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Item 2. Management’s Discussion and Analysis

2024-08-01 compared with 2024-05-02 · 217 added, 103 removed, 321 unchanged (50% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with (1) our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and (2) the audited consolidated financial statements and the related notes and management’s discussion and analysis of financial condition and results of operations for the year ended December 31, 2023 included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission, or SEC, on February 15, 2024.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with (1) our consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and (2) the audited consolidated financial statements and the related notes and management’s discussion and analysis of financial condition and results of operations for the year ended December 31, 2023 included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission, or SEC, on February 15, 2024.

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act.

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organizations with over 2,000 employees and $2 billion in annual revenue.

Revenue from government agencies represented 21.7% and 20.5% of our total revenue for the three months ended March 31, 2024 and 2023, respectively.

No single end-customer accounted for more than 10% of our total revenue in the three months ended March 31, 2024 or 2023.

Revenue from government agencies represented 22.6% and 22.1% of our total revenue for the three and six months ended June 30, 2024, respectively.

Revenue from government agencies represented 20.1% and 20.3% of our total revenue for the three and six months ended June 30, 2023, respectively.

No single end-customer accounted for more than 10% of our total revenue in the three and six months ended June 30, 2024 or 2023.

We offer our platform globally.

Our platform supports multiple languages to facilitate collaboration and address challenges in multinational organizations.

In the three months ended March 31, 2024 and 2023, 37.2% and 33.4%, respectively, of our total revenue was generated from customers outside of the United States.

As of March 31, 2024, we operated in 16 countries.

In the three and six months ended June 30, 2024, 38.2% and 37.7%, respectively, of our total revenue was generated from customers outside of the United States as compared to 38.4% and 35.8% in the three and six months ended June 30, 2023, respectively.

As of June 30, 2024, we operated in 16 countries.

We believe we have a significant opportunity to continue to grow our international footprint, and we are investing in new geographies, including through investment in direct and indirect sales channels, professional services, and customer support and implementation partners.

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Our ability to increase sales to existing customers will depend on a number of factors, including the size of our sales and professional services teams, customers’ level of satisfaction with our platform and professional services, pricing, economic conditions, and our customers’ overall spending levels.

We have also re-focused some of our professional services personnel to become customer success managers.

Some of our professional services personnel are customer success managers.

Their role is to ensure customers realize value from our platform and support strategic partners and the “land and expand” strategy versus delivering billable hours.

• Mix of Subscriptions and Professional Services Revenue - We believe our professional services have driven customer success and facilitated the adoption of our platform by customers.

During the initial period of

deployment of our platform by a customer, we generally provide a greater amount of support in building applications and training than later in the deployment, with a typical engagement lasting from two to six months.

During the initial period of deployment of our platform by a customer, we generally provide a greater amount of support in building applications and training than later in the deployment, with a typical engagement lasting from two to six months.

At the same time, many of our customers have historically purchased subscriptions for only a limited set of their total potential end users.

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As the usage of strategic partners expands, we expect the proportion of our total revenue from subscriptions to increase over time relative to professional services.

For the three months ended March 31, 2024 and 2023, 78.5% and 73.2% of our revenue, respectively, was derived from sales of subscriptions while the remaining 21.5% and 26.8%, respectively, was derived from the sale of professional services.

For the three months ended June 30, 2024 and 2023, 77.1% and 73.4% of our revenue, respectively, was derived from sales of subscriptions while the remaining 22.9% and 26.6%, respectively, was derived from the sale of professional services.

For the six months ended June 30, 2024 and 2023, 77.9% and 73.3% of our revenue, respectively, was subscriptions-based while the remaining 22.1% and 26.7%, respectively, was related to professional services.

• Investments in Growth - We have made, and plan to continue to make, investments for long-term growth, including investing in our platform and infrastructure to continuously maximize their power and speed, meet the evolving needs of our customers, and take advantage of our market opportunity.

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Cloud Subscriptions Revenue

Three Months Ended March 31,

2024 2023 % Change

Three Months Ended June 30, Six Months Ended June 30,

2024 2023 % Change 2024 2023 % Change

Cloud subscriptions revenue

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Cloud Subscriptions Revenue Retention Rate

As of March 31,

As of June 30,

Cloud subscriptions revenue retention rate

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To calculate our cloud subscriptions revenue retention rate for a particular trailing 12-month period, we first establish the recurring cloud subscriptions revenue for the previous trailing 12-month period.

This effectively represents recurring dollars we should expect in the current trailing 12-month period from the cohort of customers from the previous trailing 12-month period without any expansion or contraction.

This effectively represents

recurring dollars we should expect in the current trailing 12-month period from the cohort of customers from the previous trailing 12-month period without accounting for any expansion or contraction.

We subsequently measure the recurring cloud subscriptions revenue in the current trailing 12-month period from the cohort of customers from the previous trailing 12-month period.

Cloud subscriptions revenue retention rate is then calculated by dividing the aggregate

recurring cloud subscriptions revenue in the current trailing 12-month period by the previous trailing 12-month period.

Cloud subscriptions revenue retention rate is then calculated by dividing the aggregate recurring cloud subscriptions revenue in the current trailing 12-month period by the previous trailing 12-month period.

