Sprout Social, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report. This discussion contains forward-looking statements based upon current plans, expectations and beliefs involving risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” in Part II—Item 1A of this Quarterly Report and in Part I—Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022, and in other parts of this Quarterly Report. See "Cautionary Note Regarding Forward-Looking Statements." Overview Sprout Social is a powerful, centralized platform that provides the critical business layer to unlock the massive commercial value of social media. We have made it increasingly easy to standardize on Sprout Social as the centralized system of record for social and to help customers maximize the value of this mission critical channel. Currently, more than 32,000 customers across more than 100 countries rely on our platform. Introduced in 2011, our cloud software brings together social messaging, data and workflows in a unified system of record, intelligence and action. Operating across major networks, including X (formerly known as Twitter), Facebook, Instagram, TikTok, Pinterest, LinkedIn, Google, Reddit, Glassdoor and YouTube, and commerce platforms Facebook Shops, Shopify and WooCommerce, we provide organizations with a centralized platform to manage their social media efforts across stakeholders and business functions. Virtually every aspect of business has been impacted by social media, from marketing, sales, commerce and public relations to customer service, product and strategy, creating a need for an entirely new category of software. We offer our customers a centralized, secure and powerful platform to manage this broad, complex channel effectively across their organization. We generate revenue primarily from subscriptions to our social media management platform under a software-as-a-service model. Our subscriptions can range from monthly to one-year or multi-year arrangements and are generally non-cancellable during the contractual subscription term. Subscription revenue is recognized ratably over the contract terms beginning on the date the product is made available to customers, which typically begins on the commencement date of each contract. We also generate revenue from professional services related to our platform provided to certain customers, which is recognized at the time these services are provided to the customer. This revenue has historically represented less than 1% of our revenue and is expected to be immaterial for the foreseeable future. Our tiered subscription-based model allows our customers to choose among three core plans to meet their needs. Each plan is licensed on a per user per month basis at prices dependent on the level of features offered. Additional product modules, which offer increased functionality depending on a customer’s needs, can be purchased by the customer on a per user per month basis. We generated revenue of $85.5 million and $65.3 million during the three months ended September 30, 2023 and 2022, respectively, representing growth of 31%. We generated revenue of $240.1 million and $184.2 million during the nine months ended September 30, 2023 and 2022, respectively, representing growth of 30%. In the nine months ended September 30, 2023, software subscriptions contributed 99% of our revenue. We generated net losses of $23.0 million and $13.9 million during the three months ended September 30, 2023 and 2022, respectively, which included stock-based compensation expense of $19.0 million and $13.0 million, respectively. We generated net losses of $46.4 million and $38.3 million during the nine months ended September 30, 2023 and 2022, respectively, which included stock-based compensation expense of $49.0 million and $34.0 million, respectively. We expect to continue investing in the growth of our business and, as a result, generate net losses for the foreseeable future. 25 Macroeconomic Conditions As a company with a global footprint, we are subject to risks and exposures caused by significant events and their macroeconomic impacts, including, but not limited to, the COVID-19 pandemic, the overseas conflict, global geopolitical tension and more recently, rising inflation and interest rates, volatility in the capital markets and related market uncertainty. We continuously monitor the direct and indirect impacts, and the potential for future impacts, of these circumstances on our business and financial results, as well as the overall global economy and geopolitical landscape. Given the importance of our technology platform and heightened market awareness of social media as a strategic communications channel, these factors have not had a material adverse impact on our operational and financial performance to date. However, the potential implications of these macroeconomic events on our business, results of operations and overall financial position, particularly in the long term, introduce additional uncertainty. Our current and prospective customers are impacted by worsening macroeconomic conditions to varying degrees. We are continuing to monitor for potential future direct and indirect impacts on our business and results of operations. Acquisition of Tagger Media, Inc. On August 2, 2023, we completed our acquisition of all the outstanding equity of Tagger Media, Inc. (“Tagger”), for a total preliminary purchase consideration of $144 million. We acquired Tagger in order to expand into the influencer marketing category. Tagger’s platform enables marketers to discover influencers, plan and manage campaigns, analyze competitor strategies, report on trends and measure return on investment. We funded the purchase consideration with a combination of cash on hand and $75 million borrowed under the Facility further described in Note 5 - Revolving Line of Credit of the Notes to the Financial Statements (Part I, Item 1 of this Quarterly Report). The purchase price allocation as of the date of acquisition was based on a preliminary valuation and is subject to revision as more detailed analyses are completed and additional information about the fair value of assets and liabilities acquired become available. We expect to finalize the allocation of the purchase consideration as soon as practicable, pending any other adjustments to acquired assets or liabilities, but no later than 12 months from the acquisition date. We have included the financial results of Tagger in our condensed consolidated financial statements from the date of acquisition. Refer to Note 11 — Business Combinations of the Notes to the Financial Statements (Part I, Item 1 of this Quarterly Report) for further discussion regarding the acquisition. Acquisition of Repustate, Inc. On January 19, 2023, we