The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Condensed Consolidated Financial Statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K filed with theSecurities and Exchange Commission (the "SEC") onFebruary 26, 2021 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). As discussed in the section entitled "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 significantly from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and elsewhere in this report, particularly in the section entitled "Risk Factors" included under Part II, Item 1A below. Overview We are a leading provider of cloud communications, video meetings, collaboration, and contact center software-as-a-service ("SaaS") solutions. We believe that our innovative, cloud-based communication and contact center solutions disrupt the large market for business communications and collaboration by providing flexible and cost-effective solutions that support mobile and distributed workforces. We enable convenient and effective communications for organizations across all their locations and employees, enabling them to be more productive and more responsive to their customers. Our cloud-based business communications and collaboration solutions are designed to be easy to use, providing a single user identity across multiple locations and devices, including smartphones, tablets, PCs and desk phones. Our solutions can be deployed rapidly and configured and managed easily. Our cloud-based solutions are location and device independent. Through our platform, we enable third-party developers and customers to integrate our solution with leading business applications to customize their own business workflows. InApril 2020 , we announced RingCentral Video ("RCV"), which is another component offered as part of RingCentral Office. We have a portfolio of cloud-based offerings that are subscription based, made available at different rates varying by the specific functionalities, services, and number of users. We primarily generate revenues from the sale of subscriptions to our offerings. Our subscription plans have monthly, annual, or multi-year contractual terms. We believe that this flexibility in contract duration is important to meet the different needs of our customers. For each of the three months endedMarch 31, 2021 and 2020, subscriptions revenues accounted for 90% or more of our total revenues. The remainder of our revenues has historically been primarily comprised of product revenues from the sale and rental of pre-configured phones and professional services. We do not develop, manufacture, or otherwise touch the delivery of physical phones and offer it as a convenience for a total solution to our customers in connection with subscriptions to our services. We rely on third-party providers to develop and manufacture these devices and fulfillment partners to successfully serve our customers. We continue to invest in our direct inside sales force while also developing indirect sales channels to market our brand and our subscription offerings. Our indirect sales channels who sell our solutions consist of: • a regional and global network of resellers; •carriers including AT&T, Inc. ("AT&T"),TELUS Communications Company ("TELUS"), BT Group plc ("BT") andVodafone Group Services Limited ("Vodafone"); •strategic partners who market and sell our co-branded solutions directly and through their subsidiaries. Such partnerships include Avaya Holdings Corp. ("Avaya"); Atos SE ("Atos") and its subsidiary,Unify Software andSolutions GmbH & CO. KG ("Unify"); and Alcatel-Lucent Enterprise ("ALE"). Our revenue growth has primarily been driven by our flagship RingCentral Office andRingCentral customer engagement solutions product offering, which has resulted in an increased number of customers, increased average subscription revenue per customer, and increased retention of our existing customer and user base. We define a "customer" as any party that purchases or subscribes to our products and services directly or indirectly through our channel partners. As ofMarch 31, 2021 , we had customers from a range of industries, including financial services, education, healthcare, legal services, real estate, retail, technology, insurance, construction, hospitality, and state and local government, among others. For each of the three months endedMarch 31, 2021 and 2020, the vast majority of our total revenues were generated in theU.S. andCanada , although we expect the percentage of our total revenues derived outside of theU.S. andCanada to grow as we continue to expand internationally. 