This calculation includes the combined impact on our revenue from customer non-renewals, pricing changes, and growth in the number of users on our platform.

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Gross Profit and Gross Margin

costs associated with third-party hosting providers, and the extent to which we expand our professional services to support future growth.

Gross profit and gross margin (defined as gross profit as a percentage of total revenue), have been, and will continue to be, affected by various factors, including the mix of cloud subscriptions and on-premises term license subscriptions, the mix of total subscriptions revenue and professional services revenue, subscription pricing, the costs associated with third-party hosting providers, and the extent to which we expand or reduce our professional services to support future changes in our growth.

Our gross margin may fluctuate from period to period based on the above factors.

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Other components of each category include professional fees for third-party services such as legal, software development resources, and contractors.

In addition, operating expenses include allocated overhead costs, which are primarily comprised of facility costs, employee medical benefits, employee relations expense, and certain information technology costs for such items as infrastructure, software, and cloud computing services.

In addition, operating expenses include allocated overhead costs, which are primarily comprised of facility costs such as rent, employee medical benefits, employee relations expense, and certain information technology costs for such items as infrastructure, software, and cloud computing services.

In general, our operating expenses are expected to continue to increase in absolute dollars as we invest resources in growing our various teams although at a more measured rate than prior years.

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Additional major expenses in this category include travel and entertainment, marketing activities and promotional events, subcontracting fees, and allocated overhead costs.

In order to continue to grow our business, geographical footprint, and brand awareness, we expect to continue investing resources in sales and marketing by increasing the sales and marketing headcount in our principal markets and strategic growth areas.

In order to continue to grow our business, geographical footprint, and brand awareness, we expect to continue investing resources in sales and marketing in our principal markets and strategic growth areas.

We expect sales and marketing expense to increase in absolute dollars as we continue to invest to acquire new customers and further expand usage of our platform within our existing customer base.

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Research and development expense consists primarily of personnel costs for our employees who develop and enhance our platform, including salaries, bonuses, stock-based compensation, and other personnel costs.

Also included are non-personnel costs such as subcontracting, consulting, professional fees to third party development resources, and allocated overhead costs.

Also included are non-personnel costs such as subcontracting, consulting, professional fees to third party development resources, certain information technology expenses, and allocated overhead costs.

Our research and development efforts are focused on enhancing the capabilities, speed, and power of our software platform.

In 2022, we opened a new product development center in India.

Although we expect research and development expense to continue to increase in absolute dollars as such costs are critical to maintain and

improve the quality of applications and our competitive position, we believe our product development center will result in cost savings over time.

Although we expect research and development expense to continue to increase in absolute dollars as such costs are critical to maintain and improve the quality of applications and our competitive position, we believe our product development center will result in cost savings over time.

General and Administrative Expense

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Additional expenses included in this category are non-personnel costs such as travel-related expenses, contracting and professional fees for such services as audits, taxation, and legal, insurance and other corporate expenses, including allocated overhead costs, and bad debt expenses.

In 2024, we expect our general and administrative expense to increase in absolute dollars largely due to amortization expense associated with the judgment preservation insurance as discussed in Note 12 to the condensed consolidated financial statements and investments in our information technology team.

In 2024, we expect our general and administrative expense to increase in absolute dollars largely due to amortization expense associated with the judgment preservation insurance policy (as discussed in Note 12 to the consolidated financial statements), lease impairments (as discussed in Note 4), and investments in our information technology team.

Other Non-Operating Expense

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The following table sets forth our consolidated statements of operations (in thousands):

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2024 2023 2024 2023

Subscriptions $ 112,974 $ 93,794 $ 230,668 $ 192,751

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Other non-operating expense

Other expense (income), net 8,207 (2,690)

Other (income) expense, net (1,545) (3,886) 6,662 (6,576)

Interest expense 6,107 4,755 11,753 7,873

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The following table sets forth our consolidated statements of operations data expressed as a percentage of total revenue:

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2024 2023 2024 2023

Subscriptions 77.1 % 73.4 % 77.9 % 73.3 %

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Other non-operating expense

Other expense (income), net 5.5 (2.0)

Other (income) expense, net (1.1) (3.0) 2.2 (2.5)

Interest expense 4.2 3.7 4.0 3.0

Total other non-operating expense*

3.1 0.7 6.2 0.5

Loss before income taxes*

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* Totals may not foot due to rounding.

Comparison of the Three Months Ended March 31, 2024 and 2023

Three Months Ended March 31,

Comparison of the Three Months Ended June 30, 2024 and 2023

Three Months Ended June 30,

2024 2023 $ Change % Change

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Total revenue $ 146,450 $ 127,715 $ 18,735 14.7 %

Total revenue increased $14.6 million, or 10.8%, in the three months ended March 31, 2024 compared to the same period in 2023 due to an increase in our subscriptions revenue of $18.7 million.

Total revenue increased $18.7 million, or 14.7%, in the three months ended June 30, 2024 compared to the same period in 2023 due to an increase in our subscriptions revenue of $19.2 million.

This increase was partially offset by a decrease in our professional services revenue of $0.4 million.

The increase in subscriptions revenue was driven by a $16.9 million increase in cloud subscription revenue, a $1.2 million increase in maintenance and support revenue, and a $0.6 million increase in on-premises subscription revenue.

