost of revenue increased $9 million , or 13%, and $40 million , or 20%, in the
three and nine months ended September 30, 2022 , respectively, compared to the
same periods in 2021. The overall increase was primarily due to higher employee
compensation costs of $4 million and $23 million , respectively, primarily driven
by headcount growth, and increased hosting and related costs of $4 million and
$10 million , respectively, driven by increased customer usage. Additionally, in
the nine months ended September 30, 2022 , allocated shared costs increased by $2
million .
Our gross margin increased by 1.1 and 0.9 percentage points in the three and
nine months ended September 30, 2022 , respectively, compared to the same periods
in 2021. The overall improvement was driven primarily by efficiencies in our use
of third-party licenses and services, as well as hosting services, including
timing of vendor credits.
Operating Expenses
Research and Development Expenses
Three Months Ended September
30, Nine Months Ended September 30,
2022 2021 % Change 2022 2021 % Change
(In thousands, except percentages)
Research and development $ 105,203 $ 92,112 14 % $ 323,819 $ 248,721 30 %
Research and development expenses increased $13 million , or 14%, and $75
million , or 30%, in the three and nine months ended September 30, 2022 ,
respectively, compared to the same periods in 2021. The overall increase was
primarily due to increased employee compensation-related costs of $10 million
and $58 million , respectively, primarily due to headcount growth. The increase
was also primarily due to higher allocated shared costs of $1 million and $7
million , respectively.
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Sales and Marketing Expenses
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 % Change 2022 2021 % Change
(In thousands, except percentages)
Sales and marketing $ 211,593 $ 172,828 22 % $ 622,413 $ 495,596 26 %
Sales and marketing expenses increased $39 million , or 22%, and $127 million , or
26%, respectively, in the three and nine months ended September 30, 2022
compared to the same periods in 2021. The overall increase was primarily due to
increased employee compensation-related costs, including amortization of
deferred commissions, of $36 million and $113 million , respectively, primarily
due to headcount growth. The increase was also primarily due to higher allocated
shared costs of $2 million and $11 million , respectively. The overall increase
was partially offset by lower marketing program costs of $3 million and $11
million in the three and nine months ended September 30, 2022 , respectively,
primarily driven by decreased volume of marketing and advertising activities.
General and Administrative Expenses
Three Months Ended September
30, Nine Months Ended September 30,
2022 2021 % Change 2022 2021 % Change
(In thousands, except percentages)
General and administrative $ 76,030 $ 50,716 50 % $ 236,778 $ 139,667 70 %
General and administrative expenses increased $25 million , or 50%, and $97
million , or 70%, in the three and nine months ended September 30, 2022 ,
respectively, compared to the same periods in 2021. The overall increase was
driven by real estate impairment charges of $3 million and $28 million in the
three and nine months ended September 30, 2022 , respectively. Additionally, we
incurred higher employee compensation-related costs of $4 million and $25
million , primarily due to headcount growth, and higher allocated shared costs of
$1 million and $4 million , in the three and nine months ended September 30,
2022 , respectively. Further, one-time charges, including acquisition and merger,
restructuring, and strategic review costs of $17 million and $39 million
contributed to the increase in the three and nine months ended September 30,
2022 , respectively.
