(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on February 14, 2022. As discussed in the section titled "Special Note Regarding Forward-Looking Statements," the following discussion and analysis contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled "Risk Factors" included under Part II, Item 1A below.
Company Overview
We provide a cloud-based customer relationship management ("CRM") Platform. Our CRM Platform is comprised of Marketing Hub, Sales Hub, Service Hub, content management system ("CMS") Hub, and Operations Hub as well as other tools, integrations, and a native payment solution that enable companies to attract, engage, and delight customers throughout the customer experience.
At the core of our CRM Platform is our CRM that our customers use which creates a single view of all interactions a prospective or existing customer has with their marketing, sales and customer service teams. The CRM shares data across every application in the CRM Platform, automatically informing more personalized emails, website content, ads, and conversations, and enables more accurate timing cues for our customer's internal teams. Our CRM Platform was built to easily and seamlessly integrate third-party applications to further customize to an individual company's industry or needs. In addition, an end-to-end native payment solution, Payments, is built within our CRM Platform which enables customers to streamline their payment process. Our CRM Platform starts completely free and grows with our customers to meet their needs at different stages in their life-cycles. It supports multiple languages and currencies and offers an array of sophisticated features, including content partitioning at the enterprise level for companies operating in or serving multiple countries.
We focus on selling to mid-market business-to-business, or B2B, companies, which we define as companies that have between two and 2,000 employees. While our CRM Platform was built to grow with any company, we focus on selling to mid-market businesses because we believe we have significant competitive advantages attracting and serving this market segment. These mid-market businesses seek an integrated, easy-to-implement and easy-to-use solution to reach customers and compete with organizations that have larger marketing, sales, and customer service budgets. We efficiently reach these businesses at scale through our proven inbound methodology, our Solutions Partners, and our "freemium" model. A Solutions Partner is a service provider that helps businesses with strategy, execution, and implementation of go-to-market activities and technology solutions. Our freemium model attracts customers who begin using our CRM Platform through our free products and then upgrade to our paid products. As of March 31, 2022, we had 6,404 full-time employees and 143,689 Customers of varying sizes in more than 120 countries, representing almost every industry.
We derive most of our revenue from subscriptions to our cloud-based CRM Platform and related professional services, which consist of customer on-boarding, training and consulting services. Subscription revenue accounted for 97% of our total revenue for the three months ended March 31, 2022 and 96% of our total revenue for the three months ended March 31, 2021. We sell multiple product plans at different base prices on a subscription basis, each of which includes our CRM and integrated applications to meet the needs of the various customers we serve. Customers pay additional fees if the number of contacts stored and tracked in the customer's database exceeds specified thresholds. We also generate additional revenue based on the purchase of additional subscriptions and products, and the number of account users and subdomains. Most of our customers' subscriptions are one year or less in duration.
Subscriptions are billed in advance on various schedules. Because the mix of billing terms for orders can vary from period to period, the annualized value of the orders we enter into with our customers will not be completely reflected in deferred revenue at any single point in time. Accordingly, we do not believe that change in deferred revenue is an accurate indicator of future revenue.
Many of our customers purchase on-boarding, training, and consulting services, and utilize other tools and Payments, which are designed to help customers enhance their ability to attract, engage and delight their customers using our CRM Platform. Professional services and other revenue accounted for 3% of total revenue for three months ended March 31, 2022 and 4% of our total revenue for the three months ended March 31, 2021.
We have focused on rapidly growing our business and plan to continue to make investments to help us address some of the challenges facing us to support this growth, such as demand for our CRM Platform by existing and new customers, significant competition from other providers of marketing, sales, customer service, operations, and content management software and related applications and rapid technological change in our industry.
We believe that the growth of our business is dependent on many factors, including our ability to expand our customer base, increase adoption of our CRM Platform within existing customers, develop new products and applications to extend the functionality of our CRM Platform and provide a high level of customer service. We expect to increase our investment in sales and marketing as we continue to expand our sales teams, increase our marketing activities and grow our international operations. We also expect to increase our investment in research and development as we continue to introduce new products and applications to extend the functionality of our CRM Platform. We also intend to invest in maintaining a high level of customer service and support which we consider critical for our continued success. We plan to continue investing in our data center infrastructure and services capabilities in order to support continued future customer growth. We also expect to continue to incur additional general and administrative expenses as a result of both our growth and the infrastructure required to be a public company. We expect to use our cash flow from operations and the proceeds from our convertible debt and prior stock offerings to fund these growth strategies and support our business and do not expect to be profitable in the near term.