With respect to new versus existing customers, there was a $5.9 million increase in subscriptions revenue stemming from sales of subscriptions to new customers, while the remaining $12.9 million of the increase was attributable to expanded deployments, price increases on renewals, and corresponding sales of additional subscriptions to existing customers.

The increase in subscriptions revenue was driven by a $14.0 million increase in cloud subscription revenue, a $4.2 million increase in on-premises subscription revenue, and a $1.0 million increase in maintenance and support revenue.

With respect to new versus existing customers, there was an $8.4 million increase in subscriptions revenue stemming from sales of subscriptions to new customers, while the remaining $10.7 million of the increase was attributable to expanded deployments, price increases on renewals, and corresponding sales of additional subscriptions to existing customers.

The decrease in

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Cost of Revenue

Three Months Ended March 31,

Three Months Ended June 30,

2024 2023 $ Change % Change

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Total gross margin 73.1 % 71.2 %

Cost of revenue increased $1.9 million, or 5.3%, in the three months ended March 31, 2024 compared to the same period in 2023, primarily due to a $1.6 million increase in hosting costs and a $0.8 million increase in professional services and product support personnel costs.

Cost of revenue increased $2.6 million, or 7.0%, in the three months ended June 30, 2024 compared to the same period in 2023, primarily due to a $2.2 million increase in hosting costs and a $0.8 million increase in professional services and product support personnel costs.

These increases were partially offset by a $0.7 million decrease in contractor costs.

Hosting costs increased due to an increase in sales of our cloud offering during the three months ended March 31, 2024.

Although cost of sales headcount was flat year over year, personnel costs increased due to increased wages from March 31, 2023 to March 31, 2024, which were partially offset by a $0.1 million decrease in stock-based compensation expense.

Hosting costs increased due to an increase in sales of our cloud offering during the three months ended June 30, 2024.

Although cost of sales headcount fell 3% year over year, personnel costs increased due to a $1.3 million increase in severance expense from June 30, 2023 to June 30, 2024.

Contractor costs decreased due to a decrease in the usage of subcontractors for professional services engagements.

Subscriptions gross margin increased to 89.6% for the three months ended March 31, 2024, compared to 89.4% in the same period in 2023.

The increase in subscriptions gross margin was attributable to an increase in subscriptions revenue during the three months ended March 31, 2024 as compared to the three months ended March 31, 2023, which was substantially offset by an increase in hosting costs.

Professional services gross margin decreased to 20.0% for the three months ended March 31, 2024 compared to 29.3% in the same period in 2023 due largely to a decrease in professional services revenue in the comparable periods coupled with a modest increase in professional services expenses.

Gross margin increased to 74.6% for the three months ended March 31, 2024 compared to 73.3% for the three months ended March 31, 2023, driven largely by the increase in subscriptions revenue and the improved subscriptions gross margin as compared to the prior year.

Subscriptions gross margin decreased slightly to 88.3% for the three months ended June 30, 2024, compared to 88.5% in the same period in 2023.

The decrease in subscriptions gross margin was attributable to an increase in hosting costs, which was substantially offset by an increase in subscriptions revenue during the three months ended June 30, 2024 as compared to the three months ended June 30, 2023.

Professional services gross margin decreased to 21.9% for the three months ended June 30, 2024 compared to 23.2% in the same period in 2023 due largely to an increase in professional services severance expense as described above coupled with a modest decrease in professional services revenue in the comparable period.

Gross margin increased to 73.1% for the three months ended June 30, 2024 compared to 71.2% for the three months ended June 30, 2023, driven largely by the increase in subscriptions revenue.

Sales and Marketing Expense

Three Months Ended March 31,

Three Months Ended June 30,

2024 2023 $ Change % Change

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% of revenue 45.5 % 49.0 %

Sales and marketing expense decreased $4.9 million, or 7.8%, in the three months ended March 31, 2024 compared to the same period in 2023, primarily due to a $6.7 million decrease in sales and marketing personnel costs.

This decrease was partially offset by a $0.8 million increase in marketing costs and a $0.7 million increase in travel expenses.

Sales and marketing personnel costs decreased due to a decrease in sales and marketing headcount of 7.3% from March 31, 2023 to March 31, 2024 in addition to a $2.9 million decrease in severance costs.

These personnel decreases were partially offset by a $0.5 million increase in commissions expense.

Marketing costs increased primarily due to spending on our annual internal sales and marketing event and increased spending on public relations and lead generation.

Sales and marketing expense increased $4.0 million, or 6.4%, in the three months ended June 30, 2024 compared to the same period in 2023, primarily due to a $2.8 million increase in marketing costs, a $0.8 million increase in sales and marketing personnel costs, and a $0.3 million increase in travel expenses.

Marketing costs increased primarily due to higher spending on our annual Appian World user conference and increases in advertising, public relations, and lead generation expenses.

Sales and marketing personnel costs increased primarily due to a $2.9 million increase in severance costs and a $0.2 million increase in commissions expense, both of which were partially offset by reductions in other personnel costs stemming from a decrease in sales and marketing headcount of 5% from June 30, 2023 to June 30, 2024.

