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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One) | | | | | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2024
OR | | | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-38098
APPIAN CORPORATION
(Exact Name of Registrant as Specified in its Charter)
| | | | | | | | |
Delaware | | 54-1956084 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | |
7950 Jones Branch Drive McLean, VA | | 22102 |
(Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code: (703) 442-8844
Securities registered pursuant to Section 12(b) of the Act: | | | | | | | | |
Title of each class | Trading symbol | Name of each exchange on which registered |
Class A Common Stock | APPN | The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | | | | | | | |
Large accelerated filer | | ☒ | | Accelerated filer | | ☐ |
Non-accelerated filer | | ☐ | | Small reporting company | | ☐ |
| | | | Emerging growth company | | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of July 29, 2024, there were 41,153,021 shares of the registrant’s Class A common stock and 31,195,739 shares of the registrant’s Class B common stock, each with a par value of $0.0001 per share, outstanding.
Table of Contents
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| | Page |
PART I. | FINANCIAL INFORMATION | |
Item 1. | | |
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Item 2. | | |
Item 3. | | |
Item 4. | | |
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PART II. | OTHER INFORMATION | |
Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
Item 5. | | |
Item 6. | | |
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PART I—FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
APPIAN CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value and share data)
| | | | | | | | | | | |
| As of |
| June 30, 2024 | | December 31, 2023 |
| (unaudited) | | |
Assets | | | |
Current assets | | | |
Cash and cash equivalents | $ | 120,787 | | | $ | 149,351 | |
Short-term investments and marketable securities | 28,345 | | | 9,653 | |
Accounts receivable, net of allowances of $2,652 and $2,606, respectively | 131,693 | | | 171,561 | |
Deferred commissions, current | 34,899 | | | 34,261 | |
Prepaid expenses and other current assets | 48,261 | | | 49,529 | |
Total current assets | 363,985 | | | 414,355 | |
Property and equipment, net of accumulated depreciation of $29,011 and $25,141, respectively | 40,841 | | | 42,682 | |
| | | |
Goodwill | 26,305 | | | 27,106 | |
Intangible assets, net of accumulated amortization of $4,763 and $4,152, respectively | 3,040 | | | 3,889 | |
Right-of-use assets for operating leases | 32,848 | | | 39,975 | |
Deferred commissions, net of current portion | 56,231 | | | 59,764 | |
Deferred tax assets | 4,368 | | | 3,453 | |
Other assets | 26,963 | | | 36,279 | |
Total assets | $ | 554,581 | | | $ | 627,503 | |
Liabilities and Stockholders’ (Deficit) Equity | | | |
Current liabilities | | | |
Accounts payable | $ | 5,739 | | | $ | 6,174 | |
Accrued expenses | 13,797 | | | 11,046 | |
Accrued compensation and related benefits | 33,843 | | | 38,003 | |
Deferred revenue | 218,233 | | | 235,992 | |
Debt | 8,348 | | | 66,368 | |
Operating lease liabilities | 12,323 | | | 11,698 | |
Other current liabilities | 1,405 | | | 1,891 | |
Total current liabilities | 293,688 | | | 371,172 | |
Long-term debt | 245,625 | | | 140,221 | |
Non-current operating lease liabilities | 55,796 | | | 59,067 | |
Deferred revenue, non-current | 4,695 | | | 4,700 | |
Deferred tax liabilities | — | | | 2 | |
Other non-current liabilities | 435 | | | — | |
Total liabilities | 600,239 | | | 575,162 | |
Stockholders’ (deficit) equity | | | |
Class A common stock—par value $0.0001; 500,000,000 shares authorized as of June 30, 2024 and December 31, 2023 and 42,359,967 and 42,169,970 shares issued as of June 30, 2024 and December 31, 2023, respectively | 4 | | | 4 | |
Class B common stock—par value $0.0001; 100,000,000 shares authorized as of June 30, 2024 and December 31, 2023 and 31,196,796 and 31,196,796 shares issued as of June 30, 2024 and December 31, 2023, respectively | 3 | | | 3 | |
Additional paid-in capital | 608,528 | | | 595,781 | |
Accumulated other comprehensive loss | (11,812) | | | (23,555) | |
Accumulated deficit | (596,407) | | | (519,892) | |
Treasury stock at cost, 1,213,686 shares as of June 30, 2024 | (45,974) | | | — | |
Total stockholders’ (deficit) equity | (45,658) | | | 52,341 | |
Total liabilities and stockholders’ (deficit) equity | $ | 554,581 | | | $ | 627,503 | |
.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
APPIAN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, | | |
| 2024 | | 2023 | | 2024 | | 2023 | | | | |
Revenue | | | | | | | | | | | |
Subscriptions | $ | 112,974 | | | $ | 93,794 | | | $ | 230,668 | | | $ | 192,751 | | | | | |
Professional services | 33,476 | | | 33,921 | | | 65,617 | | | 70,199 | | | | | |
Total revenue | 146,450 | | | 127,715 | | | 296,285 | | | 262,950 | | | | | |
Cost of revenue | | | | | | | | | | | |
Subscriptions | 13,262 | | | 10,779 | | | 25,532 | | | 21,227 | | | | | |
Professional services | 26,151 | | | 26,066 | | | 51,878 | | | 51,711 | | | | | |
Total cost of revenue | 39,413 | | | 36,845 | | | 77,410 | | | 72,938 | | | | | |
Gross profit | 107,037 | | | 90,870 | | | 218,875 | | | 190,012 | | | | | |
Operating expenses | | | | | | | | | | | |
Sales and marketing | 66,592 | | | 62,581 | | | 124,748 | | | 125,671 | | | | | |
Research and development | 39,446 | | | 39,743 | | | 79,217 | | | 81,367 | | | | | |
General and administrative | 40,193 | | | 29,208 | | | 73,639 | | | 58,902 | | | | | |
Total operating expenses | 146,231 | | | 131,532 | | | 277,604 | | | 265,940 | | | | | |
Operating loss | (39,194) | | | (40,662) | | | (58,729) | | | (75,928) | | | | | |
Other non-operating expense | | | | | | | | | | | |
Other (income) expense, net | (1,545) | | | (3,886) | | | 6,662 | | | (6,576) | | | | | |
Interest expense | 6,107 | | | 4,755 | | | 11,753 | | | 7,873 | | | | | |
Total other non-operating expense | 4,562 | | | 869 | | | 18,415 | | | 1,297 | | | | | |
Loss before income taxes | (43,756) | | | (41,531) | | | (77,144) | | | (77,225) | | | | | |
Income tax (benefit) expense | (164) | | | 824 | | | (629) | | | 1,959 | | | | | |
Net loss | $ | (43,592) | | | $ | (42,355) | | | $ | (76,515) | | | $ | (79,184) | | | | | |
Net loss per share: | | | | | | | | | | | |
Basic and diluted | $ | (0.60) | | | $ | (0.58) | | | $ | (1.05) | | | $ | (1.09) | | | | | |
Weighted average common shares outstanding: | | | | | | | | | | | |
Basic and diluted | 72,300 | | | 73,041 | | | 72,800 | | | 72,956 | | | | | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
APPIAN CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(unaudited, in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, | | |
| 2024 | | 2023 | | 2024 | | 2023 | | | | |
Net loss | $ | (43,592) | | | $ | (42,355) | | | $ | (76,515) | | | $ | (79,184) | | | | | |
Comprehensive loss, net of income taxes | | | | | | | | | | | |
Foreign currency translation adjustments | (1,097) | | | (3,127) | | | 11,746 | | | (3,873) | | | | | |
Unrealized (losses) gains on available-for-sale securities | (7) | | | (45) | | | (3) | | | 1 | | | | | |
Other comprehensive loss, net of income taxes | $ | (44,696) | | | $ | (45,527) | | | $ | (64,772) | | | $ | (83,056) | | | | | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
APPIAN CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY
(unaudited, in thousands, except share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Additional Paid-In Capital | | Accumulated Other Comprehensive Loss | | Accumulated Deficit | | Treasury Stock | | Total Stockholders' Equity (Deficit) |
| Common Stock | | | | | |
| Shares | | Amount | | | | | |
Balance, December 31, 2023 | 73,366,766 | | | $ | 7 | | | $ | 595,781 | | | $ | (23,555) | | | $ | (519,892) | | | $ | — | | | $ | 52,341 | |
Net loss | — | | | — | | | — | | | — | | | (32,923) | | | — | | | (32,923) | |
Issuance of common stock to directors | 4,974 | | | — | | | — | | | — | | | — | | | — | | | — | |
Vesting of restricted stock units | 141,563 | | | — | | | (2,862) | | | — | | | — | | | — | | | (2,862) | |
Exercise of stock options | 43,460 | | | — | | | 345 | | | — | | | — | | | — | | | 345 | |
Repurchase of common stock | (1,320,531) | | | — | | | — | | | — | | | — | | | (50,019) | | | (50,019) | |
Stock-based compensation expense | — | | | — | | | 10,606 | | | — | | | — | | | — | | | 10,606 | |
Other comprehensive income | — | | | — | | | — | | | 12,847 | | | — | | | — | | | 12,847 | |
Balance, March 31, 2024 | 72,236,232 | | | $ | 7 | | | $ | 603,870 | | | $ | (10,708) | | | $ | (552,815) | | | $ | (50,019) | | | $ | (9,665) | |
Net loss | — | | | — | | | — | | | — | | | (43,592) | | | — | | | (43,592) | |
Issuance of common stock to directors | 4,692 | | | — | | | (178) | | | — | | | — | | | 178 | | | — | |
Vesting of restricted stock units | 77,116 | | | — | | | (4,279) | | | — | | | — | | | 2,919 | | | (1,360) | |
Exercise of stock options | 25,037 | | | — | | | (785) | | | — | | | — | | | 948 | | | 163 | |
Stock-based compensation expense | — | | | — | | | 9,900 | | | — | | | — | | | — | | | 9,900 | |
Other comprehensive loss | — | | | — | | | — | | | (1,104) | | | — | | | — | | | (1,104) | |
Balance, June 30, 2024 | 72,343,077 | | | $ | 7 | | | $ | 608,528 | | | $ | (11,812) | | | $ | (596,407) | | | $ | (45,974) | | | $ | (45,658) | |
| | | | | | | | | | | | | |
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Additional Paid-In Capital | | Accumulated Other Comprehensive Loss | | Accumulated Deficit | | Total Stockholders' Equity | | |
| Common Stock | | | | | | |
| Shares | | Amount | | | | | | |
Balance, December 31, 2022 | 72,817,887 | | | $ | 7 | | | $ | 561,390 | | | $ | (7,246) | | | $ | (408,451) | | | $ | 145,700 | | | |
Net loss | — | | | — | | | — | | | — | | | (36,829) | | | (36,829) | | | |
Issuance of common stock to directors | 6,713 | | | — | | | — | | | — | | | — | | | — | | | |
Vesting of restricted stock units | 111,296 | | | — | | | (2,959) | | | — | | | — | | | (2,959) | | | |
Exercise of stock options | 19,483 | | | — | | | 131 | | | — | | | — | | | 131 | | | |
Stock-based compensation expense | — | | | — | | | 11,056 | | | — | | | — | | | 11,056 | | | |
Other comprehensive loss | — | | | — | | | — | | | (700) | | | — | | | (700) | | | |
Balance, March 31, 2023 | 72,955,379 | | | $ | 7 | | | $ | 569,618 | | | $ | (7,946) | | | $ | (445,280) | | | $ | 116,399 | | | |
Net loss | — | | | — | | | — | | | — | | | (42,355) | | | (42,355) | | | |