23 -------------------------------------------------------------------------------- Table of Contents The growth of our business and our future success depend on many factors, including our ability to expand our customer base to larger customers, expand our indirect sales channels, continue to innovate, grow revenues from our existing customer base, expand our distribution channels, and scale internationally. The worldwide spread of the COVID-19 pandemic has resulted in authorities implementing numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. The COVID-19 pandemic has created a global slowdown of economic activity which has and will likely continue to decrease demand for a broad variety of goods and services, while also disrupting sales channels and marketing activities for an unknown period of time until the disease is contained. At this point, the full extent to which the COVID-19 pandemic may impact our financial condition or results of operations is uncertain. We may experience curtailed customer demand due to reduced customer spend, shortened contract duration, higher churn, lengthened payment terms, credit card declines, potential delays in professional services implementations, and reduction in demand for desktop phones, which could adversely impact our business, results of operations and overall financial performance in future periods. Additionally, the extent of the impact of the COVID-19 pandemic on our operational and financial performance will also depend on certain developments, including the duration and spread of the outbreak, actions taken to contain the virus or its impact, including the availability of effective vaccines and the speed at which they are administered to the public, impact on our partners, resellers, employees, vendors and customers, and employee or industry events, all of which are uncertain and cannot be predicted. While our revenues and earnings are relatively predictable 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 performance until future periods. During the reporting period, we saw contributions from new bookings as more businesses transition toRingCentral in the work-from-anywhere environment. We continue to see more customers opting for theRingCentral apps on laptops and mobile devices over traditional desktop phones which has impacted demand for physical phone devices. In response to the COVID-19 pandemic, we continue to focus on maintaining business continuity, helping our employees, customers and communities, and preparing for the future and the long-term success of our business. For example, to support the health and well-being of our employees, customers, partners and communities in response to the COVID-19 pandemic, a vast majority of our employees are working remotely and we have shifted some of our customer events to virtual-only experiences, and we may deem it advisable to similarly alter, postpone or cancel entirely additional customer, employee or industry events in the future. The changes we have implemented have not affected and are not expected to affect our ability to maintain operations, including financial reporting systems, internal control over financial reporting, and disclosure controls and procedures. Further discussion of the potential impacts of the COVID-19 pandemic on our business can be found in the section titled "Risk Factors" included in Part II, Item 1A below. Key Business Metrics In addition toUnited States generally accepted accounting principles ("U.S. GAAP") and financial measures such as total revenues, gross margin, and cash flows from operations, we regularly review a number of key business metrics to evaluate growth trends, measure our performance, and make strategic decisions. We discuss revenues and gross margin under "Results of Operations", and cash flow from operations and free cash flows under "Liquidity and Capital Resources." Other key business metrics are discussed below. Annualized Exit Monthly Recurring Subscriptions We believe that our Annualized Exit Monthly Recurring Subscriptions ("ARR") is a leading indicator of our anticipated subscriptions revenues. We believe that trends in revenue are important to understanding the overall health of our business, and we use these trends in order to formulate financial projections and make strategic business decisions. Our ARR equals our Monthly Recurring Subscriptions multiplied by 12. Our Monthly Recurring Subscriptions equals the monthly value of all customer recurring charges at the end of a given month. For example, our Monthly Recurring Subscriptions atMarch 31, 2021 was$117.3 million . As such, our ARR atMarch 31, 2021 was$1.4 billion . 