completed the acquisition of Repustate, Inc. for a total purchase consideration of approximately $8.4 million, consisting of approximately $6.8 million in cash paid at the closing time of the acquisition and a holdback of $1.6 million in cash to be paid as purchase consideration after the one-year anniversary of the closing of the acquisition, assuming no claims by the Company against the holdback amount for post-closing purchase price adjustments or indemnification matters. The purchase price allocation as of the date of acquisition was based on a preliminary valuation and is subject to revision as more detailed analyses are completed and additional information about the fair value of assets and liabilities acquired become available. We expect to finalize the allocation of the purchase consideration as soon as practicable, pending any other adjustments to acquired assets or liabilities, but no later than 12 months from the acquisition date. The acquisition has increased our power, breadth and automation of social listening, messaging, and customer care capabilities with added sentiment analysis, natural language processing (NLP) and 26 artificial-intelligence (AI). We have included the financial results of Repustate in our condensed consolidated financial statements from the date of acquisition. The impact of Repustate’s financial results following the date of acquisition were not significant to Sprout’s condensed consolidated financial statements. Refer to Note 11 — Business Combinations of the Notes to the Financial Statements (Part I, Item 1 of this Quarterly Report) for further discussion. Key Factors Affecting Our Performance Acquiring new customers We are focused on continuing to organically grow our customer base by increasing demand for our platform and penetrating our addressable market. We have invested, and expect to continue to invest, heavily in expanding our sales force and marketing efforts to acquire new customers. Currently, we have more than 32,000 customers. In November 2022, we announced a price increase. For the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022, this price increase contributed to an increase in our average revenue per customer. While our total number of customers decreased over this same period, our number of customers contributing over $10,000 in ARR and $50,000 in ARR increased. We expect this trend to continue as we remain focused on higher-value customers. Expanding within our current customer base We believe that there is a substantial and largely untapped opportunity for organic growth within our existing customer base. Customers often begin by purchasing a small number of user subscriptions and then expand over time, increasing the number of users or social profiles, as well as purchasing additional product modules. Customers may then expand use-cases between various departments to drive collaboration across their organizations. Our sales and customer success efforts include encouraging organizations to expand use-cases to more fully realize the value from the broader adoption of our platform throughout an organization. We will continue to invest in enhancing awareness of our brand, creating additional uses for our products and developing more products, features and functionality of existing products, which we believe are vital to achieving increased adoption of our platform. We have a history of attracting new customers and we have increased our focus on expanding their use of our platform over time. Sustaining product and technology innovation Our success is dependent on our ability to sustain product and technology innovation and maintain the competitive advantage of our proprietary technology. We continue to invest resources to enhance the capabilities of our platform by introducing new products, features and functionality of existing products. International expansion We see international expansion as a meaningful opportunity to grow our platform. Revenue generated from non-U.S. customers during the nine months ended September 30, 2023 was approximately 28% of our total revenue. We have teams in Ireland, Canada, the United Kingdom, Singapore, India, Australia and the Philippines to support our growth internationally. We believe global demand for our platform and offerings will continue to increase as awareness of our platform in international markets grows. We plan to continue adding to our local sales, customer support and customer success teams in select international markets over time. Key Business Metrics We review the following key business metrics to evaluate our business, measure our performance, identify trends, formulate financial projections and make strategic decisions. 27 Number of customers We define a customer as a unique account, multiple accounts containing a common non-personal email domain, or multiple accounts governed by a single agreement or entity. We believe that the number of customers using our platform is an indicator of our market penetration. As of September 30, 2023 2022 Number of customers 32,383 34,258 ARR We define ARR as the annualized revenue run-rate of subscription agreements from all customers as of the last date of the specified period. We believe ARR is an indicator of the scale of our entire platform while mitigating fluctuations due to seasonality and contract term. As of September 30, 2023 2022 (in thousands) ARR $ 359,545 $ 271,266 Number of customers contributing more than $10,000 in ARR We define customers contributing more than $10,000 in ARR as those on a paid subscription plan that had more than $10,000 in ARR as of a period end. We view the number of customers that contribute more than $10,000 in ARR as a measure of our ability to scale with our customers and attract larger organizations. We believe this represents potential for future growth, including expanding within our current customer base. Over time, larger customers have constituted a greater share of our revenue. As of September 30, 2023 2022 Number of customers contributing more than $10,000 in ARR 8,111 6,111 Number of customers contributing more than $50,000 in ARR We define customers contributing more than $50,000 in ARR as those on a paid subscription plan that had more than $50,000 in ARR as of a period end. We view the number of customers that contribute more than $50,000 in ARR as a measure of our ability to scale with our largest customers and attract more sophisticated organizations. We believe this represents potential for future growth, including expanding within our current customer base. Over time, our largest customers have constituted a greater share of our revenue. 