Issuance of common stock to directors | 4,928 | | | — | | | — | | | — | | | — | | | — | | | |
Vesting of restricted stock units | 99,836 | | | — | | | (1,816) | | | — | | | — | | | (1,816) | | | |
Exercise of stock options | 53,190 | | | — | | | 428 | | | — | | | — | | | 428 | | | |
Stock-based compensation expense | — | | | — | | | 11,148 | | | — | | | — | | | 11,148 | | | |
Other comprehensive loss | — | | | — | | | — | | | (3,172) | | | — | | | (3,172) | | | |
Balance, June 30, 2023 | 73,113,333 | | | 7 | | | $ | 579,378 | | | $ | (11,118) | | | $ | (487,635) | | | $ | 80,632 | | | |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
APPIAN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
| | | | | | | | | | | |
| Six Months Ended June 30, |
| 2024 | | 2023 |
Cash flows from operating activities | | | |
Net loss | $ | (76,515) | | | $ | (79,184) | |
Adjustments to reconcile net loss to net cash provided by (used by) operating activities | | | |
Stock-based compensation | 20,506 | | | 22,204 | |
Depreciation expense and amortization of intangible assets | 4,941 | | | 4,705 | |
Lease impairment charges | 5,462 | | | — | |
Bad debt expense | 253 | | | 419 | |
Amortization of debt issuance costs | 290 | | | 223 | |
| | | |
| | | |
Benefit for deferred income taxes | (982) | | | (518) | |
Foreign currency transaction losses, net | 12,787 | | | — | |
Changes in assets and liabilities | | | |
Accounts receivable | 37,114 | | | 28,663 | |
Prepaid expenses and other assets | 10,524 | | | (4,924) | |
Deferred commissions | 2,897 | | | 123 | |
Accounts payable and accrued expenses | 2,882 | | | 719 | |
Accrued compensation and related benefits | (3,808) | | | (6,240) | |
Other current and non-current liabilities | 121 | | | 1,066 | |
Deferred revenue | (14,267) | | | (6,574) | |
Operating lease assets and liabilities | (954) | | | 2,116 | |
Net cash provided by (used by) operating activities | 1,251 | | | (37,202) | |
Cash flows from investing activities | | | |
Proceeds from maturities of investments | 9,657 | | | 35,876 | |
Payments for investments | (28,354) | | | (53,443) | |
Purchases of property and equipment | (2,932) | | | (7,805) | |
Net cash used by investing activities | (21,629) | | | (25,372) | |
Cash flows from financing activities | | | |
Proceeds from borrowings | 50,000 | | | 92,000 | |
Payments for debt issuance costs | (463) | | | (411) | |
Debt repayments | (2,500) | | | (1,687) | |
Repurchase of common stock | (50,019) | | | — | |
Payments for employee taxes related to the net share settlement of equity awards | (4,221) | | | (4,775) | |
Proceeds from exercise of common stock options | 508 | | | 559 | |
Net cash (used by) provided by financing activities | (6,695) | | | 85,686 | |
Effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash | (1,491) | | | 309 | |
Net (decrease) increase in cash, cash equivalents, and restricted cash | (28,564) | | | 23,421 | |
Cash, cash equivalents, and restricted cash at beginning of period | 149,351 | | | 150,381 | |
Cash, cash equivalents, and restricted cash at end of period | $ | 120,787 | | | $ | 173,802 | |
| | | |
Supplemental disclosure of cash flow information | | | |
Cash paid for interest | $ | 11,168 | | | $ | 2,731 | |
Cash paid for income taxes | $ | 1,436 | | | $ | 1,472 | |
Supplemental disclosure of non-cash investing and financing activities | | | |
Accrued capital expenditures | $ | 182 | | | $ | 392 | |
| | | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
APPIAN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Organization and Description of Business
Appian Corporation (together with its subsidiaries, “Appian,” the “Company,” “we,” or “our”) is a software company that automates business processes. The Appian AI Process Platform includes everything you need to design, automate, and optimize even the most complex processes, from start to finish. The world's most innovative organizations trust Appian to improve their workflows, unify data, and optimize operations—resulting in better growth and superior customer experiences.
We are headquartered in McLean, Virginia and operate both in the United States and internationally, including Australia, Canada, France, Germany, India, Italy, Japan, Mexico, the Netherlands, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom.
2. Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements and footnotes include the accounts of Appian and its wholly-owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) as contained in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) for interim financial reporting. In the opinion of management, the interim financial information includes all adjustments of a normal recurring nature necessary for a fair presentation of the results of operations, financial position, changes in stockholders’ (deficit) equity, and cash flows. All intercompany accounts and transactions have been eliminated in consolidation.
The results of operations for the current period are not necessarily indicative of the results for the full year or the results for any future periods. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and related footnotes included in our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the Securities and Exchange Commission (the “SEC”) on February 15, 2024.
Use of Estimates
The preparation of our consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and judgments that affect the amounts reported in these consolidated financial statements and accompanying notes. Although we believe the estimates we use are reasonable, due to the inherent uncertainty involved in making these estimates, actual results reported in future periods could differ from those estimates.
Significant estimates embedded in the consolidated financial statements include, but are not limited to, revenue recognition, income taxes and the related valuation allowance established against deferred tax assets, the amortization period of deferred commissions, the amortization period of the cost to obtain the judgment preservation insurance policy (as discussed in Note 12), lease impairments, and stock-based compensation.
Revenue Recognition
Refer to Note 3 for a detailed discussion on specific revenue recognition principles related to our major revenue streams.
Concentration of Credit and Customer Risk
Our financial instruments exposed to concentration of credit and customer risk consist primarily of cash, cash equivalents, accounts receivable, and our short-term investments. Deposits held with banks may exceed the amount of insurance provided on such deposits; however, we believe the financial institutions holding our cash deposits are financially sound and, accordingly, minimal credit risk exists with respect to these balances.
With regard to our customers, credit evaluation and account monitoring procedures are used to minimize the risk of loss. Revenue generated from government agencies represented 22.6% and 22.1% of our revenue for the three and six months ended June 30, 2024, respectively. Additionally, 38.2% and 37.7% of our revenue during the three and six months ended June 30, 2024, respectively, was generated from international customers. Revenue generated from government agencies represented 20.1% and 20.3% of our revenue for the three and six months ended June 30, 2023, respectively. Additionally, 38.4% and 35.8% of our revenue during the three and six months ended June 30, 2023, respectively, was generated from international customers. No single end-customer accounted for more than 10% of our total revenue in the three and six months ended June 30, 2024, or 2023. As of June 30, 2024, we had one customer whose balance comprised 15% of total accounts receivable.
Cash, Cash Equivalents, and Restricted Cash
We consider all highly liquid investments with original maturities of three months or less, as well as overnight repurchase agreements, to be cash equivalents. Restricted cash consisted of cash designated to settle an escrow liability stemming from a holdback agreement related to our acquisition of Lana Labs GmbH. We paid the remaining amount owed on August 11, 2023.
The following table presents a reconciliation of cash, cash equivalents, and restricted cash as presented in the consolidated statements of cash flows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| As of |
| June 30, 2024 | | December 31, 2023 | | June 30, 2023 | | December 31, 2022 |
Cash and cash equivalents | $ | 120,787 | | | $ | 149,351 | | | $ | 171,530 | | | $ | 148,132 | |
Restricted cash, current | — | | | — | | | 2,272 | | | 2,249 | |
| | | | | | | |
Total cash, cash equivalents, and restricted cash | $ | 120,787 | | | $ | 149,351 | | | $ | 173,802 | | | $ | 150,381 | |
Allowance for Doubtful Accounts
Accounts receivable and unbilled revenue are stated at realizable value, net of an allowance for doubtful accounts. The allowance for doubtful accounts is based on our assessment of the collectability of accounts and incorporates an estimation of expected lifetime credit losses on our receivables. We regularly review the composition of the accounts receivable aging, historical bad debts, changes in payment patterns, customer creditworthiness, and current economic trends. If the financial condition of our customers were to deteriorate, resulting in their inability to make required payments, additional provisions for doubtful accounts would be required and would increase bad debt expense. The allowance for doubtful accounts totaled $2.7 million and $2.6 million as of June 30, 2024 and December 31, 2023, respectively.
Deferred Commissions
We capitalize costs of obtaining a contract with a customer, which consist of sales commissions paid to our sales team and the associated incremental payroll taxes. These costs are recorded as deferred commissions in the consolidated balance sheets. Costs to obtain a contract for a new customer or upsell an existing customer are amortized over an estimated economic life of five years as sales commissions on initial sales are not commensurate with sales commissions on contract renewals. Commissions paid relating to contract renewals are deferred and amortized over the related renewal period. We determine the estimated economic life based on both qualitative and quantitative factors such as expected renewals, product life cycles, contractual terms, and customer attrition. We periodically review the carrying amount of deferred contract acquisition costs to determine whether events or changes in circumstances have occurred that could impact the estimated economic life. Costs to obtain a contract for professional services arrangements are expensed as incurred as the contractual period of our professional services arrangements are one year or less.
