RingCentral, Inc. (RNG) FY 2022 MD&A

ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K. As discussed in the section entitled “Special Note Regarding Forward-Looking Statements,” the following discussion and analysis contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ significantly from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and elsewhere in this report, particularly in the section entitled “Risk Factors” included under Part I, Item1A.

This section of this Form 10-K generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021. Discussion regarding our financial condition and results of operations for fiscal 2021 as compared to fiscal 2020 is included in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on March 1, 2022, as amended, which information is incorporated herein by reference.

Overview

We are a leading provider of global enterprise cloud communications, video meetings, collaboration, and contact center software-as-a-service (“SaaS”) solutions. We believe that our innovative, cloud-based communication and contact center solutions disrupt the large market for business communications and collaboration by providing flexible and cost-effective solutions that support mobile and distributed workforces. We enable convenient and effective communications for organizations across all their locations and employees, enabling them to be more productive and more responsive.

Our cloud-based business communications and collaboration solutions are designed to be easy to use, providing a user identity across multiple locations and devices, including smartphones, tablets, PCs and desk phones. Our solutions can be deployed rapidly and configured and managed easily. Our cloud-based solutions are location and device independent and better suited to address the needs of modern mobile and global enterprise workforces than are legacy on-premise systems. Through our open Application Programming Interface (API) platform, we enable third-party developers and customers to integrate our solution with leading business applications to customize their own business workflows.

We have a portfolio of cloud-based offerings that are subscription based, made available at different rates varying by the specific functionalities, services, and number of users. We primarily generate revenues from the sale of subscriptions to our offerings. Our subscription plans have monthly, annual, or multi-year contractual terms. We believe that this flexibility in contract duration is important to meet the different needs of our customers. For the years ended December 31, 2022, 2021, and 2020, subscriptions revenues accounted for 90% or more of our total revenues. The remainder of our revenues has historically been primarily comprised of product revenues from the sale of pre-configured phones and professional services. We do not develop or manufacture physical phones and offer it as a convenience for a total solution to our customers in connection with subscriptions to our services; however, in some cases, we have built “interoperability” between MVP and third-party hardware devices. We rely on third-party providers to develop and manufacture these devices and fulfillment partners to successfully serve our customers.

We continue to support our direct inside sales force while also developing indirect sales channels to market our brand and our subscription offerings. Our indirect sales channels who sell our solutions consist of:

•Regional and global network of resellers and distributors;

•Strategic partners who market and sell our MVP and solutions, including co-branded solutions. Such partnerships include Mitel, Amazon, ALE, Avaya, Atos, and Unify.

•Global Service Providers including AT&T, TELUS, BT, Vodafone, Verizon, DT, 1&1 Versatel in Germany, Ecotel in Germany, MCM in Mexico, Frontier, Charter Communications and others.

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Our revenue growth has primarily been driven by our flagship RingCentral MVP, RingCentral customer engagement solutions product offering, recurring license and other fees, derived from sales through our direct and indirect sales channels, including resellers and distributors, strategic partners and global service providers, which has resulted in an increased number of customers, relatively stable average subscription revenue per user, and relatively stable retention of our existing customer and user base. While average subscription revenue per user has been relatively stable, given competitive pressures in the market, we may see a reduction of average subscription revenue per user, and/or a decrease in acquisition and renewal rates, and/or an increase in down-sell and churn in the future. We define a “customer” as any party that purchases or subscribes to our products and services directly or indirectly through our channel partners. As of December 31, 2022, we had customers from a range of industries, including financial services, education, healthcare, legal services, real estate, retail, technology, insurance, construction, hospitality, and state and local government, among others. For the years ended December 31, 2022, 2021 and 2020, the vast majority of our total revenues were generated in the U.S. and Canada, although we expect the percentage of our total revenues derived outside of the U.S. and Canada to grow as we continue to expand internationally.

The growth of our business and our future success depend on many factors, including our ability to expand our customer base to larger customers, expand our indirect sales channels, continue to innovate, grow revenues from our existing customer base, expand our distribution channels, and scale internationally.

Macroeconomic Conditions and Other Factors

We are subject to risks and exposures, including those caused by the current macroeconomic environment, the Russia-Ukraine conflict and the COVID-19 pandemic.

