(EDGAR Online via COMTEX) -- ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion in conjunction with the condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2019. Overview We are a pioneer and leading provider of intelligent cloud software for contact centers, facilitating more than six billion call minutes between our more than 2,000 clients and their customers per year. We believe we achieved this leadership position through our expertise and technology, which has empowered us to help organizations of all sizes transition from legacy on-premise contact center systems to our cloud solution. Our solution, which is comprised of our Virtual Contact Center, or VCC, cloud platform and applications, allows simultaneous management and optimization of customer interactions across voice, chat, email, web, social media and mobile channels, either directly or through our application programming interfaces, or APIs. Our VCC cloud platform matches each customer interaction with an appropriate agent resource and delivers relevant customer data to the agent in real-time through integrations with adjacent enterprise applications, such as customer relationship management, or CRM, software, to optimize the customer experience and improve agent productivity. Unlike legacy on-premise contact center systems, our solution requires minimal up-front investment, can be rapidly deployed and adjusted depending on our client's requirements. Since founding our business in 2001, we have focused exclusively on delivering cloud contact center software. We initially targeted smaller contact center opportunities with our telesales team and, over time, invested in expanding the breadth and depth of the functionality of our cloud platform to meet the evolving requirements of our clients. In 2009, we made a strategic decision to expand our market opportunity to include larger contact centers. This decision drove further investments in research and development and the establishment of our field sales team to meet the requirements of these larger contact centers. We believe this shift has helped us diversify our client base, while significantly enhancing our opportunity for future revenue growth. To complement these efforts, we have also focused on building client awareness and driving adoption of our solution through marketing activities, which include internet advertising, digital marketing campaigns, social media, trade shows, industry events, telemarketing and out of home campaigns. We provide our solution through a SaaS business model with recurring subscriptions. We offer a comprehensive suite of applications delivered on our VCC cloud platform that are designed to enable our clients to manage and optimize interactions across inbound and outbound contact centers. We primarily generate revenue by selling subscriptions and related usage of our VCC cloud platform. We charge our clients monthly subscription fees for access to our solution, primarily based on the number of agent seats, as well as the specific functionalities and applications our clients deploy. We define agent seats as the maximum number of named agents allowed to concurrently access our solution. Our clients typically have more named agents than agent seats, and multiple named agents may use an agent seat, though not simultaneously. Substantially all of our clients purchase both subscriptions and related telephony usage from us. A small percentage of our clients subscribe to our platform but purchase telephony usage directly from wholesale telecommunications service providers. We do not sell telephony usage on a stand-alone basis to any client. The related usage fees are based on the volume of minutes for inbound and outbound interactions. We also offer bundled plans, generally for smaller deployments, where the client is charged a single monthly fixed fee per agent seat that includes both subscription and unlimited usage in the contiguous 48 states and, in some cases, Canada. We offer monthly, annual and multiple-year contracts to our clients, generally with 30 days' notice required for reductions in the number of agent seats. Increases in the number of agent seats can be provisioned almost immediately. Our clients, therefore, are able to adjust the number of agent seats used to meet their changing contact center volume needs. Our larger clients typically choose annual contracts, which generally include an implementation and ramp period of several months. Fixed subscription fees, including bundled plans, are generally billed monthly in advance, while related usage fees are billed in arrears. For the three and six months ended June 30, 2020, subscription and related usage fees accounted for 92% and 91%, respectively, of our revenue. For each of the three and six months ended June 30, 2019, subscription and related usage fees accounted for 92% of our revenue. The remainder was comprised of professional services revenue from the implementation and optimization of our solution. Effects of COVID-19 Table of Contents In December 2019, a novel coronavirus disease known as COVID-19 was reported and on March 11, 2020, the World Health Organization, or WHO, characterized COVID-19 as a pandemic. This pandemic has resulted in a widespread health crisis that has significantly harmed the U.S. and global economies and financial markets, including those on which our common stock and our convertible senior notes trade, and may impact demand for our solutions. In accordance with the various shelter-in-place and other social