PROCORE TECHNOLOGIES, INC. You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our condensed consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and notes thereto and the related Management's Discussion and Analysis of Financial Condition and Results of Operations included in the prospectus datedMay 19, 2021 that forms a part of our Registration Statement on Form S-1 (File No. 333-236789), as filed with theSecurities and Exchange Commission (the "SEC"), pursuant to Rule 424(b) under the Securities Act of 1933, as amended, or the Securities Act, onMay 21, 2021 ( the "Prospectus"). You should review the disclosure under "Part II, Item 1A - Risk Factors" in this Quarterly Report on Form 10-Q for a discussion of forward-looking statements and important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. These statements, like all statements in this report, speak only as of their date (unless another date is indicated), and we undertake no obligation to update or revise these statements in light of future developments. Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to the "Company", "Procore ," "we," "us" and "our" refer toProcore Technologies, Inc. and its consolidated subsidiaries. Overview
Our mission is to connect everyone in construction on a global platform.
We are a leading provider of cloud-based construction management software, and are helping transform one of the oldest, largest, and least digitized industries in the world. We focus exclusively on construction, connecting and empowering the industry's key stakeholders, such as owners, general contractors, specialty contractors, architects, and engineers, to collaborate from any location, on any internet-connected device. Our platform is modernizing and digitizing construction management by enabling real-time access to critical project information, simplifying complex workflows, and facilitating seamless communication among key stakeholders, all of which we believe positions us to serve as the system of record for the construction industry. Adoption of our platform helps customers increase productivity and efficiency, reduce rework and costly delays, improve safety and compliance, and enhance financial transparency and accountability.
In short, we build the software for the people that build the world.
We serve customers ranging from small businesses managing a couple million dollars of annual construction volume to global enterprises managing billions of dollars of annual construction volume. Our core customers are owners, general contractors, and specialty contractors operating across the commercial, residential, industrial, and infrastructure segments of the construction industry. We primarily sell subscriptions to access our products through our direct sales team, which is specialized by stakeholder, region, size, and type. Our products are offered on our cloud-based platform and are designed to be easy to configure and deploy. Our users can access our products on computers, smartphones, and tablets through any web browser or from our mobile application available for both the iOS and Android platforms. We generate substantially all of our revenue from subscriptions to access our products and have an unlimited user model that is designed to facilitate adoption and maximize usage of our platform by all project stakeholders. We sell our products on a subscription basis for a fixed fee with pricing generally based on the number and mix of products and the annual construction volume contracted to run on our platform. As our customers subscribe to additional products, or increase the annual construction volume contracted to run on our platform, we generate more revenue. We do not provide refunds for unused construction volume, or charge customers based on consumption or on a per project basis. Subscriptions to access our products include customer support and allow for unlimited users as we do not charge a per-seat or per-user fee. Customers can invite all project participants to engage with our platform as part of a project team. This includes the customer's employees and its collaborators, who are other project participants who engage with our platform but do not pay us for such use. Further, multiple stakeholders can be customers on the same project and retain access to project information for the duration of their subscription. Recent Developments OnMay 24, 2021 , we completed our IPO, in which we issued and sold 10,410,000 shares of our common stock at a price of$67.00 per share, including 940,000 shares of common stock pursuant to the exercise in full of the underwriters' option to purchase additional shares. We received net proceeds of$665.1 million , after deducting underwriting discounts and commissions. In connection with the IPO, all outstanding shares of convertible preferred stock were automatically converted into an aggregate of 85,331,278 shares of our common stock on a one-for-one basis. OnOctober 21, 2021 , the Company completed the acquisition of all outstanding equity of LaborChart, a labor management solution that facilitates labor scheduling, forecasting, office-to-field communications, certification tracking, data 21
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management, and labor analysis. The estimated purchase price is approximately
OnNovember 2, 2021 , the Company completed the acquisition of all outstanding equity of Levelset, a lien rights management solution. Levelset also has a materials finance business that offers customers deferred payment terms on their purchases of construction materials. The materials finance business is currently immaterial, but may grow in the future. Pursuant to the merger agreement, the estimated purchase price is approximately$500 million , which consists of approximately$425 million in cash, subject to customary adjustments for working capital, transaction expenses, cash, indebtedness, and the determination of any consideration for post-combination services, and$75 million in shares ofProcore common stock. Certain Factors Affecting Our Performance
Acquiring New Customers and Retaining and Expanding Existing Customers' Use of Our Platform
We are highly focused on continuing to acquire new customers to support our long-term growth. We intend to efficiently drive new customer acquisitions by continuing to invest across our sales and marketing engine to engage our prospective customers, increase brand awareness, and drive adoption of our products and platform. The number of customers on our platform has increased from 6,095 as ofDecember 31, 2018 , to 8,506 as ofDecember 31, 2019 , to 10,166 as ofDecember 31, 2020 , reflecting year-over-year growth rates of 40% in 2019 and 20% in 2020. The number of customers on our platform was 11,605 as ofSeptember 30, 2021 . Our ability to continue to grow our business and serve the broader needs of the construction industry depends on acquiring new customers, customers purchasing new products, renewing and expanding their use of existing products, and maintaining or increasing the price of our existing products.