28 As of September 30, 2023 2022 Number of customers contributing more than $50,000 in ARR 1,252 843 Components of our Results of Operations Revenue Subscription We generate revenue primarily from subscriptions to our social media management platform under a software-as-a-service model. Our subscriptions can range from monthly to one-year or multi-year arrangements and are generally non-cancellable during the contractual subscription term. Subscription revenue is recognized ratably over the contract terms beginning on the date our product is made available to customers, which typically begins on the commencement date of each contract. Our customers do not have the right to take possession of the online software solution. We also generate a small portion of our subscription revenue from third-party resellers. Professional Services We sell professional services consisting of, but not limited to, implementation fees, specialized training, one-time reporting services and recurring periodic reporting services. Professional services revenue is recognized at the time these services are provided to the customer. This revenue has historically represented less than 1% of our revenue and is expected to be immaterial for the foreseeable future. Cost of Revenue Subscription Cost of revenue primarily consists of expenses related to hosting our platform and providing support to our customers. These expenses are comprised of fees paid to data providers, hosted data center costs and personnel costs directly associated with cloud infrastructure, customer success and customer support, including salaries, benefits, bonuses and allocated overhead. These costs also include depreciation expense and amortization expense related to acquired developed technologies that directly benefit sales. Overhead associated with facilities and information technology is allocated to cost of revenue and operating expenses based on headcount. Although we expect our cost of revenue to increase in absolute dollars as our business and revenue grows, we expect our cost of revenue to decrease as a percentage of our revenue over time. Professional Services and Other Cost of professional services primarily consists of expenses related to our professional services organization and are comprised of personnel costs, including salaries, benefits, bonuses and allocated overhead. Gross Profit and Gross Margin Gross margin is calculated as gross profit as a percentage of total revenue. Our gross margin may fluctuate from period to period based on revenue earned, the timing and amount of investments made to expand our hosting capacity, our customer support and professional services teams and in hiring additional personnel, and the impact of acquisitions. We expect our gross profit and gross margin to increase as our business grows over time. 29 Operating Expenses Research and Development Research and development expenses primarily consist of personnel costs, including salaries, benefits and allocated overhead. Research and development expenses also include depreciation expense and other expenses associated with product development. We plan to increase the dollar amount of our investment in research and development for the foreseeable future as we focus on developing new features and enhancements to our plan offerings. Sales and Marketing Sales and marketing expenses primarily consist of personnel costs directly associated with our sales and marketing department, online advertising expenses, as well as allocated overhead, including depreciation expense. Sales force commissions and bonuses are considered incremental costs of obtaining a contract with a customer. Sales commissions are earned and recorded at contract commencement for both new customer contracts and expansion of contracts with existing customers. Sales commissions are deferred and amortized on a straight-line basis over a period of benefit of three years. We plan to increase the dollar amount of our investment in sales and marketing for the foreseeable future, primarily for increased headcount for our sales department. General and Administrative General and administrative expenses primarily consist of personnel expenses associated with our finance, legal, human resources and other administrative employees. Our general and administrative expenses also include professional fees for external legal, accounting and other consulting services, amortization of intangible assets, depreciation and amortization expense, as well as allocated overhead. We expect to increase the size of our general and administrative functions to support the growth of our business. We expect the dollar amount of our general and administrative expenses to increase for the foreseeable future. However, we expect our general and administrative expenses to decrease as a percentage of revenue over time. Interest Income (Expense), Net Interest income (expense), net consists primarily of interest income earned on our cash and investment balances, partially offset by interest expense from the Facility. Other Expense, Net Other expense, net primarily consists of foreign currency transaction gains and losses. Income Tax Provision The income tax provision consists of current and deferred taxes for our United States and foreign jurisdictions. We have historically reported a taxable loss in our most significant jurisdiction, the United States, and have a full valuation allowance against our deferred tax assets. We expect this trend to continue for the foreseeable future. 30 Results of Operations The following tables set forth information comparing the components of our results of operations in dollars and as a percentage of total revenue for the periods presented. Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 (in thousands) Revenue Subscription $ 84,802 $ 64,536 $ 238,234 $ 182,048 Professional services and other 730 771 1,825 2,120 Total revenue 85,532 65,307 240,059 184,168 Cost of revenue (1) Subscription 19,874 15,008 54,479 43,641 Professional services and other 324 304 828 802 Total cost of revenue 20,198 15,312 55,307 44,443 Gross profit 65,334 49,995 184,752 139,725 Operating expenses Research and development (1) 20,057 16,278 56,889 44,717 Sales and marketing (1) 44,499 32,411 120,711 88,373 General and administrative (1) 24,982 15,691 58,206 45,162 Total operating expenses 89,538 64,380 235,806 178,252 Loss from operations (24,204) (14,385) (51,054) (38,527) Interest expense (1,147) (29) (1,210) (128) Interest income 1,651 728 5,811 1,172 Other expense, net (293) (160) (650) (558) Loss before income taxes (23,993) (13,846) (47,103) (38,041) Income tax (benefit) expense (980) 87 (753) 257 Net loss $ (23,013) $ (13,933) $ (46,350) $ (38,298) _______________ (1) Includes stock-based compensation expense as follows: Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 (in thousands) Cost of revenue $ 