Amortization associated with deferred commissions is recorded to sales and marketing expense in our consolidated statements of operations. Total commission expense was $11.5 million and $22.9 million for the three and six months ended June 30, 2024, respectively. Total commission expense was $11.3 million and $22.3 million for the three and six months ended June 30, 2023, respectively.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Significant additions or improvements extending the useful life of an asset are capitalized, while repairs and maintenance costs which do not significantly improve the related assets or extend their useful lives are charged to expense as incurred. The estimated useful lives of our property and equipment are generally 3 years for computer software, computer hardware, and internally developed software, 5 years for equipment, and 10 years for office furniture and fixtures. Leasehold improvements have an estimated useful life of the shorter of the useful life of the assets or the lease term.
Severance Costs
In June 2024, we approved a reduction of the Company’s workforce by approximately 150 full-time employees, intended to align sales and marketing teams with our go-to-market strategy and improve profitability. We incurred severance costs related to the involuntary reductions in our workforce. Costs related to benefits provided in accordance with mutually understood and ongoing agreements are recognized when an obligation has been incurred, it is probable the benefits will be paid, and the amount to be paid can be reasonably estimated. We incurred severance costs of $5.5 million during the three and six months ended June 30, 2024. The majority of the costs incurred are expected to be paid to the impacted employees by December 31, 2024.
In 2023, severance costs related to prior actions totaled $2.1 million and $6.3 million for the three and six months ended June 30, 2023, respectively.
Treasury Stock
We account for treasury stock under the cost method. During the three and six months ended June 30, 2024, we have reissued treasury stock to satisfy employee stock option exercises and vesting of restricted stock units. Because we are in an accumulated deficit position, all reissuances of treasury stock have been recorded as a decrease to additional-paid-in-capital in our consolidated balance sheets.
Recent Accounting Pronouncements
Adopted
We have not adopted any new accounting guidance in 2024 that has had a material impact on our consolidated financial statements or disclosures.
Not Yet Adopted
In November 2023, the FASB issued Accounting Standards Update (“ASU”) 2023-07, Segment Reporting (Topic 280): Improvement to Reportable Segment Disclosures, which enhances the disclosure requirements for operating segments in our annual and interim consolidated financial statements. The new guidance is effective for us beginning with our annual reporting for fiscal year 2024 and for interim period reporting beginning in fiscal year 2025 and will be applied on a retrospective basis. Early adoption is permitted. The new ASU requires public companies to disclose significant segment expenses and other segment items on an annual and interim basis and provide in interim periods all disclosures about a reportable segment’s profit or loss and assets that are currently required annually. Additionally, it requires public companies to disclose the title and position of the Chief Operating Decision Maker. The ASU does not change how a public entity identifies its operating segments, aggregates them, or applies the quantitative thresholds to determine its reportable segments. This guidance also applies to public entities that have only one segment. This ASU will only impact our disclosures with no impacts to our results of operations, cash flows, and financial condition.
In December 2023, the FASB issued ASU 2023-09, Income Tax (Topic 740): Improvement to Income Tax Disclosures, which requires public companies to disclose, on an annual basis, a tabular rate reconciliation using both percentages and currency amounts, broken out into specified categories with certain reconciling items further broken out by nature and jurisdiction to the extent those items exceed a specified threshold. In addition, all entities are required to disclose income taxes paid, net of refunds received disaggregated by federal, state/local, and foreign and by jurisdiction if the amount is at least 5% of total income tax payments, net of refunds received. The new guidance will be effective for our annual reporting for fiscal year 2025 on a prospective basis with the option to apply the standard retrospectively. Early adoption is permitted. This ASU will only impact our disclosures with no impacts to our results of operations, cash flows, and financial condition.
In March 2024, the SEC issued its final climate disclosure rule, which requires the disclosure of material Scope 1 and Scope 2 greenhouse gas emissions and other climate-related topics in annual reports if they are reasonably likely to have a material impact on the Company’s business. For large accelerated filers, disclosure requirements will begin phasing in for fiscal years beginning on or after January 1, 2025. Subsequent to issuance, the rules became the subject of litigation, and the SEC has issued a stay to allow the legal process to proceed. We are currently evaluating the impact these rules will have on our financial statements and related disclosures and will monitor the litigation progress for possible impacts on the disclosure requirements under the rules.
3. Revenue
Revenue Recognition
We generate subscriptions revenue primarily through the sale of cloud subscriptions bundled with maintenance and support and hosting services as well as term license subscriptions bundled with maintenance and support. We generate professional services revenue from fees for our consulting services, including application development and deployment assistance as well as training related to our platform.
The following table summarizes revenue recorded during the three and six months ended June 30, 2024 and 2023 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, | | |
| 2024 | | 2023 | | 2024 | | 2023 | | | | |
Cloud subscriptions | $ | 88,428 | | | $ | 74,442 | | | $ | 175,031 | | | $ | 144,134 | | | | | |
Term license subscriptions | 17,227 | | | 12,999 | | | 40,998 | | | 36,150 | | | | | |
Maintenance and support | 7,319 | | | 6,353 | | | 14,639 | | | 12,467 | | | | | |
Total subscriptions | 112,974 | | | 93,794 | | | 230,668 | | | 192,751 | | | | | |
Professional services | 33,476 | | | 33,921 | | | 65,617 | | | 70,199 | | | | | |
Total revenue | $ | 146,450 | | | $ | 127,715 | | | $ | 296,285 | | | $ | 262,950 | | | | | |
Performance Obligations and Timing of Revenue Recognition
We primarily sell products and services that fall into the categories discussed below. Each category contains one or more performance obligations that are either (1) capable of being distinct (i.e., the customer can benefit from the product or service on its own or together with readily available resources, including those purchased separately from us) and distinct within the context of the contract (i.e., separately identified from other promises in the contract) or (2) a series of distinct products or services that are substantially the same and have the same pattern of transfer to the customer. Our term license subscriptions are delivered at a point in time while our cloud subscriptions, maintenance and support, and professional services are delivered over time.
Subscriptions Revenue
Subscriptions revenue is primarily related to (1) cloud subscriptions bundled with maintenance and support and hosting services and (2) term license subscriptions bundled with maintenance and support. We generally charge subscription fees on a per-user basis or through non-user based single application licenses. We bill customers and collect payment for subscriptions to our platform in advance on an annual, quarterly, or monthly basis. In certain instances, our customers have paid their entire contract up front.
Cloud Subscriptions
We generate cloud-based subscriptions revenue primarily from the sales of subscriptions to access our cloud offering, together with related support services to our customers. We perform all required maintenance and support for our cloud offering. Revenue is recognized on a ratable basis over the contract term beginning on the date the service is made available to the customer. Our cloud-based subscription contracts generally have a term of one to three years in length. We bill customers and collect payment for subscriptions to our platform in advance, and they are non-cancellable.
Term License Subscriptions
Our term license subscriptions revenue is derived from customers with on-premises installations of our platform. The majority of our term license contracts are one year in length. Although term license subscriptions are sold with maintenance and support, the software is fully functional at the beginning of the subscription and is considered a distinct performance obligation. If a cloud-based subscription includes the right for the customer to take possession of the license, the revenue is treated as a term license. Revenue from term license subscriptions is recognized when control of the software license has transferred to the customer, which is the later of delivery or commencement of the contract term.
Maintenance and Support
Maintenance and support subscriptions include both technical support and when-and-if-available software upgrades, which are treated as a single performance obligation as they are considered a series of distinct services that are substantially the same and have the same duration and measure of progress. Revenue from maintenance and support is recognized ratably over the contract period, which is the period over which the customer has continuous access to maintenance and support.
Professional Services Revenue
Our professional services revenue is comprised of fees for consulting services, including application development and deployment assistance as well as training services related to our platform. Our professional services are considered distinct performance obligations when sold standalone or with other products.
Consulting Services
We sell consulting services to assist customers in planning and executing the deployment of our software. Customers are not required to use consulting services to fully benefit from the software. Consulting services are regularly sold on a standalone basis and most often as either (1) under a fixed-fee arrangement or (2) on a time and materials basis. We also sell advisory services on a subscription basis to support customers or partners with their development and deployment. Consulting services contracts are considered separate performance obligations because they do not integrate with each other or with other products and services to deliver a combined output to the customer, do not modify or customize (or are not modified or customized by) each other or other products and services, and do not affect the customer's ability to use other consulting offerings or other products and services. Revenue under consulting contracts is recognized over time as services are delivered. Revenue from subscription-based consulting contracts is recognized ratably over the contract period. For time and materials-based consulting contracts, we have elected the practical expedient of recognizing revenue upon invoicing since the invoiced amount corresponds directly to the value of our service to date.
Training Services
We sell various training services to our customers. Training services are sold in the form of prepaid training credits that are redeemed based on a fixed rate per course. Training revenue is recognized when the associated training services are delivered.
Significant Judgments and Estimates
Determining the Transaction Price
The transaction price is the total amount of consideration we expect to receive in exchange for the service offerings in a contract and may include both fixed and variable components. Variable consideration is included in the transaction price to the extent it is probable a significant reversal will not occur. The amount of variable consideration excluded from the transaction price for the three and six months ended June 30, 2024 and 2023 was immaterial. Our estimates of variable consideration are also subject to subsequent true-up adjustments and may result in changes to transaction prices; however, such true-up adjustments are not expected to be material.
Allocating the Transaction Price Based on Standalone Selling Prices (“SSP”)
We allocate the transaction price to each performance obligation in a contract based on its relative SSP. The SSP is the observable price at which we sell the product or service separately. In the absence of observable pricing, we estimate SSP using the residual approach. We establish SSP as follows:
1.Cloud subscriptions - Given the highly variable selling price of our cloud subscriptions, we establish the SSP of our cloud subscriptions using a residual approach after first determining the SSP of consulting and training services. We have concluded the residual approach to estimating the SSP of our cloud subscriptions is an appropriate allocation of the transaction price.