Continued Technology Innovation and Expansion of Our Platform
We plan to continue to invest in technology innovation and product development to enhance the capabilities of our platform. Additional features and products will also enable customers and collaborators to manage new workflows on our platform and allow us to attract a broader set of stakeholders. We have recently introduced new products developed in-house and through our acquisitions of BIManywhere, Honest Buildings, Construction BI, Esticom, Levelset, and LaborChart. We intend to continue to invest in building additional products, features, and functionality that expand our capabilities and facilitate the extension of our platform. We also intend to continue to evaluate strategic acquisitions and investments in businesses and technologies to drive product and market expansion, such as our recent acquisitions of LaborChart and Levelset in October andNovember 2021 , respectively. The acquisitions closed following the completion of our third fiscal quarter, and therefore the respective financial results of LaborChart and Levelset are not included in the accompanying financial statements. In addition, our results of operations discussion below do not contemplate the impact of the LaborChart and Levelset acquisitions and, as such, we expect that expenses, both in dollars and as a percentage of total revenues, may increase from the current or historical periods. Our future success is dependent on our ability to successfully develop or acquire, market, and sell existing and new products to both new and existing customers.
International Growth
We see international expansion as a major, and largely greenfield, opportunity for growth as we look to capture a larger part of the worldwide construction market. We have started to grow our presence internationally with the opening of sales and marketing offices inSydney, Australia andVancouver andToronto, Canada in 2017,London, England in 2018 andMexico City, Mexico in 2019. We have also developed focused sales and marketing efforts inSingapore and theUnited Arab Emirates in 2021, where we do not yet maintain office locations. As a result of our international efforts, we support multiple languages and currencies. Furthermore, we believe global demand for our products will continue to increase as we expand our international sales and marketing efforts, and the awareness of our products and platform grows. However, our ability to conduct our operations internationally will require considerable management attention and resources and is subject to the particular challenges of supporting a rapidly growing business in an environment of multiple languages, cultures, customs, legal, tax and regulatory systems, alternative dispute systems, and commercial markets. We have made, and plan to continue to make, significant investments in existing and select additional international markets. While these investments may adversely affect our operating results in the near term, we believe they will contribute to our long-term growth. 22
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COVID-19 Update
As governments worldwide scrambled to control the spread of COVID-19, some local
governments temporarily closed construction jobsites or imposed restrictions on
construction activity, such as limiting the number of workers allowed on site,
delaying progress on ongoing projects. The outbreak of COVID-19 negatively
impacted the number of new customers added to our platform during 2020 and in
the first nine months of 2021. However, our customers' reliance on our platform,
coupled with the steady growth of our customer base throughout the pandemic,
gives us confidence that the pandemic's impact on our industry and business is
short-term and will ultimately accelerate digital transformation in our
industry, supporting our long-term growth. Notably, the pandemic has begun to
change the way construction stakeholders operate by pushing them to adopt
digital solutions that enable distanced, distributed workforces.
We believe the temporary slowdown in construction during the pandemic has
increased the backlog of new construction and may also drive additional new
construction in the future. We have developed a highly efficient and resilient
business model that we expect to flourish from these industry tailwinds.
Further, we believe we are uniquely positioned to continue to drive forward the
digitization of global construction. The impact of the COVID-19 pandemic and its
effects on the construction industry continue to evolve. Similarly, the
pandemic's impact on our financial condition and results of operations remains
uncertain. Furthermore, as a result of our subscription-based business model,
the effect of the COVID-19 pandemic may not be fully reflected in our results of
operations and overall financial condition until future periods. See disclosure
under Part II, Item 1A - Risk Factors in this Quarterly Report on Form 10-Q for
further discussion of the possible impact of the COVID-19 pandemic on our
business and financial results.
Components of Results of OperationsRevenue
We generate substantially all of our revenue from subscriptions to access our products and related support. Subscriptions are sold for a fixed fee and revenue is recognized ratably over the term of the subscription. Our subscriptions generally have annual or multi-year terms, are typically subject to renewal at the end of the subscription term, and are non-cancellable. To the extent we invoice our customers in advance of revenue recognition, we record deferred revenue. Consequently, a portion of the revenue that we report each period is attributable to the recognition of revenue previously deferred related to subscriptions that we entered into during previous periods.
Cost of Revenue
Cost of revenue primarily consists of customer support personnel-related
compensation expenses, including salaries, bonuses, benefits, payroll taxes, and
stock-based compensation expense, third-party hosting costs, software license
fees, amortization of capitalized software development costs, amortization of
acquired technology intangible assets, and allocated overhead. We expect our
cost of revenue to increase on an absolute dollar basis as our revenue
increases. We intend to continue to invest additional resources in platform
hosting, customer support, and software development as we grow our business and
to ensure that our customers are realizing the full benefit of our products. The
level and timing of investment in these areas could affect our cost of revenue
in the future.
Costs related to the development of internal-use software for new products and
major platform enhancements are capitalized until the software is substantially
complete and ready for its intended use. Capitalized software development costs
are amortized on a straight-line basis over the developed software's estimated
useful life of two years and the amortization is recorded in cost of revenue.
We incurred significant additional cost of revenue expenses starting the second
quarter of 2021 as a result of the stock-based compensation expense associated
with restricted stock units ("RSUs") where the performance condition was
satisfied upon the effective date of the registration statement for our IPO and
employer payroll tax related to employee stock transactions. We anticipate
additional stock-based compensation expense and employer payroll tax related to
employee stock transactions going forward.
Operating Expenses
Our operating expenses consist of sales and marketing, research and development,
and general and administrative expenses. For each of these categories of
expense, personnel-related compensation expenses are the most significant
component, which include salaries, bonuses, commissions, benefits, payroll
taxes, stock-based compensation, and severance expenses as a result of
restructuring in the third quarter of 2020. Refer to Note 14 to the unaudited
condensed consolidated financial statements included elsewhere in this Quarterly
Report on Form 10-Q regarding the restructuring event.
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We incurred significant additional operating expenses starting the second
quarter of 2021 as a result of stock-based compensation expense associated with
RSUs where the performance condition was satisfied upon the effective date of
the registration statement for our IPO and employer payroll tax related to
employee stock transactions. We anticipate additional stock-based compensation
expense and employer payroll tax related to employee stock transactions going
forward.