COVID-19 Update
In March 2020, the World Health Organization, or WHO, declared the outbreak of a disease caused by a novel strain of the coronavirus ("COVID-19") to be a pandemic (the "pandemic"). This pandemic has had widespread, rapidly-evolving, and unpredictable impacts on global societies, economies, financial markets, and business practices. Federal and state governments have implemented various measures in an effort to contain the virus, which have caused, and are continuing to cause, business slowdowns or shutdowns in affected areas, both regionally and worldwide.
Our focus remains on promoting employee health and safety, serving our customers, complying with regulations, and ensuring business continuity. As we continue to monitor local regulations and restrictions across the globe, the administration of vaccines and the number of new cases, we have reopened all of our offices globally in accordance with local authority guidelines while ensuring that our return to work is thoughtful, prudent, and handled with an abundance of caution with the health of our employees being the top priority.
The pandemic has not had a material adverse financial impact on our business to date, the broader implications of the pandemic on our results of operations and overall financial performance will depend on future developments and conditions. See the section titled "Risk Factors" included under Part II, Item 1A below for further discussion of the possible impact of the pandemic on our business.
Results of Operations for the Three Months Ended March 31, 2022 and 2021
The following tables set forth our results of operations for the periods presented and as a percentage of our total revenue for those periods. The data has been derived from the unaudited consolidated financial statements contained in this Quarterly Report on Form 10-Q which include, in our opinion, all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair statement of the financial position and results of operations for the interim periods presented. The period-to-period comparison of financial results is not necessarily indicative of financial results to be achieved in future periods.
Three Months
Ended March 31,
(dollars in thousands) 2022 2021
Revenues:
Subscription $ 384,956 $ 270,263
Professional services and other 10,643 11,102
Total revenue 395,599 281,365
Cost of revenues:
Subscription 59,384 43,853
Professional services and other 13,552 10,881
Total cost of revenues 72,936 54,734
Gross profit 322,663 226,631
Operating expenses:
Research and development 92,736 68,396
Sales and marketing 197,134 141,017
General and administrative 43,947 32,250
Total operating expenses 333,817 241,663
Loss from operations (11,154 ) (15,032 )
Other expense:
Interest income 515 475
Interest expense (950 ) (9,399 )
Other income 3,692 660
Total other income (expense) 3,257 (8,264 )
Loss before income tax expense (7,897 ) (23,296 )
Income tax (expense) benefit (1,444 ) 137
Net loss $ (9,341 ) $ (23,159 )
Three Months
Ended March 31,
2022 2021
Revenue:
Subscription 97 % 96 %
Professional services and other 3 4
Total revenue 100 100
Cost of revenue:
Subscription 15 16
Professional services and other 3 4
Total cost of revenue 18 19
Gross profit 82 81
Operating expenses:
Research and development 23 24
Sales and marketing 50 50
General and administrative 11 11
Total operating expenses 84 86
Loss from operations (3 ) (5 )
Total other income (expense) 1 (3 )
Loss before income tax expense (2 ) (8 )
Income tax (expense) benefit (0 ) 0
Net loss (2 )% (8 )%
Percentages are based on actual values. Totals may not sum due to rounding.
Three Months Ended March 31, 2022 Compared to the Three Months Ended March 31,
2021
Revenue
Three Months
Ended March 31,
(dollars in thousands) 2022 2021 $ Change % Change
Revenues:
Subscription $ 384,956 $ 270,263 $ 114,693 42 %
Professional services and other 10,643 11,102 (459 ) (4 )%
Total revenue $ 395,599 $ 281,365 $ 114,234 41 %
Subscription revenue increased during the three months ended March 31, 2022 compared to the same period in 2021 primarily due to the increase in Customers, which grew from 113,925 as of March 31, 2021 to 143,689 as of March 31, 2022. Average Subscription Revenue per Customer increased from $9,886 for the three months ended March 31, 2021 to $11,030 for the three months ended March 31, 2022. The growth in Customers was primarily driven by our increased sales representative capacity to meet market demand as well as an increase in demand for our lower priced starter products and Professional and Enterprise products. The increase in average subscription revenue per customer was primarily driven by an increase in demand for our Professional and Enterprise products, product upgrades by existing customers and impact from customer mix.
