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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 endedDecember 31, 2021 . Overview We are a pioneer and leading provider of intelligent cloud software for contact centers, facilitating more than nine billion call minutes between our more than 2,500 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, 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 each of the three and six months endedJune 30, 2022 , subscription and related usage fees accounted for 91% of our revenue. For each of the three and six months endedJune 30, 2021 , 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. 29
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Macroeconomic and other factors
We are subject to risks and exposures, including those caused by macroeconomic deterioration,
Macroeconomic factors include increased inflation, increased interest rates, supply chain disruptions, decreased economic output and fluctuations in currency exchange rates, all of which can cause client hesitancy and uncertainty. We continuously monitor the direct and indirect impacts of these circumstances on our business and financial results, as well as the overall global economy and geopolitical landscape. The implications of macroeconomic events on our business, results of operations and overall financial position, particularly in the long term, remain uncertain. InMarch 2022 we decided to close ourRussia office and to establish a new European development center inPorto, Portugal , in part due to the growing uncertainty arising from theRussia -Ukraine conflict. During the three and six months endedJune 30, 2022 , we incurred approximately$1.1 million and$3.9 million in costs related to the closure and relocation of our Russian operations, of which$3.0 thousand and$0.4 million was recorded in cost of revenue,$0.1 million and$2.7 million was recorded in research and development expense,$0.8 million and$1.1 million was recorded in general and administrative expense and$0.2 million and$(0.3) million was recorded in interest income and other, respectively, in our condensed consolidated statements of operations and comprehensive loss. We currently do not believe that this decision will have a material effect on our business, results of operations or financial condition. The COVID-19 pandemic had a moderately positive impact on our financial results due to the shift from brick-and-mortar to virtual. The severity and duration of the COVID-19 pandemic, and its continuing impact on theU.S. and global economy remains uncertain, but we believe that most of this benefit has now dissipated.
Key GAAP Operating Results
Our revenue increased to$189.4 million and$372.2 million for the three and six months endedJune 30, 2022 from$143.8 million and$281.7 million for the three and six months endedJune 30, 2021 . Revenue growth was primarily attributable to our larger clients, driven by an increase in our sales and marketing activities and our improved brand awareness. For each of the three and six months endedJune 30, 2022 and 2021, no single client accounted for more than 10% of our total revenue. As ofJune 30, 2022 , we had over 2,500 clients across multiple industries. Our clients' subscriptions generally range in size from fewer than 10 agent seats to approximately 7,200 agent seats. We had a net loss of$23.7 million and$57.8 million in the three and six months endedJune 30, 2022 , compared to a net loss of$16.5 million and$28.9 million in the three and six months endedJune 30, 2021 . 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 clients, innovate and expand internationally. While these areas represent significant opportunities for us, they also pose risks and challenges, including the impact of the global economic downturn, theRussia -Ukraine conflict and the COVID-19 pandemic, that we must successfully address in order to sustain the growth of our business and improve our operating results.
Key Non-GAAP Operational and Financial Performance Indicators
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.
Dollar based annual 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 Revenue by our Retention Base
Net Revenue on a monthly basis, which we then average using the rates for the
trailing twelve months for the period presented. We define Retention Base Net
Revenue as recurring net revenue from all clients in the comparable prior year
period, and we define Retained Net Revenue as recurring net revenue from that
same group of clients in the current period. We define recurring net revenue as
net subscription and related usage revenue.
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The following table shows our annual retention rate in dollars based on net sales for the periods presented:
Twelve Months Ended
June 30, 2022 June 30, 2021
Annual Dollar-Based Retention Rate 118%
123%
Our dollar retention rate declined year-over-year, primarily due to the initial profit we previously experienced in 2021 due to the COVID-19 pandemic.