Macroeconomic factors include increased inflation, increased interest rates, supply chain disruptions, decreased economic output and fluctuations in currency exchange rates, all of which can cause uncertainty. We have experienced sales cycles normalizing to pre-COVID norms and more cautious buying behavior from larger customers manifesting itself in smaller initial deployments. We also noted sales cycle times for up-market customers elongated incrementally in 2022, as customers often required additional approvals before making purchase decisions. We anticipate this behavior may persist until the macroenvironment becomes less uncertain. Also during the year, the United States Dollar has strengthened significantly against certain foreign currencies, particularly against the British Pound Sterling, Euro and Canadian Dollar. If these conditions continue, they could have an adverse impact on our results. We continuously monitor the impact of these circumstances on our business and financial results, as well as the overall global economy and geopolitical landscape. The implications of macroeconomic conditions on our business, results of operations and overall financial position, particularly in the long term, remain uncertain.

We had previously outsourced some of our software development and design, quality assurance, and operations activities to third-party contractors that have employees and consultants located in Odesa, Ukraine, and St. Petersburg, Russia. In 2022, we relocated some of their personnel to other countries and currently have no third-party contractors or employees in Russia. During the year ended December 31, 2022, direct and incremental expenses associated with our relocation efforts was $21.9 million. We do not store or process any personal customer data in Russia or Ukraine and are not materially dependent on operations in these locations to continue to provide our core services. Further discussion of the potential impact of the Russian invasion of Ukraine on our business can be found in the section titled “Risk Factors” included in Part II, Item 1A above.

In response to the COVID-19 pandemic we adopted several measures to support the health and well-being of our global employees, customers, partners and communities. Such measures included temporarily requiring the vast majority of our employees to work remotely, suspending non-essential travel worldwide for our employees, and shifting some of our customer and industry events to virtual-only experiences. Beginning in the first quarter of 2022, we started to re-open our offices in the United States and other locations globally for employees to return. We have taken recommended measures to protect our employees who return to the office that include respecting occupancy limitations applicable to our facilities and implementing vaccination requirements; among other safety measures. We have also introduced company-wide programs to support the mental well-being of our employees such as providing virtual wellness classes. As we continue to monitor the actual and potential effects of the COVID-19 pandemic across our business, we may further adjust our policies depending on the severity of, or a spike in, COVID-19 or as may be required or recommended by federal, foreign, state or local authorities.

Further discussion of the potential impacts of the COVID-19 pandemic on our business can be found in the section titled “Risk Factors” included in Part I, Item 1A above.

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Key Business Metrics

In addition to United States generally accepted accounting principles (“U.S. GAAP”) and financial measures such as total revenues, gross margin, and cash flows from operations, we regularly review a number of key business metrics to evaluate growth trends, measure our performance, and make strategic decisions. We discuss revenues and gross margin under “Results of Operations”, and cash flow from operations and free cash flows under “Liquidity and Capital Resources.” Other key business metrics are discussed below.

Annualized Exit Monthly Recurring Subscriptions

We believe that our Annualized Exit Monthly Recurring Subscriptions (“ARR”) is a leading indicator of our anticipated subscriptions revenues. We believe that trends in revenue are important to understanding the overall health of our business, and we use these trends in order to formulate financial projections and make strategic business decisions. Our ARR equals our Monthly Recurring Subscriptions multiplied by 12. Our Monthly Recurring Subscriptions equals the monthly value of all customer recurring charges at the end of a given month. For example, our Monthly Recurring Subscriptions at December 31, 2022 was $175.0 million. As such, our ARR at December 31, 2022 was $2.1 billion compared to $1.8 billion at December 31, 2021.

Net Monthly Subscription Dollar Retention Rate

We believe that our Net Monthly Subscription Dollar Retention Rate provides insight into our ability to retain and grow subscriptions revenue, as well as our customers’ potential long-term value to us. We believe that our ability to retain our customers and expand their use of our solutions over time is a leading indicator of the stability of our revenue base and we use these trends in order to formulate financial projections and make strategic business decisions. We define our Net Monthly Subscription Dollar Retention Rate as (i) one plus (ii) the quotient of Dollar Net Change divided by Average Monthly Recurring Subscriptions.

We define Dollar Net Change as the quotient of (i) the difference of our Monthly Recurring Subscriptions at the end of a period minus our Monthly Recurring Subscriptions at the beginning of a period minus our Monthly Recurring Subscriptions at the end of the period from new customers we added during the period, all divided by (ii) the number of months in the period. We define our Average Monthly Recurring Subscriptions as the average of the Monthly Recurring Subscriptions at the beginning and end of the measurement period.