2.Term license subscriptions - Given the highly variable selling price of our term license subscriptions, we have established the SSP of term license subscriptions using a residual approach after first determining the SSP of maintenance and support. Maintenance and support is sold on a standalone basis in conjunction with renewals of our legacy perpetual software licenses and within a narrow range of the net license fee. Because an economic relationship exists between the license and maintenance and support, we have concluded the residual approach to estimating the SSP of term license subscriptions is an appropriate allocation of the transaction price.
3.Maintenance and support - We establish the SSP of maintenance and support as a percentage of the stated net subscription fee based on observable pricing of maintenance and support renewals from our legacy perpetual software licenses.
4.Consulting and training services - The SSP of consulting and training services is established based on the observable pricing of standalone sales within each geographic region where the services are sold.
Contract Balances
Timing may differ between the satisfaction of performance obligations and the invoicing and collection of amounts related to our contracts with customers. Contract assets primarily relate to unbilled amounts for contracts with customers for which the amount of revenue recognized exceeds the amount billed to the customer. Contract assets are transferred to accounts receivable when the right to invoice becomes unconditional.
Contract liabilities consist of deferred revenue and include payments received in advance of the satisfaction of performance obligations. Deferred revenue is then recognized as the revenue recognition criteria are met. Deferred revenue that will be recognized during the succeeding 12-month period is recorded as current, and the remaining deferred revenue is recorded as non-current.
The following table sets forth our contract asset and contract liability balances (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| As of |
| June 30, 2024 | | December 31, 2023 | | June 30, 2023 | | December 31, 2022 |
Contract assets, current* | $ | 8,865 | | | $ | 12,052 | | | $ | 11,870 | | | $ | 12,540 | |
Contract assets, non-current* | 1,072 | | | 915 | | | 1,069 | | | 1,720 | |
Total contract assets | $ | 9,937 | | | $ | 12,967 | | | $ | 12,939 | | | $ | 14,260 | |
| | | | | | | |
Deferred revenue, current | $ | 218,233 | | | $ | 235,992 | | | $ | 192,164 | | | $ | 194,768 | |
Deferred revenue, non-current | 4,695 | | | 4,700 | | | 3,734 | | | 5,556 | |
Total contract liabilities | $ | 222,928 | | | $ | 240,692 | | | $ | 195,898 | | | $ | 200,324 | |
* Current and non-current contract assets are reported as components of the ‘Prepaid expenses and other current assets’ and ‘Other assets’ line items, respectively, in our consolidated balance sheets.
Revenue recognized from amounts included in contract liabilities at the beginning of the period totaled $166.6 million and $141.3 million for the six months ended June 30, 2024 and 2023, respectively.
Transaction Price Allocated to the Remaining Performance Obligations
As of June 30, 2024, we had an aggregate transaction price of $469.4 million allocated to unsatisfied performance obligations. We expect to recognize $300.3 million of this balance as revenue over the next 12 months with the remaining amount recognized thereafter.
4. Leases
As of June 30, 2024, our lease portfolio consists entirely of operating leases for corporate offices. Our operating leases have remaining lease terms with various expiration dates through 2031, and some leases include options to extend the term for up to an additional 10 years.
Lease Costs
Expense for operating leases is recognized on a straight-line basis over the lease term as an operating expense. We have lease agreements which require payments for lease and non-lease components (i.e., common area maintenance) that are accounted for as a single lease component. Variable lease payment amounts that cannot be determined at the commencement of the lease such as maintenance costs, utilities, and service charges, are not included in right-of-use (“ROU”) assets or lease liabilities but rather are expensed as incurred and recorded as variable lease expense. We often receive customary incentives from our landlords such as tenant improvement allowances (“TIAs”) and rent abatement periods, which effectively reduce total lease payments owed for the leases.
The following table sets forth the components of lease expense for the three and six months ended June 30, 2024 and 2023 (in thousands, exclusive of sublease income):
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, | | |
| 2024 | | 2023 | | 2024 | | 2023 | | | | |
Operating lease cost | $ | 2,410 | | | $ | 2,145 | | | $ | 4,821 | | | $ | 4,291 | | | | | |
Short-term lease cost | 433 | | | 423 | | | 765 | | | 788 | | | | | |
Variable lease cost | 1,335 | | | 959 | | | 2,648 | | | 1,985 | | | | | |
Total | $ | 4,178 | | | $ | 3,527 | | | $ | 8,234 | | | $ | 7,064 | | | | | |
Sublease income totaled $0.3 million and $0.6 million for the three and six months ended June 30, 2024, respectively. Sublease income totaled $0.3 million and $0.7 million for the three and six months ended June 30, 2023, respectively.
Lease Impairment Charges
In connection with the headcount reductions approved in June 2024, and our continued efforts to streamline operations and maximize efficiencies, we have initiated supplemental actions to reduce the footprint of our leased office spaces. Pursuant to these initiatives, we have amended and extended the terms of our existing sublease agreement and are seeking a sublease for an additional floor within our corporate headquarters facility. During the three months ended June 30, 2024, we recorded non-cash lease impairment charges of $5.5 million within general and administrative expenses in our consolidated statements of operations related to the two ROU assets. The non-cash lease impairment charges represent the amount that the carrying value of the two asset groups exceeded their estimated fair values. The asset groups represented two separate floors within our corporate headquarters facility. The fair values of the two asset groups were measured using discounted cash flow models based on market rents and sublease incomes projected over the remaining lease terms.
Supplemental Lease Information
Supplemental balance sheet information related to operating leases as of June 30, 2024 and December 31, 2023 is presented in the following table (in thousands, except for lease term and discount rate):
| | | | | | | | | | | |
| As of |
| June 30, 2024 | | December 31, 2023 |
Right-of-use assets for operating leases | $ | 32,848 | | $ | 39,975 |
| | | |
Operating lease liabilities, current | $ | 12,323 | | $ | 11,698 |
Operating lease liabilities, net of current portion | 55,796 | | 59,067 |
Total operating lease liabilities | $ | 68,119 | | $ | 70,765 |
| | | |
Weighted average remaining lease term (in years) | 6.9 | | 7.4 |
| | | |
Weighted average discount rate | 9.4 | % | | 9.4 | % |
Supplemental cash flow and expense information related to operating leases for the three and six months ended June 30, 2024 and 2023 is shown below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, | | |
| 2024 | | 2023 | | 2024 | | 2023 | | | | |
Operating cash outflows for operating leases | $ | 3,130 | | | $ | 988 | | | $ | 5,773 | | | $ | 2,120 | | | | | |
| | | | | | | | | | | |
Amortization of operating lease right-of-use assets | 815 | | | 591 | | | 1,598 | | | 1,243 | | | | | |
Interest expense on operating lease liabilities | 1,595 | | | 1,552 | | | 3,224 | | | 3,047 | | | | | |
|
There were no TIA reimbursements for the three and six months ended June 30, 2024, while TIA reimbursements totaled $0.9 million and $1.5 million for the three and six months ended June 30, 2023, respectively.
A summary of our future minimum lease commitments under non-cancellable leases as of June 30, 2024 is shown below (in thousands):
| | | | | |
| Operating Leases |
2024 (excluding the six months ended June 30, 2024) | $ | 6,376 | |
2025 | 12,958 | |
2026 | 13,307 | |
2027 | 13,559 | |
2028 | 12,460 | |
| |
Thereafter | 34,840 | |
Total lease payments | 93,500 | |
Less: imputed interest | (25,381) | |
Total | $ | 68,119 | |
5. Goodwill and Intangible Assets
The following table details the changes in goodwill during the six months ended June 30, 2024 and fiscal year ended December 31, 2023 (in thousands):
| | | | | |
| Carrying Amount |
Balance as of December 31, 2022 | $ | 26,349 | |
| |
Foreign currency translation adjustments | 757 | |
Balance as of December 31, 2023 | 27,106 | |
| |
Foreign currency translation adjustments | (801) | |
Balance as of June 30, 2024 | $ | 26,305 | |
Intangible assets, net consisted of the following as of June 30, 2024 and December 31, 2023 (in thousands):
| | | | | | | | | | | |
| As of |
| June 30, 2024 | | December 31, 2023 |
Developed technology | $ | 6,881 | | | $ | 7,091 | |
Customer relationships | 922 | | | 950 | |
| | | |
Intangible assets, gross | 7,803 | | | 8,041 | |
Less: accumulated amortization | (4,763) | | | (4,152) | |
Intangible assets, net | $ | 3,040 | | | $ | 3,889 | |
Intangible amortization expense was $0.4 million and $0.7 million for the three and six months ended June 30, 2024 and 2023, respectively. As of June 30, 2024, the weighted average remaining amortization periods for developed technology and customer relationships were approximately 2.0 years and 6.8 years, respectively.
The following table shows the projected annual amortization expense related to amortizable intangible assets as of June 30, 2024 (in thousands):
| | | | | |
| Projected Amortization |
2024 (excluding the six months ended June 30, 2024) | $ | 734 | |
2025 | 1,168 | |
2026 | 752 | |
2027 | 92 | |
2028 | 92 | |
| |
Thereafter | 202 | |
Total projected amortization expense | $ | 3,040 | |
6. Property and Equipment, net
Property and equipment, net consisted of the following as of June 30, 2024 and December 31, 2023 (in thousands):
| | | | | | | | | | | |
| As of |
| June 30, 2024 | | December 31, 2023 |
Leasehold improvements | $ | 54,298 | | | $ | 53,313 | |
Office furniture and fixtures | 4,460 | | | 3,825 | |
Computer software and hardware | 10,397 | | | 10,491 | |
Internally developed software | 504 | | | — | |
Equipment | 193 | | | 194 | |
Property and equipment, gross | 69,852 | | | 67,823 | |
Less: accumulated depreciation | (29,011) | | | (25,141) | |
Property and equipment, net | $ | 40,841 | | | $ | 42,682 | |
Depreciation expense totaled $2.2 million and $4.2 million for the three and six months ended June 30, 2024, respectively. Depreciation expense totaled $2.0 million and $4.0 million for the three and six months ended June 30, 2023, respectively. We disposed of $0.3 million worth of fully depreciated equipment during the three and six months ended June 30, 2024, respectively. We had no disposals or retirements during the three months ended June 30, 2023 and disposed of $1.4 million worth of fully depreciated property and equipment during the six months ended June 30, 2023.