Adjusted EBITDA
We monitor adjusted EBITDA, a non-GAAP financial measure, to analyze our financial results and believe that it is useful to investors, as a supplement toU.S. GAAP measures, in evaluating our ongoing operational performance and enhancing an overall understanding of our past financial performance. We believe that adjusted EBITDA helps illustrate underlying trends in our business that could otherwise be masked by the effect of the income or expenses that we exclude from adjusted EBITDA. Furthermore, we use this measure to establish budgets and operational goals for managing our business and evaluating our performance. We also believe that adjusted EBITDA provides an additional tool for investors to use in comparing our recurring core business operating results over multiple periods with other companies in our industry. Adjusted EBITDA should not be considered in isolation from, or as a substitute for, financial information prepared in accordance withU.S. GAAP, and our calculation of adjusted EBITDA may differ from that of other companies in our industry. We compensate for the inherent limitations associated with using adjusted EBITDA through disclosure of these limitations, presentation of our financial statements in accordance withU.S. GAAP and reconciliation of adjusted EBITDA to the most directly comparableU.S. GAAP measure, net loss. We calculate adjusted EBITDA as net loss before (1) depreciation and amortization, (2) stock-based compensation, (3) interest expense, (4) interest (income) and other, (5) acquisition-related transaction and one-time integration costs, (6) contingent consideration expense, (7) exit costs related to the closure and relocation of our Russian operations, (8) provision for (benefit from) income taxes, and (9) other items that do not directly affect what we consider to be our core operating performance. 31
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The following table provides a reconciliation of net loss and adjusted EBITDA for the periods presented (in thousands):
Three Months Ended Six Months Ended
June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021
Net loss $ (23,670) $
(16,530)
Non-GAAP adjustments: Amortization expense (1)
11,640 9,651 22,435 18,414 Stock-based compensation (2) 44,786 24,901 84,179 45,809 Interest expense 1,857 2,118 3,727 4,056 Interest (income) and other (280) 353 (1,125) 178 Exit costs related to closure and relocation of Russian operations 214 - 3,441 - Acquisition-related transaction and one-time integration costs 1,714 973 3,352 2,067 Contingent consideration expense - 2,700 260 5,200 Refund for prior year overpayment of USF fees (3,511) - (3,511) - Provision for (benefit from) income taxes 332 (135) 2,588 (652) Adjusted EBITDA$ 33,082 $ 24,031 $ 57,556 $ 46,210
(1) Depreciation expense included in our results of operations is as follows (in thousands):
Three Months Ended Six Months Ended
June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021
Cost of revenue $ 8,747 $ 7,825 $ 17,247 $ 14,912
Research and development 804 729 1,629 1,325
Sales and marketing 1 1 2 2
General and administrative 2,088 1,096 3,557 2,175
Total depreciation and
amortization $ 11,640 $
9,651
(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. (3)Exit costs related to the closure and relocation of our Russian operations was$1.1 million and$3.9 million during the three and six months endedJune 30, 2022 , respectively. The$0.2 million and$3.4 million adjustments presented above were net of$0.7 million and$0.8 million included in "Depreciation and amortization" and$0.2 million and$(0.3) million included in "Interest (income) and other."
Key elements of our operating results
Revenue
Our revenue consists of subscription and related usage as well as professional services. We consider our subscription and related usage to be recurring revenue. This recurring revenue includes fixed subscription fees for the delivery and support of our VCC cloud platform, as well as related usage fees. The related usage fees are generally based on the volume of minutes for inbound and outbound client 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 for 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 plans with bundled usage, are generally billed monthly in advance, while variable usage fees are billed in arrears. Fixed subscription fees are recognized on a straight-line basis over the applicable term, which is predominantly the monthly contractual billing period. Support activities include technical assistance for our solution and upgrades and enhancements on a when and if available basis, which are not billed separately. Variable subscription related usage fees for non-bundled plans are billed in arrears based on client-specific per minute rate plans and are recognized as actual usage occurs. We generally require advance deposits from clients based on estimated usage. All fees, except usage deposits, are non-refundable. 32
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In addition, we generate professional services revenue from assisting clients in implementing our solution and optimizing use. These services include application configuration, system integration and education and training services. Professional services are primarily billed on a fixed-fee basis and are typically performed by us directly. In limited cases, our clients choose to perform these services themselves or engage their own third-party service providers to perform such services. Professional services are recognized as the services are performed using the proportional performance method, with performance measured based on labor hours, provided all other criteria for revenue recognition are met.
Revenue cost
Our cost of revenue consists primarily of personnel costs, including stock-based compensation, fees that we pay to telecommunications providers for usage,Universal Service Fund , or USF, contributions and other regulatory costs, depreciation and related expenses of the servers and equipment, costs to build out and maintain co-location data centers, costs of public cloud-based data centers, allocated office and facility costs, amortization of acquired technology and amortization of internal-use software costs. Cost of revenue can fluctuate based on a number of factors, including the fees we pay to telecommunications providers, which vary depending on our clients' usage of our VCC cloud platform, the timing of capital expenditures and related depreciation charges and changes in headcount. We expect to continue investing in professional services, public cloud, cloud operations, client support and network infrastructure to maintain high quality and availability of services, which we believe will result in absolute dollar increases in cost of revenue but percentage of revenue declines in the long-term through economies of scale.
Functionnary costs
We classify our operating expenses into research and development, sales and marketing, and general and administrative expenses.
Research and Development. Our research and development expenses consist primarily of salary and related expenses, including stock-based compensation, for personnel related to the development of improvements and expanded features for our services, as well as quality assurance, testing, product management and allocated overhead. We expense research and development expenses as they are incurred except for internal use software development costs that qualify for capitalization. We believe that continued investment in our solution is important for our future growth, and we expect our research and development expenses to increase in absolute dollars and fluctuate as a percentage of revenue in the near and longer term. Sales and Marketing. Sales and marketing expenses consist primarily of salaries and related expenses, including stock-based compensation, for personnel in sales and marketing, sales commissions, as well as advertising, marketing, corporate communications, travel costs and allocated overhead. We believe it is important to continue investing in sales and marketing to continue to generate revenue growth, and we expect sales and marketing expenses to increase in absolute dollars and fluctuate as a percentage of revenue in the near and longer term as we continue to support our growth initiatives. General and Administrative. General and administrative expenses consist primarily of salary and related expenses, including stock-based compensation, for management, finance and accounting, legal, information systems and human resources personnel, professional fees, compliance costs, other corporate expenses and allocated overhead. We expect that general and administrative expenses will fluctuate in absolute dollars and as a percentage of revenue in the near term, but to increase in absolute dollars and decline as a percentage of revenue in the longer term.
Results of operations for the three and six months ended
Based on the condensed consolidated statements of operations and comprehensive
loss set forth in this Quarterly Report on Form 10-Q, the following table sets
forth our operating results as a percentage of revenue for
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the periods indicated:
Three Months Ended Six Months Ended
June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021
Revenue 100 % 100 % 100 % 100 %
Cost of revenue 47 % 45 % 48 % 44 %
Gross profit 53 % 55 % 52 % 56 %
Operating expenses:
Research and development 18 % 17 % 19 % 17 %
Sales and marketing 34 % 32 % 34 % 32 %
General and administrative 12 % 16 % 13 % 16 %
Total operating expenses 64 % 65 % 66 % 65 %
Loss from operations (11) % (10) % (14) % (9) %
Other (expense) income, net:
Interest expense (1) % (1) % (1) % (1) %
Interest income and other - % (1) % - % - %
Total other (expense) income, net (1) % (2) % (1) % (1) %
Loss before income taxes (12) % (12) % (15) % (10) %
Provision for (benefit from) income
taxes - % (1) % 1 % - %
Net loss (12) % (11) % (16) % (10) %
Revenue
Three Months Ended Six Months Ended
$ % $ %
June 30, 2022 June 30, 2021 Change Change June 30, 2022 June 30, 2021 Change Change
(in thousands, except percentages)
Revenue $ 189,382 $ 143,782 $ 45,600 32 % $ 372,159 $ 281,664 $ 90,495 32 %
The increase in revenue for the three and six months ended June 30, 2022
compared to the same periods of 2021 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, 2022 June 30, 2021 Change Change June 30, 2022 June 30, 2021 Change Change