24 -------------------------------------------------------------------------------- Table of Contents RingCentral Office Annualized Exit Monthly Recurring Subscriptions We calculate our RingCentral Office Annualized Exit Monthly Recurring Subscriptions ("Office ARR") in the same manner as we calculate our ARR, except that primarily customer subscriptions from RingCentral Office andRingCentral customer engagement solutions customers are included when determining Monthly Recurring Subscriptions for the purposes of calculating this key business metric. We believe that trends in revenue with respect to these products are important to the understanding of the overall health of our business, and we use these trends in order to formulate financial projections and make strategic business decisions. Our Office ARR atMarch 31, 2021 was$1.3 billion . Net Monthly Subscription Dollar Retention Rate We believe that our Net Monthly Subscription Dollar Retention Rate provides insight into our ability to retain and grow subscriptions revenue, as well as our customers' potential long-term value to us. We believe that our ability to retain our customers and expand their use of our solutions over time is a leading indicator of the stability of our revenue base and we use these trends in order to formulate financial projections and make strategic business decisions. We define our Net Monthly Subscription Dollar Retention Rate as (i) one plus (ii) the quotient of Dollar Net Change divided by Average Monthly Recurring Subscriptions. We define Dollar Net Change as the quotient of (i) the difference of our Monthly Recurring Subscriptions at the end of a period minus our Monthly Recurring Subscriptions at the beginning of a period minus our Monthly Recurring Subscriptions at the end of the period from new customers we added during the period, all divided by (ii) the number of months in the period. We define our Average Monthly Recurring Subscriptions as the average of the Monthly Recurring Subscriptions at the beginning and end of the measurement period. For example, if our Monthly Recurring Subscriptions were$118 at the end of a quarterly period and$100 at the beginning of the period, and$20 at the end of the period from new customers we added during the period, then the Dollar Net Change would be equal to ($0.67 ), or the amount equal to the difference of$118 minus$100 minus$20 , all divided by three months. Our Average Monthly Recurring Subscriptions would equal$109 , or the sum of$100 plus$118 , divided by two. Our Net Monthly Subscription Dollar Retention Rate would then equal 99.4%, or approximately 99%, or one plus the quotient of the Dollar Net Change divided by the Average Monthly Recurring Subscriptions. Our key business metrics for the five quarterly periods endedMarch 31, 2021 were as follows (dollars in millions): December 31, September 30, March 31, 2021 2020 2020 June 30, 2020 March 31, 2020 Net Monthly Subscription Dollar Retention Rate >99% >99% >99% >99%
>99%
Annualized Exit Monthly Recurring Subscriptions$ 1,407.4 $ 1,299.5 $ 1,179.0 $ 1,106.5 $ 1,029.7 RingCentral Office Annualized Exit Monthly Recurring Subscriptions$ 1,322.3 $ 1,215.2 $ 1,091.6 $ 1,018.3 $ 943.3 25
-------------------------------------------------------------------------------- Table of Contents Results of Operations The following tables set forth selected consolidated statements of operations data and such data as a percentage of total revenues. The historical results presented below are not necessarily indicative of the results that may be expected for any future period (in thousands): Three Months Ended March 31, 2021 2020 Revenues Subscriptions$ 325,223 $ 243,104 Other 27,133 24,408 Total revenues 352,356 267,512 Cost of revenues Subscriptions 73,247 52,433 Other 23,734 21,011 Total cost of revenues 96,981 73,444 Gross profit 255,375 194,068 Operating expenses Research and development 62,676 40,910 Sales and marketing 179,249 131,312 General and administrative 55,461 47,336 Total operating expenses 297,386 219,558 Loss from operations (42,011) (25,490) Other income (expense), net Interest expense (16,278) (7,502) Other income (expense) 58,543 (27,517) Other income (expense), net 42,265 (35,019) Gain (loss) before income taxes 254 (60,509) Provision for income taxes 440 212 Net loss $ (186)$ (60,721) 26
-------------------------------------------------------------------------------- Table of Contents Percentage of Total Revenues * Three Months Ended March 31, 2021 2020 Revenues Subscriptions 92 % 91 % Other 8 9 Total revenues 100 100 Cost of revenues Subscriptions 21 20 Other 7 8 Total cost of revenues 28 27 Gross profit 72 73 Operating expenses Research and development 18 15 Sales and marketing 51 49 General and administrative 16 18 Total operating expenses 84 82 Loss from operations (12) (10) Other income (expense), net Interest expense (5) (3) Other income (expense) 17 (10) Other income (expense), net 12 (13) Gain (loss) before income taxes - (23) Provision for income taxes - - Net loss - % (23) %
* Percentages may not add up due to rounding.