7. Accrued Expenses
Accrued expenses consisted of the following as of June 30, 2024 and December 31, 2023 (in thousands):
| | | | | | | | | | | |
| As of |
| June 30, 2024 | | December 31, 2023 |
Hosting costs | $ | 3,585 | | | $ | 2,973 | |
Legal costs | 283 | | | 103 | |
Marketing and tradeshow expenses | 842 | | | 685 | |
Third party license fees | 677 | | | 678 | |
Contract labor costs | 966 | | | 600 | |
Reimbursable employee expenses | 1,071 | | | 880 | |
Taxes payable | 1,766 | | | 1,261 | |
Audit and tax expenses | 1,568 | | | 1,499 | |
Capital expenditures | 182 | | | 644 | |
Other accrued expenses | 2,857 | | | 1,723 | |
Total | $ | 13,797 | | | $ | 11,046 | |
8. Debt
Senior Secured Credit Facilities Credit Agreement
We have a Senior Secured Credit Facilities Credit Agreement (the “Credit Agreement”) which provides for a five-year term loan facility in an aggregate principal amount of $200.0 million and, in addition, up to $100.0 million for a revolving credit facility, including a letter of credit sub-facility in the aggregate availability amount of $20.0 million and a swingline sub-facility in the aggregate availability amount of $10.0 million (as a sublimit of the revolving loan facility). The Credit Agreement matures on November 3, 2027. We have been using the proceeds to fund the growth of our business and support our working capital requirements.
Under the agreement, we may elect whether amounts drawn bear interest on the outstanding principal amount at a rate per annum equal to either (a) the higher of the Prime rate or the Federal Funds Effective rate (“Base Rate”) plus 0.5% or (b) the forward-looking term rate based on the secured overnight financing rate (“Term SOFR”). An additional interest rate margin is added to the elected interest rates. During the first three years of the Credit Agreement, the additional interest rate margin ranges from 1.5% to 2.5% in the case of Base Rate advances or from 2.5% to 3.5% in the case of Term SOFR advances, depending on our debt to recurring revenue leverage ratio (as defined in the Credit Agreement). During the final two years of the Credit Agreement, the interest rate margin ranges from 0.5% to 2.5% in the case of Base Rate advances and from 1.5% to 3.5% in the case of Term SOFR advances, depending on our debt to consolidated adjusted EBITDA leverage ratio (as defined in the Credit Agreement).
In addition, the Credit Agreement contains other customary representations, warranties, and covenants, including covenants by us limiting additional indebtedness, guarantees, liens, fundamental changes, mergers and consolidations, dispositions of assets, investments, paying dividends on capital stock or redeeming, repurchasing, or retiring capital stock, prepaying certain junior indebtedness and preferred stock, certain corporate changes, and transactions with affiliates. The Credit Agreement also provides for customary events of default, including but not limited to, non-payment, breaches, or defaults in the performance of covenants, insolvency, bankruptcy, and the occurrence of a material adverse effect on us.
The following table summarizes outstanding debt balances (in thousands):
| | | | | | | | | | | |
| As of |
| June 30, 2024 | | December 31, 2023 |
Borrowings under revolving credit facility | $ | 62,000 | | | $ | 62,000 | |
Secured term loan facility | 193,312 | | | 145,813 | |
Less: Debt issuance costs (1) | (1,339) | | | (1,224) | |
Total debt, net of debt issuance costs | $ | 253,973 | | $ | 206,589 |
| | | |
Debt, current | $ | 8,348 | | $ | 66,368 |
Long-term debt | 245,625 | | 140,221 |
Total debt | $ | 253,973 | | $ | 206,589 |
(1) Deferred debt issuance costs associated with the term loan facility are recorded net of the debt obligation and amortized to interest expense over the term of the Credit Agreement.
We were in compliance with all covenants contained in the Credit Agreement. As of June 30, 2024, we had $62.0 million outstanding under our $100.0 million revolving credit facility, and we had outstanding letters of credit totaling $14.5 million in connection with securing our leased office space.
9. Income Taxes
The provision for income taxes is based upon the estimated annual effective tax rates for the year applied to the current period income before tax plus the tax effect of any significant or unusual items, discrete events, or changes in tax law. Our operating subsidiaries are exposed to statutory effective tax rates ranging from zero to approximately 35%. Fluctuations in the distribution of pre-tax income among our operating subsidiaries can lead to fluctuations of the effective tax rate in the consolidated financial statements. For the three and six months ended June 30, 2024, the actual effective tax rates were 0.4% and 0.8%, respectively. For the three and six months ended June 30, 2023, the actual effective tax rates were (2.0)% and (2.5)%, respectively.
As of June 30, 2024, our net unrecognized tax benefits totaled $6.5 million, which if recognized would result in no net effect on the effective tax rate due to a valuation allowance. The amount of reasonably possible unrecognized tax benefits that could decrease over the next 12 months due to the expiration of certain statutes of limitations or settlements of tax audits is not material to our consolidated financial statements.
We file income tax returns in the U.S. federal jurisdiction and in various state and foreign jurisdictions. Due to our net operating loss carryforwards, the tax years 2016 through 2023 remain open to examination by the major taxing jurisdictions to which we are subject. There are no open examinations that would have a meaningful impact on our consolidated financial statements.
10. Stock-Based Compensation
Compensation expense related to stock-based awards is accounted for using the estimated fair value of the award on the grant date. We calculate the fair value of stock options containing only a service condition using the Black-Scholes option pricing model. The fair value of restricted stock units (“RSUs”) is based on the closing market price of our common stock on the Nasdaq Global Market on the date of grant. For service-based awards such as RSUs, stock-based compensation expense is recognized on a straight-line basis over the requisite service period.
In June 2022, our Board of Directors granted to our Chief Executive Officer (“CEO”) a stock option award that is eligible to vest based on the achievement of various stock price appreciation targets. This option grant (the “2022 CEO option grant”) is our only outstanding stock-based award that vests based on the achievement of market conditions. For awards with market-based conditions, compensation expense is measured using a Monte Carlo simulation, and expense is recognized using the accelerated attribution method over the derived service period based on the expected market performance as of the grant date.
We account for forfeitures of our stock-based awards as they occur rather than estimating expected forfeitures. As of June 30, 2024, the total compensation cost related to unvested stock options not yet recognized, which relates exclusively to the 2022 CEO option grant, was $8.4 million and will be recognized over a weighted average period of 1.7 years. Total unrecognized compensation cost related to unvested RSUs was approximately $38.0 million, which will be recognized over a weighted average period of 1.4 years.
The following table summarizes the components of our stock-based compensation expense for the three and six months ended June 30, 2024 and 2023 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, | | |
| 2024 | | 2023 | | 2024 | | 2023 | | | | |
Cost of revenue | | | | | | | | | | | |
Subscriptions | $ | 217 | | | $ | 230 | | | $ | 430 | | | $ | 502 | | | | | |
Professional services | 1,461 | | | 1,472 | | | 3,039 | | | 3,063 | | | | | |
Operating expenses | | | | | | | | | | | |
Sales and marketing | 1,997 | | | 2,772 | | | 4,524 | | | 5,217 | | | | | |
Research and development | 2,919 | | | 2,910 | | | 5,920 | | | 6,536 | | | | | |
General and administrative | 3,306 | | | 3,764 | | | 6,593 | | | 6,886 | | | | | |
Total stock-based compensation expense | $ | 9,900 | | | $ | 11,148 | | | $ | 20,506 | | | $ | 22,204 | | | | | |
11. Basic and Diluted Loss per Share
Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the reporting period. Diluted loss per share is computed similar to basic, except the weighted average number of common shares outstanding is increased to include additional outstanding shares from the assumed exercise of stock options and vesting of RSUs, if dilutive. The dilutive effect, if any, of convertible shares is calculated using the treasury stock method. As we reported net losses for all periods presented, all outstanding shares would be considered antidilutive if they were to be assumed as vested or exercised.
The following outstanding securities, prior to the use of the treasury stock method, have been excluded from the computation of diluted weighted-average shares outstanding for the respective periods below because they would have been antidilutive to earnings per share:
| | | | | | | | | | | |
| Three and Six Months Ended June 30, |
| 2024 | | 2023 |
Stock options | 2,530,468 | | | 2,625,286 | |
Non-vested restricted stock units | 1,189,539 | | | 1,125,505 | |
12. Commitments, Contingencies, and Other Matters
Minimum Purchase Commitments
We have a non-cancellable cloud hosting arrangement with Amazon Web Services (“AWS”) that contains provisions for minimum purchase commitments. Specifically, purchase commitments under the agreement total $131.0 million over five years. The agreement, which started July 2021 and is now in its third year as of June 30, 2024, contains minimum spending requirements of $28.0 million in each of the third, fourth, and fifth years. Spending under this agreement for the three and six months ended June 30, 2024 totaled $10.7 million and $21.0 million, respectively. Spending under this agreement for the three and six months ended June 30, 2023 totaled $9.1 million and $18.5 million, respectively. The timing of payments under the agreement may vary.
Exclusive of the AWS contract, we have other non-cancellable agreements for subscription software products that contain provisions stipulating minimum purchase commitments. However, the annual purchase commitments under these contracts are, individually and in the aggregate, immaterial to our consolidated financial statements.
Pegasystems Litigation
On May 29, 2020, we filed a civil complaint against Pegasystems, Inc. (“Pegasystems”) and Youyong Zou, a Virginia resident, in the Circuit Court for Fairfax County, Virginia. Appian Corp v. Pegasystems Inc. & Youyong Zou, No. 2020-07216 (Fairfax Cty. Ct.). On May 10, 2022, we announced the jury awarded us $2.036 billion in damages for misappropriation of our trade secrets and $1 in damages for violating the Virginia Computer Crimes Act. Pegasystems filed several post-trial motions seeking relief in the form of reducing the damages award or setting aside the jury’s verdict and either granting a new trial or entering judgment in Pegasystems’ favor. All of these motions were denied, and final judgment was entered by the Court on September 15, 2022. The final judgment reaffirmed the $2.036 billion in damages and also ordered Pegasystems to pay Appian $23.6 million in attorney's fees associated with the case as well as statutory post-judgment interest on the judgment at an annual rate of 6%, or approximately $122.0 million per year.