971 $ 674 $ 2,329 $ 1,888 Research and development 5,020 3,122 12,949 7,907 Sales and marketing 8,570 6,164 22,346 16,341 General and administrative 4,452 3,014 11,421 7,894 Total stock-based compensation $ 19,013 $ 12,974 $ 49,045 $ 34,030 31 Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 (as a percentage of total revenue) Revenue Subscription 99 % 99 % 99 % 99 % Professional services and other 1 % 1 % 1 % 1 % Total revenue 100 % 100 % 100 % 100 % Cost of revenue Subscription 23 % 23 % 23 % 24 % Professional services and other — % — % — % — % Total cost of revenue 24 % 23 % 23 % 24 % Gross profit 76 % 77 % 77 % 76 % Operating expenses Research and development 23 % 25 % 24 % 24 % Sales and marketing 52 % 50 % 50 % 48 % General and administrative 29 % 24 % 24 % 25 % Total operating expenses 105 % 99 % 98 % 97 % Loss from operations (28) % (22) % (21) % (21) % Interest expense (1) % — % (1) % — % Interest income 2 % 1 % 2 % 1 % Other expense, net — % — % — % — % Loss before income taxes (28) % (21) % (20) % (21) % Income tax (benefit) expense (1) % — % — % — % Net loss (27) % (21) % (19) % (21) % Note: Certain amounts may not sum due to rounding 32 Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022 Revenue Three Months Ended September 30, Change 2023 2022 Amount % ( dollars in thousands ) Revenue Subscription $ 84,802 $ 64,536 $ 20,266 31 % Professional services and other 730 771 (41) (5) % Total revenue $ 85,532 $ 65,307 $ 20,225 31 % Percentage of Total Revenue Subscription 99 % 99 % Professional services and other 1 % 1 % The increase in subscription revenue was primarily driven by increased revenue from our highest tier customers. Customers contributing over $10,000 in ARR grew 33% versus the prior year and customers contributing over $50,000 in ARR grew 49% versus the prior year. The increase in new customers within the highest tiers was primarily driven by prioritizing our customer success and growth resources towards these customers and continuing to grow our sales force capacity to meet market demand. Cost of Revenue and Gross Margin Three Months Ended September 30, Change 2023 2022 Amount % ( dollars in thousands ) Cost of revenue Subscription $ 19,874 $ 15,008 $ 4,866 32 % Professional services and other 324 304 20 7 % Total cost of revenue 20,198 15,312 4,886 32 % Gross profit $ 65,334 $ 49,995 $ 15,339 31 % Gross margin Total gross margin 76 % 77 % 33 The increase in cost of subscription revenue for the three months ended September 30, 2023 compared to the three months ended September 30, 2022 was primarily due to the following: Change ( in thousands ) Data provider fees $ 3,290 Personnel costs 378 Stock-based compensation expense 297 Amortization of intangible assets 470 Other 431 Subscription cost of revenue $ 4,866 Fees paid to our data providers increased due to revenue growth. Personnel costs increased primarily as a result of a 7% increase in headcount as we continue to grow our customer support and customer success teams to support our customer growth. The increase in stock-based compensation expense was primarily due to the increased headcount. The increase in the amortization expense of intangible assets was driven by the acquired developed technology recognized as part of the Tagger acquisition. Operating Expenses Research and Development Three Months Ended September 30, Change 2023 2022 Amount % ( dollars in thousands ) Research and development $ 20,057 $ 16,278 $ 3,779 23 % Percentage of total revenue 23 % 25 % The increase in research and development expense for the three months ended September 30, 2023 compared to the three months ended September 30, 2022 was primarily due to the following: Change ( in thousands ) Personnel costs $ 1,756 Stock-based compensation expense 1,898 Other 125 Research and development $ 3,779 Personnel costs increased primarily as a result of a 9% increase in headcount to grow our research and development teams to drive our technology innovation through the development and maintenance of our platform. The increase in stock-based compensation expense was primarily due to the increased headcount. 34 Sales and Marketing Three Months Ended September 30, Change 2023 2022 Amount % ( dollars in thousands ) Sales and marketing $ 44,499 $ 32,411 $ 12,088 37 % Percentage of total revenue 52 % 50 % The increase in sales and marketing expense for the three months ended September 30, 2023 compared to the three months ended September 30, 2022 was primarily due to the following: Change ( in thousands ) Personnel costs $ 9,029 Stock-based compensation expense 2,406 Other 653 Sales and marketing $ 12,088 Personnel costs increased primarily as a result of a 17% increase in headcount as we continue to expand our sales teams to grow our customer base, as well as additional sales commission expense due to the year-over-year sales growth, which increased the amortization of contract acquisition costs. The increase in stock-based compensation expense was primarily due to the increased headcount. General and Administrative Three Months Ended September 30, Change 2023 2022 Amount % ( dollars in thousands ) General and administrative $ 24,982 $ 15,691 $ 9,291 59 % Percentage of total revenue 29 % 24 % The increase in general and administrative expense for the three months ended September 30, 2023 compared to the three months ended September 30, 2022 was primarily due to the following: Change ( in thousands ) Acquisition-related costs $ 3,755 Personnel costs 1,993 Stock-based compensation expense 1,438 Credit losses on accounts receivable 783 Amortization of intangible assets 469 Other 853 General and administrative $ 9,291 35 Acquisition-related costs increased due to the acquisition of Tagger on August 2, 2023. Personnel costs and stock-based compensation expense increased primarily as a result of a 14% increase in headcount as we continue to grow our business. The increase in the amortization expense of intangible assets was primarily driven by the intangible assets recognized as part of the Tagger acquisition. The increase in credit losses on accounts receivable was primarily driven by higher accounts receivable balances. Interest Income, Net Three Months Ended September 30, Change 2023 2022 Amount % ( dollars in thousands ) Interest income, net $ 504 $ 699 $ (195) (28) % Percentage of total revenue 1 % 1 % The decrease in interest income, net was primarily driven by higher interest expense from the Facility, partially offset by higher interest income from the Company’s marketable securities due to higher interest rates. Other Expense, Net Three Months Ended September 30, Change 2023 2022 Amount % ( dollars in thousands ) Other expense, net $ (293) $ (160) $ (133) 83 % Percentage of total revenue — % — % The change in other expense, net was primarily driven by foreign exchange transaction losses. Income Tax (Benefit) Expense Three Months Ended September 30, Change 2023 2022 Amount % ( dollars in thousands ) Income tax (benefit) expense $ (980) $ 87 $ (1,067) n/m (1) Percentage of total revenue (1) % — % _________________ (1) Calculated metric is not meaningful. The change in income tax (benefit) expense was primarily driven by the income tax benefit recorded in the third quarter of 2023 due to a release of the Company’s valuation allowance resulting from deferred tax liabilities established for finite-lived intangible assets from the acquisition of Tagger. 