Comparison of the Three Months Ended
Three Months Ended March 31, (in thousands, except percentages) 2021 2020 $ Change % Change Revenues Subscriptions$ 325,223 $ 243,104 $ 82,119 34 % Other 27,133 24,408 2,725 11 % Total revenues$ 352,356 $ 267,512 $ 84,844 32 % Percentage of revenues Subscriptions 92 % 91 % Other 8 9 Total 100 % 100 % Subscriptions revenue. Subscriptions revenue increased by$82.1 million , or 34%, for the three months endedMarch 31, 2021 as compared to the respective prior year period. The increase was primarily a combination of the acquisition of new customers and upsells of seats and additional offerings to our existing customer base. This growth was primarily driven by an increase in sales to our mid-market and enterprise customers as we continue to move up market and increase sales through our direct and indirect sales channels. Although we expect to continue to add new customers and for existing customers to increase their usage of our product, we will continue to monitor the COVID-19 pandemic carefully and its impact on customer 27 -------------------------------------------------------------------------------- Table of Contents demand, contract duration, churn, payment terms, and credit card declines. Fluctuations in foreign currency exchange rates and volatility in the market, including those resulting from the COVID-19 pandemic, could also cause variability in our revenue. Other revenues. Other revenues are primarily comprised of product revenue from the sale of pre-configured phones, phone rentals, and professional services. Other revenues increased by$2.7 million , or 11%, for the three months endedMarch 31, 2021 as compared to the respective prior year period, primarily due to the increase in product sales and professional services resulting from the overall growth in our business. Due to shelter in place restrictions adopted in many jurisdictions in response to the COVID-19 pandemic, we continued to see a shift towards usingRingCentral apps on laptops and mobile devices over traditional desktop phones which impacted the demand of phones and timing of professional services. We will continue to monitor the COVID-19 pandemic carefully and its impact on phone and professional services revenue. Cost of Revenues and Gross Margin Three Months Ended March 31, (in thousands, except percentages) 2021 2020 $ Change % Change Cost of revenues Subscriptions$ 73,247 $ 52,433 $ 20,814 40 % Other 23,734 21,011 2,723 13 % Total cost of revenues$ 96,981 $ 73,444 $ 23,537 32 % Gross margins Subscriptions 77 % 78 % Other 13 % 14 % Total gross margin % 72 % 73 % Subscriptions cost revenues and gross margin. Cost of subscriptions revenues increased by$20.8 million , or 40%, for the three months endedMarch 31, 2021 as compared to the respective prior year period. The primary drivers of the increase were increases in infrastructure support costs of$7.1 million , third-party costs to support our solution offerings of$6.9 million , personnel and contractor-related costs of$3.6 million , and amortization of acquired intangible assets of$2.9 million . Personnel and contactor related costs includes share-based compensation expense of$1.3 million . Gross margin remained relatively consistent period over period. The increase in expenses was primarily driven by investments in our infrastructure and capacity to improve the availability of our subscription offerings, while also supporting the growth in new customers and increased usage of our subscriptions by our existing customer base. We expect subscription gross margin to be within a relatively similar range in the future. However, we continue to monitor the COVID-19 pandemic carefully and its impact on our customers. Other cost of revenues and gross margin. Cost of other revenues increased by$2.7 million , or 13%, for the three months endedMarch 31, 2021 as compared to the respective prior year period. This was primarily due to an increase in personnel costs of$2.3 million including share-based compensation expense. Gross margin remained relatively consistent period over period. We continue to monitor the impact of the COVID-19 pandemic on timing of professional services and transaction price of product sales. Research and Development Three Months Ended March 31, (in thousands, except percentages) 2021 2020 $ Change % Change Research and development$ 62,676 $ 40,910 $ 21,766 53 % Percentage of total revenues 18 % 15 %
Research and development expenses increased by