Defendant Youyong Zou has satisfied the judgment of $5,000 (plus interest) against him in lieu of appealing that judgment. On September 15, 2022, Pegasystems filed a notice of appeal to the Court of Appeals of Virginia. On July 30, 2024, the Court of Appeals of Virginia issued a decision reversing the judgment against Pegasystems and remanding for a new trial. The decision rejected Pegasystems’ argument that Appian had not presented evidence that trade secrets were misappropriated, but reversed the judgment on the basis of evidentiary and damages rulings made by the trial court. On the same day, Appian announced its intention to appeal that decision to the Supreme Court of Virginia and seek to reinstate the full judgment against Pegasystems. A petition to the Supreme Court is expected to be filed by August 29, 2024. After that, the timeline to hear the petition will be in the control of the Supreme Court.
We cannot predict the outcome of any appeals or the exact time it will take to resolve them.
Judgment Preservation Insurance
On September 1, 2023, we entered into a Judgment Preservation Insurance (“JPI”) policy in connection with our $2.036 billion judgment against Pegasystems. The total cost of the policy was $57.3 million and is comprised of the premium, a one-time broker fee, and Virginia lines tax. The policy provides up to $500.0 million of coverage.
The total cost of the policy was capitalized and is being amortized on a straight-line basis over the estimated length of the appeals process. As of June 30, 2024, we estimated the length of the appeals process (solely for amortization purposes) to be approximately three years. This estimate is updated each reporting period. Amortization expense associated with the JPI premium is recorded to general and administrative expenses in our consolidated statements of operations. JPI amortization expense was $4.5 million and $9.0 million for the three and six months ended June 30, 2024. As of June 30, 2024, $18.1 million of the unamortized balance is classified as ‘Prepaid expenses and other current assets’ while the remaining $24.2 million is classified as 'Other assets’ on our consolidated balance sheets. We are currently evaluating the impact, if any, that the decision from the Court of Appeals of Virginia will have on our estimated length of the appeals process.
Other Legal Matters
From time to time, we are subject to legal, regulatory, and other proceedings and claims that arise in the ordinary course of business. Other than as disclosed elsewhere in this Quarterly Report, we are not presently a party to any legal proceedings that, if determined adversely to us, would individually or taken together have a material adverse effect on our business, operating results, financial condition, or cash flows. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors.
Share Repurchase Program
In February 2024, our Board of Directors authorized a program to repurchase up to $50.0 million of our common stock from March 2024 to February 2026. In March 2024, we repurchased 1.3 million shares under this program at an average share price of $37.86, totaling an aggregate cost of $50.0 million. As of June 30, 2024, shareholders’ equity included 72.3 million shares outstanding, net of 1.2 million shares of common stock held in treasury.
13. Segment and Geographic Information
The following table summarizes revenue by geography for the three and six months ended June 30, 2024 and 2023 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, | | |
| 2024 | | 2023 | | 2024 | | 2023 | | | | |
Domestic | $ | 90,534 | | | $ | 78,694 | | | $ | 184,647 | | | $ | 168,699 | | | | | |
International | 55,916 | | | 49,021 | | | 111,638 | | | 94,251 | | | | | |
Total | $ | 146,450 | | | $ | 127,715 | | | $ | 296,285 | | | $ | 262,950 | | | | | |
With respect to geographic information, revenue is attributed to respective geographies based on the contracting address of the customer. The value of our long-lived assets, which are comprised of property and equipment and intangible assets, held in the United States and internationally as of June 30, 2024 were $31.8 million and $12.1 million, respectively. As of December 31, 2023, our long-lived assets held in the United States and internationally were $34.0 million and $12.6 million, respectively.
14. Investments and Fair Value Measurements
Fair Value Measurements
U.S. GAAP establishes a three-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring basis, as well as assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement. The hierarchy requires us to use observable inputs when available and to minimize the use of unobservable inputs when determining fair value. The three tiers are defined as follows:
•Level 1 - Observable inputs based on unadjusted quoted prices in active markets for identical assets or liabilities;
•Level 2 - Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
•Level 3 - Unobservable inputs for which there is little or no market data and which require us to develop our own estimates and assumptions reflecting those that a market participant would use.
The asset or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques maximize the use of relevant observable inputs and minimize the use of unobservable inputs. There were no instruments measured at fair value on a recurring basis using significant unobservable inputs as of June 30, 2024 and December 31, 2023.
The valuation techniques that may be used to measure fair value are as follows:
•Market approach - Uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities;
•Income approach - Uses valuation techniques to convert future amounts to a single present amount based on current market expectations about those future amounts; and
•Cost approach - Based on the amount that currently would be required to replace the service capacity of an asset (i.e., replacement cost).
The carrying amounts of our accounts receivable, accounts payable, and accrued expenses approximate fair value as of June 30, 2024 and December 31, 2023 because of the relatively short duration of these instruments. Additionally, the carrying value of our debt associated with the term loan facility approximates fair value because the interest rates are variable and reset on relatively short durations to the then market rates.
Investments
Our investment portfolio consists largely of debt investments classified as available-for-sale. Changes in the fair value of available-for-sale securities, excluding other-than-temporary impairments, have been recorded in ‘Accumulated other comprehensive income (loss)’ in our consolidated balance sheets. The components of our investments as of June 30, 2024 are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of June 30, 2024 |
| Fair Value Measurement | | Balance Sheet Classification |
| Fair Value Level | | Cost Basis | | Unrealized Gains (Losses) | | Fair Value | | Cash and Cash Equivalents | | Short-term Investments and Marketable Securities | | |
Cash | Level 1 | | $ | 66,506 | | | $ | — | | | $ | 66,506 | | | $ | 66,506 | | | $ | — | | | |
Money market fund | Level 1 | | 54,281 | | | — | | | 54,281 | | | 54,281 | | | — | | | |
U.S. Treasury bonds | Level 1 | | 14,660 | | | (3) | | | 14,657 | | | — | | | 14,657 | | | |
Commercial paper | Level 2 | | 2,893 | | | (3) | | | 2,890 | | | — | | | 2,890 | | | |
Corporate bonds | Level 2 | | 10,800 | | | (2) | | | 10,798 | | | — | | | 10,798 | | | |
Total investments | | | $ | 149,140 | | | $ | (8) | | | $ | 149,132 | | | $ | 120,787 | | | $ | 28,345 | | | |
At December 31, 2023, our investments consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2023 |
| Fair Value Measurement | | Balance Sheet Classification |
| Fair Value Level | | Cost Basis | | Unrealized Gains (Losses) | | Fair Value | | Cash and Cash Equivalents | | Short-term Investments and Marketable Securities | | |
Cash | Level 1 | | $ | 93,029 | | | $ | — | | | $ | 93,029 | | | $ | 93,029 | | | $ | — | | | |
Money market fund | Level 1 | | 56,322 | | | — | | | 56,322 | | | 56,322 | | | — | | | |
U.S. Treasury bonds | Level 1 | | 4,830 | | | (2) | | | 4,828 | | | — | | | 4,828 | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Agency bonds | Level 2 | | 4,828 | | | (3) | | | 4,825 | | | — | | | 4,825 | | | |
Total investments | | | $ | 159,009 | | | $ | (5) | | | $ | 159,004 | | | $ | 149,351 | | | $ | 9,653 | | | |
We did not hold any Level 3 assets at any point during the three and six months ended June 30, 2024. Additionally, there were no transfers between Levels 1 and 2 during the six months ended June 30, 2024. Interest income on our investments totaled $1.7 million and $3.6 million for the three and six months ended June 30, 2024, respectively. Interest income on our investments totaled $2.7 million and $4.7 million for the three and six months
ended June 30, 2023, respectively. Interest income is recorded within other operating (income) expense on our consolidated statements of operations.
The contractual maturities of our debt securities as of June 30, 2024 and December 31, 2023 were all one year or less. Actual maturities may differ from contractual maturities because borrowers have the right to call or prepay certain obligations.
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 (1) our consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and (2) the audited consolidated financial statements and the related notes and management’s discussion and analysis of financial condition and results of operations for the year ended December 31, 2023 included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission, or SEC, on February 15, 2024.
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements are often identified by the use of words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “will,” “would,” or the negative or plural of these words or similar expressions or variations, including statements regarding our future financial and operating performance, anticipated expansion of the usage of partners to perform professional services, the increase of our subscriptions revenue as a percentage of total revenue, the fluctuation of gross margin on a quarterly basis, our future capital requirements, and our ability to meet our financial covenants under our Credit Agreement. Such forward-looking statements are subject to a number of risks, uncertainties, assumptions, and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified herein and those discussed in the section titled “Risk Factors,” set forth in Part I, Item 1A of our Annual Report on Form 10-K filed with the SEC on February 15, 2024 and in our other filings with the SEC. Forward-looking statements should not be relied on as predictions of future events. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.
Overview
Appian is a software company that automates business processes. The Appian AI Process Platform includes everything you need to design, automate, and optimize even the most complex processes, from start to finish. The world's most innovative organizations trust Appian to improve their workflows, unify data, and optimize operations—resulting in better growth and superior customer experiences.
We have generated the majority of our revenue from sales of subscriptions, which include (1) cloud subscriptions bundled with maintenance and support and hosting services and (2) term license subscriptions bundled with maintenance and support. Our subscription contracts are priced based primarily on the number of users who access and utilize the applications built on our platform or, alternatively, non-user-based single application licenses. Our subscription contract terms generally vary from one to three years with most providing for payment in advance on an annual, quarterly, or monthly basis. Due to the variability of our billing terms and the episodic nature of our customers purchasing additional subscriptions, we do not believe changes in our deferred revenue in a given period are directly correlated with our revenue growth.