Research and Development Expense

Three Months Ended March 31,

Three Months Ended June 30,

2024 2023 $ Change % Change

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% of revenue 26.9 % 31.1 %

Research and development expense decreased $1.9 million, or 4.5%, in the three months ended March 31, 2024 compared to the same period in 2023, primarily due to a $2.6 million decrease in research and development personnel costs and a $0.2 million decrease in professional fees.

These decreases were partially offset by a $0.9 million increase in overhead costs.

Although research and development personnel headcount increased 2.1% from March 31, 2023 to March 31, 2024, overall personnel costs decreased due to realized cost savings stemming from our product development center in India as well as a $0.6 million decrease in stock-based compensation expense.

Professional fees decreased due to a decline in consulting fees stemming from a lower usage of external resources to assist in our platform development efforts in the three months ended March 31, 2024 relative to the three months ended March 31, 2023.

Overhead costs increased primarily due to an increase in certain allocated costs tied to our growth, primarily related to cloud computing services, our new leased facility in India, and computer software costs.

Research and development expense decreased $0.3 million, or 0.7%, in the three months ended June 30, 2024 compared to the same period in 2023, primarily due to a $1.9 million decrease in research and development personnel costs, which was substantially offset by a $0.7 million increase in employee medical benefits and a $0.4 million increase in rent expense.

Although wages and salaries were higher due to research and development personnel headcount increasing 6% from June 30, 2023 to June 30, 2024, overall personnel costs decreased primarily due to lower bonus expense, a $0.8 million decrease in severance expense, and additional realized cost savings stemming from our product development center in India.

General and Administrative Expense

Three Months Ended March 31,

Three Months Ended June 30,

2024 2023 $ Change % Change

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% of revenue 27.4 % 22.9 %

General and administrative expense increased $3.8 million, or 12.6%, in the three months ended March 31, 2024 compared to the same period in 2023 primarily due to an increase of $4.5 million in amortization expense related to our judgment preservation insurance policy.

This increase was partially offset by a $0.7 million decrease in professional fees and a $0.4 million decrease in general and administrative personnel costs.

Professional fees decreased due to a $1.2 million decline in legal fees incurred relative to the three months ended March 31, 2023, which was partially offset by a $0.4 million increase in contract labor expense.

Personnel costs decreased due to a decrease in headcount of 10.7% from March 31, 2023 to March 31, 2024, which was partially offset by a $0.2 million increase in stock-based compensation expense.

General and administrative expense increased $11.0 million, or 37.6%, in the three months ended June 30, 2024 compared to the same period in 2023 primarily due to increases of $5.5 million from lease impairment charges, $4.5 million in amortization expense primarily related to our judgment preservation insurance policy, and $0.3 million in professional fees.

Other Non-Operating Income, Net

Three Months Ended June 30,

2024 2023 $ Change % Change

(dollars in thousands)

Other income, net

$ (1,545) $ (3,886) $ 2,341 (60.2) %

% of revenue (1.1) % (3.0) %

Other income, net was $1.5 million in the three months ended June 30, 2024 compared to other income, net of $3.9 million in the three months ended June 30, 2023.

This change was primarily due to $0.2 million in foreign exchange losses in the three months ended June 30, 2024 as compared to $1.2 million in foreign exchange gains in the three months ended June 30, 2023.

In addition, there was a $0.9 million decrease in interest income in the three months ended June 30, 2024 relative to the prior year.

Interest Expense

Three Months Ended June 30,

2024 2023 $ Change % Change

(dollars in thousands)

Interest expense $ 6,107 $ 4,755 $ 1,352 28.4 %

% of revenue 4.2 % 3.7 %

Interest expense increased by $1.4 million in the three months ended June 30, 2024 as compared to the corresponding period in 2023 primarily due to interest expense incurred on additional credit facility borrowings that we entered into during the first quarter of 2024 and the latter half of 2023.

Income Tax (Benefit) Expense

Three Months Ended June 30,

2024 2023 $ Change % Change

(dollars in thousands)

Income tax (benefit) expense

$ (164) $ 824 $ (988) ***

(0.1) % 0.6 %

*** Indicates a percentage that is not meaningful.

Income tax (benefit) expense decreased by $1.0 million in the three months ended June 30, 2024 as compared to the corresponding period in 2023.

This change was primarily driven by a discrete benefit in the three months ended June 30, 2024 related to net operating loss true-ups at one of our foreign subsidiaries.

Comparison of the Six Months Ended June 30, 2024 and 2023

Six Months Ended June 30,

2024 2023 $ Change % Change

(dollars in thousands)

Subscriptions $ 230,668 $ 192,751 $ 37,917 19.7 %

Professional services 65,617 70,199 (4,582) (6.5)

Total revenue $ 296,285 $ 262,950 $ 33,335 12.7 %

Total revenue increased $33.3 million, or 12.7%, in the six months ended June 30, 2024 compared to the same period in 2023 due to an increase in our subscriptions revenue of $37.9 million.

This increase was partially offset by a decrease in our professional services revenue of $4.6 million.

The increase in subscriptions revenue was driven by a $30.9 million increase in cloud subscription revenue, a $4.8 million increase in on-premises subscription revenue, and a $2.2 million increase in maintenance and support revenue.