28 -------------------------------------------------------------------------------- Table of Contents million in professional fees, and$1.9 million in overhead costs to support our research and development efforts. The increase in personnel and contractor costs was mainly driven by approximately$10.7 million relating to headcount growth and$5.7 million share-based compensation expense. The increases in research and development headcount and other expense categories were driven by continued investment in current and future software development projects for our applications. Given the continued emphasis and focus on product innovation, we expect research and development expenses to continue to increase in absolute dollars. Sales and Marketing Three Months Ended March 31, (in thousands, except percentages) 2021 2020 $ Change % Change Sales and marketing$ 179,249 $ 131,312 $ 47,937 37 % Percentage of total revenues 51 % 49 % Sales and marketing expenses increased by$47.9 million , or 37%, for the three months endedMarch 31, 2021 as compared to the respective prior year period, primarily due to increases in personnel and contractor costs of$24.6 million , third-party commissions of$19.7 million , amortization of deferred sales commission costs of$5.8 million , and overhead costs of$1.1 million to support our sales and marketing efforts, partially offset by$3.6 million decrease in travel costs resulting from the impact of the COVID-19 pandemic. Of the total increase in personnel and contractor costs,$14.2 million was primarily due to headcount growth and approximately$10.1 million was due to higher share-based compensation expense. The increases in sales and marketing headcount and other expense categories were necessary to support our growth strategy to acquire new customers with a focus on larger customers, and to establish brand recognition to achieve greater penetration into theNorth America and international markets. Additionally, we expect sales and marketing expenses to continue to increase in absolute dollars as we continue to expand our presence inNorth America and international markets. General and Administrative Three Months Ended March 31, (in thousands, except percentages) 2021 2020 $ Change % Change General and administrative$ 55,461 $ 47,336 $ 8,125 17 % Percentage of total revenues 16 % 18 % General and administrative expenses increased by$8.1 million , or 17%, for the three months endedMarch 31, 2021 as compared to the respective prior year period, primarily due to increases in personnel and contractor costs of$3.3 million , business fees and taxes of$1.9 million , and overhead costs of$1.6 million . We expect general and administrative expenses to continue to increase in absolute dollars as we continue to make additional investments in processes, systems, and personnel to support our anticipated revenue growth. Other Income (Expense), Net Three Months Ended March 31, (in thousands, except percentages) 2021 2020 $ Change % Change Interest expense$ (16,278) $ (7,502) $ (8,776) nm Other income (expense) 58,543 (27,517) 86,060 nm Other income (expense), net$ 42,265 $ (35,019) $ 77,284 nm
nm - not meaningful
Other income (expense), net increased by
29 -------------------------------------------------------------------------------- Table of Contents Interest expense was higher by$8.8 million mainly due to increase in the amortization of debt discount and issuance costs from our 2025 and 2026 convertible senior notes issued in the first and third quarter of 2020. Other income, net was higher by$86.1 million , primarily due to an increase of$79.7 million net unrealized gain recognized on our long-term investments, which may fluctuate due to volatility in investee's stock price,$6.6 million lower loss on partial redemption of our convertible senior notes driven by lower conversions and changes in interest rates. This was partially offset by$0.9 million decrease in interest income on our investments as a result of a reduction in interest rates. We expect interest income to further reduce in the future due to interest rate volatility in the current macroeconomic environment and reduction of our investments in money market funds. Net loss Net loss decreased by$60.5 million for the three months endedMarch 31, 2021 , as compared to the respective prior year period, mainly due to non-cash items including an increase of$79.7 million net unrealized gain recognized from our long-term investments, partially offset by$18.4 million higher share-based compensation expense primarily driven by equity awards granted to new and existing employees, and$3.0 million amortization of acquired intangible assets. Liquidity and Capital Resources Liquidity is a measure of our ability to access sufficient cash flows to meet the short-term and long-term cash requirements of our business operations. As ofMarch 31, 2021 andDecember 31, 2020 , we had cash and cash equivalents of$463.1 million and$639.9 million , respectively. We finance our operations primarily through sales to our customers, which could be billed either monthly or annually one year in advance. For customers with annual or multi-year contracts and those who opt for annual invoicing, we generally invoice only one annual period in advance and revenue is deferred for such advanced billings. We also finance our operations from proceeds from issuance of convertible senior notes and proceeds from issuance of stock under our stock plans. InMarch 2021 , we delivered a notice of full redemption to redeem the remaining$41.2 million aggregate principal of the 2023 Notes, which was settled inApril 2021 for$153.3 million in cash. For additional details, refer to Note 6, Convertible Senior Notes, to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. We are in compliance with all covenants under the 2026, 2025 and 2023 Notes as ofMarch 31, 2021 . InMarch 2021 , we