Sales and Marketing
Sales and marketing expenses primarily consist of personnel-related compensation
expenses for our sales and marketing organizations, advertising costs, marketing
events, travel, trade shows and other marketing activities, contractor costs to
supplement our staff levels, consulting services, amortization of acquired
customer relationship intangible assets, and allocated overhead. We expense
advertising and other promotional expenditures as incurred. We expect sales and
marketing expenses to increase on an absolute dollar basis and vary from period
to period as a percentage of revenue, as we increase our investment in sales and
marketing efforts over the foreseeable future, primarily from increased
headcount in sales and marketing as well as investment in marketing to drive
customer growth.
Research and Development
Research and development expenses primarily consist of personnel-related
compensation expenses for our engineering, product, and design teams, contractor
costs to supplement our staff levels, consulting services, amortization of
certain acquired intangible assets used in research and development activities,
and allocated overhead. We expect research and development expenses to increase
on an absolute dollar basis and vary from period to period as a percentage of
revenue for the foreseeable future as we continue to invest in headcount to
build, enhance, maintain, and scale our products and platform.
General and Administrative
General and administrative expenses primarily consist of personnel-related compensation expenses for our finance, human resources, IT, legal, and other administrative functions. Additionally, general and administrative expenses include non-personnel-related expenses, such as professional fees for audit, legal, tax, and other external consulting services, including acquisition-related transaction expenses, costs associated with operating as a public company, including insurance costs, professional services, investor relations, and other compliance costs applicable to companies listed on a national securities exchange, property and use taxes, licenses, travel and entertainment costs, and allocated overhead. We expect to increase the size of our general and administrative functions to support the growth of our business, including our international expansion.
Interest Expense, Net
Interest expense, net consists primarily of interest expense associated with our finance leases and undrawn fees associated with our credit agreement (the "Credit Facility") provided bySilicon Valley Bank , which is partially offset by interest income from money market funds.
Change in Fair Value of Series I Redeemable Convertible Preferred Stock Warrant Liability
Change in fair value of Series I redeemable convertible preferred stock warrant liability consisted of losses from the remeasurement of the Series I redeemable convertible preferred stock warrant to fair value from issuance inMarch 2020 toSeptember 2020 . Other Income (Expense), Net
Other income (expense), net primarily consists of gain or loss on foreign currency transactions and miscellaneous other income.
Provision for Income Taxes
Provision for income taxes consists primarily of income taxes ofU.S. state franchise taxes and certain foreign jurisdictions in which we conduct business, net of the release of valuation allowance as a result of deferred tax liabilities from acquisitions that are an available source of income to realize our deferred tax assets. As we expand our international operations, we expect to incur increased foreign tax expenses. We have a full valuation allowance for netU.S. andU.K. deferred tax assets. TheU.S. valuation allowance includes net operating loss carryforwards, and tax credits related primarily to research and development for our operations inthe United States . TheU.K. valuation allowance is primarily comprised of net operating loss carryforwards. We expect to maintain this full valuation allowance for our netU.S. andU.K. deferred tax assets for the foreseeable future. 24 --------------------------------------------------------------------------------
Results of Operations
The following tables set forth our condensed consolidated statements of operations data and such data as a percentage of revenue for each of the periods indicated. Certain percentages below may not sum due to rounding.
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2021 2020 2021
(in thousands)
Revenue $ 101,891 $ 131,990 $ 290,781 $ 368,718
Cost of revenue (1)(2)(3)(5) 18,063 22,693 52,589 68,545
Gross profit 83,828 109,297 238,192 300,173
Operating expenses:
Sales and marketing (1)(2)(3)(4)(5) 47,410 70,356 138,110 224,226
Research and development (1)(2)(3)(4)(5) 34,504 53,447 89,255 176,619
General and administrative (1)(3)(4)(5) 18,320 35,051 47,770 110,805
Total operating expenses 100,234 158,854 275,135 511,650
Loss from operations (16,406 ) (49,557 ) (36,943 ) (211,477 )
Interest expense, net (573 ) (521 ) (1,493 ) (1,659 )
Change in fair value of Series I
redeemable
convertible preferred stock warrant
liability 1,002 - (9,603 ) -
Other income (expense), net 248 (653 ) (229 ) (880 )
Loss before provision for income taxes (15,729 ) (50,731 ) (48,268 ) (214,016 )
Provision for income taxes 224 11 468 177
Net loss $ (15,953 ) $ (50,742 ) $ (48,736 ) $ (214,193 )
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2021 2020 2021
(as a percentage of revenue)
Revenue 100 % 100 % 100 % 100 %
Cost of revenue (1)(2)(3)(5) 18 % 17 % 18 % 19 %
Gross profit 82 % 83 % 82 % 81 %
Operating expenses:
Sales and marketing (1)(2)(3)(4)(5) 47 % 53 % 47 % 61 %
Research and development (1)(2)(3)(4)(5) 34 % 40 % 31 % 48 %
General and administrative (1)(3)(4)(5) 18 % 27 % 16 % 30 %
Total operating expenses 98 % 120 % 95 % 139 %
Loss from operations (16 %) (38 %) (13 %) (57 %)
Interest expense, net (1 %) (0 %) (1 %) (0 %)
Change in fair value of Series I
redeemable
convertible preferred stock warrant
liability 1 % 0 % (3 %) 0 %
Other income (expense), net 0 % (0 %) (0 %) (0 %)
Loss before provision for income taxes (15 %) (38 %) (17 %) (58 %)
Provision for income taxes 0 % 0 % 0 % 0 %
Net loss (16 %) (38 %) (17 %) (58 %)
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(1) Includes stock-based compensation expense as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2021 2020 2021
(in thousands)
Cost of revenue $ 633 $ 679 $ 1,168 $ 6,758
Sales and marketing 3,410 11,178 8,644 57,285
Research and development 2,898 15,064 6,747 69,627
General and administrative 3,074 11,262
5,782 52,259
Total stock-based compensation expense
(2) Includes amortization of acquired intangible assets as follows:
Three Months Ended September 30, Nine Months Ended September 30,
2020 2021 2020 2021
(in thousands)
Cost of revenue $ 761 $ 1,086 $ 2,283 $ 3,258
Sales and marketing 404 404 1,212 1,349
Research and development 183 907 488 1,770