For example, if our Monthly Recurring Subscriptions were $118 at the end of a quarterly period and $100 at the beginning of the period, and $20 at the end of the period from new customers we added during the period, then the Dollar Net Change would be equal to ($0.67), or the amount equal to the difference of $118 minus $100 minus $20, all divided by three months. Our Average Monthly Recurring Subscriptions would equal $109, or the sum of $100 plus $118, divided by two. Our Net Monthly Subscription Dollar Retention Rate would then equal 99.4%, or approximately 99%, or one plus the quotient of the Dollar Net Change divided by the Average Monthly Recurring Subscriptions.

Our key business metrics for the five quarterly periods ended December 31, 2022 were as follows (dollars in millions):

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Components of Results of Operations

Revenues

Our revenues for the years presented consisted of subscriptions and other revenues. Our subscriptions revenue primarily includes recurring fixed plan subscription fees, variable usage-based fees for usage in excess of plan limits, one-time fees, recurring license and other fees, derived from sales through our direct and indirect sales channels, including resellers and distributors, strategic partners and global service providers. We provide our subscriptions to our customers pursuant to contractual arrangements that range in duration typically from one month to five years. We provide our subscriptions to our customers pursuant to either “click through” online agreements for service terms up to one year or written agreements when the arrangement is expected to be one year or longer. We offer our subscriptions based on the functionalities and services selected by a customer, and generally our subscription arrangements automatically renew for additional periods at the end of the initial subscription term. We believe that this flexibility in contract duration is important to meet the different needs of our customers.

We generally bill our subscription fees in advance. We recognize subscription revenue over the term of the agreement. Amounts billed in excess of revenue recognized for the period are reported as deferred revenue on our Consolidated Balance Sheets.

We also generate revenues through sales of our subscriptions and products by resellers, strategic partners, and global service providers. When we control the performance of the contractual obligations, we record the revenues on a gross basis and amounts retained by our resellers are recorded as sales and marketing expense. Our assumption of such control is evidenced when, among other things, we are primarily responsible for the delivery of the service or products, have inventory risk, and have discretion in establishing pricing of the arrangement.

“Other revenues” includes product revenues from the sale of pre-configured phones, and professional services. Product revenue is recognized when the product has been delivered to the customer. Professional services revenue is recognized as and when services are delivered.

Cost of Revenues and Gross Margin

Our cost of subscriptions revenue primarily consists of fees paid to third-party telecommunications providers, network operations, costs to build out and maintain data centers, including co-location fees for the right to place our servers in data centers owned by third parties, depreciation of servers and equipment, along with related utilities and maintenance costs, amortization of acquired technology related intangible assets, personnel costs associated with customer care and support of the functionality of our platform and data center operations, including share-based compensation expenses, and allocated costs of facilities and information technology.

We define subscriptions gross margins as subscriptions revenue minus the cost of subscriptions revenue expressed as a percentage of subscriptions revenue.

Cost of other revenue is comprised primarily of the cost associated with the purchase of phones, personnel costs for employees and contractors, including share-based compensation expenses, cost of professional services, and allocated costs of facilities and information technology.

Operating Expenses

We classify our operating expenses as research and development, sales and marketing, general and administrative expenses, and asset write-down charges.

Our research and development efforts are focused on developing new and expanded features for our solutions, integrations with distributors and other software platforms, and improvements to our backend architecture. Research and development expenses consist primarily of personnel costs for employees and contractors, including share-based compensation expenses, and allocated costs of facilities and information technology, software tools, product certification, and the impact of the “reductions in force” (“RIF”) undertaken in 2022. We expense research and development costs as incurred, except for certain internal-use software development costs that we capitalize. We believe that continued investment in our products is important for our future growth, and we expect our research and development expenses to continue to increase in absolute dollars for the foreseeable future, although these expenses may fluctuate as a percentage of our total revenues from period to period depending on the timing of these expenses.

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Sales and marketing expenses are the largest component of our operating expenses and consist primarily of personnel costs for employees and contractors directly associated with our sales and marketing activities including share-based compensation expenses, internet advertising fees, television, radio and billboard advertising, public relations, commissions paid to employees, resellers and other third parties, amortization of capitalized sales commissions, trade shows, travel expenses, credit card fees, marketing and promotional activities, amortization of acquired customer relationship intangibles, allocated costs of facilities and information technology, and the impact of the RIF undertaken in 2022. We expect our sales and marketing expenses to continue to increase in absolute dollars for the foreseeable future as we expand our sales and marketing efforts domestically and internationally and continue to build our brand, although these expenses may fluctuate as a percentage of our total revenues from period to period depending on the timing of these expenses.