paid approximately$8.6 million to purchase certain intangible assets. We believe that our operations, existing liquidity sources as well as capital resources and ability to raise cash through additional financing will satisfy our future cash requirements and obligations for at least the next 12 months. Our future capital requirements will depend on many factors, including revenue growth and costs incurred to support customer growth, acquisitions and expansions, sales and marketing, research and development, increased general and administrative expenses to support the anticipated growth in our operations, and capital equipment required to support our growing headcount and in support of our co-location data center facilities, as well as the extent of the COVID-19 pandemic and its effect on our business. Our capital expenditures in future periods are expected to grow in line with our business. We continually evaluate our capital needs and may decide to raise additional capital to fund the growth of our business for general corporate purposes through public or private equity offerings or through additional debt financing. In the future, we may also make investments in or acquire businesses or technologies that could require us to seek additional equity or debt financing. Access to additional capital may not be available or on favorable terms. The uncertainty created by the changing markets and economic conditions related to the COVID-19 pandemic may also impact our customers' ability to pay on a timely basis, which could negatively impact our operating cash flows. 30
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Table of Contents
The table below provides selected cash flow information (in thousands):
Three Months Ended
2021 2020 Net cash provided by operating activities $ 36,955$ 13,069 Net cash used in investing activities (26,836) (14,250) Net cash (used in) provided by financing activities (186,496) 420,296 Effect of exchange rate changes (409) (657) Net (decrease) increase in cash and cash equivalents $
(176,786)
Net Cash (Used in) Provided by Operating Activities Cash used in or provided by operating activities is driven by the timing of customer collections, as well as the amount and timing of disbursements to our vendors, the amount of cash we invest in personnel, marketing, and infrastructure costs to support the anticipated growth of our business, payments under strategic arrangements, and amounts attributable to repayment of convertible notes. Net cash provided by operating activities was$37.0 million for the three months endedMarch 31, 2021 . The cash flow from operating activities was driven by timing of cash receipts from customers and carriers, offset by cash payments for personnel related costs and to vendors. Net cash provided by operating activities for the three months endedMarch 31, 2021 , increased by$23.9 million as compared to the respective prior year period. This change reflects working capital impacts resulting from the timing of payments and collections, and payment of a portion of the 2023 Notes related to interest.Net Cash Used in Investing Activities Our primary investing activities have consisted of our purchase of capital expenditures and internal-use software, and acquisition of intellectual properties. As our business grows, we expect our capital expenditures to continue to increase. Net cash used in investing activities was$26.8 million for the three months endedMarch 31, 2021 , primarily due to capital expenditures including personnel-related costs associated with development of internal-use software of$18.5 million and our acquisition of intellectual property of$8.4 million in the first quarter of 2021 to complement and support our product development and enhancement initiatives. Net cash used in investing activities for the three months endedMarch 31, 2021 increased by$12.6 million as compared to the respective prior year period. The increase was primarily due to our acquisition of intellectual property of$8.4 million in the first quarter of 2021 and increased investment in capital expenditures and internal-use software development of$4.2 million .Net Cash (Used in) Provided by Financing Activities Our primary financing activities have consisted of our partial conversion of our 2023 Notes, partially offset by raising proceeds through the issuance stock under our stock plans. Net cash used in financing activities was$186.5 million for the three months endedMarch 31, 2021 , primarily due to cash paid of$178.5 million due to conversion requests for our 2023 Notes and$3.6 million settlement of our contingent consideration in connection with prior-year business acquisition and$3.7 million for net taxes paid in connection with our stock plans. Net cash used in financing activities for the three months endedMarch 31, 2021 increased by$606.8 million as compared to the respective prior year period primarily due to proceeds from both our 2026 Notes and 2025 Notes issued in 2020, offset by the partial settlement of the 2023 Notes. Refer to Note 6, Convertible Senior Notes, in the accompanying notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. 