Total amortization of acquired
intangible assets $ 1,348 $ 2,397 $ 3,983 $ 6,377
(3) Includes employer payroll taxes on employee stock transactions as follows:
Three Months Ended September 30, Nine Months Ended September 30,
2020 2021 2020 2021
(in thousands)
Cost of revenue $ - $ 66 $ - $ 400
Sales and marketing 36 473 112 1,830
Research and development 8 386 43 2,208
General and administrative 58 170 85 885Total employer payroll tax on employee stock
transactions$ 102 $ 1,095 $ 240 $ 5,323
(4) Includes acquisition-related expenses as follows:
Three Months Ended
September 30, Nine Months Ended September 30,
2020 2021 2020 2021
(in thousands)
Sales and marketing $ - $ - $ - $ 110
Research and development - 251 - 442
General and administrative 51 2,472 659 2,914
Total acquisition-related expenses
$ 659 $ 3,466 26
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(5)Includes restructuring-related charges as follows:
Three Months Ended September 30, Nine Months Ended September 30,
2020 2021 2020 2021
(in thousands)
Cost of revenue $ 127 $ - $ 127 $ -
Sales and marketing 1,763 - 1,763 -
Research and development 1,681 - 1,681 -
General and administrative 801 - 801 -
Total restructuring-related charges $ 4,372 $ - $ 4,372 $ -
Comparison of the Three Months Ended
Revenue
Three Months Ended
September 30, Change
2020 2021 Dollar Percent
(dollars in thousands)
Revenue $ 101,891 $ 131,990 $ 30,099 30 %
During the three months ended September 30, 2021 , our revenue increased $30.1
million , or 30%, compared to the three months ended September 30, 2020 , which is
primarily due to expansion with our existing customers and revenue from new
customers added during the quarter. The increase in revenue from existing
customers includes the net benefit of a full quarter of subscription revenue in
the three months ended September 30, 2021 from customers that were newly
acquired in the first half of 2021 and continued their subscriptions in the
third quarter of 2021, as well as customers that expanded their subscriptions in
2020 and the first three quarters of 2021 through the purchase of additional
construction volume or products, as well as price increases.
Cost of Revenue, Gross Profit, and Gross Margin
Three Months Ended
September 30, Change
2020 2021 Dollar Percent
(dollars in thousands)
Cost of revenue $ 18,063 $ 22,693 $ 4,630 26 %
Gross profit 83,828 109,297 25,469 30 %
Gross margin 82 % 83 %
The increase in cost of revenue during the three months ended September 30, 2021
was primarily attributable to an increase of $1.8 million in personnel-related
expenses. Personnel-related expenses increased primarily due to annual merit
increases approved during the second quarter of 2021, and an increase in
headcount of 23%. The increase in cost of revenue was also attributable to a
$1.7 million increase in hosting and other direct costs.
Operating Expenses
Three Months Ended
September 30, Change
2020 2021 Dollar Percent
(dollars in thousands)
Sales and marketing $ 47,410 $ 70,356 $ 22,946 48 %
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-------------------------------------------------------------------------------- The increase in sales and marketing expenses during the three months endedSeptember 30, 2021 was primarily attributable to an increase of$15.4 million in personnel-related expenses, including an increase of$7.8 million in stock-based compensation expense. Personnel-related expenses increased primarily due to stock-based compensation expense associated with RSUs where the performance condition was satisfied upon the effectiveness date of the registration statement for the IPO, annual merit increases approved during the second quarter of 2021, and an increase in headcount of 26%. The increase in sales and marketing expenses was also attributable to a$2.8 million increase in professional fees primarily for contractors to supplement our staff levels and a$2.3 million increase in marketing events and expenses. Three Months Ended September 30, Change 2020 2021 Dollar Percent (dollars in thousands) Research and development$ 34,504 $ 53,447 $ 18,943 55 % The increase in research and development expenses during the three months endedSeptember 30, 2021 was primarily attributable to an increase of$15.3 million in personnel-related expenses, including an increase of$12.2 million in stock-based compensation expense, offset by a decrease in restructuring-related charges, primarily severance, of$1.5 million . Personnel-related expenses increased primarily due to stock-based compensation expense associated with RSUs where the performance condition was satisfied upon the effectiveness date of the registration statement for the IPO, annual merit increases approved during the second quarter of 2021, and an increase in headcount of 38%. The increase in research and development expenses was also attributable to a$1.7 million increase in professional fees primarily for contractors to supplement our staff levels. Three Months Ended September 30, Change 2020 2021 Dollar Percent (dollars in thousands)
General and administrative
91 %
The increase in general and administrative expenses during the three months endedSeptember 30, 2021 was primarily due to an increase of$9.0 million in personnel-related expenses, including an increase of$8.2 million in stock-based compensation expense. Personnel-related expenses increased primarily due to stock-based compensation expense associated with RSUs where the performance condition was satisfied upon the effectiveness date of the registration statement for the IPO, annual merit increases approved during the second quarter of 2021, and an increase in headcount of 23%. The increase in general and administrative expenses was also attributable to a$6.1 million increase in professional fees, of which$2.2 million are acquisition-related transaction expenses. Interest Expense, Net, Change in Fair Value of Series I Redeemable Convertible Preferred Stock Warrant Liability, Other Income (Expense), Net, and Provision for Income Taxes Three Months Ended September 30, Change 2020 2021 Dollar Percent (dollars in thousands) Interest expense, net$ (573 ) $ (521 ) $ 52 (9 %) Change in fair value of Series I redeemable convertible preferred stock warrant liability 1,002 - (1,002 ) (100 %) Other income (expense), net 248 (653 ) (901 ) (363 %) Provision for income taxes 224 11
(213 ) (95 %)
The change in fair value of Series I redeemable convertible preferred stock warrant liability in the three months endedSeptember 30, 2020 was due to$1.0 million of gain recognized from the remeasurement to fair value of the Series I redeemable convertible preferred stock warrant liability, which was issued to a new investor inMarch 2020 and was exercised inDecember 2020 . The gain recognized was due to the decrease in the fair value of the Series I redeemable convertible preferred stock warrant fromJune 30, 2020 throughSeptember 30, 2020 .
