What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-02-16 compared with 2023-02-23 · 135 added, 146 removed, 355 unchanged (44% 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 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) 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.

We deliver modern and innovative AI-guided customer and employee service solutions that enable companies of all sizes to drive delightful engagement and increase productivity.

We started with Freshdesk, our customer service (CS) product, and later expanded our offering to include Freshservice, our IT and employee service management (ITSM) product.

Next, we introduced Freshsales and Freshmarketer, our sales force and marketing automation solutions, and Freshchat, our messaging/chat product offering.

We currently have more than 67,100 businesses using our software to make engaging customers and employees more efficient and enjoyable.

We generate revenue primarily from the sale of subscriptions for accessing our cloud-based software products over the contract term.

Our subscription arrangements are available in monthly, quarterly, semi-annual, and annual plans, and we typically invoice for the full term in advance.

We generally enter into subscription agreements with our customers on monthly, annual, or multi-year terms and invoice customers in advance in either monthly or annual installments.

We also sell professional services that include product configuration, data migration, systems integration, and training.

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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.

Current macroeconomic uncertainties, including inflationary pressures, significant volatility in global markets, and geopolitical developments 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.

Foreign currency exchange rate fluctuations negatively impacted our revenue growth in 2022, but in 2023, the United States Dollar weakened against the Euro and British Pound contributing to positive impacts in our revenue.

However the volatility in the foreign currency market still exists, and could impact our results of operations.

For the years ended December 31, 2023 and 2022, we had approximately 27% and 26%, respectively, 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.

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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, 2023 and 2022, 20,261 and 17,722 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, 2023 and 2022, customers contributing more than $5,000 in ARR represented 89% and 87% 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.

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.

We also run focused programs to acquire startup and incubator customers.

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We have experienced, and expect to continue to experience that, over time, a significant portion of our revenue growth will come from our existing customers expanding their usage of our products and buying additional products.

We measure the rate of expansion within our customer base using net dollar retention rate (as defined under Key Business Metrics ), and we believe that our net dollar retention rate demonstrates a significant rate of expansion within our existing customer base.

As of December 31, 2022 and 2021, our net dollar retention rate was 108% and 114%, respectively.

We measure the rate of expansion within our customer base using net dollar retention rate (as defined under Key Business Metrics ), and we believe that our net dollar retention rate demonstrates our rate of expansion within our existing customer base.

As of December 31, 2023 and 2022, our net dollar retention rate remained flat at 108%.

On constant currency basis, our net dollar retention rate was 107% as of December 31, 2023 which was a decrease from prior year primarily due to lower expansion within existing customers driven by macroeconomic pressures.

We have a significant opportunity to expand within our existing customer base and substantially increase the number of customers that purchase multiple Freshworks products.

As of December 31, 2022, approximately 24% of our customers purchased two or more Freshworks products, which includes customers on our Freshdesk Omnichannel Suite and Freshsales Suite subscription plans counting as customers who purchased multiple products.

As of December 31, 2023, approximately 26% of our customers purchased two or more Freshworks products, which includes customers on our Freshworks Customer Service Suite and Freshsales Suite subscription plans counting as customers who purchased multiple products.

These customers represented 47% of total ARR as of December 31, 2023, illustrating the large opportunity we have to sell additional products to our current customer base and drive growth.

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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

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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.

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, 2023, and we have no significant concentration in a specific industry vertical.

Investing in Our Growth

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We intend to invest aggressively in our direct and indirect sales and marketing capabilities, including investments in our outbound sales motion.

We have been global from our earliest product sales and our global footprint continues to expand, with customers in more than 170 countries.

We have been global from our earliest product sales and our global footprint continues to expand, with customers in approximately 170 countries.

During the year ended December 31, 2023, 45%, 38%, and 17% of our revenue was derived from customers in North America;

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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 expand our presence in countries where we already operate.

We plan to support more languages, recruit partners, hire sales and customer service 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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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 also review customer data used for calculating these key business metrics on an ongoing basis and make 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.

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To calculate net dollar retention rate as of a particular date, we first determine "Entering ARR," which is ARR from the population of our customers as of 12 months prior to the end of the reporting period.

We then calculate the "Ending ARR" from the same set of customers as of the end of the reporting period.

We then calculate the "Ending ARR" which is ARR from the same set of customers as of the end of the reporting period.

We then divide the Ending ARR by the Entering ARR to arrive at our net dollar retention rate.

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.

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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.

Our net dollar retention rate was 108% as of December 31, 2023 and 2022.

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.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with GAAP.

The preparation of these consolidated financial statements requires our management to make estimates, assumptions, and judgments that affect the reported amounts of assets, liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue, costs and expenses and related disclosures during the applicable periods.

We base our estimates, assumptions, and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances.

Different assumptions and judgments would change the estimates used in the preparation of our consolidated financial statements, which, in turn, could change the results from those reported.

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

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.

Revenue Recognition

We derive revenue from subscription fees and related professional services.

We sell subscriptions for our cloud-based solutions directly to customers and indirectly through channel partners through arrangements that are non-cancelable and non-refundable.

Our subscription arrangements do not provide customers with the right to take possession of the software supporting the solutions and, as a result, are accounted for as service arrangements.

We record revenue net of sales or value-added taxes.

Subscription Revenue

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.

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.

Professional Services Revenue

Professional services revenue is comprised of fees charged for services ranging from product configuration, data migration, systems integration and training.

Professional services revenue is recognized as services are performed and represents less than 5% of total revenue.

Customers with Multiple Performance Obligations

Some of our contracts with customers contain both subscriptions and professional services.

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 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.

Evaluating the terms and conditions of our customer contracts for appropriate revenue recognition and determining whether products and services are considered distinct performance obligations may require significant judgment.

Judgment is also used to estimate the contract's transaction price and allocate it to each performance obligation.

Deferred Contract Acquisition Costs

Deferred contract acquisition costs are incremental costs that are associated with acquiring customer contracts and consist primarily of sales commissions and the associated payroll taxes and certain referral fees paid to independent third parties.

The costs incurred upon the execution of initial and expansion contracts are primarily deferred and amortized over an expected benefit period of three years.

The Company considers the expected benefit period to exceed the initial contract term for certain costs because of anticipated renewals and because sales commission rates for renewal contracts are not commensurate with sales commissions for initial contracts.

Significant judgement is used to determine the expected benefit period by taking into consideration the Company’s technology life cycle and an estimated customer relationship period, including expected contract renewals.

Stock-Based Compensation

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.

The fair value of RSUs is based on the closing market price of our Class A common stock on the date of the grant.

We recognize stock-based compensation expense over the requisite service period, which is the vesting period of the respective awards.

Forfeitures are accounted for when they occur.

Prior to our IPO, the fair value of our common stock on the date of the grant was determined based on independent third-party valuations as there was no public market, and there was no stock-based compensation expense recognized from the RSUs as the liquidity event-related performance condition was not probable.

Upon the completion of the IPO, the performance condition became probable, and we began to recognize stock-based compensation expense.

We also granted a performance-based award with both a service-based vesting condition and a market condition involving a certain range of stock price targets, and the fair value of such award was determined by using the Monte-Carlo simulation model.

The associated stock-based compensation expense is recognized over the longer of the derived service period or the requisite service period, using the accelerated attribution method.

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 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.

Non-GAAP Financial Measures

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• Stock-based compensation expense.

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.

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.

• Employer payroll taxes on employee stock transactions.

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We exclude these amortization expenses because we do not believe these expenses have a direct correlation to the operation of our business.

• Acquisition-related expenses.

We exclude transaction, integration, and retention expenses that are directly related to business combinations from certain of our non-GAAP financial measures because we believe that excluding these items provides meaningful supplemental information regarding operational performance and investors to make more meaningful comparisons between our operating results and those of other companies.

• Gain on sale of non-marketable equity investments.

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

We define non-GAAP loss from operations as GAAP loss from operations excluding stock-based compensation expense, employer payroll taxes on employee stock transactions, amortization of acquired intangibles, and acquisition-related expenses.

We define non-GAAP net loss as GAAP net loss, excluding stock-based compensation expense, employer payroll taxes on employee stock transactions, amortization of acquired intangibles, acquisition-related expenses, and gain on sale of non-marketable equity investments, net of their related tax effects.

The following tables present a reconciliation of our GAAP loss from operations to our non-GAAP loss from operations and our GAAP net loss to our non-GAAP net loss for each of the periods presented (in thousands):

Non-GAAP Loss from Operations

Non-GAAP Income (Loss) From Operations and Non-GAAP Net Income (Loss)

We define non-GAAP income (loss) from operations as GAAP loss from operations excluding stock-based compensation expense, employer payroll taxes on employee stock transactions and amortization of acquired intangibles.

We define non-GAAP net income (loss) as GAAP net loss, excluding stock-based compensation expense, employer payroll taxes on employee stock transactions, amortization of acquired intangibles, and gain on sale of non-marketable equity investments, net of their related tax effects.

The following tables present a reconciliation of our GAAP loss from operations to our non-GAAP income (loss) from operations and our GAAP net loss to our non-GAAP net income (loss) for each of the periods presented (in thousands):

Non-GAAP Income (Loss) from Operations

Year Ended December 31,

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Amortization of acquired intangibles 303 1,591 4,329

Acquisition-related expenses — — 304

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

Non-GAAP Net Loss

Non-GAAP income (loss) from operations

$ 44,549 $ (22,258) $ (18,256)

Non-GAAP Net Income (Loss)

Year Ended December 31,

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Amortization of acquired intangibles 303 1,591 4,329

Acquisition-related expenses — — 304

Gain on sale of non-marketable equity investments — — (23,830)

Income tax adjustments 1,398 1,978 1,802

Non-GAAP net loss $ (19,040) $ (27,497) $ (9,442)

Non-GAAP net income (loss)

$ 78,683 $ (19,040) $ (27,497)

Free Cash Flow

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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 further investments in our business and potential acquisitions of businesses.

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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 (in thousands):

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Free cash flow $ 77,838 $ (14,770) $ 2,343

Net cash used in investing activities $ (284,827) $ (420,296) $ (11,425)

Net cash provided by (used in) investing activities

$ 158,499 $ (284,827) $ (420,296)

Net cash provided by (used in) financing activities $ (60,619) $ (156,354) $ 1,058,369

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Professional services revenue is recognized as services are performed.

Our subscription arrangements are available in monthly, quarterly, semi-annual, and annual plans, and we typically invoice for the full term in advance.

We generally enter into subscription agreements with our customers on monthly, annual, or multi-year terms and invoice customers in advance in either monthly or annual installments.

Our payment terms generally require the customers to pay the invoiced amount in advance or within 30 days from the invoice date.

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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 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, 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.

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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.

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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 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.

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.

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

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

Interest and Other (expense) Income, Net

Interest and Other 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 (Benefit from) Income Taxes

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

Provision for Income Taxes

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

states and foreign jurisdictions in which we conduct business.

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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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Research and development (1)

37,524 36,413 45,162

Sales and marketing (2)

66,755 64,328 53,169

General and administration (3)

99,654 99,916 69,508

Total stock-based compensation expense $ 210,707 $ 207,696 $ 173,443

(1) Stock-based compensation expense recorded to research and development in the consolidated statements of operations excludes amounts that were capitalized for internal-use software.

(2) Sales and marketing expense for the years ended December 31, 2023 and 2022 includes $9.6 million and $3.2 million, respectively, of stock-based compensation expense associated with RSU and options granted to the President in September 2022.

(3) General and administrative expense includes $55.9 million, $55.9 million and $19.1 million of stock-based compensation expense associated with RSUs and PRSUs primarily granted to the CEO in September 2021 for the years ended December 31, 2023, 2022 and 2021, respectively.

Recognition of Stock-Based Compensation

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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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Cost of revenue $ 103,369 $ 95,772 $ 7,597 8 %

Gross Margin 81 % 79 %

Cost of revenue increased by $7.6 million, or 8%, for the year ended December 31, 2023 compared to the year ended December 31, 2022.

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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This increase was primarily due to increases of $4.0 million in third-party hosting costs, $3.4 million in software license fees, $1.9 million in amortization of internally capitalized software, partially offset by decreases of $1.0 million in amortization of developed technology and $0.8 million in professional fees including legal costs.

Our gross margin increased to 83% from 81% as we increased revenue and realized benefits from economies of scale and due to ongoing initiatives to improve our cost structure.

Operating Expenses

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Total operating expenses $ 663,235 $ 635,599 $ 27,636

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.

The increases in our operating expenses in the year ended December 31, 2023 compared to the year ended December 31, 2022 were primarily driven by increases in personnel-related costs due to compensation adjustments and stock-based compensation expense.

Research and Development

Research and development expense increased by $2.2 million, or 2%, for the year ended December 31, 2023 compared to the year ended December 31, 2022.

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.

This increase was primarily due to increases of $1.7 million in personnel-related costs due to compensation adjustments, $1.1 million in stock-based compensation expense, partially offset by a decrease of $1.6 million in professional services fees.

Sales and Marketing

Sales and marketing expense increased by $14.6 million, or 4%, for the year ended December 31, 2023 compared to the year ended December 31, 2022.

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.

This increase was primarily due to increases of $22.7 million in personnel-related costs due to compensation adjustments, $2.4 million in stock-based compensation expense, $1.2 million in travel related expenses for sales and marketing events, partially offset by decreases of $7.3 million in advertising, branding and event costs, $3.6 million in reseller commissions, and $2.1 million in professional services fees.

General and Administrative

General and administrative expense increased by $10.8 million, or 7%, for the year ended December 31, 2023 compared to the year ended December 31, 2022.

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.

This increase was primarily due to increases of $6.0 million in personnel-related costs due to compensation adjustments, $4.9 million in professional services fees, comprised primarily of legal, accounting, and consulting fees, $2.7 million in tax reserves in accordance with ASC 450, partially offset by a decrease of $3.3 million in directors and officers insurance.

Interest and Other Income, Net

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Interest and other income, net $ 46,403 $ 12,582 $ 33,821 269 %

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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Interest income increased by $31.1 million primarily due to approximately $20.2 million of discount amortization on cash equivalents and marketable securities and approximately $11.9 million increase in interest income resulting from an increase in average interest rates compared to prior year.

Other income (expense), net increased primarily due to a $2.7 million decrease in foreign exchange loss during the year ended December 31, 2023.

Provision for Income Taxes

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The effective tax rates for the years ended December 31, 2023 and 2022 were (11.0)% and (5.1)% 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 $0.8 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.

The effective tax rates differ from the statutory rate of 21% primarily due to nondeductible compensation and change in the valuation allowance.

The $2.3 million increase in tax expense was mainly due to an increase in foreign taxes caused by higher pre-tax earnings from foreign subsidiaries and an increase in unrecognized tax benefit.

Comparison of Fiscal Years Ended December 31, 2022 and 2021

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

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.

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, $1.9 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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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.

Operating Expenses

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

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 $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 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.

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.

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 $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) %

*Not meaningful

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

Provision for Income Taxes

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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.

Liquidity and Capital Resources

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As of December 31, 2023, we had an accumulated deficit of $3.6 billion.

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

Our operating activities resulted in cash inflows of $86.2 million for the year ended December 31, 2023.

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).

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Net cash provided by (used in) operating activities

Net cash used in investing activities $ (284,827) $ (420,296) $ (11,425)

$ 86,178 $ (2,525) $ 11,460

Net cash provided by (used in) investing activities

$ 158,499 $ (284,827) $ (420,296)

Net cash provided by (used in) financing activities $ (60,619) $ (156,354) $ 1,058,369

Operating Activities

Net cash provided by operating activities of $86.2 million for the year ended December 31, 2023 reflects our net loss of $137.4 million, adjusted for non-cash items such as stock-based compensation of $210.7 million, depreciation and amortization of $12.1 million, amortization of deferred contract acquisition costs of $24.0 million, non-cash lease expense of $7.7 million, premium amortization on marketable securities of $15.7 million, and net cash outflows of $14.1 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 $27.0 million in deferred contract acquisition costs, $27.0 million in accounts receivable, $7.4 million in prepaid expenses and other assets and decreases of $12.9 million in operating lease liabilities and $2.4 million in accounts payable;

partially offset by increases in operating liabilities of $60.8 million in deferred revenue and $1.8 million in accrued and other liabilities.

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.

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

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, 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 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

Net cash provided by investing activities of $158.5 million for the year ended December 31, 2023 consisted of $166.7 million in proceeds from maturities and sales, net of purchases of marketable securities;

partially offset by $2.0 million in purchases, net of proceeds from sale of property and equipment, and $6.3 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

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 used in financing activities of $60.6 million for the year ended December 31, 2023 consisted primarily of $68.0 million in payment of withholding taxes on net share settlement of equity awards, partially offset by $7.3 million in proceeds from issuance of common stock under our 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

We generally enter into subscription agreements with our customers on monthly, annual, or multi-year terms and invoice customers in advance in either monthly or annual installments.

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.

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

As of December 31, 2023, remaining performance obligations totaled $418.9 million, which comprised $266.4 million of deferred revenue and $152.5 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.

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As of December 31, 2023, our estimated future contractual obligations totaled $367.0 million, of which $29.5 million and $337.5 million were operating lease commitments and other contractual obligations, 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.

As disclosed in Notes 7 and 8 to the consolidated financial statements included elsewhere in this report, our operating leases included short-term and long-

term commitments of $2.7 million and $26.8 million, respectively.

Our other contractual obligations included short-term and long-term commitments of $63.7 million and $273.8 million respectively.

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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 Policies and Estimates

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

The preparation of these consolidated financial statements requires our management to make estimates, assumptions, and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the applicable periods.

We base our estimates, assumptions, and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances.

Different assumptions and judgments would change the estimates used in the preparation of our consolidated financial statements, which, in turn, could change the results from those reported.

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

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.

Revenue Recognition

We derive revenue from subscription fees and related professional services.

We sell subscriptions for our cloud-based solutions directly to customers and indirectly through channel partners through arrangements that are non-cancelable and non-refundable.

Our subscription arrangements do not provide customers with the right to take possession of the software supporting the solutions and, as a result, are accounted for as service arrangements.

We record revenue net of sales or value-added taxes.

Subscription Revenue

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

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to take possession of the software.

Professional Services Revenue

Professional services revenue is comprised of fees charged for services ranging from product configuration, data migration, systems integration and training.

Professional services revenue is recognized as services are performed and represents less than 5% of total revenue.

Customers with Multiple Performance Obligations

Some of our contracts with customers contain both subscriptions and professional services.

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 standalone selling price (SSP).

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

Judgment is also used to estimate the contract's transaction price and allocate it to each performance obligation.

Deferred Contract Acquisition Costs

The costs incurred upon the execution of initial and expansion contracts are primarily deferred and amortized over an expected benefit period of three years.

Stock-Based Compensation

The fair value of RSUs is based on the closing market price of our Class A common stock on the date of the grant.

We recognize stock-based compensation expense over the requisite service period, which is the vesting period of the respective awards.

Forfeitures are accounted for when they occur.

Upon the completion of the IPO, the performance condition became probable, and we began to recognize stock-based compensation expense.

The associated stock-based compensation expense is recognized over the longer of the derived service period or the requisite service period, using the accelerated attribution method.

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