With respect to new versus existing customers, there was a $13.3 million increase in subscriptions revenue stemming from sales of subscriptions to new customers, while the remaining $24.6 million of the increase was attributable to expanded deployments, price increases on renewals, and corresponding sales of additional subscriptions to existing customers.

The decrease in professional services revenue was due primarily to a $15.1 million decrease in revenue from existing customers, which was partially offset by a $10.5 million increase in sales to new customers.

Cost of Revenue

Six Months Ended June 30,

2024 2023 $ Change % Change

(dollars in thousands)

Cost of revenue

Subscriptions $ 25,532 $ 21,227 $ 4,305 20.3 %

Professional services 51,878 51,711 167 0.3

Total cost of revenue $ 77,410 $ 72,938 $ 4,472 6.1 %

Subscriptions gross margin 88.9 % 89.0 %

Professional services gross margin 20.9 % 26.3 %

Total gross margin 73.9 % 72.3 %

Cost of revenue increased $4.5 million, or 6.1%, in the six months ended June 30, 2024 compared to the same period in 2023, primarily due to a $3.8 million increase in hosting costs and a $1.7 million increase in professional services and product support personnel costs.

These increases were partially offset by a $1.2 million decrease in contractor costs.

Hosting costs increased due to an increase in sales of our cloud offering during the six months ended June 30, 2024.

Although cost of sales headcount fell 3% year over year, personnel costs increased due to a $1.2 million increase in severance expense from June 30, 2023 to June 30, 2024, which was partially offset by slightly lower wages and salaries expense.

Contractor costs decreased due to a decrease in the usage of subcontractors for professional services engagements.

Subscriptions gross margin decreased slightly to 88.9% for the six months ended June 30, 2024, compared to 89.0% in the same period in 2023.

The decrease in subscriptions gross margin was attributable to increased hosting costs, which were substantially offset by an increase in subscriptions revenue during the six months ended June 30, 2024 as compared to the six months ended June 30, 2023.

Professional services gross margin decreased to 20.9% for the six months ended June 30, 2024 compared to 26.3% in the same period in 2023 due largely to a decrease in professional services revenue in the comparable periods coupled with a modest increase in professional services expenses, driven by an increase in severance expense.

Gross margin increased to 73.9% for the six months ended June 30, 2024 compared to 72.3% for the six months ended June 30, 2023, driven largely by the increase in subscriptions revenue.

Sales and Marketing Expense

Six Months Ended June 30,

2024 2023 $ Change % Change

(dollars in thousands)

Sales and marketing $ 124,748 $ 125,671 $ (923) (0.7) %

% of revenue 42.1 % 47.8 %

Sales and marketing expense decreased $0.9 million, or 0.7%, in the six months ended June 30, 2024 compared to the same period in 2023, primarily due to a $5.8 million decrease in sales and marketing personnel costs.

This decrease was partially offset by a $3.6 million increase in marketing costs, a $1.0 million increase in travel expenses, and a $0.2 million increase in contractor costs.

Sales and marketing personnel costs decreased due to a decrease in sales and marketing headcount of 5% from June 30, 2023 to June 30, 2024 in addition to a $0.8 million decrease in severance costs, both of which were partially offset by a $0.7 million increase in commissions expense.

Marketing costs increased primarily due to spending on our annual Appian World conference and internal sales and marketing events as well as increased spending on public relations and lead generation.

Travel and entertainment expense increased due to a higher number of in-person events and engagements relative to the prior year.

Research and Development Expense

Six Months Ended June 30,

2024 2023 $ Change % Change

(dollars in thousands)

Research and development $ 79,217 $ 81,367 $ (2,150) (2.6) %

% of revenue 26.7 % 30.9 %

Research and development expense decreased $2.2 million, or 2.6%, in the six months ended June 30, 2024 compared to the same period in 2023, primarily due to a $4.5 million decrease in research and development personnel costs and a $0.2 million decrease in professional fees.

These decreases were partially offset by a $0.9 million increase in employee medical benefits and a $0.7 million increase in rent expense.

Although research and development personnel headcount increased 6% from June 30, 2023 to June 30, 2024, overall personnel costs decreased due to lower bonus expense, a $1.0 million decrease in severance expense, a $0.6 million decrease in stock-based compensation expense, and additional realized cost savings from our product development center in India.

Professional fees decreased due to a decline in consulting fees from lower usage of external resources to assist in our platform development efforts in the six months ended June 30, 2024 relative to the six months ended June 30, 2023.

General and Administrative Expense

Six Months Ended June 30,

2024 2023 $ Change % Change

(dollars in thousands)

General and administrative

$ 73,639 $ 58,902 $ 14,737 25.0 %

% of revenue 24.9 % 22.4 %

General and administrative expense increased $14.7 million, or 25.0%, in the six months ended June 30, 2024 compared to the same period in 2023 primarily due to increases of $9.0 million in amortization expense related to our judgment preservation insurance policy and $5.5 million in rent expense from lease impairment charges.

Other Non-Operating Expense (Income), Net

Three Months Ended March 31,

Six Months Ended June 30,

2024 2023 $ Change % Change

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$ 6,662 $ (6,576) $ 13,238 ***

% of revenue 5.5 % (2.0) %

2.2 % (2.5) %

*** Indicates a percentage that is not meaningful.

Other expense, net was $8.2 million in the three months ended March 31, 2024 compared to other income, net of $2.7 million in the three months ended March 31, 2023.