Other Income (Expense), Net
Three Months Ended September
30, Nine Months Ended September 30,
2022 2021 % Change 2022 2021 % Change
(Inthousands, except percentages)
Interest expense$ (3,131) $ (14,762) (79) %$ (9,373) $ (43,768) (79) % Interest and other income (expense), net 2,913 2,386 22 % 5,845 8,430 (31) % Interest expense decreased by$12 million and$34 million in the three and nine months endedSeptember 30, 2022 , respectively, compared to the same periods in 2021, primarily due to the adoption of ASU 2020-06, which resulted in the elimination of the debt discounts that were amortized to interest expense over the contractual term of the related convertible senior notes prior toJanuary 1, 2022 . Interest and other income (expense), net increased by$1 million in the three months endedSeptember 30, 2022 compared to the same period in 2021, primarily due to rising interest rates. Interest and other income (expense), net decreased by$3 million in the nine months endedSeptember 30, 2022 compared to the same period in 2021, primarily due to net foreign currency losses. Liquidity and Capital Resources As ofSeptember 30, 2022 , our principal sources of liquidity were cash, cash equivalents, and marketable securities totaling$1.7 billion , which were held for working capital and general corporate purposes. Our cash equivalents and marketable securities are comprised ofU.S. Treasury securities, corporate bonds, money market funds, asset-backed securities, agency securities, commercial paper, certificates of deposit, and time deposits. 35
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The following table summarizes our cash flows for the periods indicated (in
thousands):
Nine Months Ended September 30,
2022 2021
Net cash provided by operating activities $ 90,175 $ 134,283
Net cash provided by (used in) investing activities 97,032 (55,723)
Net cash provided by financing activities 44,680 47,085
To date, we have financed our operations primarily through customer payments for
subscription services, the issuance of our convertible senior notes, and public
and private equity financings. Cash from operations could also be affected by
various risks and uncertainties, including, but not limited to, the effects of
the COVID-19 pandemic, including timing of cash collections from our customers,
and other risks detailed in the "Risk Factors" section. However, based on our
current business plan and revenue prospects, we believe that our existing cash,
cash equivalents, and marketable securities balances, together with cash
generated from operations, will be sufficient to meet our working capital and
capital expenditure requirements for at least the next 12 months.
In March 2018 , we issued $575 million aggregate principal amount of 0.25%
convertible senior notes due March 15, 2023 (refer to Note 8 of the Notes to our
Condensed Consolidated Financial Statements for more information). As of the
date of this filing, we have received one request for conversion for an
immaterial amount. The 2023 Notes are not convertible during the three months
ending December 31, 2022 .
In June 2020 , we issued $1,150 million aggregate principal amount of 0.625%
convertible senior notes due June 15, 2025 (refer to Note 8 of the Notes to our
Condensed Consolidated Financial Statements for more information). In connection
with the offering of the 2025 Notes, we used $618 million of the proceeds from
the offering to repurchase a portion of the 2023 Notes, of which $39 million was
related to repayment of the debt discount and was reflected as a cash outflow
from operating activities. We also terminated a portion of our existing capped
call in amounts corresponding to the principal of the 2023 Notes repurchased.
The 2025 Notes are not convertible during the three months ending December 31,
2022 .
We are in compliance with all covenants under both the 2023 Notes and the 2025
Notes as of
The impact of the 2023 Notes and the 2025 Notes on our liquidity will depend on whether we elect to settle any conversions in shares of our common stock or a combination of cash and shares. In connection with the closing of the Merger, the outstanding Notes will be terminated and the Capped Calls are expected to be unwound. In the case that the Merger is terminated, the Option Counterparties may adjust the initial strike prices of the Capped Calls upward to reflect the impact of the Merger announcement on the option values. Our material cash requirements from known contractual and other obligations consist of our convertible senior notes, obligations under operating leases for office space, and contractual commitments for third-party managed hosting and other support services. For more information regarding our convertible senior notes, refer to Note 8 of the Notes to our Condensed Consolidated Financial Statements. For more information regarding our lease obligations, refer to Note 6 of the Notes to our Condensed Consolidated Financial Statements. Our other contractual obligations consist primarily of purchase commitments for third-party managed hosting services. Except as discussed below, there were no material changes to our material cash requirements from known contractual and other obligations from those disclosed in our audited consolidated financial statements for the year endedDecember 31, 2021 . InFebruary 2022 , we terminated and entered into a new agreement with a cloud services provider for which we have a total obligation of$400 million over a five-year period. Our future capital requirements will depend on many factors, including employee-related expenditures from expansion of our headcount, hosting costs to support the growth in our customer accounts and continued customer expansion, the timing and extent of spending to support product development efforts, the introduction of new and enhanced solutions, features, and functionality, the expansion of sales and marketing activities, and costs related to leased office facilities. We may in the future enter into arrangements to acquire or invest in complementary businesses, services, and technologies, and intellectual property rights. We may be required to seek additional equity or debt financing in order to meet these future capital requirements. 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 when desired, our business, results of operations, and financial condition would be adversely affected. 36
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Operating Activities
Our largest source of operating cash inflows is cash collections from our customers. Our primary uses of cash from operating activities are for employee-related expenditures, hosting costs, office facilities, and marketing programs.
