What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-02-23 compared with 2022-02-23 · 136 added, 123 removed, 365 unchanged (42% of the section changed)

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Our mission is to make it fast and easy for businesses to delight their customers and employees.

We provide businesses of all sizes with modern SaaS products that are designed with the user in mind.

We provide businesses of all sizes with modern SaaS products that are designed with the end-user in mind.

Our primary product offerings include Freshdesk, our customer experience (CX) product;

Freshservice, our IT service management (ITSM) product;

and our customer relationship management (CRM) solution, which includes sales force and marketing automation.

and our customer relationship management (CRM) solutions, which include Freshsales and Freshmarketer for sales and marketing automation.

We currently have more than 63,400 businesses using our software to delight their customers and employees.

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Professional services revenue is recognized as services are performed.

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Our business has grown rapidly in recent periods as our customer base and operations have scaled.

Our customer base and operations have scaled over time.

Our total revenue was $498.0 million, $371.0 million and $249.7 million in the years ended December 31, 2022, 2021 and 2020, respectively, representing year-over-year growth rates of 34% and 49%, respectively.

We incurred operating losses of $233.4 million, $204.8 million and $56.1 million in the years ended December 31, 2022, 2021 and 2020, respectively, and our net losses were $232.1 million, $192.0 million and $57.3 million in the years ended December 31, 2022, 2021 and 2020, respectively.

Initial Public Offering

In September 2021, we completed our IPO, in which we issued and sold 31,350,000 shares of our newly authorized Class A common stock at $36.00 per share, which included 2,850,000 shares issued upon the exercise of the underwriters’ option to purchase additional shares.

We received net proceeds of approximately $1.1 billion from our IPO, after deducting underwriters’ discounts.

Pursuant to our amended and restated certificate of incorporation in effect prior to our IPO, all shares of common stock then outstanding were reclassified as Class B common stock prior to our IPO.

Upon completion of our IPO, the majority of shares of Class B common stock then outstanding was automatically converted into Class A common stock on a one-to-one basis, unless an option to remain as Class B common stock was elected by the holder.

In addition, all shares of redeemable convertible preferred stock then outstanding were converted into 153,937,730 shares of common stock on a one-to-one basis and then reclassified into Class B common stock.

Impact of COVID-19

In response to the COVID-19 pandemic, we undertook decisive and comprehensive actions to lessen the impact of the pandemic on our business, including implementing a fully remote, work from home policy across all our global offices, enacting new policies and operating procedures, including restrictions on Freshworks-related business travel and reductions of in-person events.

Our customers were impacted by the pandemic throughout 2020, as conditions caused by the pandemic adversely affected spending by new customers and renewal and retention rates of existing customers.

In 2020 we also experienced, and continued to experience through the year ended December 31, 2021, certain positive impacts on other aspects of our business.

We believe that the pandemic has caused many of our customers and potential customers to accelerate their IT and digital investments benefiting businesses, like ours, that enable and enhance digital transformations.

In addition, we have seen a temporary reduction in certain operating expenses related to reduced business travel, deferred hiring in certain areas, and the virtualization or postponement of in-person customer and employee events, in all periods presented.

Given our subscription-based business model, the effects of the COVID-19 pandemic may not be fully reflected in our revenue until future periods.

The extent of the impact of COVID-19 on our future operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, related public health measures, and their impact on the macroeconomy, our current and prospective customers, employees, and vendors.

The ultimate impact of the COVID-19 pandemic on our business and operations remains highly uncertain, and it is not possible for us to predict the duration and extent to which this will affect our business, including productivity of our employees in the United States and in India, where we have significant operations, future results of operations, and financial condition at this time.

See the section titled “Risk Factors” for further discussion of the challenges and risks we have encountered and could encounter related to the COVID-19 pandemic.

Macroeconomic and Other Factors

Current macroeconomic uncertainties, including inflationary pressures, significant volatility in global markets, geopolitical developments, and the ongoing impacts of the COVID-19 pandemic have impacted and may continue to impact business spending and the overall economy, and in turn our business.

These macroeconomic events could adversely affect demand for our products and services.

Additionally, foreign currency exchange rate fluctuations have negatively impacted our revenue growth in 2022.

Recently, the U.S.

dollar has strengthened significantly against certain foreign currencies in the markets in which we operate, particularly against the Euro and British Pound Sterling.

For the year ended December 31, 2022, we had approximately 26% of revenue exposure related to the Euro and British Pound Sterling.

If these conditions persist, they could have a material adverse impact on our results and our ability to accurately predict our future results and earnings.

Given our subscription-based business model, the effects of the macroeconomic conditions may not be fully reflected in our revenue until future periods.

The ultimate impact on our business and operations remains highly uncertain, and it is not possible for us to predict the duration and extent to which this will affect our business, productivity of our employees, future results of operations, and financial condition.

See the section titled “Risk Factors” for further discussion of the challenges and risks we have encountered and could encounter related to these macroeconomic events.

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Key Factors Affecting Our Performance

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As of December 31, 2022 and 2021, we had more than 63,400 and 56,000 paying customers, respectively.

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Recently, we have made significant investments in strengthening our outbound sales motion to enable adoption of department-specific and organization-wide use cases for mid-market and enterprise customers .

We have made and continue to make significant investments in strengthening our outbound sales motion to enable adoption of department-specific and organization-wide use cases for mid-market and enterprise customers.

We believe that larger businesses can benefit from implementing multiple Freshworks products, as once they are a customer they are able to expand their use of these products.

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As of December 31, 2021 and 2020, 14,814 and 11,570 of our customers contributed more than $5,000 in ARR, respectively, demonstrating the broad appeal of our products to customers of all sizes and geographies.

As of December 31, 2022 and 2021, 17,722 and 14,814 of our customers contributed more than $5,000 in ARR, respectively, demonstrating the broad appeal of our products to customers of all sizes and geographies, and as of December 31, 2022 and 2021, customers contributing more than $5,000 in ARR represented 87% and 85% of total ARR, respectively.