Professional services and other revenue decreased during the three months ended March 31, 2022 compared to the same period in 2021 primarily due to non-recurring advertising revenue generated from our acquisition of the Hustle in the first quarter of 2021 and lower overall services revenue from onboardings and trainings, partially offset by fees earned from Payments, revenue share arrangements with third parties, and other revenue streams.
Cost of Revenue, Gross Profit and Gross Margin Percentage
Three Months
Ended March 31,
(dollars in thousands) 2022 2021 $ Change % Change
Total cost of revenue $ 72,936 $ 54,734 $ 18,202 33 %
Gross profit $ 322,663 $ 226,631 $ 96,032 42 %
Gross margin percentage 82 % 81 %
Total cost of revenue for the three months ended March 31, 2022 increased compared to the same period in 2021 primarily due to an increase in subscription and hosting costs, employee-related costs, amortization of capitalized software development costs, allocated overhead expenses, and amortization of acquired technology. Gross margins remained consistent year-over-year.
Three Months
Ended March 31,
(dollars in thousands) 2022 2021 $ Change % Change
Subscription cost of revenue $ 59,384 $ 43,853 $ 15,531 35 %
Percentage of subscription revenue 15 % 16 %
The increase in subscription cost of revenue for the three months ended March 31, 2022 compared to the same period in 2021 was primarily due to the following:
Change
Three Months
(in thousands)
Subscription and hosting costs $ 9,155
Employee-related costs 3,925
Amortization of capitalized software development costs 2,191
Allocated overhead expenses 177
Amortization of acquired technology 83
$ 15,531
Subscription and hosting costs increased primarily due to growth in our Total Customer base from 113,925 as of March 31, 2021 to 143,689 as of March 31, 2022. We also saw higher subscription and hosting costs as we launched an additional data center in the third quarter of 2021 and continued to focus on the security, reliability and performance of our CRM Platform. Employee-related costs increased as a result of increased headcount as we continue to grow our customer support organization to support our customer growth and improve service levels and offerings. Amortization of capitalized software development costs increased due to the
increased number of developers working on our software platform as we continue to develop new products and increased functionality. Allocated overhead expenses increased due to an increase in shared company expenses associated with our systems and infrastructure as we continued to grow our business and expand headcount. Amortization of acquired technology increased due to certain acquired technology being amortized using a method reflective of the expected economic benefit consumption over the expected useful life of the asset.
Three Months
Ended March 31,
(dollars in thousands) 2022 2021 $ Change % Change
Professional services and other cost
of revenue $ 13,552 $ 10,881 $ 2,671 25 %
Percentage of professional services
and other revenue 127 % 98 %
The increase in professional services and other cost of revenue for three months ended March 31, 2022 compared to the same period in 2021 was primarily due to the following:
Change
Three Months
(in thousands)
Employee-related costs $ 2,505
Allocated overhead expenses 166
$ 2,671
Employee-related costs increased as a result of increased headcount as we continue to grow our professional services organization to support our customer growth. Allocated overhead expenses increased due to an increase in shared company expenses associated with our systems and infrastructure as we continued to grow our business and expand headcount.
Research and Development
Three Months
Ended March 31,
(dollars in thousands) 2022 2021 $ Change % Change
Research and development $ 92,736 $ 68,396 $ 24,340 36 %
Percentage of total revenue 23 % 24 %
The increase in research and development expense for the three months ended March 31, 2022 compared to the same period in 2021 was primarily due to the following:
Change
Three Months
(in thousands)
Employee-related costs $ 25,997
Professional services 424
Allocated overhead expenses 431
Hosting expenses (2,512 )
$ 24,340
Employee-related costs increased as a result of increased headcount as we continue to grow our engineering organization to develop new products, increase functionality and to maintain our existing CRM Platform. Professional services increased due to an increase in the use of third-party services and contractors as we continued to grow our engineering organization. Allocated overhead expenses increased due to an increase in shared company expenses associated with our systems and infrastructure as we continued to grow our business and expand headcount. Hosting expense decreased due to incremental spend in the first quarter of 2021 associated with product development infrastructure that is unrelated to the hosting of our CRM Platform for paying Customers. In July of 2021, we launched a new data center and the ongoing expenses related to the hosting of our CRM Platform on that data center are classified as subscription cost of revenue.
