WORKIVA INC (WK) FY 2022 MD&A

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of our operations should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Annual Report. In addition to historical consolidated financial information, this discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to these differences include, but are not limited to, those identified below, and those discussed in “Section 1A. Risk Factors” included elsewhere in this Annual Report.

Overview

Workiva simplifies complex work for thousands of organizations worldwide. We are a leading provider of cloud-based compliance and regulatory reporting solutions that are designed to solve business challenges at the intersection of data, process and people.

Workiva changes the way enterprises manage and report business data. Our open, intelligent and intuitive platform is based on single instance, multi-tenant software applications deployed in the cloud. Our platform connects data, documents and teams, which results in improved efficiency, greater transparency and reduced risk of errors. We offer customers controlled collaboration, data linking, data integrations, granular permissions, process management and a full audit trail on our proprietary platform.

Customers use our platform to create, review and publish data-linked documents and reports with greater control, consistency, accuracy and productivity. Customers collaborate in the same document simultaneously, which improves efficiency and version control. Our platform is flexible and scalable, so customers can easily adapt it to define, automate and change their business processes in real time.

Our platform lets our customers connect data from Enterprise Resource Planning (“ERP”), Governance, Risk and Compliance (“GRC”), Human Capital Management (“HCM”) and Customer Relationship Management (“CRM”) systems, as well as other third-party cloud and on-premise applications.

While our customers use our platform for dozens of different use cases, our sales and marketing resources are organized into four solution groups: Financial Reporting, ESG, GRC and Industry Verticals.

We operate our business on a Software-as-a-Service (“SaaS”) model. Customers enter into annual and multi-year subscription contracts to gain access to our platform. Our subscription fee includes the use of our software and technical support. Our subscription pricing is based primarily on a solution-based licensing model. Under this model, operating metrics related to a customer’s expected use of each solution determine the price. We charge customers additional fees primarily for document setup and XBRL tagging services.

We generate sales primarily through our direct sales force and, to a lesser extent, our customer success and professional services teams. In addition, we augment our direct sales channel with partnerships. Our advisory and service partners offer a wider range of domain and functional expertise that broadens the capabilities of our platform, bringing scale and support to customers and prospects. Our technology partners enable more data and process integrations to help customers connect critical transactional systems directly to our platform.

We continue to invest in the development of our solutions, infrastructure and sales and marketing to drive long-term growth. Our full-time employee headcount expanded to 2,447 at December 31, 2022 from 2,106 at December 31, 2021, an increase of 16.2%.

We have achieved significant revenue growth in recent periods. Our revenue grew to $537.9 million in 2022 from $443.3 million in 2021, an increase of 21.3%. We incurred net losses of $90.9 million and $37.7 million in 2022 and 2021, respectively.

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While we continue to see growth in our total revenues, macroeconomic factors have impacted our business and our customers’ businesses in ways that are difficult to isolate and quantify. During the course of 2022, we have seen more measured buying behavior from our customers resulting in elongated sales cycles. Slower growth in new business in any given period could negatively affect our revenues or operating margins in future periods, particularly if experienced on a sustained basis.

In addition, the expanding international scope of our business and the heightened volatility of global markets, expose us to the risk of fluctuations in foreign currency markets. Foreign currency fluctuations have negatively impacted year over year revenue growth. Recently the United States Dollar has strengthened against certain foreign currencies in the markets in which we operate, particularly against the Euro and British Pound Sterling. If these conditions continue throughout fiscal 2023, they could have a material adverse impact on our near-term results and our ability to accurately predict our future results and earnings.

We continue to invest for future growth and are focused on several key drivers, including focusing on multi-solution adoption by new and existing customers, further developing our partner program, accelerating international expansion and our fit-for-purpose solutions. These growth drivers often require a more sophisticated go-to-market approach and, as a result, we may incur additional costs upfront to obtain new customers and expand our relationships with existing customers, including additional sales and marketing expenses.

Recent Business Developments

On April 1, 2022, we acquired all of the issued and outstanding equity interests in ParsePort ApS, a leading solution provider for the ESEF financial reporting mandate, which complements Workiva's cloud platform.