We have invested in our Customer Success organization to help ensure customers are able to build and deploy applications on our platform. We have several strategic partnerships, including with Accenture, Capgemini, Deloitte, EY, KPMG, PwC, and TCS, which allow them to refer customers to us in order to purchase subscriptions. Our partners then provide professional services directly to the customers using our platform. We intend to continue focusing on adding new customers with our strategic partners. In addition, over time we expect our professional services revenue as a percentage of total revenue to decline as we increasingly rely on strategic partners to help our customers deploy our software. We believe our investment in professional services, including strategic partners building their practices around Appian, will drive increased adoption of our platform.
Our customers primarily include financial services, government, life sciences, insurance, manufacturing, energy, healthcare, telecommunications, and transportation organizations. Generally, our sales team targets its efforts to
organizations with over 2,000 employees and $2 billion in annual revenue. Revenue from government agencies represented 22.6% and 22.1% of our total revenue for the three and six months ended June 30, 2024, respectively. Revenue from government agencies represented 20.1% and 20.3% of our total revenue for the three and six months ended June 30, 2023, respectively. No single end-customer accounted for more than 10% of our total revenue in the three and six months ended June 30, 2024 or 2023.
We offer our platform globally. Our platform supports multiple languages to facilitate collaboration and address challenges in multinational organizations. In the three and six months ended June 30, 2024, 38.2% and 37.7%, respectively, of our total revenue was generated from customers outside of the United States as compared to 38.4% and 35.8% in the three and six months ended June 30, 2023, respectively. As of June 30, 2024, we operated in 16 countries. We believe we have a significant opportunity to continue to grow our international footprint, and we are investing in new geographies, including through investment in direct and indirect sales channels, professional services, and customer support and implementation partners.
Our business model focuses on maximizing the lifetime value of customer relationships, which is a function of the duration of a customer’s deployment of our platform as well as the price and number of subscriptions of our platform that a customer purchases. We incur significant customer acquisition costs, including expenses associated with hiring new sales representatives, who can take anywhere from six months to a year to become productive given the length of our sales cycle, and marketing costs which, with the exception of certain types of sales commissions, are expensed as incurred.
Key Factors Affecting Our Performance
The following are several key factors that affect our performance:
•Market Adoption of Our Platform - Our ability to grow our customer base and drive market adoption of our platform is affected by the pace at which organizations digitally transform. We expect our revenue growth will be primarily driven by the pace of adoption and penetration of our platform. We offer a leading custom software platform and intend to continue to invest to expand our customer base. The degree to which prospective customers recognize the need for our software platform and its ability to enable their organizations to digitally transform, and subsequently allocate budget dollars to purchase our software, will drive our ability to acquire new customers and increase sales to existing customers, which, in turn, will affect our future financial performance.
•Growth of Our Customer Base - We believe we have a substantial opportunity to grow our customer base. We have aggressively invested, and intend to continue to invest, in our sales team in order to drive sales to new customers. We continue to make investments to enhance the expertise of our sales and marketing organization within our key industry verticals of financial services, government, life sciences, insurance, and manufacturing. In addition, we have established relationships with strategic partners who work with organizations undergoing digital transformations. Our ability to continue to grow our customer base is dependent, in part, upon our ability to differentiate ourselves within the increasingly competitive markets in which we participate.
•Further Penetration of Existing Customers - Our sales team seeks to generate additional revenue from existing customers by adding new users to our platform. Many of our customers begin by building a single application and then grow to build dozens of applications on our platform. Generally, the development of new applications on our platform results in the expansion of our user base within an organization and a corresponding increase in revenue. As a result of this “land and expand” strategy, we have generated significant additional revenue from our customer base. Our ability to increase sales to existing customers will depend on a number of factors, including the size of our sales and professional services teams, customers’ level of satisfaction with our platform and professional services, pricing, economic conditions, and our customers’ overall spending levels. Some of our professional services personnel are customer success managers. Their role is to ensure customers realize value from our platform and support strategic partners and the “land and expand” strategy versus delivering billable hours.
•Mix of Subscriptions and Professional Services Revenue - We believe our professional services have driven customer success and facilitated the adoption of our platform by customers. During the initial period of deployment of our platform by a customer, we generally provide a greater amount of support in building applications and training than later in the deployment, with a typical engagement lasting from two to six months. At the same time, many of our customers have historically purchased subscriptions for only a limited set of their total potential end users. As a result of these factors, the proportion of total revenue for a customer associated with professional services is relatively high during the initial deployment period. Over time, as the need for professional services associated with user deployments decreases and the number of end users increases, we expect subscriptions revenue as a percentage of total revenue to increase. In addition, we continue to grow our base of strategic partners to provide broader customer coverage and solution delivery capabilities. These partners perform professional services with respect to any new service contracts they originate. As the usage of strategic partners expands, we expect the proportion of our total revenue from subscriptions to increase over time relative to professional services. For the three months ended June 30, 2024 and 2023, 77.1% and 73.4% of our revenue, respectively, was derived from sales of subscriptions while the remaining 22.9% and 26.6%, respectively, was derived from the sale of professional services. For the six months ended June 30, 2024 and 2023, 77.9% and 73.3% of our revenue, respectively, was subscriptions-based while the remaining 22.1% and 26.7%, respectively, was related to professional services.
•Investments in Growth - We have made, and plan to continue to make, investments for long-term growth, including investing in our platform and infrastructure to continuously maximize their power and speed, meet the evolving needs of our customers, and take advantage of our market opportunity. In addition, we may pursue strategic acquisitions that enhance our product offerings. We also intend to continue to invest in sales and marketing as we further expand our sales teams, increase our marketing activities, and grow our international operations.
Key Metrics
We monitor the following metrics to help us measure and evaluate the effectiveness of our operations. All dollar amounts are presented in thousands.
Cloud Subscriptions Revenue
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, | | |
| 2024 | | 2023 | | % Change | | 2024 | | 2023 | | % Change | | | | | | |
Cloud subscriptions revenue | $ | 88,428 | | | $ | 74,442 | | | 18.8 | % | | $ | 175,031 | | | $ | 144,134 | | | 21.4 | % | | | | | | |
Cloud subscriptions revenue includes cloud subscriptions bundled with maintenance and support and hosting services. Our cloud subscriptions revenue for any customer is primarily determined by the number of users who access and utilize the applications built on our platform or by the number of application licenses purchased, as well as the price paid. We believe increasing cloud subscriptions revenue is an indicator of the demand for our platform, the pace at which the market for our solutions is growing, the productivity of our sales team and strategic relationships in growing our customer base, and our ability to further penetrate our existing customer base.
Cloud Subscriptions Revenue Retention Rate
| | | | | | | | | | | |
| As of June 30, |
| 2024 | | 2023 |
Cloud subscriptions revenue retention rate | 118 | % | | 115 | % |
A key factor to our success is the renewal and expansion of subscription agreements with our existing customers. We calculate this metric over a set of customers who have been with us for at least one full year. To calculate our cloud subscriptions revenue retention rate for a particular trailing 12-month period, we first establish the recurring cloud subscriptions revenue for the previous trailing 12-month period. This effectively represents
recurring dollars we should expect in the current trailing 12-month period from the cohort of customers from the previous trailing 12-month period without accounting for any expansion or contraction. We subsequently measure the recurring cloud subscriptions revenue in the current trailing 12-month period from the cohort of customers from the previous trailing 12-month period. Cloud subscriptions revenue retention rate is then calculated by dividing the aggregate recurring cloud subscriptions revenue in the current trailing 12-month period by the previous trailing 12-month period. This calculation includes the combined impact on our revenue from customer non-renewals, pricing changes, and growth in the number of users on our platform. Our cloud subscriptions revenue retention rate can fluctuate from period to period due to large customer contracts in any given period.
Key Components of Results of Operations
Revenue
We generate revenue primarily through sales of subscriptions to our platform as well as professional services. We typically sell our software on a per-user basis or through non-user-based single application licenses. We generally bill customers and collect payment for subscriptions to our platform in advance on an annual, quarterly, or monthly basis. In certain instances, we have had customers pay their entire contract value up front.
Our revenue is comprised of the following:
Subscriptions
Subscriptions revenue is primarily derived from cloud subscriptions bundled with maintenance and support and hosting services and on-premises term license subscriptions bundled with maintenance and support. Our maintenance and support agreements provide customers with the right to unspecified software upgrades, maintenance releases and patches released during the term of the maintenance and support agreement on a when-and-if-available basis, and rights to technical support. On-premises term license subscriptions are offered when the customer prefers to self-manage the deployment of our platform within their own infrastructure. When our platform is delivered as a cloud subscription, we manage operational needs in third-party hosted data centers.
Professional Services
Our professional services revenue is comprised of fees for consulting services, including application development, deployment assistance, and training related to our platform. Over time, we expect professional services revenue as a percentage of total revenue to decrease as the usage of our partner network expands.
Cost of Revenue
Subscriptions
Cost of subscriptions revenue consists primarily of fees paid to our third-party managed hosting providers and other third-party service providers, personnel costs, including payroll and benefits for our technology operations and customer support teams, amortization of acquired technology, and allocated overhead costs. We expect cost of revenue to continue to increase in absolute dollars for the foreseeable future as our customer base grows.
Professional Services
Cost of professional services revenue includes all direct and indirect costs to deliver our professional services and training, including employee compensation for our global professional services and training personnel, third-party contractor costs, allocated overhead costs, and the costs of billable expenses such as travel and lodging. The unpredictability of the timing of providing services related to significant professional services agreements sold on a standalone basis may cause significant fluctuations in our cost of professional services which, in turn, may impact our quarterly financial results.
Gross Profit and Gross Margin
Gross profit and gross margin (defined as gross profit as a percentage of total revenue), have been, and will continue to be, affected by various factors, including the mix of cloud subscriptions and on-premises term license subscriptions, the mix of total subscriptions revenue and professional services revenue, subscription pricing, the costs associated with third-party hosting providers, and the extent to which we expand or reduce our professional services to support future changes in our growth. Our gross margin may fluctuate from period to period based on the above factors.