This change was primarily due to $11.5 million in foreign exchange losses in the three months ended March 31, 2024 as compared to $0.6 million in foreign exchange gains

in the three months ended March 31, 2023.

In addition, there was a $0.1 million decrease in interest income in the three months ended March 31, 2024 relative to the prior year.

Other expense, net was $6.7 million in the six months ended June 30, 2024 compared to other income, net of $6.6 million in the six months ended June 30, 2023.

This change was primarily due to $11.7 million in foreign exchange losses in the six months ended June 30, 2024 as compared to $1.9 million in foreign exchange gains in the six months ended June 30, 2023.

In addition, there was a $1.1 million decrease in interest income in the six months ended June 30, 2024 relative to the prior year.

These decreases were partially offset by a $1.4 million increase in other income attributable to a payment from a state government related to the achievement of certain capital investment goals.

Interest Expense

Three Months Ended March 31,

Six Months Ended June 30,

2024 2023 $ Change % Change

2 unchanged sentences

% of revenue 4.0 % 3.0 %

Interest expense increased by $2.5 million in the three months ended March 31, 2024 as compared to the corresponding period in 2023 primarily due to interest expense incurred on additional credit facility borrowings that we entered into during the three months ended March 31, 2024 and the latter half of 2023.

Interest expense increased by $3.9 million in the six months ended June 30, 2024 as compared to the corresponding period in 2023 primarily due to interest expense incurred on additional credit facility borrowings that we entered into during the first quarter of 2024 and the latter half of 2023.

Income Tax (Benefit) Expense

Three Months Ended March 31,

Six Months Ended June 30,

2024 2023 $ Change % Change

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*** Indicates a percentage that is not meaningful.

Income tax expense decreased by $1.6 million in the three months ended March 31, 2024 as compared to the corresponding period in 2023.

This change was primarily driven by the estimated annual effective tax rate applied to current period pre-tax book losses for certain of our international subsidiaries for the three months ended March 31, 2024 as compared to current period pre-tax book income for those same subsidiaries for the three months ended March 31, 2023.

Income tax expense decreased by $2.6 million in the six months ended June 30, 2024 as compared to the corresponding period in 2023 primarily due to lower pre-tax book income at our foreign subsidiaries as well as a discrete benefit in the six months ended June 30, 2024 related to net operating loss true-ups at one of our foreign subsidiaries.

Non-GAAP Financial Measures

To supplement our condensed consolidated financial statements, which are prepared and presented in accordance with GAAP, we provide investors with certain non-GAAP financial performance measures.

To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, we provide investors with certain non-GAAP financial performance measures.

We use these non-GAAP financial performance measures for financial and operational decision-making and as a means to evaluate period-to-period comparisons.

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non-GAAP subscriptions cost of revenue, non-GAAP professional services costs of revenue, non-GAAP total cost of revenue, non-GAAP total operating expense, non-GAAP operating loss, non-GAAP income tax (benefit) expense, non-GAAP net loss, and non-GAAP net loss per share, basic and diluted.

These non-GAAP financial performance measures exclude the effect of stock-based compensation expense, certain non-ordinary litigation-related expenses consisting of legal and other professional fees associated with the Pegasystems cases (net of insurance reimbursements), or Litigation Expense, amortization of the judgment preservation insurance policy, or JPI Amortization, and severance costs related to an involuntary reduction in our workforce in 2023, or Severance Costs.

While some of these items may be recurring in

nature and should not be disregarded in the evaluation of our earnings performance, it is useful to exclude such items when analyzing current results and trends compared to other periods as these items can vary significantly from period to period depending on specific underlying transactions or events that may occur.

While some of these items may be recurring in nature and should not be disregarded in the evaluation of our earnings performance, it is useful to exclude such items when analyzing current results and trends compared to other periods as these items can vary significantly from period to period depending on specific underlying transactions or events that may occur.

Therefore, while we may incur or recognize these types of expenses in the future, we believe removing these items for purposes of calculating our non-GAAP financial measures provides investors with a more focused presentation of our ongoing operating performance.

We also discuss adjusted EBITDA, a non-GAAP financial performance measure we believe offers a useful view of the overall operation of our business.

We define adjusted EBITDA as net loss before (1) other expense (income), net, (2) interest expense, (3) income tax (benefit) expense, (4) depreciation expense and amortization of intangible assets, (5) stock-based compensation expense, (6) Litigation Expense, (7) JPI Amortization, and (8) Severance Costs.

The most directly comparable GAAP financial measure to adjusted EBITDA is net loss.

Users should consider the limitations of using adjusted EBITDA, including the fact this measure does not provide a complete measure of our operating performance.

Users should consider the limitations of using adjusted EBITDA, including the fact that this measure does not provide a complete measure of our operating performance.

Adjusted EBITDA is not intended to purport to be an alternative to net loss as a measure of operating performance or to cash flows from operating activities as a measure of liquidity.