We believe that the number of customers that contribute more than $5,000 in ARR is an indicator of our success in expanding upmarket to larger businesses.

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We had 1,908 customers each contributing $50,000 or more in ARR as of December 31, 2022, representing an increase of 35% year-over-year from 1,416 customers as of December 31, 2021.

As of December 31, 2021 and 2020, customers contributing more than $50,000 in ARR represented approximately 41% and 34% of total ARR, respectively.

As of December 31, 2022 and December 31, 2021, customers contributing more than $50,000 in ARR represented approximately 44% and 41% of total ARR, respectively.

We believe that the number of customers contributing $50,000 or more in ARR indicates the strategic importance of our products for our customers and our ability to both initially land significant accounts or grow customers into significant accounts over time.

No single customer accounted for more than 1% of ARR and our top 10 customers represented less than 5% of ARR as of December 31, 2021, and we have no significant concentration in a specific industry vertical or geography.

No single customer

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accounted for more than 1% of ARR and our top 10 customers represented less than 5% of ARR as of December 31, 2022, and we have no significant concentration in a specific industry vertical.

Investing in Our Growth

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We have a significant opportunity to further expand globally.

We plan to support more languages, recruit partners, hire sales and customer experience personnel in additional countries as needed, and

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expand our presence in countries where we already operate.

We plan to support more languages, recruit partners, hire sales and customer experience personnel in additional countries as needed, and expand our presence in countries where we already operate.

A critical part of our go-to-market strategy has been our broad and diverse set of partners that enrich our offerings, scale our geographic coverage, and help us reach a broader audience than we would be able to reach on our own, thus amplifying our go-to-market investments.

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

Key business metrics and our financial performance are impacted by various factors discussed below, including fluctuations in the value of foreign currencies relative to the U.S.

We also review customer data used for calculating these key business metrics on an ongoing basis and make the necessary modifications resulting from such review.

We believe these key business metrics provide meaningful supplemental information for management and investors in assessing our operating performance.

2021 2020 % Growth

Number of customers contributing more than $5,000 in annual recurring revenue 14,814 11,570 28 %

2022 2021 2020

Number of customers contributing more than $5,000 in ARR 17,722 14,814 11,570

ARR from customers contributing more than $5,000 in ARR as a percent of total ARR 87 % 85 % 82 %

Net dollar retention rate 108 % 114 % 111 %

Number of Customers Contributing More Than $5,000 in ARR

We define our total customers contributing more than $5,000 in ARR as of a particular date as the number of business entities or individuals, represented by a unique domain or a unique email address, with one or more paid subscriptions to one or more of our products that contributed more than $5,000 in ARR.

We define our total customers contributing more than $5,000 in annual recurring revenue (ARR) as of a particular date as the number of business entities or individuals, represented by a unique domain or a unique email address, with one or more paid subscriptions to one or more of our products that contributed more than $5,000 in ARR.

We believe that the number of customers that contribute more than $5,000 in ARR is an indicator of our success in attracting, retaining, and expanding with larger businesses.

Net Dollar Retention Rate

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Ending ARR includes upsells, cross-sells, and renewals during the measurement period and is net of any contraction or attrition over this period.

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For monthly subscriptions, we take the recurring revenue run-rate of such subscriptions for the last month of the period and multiply it by 12 to get to ARR.

While monthly subscribers as a group have historically maintained or increased their subscriptions over time, there is no guarantee that any particular customer on a monthly subscription will renew its subscription in any given month, and therefore the calculation of ARR for these monthly subscriptions may not accurately reflect revenue to be received over a 12-month period from such customers, and net dollar retention rate may reflect a higher rate than the actual rate if customers on monthly subscriptions choose not to renew during the course of the 12 months.

Monthly subscriptions represented 20%, 24%, and 28% of ARR as of December 31, 2022, 2021 and 2020 respectively.

The net dollar retention rate for customers on monthly contracts has generally been lower than our overall net dollar retention rate.

In addition, as part of our regular review of customer data that includes reviewing customers purchasing our products via resellers so we can properly attribute them as end customers, we may make adjustments that could impact the calculation of net dollar retention.

We expect our net dollar retention rate could fluctuate in future periods due to a number of factors, including our expected growth, the level of penetration within our customer base, our ability to upsell and cross-sell products to existing customers, and our ability to retain our customers.

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As a result, our non-GAAP financial measures are presented for supplemental informational purposes only.

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We exclude the following items from one or more of our non-GAAP financial measures, including the related income tax effect of these adjustments:

• Stock-based compensation expense.

We exclude stock-based compensation, which is a non-cash expense, from certain of our non-GAAP financial measures because we believe that excluding this expense provides meaningful supplemental information regarding operational performance.

In particular, stock-based compensation expense is not comparable across companies given the variety of valuation methodologies and assumptions.

We exclude stock-based compensation expense, which is a non-cash expense, from certain of our non-GAAP financial measures because we believe that excluding this expense provides meaningful supplemental information regarding operational performance.

In particular, stock-based compensation expense is not comparable across companies due to the variety of valuation methodologies and assumptions.

• Employer payroll taxes on employee stock transactions.

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We exclude gains on the sale of non-marketable equity investments from certain of our non-GAAP financial measures because we believe they are unrelated to our ongoing operating performance and are not expected to recur in our continuing operating results.

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Non-GAAP Loss From Operations and Non-GAAP Net Loss

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Non-GAAP loss from operations $ (22,258) $ (18,256) $ (8,260)

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Non-GAAP Net Loss

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Free Cash Flow

We define free cash flow as net cash provided by (used in) operating activities, less purchases of property and equipment and capitalized internal-use software.

We define free cash flow as net cash provided by (used in) operating activities, less purchases of property and equipment and capitalized internal-use software costs.

We believe that free cash flow is a useful indicator of liquidity as it measures our ability to generate cash from our core operations after purchases of property and equipment.

Free cash flow is a measure to determine, among other things, cash available for strategic initiatives, including further investments in our business and potential acquisitions of businesses.