Subscriptions Gross Margin
Subscriptions gross margin is primarily affected by the growth in our subscriptions revenue as compared to the growth in, and timing of, costs to support such revenue. We expect to continue to invest in customer support and cloud operations to support growth in our business, and the timing of those investments is expected to cause subscriptions gross margin to fluctuate on a quarterly basis.
Professional Services Gross Margin
Professional services gross margin is affected by the growth in our professional services revenue as compared to the growth in, and timing of, the costs of our Customer Success organization as we continue to invest in the growth of our business, as well as by consultant utilization rates. Professional services gross margin is also impacted by the amount of services performed by subcontractors and partners as opposed to internal resources. In 2024, we expect professional services gross margin to be slightly lower than in 2023; however, the margin remains subject to fluctuation based on the factors discussed above.
Operating Expenses
Operating expenses consist of sales and marketing, research and development, and general and administrative expenses. Personnel-related costs such as salaries, bonuses, commissions, payroll tax payments, and stock-based compensation expense are the most significant components of each of these expense categories. Other components of each category include professional fees for third-party services such as legal, software development resources, and contractors. In addition, operating expenses include allocated overhead costs, which are primarily comprised of facility costs such as rent, employee medical benefits, employee relations expense, and certain information technology costs for such items as infrastructure, software, and cloud computing services.
In general, our operating expenses are expected to continue to increase in absolute dollars as we invest resources in growing our various teams although at a more measured rate than prior years.
Sales and Marketing Expense
Sales and marketing expense primarily includes personnel costs, including salaries, bonuses, commissions, stock-based compensation, and other personnel costs related to sales teams. Additional major expenses in this category include travel and entertainment, marketing activities and promotional events, subcontracting fees, and allocated overhead costs.
In order to continue to grow our business, geographical footprint, and brand awareness, we expect to continue investing resources in sales and marketing in our principal markets and strategic growth areas. We expect sales and marketing expense to increase in absolute dollars as we continue to invest to acquire new customers and further expand usage of our platform within our existing customer base. We will continue our efforts to build on our brand reputation and increase market awareness of our platform.
Research and Development Expense
Research and development expense consists primarily of personnel costs for our employees who develop and enhance our platform, including salaries, bonuses, stock-based compensation, and other personnel costs. Also included are non-personnel costs such as subcontracting, consulting, professional fees to third party development resources, certain information technology expenses, and allocated overhead costs.
Our research and development efforts are focused on enhancing the capabilities, speed, and power of our software platform. In 2022, we opened a new product development center in India. Although we expect research and development expense to continue to increase in absolute dollars as such costs are critical to maintain and improve the quality of applications and our competitive position, we believe our product development center will result in cost savings over time.
General and Administrative Expense
General and administrative expense consists primarily of personnel costs, including salaries, bonuses, stock-based compensation, and other personnel costs for our administrative, legal, information technology, human resources, finance, and accounting teams as well as our senior executives. Additional expenses included in this category are non-personnel costs such as travel-related expenses, contracting and professional fees for such services as audits, taxation, and legal, insurance and other corporate expenses, including allocated overhead costs, and bad debt expenses. In 2024, we expect our general and administrative expense to increase in absolute dollars largely due to amortization expense associated with the judgment preservation insurance policy (as discussed in Note 12 to the consolidated financial statements), lease impairments (as discussed in Note 4), and investments in our information technology team.
Other Non-Operating Expense
Other Expense (Income), Net
Other expense (income), net consists primarily of gains and losses related to changes in foreign currency exchange rates, interest income on our cash and cash equivalents and investments, and other sources of income or expense not related to our core business operations.
Interest Expense
Interest expense consists primarily of interest on our debt, amortization of deferred financing fees, unused credit facility fees, and commitment fees on our letters of credit.
Results of Operations
The following table sets forth our consolidated statements of operations (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, | | |
| 2024 | | 2023 | | 2024 | | 2023 | | | | |
Revenue | | | | | | | | | | | |
Subscriptions | $ | 112,974 | | | $ | 93,794 | | | $ | 230,668 | | | $ | 192,751 | | | | | |
Professional services | 33,476 | | | 33,921 | | | 65,617 | | | 70,199 | | | | | |
Total revenue | 146,450 | | | 127,715 | | | 296,285 | | | 262,950 | | | | | |
Cost of revenue | | | | | | | | | | | |
Subscriptions | 13,262 | | | 10,779 | | | 25,532 | | | 21,227 | | | | | |
Professional services | 26,151 | | | 26,066 | | | 51,878 | | | 51,711 | | | | | |
Total cost of revenue | 39,413 | | | 36,845 | | | 77,410 | | | 72,938 | | | | | |
Gross profit | 107,037 | | | 90,870 | | | 218,875 | | | 190,012 | | | | | |
Operating expenses | | | | | | | | | | | |
Sales and marketing | 66,592 | | | 62,581 | | | 124,748 | | | 125,671 | | | | | |
Research and development | 39,446 | | | 39,743 | | | 79,217 | | | 81,367 | | | | | |
General and administrative | 40,193 | | | 29,208 | | | 73,639 | | | 58,902 | | | | | |
Total operating expenses | 146,231 | | | 131,532 | | | 277,604 | | | 265,940 | | | | | |
Operating loss | (39,194) | | | (40,662) | | | (58,729) | | | (75,928) | | | | | |
Other non-operating expense | | | | | | | | | | | |
Other (income) expense, net | (1,545) | | | (3,886) | | | 6,662 | | | (6,576) | | | | | |
Interest expense | 6,107 | | | 4,755 | | | 11,753 | | | 7,873 | | | | | |
Total other non-operating expense | 4,562 | | | 869 | | | 18,415 | | | 1,297 | | | | | |
Loss before income taxes | (43,756) | | | (41,531) | | | (77,144) | | | (77,225) | | | | | |
Income tax (benefit) expense | (164) | | | 824 | | | (629) | | | 1,959 | | | | | |
Net loss | $ | (43,592) | | | $ | (42,355) | | | $ | (76,515) | | | $ | (79,184) | | | | | |
The following table sets forth our consolidated statements of operations data expressed as a percentage of total revenue:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, | | |
| 2024 | | 2023 | | 2024 | | 2023 | | | | |
Revenue | | | | | | | | | | | |
Subscriptions | 77.1 | % | | 73.4 | % | | 77.9 | % | | 73.3 | % | | | | |
Professional services | 22.9 | | | 26.6 | | | 22.1 | | | 26.7 | | | | | |
Total revenue | 100.0 | | | 100.0 | | | 100.0 | | | 100.0 | | | | | |
Cost of revenue | | | | | | | | | | | |
Subscriptions | 9.1 | | | 8.4 | | | 8.6 | | | 8.1 | | | | | |
Professional services | 17.9 | | | 20.4 | | | 17.5 | | | 19.7 | | | | | |
Total cost of revenue | 26.9 | | | 28.8 | | | 26.1 | | | 27.7 | | | | | |
Gross profit | 73.1 | | | 71.2 | | | 73.9 | | | 72.3 | | | | | |
Operating expenses | | | | | | | | | | | |
Sales and marketing | 45.5 | | | 49.0 | | | 42.1 | | | 47.8 | | | | | |
Research and development | 26.9 | | | 31.1 | | | 26.7 | | | 30.9 | | | | | |
General and administrative | 27.4 | | | 22.9 | | | 24.9 | | | 22.4 | | | | | |
Total operating expenses* | 99.9 | | | 103.0 | | | 93.7 | | | 101.1 | | | | | |
Operating loss | (26.8) | | | (31.8) | | | (19.8) | | | (28.9) | | | | | |
Other non-operating expense | | | | | | | | | | | |
Other (income) expense, net | (1.1) | | | (3.0) | | | 2.2 | | | (2.5) | | | | | |
Interest expense | 4.2 | | | 3.7 | | | 4.0 | | | 3.0 | | | | | |
Total other non-operating expense* | 3.1 | | | 0.7 | | | 6.2 | | | 0.5 | | | | | |
Loss before income taxes* | (29.9) | | | (32.5) | | | (26.0) | | | (29.4) | | | | | |
Income tax (benefit) expense | (0.1) | | | 0.6 | | | (0.2) | | | 0.7 | | | | | |
Net loss* | (29.8) | % | | (33.2) | % | | (25.8) | % | | (30.1) | % | | | | |
* Totals may not foot due to rounding.
Comparison of the Three Months Ended June 30, 2024 and 2023
Revenue
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | |
| 2024 | | 2023 | | $ Change | | % Change |
| (dollars in thousands) | | | | |
Revenue | | | | | | | |
Subscriptions | $ | 112,974 | | | $ | 93,794 | | | $ | 19,180 | | | 20.4 | % |
Professional services | 33,476 | | | 33,921 | | | (445) | | | (1.3) | |
Total revenue | $ | 146,450 | | | $ | 127,715 | | | $ | 18,735 | | | 14.7 | % |
Total revenue increased $18.7 million, or 14.7%, in the three months ended June 30, 2024 compared to the same period in 2023 due to an increase in our subscriptions revenue of $19.2 million. This increase was partially offset by a decrease in our professional services revenue of $0.4 million. The increase in subscriptions revenue was driven by a $14.0 million increase in cloud subscription revenue, a $4.2 million increase in on-premises subscription revenue, and a $1.0 million increase in maintenance and support revenue. With respect to new versus existing customers, there was an $8.4 million increase in subscriptions revenue stemming from sales of subscriptions to new customers, while the remaining $10.7 million of the increase was attributable to expanded deployments, price increases on renewals, and corresponding sales of additional subscriptions to existing customers. The decrease in
professional services revenue was due primarily to a $6.3 million decrease in revenue from existing customers, which was partially offset by a $5.9 million increase in sales to new customers.
Cost of Revenue
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | |
| 2024 | | 2023 | | $ Change | | % Change |
| (dollars in thousands) | | | | |
Cost of revenue | | | | | | | |
Subscriptions | $ | 13,262 | | $ | 10,779 | | $ | 2,483 | | | 23.0 | % |
Professional services | 26,151 | | 26,066 | | 85 | | | 0.3 | |
Total cost of revenue | $ | 39,413 | | $ | 36,845 | | $ | 2,568 | | |