On December 29, 2021, we acquired all of the equity interest in Mark V Systems Limited, a California corporation (“Mark V Systems”) and owner of Arelle, the leading open-source XBRL validation engine. As the global standard, Arelle is used by a community of over 50 global regulators, banks and technology companies that depend on it for data quality and comparison. Workiva is committed to working with the XBRL community to keep Arelle open-sourced and collaborating for the advancement of this important validation engine.

On December 10, 2021, we acquired all of the membership interests in AuditNet, LLC (“AuditNet”), a global audit content and services provider, which strengthens Workiva’s risk and assurance offerings.

On July 30, 2021, we acquired all of the equity interest in OneCloud, Inc., an integration platform as a service (“iPaaS”) company, in order to extend our integration and data preparation capabilities. See Note 12 to the consolidated financial statements for more information on our acquisitions.

Impact of COVID-19

Although the COVD-19 pandemic persists, we do not believe that it has adversely affected our business. We have been able to maintain business continuity and have experienced no pandemic-related employee furloughs or layoffs. We have remote-work options available for most employees, while permitting in-person collaboration at our various offices. We continue to monitor and update our practices in response to changes in the COVID-19 workplace safety and health standards established by the Occupational Safety and Health Administration (“OSHA”) and guidance provided by the Centers for Disease Control and Prevention (“CDC”).

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COVID-19 variants continue to develop and spread, and there is therefore the possibility of future disruption to Workiva’s operations. The impact of any disruption is dependent upon a number of factors including the duration and severity of any COVID-19 resurgence, its impact on the overall economy and specific industry sectors, vaccination rates and the longer-term efficacy of vaccinations. We will continue to evaluate the nature and extent of the impact of the COVID-19 pandemic on our business.

Effects of Volatility in the IPO/SPAC Markets

In the United States, volatility in the public markets led to a decrease in the number of initial public offerings (“IPOs”) and special-purpose acquisition companies (“SPACs”) in 2022. New sales of our SEC and capital markets solutions were adversely affected by this decline in the IPO and SPAC markets. We expect reduced valuation multiples caused by higher interest rates, inflation, and geopolitical instability to continue to negatively impact the number of IPOs and SPACs in fiscal year 2023. Accordingly, we expect this volatility to continue to apply pressure to new sales of our SEC and capital markets solutions. Whether and to what extent the IPO and SPAC markets will moderate cannot be accurately predicted.

Key Factors Affecting Our Performance

Generate Growth From Existing Customers. The Workiva platform can exhibit a powerful network effect within an enterprise, meaning that the usefulness of our platform attracts additional users. Since solution-based licensing offers our customers an unlimited number of seats for each solution purchased, we expect customers to add more seats over time. As more employees in an enterprise use our platform, additional opportunities for collaboration and automation drive demand among their colleagues for additional solutions.

Pursue New Customers. We sell to organizations that manage large, complex processes with distributed teams of contributors and disparate sets of business data. We market our platform to professionals and executives in the areas of financial and non-financial reporting, including regulatory, multi-entity and performance reporting. In addition, we market to teams responsible for environmental, social and governance reporting, and governance, risk and compliance programs. We intend to continue to build our sales and marketing organization and leverage our brand equity to attract new customers.

Offer More Solutions. We intend to introduce new solutions to continue to meet growing demand for our platform. Our close and trusted relationships with our customers are a source for new use cases, features and solutions. We have a disciplined process for tracking, developing and releasing new solutions that are designed to have immediate, broad applicability; a strong value proposition; and a high return on investment for both Workiva and our customers. Our advance planning team assesses customer needs, conducts industry-based research and defines new markets. This vetting process involves our sales, product marketing, customer success, professional services, research and development, finance and senior management teams.

Expand Across Enterprises. Our success in delivering multiple solutions has created demand from customers for a broader-based, enterprise-wide Workiva platform. In response, we have been improving our technology and realigning sales and marketing to capitalize on our growing enterprise-wide opportunities. We believe this expansion will add seats and revenue and continue to support our high revenue retention rates. However, we expect that enterprise-wide deals will be larger and more complex, which tend to lengthen the sales cycle.

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Add Partners. We continue to expand and deepen our relationships with global and regional partners, including consulting firms, system integrators, large and mid-sized independent software vendors, and implementation partners. Our advisory and service partners offer a wider range of domain and functional expertise that broadens our platform’s capabilities and promotes Workiva as part of the digital transformation projects they drive for their customers. Our technology partners enable powerful data and process integrations to help customers connect critical transactional systems directly to our platform, with powerful linking, auditability and control features. We believe that our partner ecosystem extends our global reach, accelerates the usage and adoption of our platform, and enables more efficient delivery of professional services.