Net cash provided by operating activities in the nine months endedSeptember 30, 2022 was$90 million , reflecting our net loss of$221 million , adjusted by non-cash charges including share-based compensation expense of$217 million , amortization of deferred costs of$65 million , depreciation and amortization of$29 million , real estate impairment charges of$28 million , allowance for credit losses on accounts receivable of$7 million , and amortization of debt issuance costs of$4 million , partially offset by net changes in operating assets and liabilities of$43 million . The net outflow from changes in operating assets and liabilities was primarily attributable to an increase in deferred costs of$81 million , primarily including sales commissions, a decrease in accrued compensation and related benefits of$25 million , an increase in prepaid expenses and other current assets of$7 million , and a decrease in accounts payable of$6 million due to timing of vendor payments, partially offset by a decrease in accounts receivable of$46 million due to timing of customer billings and collections, an increase in deferred revenue of$19 million , and an increase in accrued liabilities of$16 million . Net cash provided by operating activities in the nine months endedSeptember 30, 2021 was$134 million , reflecting our net loss of$162 million , adjusted by non-cash charges including share-based compensation expense of$169 million , amortization of deferred costs of$49 million , amortization of debt discount and issuance costs of$38 million , depreciation and amortization of$28 million , allowance for credit losses on accounts receivable of$6 million , and net changes in operating assets and liabilities of$5 million . The net inflow from changes in operating assets and liabilities was primarily attributable to an increase in deferred revenue of$65 million , an increase in accounts payable of$18 million due to timing of vendor payments, an increase in accrued compensation and related benefits of$16 million , and a decrease in lease right-of-use assets of$13 million , partially offset by an increase in deferred costs of$76 million , primarily including sales commissions, a decrease in lease liabilities of$23 million driven partially by the execution of a lease termination, and an increase in prepaid expenses and other current assets of$9 million . Investing Activities Net cash provided by investing activities in the nine months endedSeptember 30, 2022 of$97 million was primarily attributable to proceeds from sales and maturities of marketable securities of$122 million , net of purchases, partially offset by purchases of property and equipment of$15 million , primarily for leasehold improvements for newly leased office facilities and employee equipment, capitalized internal-use software costs of$8 million , primarily related to the development of additional features and functionality for our platform, and the purchase of strategic investments of$2 million . Net cash used in investing activities in the nine months endedSeptember 30, 2021 of$56 million was primarily attributable to purchases of marketable securities of$26 million , net of sales and maturities, capitalized internal-use software costs of$11 million , primarily related to the development of additional features and functionality for our platform, purchases of property and equipment of$11 million , primarily for employee equipment, and cash paid for the acquisition of Cleverly, net of cash acquired, of$8 million .
Financing Activities
Net cash provided by financing activities in the nine months endedSeptember 30, 2022 of$45 million was primarily attributable to proceeds from our employee stock purchase plan of$35 million and proceeds from exercises of employee stock options of$16 million , partially offset by payments for withholding taxes related to net share settlement of RSUs of$6 million . Net cash provided by financing activities in the nine months endedSeptember 30, 2021 of$47 million was primarily attributable to proceeds from our employee stock purchase plan of$37 million and proceeds from exercises of employee stock options of$19 million , partially offset by payments for withholding taxes related to net share settlement of RSUs of$9 million . 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. 37
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There were no changes to our critical accounting policies described in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , filed with theSecurities and Exchange Commission (the "SEC") onFebruary 15, 2022 , that had a material impact on our condensed consolidated financial statements and related notes.
Recently Issued and Adopted Accounting Pronouncements
Refer to Note 1 of the Notes to our Condensed Consolidated Financial Statements for a summary of recently issued and adopted accounting pronouncements.
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