36 Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022 Revenue Nine Months Ended September 30, Change 2023 2022 Amount % ( dollars in thousands ) Revenue Subscription $ 238,234 $ 182,048 $ 56,186 31 % Professional services and other 1,825 2,120 (295) (14) % Total revenue $ 240,059 $ 184,168 $ 55,891 30 % Percentage of Total Revenue Subscription 99 % 99 % Professional services and other 1 % 1 % The increase in subscription revenue was primarily driven by increased revenue from our highest tier customers. Customers contributing over $10,000 in ARR grew 33% versus the prior year and customers contributing over $50,000 in ARR grew 49% versus the prior year. The increase in new customers within the highest tiers was primarily driven by prioritizing our customer success and growth resources towards these customers and continuing to grow our sales force capacity to meet market demand. Cost of Revenue and Gross Margin Nine Months Ended September 30, Change 2023 2022 Amount % ( dollars in thousands ) Cost of revenue Subscription $ 54,479 $ 43,641 $ 10,838 25 % Professional services and other 828 802 26 3 % Total cost of revenue 55,307 44,443 10,864 24 % Gross profit $ 184,752 $ 139,725 $ 45,027 32 % Gross margin Total gross margin 77 % 76 % 37 The increase in cost of subscription revenue for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 was primarily due to the following: Change ( in thousands ) Data provider fees $ 8,252 Personnel costs 895 Stock-based compensation expense 441 Amortization of intangible assets 470 Other 780 Subscription cost of revenue $ 10,838 Fees paid to our data providers increased due to revenue growth. Personnel costs increased primarily as a result of a 7% increase in headcount as we continue to grow our customer support and customer success teams to support our customer growth. The increase in stock-based compensation expense was primarily due to the increased headcount. The increase in the amortization expense of intangible assets was driven by the acquired developed technology recognized as part of the Tagger acquisition. Operating Expenses Research and Development Nine Months Ended September 30, Change 2023 2022 Amount % ( dollars in thousands ) Research and development $ 56,889 $ 44,717 $ 12,172 27 % Percentage of total revenue 24 % 24 % The increase in research and development expense for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 was primarily due to the following: Change ( in thousands ) Personnel costs $ 7,020 Stock-based compensation expense 5,042 Other 110 Research and development $ 12,172 Personnel costs increased primarily as a result of a 9% increase in headcount to grow our research and development teams to drive our technology innovation through the development and maintenance of our platform. The increase in stock-based compensation expense was primarily due to the increased headcount. 38 Sales and Marketing Nine Months Ended September 30, Change 2023 2022 Amount % ( dollars in thousands ) Sales and marketing $ 120,711 $ 88,373 $ 32,338 37 % Percentage of total revenue 50 % 48 % The increase in sales and marketing expense for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 was primarily due to the following: Change ( in thousands ) Personnel costs $ 25,231 Stock-based compensation expense 6,005 Other 1,102 Sales and marketing $ 32,338 Personnel costs increased primarily as a result of a 17% increase in headcount as we continue to expand our sales teams to grow our customer base, as well as additional sales commission expense due to the year-over-year sales growth, which increased the amortization of contract acquisition costs. The increase in stock-based compensation expense was primarily due to the increased headcount. General and Administrative Nine Months Ended September 30, Change 2023 2022 Amount % ( dollars in thousands ) General and administrative $ 58,206 $ 45,162 $ 13,044 29 % Percentage of total revenue 24 % 25 % The increase in general and administrative expense for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 was primarily due to the following: Change ( in thousands ) Acquisition-related costs $ 4,221 Stock-based compensation expense 3,527 Personnel costs 3,374 Credit losses on accounts receivable 1,021 Amortization of intangible assets 685 Other 216 General and administrative $ 13,044 39 Acquisition-related costs increased due to the acquisition of Tagger on August 2, 2023. Stock-based compensation expense and personnel costs increased primarily as a result of a 14% increase in headcount as we continue to grow our business. The increase in the amortization expense of intangible assets was driven by the intangible assets recognized as part of the Repustate and Tagger acquisitions. The increase in credit losses on accounts receivable was primarily driven by higher accounts receivable balances. Interest Income, Net Nine Months Ended September 30, Change 2023 2022 Amount % ( dollars in thousands ) Interest income, net $ 4,601 $ 1,044 $ 3,557 n/m (1) Percentage of total revenue 2 % 1 % _________________ (1) Calculated metric is not meaningful. The increase in interest income, net was primarily driven by higher interest income from the Company’s marketable securities due to higher interest rates, partially offset by higher interest expense from the Facility. Other Expense, Net Nine Months Ended September 30, Change 2023 2022 Amount % ( dollars in thousands ) Other expense, net $ (650) $ (558) $ (92) 16 % Percentage of total revenue — % — % The change in other expense, net was primarily driven by foreign exchange transaction losses. Income Tax (Benefit) Expense Nine Months Ended September 30, Change 2023 2022 Amount % ( dollars in thousands ) Income tax (benefit) expense $ (753) $ 257 $ (1,010) n/m (1) Percentage of total revenue — % — % _________________ (1) Calculated metric is not meaningful. The change in income tax (benefit) expense was primarily driven by the income tax benefit recorded in the third quarter of 2023 due to the release of the Company’s valuation allowance resulting from deferred tax liabilities established for finite-lived intangible assets from the acquisition of Tagger. 40 Non-GAAP Financial Measures In addition to our results determined in accordance with U.S. generally accepted accounting principles, or GAAP, we believe the following non-GAAP measures are useful in evaluating our operating performance. We use the below non-GAAP financial information, collectively, to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that non-GAAP financial information, when taken collectively, may be helpful to investors because it provides consistency and comparability with past financial performance by excluding certain items that may not be indicative of our business, operating results or future outlook. However, non-GAAP financial information is presented for supplemental informational purposes only, has limitations as an analytical tool and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP. In addition, other companies, including companies in our industry, may calculate non-GAAP financial measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measures as tools for comparison. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures, and not to rely on any single financial measure to evaluate our business. Non-GAAP Gross Profit We define non-GAAP gross profit as GAAP gross profit, excluding stock-based compensation expense and amortization expense associated with the acquired developed technology from the Tagger acquisition. We believe non-GAAP gross profit provides our management and investors consistency and comparability with our past financial performance and facilitates period-to-period comparisons of operations, as this non-GAAP financial measure eliminates the effect of stock-based compensation and amortization expense, which are often unrelated to overall operating performance. During the third quarter of 2023, we revised our definition of non-GAAP gross profit to exclude amortization expense associated with the acquired developed technology from the Tagger acquisition. Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Reconciliation of Non-GAAP gross profit ( dollars in thousands ) Gross profit $ 65,334 $ 49,995 $ 184,752 $ 139,725 Stock-based compensation expense 971 674 2,329 1,888 Amortization of acquired developed technology 470 — 470 — Non-GAAP gross profit $ 66,775 $ 50,669 $ 187,551 $ 141,613 Non-GAAP Operating Income (Loss) We define non-GAAP operating income (loss) as GAAP loss from operations, excluding stock-based compensation expense, acquisition-related expenses and amortization expense associated with the acquired intangible assets from the Tagger acquisition. We believe non-GAAP operating income (loss) provides our management and investors consistency and comparability with our past financial performance and facilitates period-to-period comparisons of operations, as this non-GAAP financial measure eliminates the effect of stock-based compensation, acquisition-related expenses and amortization expense, which are often unrelated to overall operating performance. During the second quarter of 2023, we revised our definition of non-GAAP operating income (loss) to exclude acquisition-related expenses in connection with our acquisition of Tagger. During the third quarter of 2023, we 41 revised our definition of non-GAAP operating income (loss) to exclude amortization expense associated with the acquired intangible assets from the Tagger acquisition. Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Reconciliation of Non-GAAP operating income (loss) ( dollars in thousands ) Loss from operations $ (24,204) $ (14,385) $ (51,054) $ (38,527) Stock-based compensation expense 19,013 12,974 49,045 34,030 Acquisition-related expenses 3,755 — 4,221 — Amortization of acquired intangible assets 809 — 809 — Non-GAAP operating income (loss) $ (627) $ (1,411) $ 3,021 $ (4,497) Non-GAAP Net Income (Loss) We define non-GAAP net income (loss) as GAAP net loss, excluding stock-based compensation expense, acquisition-related expenses, amortization expense associated with the acquired intangible assets from the Tagger acquisition and tax benefits due to changes in the valuation allowance from the Tagger acquisition. We believe non-GAAP net income (loss) provides our management and investors consistency and comparability with our past financial performance and facilitates period-to-period comparisons of operations, as this non-GAAP financial measure eliminates the effect of stock-based compensation, acquisition-related expenses, amortization expense and tax benefits due to changes in valuation allowances from business acquisitions, which are often unrelated to overall operating performance. During the second quarter of 2023, we revised our definition of non-GAAP net income (loss) to exclude acquisition-related expenses in connection with our acquisition of Tagger. During the third quarter of 2023, we revised our definition of non-GAAP net income (loss) to exclude amortization expense associated with the acquired intangible assets from the Tagger acquisition and tax benefits recognized from changes in the valuation allowance associated with our acquisition of Tagger. Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Reconciliation of Non-GAAP net income (loss) ( dollars in thousands ) Net loss $ (23,013) $ (13,933) $ (46,350) $ (38,298) Stock-based compensation expense 19,013 12,974 49,045 34,030 Acquisition-related expenses 3,755 — 4,221 — Amortization of acquired intangible assets 809 — 809 — Tax benefit due to change in valuation allowance from business acquisition (1,134) — (1,134) — Non-GAAP net income (loss) $ (570) $ (959) $ 6,591 $ (4,268) Non-GAAP Net Income (Loss) per Share We define non-GAAP net income (loss) per share as GAAP net loss per share attributable to common shareholders, basic and diluted, excluding stock-based compensation expense, acquisition-related expenses, amortization expense associated with the acquired intangible assets from the Tagger acquisition and tax benefits due to changes in the valuation allowance from the Tagger acquisition. We believe non-GAAP net income (loss) per share provides our management and investors consistency and comparability with our past financial performance and facilitates period-to-period comparisons of 42 operations, as this non-GAAP financial measure eliminates the effect of stock-based compensation, acquisition-related expenses, amortization expense and tax benefits due to changes in valuation allowances from business acquisitions, which are often unrelated to overall operating performance. During the second quarter of 2023, we revised our definition of non-GAAP net income (loss) per share to exclude acquisition-related expenses in connection with our acquisition of Tagger. During the third quarter of 2023, we revised our definition of non-GAAP net income (loss) per share to exclude amortization expense associated with the acquired intangible assets from the Tagger acquisition and tax benefits recognized from changes in the valuation allowance associated with our acquisition of Tagger. Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Reconciliation of Non-GAAP net income (loss) per share Net loss per share attributable to common shareholders, basic and diluted $ (0.41) $ (0.25) $ (0.83) $ (0.70) Stock-based compensation expense per share 0.34 0.23 0.88 0.62 Acquisition-related expenses 0.07 — 0.08 — Amortization of acquired intangible assets 0.01 — 0.01 — Tax benefit due to change in valuation allowance from business acquisition (0.02) — (0.02) — Non-GAAP net income (loss) per share $ (0.01) $ (0.02) $ 0.12 $ (0.08) Free Cash Flow Free cash flow is a non-GAAP financial measure that we define as net cash provided by operating activities less expenditures for property and equipment and acquisition-related costs. We believe that free cash flow is a useful indicator of liquidity that provides information to management and investors about the amount of cash provided by our core operations that, after the expenditures for property and equipment and acquisition-related costs, is available to be used for strategic initiatives. For example, if free cash flow is negative, we may need to access cash reserves or other sources of capital to invest in strategic initiatives. One limitation of free cash flow is that it does not reflect our future contractual obligations. Additionally, free cash flow does not represent the total increase or decrease in our cash balance for a given period. During the third quarter of 2023, we revised our definition of free cash flow to exclude payments related to acquisition-related costs associated with our acquisition of Tagger. Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Reconciliation of Free cash flow ( dollars in thousands ) Net cash provided by operating activities $ (5,518) $ 1,047 $ 9,060 $ 7,716 Expenditures for property and equipment (800) (514) (1,444) (1,427) Acquisition-related costs 2,906 — 2,906 — Free cash flow $ (3,412) $ 533 $ 10,522 $ 6,289 43 Liquidity and Capital Resources As of September 30, 2023, our principal sources of liquidity were cash and cash equivalents of $41.1 million, marketable securities of $80.3 million and net accounts receivable of $45.1 million. Historically, we have generated losses from operations as evidenced by our accumulated deficit and in previous years, we had negative cash flows from operations. However, for the nine months ended September 30, 2023 and 2022, we generated positive cash flows from operations. We expect to continue to incur operating losses and may have negative operating cash flows for the foreseeable future as we continue to grow the business. We may experience greater than anticipated operating losses in the short- and long-term due to macroeconomic, financial, and other factors that are beyond our control, such as rising inflation rates and a potential recession. The impact of these factors on our customers and our operations going forward remains uncertain, and we continue to proactively monitor our liquidity position. Prior to our IPO in December 2019, we financed our operations primarily through private issuance of equity securities and line of credit borrowings. In our IPO, we received net proceeds of $134.3 million after deducting underwriting discounts and commissions of $10.5 million and offering expenses of $5.2 million. We subsequently received an additional $10.0 million of net proceeds after deducting underwriting discounts and commissions in January 2020 as a result of the over-allotment option exercise by the underwriters of our IPO. In August 2020, we received $42.1 million of net proceeds from our equity follow-on offering after deducting underwriting discounts and commissions. Our principal uses of cash in recent periods have been to fund operations and invest in capital expenditures. We believe our existing cash and cash equivalents will be sufficient to meet our operating and capital 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 cash flows from operating activities, available cash, investment balances, and potential future equity or debt transactions. Our future capital requirements will depend on many factors, including our subscription growth rate, subscription renewal activity, billing frequency, the impact of macroeconomic conditions on our customers and our operations, the timing and extent of spending to support our research and development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced product offerings, and the continuing market acceptance of our product. We have in the past, and may in the future, enter into arrangements to acquire or invest in complementary businesses, products and technologies, including intellectual property rights. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us, or at all. If we are unable to raise additional capital or generate cash flows necessary to expand our operations, our business, results of operations and financial condition could be adversely affected. Credit Agreement On August 1, 2023,we entered into a Credit Agreement (the “Credit Agreement”) by and among the Company, the banks and other financial institutions or entities party thereto as lenders and MUFG Bank, LTD. as administrative agent and collateral agent. The Credit Agreement provides for a $100 million senior secured revolving credit facility, maturing on August 1, 2028. Borrowings under the Facility may be used to finance acquisitions and other investments permitted under the terms of the Credit Agreement, to pay related fees and expenses and for general corporate purposes. Borrowings under the Facility may be designated as SOFR Loans or ABR Loans (each as defined in the Credit Agreement), subject to certain terms and conditions under the Credit Agreement, and bear interest at a rate of either (i) SOFR (subject to a 1.0% floor), plus 0.10%, plus a margin ranging from 2.75% to 3.25% based on the Company’s liquidity or (ii) ABR (subject to a 2.0% floor) plus a margin ranging from 1.75% to 2.25% based on the Company’s liquidity. The Facility also includes a quarterly commitment fee on the unused portion of the Facility of 0.30% or 0.35% based on the Company’s liquidity. 