Sales and Marketing
Three Months
Ended March 31,
(dollars in thousands) 2022 2021 $ Change % Change
Sales and marketing $ 197,134 $ 141,017 $ 56,117 40 %
Percentage of total revenue 50 % 50 %
The increase in sales and marketing expense for the three months ended March 31, 2022 compared to the same period in 2021 was primarily due to the following:
Change
Three Months
(in thousands)
Employee-related costs $ 39,267
Solutions Partner commissions 7,325
Marketing programs 6,148
Allocated overhead expenses 2,130
Professional services 1,247
$ 56,117
Employee-related costs increased as a result of increased headcount as we continue to expand our selling and marketing organizations to grow our customer base. Solutions Partner commissions increased as a result of increased revenue generated through our Solutions Partners. Marketing programs increased due to the timing and size of certain marketing efforts as we continue to make investments in attracting new customers. Allocated overhead expenses increased due to an increase in shared company expenses associated with our systems and infrastructure as we continued to grow our business and expand headcount. Professional fees increased due to an increase in the use of third-party services and contractors for our marketing efforts.
General and Administrative
Three Months
Ended March 31,
(dollars in thousands) 2022 2021 $ Change % Change
General and administrative $ 43,947 $ 32,250 $ 11,697 36 %
Percentage of total revenue 11 % 11 %
The increase in general and administrative expense for the three months ended March 31, 2022 compared to the same period in 2021 was primarily due to the following:
Change
Three Months
(in thousands)
Employee-related costs $ 8,580
Allocated overhead expenses 1,227
Customer credit card fees 1,890
$ 11,697
Employee-related costs increased as a result of increased headcount as we continue to grow our business and require additional personnel to support our expanded operations. Allocated overhead expenses increased due to an increase in shared company expenses associated with our systems and infrastructure as we continued to grow our business and expand headcount. Customer credit card fees increased due to increased customer transactions as we continue to grow our business.
Interest income
Three Months
Ended March 31,
(dollars in thousands) 2022 2021 $ Change % Change
Interest income $ 515 $ 475 $ 40 8 %
Percentage of total revenue * *
* not meaningful
Interest income primarily consists of interest earned on invested cash and cash equivalents balances and investments. The increase during the three months ended March 31, 2022 is due to an increase in yields on our investment balances.
Interest expense
Three Months
Ended March 31,
(dollars in thousands) 2022 2021 $ Change % Change
Interest expense $ (950 ) $ (9,399 ) $ (8,449 ) (90 )%
Percentage of total revenue * (3 )%
* not meaningful
The change in interest expense for the three months ended March 31, 2022 compared to the same period in 2021 is due to the following:
Change
Three Months
(in thousands)
Amortization of the debt discount and issuance costs and $ (6,044 )
contractual interest expense related to our Notes
Loss on early extinguishment of 2022 Convertible Notes (2,405 )
$ (8,449 )
Interest expense primarily consists of amortization of the debt discount and issuance costs and contractual interest expense related to our Notes, and the loss on early extinguishment of our 2022 Notes. The decrease in interest expense related to the Notes is primarily due to the adoption of the new convertible debt guidance.
Other income
Three Months
Ended March 31,
(dollars in thousands) 2022 2021 $ Change % Change
Other income $ 3,692 $ 660 $ 3,032 459 %
Percentage of total revenue 1 % *
* not meaningful
The change in other income during the three months ended March 31, 2022 is primarily due to the following:
Change
Three Months
(in thousands)
Foreign currency gains and losses $ (1,189 )
Gain on strategic investments 4,221
$ 3,032
Other income primarily consists of the impact of foreign currency transaction gains and losses associated with monetary assets and liabilities and any gains or losses on our strategic investments. The gain on investments is due to an adjustment to the fair value of an investment as a result of an observable price change.
Income tax expense
Three Months
Ended March 31,
(dollars in thousands) 2022 2021 $ Change % Change
Income tax (expense) benefit $ (1,444 ) $ 137 $ 1,581 1154 %
Effective tax rate 18 % (1 )%
Income tax (expense) benefit consists of current and deferred taxes for U.S. and foreign income taxes. The increase in the income tax expense was primarily driven by increased income in jurisdictions outside of the United States that . . .
May 05, 2022
COMTEX_406757863/2041/2022-05-05T17:21:56
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