General and administrative expenses consist primarily of personnel costs, including share-based compensation expenses, for employees and contractors engaged in infrastructure and administrative activities to support the day-to-day operations of our business. Other significant components of general and administrative expenses include professional service fees, allocated costs of facilities and information technology, cost of compliance with certain government-imposed taxes, the costs of legal matters, business acquisition costs, loss contingencies, and the impact of the RIF undertaken in 2022. We expect our general and administrative expenses to continue to increase in absolute dollars for the foreseeable future, although these expenses may fluctuate as a percentage of our total revenues from period to period, depending on the timing of these expenses.

Asset write-down charges consist of write-offs related to our assets, including deferred and prepaid sales commission and acquired intangibles balances, whenever events or changes in circumstances have occurred that could indicate the carrying amount of such assets may not be recoverable.

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Other Income (Expense), Net

Interest expenses consist primarily of amortization of the debt discount and issuance costs in connection with our convertible senior notes.

Other income (expenses) consist primarily of the following items:

•unrealized gains and losses from fair value adjustments on our long-term investments

•the realized impact on foreign exchange resulting from the settlement of our foreign currency assets and liabilities as well as unrealized impact on foreign exchange resulting from remeasurement of transactions and monetary assets and liabilities denominated in non-functional currencies; and

•interest income from our investments.

Results of Operations

The following tables set forth selected consolidated statements of operations data and such data as a percentage of total revenues. The historical results presented below are not necessarily indicative of the results that may be expected for any future period (in thousands):

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Percentage of Total Revenues*

* Percentages may not add up due to rounding.

Comparison of Fiscal Years Ended December 31, 2022, 2021, and 2020:

Revenues

Subscriptions revenue. Subscriptions revenue increased by $405.7 million, or 27%, during fiscal year 2022 as compared to fiscal year 2021. The increase was primarily a combination of the acquisition of new customers and upsells of seats and additional offerings to our existing customer base from our MVP and customer engagement solutions, and an increase in recurring license and other fees, derived from sales through our direct and indirect sales channels, including resellers and distributors, strategic partners and global service providers. This growth was primarily driven by an increase in sales to our

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mid-market and enterprise customers as we continue to move up market. Although we expect to continue to add new customers and to increase the usage of our product for existing customers, we will monitor the impact of macroeconomic conditions, strengthening U.S. Dollar, and the effects of the COVID-19 pandemic. Subscriptions revenues included an adverse foreign currency impact of approximately 2% for the year ended December 31, 2022, compared to the respective prior year period. In addition, these macroeconomic factors could have an impact on customer buying behavior and demand, contract duration, churn, upsell and down-sell, payment terms, and credit card declines, all of which could cause variability in our revenue.

Other revenues. Other revenues are primarily comprised of product revenue from the sale of pre-configured phones and professional services.

Other revenues decreased by $12.1 million, or 11%, during fiscal year 2022 as compared to fiscal year 2021, primarily due to the timing of revenue contracts for professional services compared to the prior year. Other revenues included an adverse foreign currency impact of approximately 1% for the year ended December 31, 2022 compared to the prior year. Due to evolving hybrid work environments, we continued to see a shift towards using RingCentral apps on laptops and mobile devices over traditional desktop phones which impacted the demand of phones and timing of professional services. We will continue to monitor the impact of the global economic conditions, and the effects of the COVID-19 pandemic on phone and professional services revenue.

Cost of Revenues and Gross Margin

Subscription cost of revenues and gross margin. Cost of subscriptions revenues increased by $185.2 million, or 54%, during fiscal year 2022 as compared to fiscal year 2021. The higher cost of subscription revenues and lower gross margin were due to incremental amortization of $108.2 million primarily from intangible assets we acquired in the fourth quarter of 2021, third-party costs of $31.8 million to support our solution offerings, infrastructure support costs of $29.2 million, personnel and contractor-related costs of $14.2 million, and professional fees of $1.4 million. Personnel and contractor related costs includes share-based compensation expense of $4.6 million.

The increase in expenses was driven by amortization of intangible assets we acquired in prior year, investments in our infrastructure and capacity to improve the availability of our subscription offerings, while also supporting the growth of new customers and increased usage of our subscriptions by our existing customer base.

Other cost of revenues and gross margin. Cost of other revenues increased by $8.2 million, or 8%, during fiscal year 2022 as compared to fiscal year 2021. The higher cost of other revenues and lower gross margin were primarily due to the increase in professional fees of $5.9 million and personnel costs of $5.0 million, partially offset by a decrease in hardware costs of $3.4 million.

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Research and Development

Research and development expenses increased by $52.5 million, or 17%, during fiscal year 2022 as compared to fiscal year 2021, primarily driven by an increase in personnel and contractor costs of $50.2 million, and $6.8 million in overhead costs to support our research and development efforts, partially offset by a $5.2 million reduction in professional fees. The increase in personnel and contractor costs was mainly driven by $18.5 million in incremental expenses associated with relocation of our third-party contractors as a result of the Russia-Ukraine conflict, $13.3 million related to headcount growth, $7.4 million related to contractor-related costs, $5.8 million related to share-based compensation expense primarily driven by equity awards granted to new and existing employees, and $5.3 million was due to restructuring costs.

The increases in research and development headcount and other expense categories were driven by continued investment in current and future software development projects for our applications. Given the continued emphasis and focus on product innovation, we expect research and development expenses to continue to increase in absolute dollars.

Sales and Marketing

Sales and marketing expenses increased by $203.1 million, or 24%, during fiscal year 2022 as compared to fiscal year 2021, primarily due to increases in third-party commissions of $64.0 million, personnel and contractor costs of $50.9 million, amortization of deferred sales commission costs of $42.4 million, advertising, marketing and related travel costs of $42.2 million, and overhead costs of $4.5 million. Of the total increase in personnel and contractor costs, $18.0 million was attributable to headcount growth, $14.0 million was due to higher share-based compensation expense primarily driven by equity awards granted to new and existing employees, $9.7 million was driven by restructuring costs, and $4.3 million due to contractor-related costs.

The increases in sales and marketing headcount and other expense categories were necessary to support our growth strategy to acquire new customers with a focus on larger customers, and to establish brand recognition to achieve greater penetration into the North America and international markets. Additionally, we expect sales and marketing expenses to continue to increase in absolute dollars as we continue to expand our presence in North America and international markets.

General and Administrative

General and administrative expenses increased by $8.6 million, or 3%, during fiscal year 2022 as compared to fiscal year 2021, primarily due to increases in personnel and contractor costs of $7.9 million, business fees and taxes of $3.6 million, and overhead costs of $1.6 million, partially offset by a $4.4 million reduction in professional fees. Of the total increase in personnel and contractor costs, $3.3 million was mainly due to higher share-based compensation expense primarily driven by equity awards granted to new and existing employees, and $2.7 million was due to restructuring costs.

We expect general and administrative expenses to continue to increase in absolute dollars as we continue to make additional investments in processes, systems, and personnel to support our anticipated revenue growth.

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Asset Write-Down Charges

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Asset write-down charges increased by $283.7 million during fiscal year 2022 as compared to fiscal year 2021, primarily due to the non-cash write-down of our prepaid sales commission balances in the second half of 2022 in connection with our strategic partnerships for Avaya. Refer to Note 5 – Strategic Partnerships and Asset Acquisitions the accompanying notes to the consolidated financial statements included in Part II, Item 8, “Consolidated Financial Statements and Supplementary Data” of this Annual Report on Form 10-K for further information regarding our assessment of our deferred and prepaid sales commission balances with our strategic partners.

Other Income (Expense), Net

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Other expense, net, increased by $152.6 million during fiscal year 2022 as compared to fiscal year 2021, primarily due to incremental net unrealized losses of $188.1 million recognized from our long-term investments, and a write-down charge of $21.7 million related to accrued interest on our prepaid sales commission balance, partially offset by a $59.6 million reduction in non-cash interest expense from the amortization of the debt discount and issuances costs related to our 2025 and 2026 Notes as a result of adopting ASU No. 2020-06 in the first quarter of 2022. The net unrealized losses on our long-term investments were $202.3 million for the year ended December 31, 2022, compared to a loss of $14.2 million recognized in the respective prior year period.

We expect interest income to further fluctuate in the future due to interest rate volatility in the current macroeconomic environment and reduction of our investments in money market funds.

Net Loss

Net loss increased by $502.9 million during fiscal year 2022 as compared to fiscal year 2021, mainly due to non-cash items including $305.4 million related to asset write-down charges on our prepaid sales commission balance, a $188.1 million increase of unrealized net losses recognized from our long-term investments, and $108.2 million of incremental amortization from certain intangible assets we acquired in the prior year, partially offset by a $59.6 million reduction in non-cash interest expense from the amortization of the debt discount and issuances costs related to our 2025 and 2026 Notes as a result of our adoption of ASU No. 2020-06.

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Liquidity and Capital Resources

Liquidity is a measure of our ability to access sufficient cash flows to meet the short-term and long-term cash requirements of our business operations.

We finance our operations primarily through sales to our customers, which could be billed either monthly or annually one year in advance. For customers with annual or multi-year contracts and those who opt for annual invoicing, we generally invoice only one annual period in advance and revenue is deferred for such advanced billings. We also finance our operations from proceeds from issuance of convertible senior notes, proceeds from issuance of convertible preferred stock, and proceeds from issuance of stock under our stock plans.

As of December 31, 2022 and 2021, we had cash and cash equivalents of $270.0 million and $267.2 million, respectively. For the year ended December 31, 2022 our cash flows reflected the following:

In December 2021, our board of directors authorized a share repurchase program to repurchase up to $100 million of our outstanding shares of Class A Common Stock. During the year ended December 31, 2022, we repurchased and subsequently retired 2,297,330 shares of our Class A Common Stock for an aggregate amount of approximately $100 million. We completed our share repurchase program on December 31, 2022.

We believe that our operations, existing liquidity sources as well as capital resources and ability to raise cash through additional financing will satisfy our future cash requirements and obligations for at least the next 12 months. Our future capital requirements will depend on many factors, including revenue growth and costs incurred to support customer growth, acquisitions and expansions, sales and marketing, research and development, increased general and administrative expenses to support the anticipated growth in our operations, and capital equipment required to support our headcount and in support of our co-location data center facilities, repurchase, repayment or otherwise settlement of a portion of our 2025 Notes and/or the 2026 Notes, as well as the impact of the global macroeconomic conditions. Our capital expenditures in future periods are expected to grow in line with our business. We continually evaluate our capital needs and may decide to raise additional capital to fund the growth of our business for general corporate purposes through public or private equity offerings or through additional debt financing. In the future, we may also make investments in or acquire businesses or technologies that could require us to seek additional equity or debt financing. Access to additional capital may not be available or on favorable terms. The uncertainty created by the global economic conditions, including concerns about rising inflation and an associated economic downturn, and the effects of the COVID-19 pandemic may also impact our customers’ ability to pay on a timely basis, which could negatively impact our operating cash flows.

Subsequent Events

Share Repurchase Program

On February 13, 2023, our board of directors authorized a share repurchase program under which we may repurchase up to $175 million of our outstanding shares of Class A Common Stock. Under the program, share repurchases may be made at the our discretion from time to time in open market transactions, privately negotiated transactions, or other means, subject to us maintaining a minimum cash balance. The program does not obligate us to repurchase any specific dollar amount or to acquire any specific number of shares of our Class A Common Stock. The timing and number of any shares repurchased under the program will depend on a variety of factors, including stock price, trading volume, and general business and market conditions. The authorization is effective until December 31, 2023.

Credit Agreement

On February 14, 2023, we entered into a Credit Agreement (the “Credit Agreement”), among the Company, the lenders from time to time party thereto and Bank of America, N.A., as administrative agent and as collateral agent. The Credit Agreement provides for a $200.0 million revolving loan facility, with a $25.0 million sublimit for the issuance of letters of credit, and a $400.0 million delayed draw term loan facility. The obligations under the Credit Agreement and the other loan documents are guaranteed by certain of our material domestic subsidiaries, and secured by substantially all of our personal property and that of such subsidiary guarantors. As of the date of this filing, no loans or letters of credit were outstanding under the Credit Agreement. Refer to Note 16 – Subsequent Events of the notes to the consolidated financial statements included in Part II, Item 8, “Consolidated Financial Statements and Supplementary Data” in this Annual Report on Form 10-K for additional information.

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The proceeds of the loans under the Revolving Facility may be used for working capital and general corporate purposes. To the extent drawn, the proceeds of the loans under the Term Facility must be used to repurchase, repay, acquire or otherwise settle a portion of the 2025 Notes and/or the 2026 Notes.

Cash Flows

The table below provides selected cash flow information for the periods indicated (in thousands):

Net Cash Provided by Operating Activities

Cash used in or provided by operating activities is driven by the timing of customer collections, as well as the amount and timing of disbursements to our vendors, the amount of cash we invest in personnel, marketing, and infrastructure costs to support the anticipated growth of our business, and payments under strategic arrangements.

Net cash provided by operating activities was $191.3 million for the year ended December 31, 2022. The cash flow from operating activities was driven by timing of cash receipts from customers and global service providers, primarily offset by cash payments for personnel related costs and to vendors.

Net cash provided by operating activities for the year ended December 31, 2022, increased by $39.2 million as compared to the year ended December 31, 2021. This change reflects working capital impacts resulting from the timing of payments and collections.

Net Cash Used In Investing Activities

Our primary investing activities have consisted of our capital expenditures and expenditures for internal-use software, intellectual property assets, and long-term investments, partially offset by proceeds from sales of our marketable equity investments. As our business grows, we expect our capital expenditures to continue to increase.

Net cash used in investing activities was $87.2 million for the year ended December 31, 2022, primarily due to capital expenditures including personnel-related costs associated with development of internal-use software of $86.4 million, our acquisition of intellectual property of $4.0 million to complement and support our product development and enhancement initiatives, partially offset by proceeds from the sales of our marketable equity investments of $3.2 million.

Net cash used in investing activities for the year ended December 31, 2022 decreased by $309.6 million as compared to the year ended December 31, 2021. The decrease was primarily due to lower payments of $320.2 million due to our acquisitions of intellectual property and investments in 2021, partially offset by higher payments of $13.8 million related to capital expenditures and internal-use software development.

Net Cash Used In Financing Activities

Our primary financing activities have consisted of the issuance of stock under our stock plans, offset by payments toward the repurchase of our Class A Common Stock and our current financing obligations.

Net cash used in financing activities was $98.2 million for the year ended December 31, 2022, primarily due to payments of $99.8 million to repurchase and retire 2,297,330 shares of our Class A Common Stock pursuant to our share repurchase program, $7.6 million for net taxes paid in connection with our stock plans, and $4.8 million in payments toward our current financing obligations, partially offset by $15.9 million in proceeds from issuance of stock in connection with our stock plans.

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Net cash used in financing activities for the year ended December 31, 2022, decreased by $28.8 million as compared to the year ended December 31, 2021. This decrease was primarily due to lower repayments of $333.6 million from conversion requests and the redemption of our 2023 Notes, partially offset by lower proceeds of $199.4 million from the issuance of our Series A Convertible Preferred Stock, and higher payments of $99.8 million to repurchase and retire 2,297,330 shares of our Class A Common Stock pursuant to our share repurchase program.

Non-GAAP Free Cash Flow

To supplement our statements of cash flows presented on a GAAP basis, we use non-GAAP measures of cash flows to analyze cash flow generated from our operations. We define free cash flow, a non-GAAP financial measure, as GAAP net cash provided by (used in) operating activities plus (subtract) cash paid (received) for strategic partnerships and repayments of convertible notes attributable to debt discount, reduced by purchases of property and equipment and capitalized internal-use software. We believe information regarding free cash flow provides useful information to management and investors in understanding the strength of liquidity and available cash. A limitation of the use of free cash flow is that it does not represent the total increase or decrease in our cash balance for the period. Free cash flow should not be considered in isolation or as an alternative to cash flows from operations, and should be considered alongside our other GAAP-based financial liquidity performance measures, such as net cash provided by (used in) operating activities and our other GAAP financial results.

The following table presents a reconciliation of free cash flow to net cash provided by (used in) operating activities, the most directly comparable GAAP measure, for each of the periods presented (in thousands):

Backlog

We have generally signed new customers contracts with varying length, from month-to-month to multi-year terms for our subscription services. At any point in the contract term, there can be amounts allocated to services that we have not yet contractually performed, which constitute a backlog. Until we meet our performance obligations, we do not recognize them as revenues in our consolidated financial statements. Given the variability in our contract length, we believe that backlog is not a reliable indicator of future revenues and we do not utilize backlog as a key management metric internally.

Deferred Revenue

Deferred revenue primarily consists of the unearned portion of monthly or annual invoiced fees for our subscriptions, which we recognize as revenue in accordance with our revenue recognition policy. For customers with multi-year contracts, we generally invoice for only one monthly or annual subscription period in advance. Therefore, our deferred revenue balance does not capture the full contract value of multi-year contracts. Accordingly, we believe that deferred revenue is not a reliable indicator of future revenues and we do not utilize deferred revenue as a key management metric internally.

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Contractual Obligations

The following summarizes our contractual obligations as of December 31, 2022 (in thousands):

Purchase obligations represent an estimate of open purchase orders and contractual obligations in the normal course of business for which we have not received the goods or services as of December 31, 2022. Although open purchase orders are considered enforceable and legally binding, except for our purchase orders with our inventory suppliers, the terms generally allow us the option to cancel, reschedule, and adjust our requirements based on our business needs prior to the delivery of goods or performance of services. Our purchase orders with our inventory suppliers are non-cancellable. In addition, we have other obligations for goods and services that we enter into in the normal course of business. These obligations, however, are either not enforceable or legally binding, or are subject to change based on our business decisions. The aggregate of these items represents our estimate of purchase obligations.