distancing orders and recommendations of applicable government agencies, all of our employees have transitioned to work-from-home operations and we have canceled all business travel by our employees, which have changed how we operate our business. Our clients and business partners are also subject to various and changing shelter-in-place and other social distancing orders and recommendations, which have changed the way we interact with our clients and business partners. Our financial results for the first half of 2020 were not materially impacted by COVID-19. The severity and duration of the COVID-19 pandemic is uncertain and such uncertainty will likely continue in the near term and we will continue to actively monitor the situation taking into account the impact to our employees, customers, partners and suppliers. While there is considerable uncertainty, we believe that certain parts of our business will benefit, particularly over the longer term, from the need to enable work from home agents and to enhance business continuity planning. On the other hand, our smaller clients with less financial resources will likely see their business decline or cease altogether, and clients in certain industry verticals, such as travel and leisure, and consumer discretionary may reduce their number of agent seats. In addition, our clients in general face uncertain and challenging macroeconomic conditions and may reduce the number of agent seats, delay purchasing decisions or payments, or experience an adverse impact on their ability to pay or may not be able to pay us. See Part II, Item 1A. Risk Factors, for further discussion of the impact of the COVID-19 pandemic on our business and operations. Key GAAP Operating Results Our revenue increased to $99.8 million and $194.9 million for the three and six months ended June 30, 2020, respectively, from $77.4 million and $152.0 million for the three and six months ended June 30, 2019, respectively. Revenue growth has primarily been driven by our larger clients. For each of the three and six months ended June 30, 2020 and 2019, no single client accounted for more than 10% of our total revenue. As of June 30, 2020, we had over 2,000 clients across multiple industries. Our clients' subscriptions generally range in size from fewer than 10 agent seats to approximately 6,000 agent seats. We had a net loss of $16.1 million and $23.5 million in the three and six months ended June 30, 2020, respectively, compared to a net loss of $1.9 million and $3.8 million in the three and six months ended June 30, 2019, respectively. We have continued to make significant expenditures and investments, including in sales and marketing, research and development and infrastructure. We primarily evaluate the success of our business based on revenue growth and the efficiency and effectiveness of our investments. The growth of our business and our future success depend on many factors, including our ability to continue to expand our base of larger clients, grow revenue from our existing client base, innovate and expand internationally. While these areas represent significant opportunities for us, they also pose risks and challenges that we must successfully address in order to sustain the growth of our business and improve our operating results, including the impact of the COVID-19 pandemic. Due to our continuing investments to grow our business, increase our sales and marketing efforts, pursue new opportunities, enhance our solution and build our technology, we expect our cost of revenue and operating expenses to increase in absolute dollars in future periods. However, we expect cost of revenue and certain operating expenses to fluctuate as a percentage of revenue in the near term taking into consideration the impact of COVID-19 and the macroeconomic environment. Key Operating and Non-GAAP Financial Performance Metrics In addition to measures of financial performance presented in our condensed consolidated financial statements, we monitor the key metrics set forth below to help us evaluate growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts and assess operational efficiencies. Table of Contents Annual Dollar-Based Retention Rate We believe that our Annual Dollar-Based Retention Rate provides insight into our ability to retain and grow revenue from our clients, and is a measure of the long-term value of our client relationships. Our Annual Dollar-Based Retention Rate is calculated by dividing our Retained Net Invoicing by our Retention Base Net Invoicing on a monthly basis, which we then average using the rates for the trailing twelve months for the period being presented. We define Retention Base Net Invoicing as recurring net invoicing from all clients in the comparable prior year period, and we define Retained Net Invoicing as recurring net invoicing from that same group of clients in the current period. We define recurring net invoicing as subscription and related usage revenue excluding the impact of service credits, reserves and deferrals. Historically, the difference between recurring net invoicing and our subscription and related usage revenue has been within 10%. The following table shows our Annual Dollar-Based Retention Rate for the periods presented: Twelve Months Ended June 30, 2020 June 30, 2019 Annual Dollar-Based Retention Rate 105% 107%
Our Dollar-Based Retention Rate decreased year over year primarily due to fluctuations caused by our larger clients coming onto the platform at different times and ramping at different rates.