Investment in growth. We plan to continue to invest in the development of our platform, fit-for-purpose solutions and application marketplace to enhance our current offerings and build new features. In addition, we expect to continue to invest in our sales, marketing, professional services and customer success organizations to drive additional revenue and support the needs of our growing customer base and to take advantage of opportunities that we have identified in EMEA and APAC.

Seasonality. Our revenue from professional services has some degree of seasonality. Many of our customers employ our professional services just before they file their Form 10-K, often in the first calendar quarter. As of December 31, 2022, the majority of our SEC customers reported their financials on a calendar-year basis. Our sales and marketing expense also has some degree of seasonality. With the exception of September 2020 and September 2021 when we transitioned to a virtual event, sales and marketing expense has historically been higher in the third quarter due to our annual user conference in September, which was held as a hybrid in-person/virtual event in 2022. In addition, the timing of the payments of cash bonuses to employees during the first and fourth calendar quarters may result in some seasonality in operating cash flow.

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Key Performance Indicators

Total customers. We believe total number of customers is a key indicator of our financial success and future revenue potential. We define a customer as an entity with an active subscription contract as of the measurement date. Our customer is typically a parent company or, in a few cases, a significant subsidiary that works with us directly. Companies with publicly-listed securities account for a substantial majority of our customers. As of December 31, 2022, our total customer count includes 922 ParsePort ESEF customers.

Subscription and support revenue retention rate. We calculate our subscription and support revenue retention rate based on all customers that were active at the end of the same calendar quarter of the prior year (“base customers”). We begin by annualizing the subscription and support revenue recorded in the same calendar quarter of the prior year for those base customers who are still active at the end of the current quarter. We divide the result by the annualized subscription and support revenue in the same quarter of the prior year for all base customers.

Our subscription and support revenue retention rate was 97.8% as of December 31, 2022, up from 97.0% as of December 31, 2021. We believe that our success in maintaining a high rate of revenue retention is attributable primarily to our robust technology platform and strong customer service. Customers whose securities were deregistered due to merger or acquisition or financial distress accounted for just over half of our revenue attrition in the latest quarter. Our subscription and support revenue retention rate as of December 31, 2022 does not include ParsePort due to lack of comparable data in the prior year.

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Subscription and support revenue retention rate including add-ons. Add-on revenue includes the change in both solutions and pricing for existing customers. We calculate our subscription and support revenue retention rate including add-ons by annualizing the subscription and support revenue recorded in the current quarter for our base customers that were active at the end of the current quarter. We divide the result by the annualized subscription and support revenue in the same quarter of the prior year for all base customers.

Our subscription and support revenue retention rate including add-ons was 108.5% as of the year ended December 31, 2022, down from 110.0% as of December 31, 2021. There has been downward pressure on this key performance indicator as the IPO/SPAC market slowed in 2022 and customers that purchased higher priced capital markets solutions throughout 2021 transitioned to more moderately priced ongoing solutions in 2022. Our subscription and support revenue retention rate including add-ons as of December 31, 2022 does not include ParsePort due to lack of comparable data in the prior year.

Annual contract value. Our annual contract value (“ACV”) for each customer is calculated by annualizing the subscription and support revenue recognized during each quarter. We believe the increase in the number of larger contracts shows our progress in expanding our customers’ adoption of our platform. Our ACV metrics as of December 31, 2022 include information related to ParsePort.

Components of Results of Operations

Revenue

We generate revenue through the sale of subscriptions to our cloud-based software and the delivery of professional services. We serve a wide range of customers in many industries, and our revenue is not concentrated with any single customer or small group of customers. For each of the years ended December 31, 2022, 2021 and 2020, no single customer represented more than 1% of our revenue, and our largest 10 customers accounted for less than 5% of our revenue in the aggregate.

We generate sales directly through our sales force and partners. We also identify some sales opportunities with existing customers through our customer success and professional services teams.

Our customer contracts typically range in length from twelve to 36 months. We typically invoice our customers for subscription fees annually in advance. For contracts with a two or three year term, customers sometimes elect to pay the entire multi-year subscription term in advance. Our arrangements do not contain general rights of return.

Subscription and Support Revenue. We recognize subscription and support revenue on a ratable basis over the contract term beginning on the date that our service is made available to the customer. Amounts that are invoiced are initially recorded as deferred revenue.

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Professional Services Revenue. We believe our professional services facilitate the sale of our subscription service to certain customers. To date, most of our professional services have consisted of document set up, XBRL tagging, and consulting to help our customers with business processes and best practices for using our platform. Our professional services are not required for customers to utilize our solution. We recognize revenue for document set ups when the service is complete and control has transferred to the customer. Revenues from XBRL tagging and consulting services are recognized as the services are performed.

Cost of Revenue

Cost of revenue consists primarily of personnel and related costs directly associated with our professional services, customer success teams and training personnel, including salaries, benefits, bonuses, and stock-based compensation; the costs of contracted third-party vendors; the costs of server usage by our customers; information technology costs; and facility costs. Costs of server usage are comprised primarily of fees paid to Amazon Web Services.

Sales and Marketing Expenses

Sales and marketing expenses consist primarily of personnel and related costs, including salaries, benefits, bonuses, commissions, travel, and stock-based compensation. Other costs included in this expense are marketing and promotional events, our annual user conference, online marketing, product marketing, information technology costs, and facility costs. We pay sales commissions for initial contracts and expansions of existing customer contracts. When the relevant amortization period is one year or less, we expense sales commissions as incurred. All other sales commissions are considered incremental costs of obtaining a contract with a customer and are deferred and amortized on a straight-line basis over a period of benefit that we have determined to be three years.

Research and Development Expenses

Research and development expenses consist primarily of personnel and related costs, including salaries, benefits, bonuses, and stock-based compensation; costs of server usage by our developers; information technology costs; and facility costs.

General and Administrative Expenses

General and administrative expenses consist primarily of personnel and related costs for our executive, finance and accounting, legal, human resources, and administrative personnel, including salaries, benefits, bonuses, and stock-based compensation; legal, accounting, and other professional service fees; other corporate expenses; information technology costs; and facility costs.

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Results of Operations

The following table sets forth selected consolidated statement of operations data for each of the periods indicated:

(1) Stock-based compensation expense included in these line items was as follows:

The following table sets forth our consolidated statement of operations data as a percentage of revenue for each of the periods indicated:

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Revenue

Comparison of Years Ended December 31, 2022 and 2021

Total revenue increased $94.6 million in 2022 compared to 2021 due primarily to the increase in subscription and support revenue of $85.6 million. Growth in subscription and support revenue in 2022 was attributable mainly to strong demand and continued solution expansion across our customer base. The total number of our customers increased 31.3% from December 31, 2021 to December 31, 2022. Professional services revenue increased $9.0 million due primarily to growth in revenue from XBRL professional services.

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Cost of Revenue

Comparison of Years Ended December 31, 2022 and 2021

Cost of revenue increased $26.1 million in 2022 compared to 2021 due primarily to $18.0 million in higher cash-based compensation and benefits due in part to increased headcount, $1.0 million of additional stock-based compensation, a $3.4 million increase in the cost of cloud infrastructure services, a $1.4 million increase in travel expense, $0.8 million increase in outsourced service fees, and a $1.4 million increase in information technology and facility costs in support of our employees. The increases in headcount, cloud infrastructure services, and outsourced service fees resulted primarily from our continued investment in and support of our platform and solutions. The increase in travel expense was due to a return to travel as travel restrictions and company policies originally implemented in response to the COVID-19 pandemic ease.

Operating Expenses

Comparison of Years Ended December 31, 2022 and 2021

Research and Development

Research and development expenses increased $36.0 million in 2022 compared to 2021 due primarily to $21.5 million in higher cash-based compensation and benefits, $3.0 million of additional stock-based compensation, a $2.8 million increase in the cost of cloud infrastructure services, a $2.8 million increase in travel expense, a $2.4 million increase related to the amortization of acquisition-related intangible assets, a $1.9 million increase in information technology and facility costs in support of our research development organization, and a $1.6 million increase related to consulting fees. The increase in cash-based compensation and stock-based compensation were due primarily to an increase in employee headcount. The increase in cloud infrastructure services and consulting fees resulted primarily from our continued investment in and support of our platform and solutions. The increase in travel expense was due to a return to travel as travel restrictions and company policies originally implemented in response to the COVID-19 pandemic ease.

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Sales and Marketing

Sales and marketing expenses increased $66.5 million in 2022 compared to 2021 due primarily to $42.7 million in higher cash-based compensation and benefits, $5.4 million of additional stock-based compensation, a $5.5 million increase in the cost of marketing programs, a $5.7 million increase in travel expense, a $1.9 million increase related to the amortization of acquisition-related intangible assets, and a $3.8 million increase in information technology and facility costs in support of sales and marketing. The increase in cash-based compensation was due primarily to an increase in employee headcount. During 2022, we recognized an additional $1.4 million in stock-based compensation pursuant to certain severance obligations. The increase in the cost of marketing programs was due to an increase in-person events as well as costs related to our annual user conference. The increase in travel expense was due to a return to travel as travel restrictions and company policies originally implemented in response to the COVID-19 pandemic ease.

General and Administrative

General and administrative expenses increased $25.5 million in 2022 compared to 2021, due primarily to $3.4 million in higher cash-based compensation and benefits, $12.5 million of additional stock-based compensation, a $1.8 million increase in travel expense, a $0.9 million increase in software expense, and a $4.9 million increase related to consulting, recruiting, and professional services fees. The increase in cash-based compensation was due to an increase in employee headcount. During 2022 we recognized an additional $3.8 million in stock-based compensation pursuant to certain severance agreements. The remaining increase in stock-based compensation was due primarily to increased employee headcount in addition to the issuance of performance-based stock units to our executives. The increases in software, consulting, recruiting and professional service fees were the result of our continued investment in and support of our platform and solutions. The increase in travel expense was due to a return to travel as travel restrictions and company policies originally implemented in response to the COVID-19 pandemic ease.

Non-Operating Income (Expenses)

Comparison of Years Ended December 31, 2022 and 2021

Interest income increased $3.8 million in 2022 compared to 2021 due primarily to higher interest rates on investments. Interest expense decreased $8.0 million in 2022 compared to 2021 due primarily to our adoption of ASU 2020-06 in 2022 which resulted in the reduction of non-cash interest expense. Other income, net decreased $2.3 million in 2022 compared to 2021 due primarily to a $3.7 million gain recognized upon the settlement of our equity interest in OneCloud in 2021 which did not recur in 2022.

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Results of Operations for Fiscal 2021 Compared to 2020

For a comparison of our results of operations for the fiscal years ended December 31, 2021 and 2020, see “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our annual report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on February 22, 2022.

Liquidity and Capital Resources

Overview of Sources and Uses of Cash

As of December 31, 2022, our principal sources of liquidity were cash, cash equivalents, and marketable securities totaling $430.8 million, which were held for working capital purposes. We have financed our operations primarily through the proceeds of offerings of equity, convertible debt, and cash from operating activities. We have generated significant operating losses and negative cash flows as reflected in our accumulated deficit and consolidated statements of cash flows. While we expect to continue to incur operating losses and may incur negative cash flows from operations in the future, we believe that current cash and cash equivalents and cash flows from operating activities will be sufficient to fund our operations for at least the next twelve months from the date of the issuance of the audited consolidated financial statements.

Convertible Debt

In August 2019, we issued $345.0 million aggregate principal amount of 1.125% convertible senior notes due 2026, including the exercise in full by the initial purchasers of their option to purchase an additional $45.0 million principal amount. The Notes are senior, unsecured obligations and bear interest at a fixed rate of 1.125% per annum, payable semi-annually in arrears on February 15 and August 15 of each year, commencing on February 15, 2020. Proceeds from the issuance of the Notes totaled $335.9 million, net of initial purchaser discounts and issuance costs.

Cash Flows

The following table summarizes cash flow activity during the years ended December 31, 2022, 2021 and 2020 (in thousands):

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Operating Activities

For the year ended December 31, 2022, cash provided by operating activities was $11.3 million. The primary factors affecting our operating cash flows during the period were our net loss of $90.9 million, adjusted for non-cash charges of $10.2 million for depreciation and amortization of our property and equipment and intangible assets, $70.7 million of stock-based compensation expense, $1.3 million for the amortization of our debt issuance costs, $1.1 million for the amortization of premiums and discounts on marketable securities, and an $18.3 million net change in operating assets and liabilities. The primary drivers of the changes in operating assets and liabilities were a $28.9 million increase in accounts receivable, an $8.5 million increase in deferred costs, a $1.7 million increase in other receivables, a $2.9 million increase in prepaid expenses, a $2.4 million increase in other assets, and a $1.5 million decrease in accrued expenses and other liabilities offset by a $2.4 million increase in accounts payable and a $61.7 million increase in deferred revenue. Customer growth accounted for most of the increase in deferred revenue. The increases in accounts receivable, prepaid expenses, other assets and account payable as well as the decrease in accrued expenses and other liabilities were attributable primarily to the timing of our billings, cash collections, and cash payments. The increase in other receivables was attributable primarily to an increase in our refundable research and development tax credit. The increase in deferred costs was primarily due to additional payments made to our sales force related to the direct and incremental costs of obtaining a customer contract.

For the year ended December 31, 2021, cash provided by operating activities was $49.8 million. The primary factors affecting our operating cash flows during the period were our net loss of $37.7 million, adjusted for non-cash charges of $5.2 million for depreciation and amortization of our property and equipment and intangible assets, $48.6 million of stock-based compensation, $9.2 million for the amortization of our debt discount and issuance costs, $3.0 million for the amortization of premiums and discounts on marketable securities, and a $27.3 million net change in operating assets and liabilities partially offset by a gain on the settlement of equity securities of $3.7 million and deferred income tax of $2.0 million. The primary drivers of the changes in operating assets and liabilities were a $19.2 million increase in deferred costs, a $7.7 million increase in accounts receivable, and a $6.5 million increase in prepaid expenses and other, offset by a $47.4 million increase in deferred revenue and a $14.7 million increase in accrued expenses and other liabilities. Customer growth as well as the prior year impact of the COVID-19 pandemic accounted for most of the increase in deferred revenue. We offer limited incentives for customers to enter into contract terms for more than one year. The increases in accounts receivable and accrued expenses and other liabilities were attributable primarily to the timing of our billings, cash collections, and cash payments. The increase in prepaid expenses was attributable primarily to the timing of annual contracts. The increase in deferred contract costs was primarily due to additional payments made to our sales force related to the direct and incremental costs of obtaining a customer contract.

Investing Activities

Cash used in investing activities of $68.0 million for the year ended December 31, 2022 was due primarily to $130.8 million in purchases of marketable securities, $99.2 million for the acquisition of ParsePort, and $3.5 million in purchases of fixed assets partially offset by $150.6 million from the maturities of marketable securities as well as $15.0 million from the sale of marketable securities. Our capital expenditures were associated primarily with computer equipment in support of expanding our infrastructure and work force.

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Cash used in investing activities of $68.6 million for the year ended December 31, 2021 was due primarily to $170.1 million for the purchase of marketable securities, $37.5 million for acquisitions, net of cash acquired, and $3.5 million of capital expenditures, partially offset by $143.2 million from the maturities of marketable securities. Our capital expenditures were associated primarily with computer equipment in support of expanding our infrastructure and work force.

Financing Activities

Cash used in financing activities of $1.6 million for the year ended December 31, 2022 was due primarily to $12.5 million in taxes paid related to net share settlements of stock-based compensation awards and $1.6 million in principal payments on finance lease obligations partially offset by $9.3 million in proceeds from shares issued in connection with our employee stock purchase plan and $3.3 million in proceeds from option exercises.

Cash used in financing activities of $3.4 million for the year ended December 31, 2021 was due primarily to $16.6 million in proceeds from option exercises and $8.9 million in proceeds from shares issued in connection with our employee stock purchase plan, offset by $27.1 million in taxes withheld related to net share settlement of our stock-based compensation awards and an aggregate $1.7 million in payments on finance lease obligations.

Contractual Obligations and Commitments

The following table represents our contractual obligations as of December 31, 2022, aggregated by type:

Total future payments related to our Convertible Senior Notes due 2026 shown in the table above includes $345.0 million principal amount and future interest payments of $15.5 million. For more information on our convertible senior notes, refer to Note 8 of our accompanying Notes to the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.

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We lease certain office space, residential space, buildings and land with various lease terms which are primarily accounted for as operating leases. We have entered into a lease agreement for land and an office building in Ames, Iowa, which was constructed in two phases, and is accounted for as a finance lease. The lease term includes an initial 15-year term and three five-year extensions at our option because renewal was determined to be reasonably assured at the inception of the lease. The lease contains purchase options to acquire the landlord’s interest in the land lease and building at any time beginning three years from June 2014 (the commencement date of the second phase of the lease). In addition, the lease requires us to purchase the building from the landlord upon certain events, such as a change in control.

We enter into certain non-cancelable agreements with third-party providers in the ordinary course of business. Our total commitments under these agreements are $40.0 million and are primarily for cloud infrastructure and cloud services. These amounts are included in the table above under “other contractual commitments”.

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Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, provision for income taxes and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions.

We believe that of our significant accounting policies, which are described in Note 1 to our consolidated financial statements, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of our operations.

Revenue Recognition

We generate revenue through the sale of our cloud-based software and the delivery of professional services. Revenues are recognized when control of these services is transferred to our customers in an amount that reflects the consideration we expect to be entitled to in exchange for those services.

We determine revenue recognition through the following steps:

•Identification of the contract, or contracts, with a customer

•Identification of the performance obligations in the contract

•Determination of the transaction price

•Allocation of the transaction price to the performance obligations in the contract

•Recognition of revenue when, or as, we satisfy a performance obligation

Subscription and Support Revenue

We recognize subscription and support revenue on a ratable basis over the contract term beginning on the date that our service is made available to the customer. Our subscription contracts are generally twelve to 36 months in duration, are billed either annually or in advance and are non-cancelable. We consider the access to our platform and related support services in a customer contract to be a series of distinct services which comprise a single performance obligation because they are substantially the same and have the same pattern of transfer.

Professional Services Revenue and Customer Options

Professional services revenues primarily consist of fees for document set up, XBRL tagging, and consulting with our customers on business processes and best practices for using our platform. We have determined that an agreement to purchase these professional services constitutes an option to purchase services in accordance with ASC 606 rather than an agreement that creates enforceable rights and obligations because of the customer’s contractual right to cancel services that have not yet been used. In the limited case of agreements where we determined that the option provides the customer with a material right, we allocate a portion of the transaction price to the material right based upon the relative standalone selling price. Professional service agreements that do not contain a material right are accounted for when the customer exercises its option to purchase additional services.

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Revenue is recognized for document set ups when the service is complete and control has transferred to the customer. Revenues from XBRL tagging and consulting services are recognized as the services are performed.

Our professional services revenue is higher in the first calendar quarter because many of our customers employ our professional services just before they file their Form 10-K.

Contracts with Multiple Performance Obligations

Some of our contracts with customers contain multiple performance obligations. For these contracts, we account for the individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. We determine the standalone selling prices based on our overall pricing objectives, taking into consideration market conditions and entity-specific factors, including the value of our arrangements, length of term, customer demographics and the numbers and types of users within our arrangements.

While changes in assumptions or judgments or changes to the elements of the arrangement could cause an increase or decrease in the amount of revenue that we report in a particular period, these changes have not historically been significant because our recurring revenue is primarily subscription and support revenue.

Acquisitions

We account for acquisitions under Accounting Standards Codification 805, Business Combinations. In general, the acquisition method of accounting requires companies to record assets acquired and liabilities assumed at their respective fair market values at the date of acquisition. Determining the fair value of assets acquired and liabilities assumed requires significant judgment and estimates, including the selection of valuation methodologies, estimates of future revenue, earnings before interest, tax, depreciation and amortization margins, and discount rates. We engage the assistance of third-party valuation specialists in concluding on fair value measurements in connection with determining fair values of assets acquired and liabilities assumed in a business combination. Any amount of the purchase price paid that is in excess of the estimated fair values of net assets acquired is recorded as goodwill in our consolidated balance sheets. Transaction costs, as well as costs to reorganize acquired companies, are expensed as incurred in our consolidated statement of operations. Although we believe that the judgments and estimates discussed herein are reasonable, actual results could differ, and we may be exposed to an impairment charge if we are unable to recover the value of the recorded net assets.

Recent Accounting Pronouncements

Refer to Note 1 of the notes to consolidated financial statements for a full description of recent accounting pronouncements.

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