Indemnification Obligations

Certain of our agreements with sales agents, resellers and customers include provisions for indemnification against liabilities if our products infringe a third-party’s intellectual property rights. To date, we have not incurred any material costs as a result of such indemnification provisions and have not accrued any liabilities related to such obligations in the consolidated financial statements as of December 31, 2022.

Contingencies

We are and may be in the future subject to certain legal proceedings and from time to time may be involved in a variety of claims, lawsuits, investigations, and proceedings relating to contractual disputes, intellectual property rights, employment matters, regulatory compliance matters, and other matters relating to various claims that arise in the normal course of business. We record a provision for a liability when we believe that it is both probable that a liability has been incurred, and the amount can be reasonably estimated. Significant judgment is required to determine both probability and the estimated amount of loss. Such legal proceedings are inherently unpredictable and subject to significant uncertainties, some of which are beyond our control. Should any of these estimates and assumptions change or prove to be incorrect, it could have a significant impact on our results of operations, financial position, and cash flows.

Refer to Note 8 – Commitments and Contingencies of the notes to the consolidated financial statements included in Part II, Item 8, “Consolidated Financial Statements and Supplementary Data” in this Annual Report on Form 10-K for additional information.

Critical Accounting Policies and Estimates

We prepare our consolidated financial statements in accordance with U.S. GAAP. In many cases, the accounting treatment of a particular transaction is specifically dictated by U.S. GAAP and does not require management’s judgment in its application. In other cases, management’s judgment is required in selecting among available alternative accounting standards that provide for different accounting treatment for similar transactions. The preparation of consolidated financial statements also requires us to make estimates and assumptions that affect the amounts we report as assets, liabilities, revenues, costs, and expenses, and affect the related disclosures. We base our estimates on historical experience and other assumptions that we believe are reasonable under the circumstances. In many instances, we could reasonably use different accounting estimates, and in some instances changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, our actual results could differ significantly from the estimates made by our management. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations, and cash flows will be affected. A summary of our significant accounting policies is included in Note 1 of the notes to the

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consolidated financial statements included in Part II, Item 8, which is incorporated herein by reference. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.

Revenue Recognition

We derive our revenues from subscriptions, sale of products, and professional services. Subscriptions revenue is generally recognized over the period of the subscription contract. Subscription contracts generally allow the customers to terminate their services at any time during the first 30 to 60 days of the subscription period and are charged for the term of usage. Upon cancellation during the termination period, customers receive a pro-rata refund for any amounts paid. After the end of the termination period, the contract is non-cancellable and the customer is obligated to pay for the remaining term of the contract. For sale of products, revenue is recognized when control is transferred. For professional services, revenue is recognized as and when services are rendered.

Deferred and Prepaid Sales Commission

We capitalize sales commission expenses and associated payroll taxes paid to internal sales personnel and resellers, who sell our offerings. The resellers are selling agents for us and earn sales commissions which are directly tied to the value of the contracts that we enter with the end-user customers. These sales commissions are incremental costs we incur to obtain contracts with its end-user customers. We pay sales commissions on initial contracts and contracts for increased purchases with existing customers (expansion contracts). We generally do not pay sales commissions for contract renewals. These sales commission costs are deferred and then amortized over the expected period of benefit, which is estimated to be five years. We have determined the period of benefit taking into consideration the expected subscription term and expected renewal periods of its customer contracts, the duration of its relationships with its customers considering historical and expected customer retention, technology and other factors.

We estimate the recoverability of our deferred and prepaid and sales commissions balance whenever events or changes in circumstances have occurred that could indicate the carrying amount of such assets may not be recoverable. We have used various valuation techniques to determine the fair-values of our deferred and prepaid sales commission to measure and allocate an asset write-down charge. Determining valuations using these valuation techniques requires significant judgment and assumptions by management. Different judgments could yield different results.

Recent Accounting Pronouncements

For a summary of recent accounting pronouncements and the anticipated effects on our consolidated financial statements, see Note 1 to the consolidated financial statements included in Part II, Item 8, “Consolidated Financial Statements and Supplementary Data” in this Annual Report on Form 10-K, which is incorporated herein by reference.

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