The following table presents a reconciliation of free cash flow to net cash provided by (used in) operating activities, the most directly comparable measure calculated in accordance with GAAP for each of the periods presented:

Free cash flow is a measure to determine, among other things, cash available for further investments in our business and potential acquisitions of businesses.

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Year Ended December 31,

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Components of Our Results of Operations

Substantially all of our revenue is derived from subscriptions, which comprises fees paid by customers for accessing our cloud-based software products during the term of the subscription.

Substantially all of our revenue is derived from subscriptions, which is comprised of fees paid by customers for accessing our cloud-based software products during the term of the subscription.

Subscription revenue is recognized ratably over the contract term beginning on the commencement date of each subscription, which is the date that the cloud-based software is made available to customers.

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Cost of revenue consists primarily of personnel-related expenses (including salaries, related benefits, and stock-based compensation expense) for employees associated with our cloud-based infrastructure, payment gateway fees, voice, product support, and professional services organizations, as well as costs for hosting capabilities.

Cost of revenue also includes third-

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party license fees, amortization of acquired technology intangibles, amortization of capitalized internal-use software, and allocation of general overhead costs such as facilities and information technology.

Cost of revenue also includes third-party license fees, amortization of acquired technology intangibles, amortization of capitalized internal-use software, and allocation of general overhead costs such as facilities and information technology.

We expect our cost of revenue to continue to increase in dollar amount as we invest additional resources in our cloud-based infrastructure and customer support and professional services organizations.

However, our gross profit and gross margin may fluctuate from period to period and due to the timing and extent of our investments in third-party hosting capacity, expansion of our cloud-based infrastructure, and customer support, and professional services organizations, as well as the amortization of costs associated with capitalized internal-use software.

However, our gross profit and gross margin may fluctuate from period to period due to the timing and extent of our investments in third-party hosting capacity, expansion of our cloud-based infrastructure, and customer support, and professional services organizations, as well as the amortization of costs associated with capitalized internal-use software.

Overhead Allocation

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All other research and development costs are expensed as incurred.

We believe that continued investment in our products is important for our growth, and as such, we expect that our research and development expenses will continue to increase in dollar amount while varying as a percentage of revenue in the future.

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We believe that continued investment in our products is important for our growth, and as such, we expect that our research and development expenses will continue to increase in dollar amount for the foreseeable future, however, we expect it to decline as a percentage of revenue over the longer term.

This percentage may fluctuate from period to period depending upon the timing and amount of these expenses.

Sales and Marketing.

Sales and marketing expense consists primarily of personnel-related costs, including salaries, related benefits, and stock-based compensation expense for our sales personnel, sales commissions for our sales force and reseller commissions for our channel sales partners, as well as costs associated with marketing activities, travel and entertainment costs, software license fees, and rental of office premises.

Sales commissions that are considered incremental costs incurred to obtain contracts with customers, are deferred and amortized over the expected benefit period of three years.

Sales commissions are considered incremental costs incurred to obtain contracts with customers, and these costs are deferred and amortized over the expected benefit period of three years.

Marketing activities include online lead generation, advertising, and promotional events.

We expect to continue to make significant investments as we expand our customer acquisition and retention efforts and return to in-person marketing events and normal business travel as the impact of COVID-19 subsides.

As a result, we expect that our sales and marketing expenses will continue to increase in dollar amount while varying as a percentage of revenue in the future.

We expect to continue to make significant investments as we expand our customer acquisition, retention efforts and in-person marketing events and associated business travel.

As a result, we expect that our sales and marketing expenses will continue to increase in dollar amount for the foreseeable future, however, we expect it to decline as a percentage of revenue over the longer term.

This percentage may fluctuate from period to period depending upon the timing and amount of these expenses.

General and Administrative.

General and administrative expense consists primarily of personnel-related costs, including salaries, related benefits, and stock-based compensation expense for general and administrative personnel, third-party professional services fees, including consulting, legal, audit, and accounting services, travel and entertainment costs, accounting, legal, human resources, and recruiting personnel, costs associated with acquisitions of businesses, software license fees, and rental of office premises.

As a publicly traded company, we expect increases in expenses associated with ongoing compliance and reporting obligations pursuant to the rules and regulations of the SEC, professional services fees and consulting expenses, costs to broaden our IT related infrastructure, as well as additional costs for accounting, insurance, and investor relations.

General and administrative expense consists primarily of personnel-related costs, including salaries, related benefits, and stock-based compensation expense for certain executives and other general and administrative personnel, third-party professional services fees;

including consulting, legal, audit, and accounting services, travel and entertainment costs, accounting, legal, human resources, and recruiting personnel, costs of director and officer insurance, costs associated with acquisitions of businesses, software license fees, and rental of office premises.

As a publicly traded company, we expect to increase personnel-related and professional service expenses associated with ongoing compliance and reporting obligations and costs to broaden our IT related infrastructure.

Our general and administrative expenses are expected to continue to increase in dollar amount for the foreseeable future, however, we expect it to decline as a percentage of revenue over the longer term.

This percentage may fluctuate from period to period depending upon the timing and amount of our general and administrative expenses.

Interest and Other Income, Net

Interest and Other (expense) Income, Net

Interest and other income, net primarily consists of interest income from our investment portfolios, amortization of premium or discount on marketable securities, and foreign currency gains and losses.

Provision for Income Taxes

Provision for income taxes consists primarily of income taxes related to U.S.

Provision for (Benefit from) Income Taxes

Provision for (benefit from) income taxes consists primarily of income taxes related to U.S.

states and foreign jurisdictions in which we conduct business.

We maintain a full valuation allowance on our U.S.

federal and state net deferred tax assets as we have

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concluded that it is not more likely than not that the deferred tax assets will be realized.

federal and state net deferred tax assets as we have concluded that it is not more likely than not that the deferred tax assets will be realized.

Our effective tax rate is affected by tax rates in foreign jurisdictions and the relative amounts of income we earn in those jurisdictions, as well as non-deductible expenses, such as stock-based compensation, and changes in our valuation allowance.

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Results of Operations

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Recognition of Stock-Based Compensation

Prior to the IPO, there was no stock-based compensation expense recognized from our equity awards as the liquidity event-related performance condition was not probable.

Prior to our initial public offering (IPO), there was no stock-based compensation expense recognized from our equity awards as the liquidity event-related performance condition was not probable.

The performance condition was satisfied upon the completion of the IPO in September 2021, and we began to recognize stock-based compensation expense.

During the year ended December 31, 2021, stock-based compensation expense recognized included a cumulative charge associated with certain restricted stock units (RSUs) for which the service-based vesting condition had been satisfied upon the completion of the liquidity event.

During the year ended December 31, 2020, as described in Notes 10 and 11 to our consolidated financial statements included elsewhere in this report, we facilitated certain secondary equity transactions from which we recognized stock-based compensation expense for shares that were repurchased at excess value.

We refer to these secondary transactions together as the "2020 Equity Transactions."

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During the year ended December 31, 2021, stock-based compensation expense recognized included a cumulative charge associated with certain RSUs for which the service-based vesting condition had been satisfied upon the completion of the liquidity event.

During the year ended December 31, 2020, as described in Note 10 to our consolidated financial statements included elsewhere in this report, we facilitated certain secondary equity transactions from which we recognized stock-based compensation expense for shares that were repurchased at excess value.

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The following table sets forth our consolidated statements of operations data for the periods presented, as a percentage of revenue:

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(dollars in thousands)

Revenue $ 371,022 $ 249,659 $ 121,363 49 %

Subscription services $ 485,322 $ 360,506 $ 124,816 35 %

Professional services $ 12,677 $ 10,516 $ 2,161 21 %

Total revenue $ 497,999 $ 371,022 $ 126,977 34 %

Revenue increased by $127.0 million, or 34%, for the year ended December 31, 2022 compared to the year ended December 31, 2021.

The total increase in revenue was primarily driven by increases in additional agents enabled by our customers under their account and sales of products to existing customers, as well as the addition of new customers.

Of the total increase in revenue, approximately $94.9 million was attributable to revenue from existing customers as of December 31, 2021, net of contraction and churn, and approximately $32.1 million was attributable to revenue from new customers acquired during the year ended December 31, 2022, net of contraction and churn.

Our net dollar retention rate of 108% for the year ended December 31, 2022 reflects the expansion within existing customers and the sale of additional products to these customers.

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Cost of revenue increased by $17.7 million, or 23%, for the year ended December 31, 2022 compared to the year ended December 31, 2021.

This increase was primarily due to increases of $5.6 million in stock-based compensation expense, $6.9 million in third-party hosting costs, $5.7 million in personnel-related costs due to annual compensation adjustments and higher headcount, $1.5 million in cloud voice service costs, $1.9 million in software license fees, $1.6 million increase in professional fees including legal costs, $1.4 million in payment gateway fees, and approximately $1.1 million in amortization of capitalized internal use software.

Our gross margin remained consistent at 79% for the years ended December 31, 2021 and 2020.

We expect our cost of revenue to continue to increase in dollar amount as we invest additional resources in our cloud-based infrastructure and customer experience and professional services organizations.

However, our gross profit and gross margin may fluctuate from period to period as our revenue grows and the timing and extent of our investments in third-party hosting capacity, expansion of our cloud-based infrastructure, customer experience and professional services organizations.

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This increase was primarily due to increases of $8.5 million in third-party hosting costs, $5.3 million in personnel-related costs due to annual compensation adjustments and higher headcount, $3.8 million in software license fees, $1.4 million in stock-based compensation expense, $1.1 million increase in professional fees including legal costs, and $1.0 million in payment gateway fees, partially offset by $2.7 million decrease in amortization of developed technology and a decrease of $2.0 million in cloud voice service costs.

Our gross margin increased to 81% from 79% as we increased revenue and realized benefits from economies of scale primarily related to our third party hosting costs.

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Operating Expenses

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General and administrative 156,849 117,022 39,827 34 %

Total opening expenses $ 497,774 $ 253,279 $ 244,495

The increases in our operating expenses in the year ended December 31, 2021 compared to the year ended December 31, 2020 were headcount driven to support the growth of our business, as well as cumulative stock-based compensation recognized in connection with the IPO.

Total operating expenses $ 635,599 $ 497,774 $ 137,825

The increases in our operating expenses in the year ended December 31, 2022 compared to the year ended December 31, 2021 were primarily driven by personnel-related costs due to higher headcount to support the growth of our business, compensation adjustments and changes in stock-based compensation expense.

Research and Development

Research and development expense increased by $15.1 million, or 13%, for the year ended December 31, 2022 compared to the year ended December 31, 2021.

This increase was primarily due to increases of $29.3 million in stock-based compensation expense (which reflects the increase related to the cumulative stock-based compensation expense in connection with our IPO, net of the absence in the current period of stock-based compensation expense of $15.9 million recognized in connection with the 2020 Equity Transactions as described above), $20.2 million in personnel-related costs due to annual compensation adjustments and higher headcount, and $1.3 million in software license fees.

This increase was primarily due to increases of $18.9 million in personnel-related costs due to compensation adjustments and higher headcount, $2.3 million in professional services fees and $1.2 million in third party cloud infrastructure expenses to support the operations of our research and development, partially offset by a decrease of $8.7 million in stock-based compensation expense.

Sales and Marketing

Sales and marketing expense increased by $82.9 million, or 32%, for the year ended December 31, 2022 compared to the year ended December 31, 2021.

This increase was primarily due to increases of $53.2 million in stock-based compensation expense, $41.9 million in personnel-related costs due to annual compensation adjustments and higher headcount, $22.8 million in higher advertising, branding and event costs, $5.3 million in reseller commissions, and $4.3 million in software license fees.

This increase was primarily due to increases of $48.5 million in personnel-related costs due to compensation adjustments and higher headcount, $11.2 million in stock-based compensation expense, $5.5 million in travel related expenses for sales and marketing events, $4.8 million in higher advertising, branding and event costs, $4.0 million in reseller commissions, $3.8 million in software license fees and $2.9 million in professional services fees.

General and Administrative

General and administrative expense increased by $39.8 million, or 34%, for the year ended December 31, 2022 compared to the year ended December 31, 2021.

This increase was primarily due to increases of $42.1 million in stock-based compensation expense (which reflects the increase related to the cumulative stock-based compensation expense in connection with our IPO, net of the absence in the current period of stock-based compensation expense of $27.4 million recognized in connection with the 2020 Equity Transactions as described above), $11.9 million in personnel-related costs due to annual compensation adjustments and higher headcount, $4.5 million in professional services fees, comprised primarily of legal, accounting, and consulting fees, $3.9 million related to a legal settlement, $1.9 million in directors and officers insurance, $0.5 million in software license fees, $0.5 million in other taxes and licenses, and $0.7 million in other individually immaterial costs.

This increase was primarily due to increases of $30.4 million in stock-based compensation expense, $6.8 million in personnel-related costs due to compensation adjustments and higher headcount, $4.7 million in directors and officers insurance, and $1.1 million in software license fees, partially offset by decreases of $3.3 million related to legal settlements and $1.5 million in professional services fees, comprised primarily of legal, accounting, and consulting fees.

Interest and Other Income, Net

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Interest and other income, net $ 12,582 $ 23,303 $ (10,721) (46) %

Interest and other income, net increased by $20.5 million, or 723%, primarily due to a $23.8 million gain from the sale of non-marketable equity investments and a $1.7 million benefit from the release of interest and penalties accrued for indirect taxes, offset by a $1.9 million decrease in interest income earned due to lower coupon rates and bond premium amortization, and $3.0 million in foreign exchange losses.

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Interest income increased primarily due to $13.8 million higher interest income earned from marketable securities.

Other income (expense), net decreased primarily due to a $23.8 million gain from the sale of non-marketable equity investments and $0.9 million of benefit from the release of interest and penalties accrued for indirect taxes recorded during fiscal 2021 that did not recur in fiscal 2022, partially offset by $1.3 million in decrease in foreign exchange loss during fiscal 2022.

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Provision for Income Taxes

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We are subject to federal and state income taxes in the United States and taxes in foreign jurisdictions.

For the years ended December 31, 2021 and 2020, we recorded a provision for income taxes of $10.5 million, and $4.0 million on loss before taxes of $181.5 million and $53.3 million, respectively.

For the years ended December 31, 2022 and 2021, we recorded a provision for income taxes of $11.3 million, and $10.5 million, respectively, on loss before taxes of $220.8 million and $181.5 million, respectively.

The effective tax rates for the years ended December 31, 2022 and 2021 were (5.1)% and (5.8)% respectively.

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federal and state net deferred tax assets as it was more likely than not that those deferred tax assets will not be realized.

The $6.5 million increase in tax expense was due to a $3.7 million increase in foreign taxes due to higher pre-tax earnings and a $2.8 million increase in uncertain tax position for the year ended December 31, 2021.

The $0.8 million increase in tax expense was due to a $1.7 million increase in foreign taxes due to higher pre-tax earnings and foreign sales, partially offset by a decrease in unrecognized tax benefit of $0.9 million for the year ended December 31, 2022.

Comparison of Fiscal Years Ended December 31, 2021 and 2020

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(dollars in thousands)

Revenue $ 249,659 $ 172,377 $ 77,282 45 %

Subscription services $ 360,506 $ 242,879 $ 117,627 48 %

Professional services $ 10,516 $ 6,780 $ 3,736 55 %

Total revenue $ 371,022 $ 249,659 $ 121,363 49 %

Revenue increased by $121.4 million, or 49%, for the year ended December 31, 2021 compared to the year ended December 31, 2020.

Of the total increase in revenue, approximately $35.4 million was attributable to revenue from new customers acquired during the year ended December 31, 2021, net of contraction and churn, and approximately $86.0 million was attributable to revenue from existing customers as of December 31, 2020, net of contraction and churn.

Our net dollar retention rate of 114% for the year ended December 31, 2021 reflects the expansion within existing customers and the sale of additional products to these customers.

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Cost of revenue increased by $25.5 million, or 49%, for the year ended December 31, 2021 compared to the year ended December 31, 2020.

This increase was primarily due to increases of $5.5 million in third-party hosting costs, $2.8 million in personnel-related costs due to higher headcount, $2.7 million in amortization of costs associated with acquired technology intangibles, $1.5 million in cloud voice service costs, and $1.4 million in software license fees and $1.0 million increase in professional fees including legal costs.

This increase was primarily due to increases of $5.6 million in stock-based compensation expense, $6.9 million in third-party hosting costs, $5.7 million in personnel-related costs due to annual compensation adjustments and higher headcount, $1.9 million in software license fees, $1.6 million increase in professional fees including legal costs, $1.5 million in cloud voice service costs, $1.4 million in payment gateway fees, and approximately $1.1 million in amortization of capitalized internal-use software.

Our gross margin remained consistent at 79% for the years ended December 31, 2021 and 2020.

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Operating Expenses

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General and administrative 117,022 50,792 66,230 130 %

Total opening expenses $ 253,279 $ 165,585 $ 87,694

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The increases in our operating expenses in the year ended December 31, 2020 compared to the year ended December 31, 2019 were primarily headcount driven, as we substantially grew our business to 3,585 employees as of December 31, 2020 compared to 2,691 employees as of December 31, 2019.

Total operating expenses $ 497,774 $ 253,279 $ 244,495

The increases in our operating expenses in the year ended December 31, 2021 compared to the year ended December 31, 2020 were primarily headcount driven to support the growth of our business, as well as cumulative stock-based compensation recognized in connection with the IPO.

Research and Development

Research and development expense increased by $51.2 million, or 74%, for the year ended December 31, 2021 compared to the year ended December 31, 2020.

This increase was primarily due to a $15.9 million increase in stock-based compensation expense recognized in connection with the 2020 Equity Transactions described above, and increases of $12.8 million in personnel-related costs and $2.4 million in software license fees, offset by a decrease in other individually immaterial costs.

This increase was primarily due to increases of $29.3 million in stock-based compensation expense recognized (which reflects the increase related to cumulative stock-based compensation expense in connection with our IPO, net of the absence in the current period of stock-based compensation expense of $15.9 million recognized in connection with certain secondary equity transactions occurring in the year ended December 31, 2020 (the 2020 Equity Transactions) as described above), $20.2 million in personnel-related costs due to annual compensation adjustments and higher headcount, and $1.3 million in software license fees.

Sales and Marketing

Sales and marketing expense increased by $127.1 million, or 95%, for the year ended December 31, 2021 compared to the year ended December 31, 2020.

This increase was primarily due to increases of $24.7 million in personnel-related costs, $3.3 million in reseller commissions, $1.9 million in rental of premises, $1.8 million in software license fees, and $1.3 million in other individually immaterial costs, partially offset by decreases of $6.2 million in marketing costs and $4.6 million in travel costs.

The decrease in marketing costs and travel was a direct impact of the COVID-19 pandemic and curtailment of in-person marketing events and travel.

General and Administrative

General and administrative expense increased by $66.2 million, or 130%, for the year ended December 31, 2021 compared to the year ended December 31, 2020.

This increase was primarily due to $27.4 million in stock-based compensation expense recognized in connection with the 2020 Equity Transactions and increases of $4.5 million in personnel-related costs, and $2.8 million in professional services fees, comprised primarily of legal, accounting, and consulting fees.

This increase was primarily due to $42.1 million in stock-based compensation expense (which reflects the increase related to the cumulative stock-based compensation expense in connection with our IPO, net of the absence in the current period of stock-based compensation expense of $27.4 million recognized in connection with the 2020 Equity Transactions as described above), $11.9 million in personnel-related costs due to annual compensation adjustments and higher headcount, $4.5 million in professional services fees, comprised primarily of legal, accounting, and consulting fees, $3.9 million related to a legal settlement, $1.9 million in directors and officers insurance, $0.5 million in software license fees, $0.5 million in other taxes and licenses, and $0.7 million in other individually immaterial costs.

Interest and Other Income, Net

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Interest and other income, net $ 23,303 $ 2,833 $ 20,470 723 %

Interest income increased by $2.9 million, or 230%, primarily due to a full year of interest earned from higher balances of our investment portfolios during the year ended December 31, 2020, when compared to a partial year of interest earned during the year ended December 31, 2019.

Other income (expense), net, decreased by $2.3 million, or 252%, for the year ended December 31, 2020 compared to the year ended December 31, 2019, primarily due to increases of $1.4 million in premiums amortized on marketable securities and other insignificant items.

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Interest income decreased primarily due to $1.9 million lower lower coupon rates and bond premium amortization.

Other income (expense), net increased by $22.2 million, primarily due to a $23.8 million gain from the sale of non-marketable equity investments and $0.9 million of benefit from the release of interest and penalties accrued for indirect taxes that was originally reserved in fiscal 2020, partially offset by $3.0 million of foreign exchange losses.

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Provision for Income Taxes

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We are subject to federal and state income taxes in the United States and taxes in foreign jurisdictions.

For the years ended December 31, 2020 and 2019, we recorded provision for income taxes of $4.0 million and $3.6 million on loss before taxes of $53.3 million and $27.5 million, respectively.

The effective tax rate for the years ended December 31, 2020 and 2019 were (7.6)% and (13.2)% respectively.

The effective tax rates differ from the statutory rate primarily as a result of providing no benefit on pre-tax losses incurred in the United States.

We maintain a full valuation allowance on our U.S.

For the years ended December 31, 2021 and 2020, we recorded provision for income taxes of $10.5 million and $4.0 million, respectively, on loss before taxes of $181.5 million and $53.3 million, respectively.

The effective tax rates for the years ended December 31, 2021 and 2020 were (5.8)% and (7.6)% respectively.

The effective tax rates differ from the statutory rate primarily due to maintaining a full valuation allowance on our U.S.

federal and state net deferred tax assets as it was more likely than not that those deferred tax assets will not be realized.

The $0.4 million increase in tax expense resulted primarily from an increase in pre-tax earnings in our foreign jurisdictions.

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Liquidity and Capital Resources

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As of December 31, 2022, we had an accumulated deficit of $3.5 billion.

Our operating activities provided cash flow of $11.5 million for the year ended December 31, 2021.

In February 2022, in connection with the expiration of the final lock-up period following the IPO, we issued an aggregate of 9.3 million shares of our common stock, net of shares withheld for taxes, as settlement of RSUs that had met the time-based service condition.

We expect to pay $112.6 million in taxes on net share settlement of these RSUs.

Our operating activities resulted in cash outflows of $2.5 million for the year ended December 31, 2022.

Our other material cash requirements are related to the settlement of future contractual obligations associated with operating leases and other service subscription agreements (as described in Contractual Obligations below).

We believe our existing cash, cash equivalents and marketable securities, will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months.

We believe we will meet longer term expected future cash requirements and obligations through a combination of our existing cash and cash equivalents balances, cash flow from operations, and issuances of equity securities or debt offerings.

Our future capital requirements will depend on many factors, including the rate of our revenue growth, the timing and extent of spending on research and development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced product offerings, and other business initiatives and the continuing market adoption of our products.

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Operating Activities

Net cash used in operating activities of $2.5 million for the year ended December 31, 2022 reflects our net loss of $232.1 million, adjusted for non-cash items such as stock-based compensation of $207.7 million, depreciation and amortization of $11.5 million, amortization of deferred contract acquisition costs of $18.5 million, non-cash lease expense of $6.2 million, premium amortization on marketable securities of $1.6 million, and net cash outflows of $11.1 million from changes in operating assets and liabilities.