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The following tables reconcile our non-GAAP measures to their nearest comparable GAAP measures (in thousands, except per share data):

GAAP Measure Stock-Based Compensation Litigation Expense

JPI Amortization Non-GAAP Measure

Three Months Ended March 31, 2024

GAAP Measure Stock-Based Compensation Litigation Expense JPI Amortization Severance Costs Lease Impairment Charges

Non-GAAP Measure

Three Months Ended June 30, 2024

Subscriptions cost of revenue $ 13,262 $ (217) $ — $ — $ — $ — $ 13,045

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Income tax (benefit) expense (164) 537 — — 1,096 — 1,469

(465) 604 — — 139

Net loss (43,592) 9,363 721 4,504 4,438 5,462 (19,104)

Net loss per share, basic and diluted $ (0.60) $ 0.13 $ 0.01 $ 0.06 $ 0.06 $ 0.08 $ (0.26)

Six Months Ended June 30, 2024

Subscriptions cost of revenue $ 25,532 $ (430) $ — $ — $ — $ — $ 25,102

Professional services cost of revenue 51,878 (3,039) — — (1,398) — 47,441

Total cost of revenue 77,410 (3,469) — — (1,398) — 72,543

Total operating expense 277,604 (17,037) (1,463) (9,008) (4,136) (5,462) 240,498

Operating loss (58,729) 20,506 1,463 9,008 5,534 5,462 (16,756)

Income tax (benefit) expense

(629) 1,141 — — 1,096 — 1,608

Net loss (76,515) 19,365 1,463 9,008 4,438 5,462 (36,779)

Net loss per share, basic and diluted (a)

$ (1.05) $ 0.27 $ 0.02 $ 0.12 $ 0.06 $ 0.08 $ (0.51)

(a) Per share amounts do not foot due to rounding.

GAAP Measure Stock-Based Compensation Litigation Expense

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Non-GAAP Measure

Three Months Ended March 31, 2023

Three Months Ended June 30, 2023

Subscriptions cost of revenue $ 10,779 $ (230) $ — $ (19) $ 10,530

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Operating loss (40,662) 11,148 347 2,095 (27,072)

Income tax expense

824 221 7 42 1,094

Net loss (42,355) 11,369 354 2,137 (28,495)

Net loss per share, basic and diluted $ (0.58) $ 0.16 $ — $ 0.03 $ (0.39)

The following table reconciles GAAP net loss to adjusted EBITDA for the three months ended March 31, 2024 and 2023 (in thousands):

Three Months Ended March 31,

Six Months Ended June 30, 2023

Subscriptions cost of revenue $ 21,227 $ (502) $ — $ (30) $ 20,695

Professional services cost of revenue 51,711 (3,063) — (158) 48,490

Total cost of revenue 72,938 (3,565) — (188) 69,185

Total operating expense 265,940 (18,639) (2,189) (6,111) 239,001

Operating loss (75,928) 22,204 2,189 6,299 (45,236)

Income tax expense

1,959 563 56 160 2,738

Net loss (79,184) 22,767 2,245 6,459 (47,713)

Net loss per share, basic and diluted (a)

$ (1.09) $ 0.31 $ 0.03 $ 0.09 $ (0.65)

(a) Per share amounts do not foot due to rounding.

The following table reconciles GAAP net loss to adjusted EBITDA for the three and six months ended June 30, 2024 and 2023 (in thousands):

Three Months Ended June 30, Six Months Ended June 30,

2024 2023 2024 2023

GAAP net loss $ (43,592) $ (42,355) $ (76,515) $ (79,184)

Other expense (income), net 8,207 (2,690)

Other (income) expense, net

(1,545) (3,886) 6,662 (6,576)

Interest expense 6,107 4,755 11,753 7,873

Income tax (benefit) expense

(164) 824 (629) 1,959

Depreciation expense and amortization of intangible assets

2,580 2,364 4,941 4,705

Stock-based compensation expense 9,900 11,148 20,506 22,204

Litigation Expense

721 347 1,463 2,189

JPI Amortization

4,504 — 9,008 —

Severance Costs

5,534 2,095 5,534 6,299

Lease Impairment Charges

5,462 — 5,462 —

Adjusted EBITDA $ (10,493) $ (24,708) $ (11,815) $ (40,531)

Liquidity and Capital Resources

The following table presents selected financial information and statistics pertaining to liquidity and capital resources as of March 31, 2024 and December 31, 2023:

March 31, 2024 December 31, 2023

The following table presents selected financial information and statistics pertaining to liquidity and capital resources as of June 30, 2024 and December 31, 2023:

June 30, 2024 December 31, 2023

Cash and cash equivalents $ 120,787 $ 149,351

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We have historically financed our operations in large part with equity financing arrangements.

Our last public offering was completed in June 2020, which was our fourth round of public offerings.

Our last public offering was completed in June 2020.

Through these public offerings, we received net proceeds of $344.8 million.

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The Credit Agreement matures on November 3, 2027.

We will use the proceeds from the term loan to fund the continued growth of our business and support our working capital requirements.

We were in compliance with all covenants as of March 31, 2024.

As of March 31, 2024, we had used borrowing capacity of $62.0 million under our $100.0 million revolving credit facility, and we had outstanding letters of credit totaling $11.8 million in connection with securing our leased office space.