Other expense, net during the three months ended
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Comparison of the Nine Months Ended
Revenue
Nine Months Ended
September 30, Change
2020 2021 Dollar Percent
(dollars in thousands)
Revenue $ 290,781 $ 368,718 $ 77,937 27 %
During the nine months ended September 30, 2021 , our revenue increased $77.9
million , or 27%, compared to the nine months ended September 30, 2020 , which is
primarily due to expansion with our existing customers and revenue from new
customers added during the period. The increase in revenue from existing
customers includes the net benefit of a full three quarters of subscription
revenue in the nine months ended September 30, 2021 from customers that were
newly acquired in 2020 and continued their subscriptions in 2021, and customers
that expanded their subscriptions in 2020 and the first three quarters of 2021
through the purchase of additional construction volume or products, as well as
price increases.
Cost of Revenue, Gross Profit, and Gross Margin
Nine Months Ended
September 30, Change
2020 2021 Dollar Percent
(dollars in thousands)
Cost of revenue $ 52,589 $ 68,545 $ 15,956 30 %
Gross profit 238,192 300,173 61,981 26 %
Gross margin 82 % 81 %
The increase in cost of revenue during the nine months ended September 30, 2021
was primarily attributable to an increase of $10.4 million in personnel-related
expenses, including an increase of $5.6 million in stock-based compensation
expense. Personnel-related expenses increased primarily due to stock-based
compensation expense associated with RSUs where the performance condition was
satisfied upon the effectiveness date of the registration statement for the IPO,
annual merit increases approved during the second quarter of 2021, and an
increase in average headcount of 17%. The increase in cost of revenue was also
attributable to a $2.6 million increase in hosting and other direct costs and a
$1.6 million increase in amortization of capitalized software.
Operating Expenses
Nine Months Ended
September 30, Change
2020 2021 Dollar Percent
(dollars in thousands)
Sales and marketing $ 138,110 $ 224,226 $ 86,116 62 %
The increase in sales and marketing expenses during the nine months ended
September 30, 2021 was primarily attributable to an increase of $70.6 million in
personnel-related expenses, including an increase of $48.6 million in
stock-based compensation expense and a $1.7 million increase in employer payroll
tax related to employee stock transactions. Personnel-related expenses increased
primarily due to stock-based compensation expense associated with RSUs where the
performance condition was satisfied upon the effectiveness date of the
registration statement for the IPO, annual merit increases approved during the
second quarter of 2021, and an increase in average headcount of 14%. The
increase in sales and marketing expenses was also attributable to a $7.3 million
increase in professional fees primarily for contractors to supplement our staff
levels and a $6.3 million increase in marketing events and expenses.
Nine Months Ended
September 30, Change
2020 2021 Dollar Percent
(dollars in thousands)
Research and development $ 89,255 $ 176,619 $ 87,364 98 %
The increase in research and development expenses during the nine months endedSeptember 30, 2021 was primarily attributable to an increase of$81.5 million in personnel-related expenses, including an increase of$62.9 million in stock-based 29 -------------------------------------------------------------------------------- compensation expense and a$2.2 million increase in employer payroll tax related to employee stock transactions. Personnel-related expenses increased primarily due to stock-based compensation expense associated with RSUs where the performance condition was satisfied upon the effectiveness date of the registration statement for the IPO, annual merit increases approved during the second quarter of 2021, and an increase in average headcount of 16%. The increase in research and development expenses was also attributable to a$3.6 million increase in professional fees primarily for contractors to supplement our staff levels and a$1.3 million increase in amortization of acquired developed technology intangible assets. Nine Months Ended September 30, Change 2020 2021 Dollar Percent (dollars in thousands)
General and administrative
The increase in general and administrative expenses during the nine months endedSeptember 30, 2021 was primarily due to an increase of$52.5 million in personnel-related expenses, including an increase of$46.5 million in stock-based compensation expense. Personnel-related expenses increased primarily due to stock-based compensation expense associated with RSUs where the performance condition was satisfied upon the effectiveness date of the registration statement for the IPO and annual merit increases approved during the second quarter of 2021, and an increase in average headcount of 9%. The increase in general and administrative expenses was also attributable to a$8.6 million increase in professional fees, of which$2.3 million are acquisition-related transaction expenses. Interest Expense, Net, Change in Fair Value of Series I Redeemable Convertible Preferred Stock Warrant Liability, Other Expense, Net and Provision for Income Taxes Nine Months Ended September 30, Change 2020 2021 Dollar Percent (dollars in thousands) Interest expense, net$ (1,493 ) $ (1,659 ) $ (166 ) 11 % Change in fair value of Series I redeemable convertible preferred stock warrant liability (9,603 ) - 9,603 (100 %) Other expense, net (229 ) (880 ) (651 ) 284 % Provision for income taxes 468 177 (291 ) (62 %) The change in fair value of Series I redeemable convertible preferred stock warrant liability in the nine months endedSeptember 30, 2020 was due to$9.6 million of loss recognized from the remeasurement to fair value of the Series I redeemable convertible preferred stock warrant liability, which was issued to a new investor inMarch 2020 and was exercised inDecember 2020 . The loss recognized was primarily due to the increase in the fair value of the Series I redeemable convertible preferred stock from the issuance date throughSeptember 30, 2020 . Non-GAAP Financial Measures In addition to our results determined in accordance with accounting principles generally accepted inthe United States of America ("GAAP"), we believe certain non-GAAP measures, as described below, are useful in evaluating our operating performance. We use this non-GAAP financial information, collectively, to evaluate our ongoing operations as well as for internal planning and forecasting purposes. We believe that non-GAAP financial information, when taken collectively, is helpful to investors because it provides consistency and comparability with past financial performance, and may assist in comparisons with other companies, some of which use similar non-GAAP financial information to supplement their GAAP results. The non-GAAP financial information is presented for supplemental informational purposes only, and should not be considered a substitute for financial information presented in accordance with GAAP, and may be different from similarly-titled non-GAAP measures used by other companies. A reconciliation is provided below for each non-GAAP financial measure to the most directly comparable financial measure stated in accordance with GAAP. 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.
Non-GAAP Gross Profit, Non-GAAP Gross Margin, Non-GAAP Operating Expenses, Non-GAAP Loss from Operations, and Non-GAAP Operating Margin
We define these non-GAAP financial measures as the respective GAAP measures, excluding stock-based compensation
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expense, amortization of acquired technology intangible assets, employer payroll
tax related to employee stock transactions, acquisition-related expenses and
restructuring-related charges. We excluded certain acquisition-related expenses
for the first time during the current reporting period, which include
transaction costs, such as legal and due diligence costs, and retention
payments. These expenses are unpredictable, and generally would not have
otherwise been incurred in the periods presented as part of our continuing
operations. In addition, the size and complexity of an acquisition, which often
drives the magnitude of acquisition-related expenses, may not be indicative of
such future costs. We believe excluding acquisition-related expenses facilitates
the comparison of our financial results to the Company's historical operating
results and to other companies in our industry. This adjustment was made
retroactively to calculate the non-GAAP financial measures for the comparative
historical periods. The acquisition-related expenses were immaterial
historically prior to the current reporting period. We believe it is useful to
exclude these expenses in order to better understand the long-term performance
of our core business and to facilitate comparison of our results
period-over-period and to those of peer companies.
The following tables present reconciliations of our GAAP financial measures to our non-GAAP financial measures as of the periods presented:
Reconciliation of gross profit and gross margin:
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2021 2020 2021
(dollars in thousands)
Revenue $ 101,891 $ 131,990 $ 290,781 $ 368,718
Gross profit 83,828 109,297 238,192 300,173
Stock-based compensation expense 633 679 1,168 6,758
Amortization of acquired technology
intangible assets 761 1,086 2,283 3,258
Employer payroll tax on employee stock
transactions - 66 - 400
Restructuring-related charges 127 - 127 -
Non-GAAP gross profit $ 85,349 $ 111,128 $ 241,770 $ 310,589
Gross margin 82 % 83 % 82 % 81 %
Non-GAAP gross margin 84 % 84 % 83 % 84 %
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Reconciliation of operating expenses:
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2021 2020 2021
(dollars in thousands)
Revenue $ 101,891 $ 131,990 $ 290,781 $ 368,718
GAAP sales and marketing 47,410 70,356 138,110 224,226
Stock-based compensation expense (3,410 ) (11,178 ) (8,644 ) (57,285 )
Amortization of acquired intangible
assets (404 ) (404 ) (1,212 ) (1,349 )
Employer payroll tax on employee stock
transactions (36 ) (473 ) (112 ) (1,830 )
Acquisition-related expenses - - - (110 )
Restructuring-related charges (1,763 ) - (1,763 ) -
Non-GAAP sales and marketing $ 41,797 $ 58,301 $ 126,379 $ 163,652
GAAP sales and marketing as a percentage
of revenue 47 % 53 % 47 % 61 %
Non-GAAP sales and marketing as a
percentage of
revenue 41 % 44 % 43 % 44 %
GAAP research and development 34,504 53,447 89,255 176,619
Stock-based compensation expense (2,898 ) (15,064 ) (6,747 ) (69,627 )
Amortization of acquired intangible
assets (183 ) (907 ) (488 ) (1,770 )
Employer payroll tax on employee stock
transactions (8 ) (386 ) (43 ) (2,208 )
Acquisition-related expenses - (251 ) - (442 )
Restructuring-related charges (1,681 ) - (1,681 ) -
Non-GAAP research and development $ 29,734 $ 36,839 $ 80,296 $ 102,572
GAAP research and development as a
percentage of
revenue 34 % 40 % 31 % 48 %
Non-GAAP research and development as a
percentage of revenue 29 % 28 % 28 % 28 %
GAAP general and administrative 18,320 35,051 47,770 110,805
Stock-based compensation expense (3,074 ) (11,262 ) (5,782 ) (52,259 )
Employer payroll tax on employee stock
transactions (58 ) (170 ) (85 ) (885 )
Acquisition-related expenses (51 ) (2,472 ) (659 ) (2,914 )
Restructuring-related charges (801 ) - (801 ) -
Non-GAAP general and administrative $ 14,336 $ 21,147 $ 40,443 $ 54,747
GAAP general and administrative as a
percentage of
revenue 18 % 27 % 16 % 30 %
Non-GAAP general and administrative as a
percentage of revenue 14 % 16 % 14 % 15 %
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Reconciliation of loss from operations and operating margin:
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2021 2020 2021
(dollars in thousands)
Revenue $ 101,891 $ 131,990 $ 290,781 $ 368,718
Loss from operations (16,406 ) (49,557 ) (36,943 ) (211,477 )
Stock-based compensation expense 10,015 38,183 22,341 185,929
Amortization of acquired intangible
assets 1,348 2,397 3,983 6,377
Employer payroll tax on employee stock
transactions 102 1,095 240 5,323
Acquisition-related expenses 51 2,723 659 3,466
Restructuring-related charges 4,372 - 4,372 -
Non-GAAP loss from operations $ (518 ) $ (5,159 ) $ (5,348 ) $ (10,382 )
Operating margin (16 %) (38 %) (13 %) (57 %)
Non-GAAP operating margin (1 %) (4 %) (2 %) (3 %)
Liquidity and Capital Resources
To date, we have financed our operations principally through private placements
of our equity securities. As of September 30, 2021 , our principal sources of
liquidity are cash and cash equivalents of $1,072.1 million , which were held in
checking accounts, savings accounts, and highly liquid money market funds. A
portion of the cash and cash equivalents were used to complete the acquisitions
of LaborChart and Levelset during the fourth quarter of 2021. The estimated
purchase price to acquire Levelset is approximately $500 million , of which
approximately $425 million was paid in cash when the acquisition was completed
on November 2, 2021 , subject to customary adjustments for working capital,
transaction expenses, cash, indebtedness, and the determination of any
consideration for post-combination services. In addition, the estimated purchase
price to acquire LaborChart is approximately $85 million in cash which was paid
in cash when the acquisition was completed on October 21, 2021 , subject to
customary adjustments for working capital, transaction expenses, cash,
indebtedness, and the determination of any consideration for post-combination
services. We also have our Credit Facility with Silicon Valley Bank that may be
used for general corporate purposes. As of September 30, 2021 , $75.0 million ,
less $6.4 million in outstanding letters of credit, was available to be drawn
under the Credit Facility.
We believe our existing cash and cash equivalents will be sufficient to meet our
needs for at least the next 12 months. This assessment is a forward-looking
statement and involves risks and uncertainties. Our future capital requirements
will depend on many factors, including our revenue growth rate, new customer
acquisition and subscription renewal activity, timing of billing activities, our
ability to integrate the companies or technologies we acquire and realize
strategic and financial benefits from our investments and acquisitions, the
timing and extent of spending to support further sales and marketing and
research and development efforts, general and administrative expenses to support
our growth, including international expansion, and the ongoing impact of the
COVID-19 pandemic. We may in the future enter into arrangements to acquire or
invest in complementary businesses, services, and technologies, including
intellectual property rights. We may be required to seek additional equity or
debt financing to fund these activities. If we are unable to raise additional
capital when desired, or on acceptable terms, our business, results of
operations, and financial condition could be materially adversely affected.
The following table summarizes our cash flows for the periods presented:
Nine Months Ended September 30,
2020 2021
(in thousands)Net cash provided by operating activities $ 10,072 $
40,305
Net cash used in investing activities (19,446 ) (42,020 ) Net cash provided by financing activities 192,091 694,946 Operating Activities
Our largest source of operating cash is collections from the sales of subscriptions to our customers. Our primary uses of cash from operating activities are for personnel expenses, marketing expenses, hosting and software license expenses, and
33
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overhead. Net cash provided by operating activities was $40.3 million during the
nine months ended September 30, 2021 , which resulted from a net loss of $214.2
million , adjusted for non-cash charges of $216.3 million and net cash inflow of
$38.2 million from changes in operating assets and liabilities. The $216.3
million of non-cash charges primarily reflected the following:
• $185.9 million in stock-based compensation expense;
• $23.3 million in depreciation and amortization; and
•
lease assets.
The
• a
primarily due to timing of employee stock purchase plan contributions,
payroll, and cash payments to our vendors;
• a
of our business and timing of billings; and
• a
billings and cash receipts from customers;
These inflows from changes in our operating assets and liabilities were partially offset by the following:
• a
to timing of cash payments to our vendors;
• a $7.1 million increase in deferred contract cost assets; and
• a
payments.
Net cash used in operating activities was$10.1 million during the nine months endedSeptember 30, 2020 , which resulted from a net loss of$48.7 million , adjusted for non-cash charges of$58.1 million and net cash inflow of$0.7 million from changes in operating assets and liabilities. The$58.1 million of non-cash charges primarily reflected the following: •$22.3 million in stock-based compensation expense; •$18.9 million in depreciation and amortization;
•
stock warrant liability;
•
lease assets; and
• $2.9 million in abandonments of long-lived assets.
The
• a
billings and cash receipts from customers;
• a
our business and timing of billings; and
• a $1.1 million increase in accrued expenses and other liabilitiesprimarily due to timing of payroll and cash payments to our vendors.
These inflows from changes in our operating assets and liabilities were partially offset by the following:
• a
payments;
• a
to our vendors; and
• a
to timing of cash payments to our vendors.
Investing Activities
Net cash used in investing activities of$42.0 million during the nine months endedSeptember 30, 2021 consisted of the acquisition of Indus, net of cash acquired, of$20.0 million , capitalized software development costs of$10.2 million , purchases of property and equipment of$8.4 million primarily related to computer equipment purchases, and$3.5 million in strategic investments. 34 -------------------------------------------------------------------------------- Net cash used in investing activities of$19.4 million during the nine months endedSeptember 30, 2020 consisted of capitalized software development costs of$9.4 million , purchases of property and equipment of$6.7 million primarily related to improvements to our leased office spaces and computer equipment purchases, and the acquisition ofAvata Intelligence, Inc. , net of cash acquired, of$3.3 million .
Financing Activities
Net cash provided by financing activities of$694.9 million during the nine months endedSeptember 30, 2021 primarily consisted of proceeds from issuance of common stock in IPO, net of underwriting discounts and commissions, of$665.1 million , proceeds from stock option exercises of$35.3 million , partially offset by payments of deferred offering costs of$3.8 million . Net cash provided by financing activities of$192.1 million during the nine months endedSeptember 30, 2020 primarily consisted of the proceeds of$179.9 million from the issuance of our Series I redeemable convertible preferred stock and preferred stock warrant and proceeds from stock option exercises of$15.7 million , partially offset by payments of deferred offering costs of$2.3 million . Credit Facility Our Credit Facility provides for debt financing of up to$75.0 million to be used for general corporate purposes, including the financing of working capital requirements, and is secured by a blanket lien on the Company's assets. The Credit Facility has a maturity date ofMay 7, 2022 , and carries a fee of 0.225% applied to unused balances and an interest rate equal to theWall Street Journal prime rate plus 1.25% applied to all amounts outstanding, with a floor of 3.25%. The Credit Facility contains financial covenants that require us to maintain minimum annual recurring revenue, as defined in the loan and security agreement, and a liquidity ratio, if the Credit Facility is drawn, of at least 1.25 to 1.00. The Credit Facility also contains restrictions on our ability to dispose of our business or property, engage in changes in business, merge with or acquire another business, incur indebtedness, encumber the collateral securing the Credit Facility, pay dividends, make distributions or payments to stockholders or redeem, retire, or repurchase any capital stock, or make any restricted investments. As ofSeptember 30, 2021 , no amounts had been drawn down under the Credit Facility, and we were in compliance with all covenants. The Credit Facility also provides us with the ability to issue standby letters of credit for up to$15.0 million , which if issued reduce the amount available for borrowing under the Credit Facility. As ofSeptember 30, 2021 , we had issued letters of credit totaling$6.4 million to secure variousU.S. leased office facilities. Remaining Performance Obligations Our subscriptions typically have a term of one to three years. The transaction price allocated to remaining performance obligations under our subscriptions represents the contracted transaction price that has not yet been recognized as revenue, which includes deferred revenue and amounts under non-cancellable subscriptions that will be invoiced and recognized as revenue in future periods. As ofSeptember 30, 2021 , the aggregate amount of the transaction price allocated to remaining performance obligations was$497.3 million , 72% of which is expected to be recognized as revenue in the next 12 months and substantially all of the remainder between 12 and 36 months thereafter. We expect remaining performance obligations to change from period to period primarily due to the size, timing and duration of new customer contracts and customer renewals. Commitments and Contractual Obligations
There have been no material changes to our contractual obligations and commitments from those disclosed in our Management's Discussion and Analysis of Financial Condition and Results of Operations, included in the Prospectus.
Off-Balance Sheet Arrangements
As of September 30, 2021 , we did not have any relationships with unconsolidated
organizations or financial partnerships, such as structured finance or special
purpose entities, that would have been established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes.
Critical Accounting Policies and Estimates
Critical accounting policies and estimates are those accounting policies and
estimates that are both the most important to the portrayal of our net assets
and results of operations and require the most difficult, subjective, or complex
judgments, often as a result of the need to make estimates about the effect of
matters that are inherently uncertain. These estimates are developed based on
historical experience and various other assumptions that we believe to be
reasonable under the
35
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circumstances. Critical accounting estimates are accounting estimates where the
nature of the estimates are material due to the levels of subjectivity and
judgment necessary to account for highly uncertain matters or the susceptibility
of such matters to change and the impact of the estimates on financial condition
or operating performance is material.
Our significant accounting policies are more fully described in Note 2 of our
condensed consolidated financial statements. Our critical accounting policies
and more significant judgments and estimates used in the preparation of our
financial statements are discussed in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the Prospectus. There have
been no significant changes to these policies for the three months ended
September 30, 2021 .
JOBS Act Accounting Election
The Jumpstart Our Business Startups Act of 2012, or the JOBS Act, permits an
"emerging growth company" such as us to delay the adoption of new or revised
accounting standards issued subsequent to the enactment of the JOBS Act until
such time as those standards apply to private companies. We have irrevocably
elected not to avail ourselves of this exemption from new or revised accounting
standards, and therefore, we will be subject to the same new or revised
accounting standards as other public companies that are not emerging growth
companies. We intend to rely on other exemptions provided by the JOBS Act,
including not being required to comply with the auditor attestation requirements
of Section 404(b) of the Sarbanes-Oxley Act.
We will remain an emerging growth company until the earliest to occur of: (1)
the last day of our first fiscal year in which we have total annual revenues of
more than $1.07 billion ; (2) the date we qualify as a "large accelerated filer,"
with at least $700 million of equity securities held by non-affiliates; (3) the
date on which we have issued more than $1.0 billion in non-convertible debt
securities during the prior three-year period; and (4) the last day of the
fiscal year ending after the fifth anniversary of our IPO.
Recent Accounting PronouncementsRefer to Note 2 of our condensed consolidated financial statements for discussion of recent accounting pronouncements.
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