The net cash outflows from changes in operating assets and liabilities were due to increases of operating assets of $28.6 million in deferred contract acquisition costs, $18.9 million in accounts receivable, $8.1 million in

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prepaid expenses and other assets and a decrease of $8.8 million in operating lease liabilities;

partially offset by increases in operating liabilities of $45.5 million in deferred revenue and $7.7 million in accrued and other liabilities.

Net cash provided by operating activities of $11.5 million for the year ended December 31, 2021 reflects our net loss of $192.0 million, adjusted for non-cash items such as stock-based compensation of $173.4 million, gain realized on sale of non-marketable equity investment of $23.8 million, depreciation and amortization of $13.3 million, amortization of deferred contract acquisition costs of $12.8 million, deferred income taxes of $1.9 million, premium amortization on marketable securities of $1.8 million, and net cash inflows of $28.0 million from changes in operating assets and liabilities.

The net cash inflows from changes in operating assets and liabilities were due to increases of $56.0 million in deferred revenue, $17.7 million in accrued and other liabilities, and $2.0 million in accounts payable, offset by increases in assets of $24.2 million in deferred contract acquisition costs, $17.5 million in accounts receivable, and $5.9 million in prepaid expenses and other assets.

The net cash inflows from changes in operating assets and liabilities were due to increases of $56.0 million in deferred revenue, $17.7 million in accrued and other liabilities, and $2.0 million in accounts payable, partially offset by increases in assets of $24.2 million in deferred contract acquisition costs, $17.5 million in accounts receivable, and $5.9 million in prepaid expenses and other assets.

Net cash provided by operating activities of $32.5 million for the year ended December 31, 2020 reflects our net loss of $57.3 million, adjusted for non-cash items such as stock-based compensation of $43.3 million, depreciation and amortization of $11.2 million, amortization of deferred contract acquisition costs of $7.7 million, deferred income taxes of $2.4 million and net cash inflows of $28.9 million from changes in operating assets and liabilities.

The net cash inflows from changes in operating assets and liabilities were due to increases of $36.4 million in deferred revenue and $24.9 million in accrued and other liabilities, partially offset by increases in assets of $14.3 million in deferred contract acquisition costs, $9.9 million in accounts receivable, $8.2 million in prepaid expenses and other assets.

Net cash used in operating activities of $8.2 million for the year ended December 31, 2019, was comprised primarily of a net loss of $31.1 million, adjusted for non-cash items such as depreciation and amortization of $6.3 million, amortization of deferred contract acquisition costs of $4.0 million, deferred income taxes of $0.9 million and net cash inflows of $13.7 million from changes in operating assets and liabilities.

The net cash inflows from changes in operating liabilities were due to increases

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of $27.4 million in deferred revenue, $13.9 million in accrued and other liabilities, and $2.7 million increase in accounts payable, offset by increases in assets of $11.3 million in prepaid expenses and other assets, $9.6 million in deferred contract acquisition costs, and $9.4 million in accounts receivable.

The net cash inflows from changes in operating assets and liabilities were due to increases in operating liabilities of $36.4 million in deferred revenue and $24.9 million in accrued and other liabilities, partially offset by increases in assets of $14.3 million in deferred contract acquisition costs, $9.9 million in accounts receivable, and $8.2 million in prepaid expenses and other assets.

Investing Activities

Cash used in investing activities of $420.3 million for the year ended December 31, 2021 consisted of $435.8 million in purchases, net of maturities and sales, of marketable securities, $4.9 million in purchases, net of proceeds from sale of property and equipment, $3.6 million related to the capitalization of internal-use software, offset by $24.0 million in proceeds from sale of non-marketable equity investments.

Cash used in investing activities of $11.4 million for the year ended December 31, 2020 consisted of $5.1 million net payment for acquisitions, $4.6 million related to the capitalization of internal-use software, $4.4 million in purchases of property and equipment, and $1.8 million acquisition of intangibles, offset by $4.4 million in proceeds, net of purchases, from the maturities and sales of marketable securities.

Cash used in investing activities of $149.0 million for the year ended December 31, 2019 consisted of $128.2 million in purchases, net of maturities and sales of marketable securities, $11.5 million in purchases of property and equipment, $6.0 million net payment for acquisitions, and $3.3 million related to the capitalization of internal-use software.

Net cash used in investing activities of $284.8 million for the year ended December 31, 2022 consisted of $272.7 million in purchases, net of maturities and sales, of marketable securities, $7.0 million in purchases, net of proceeds from sale of property and equipment, and $5.1 million related to the capitalization of internal-use software.

Net cash used in investing activities of $420.3 million for the year ended December 31, 2021 consisted of $435.8 million in purchases, net of maturities and sales, of marketable securities, $4.9 million in purchases, net of proceeds from sale of property and equipment, $3.6 million related to the capitalization of internal-use software, offset by $24.0 million in proceeds from sale of non-marketable equity investments.

Net cash used in investing activities of $11.4 million for the year ended December 31, 2020 consisted of $5.1 million net payment for acquisitions, $4.6 million related to the capitalization of internal-use software, $4.4 million in purchases of property and equipment, $1.8 million acquisition of intangibles, offset by $4.4 million proceeds, net of purchases, from maturities and sales of marketable securities.

Financing Activities

Cash provided by financing activities for the year ended December 31, 2021 consisted of approximately $1.1 billion in proceeds from our IPO, net of underwriting discounts, offset by $6.8 million in payments for deferred offering costs, $3.3 million in payment of withholding taxes on net share settlement of equity awards, and $0.9 million in payments for acquisition-related liabilities.

Cash used in financing activities of $1.9 million for the year ended December 31, 2020 consisted primarily of $2.1 million in payments for acquisition-related liabilities.

Cash provided by financing activities of $150.2 million for the year ended December 31, 2019 consisted primarily of net proceeds of $149.8 million from the issuance of Series H redeemable convertible preferred stock.