44 The Credit Agreement includes customary conditions to credit extensions, affirmative and negative covenants, and customary events of default. In addition, the Credit Agreement contains financial covenants as to (i) minimum liquidity, requiring the maintenance, at all times and measured at the end of each fiscal quarter, of cash and cash equivalents of not less than the greater of (x) $30 million and (y) 30% of the total revolving commitments, and (ii) minimum recurring revenue growth, requiring recurring revenue growth for the trailing four fiscal quarter period, measured at the end of each fiscal quarter, of not less than 115% of the actual recurring revenue for the same period in the prior fiscal year. On August 1, 2023, we borrowed $75 million under the Credit Agreement in connection with the Tagger acquisition. As of September 30, 2023, $75 million remains outstanding under the Credit Agreement. Refer to Note 11 — Business Combinations of the Notes to the Financial Statements (Part I, Item 1 of this Quarterly Report) for further discussion. The following table summarizes our cash flows for the periods presented: Nine Months Ended September 30, 2023 2022 (in thousands) Net cash provided by operating activities $ 9,060 $ 7,716 Net cash used in investing activities (118,806) (18,799) Net cash provided by (used in) financing activities 73,790 (890) Net decrease in cash, cash equivalents and restricted cash $ (35,956) $ (11,973) Operating Activities Our largest source of operating cash is cash collections from our customers for subscription services. Our primary uses of cash from operating activities are for personnel costs across the sales and marketing and research and development departments and hosting costs. Historically, we have generated negative cash flows from operating activities. However, for the nine months ended September 30, 2023 and 2022, we generated positive cash flows from operating activities. Net cash provided by operating activities during the nine months ended September 30, 2023 was $9.1 million, which resulted from a net loss of $46.4 million adjusted for non-cash charges of $71.2 million and net cash outflow of $15.8 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of $49.0 million of stock-based compensation expense, $19.1 million for amortization of deferred contract acquisition costs, which were primarily commissions, $1.1 million of amortization of right-of-use, or ROU, operating lease assets, and $4.2 million of depreciation and intangible asset amortization expense. The net cash outflow from changes in operating assets and liabilities was primarily the result of a $26.0 million increase in deferred commissions due to the addition of new customers and expansion of the business, a $3.5 million increase in prepaid expenses and other assets, a $2.6 million decrease in operating lease liabilities, and a $7.7 million increase in accounts receivable. These outflows were primarily offset by a $23.9 million increase in deferred revenue. Net cash provided by operating activities during the nine months ended September 30, 2022 was $7.7 million, which resulted from a net loss of $38.3 million adjusted for non-cash charges of $51.5 million and net cash outflow of $5.5 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of $34.0 million of stock-based compensation expense, $2.9 million of depreciation and intangible asset amortization expense, $13.3 million for amortization of deferred contract acquisition costs, which were primarily commissions, and $0.7 million of amortization of ROU operating lease assets. The net cash outflow from changes in operating assets and liabilities was primarily the result of a $19.7 million increase in deferred commissions due to the addition of new customers and expansion of the 45 business, a $2.2 million increase in prepaid expenses and other assets, as well as a $2.3 million decrease in operating lease liabilities. These outflows were primarily offset by a $15.7 million increase in deferred revenue and a $4.8 million increase in accounts payable and accrued expenses. Investing Activities Net cash used in investing activities for the nine months ended September 30, 2023 was $118.8 million, which was primarily due to $145.8 million paid for the acquisitions of Tagger and Repustate and $63.1 million in purchases of marketable securities, partially offset by $91.5 million in proceeds from the maturities and sale of marketable securities. Net cash used in investing activities for the nine months ended September 30, 2022 was $18.8 million, which was primarily due to $135.7 million in purchases of marketable securities, partially offset by $118.4 million in proceeds from maturities of marketable securities. Financing Activities Net cash provided by financing activities for the nine months ended September 30, 2023 was $73.8 million, primarily driven by $75.0 million in borrowings under the Facility and $1.4 million in proceeds from purchases under our employee stock purchase plan, partially offset by $1.8 million in payments related to employee withholding taxes as a result of the net settlement of stock-based awards and $0.8 million in issuance costs related to the Facility. Net cash used in financing activities for the nine months ended September 30, 2022 was $0.9 million, primarily driven by $1.6 million in payments related to employee withholding taxes as a result of the net settlement of stock-based awards, partially offset by $0.7 million in proceeds from purchases under our employee stock purchase plan. Contractual Obligations As of September 30, 2023, we have non-cancellable contractual obligations related primarily to operating leases and minimum guaranteed purchase commitments for data and services. As of September 30, 2023, the total obligation for operating leases was $22.3 million, of which $4.7 million is expected to be paid in the next twelve months. As of September 30, 2023, our purchase commitment for primarily data and services was $9.4 million, of which $5.0 million is expected to be paid in the next twelve months. S ee Note 3 and Note 7 of the notes to our unaudited condensed consolidated financial statements included in this Quarterly Report for more information regarding these obligations. Recent Accounting Pronouncements Refer to section titled “Summary of Significant Accounting Policies” in Note 1 of the notes to our unaudited condensed consolidated financial statements included in this Quarterly Report for more information. Critical Accounting Policies and Estimates Our unaudited condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates. 46 Our significant accounting policies are discussed in Note 1, “Nature of Operations and Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements as of and for the year ended December 31, 2022 included in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on February 22, 2023. There have been no significant changes to these policies during the nine months ended September 30, 2023, except as noted in Note 1 - Summary of Significant Accounting Policies of the Notes to the Financial Statements (Part I, Item 1 of this Quarterly Report). 47