Three Months Ended Six Months Ended June 30, 2020 June 30, 2019 June 30, 2020 June 30, 2019 Net loss $ (16,052) $ (1,860) $ (23,489) $ (3,784) Non-GAAP adjustments: Depreciation and amortization (1) 6,243 3,361 11,213 6,553 Stock-based compensation (2) 16,791 10,436 30,585 19,122 Interest expense 5,734 3,406 9,218 6,802 Interest income and other 4,965 (1,490) 3,893 (3,235) Legal settlement - 420 - 420 Legal and indemnification fees related to settlement (3) - 64 - 356 Acquisition-related transaction costs and one-time integration costs 1,637 - 1,966 - COVID-19 relief bonus for employees 1,817 - 1,817 - Provision for (benefit from) income taxes (2,876) 29 (2,807) (20) Adjusted EBITDA $ 18,259 $ 14,366 $ 32,396 $ 26,214
(1)Depreciation and amortization expenses included in our results of operations are as follows (in thousands):
Three Months Ended Six Months Ended June 30, 2020 June 30, 2019 June 30, 2020 June 30, 2019 Cost of revenue $ 5,120 $ 2,504 $ 9,060 $ 4,870 Research and development 497 450 963 890 Sales and marketing 2 1 3 2 General and administrative 624 406 1,187 791 Total depreciation and amortization $ 6,243 $ 3,361 $ 11,213 $ 6,553
(2)See Note 7 to the condensed consolidated financial statements for stock-based compensation expense included in our results of operations for the periods presented.
Key Components of Our Results of Operations Revenue
Table of Contents
Three Months Ended Six Months Ended June 30, 2020 June 30, 2019 June 30, 2020 June 30, 2019 Revenue 100 % 100 % 100 % 100 % Cost of revenue 43 % 40 % 42 % 41 % Gross profit 57 % 60 % 58 % 59 % Operating expenses: Research and development 17 % 14 % 17 % 14 % Sales and marketing 32 % 30 % 32 % 29 % General and administrative 16 % 16 % 16 % 16 % Total operating expenses 65 % 60 % 65 % 59 % Income (loss) from operations (8) % - % (7) % - % Other income (expense), net: Interest expense (6) % (4) % (5) % (4) % Interest income and other (5) % 2 % (1) % 2 % Total other income (expense), net (11) % (2) % (6) % (2) % Loss before income taxes (19) % (2) % (13) % (2) % Provision for (benefit from) income taxes (3) % - % (1) % - % Net loss (16) % (2) % (12) % (2) % Revenue Three Months Ended Six Months Ended $ % $ %
June 30, 2020 June 30, 2019 Change Change June 30, 2020 June 30, 2019 Change Change (in thousands, except percentages) Revenue $ 99,792 $ 77,436 $ 22,356 29 % $ 194,880 $ 151,974 $ 42,906 28 % The increase in revenue for the three and six months ended June 30, 2020 compared to the same periods of 2019 was primarily attributable to our larger clients, driven by an increase in our sales and marketing activities and our improved brand awareness. Cost of Revenue Three Months Ended Six Months Ended $ % $ % June 30, 2020 June 30, 2019 Change Change June 30, 2020 June 30, 2019 Change Change (in thousands, except percentages) Cost of revenue $ 42,453 $ 31,248 $ 11,205 36 % $ 82,490 $ 62,099 $ 20,391 33 % % of Revenue 43 % 40 % 42% 41%
The increase in cost of revenue for the three and six months ended June 30, 2020 compared to the same periods of 2019 was primarily due to a $3.9 million and $6.4 million increase in personnel costs including stock-based compensation costs, driven mainly by increased headcount and a higher fair value of employee equity awards due primarily to our increased stock price, a $2.3 million and a $3.5 million increase in depreciation and data center costs driven by increased capital expenditures to support our growing capacity needs and continuing expansion of our existing data center facilities, a $1.7 million and a $2.7 million increase in amortization expense due to the acquisitions of certain intangible assets from Whendu in November 2019 and Virtual Observer in April 2020, a $1.1 million and a $2.6 million increase in third-party hosted software costs driven by increased client activities, a $1.0 million and $1.7 million increase in facilities and related costs, and a $0.9 million and $1.5 million increase in USF
Aug 03, 2020
Is there a problem with this press release? Contact the source provider Comtex at firstname.lastname@example.org. You can also contact MarketWatch Customer Service via our Customer Center.
(c) 1995-2020 Cybernet Data Systems, Inc. All Rights Reserved