Net cash used in financing activities of $156.4 million for the year ended December 31, 2022 consisted primarily of $167.2 million in payment of withholding taxes on net share settlement of equity awards, partially offset by $10.9 million in proceeds from issuance of common stock under employee stock purchase plan, net.

Net cash provided by financing activities of $1.1 billion for the year ended December 31, 2021 consisted primarily of $1.1 billion in proceeds from our IPO, net of underwriting discounts, offset by $6.8 million in payments for deferred offering costs, $3.3 million in payment of withholding taxes on net share settlement of equity awards, and $0.9 million in payments for acquisition-related liabilities.

Net cash used in financing activities of $1.9 million for the year ended December 31, 2020 consisted primarily of $2.2 million in payments for acquisition-related liabilities.

Remaining Performance Obligations on Customer Contracts

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A small portion of our annual contracts may have billing terms that are different from their subscription terms, and our multi-year contracts are invoiced annually.

As of December 31, 2021 , remaining performance obligations totaled $230.8 million , which comprised $160.2 million of deferred revenue and $70.6 million of unbilled amounts.

As of December 31, 2022 , remaining performance obligations totaled $301.5 million , which comprised $205.6 million of deferred revenue and $95.9 million of unbilled revenue.

We expect that the value of the remaining performance obligations will change from one period to another for several reasons, including new contracts, timing of renewals, cancellations, contract modifications and foreign currency fluctuations.

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We believe that fluctuations in remaining performance obligations are not necessarily a reliable indicator of future revenue and we do not utilize it as a key management metric internally.

Contractual Obligations

Contractual Obligations and Commitments

Our principal commitments consist of operating lease obligations for office space and contractual obligations under third-party cloud infrastructure agreements and service subscription agreements.

As of December 31, 2022, our estimated future contractual obligations totaled $140.0 million, of which $34.9 million and $105.1 million were operating lease commitments and other contractual obligations, respectively.

As disclosed in Note 9 to the consolidated financial statements included elsewhere in this report, our operating leases included short-term and long-term

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commitments of $7.0 million and $27.2 million, respectively.

As disclosed in Notes 8 and 9 to the consolidated financial statements included elsewhere in this report, our operating leases included short-term and long-term commitments of $6.8 million and $28.2 million, respectively.

Our other contractual obligations included short-term and long-term commitments of $46.2 million and $58.9 million respectively.

Our operating leases expire on varying dates through September 2028.

Our operating leases expire on varying dates through 2031.

Our other contractual obligations have commitments outstanding through December 2025.

Off-Balance Sheet Arrangements

As of December 31, 2022, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Indemnification Agreements

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No demands have been made upon us to provide indemnification under such agreements and there are no claims that we are aware of that could have a material effect on our consolidated balance sheets, consolidated statements of operations and comprehensive loss, or consolidated statements of cash flows.

Critical Accounting Estimates

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP).

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We evaluate our estimates, assumptions, and judgments on an ongoing basis.

Our significant accounting policies are discussed in additional detail in Note 2, Summary of Significant Accounting Policies, to the consolidated financial statements included in Item 8 of Part II of this 10-K.

Our significant accounting policies are discussed in detail in Note 2, Summary of Significant Accounting Policies, to the consolidated financial statements included in Item 8 of Part II of this 10-K.

The critical accounting estimates, assumptions, and judgments that we believe have the most significant impact on our consolidated financial statements are described below.

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Subscription revenue is primarily comprised of fees paid by our customers for accessing our cloud-based software during the term of the arrangement.

Our cloud-based services allow customers to use the multi-tenant software without requiring them to take possession of the software.

Our cloud-based services allow customers to use the multi-tenant software without requiring them

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to take possession of the software.

Given that access to the cloud-based software represents a series of distinct services that comprise a single performance obligation that is satisfied over time, subscription revenue is recognized ratably over the contract term beginning on the commencement date of each contract, which is the date that the cloud-based software is made available to customers.

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For these contracts, we account for individual performance obligations separately.

The transaction price is allocated to the separate performance obligations on the basis of relative SSP.

We determine SSP by taking into consideration historical selling price of these performance

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obligations in similar transactions, as well as current pricing practices and other observable inputs including, but not limited to, customer size and geography.

The transaction price is allocated to the separate performance obligations on the basis of relative standalone selling price (SSP).

We determine SSP by taking into consideration historical selling price of these performance obligations in similar transactions, as well as current pricing practices and other observable inputs including, but not limited to, customer size and geography.

As our go-to-market strategies evolve, we may modify our pricing practices in the future, which could result in changes to SSP.

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Stock-Based Compensation

We issue stock options and restricted stock units (RSUs) to employees, consultants, and directors, and stock purchase rights granted under the Employee Stock Purchase Plan (ESPP) to employees based on their estimated fair value on the date of the grant.

We issue stock options and RSUs to employees, consultants, and directors, and stock purchase rights granted under the Employee Stock Purchase Plan (ESPP) to employees based on their estimated fair value on the date of the grant.

For stock options and ESPP, the fair value is estimated using the Black-Scholes option-pricing model, and stock-based compensation is recognized in the consolidated statements of operations using the straight-line attribution method.

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Changes in the assumptions, which are subjective and generally require significant analysis and judgement to develop, can materially affect the valuation of our equity awards and impact how much stock-based compensation expense is recognized.

The Company determines whether an arrangement constitutes a lease and records lease liabilities and right-of-use (ROU) assets on its consolidated balance sheets at the lease commencement date.

Lease liabilities are measured based on the present

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value of the total lease payments not yet paid, discounted based on either the rate implicit in the lease or the Company's incremental borrowing rate (the estimated rate the Company would be required to pay for a collateralized borrowing equal to the total lease payments over the term of the lease), whichever is more readily determinable.

The incremental borrowing rate is based on an estimate of the Company's expected unsecured borrowing rate for its notes, adjusted for tenor and collateralized security features.

We estimate the incremental borrowing rate using yields for maturities that are in line with the duration of the lease payments.

Recent Accounting Pronouncements

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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-K

Item 7. Management’s Discussion and Analysis