(in thousands, except percentages)
Cost of revenue $ 88,229 $ 64,395 $ 23,834 37 % $ 177,096 $ 124,198 $ 52,898 43 %
% of Revenue 47 % 45 % 48% 44%
The increase in cost of revenue for the three and six months ended June 30, 2022
compared to the same periods of 2021 was primarily due to a $11.4 million and
$24.1 million increase in personnel costs, including stock-based compensation
costs, driven mainly by increased headcount and higher salaries, a $8.4 million
and $15.1 million increase in depreciation, data center and public cloud costs
to support our growing capacity needs, a $4.4 million and $9.8 million increase
in third-party hosted software costs driven by increased client activities, a
$1.4 million and $3.8 million increase in usage and carrier costs due to
increased volume and higher costs, a $1.3 million and $2.4 million increase in
consulting costs for global expansion and a $1.2 million and $2.5 million
increase in staff augmentation costs related to implementation of our solutions,
partially offset by a $5.1 million and $6.4 million decrease in USF
contributions and other federal telecommunication service fees due primarily to
a change in methodology, which resulted in a $3.5 million refund for 2020 and a
decrease in the USF contribution rate, offset in part by increased client usage.
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Gross Profit
Three Months Ended Six Months Ended
$ % $ %
June 30, 2022 June 30, 2021 Change Change June 30, 2022 June 30, 2021 Change Change
(in thousands, except percentages)
Gross profit$ 101,153 $ 79,387 $ 21,766 27 %$195,063 $157,466 $37,597 24% % of Revenue 53 % 55 % 52% 56% The increase in gross profit for the three and six months endedJune 30, 2022 compared to the same periods of 2021 was primarily due to increases in subscription and related revenues. The decrease in gross margin for the three and six months endedJune 30, 2022 compared to the same periods of 2021 was primarily due to increased cost of revenue as described above, which grew slightly more than our growth in revenue. We expect gross margin to increase in the long term despite continued investments in professional services, public cloud, cloud operations, client support and network infrastructure. Operating Expenses Research and Development Three Months Ended Six Months Ended $ % $ % June 30, 2022 June 30, 2021 Change Change June 30, 2022 June 30, 2021 Change Change (in thousands, except percentages)
Research and development
$ 10,344 42 %$70,816 $46,769 $24,047 51% % of Revenue 18 % 17 % 19% 17% The increase in research and development expenses for the three and six months endedJune 30, 2022 compared to the same periods of 2021 was primarily due to a$9.7 million and$22.4 million increase in personnel-related costs including stock-based compensation costs, driven mainly by increased headcount and higher salaries, and a$1.0 million and$1.5 million increase in office, facilities and related costs. Sales and Marketing Three Months Ended Six Months Ended $ % $ % June 30, 2022 June 30, 2021 Change Change June 30, 2022 June 30, 2021 Change Change (in thousands, except percentages)
Sales and marketing$ 64,098 $ 46,024 $ 18,074 39 %$128,709 $90,823 $37,886 42% % of Revenue 34 % 32 % 34% 32% The increase in sales and marketing expenses for the three and six months endedJune 30, 2022 compared to the same periods of 2021 was primarily due to a$10.2 million and$22.9 million increase in personnel-related costs, including stock-based compensation costs driven mainly by increased headcount and higher salaries, a$3.9 million and$7.3 million increase in sales commission expenses driven by the growth in sales and bookings of our solution, a$1.0 million and$2.1 million increase in travel costs and a$0.7 million and$1.2 million increase in office, facilities and related costs. The remaining net increase in sales and marketing expenses was primarily due to the execution of our growth strategy to acquire new clients, increase the number of agent seats within our existing client base, and increased advertising and other marketing expenses to increase our brand awareness. 35
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General and Administrative
Three Months Ended Six Months Ended
$ % $ %
June 30, 2022 June 30, 2021 Change Change June 30, 2022 June 30, 2021 Change Change
(in thousands, except percentages)
General and administrative$ 23,824 $ 22,909 $ 915 4 %$48,138 $45,154 $2,984 7% % of Revenue 12 % 16 % 13% 16% The increase in general and administrative expenses for the three and six months endedJune 30, 2022 compared to the same periods of 2021 was primarily due to a$3.5 million and$6.4 million increase in personnel costs including stock-based compensation costs, driven mainly by increased headcount and higher salaries, a$0.1 million and$1.7 million increase in legal and other professional service costs, partially offset by a$2.7 million and$4.9 million decrease in contingent consideration expense for the Inference acquisition. Other (Expense) Income, Net Three Months Ended Six Months Ended $ % $ % June 30, 2022 June 30, 2021 Change Change June 30, 2022 June 30, 2021 Change Change
(in thousands, except percentages) Interest expense
(12) %$ (3,727) $ (4,056) $ 329 (8) % Interest income and other 280 (353) 633 (179) % 1,125 (178) 1,303 (732) % Total other (expense) income, net$ (1,577) $ (2,471) $ 894 (36) %$ (2,602) $ (4,234) $ 1,632 (39) % % of Revenue (1) % (2) % (1) % (1) % The decrease in interest expense for the three and six months endedJune 30, 2022 compared to the same periods of 2021 was primarily due to the reduction in the aggregate outstanding principal amount of our 2023 convertible senior notes. See Note 6 to the consolidated financial statements for further details. The increase in interest income and other for the three and six months endedJune 30, 2022 compared to the same periods of 2021 was primarily due to higher interest income on our marketable investments and an increase in foreign currency remeasurement gains.
Cash and capital resources
To date, we have financed our operations primarily through sales of our solution, net proceeds from our equity and debt financings, including the issuance of our 2025 convertible senior notes in May andJune 2020 and of our 2023 convertible senior notes inMay 2018 , and lease facilities. As ofJune 30, 2022 , we had$513.4 million in working capital, which included$101.3 million in cash and cash equivalents and$397.1 million in short-term marketable investments, and excluded long-term marketable investments of$60.4 million . We believe our existing cash and cash equivalents will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months. We plan to continue to finance our operations in the future primarily through sales of our solution, net proceeds from equity and debt financings, and lease facilities. Our future capital requirements will depend on many factors including our growth rate, continuing market acceptance of our solution, the strength of the global economy, client retention, our ability to gain new clients, the timing and extent of spending to support research and development efforts, the outcome of any pending or future litigation or other claims by third parties or governmental entities, the expansion of sales and marketing activities and personnel, the introduction of new and enhanced offerings, expenses incurred in closing ourRussia operations and opening a new office inEurope and any operational disruptions due to this transition, and the impact of theRussia -Ukraine conflict and the COVID-19 pandemic on these or other factors, the global economy, or our business. We may also acquire or invest in complementary businesses, technologies and intellectual property rights, which may increase our use of cash and future capital requirements, both to pay acquisition costs and to support our combined operations. We may raise additional capital through equity or engage in debt financings at any time to fund these or other requirements. 36
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However, we may not be able to raise additional capital through equity or debt financings when needed on terms acceptable to us or at all, depending on our financial performance, economic and market conditions, the trading price of our common stock, and other factors, including the length and severity of the current economic downturn and fluctuations in the financial markets, including due to theRussia -Ukraine conflict and the ongoing COVID-19 pandemic. If we are unable to raise additional capital as needed, our business, operating results and financial condition could be harmed. In addition, if our operating performance during the next twelve months is below our expectations, our liquidity and ability to operate our business also could be harmed. If we raise additional funds by issuing equity or equity-linked securities, the ownership of our existing stockholders would be diluted. If we raise additional funds through the incurrence of additional indebtedness, we will be subject to increased debt service obligations and could also be subject to restrictive covenants and other operating restrictions that could negatively impact our ability to operate our business.
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