31 -------------------------------------------------------------------------------- Table of Contents Non-GAAP Free Cash Flow To supplement our statements of cash flows presented on a GAAP basis, we use non-GAAP measures of cash flows to analyze cash flow generated from our operations. We define free cash flow, a non-GAAP financial measure, as GAAP net cash provided by (used in) operating activities plus cash paid for strategic partnerships and repayments of convertible senior notes attributable to debt discount, reduced by purchases of property and equipment and capitalized internal-use software. We believe information regarding free cash flow provides useful information to management and investors in understanding the strength of liquidity and available cash. A limitation of the use of free cash flow is that it does not represent the total increase or decrease in our cash balance for the period. Free cash flow should not be considered in isolation or as an alternative to cash flows from operations, and should be considered alongside our other GAAP-based financial liquidity performance measures, such as net cash used in operating activities and our other GAAP financial results. The following table presents a reconciliation of free cash flow to net cash provided by (used in) operating activities, the most directly comparable GAAP measure, for each of the periods presented (in thousands):
Three Months Ended
2021 2019 Net cash provided by operating activities $
36,955
Repayment of convertible senior notes attributable to debt discount
4,712 13,894 Non-GAAP net cash provided by operating activities 41,667 26,963 Purchases of property and equipment (8,721) (6,861) Capitalized internal-use software (9,757) (7,389) Non-GAAP free cash flow$ 23,189 $ 12,713 Backlog We have generally signed new customers contracts with varying length, from month-to-month to multi-year terms for our subscription services. At any point in the contract term, there can be amounts allocated to services that we have not yet contractually performed, which constitute a backlog. Until we meet our performance obligations, we do not recognize them as revenues in our condensed consolidated financial statements. Given the variability in our contract length, we believe that backlog is not a reliable indicator of future revenues and we do not utilize backlog as a key management metric internally. Deferred Revenue Deferred revenue primarily consists of the unearned portion of monthly or annual invoiced fees for our subscriptions, which we recognize as revenue in accordance with our revenue recognition policy. For customers with multi-year contracts, we generally invoice for only one monthly or annual subscription period in advance. Therefore, our deferred revenue balance does not capture the full contract value of multi-year contracts. Accordingly, we believe that deferred revenue is not a reliable indicator of future revenues and we do not utilize deferred revenue as a key management metric internally. Contractual Obligations and Commitments Except as set forth below, and in Notes 3, 6, 7 and 8 in the accompanying notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, there were no significant changes in our commitments under contractual obligations, as disclosed in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . Contingencies We are and may be in the future subject to certain legal proceedings and from time to time may be involved in a variety of claims, lawsuits, investigations, and proceedings relating to contractual disputes, intellectual property rights, employment matters, regulatory compliance matters, and other matters relating to various claims that arise in the normal course of business. We record a provision for a liability when we believe that it is both probable that a liability has been incurred, and the amount can be reasonably estimated. Significant judgment is required to determine both probability and the estimated amount of loss. Such legal proceedings are inherently unpredictable and subject to significant uncertainties, some of which are beyond our control. Should any of these estimates and assumptions change or prove to be incorrect, it could have a significant impact on our results of operations, financial position, and cash flows. 32 -------------------------------------------------------------------------------- Table of Contents Off-balance Sheet Arrangements During the three months endedMarch 31, 2021 and 2020, 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. Item 3. Quantitative and Qualitative Disclosures About Market Risk We are exposed to market risk in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in foreign currency exchange rates and interest rates. We do not hold or issue financial instruments for trading purposes. Foreign Currency Risk The majority of our sales and contracts are denominated inU.S. dollars, and therefore our net revenue is not currently subject to significant foreign currency risk. As part of our international operations, we charge customers in British Pounds,European Union ("EU") Euro, Canadian Dollars and Australian Dollars, among others. Fluctuations in foreign currency exchange rates and volatility in the market, including those resulting from the COVID-19 pandemic, will cause variability in our revenue. However, this impact has not been significant during the three months endedMarch 31, 2021 . Our operating expenses are generally denominated in the currencies of the countries in which our operations are located, which are primarily in theU.S. , and to a lesser extent inCanada ,Europe , andAsia-Pacific . The functional currency of our foreign subsidiaries is generally the local currency. Our consolidated results of operations and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates and may be adversely affected in the future due to changes in foreign currency exchange rates. To date, we have not entered into any hedging arrangements with respect to foreign currency risk. During the three months endedMarch 31, 2021 , a hypothetical 10% change in foreign currency exchange rates applicable to our business would not have had a material impact on our condensed consolidated financial statements. As our international operations continue to expand, risks associated with fluctuating foreign currency rates may increase. We will continue to reassess our approach to managing these risks. Interest Rate Risk As ofMarch 31, 2021 , we had cash and cash equivalents of$463.1 million . We invest our cash and cash equivalents in short-term money market funds. We have experienced a decline in the interest rates associated with money market funds over the last several quarters. Declines in interest rates would reduce future interest income. For the three months endedMarch 31, 2021 , a hypothetical 10% increase or decrease in overall interest rates would not have had a material impact on our interest income. The carrying amount of our cash equivalents reasonably approximates fair values. Due to the short-term nature of our money-market funds, we believe that exposure to changes in interest rates will not have a material impact on the fair value of our cash equivalents. Interest income may further reduce in the future due to interest rate volatility in the current macroeconomic environment. As ofMarch 31, 2021 , we had$37.1 million ,$834.6 million , and$516.2 million outstanding from the 2023 Notes, 2025 Notes, and 2026 Notes (collectively the "Notes"), respectively. We carry the Notes at face value less unamortized discount on our balance sheet, and we present the fair value for required disclosure purposes only. The Notes have a zero percent fixed annual interest rate and, therefore, we have no economic exposure to changes in interest rates. The fair value of the Notes is exposed to interest rate risk. Generally, the fair value of our fixed interest rate Notes will increase as interest rates decline and decrease as interest rates increase. In addition, the fair values of the Notes are affected by our stock price. The fair value of the Notes will generally increase as our common stock price increases and will generally decrease as our common stock price decrease in value. Market Risk As ofMarch 31, 2021 , we had long-term investments in convertible and redeemable preferred stock of$270.7 million . These equity investments are subject to market related risks that could decrease or increase the fair value of our holdings. These equity investments are adjusted to fair value based on market inputs at the balance sheet date, which are subject to market-related risks that could decrease or increase the fair value of our holdings, including the potential impacts from COVID-19. A fluctuation in the investee's stock price, volatility or a combination of both could have an adverse impact on the fair value of our 33 -------------------------------------------------------------------------------- Table of Contents investment. A hypothetical adverse stock price or volatility change of 10% could have resulted in a potential decrease of up to$22.4 million in the fair-value of our investment as ofMarch 31, 2021 . Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as ofMarch 31, 2021 . The term "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in theSEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Based on the evaluation of our disclosure controls and procedures as ofMarch 31, 2021 , our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level. Changes in Internal Control over Financial Reporting There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has significantly affected, or is reasonably likely to significantly affect, our internal control over financial reporting. We have not experienced any material impact to our internal controls over financial reporting although sinceMarch 2020 most of our employees and extended workforce are now working remotely due to the COVID-19 pandemic. We are continually monitoring and assessing the impact of the COVID-19 pandemic on our internal controls to address impacts to their design, implementation and operating effectiveness. Limitations on Effectiveness of Controls and Procedures In designing and evaluating our disclosure controls and procedures, management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. 34
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