We have been using the proceeds to fund the growth of our business and support our working capital requirements.

As of June 30, 2024, we were in compliance with all covenants, had used borrowing capacity of $62.0 million under our $100.0 million revolving credit facility, and had outstanding letters of credit totaling $14.5 million in connection with securing our leased office space.

We expect future sources of funds to consist primarily of cash generated from sales of subscriptions and the related professional services.

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However, as we continue to invest in growing our business, operating expenses have also increased.

In 2023, we entered into a Judgment Preservation Insurance (“JPI”) policy in connection with our $2.036 billion judgment against Pegasystems.

See Note 12 to the condensed consolidated financial statements for additional details.

In 2023, we entered into a Judgment Preservation Insurance policy in connection with our $2.036 billion judgment against Pegasystems.

See Note 12 to the consolidated financial statements for additional details.

The total cost of the policy was $57.3 million, which we paid with operating cash on hand.

In addition, in February 2024 our Board of Directors authorized a share repurchase program, under which we repurchased approximately $50.0 million worth of our common stock during the three months ended March 31, 2024.

Outside of the above items and cash used by operations, other uses of cash in 2024 to date have included capital expenditures related to the expansion of the new leased facility for our research development center in India and principal repayments of our term loan debt.

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Specifically, purchase commitments under the agreement total $131.0 million over five years.

The agreement, which started in July 2021 and is now in its third year as of March 31, 2024, contains minimum spending requirements of $28.0 million in each of the third, fourth, and fifth years.

Spending under this agreement for the three months ended March 31, 2024 and 2023, totaled $10.3 million and $9.4 million, respectively.

The agreement, which started in July 2021 and is now in its third year as of June 30, 2024, contains minimum spending requirements of $28.0 million in each of the third, fourth, and fifth years.

Spending under this agreement for the three and six months ended June 30, 2024, totaled $10.7 million and $21.0 million, respectively.

Spending under this agreement for the three and six months ended June 30, 2023, totaled $9.1 million and $18.5 million, respectively.

The timing of payments under the agreement may vary, and the total amount of payments may exceed the minimum depending on the volume of services utilized.

Historical Cash Flows

Three Months Ended March 31,

Six Months Ended June 30,

2024 2023 $ Change % Change

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Changes in working capital 34,509 14,949 19,560 ***

Net cash provided by (used in) operating activities 18,866 (25,265) 44,131 ***

Net cash provided by (used by) operating activities 1,251 (37,202) 38,453 ***

Investing activities:

Net cash provided by (used in) investing activities

Net cash (used by) provided by investing activities

(21,629) (25,372) 3,743 (14.8)

Financing activities:

Net cash (used in) provided by financing activities (4,249) 88,144 (92,393) ***

Net cash (used by) provided by financing activities (6,695) 85,686 (92,381) ***

Effect of exchange rates (1,491) 309 (1,800) ***

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Operating Activities

Net cash provided by operating activities was $18.9 million for the three months ended March 31, 2024 as compared to $25.3 million used in operating activities for the three months ended March 31, 2023.

The increase in net cash provided by operating activities was due to stronger collections from accounts receivable and a decline in legal fees and other operating expenses across the three months ended March 31, 2024 as compared to the three months ended March 31, 2023.

Net cash provided by operating activities was $1.3 million for the six months ended June 30, 2024 as compared to $37.2 million used by operating activities for the six months ended June 30, 2023.

The increase in net cash provided by operating activities was due to stronger collections from accounts receivable and a decline in legal fees and other operating expenses during the six months ended June 30, 2024 as compared to the six months ended June 30, 2023.

Investing Activities

Net cash provided by investing activities was $7.5 million for the three months ended March 31, 2024 as compared to $12.3 million in net cash used in investing activities for the three months ended March 31, 2023.

Net cash used by investing activities was $21.6 million for the six months ended June 30, 2024 as compared to $25.4 million in net cash used by investing activities for the six months ended June 30, 2023.

This change was primarily driven by a $25.1 million decrease in purchases of investments, partially offset by a decline of $26.2 million in proceeds from the sale of investments and a $4.9 million decrease in capital expenditures.

Financing Activities

Net cash used in financing activities was $4.2 million for the three months ended March 31, 2024 as compared to $88.1 million of net cash provided by financing activities for the three months ended March 31, 2023.

The decrease in net cash provided by financing activities was primarily due to a $50.0 million increase in common stock repurchases, a $42.0 million decrease in proceeds from borrowings, and a $0.5 million increase in debt repayments during the three months ended March 31, 2024.

Net cash used by financing activities was $6.7 million for the six months ended June 30, 2024 as compared to $85.7 million of net cash provided by financing activities for the six months ended June 30, 2023.

The decrease in net cash provided by financing activities was primarily due to a $50.0 million increase in common stock repurchases, a $42.0 million decrease in proceeds from borrowings, a $0.8 million increase in debt repayments, and a $0.6 million decrease in payments for employee taxes related to the net share settlement of equity awards during the six months ended June 30, 2024.

Critical Accounting Estimates

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Recent Accounting Pronouncements

See Note 2 to the unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for a discussion of recent accounting pronouncements.

See Note 2 to the unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for a discussion of recent accounting pronouncements.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis