SEC Filing | Five9, Inc.

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2023


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-36383

Five9, Inc.

(Exact Name of Registrant as Specified in Its Charter)


Delaware						94-3394123
(State or Other Jurisdiction of Incorporation or Organization)						(I.R.S. Employer Identification No.)

3001 Bishop Drive, Suite 350

San Ramon, CA 94583

(Address of Principal Executive Offices) (Zip Code)

(925) 201-2000

(Registrant’s Telephone Number, Including Area Code)

_______________________________

Securities registered pursuant to Section 12(b) of the Act:


Title of Each Class	Trading Symbol(s)	Name of Each Exchange on Which Registered
Common stock, par value $0.001 per share	FIVN	The NASDAQ Global Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes: ☒ No: ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes: ☒ No: ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer

☒

Accelerated Filer

☐

Non-accelerated filer

☐

(Do not check if a smaller reporting Company)

Smaller Reporting Company

☐

Emerging Growth Company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Yes: ☐ No: ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes: ☐ No: ☒

As of October 27, 2023, there were 72,695,935 shares of the Registrant’s common stock, par value $0.001 per share, outstanding.

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FIVE9, INC.

FORM 10-Q

TABLE OF CONTENTS


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS						2

PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements						4
Condensed Consolidated Balance Sheets (Unaudited)						4
Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited)						5
Condensed Consolidated Statements of Stockholder’ Equity (Unaudited)						6
Condensed Consolidated Statements of Cash Flows (Unaudited)						8
Notes to Condensed Consolidated Financial Statements (Unaudited)						9
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations						27
Overview						27
Key Operating and Non-GAAP Financial Performance Metrics						28
Key Components of Our Results of Operations						30
Results of Operations for the Three and Nine Months Ended September 30, 2023 and 2022						31
Liquidity and Capital Resources						34
Critical Accounting Policies and Estimates						36
Recent Accounting Pronouncements						36

Contractual and Other Obligations						36
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk						39
ITEM 4. Controls and Procedures						40

PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings						41
ITEM 1A. Risk Factors						41
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds						42
ITEM 3. Defaults Upon Senior Securities						42
ITEM 4. Mine Safety Disclosures						42
ITEM 5. Other Information						42
ITEM 6. Exhibits						43

SIGNATURES						44

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which involve substantial risks and uncertainties. These statements reflect the current views of our senior management with respect to our future events, strategies and financial trends and performance. These forward-looking statements include statements with respect to our business, expenses, strategies, losses, growth plans, product and client initiatives, market growth projections, and our industry. Statements that include the words “expect,” “intend,” “plan,” “believe,” “project,” “forecast,” “estimate,” “may,” “should,” “anticipate” and similar statements of a future or forward-looking nature identify forward-looking statements for purposes of the federal securities laws or otherwise.

Forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause our actual results to differ materially from those indicated in these statements. These factors include the information under the caption "Risk Factors" set forth in Part 1, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 and Part II, Item 1A, of this Quarterly Report, which we encourage you to carefully read, and include the following:

•adverse economic conditions, including the impact of macroeconomic deterioration, including continuing inflation, increased interest rates, supply chain disruptions, decreased economic output and fluctuations in currency rates, the impact of the Russia-Ukraine conflict, the impact of the conflict in Israel, and other factors, that may continue to harm our business;

•if we are unable to attract new clients or sell additional services and functionality to our existing clients, our revenue and revenue growth will be harmed;

•if our existing clients terminate their subscriptions or reduce their subscriptions and related usage, or fail to grow subscriptions at the rate they have in the past or that we might expect, our revenues and gross margins will be harmed, and we will be required to spend more money to grow our client base;

•because a significant percentage of our revenue is derived from existing clients, downturns or upturns in new sales will not be immediately reflected in our operating results and may be difficult to discern;

•we have established, and are continuing to increase, our network of technology solution brokers and resellers to sell our solution; our failure to effectively develop, manage, and maintain this network could materially harm our revenues;

•our quarterly and annual results may fluctuate significantly, including as a result of the timing and success of new product and feature introductions by us, may not fully reflect the underlying performance of our business and may result in decreases in the price of our common stock;

•our recent rapid growth may not be indicative of our future growth, and even if we continue to grow rapidly, we may fail to manage our growth effectively;

•failure to adequately retain and expand our sales force will impede our growth;

•if we fail to manage our technical operations infrastructure, our existing clients may experience service outages, our new clients may experience delays in the deployment of our solution and we could be subject to, among other things, claims for credits or damages;

•further development of our AI solutions may not be successful and may result in reputational harm and our future operating results could be materially harmed;

•the AI technology and features incorporated into our solution include new and evolving technologies that may present both legal and business risks;

•the use of AI by our workforce may present risks to our business;

•our growth depends in part on the success of our strategic relationships with third parties and our failure to successfully maintain, grow and manage these relationships could harm our business;

•the markets in which we participate involve a high number of competitors that are continuing to increase, and if we do not compete effectively, our operating results could be harmed;

•we continue to expand our international operations, which exposes us to significant macroeconomic and other risks;

•security breaches and improper access to or disclosure of our data or our clients’ data, or other cyber attacks on our systems, could result in litigation and regulatory risk, harm our reputation, our business or financial results;

•we may acquire other companies, or technologies or be the target of strategic transactions, or be impacted by transactions by other companies, which could divert our management’s attention, result in additional

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dilution to our stockholders or use a significant amount of our cash resources and otherwise disrupt our operations and harm our operating results;

•we sell our solution to larger organizations that require longer sales and implementation cycles and often demand more configuration and integration services or customized features and functions that we may not offer, any of which could delay or prevent these sales and harm our growth rates, business and operating results;

•we rely on third-party telecommunications and internet service providers to provide our clients and their customers with telecommunication services and connectivity to our cloud contact center software and any failure by these service providers to provide reliable services could cause us to lose clients and subject us to claims for credits or damages, among other things;

•we have a history of losses and we may be unable to achieve or sustain profitability;

•the contact center software solutions market is subject to rapid technological change, and we must develop and sell incremental and new cloud contact center solutions, which we refer to as our solution, in order to maintain and grow our business;

•our stock price has been volatile, may continue to be volatile and may decline, including due to factors beyond our control;

•we may not be able to secure additional financing on favorable terms, or at all, to meet our future capital needs;

•failure to comply with laws and regulations could harm our business and our reputation; and

•we may not have sufficient cash to service our convertible senior notes and repay such notes, if required.

The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in, or incorporated into, this report. If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, our actual results may differ materially from what we anticipate. You should not place undue reliance on our forward-looking statements. Any forward-looking statements you read in this report reflect our views only as of the date of this report with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategy and liquidity. We undertake no obligation to update any forward-looking statements made in this report to reflect events or circumstances after the date of this report or to reflect new information or the occurrence of unanticipated events, except as required by law.

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PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

FIVE9, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)



	September 30, 2023		December 31, 2022
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	127,828	$	180,520
Marketable investments	572,462		433,743
Accounts receivable, net	94,436		87,494
Prepaid expenses and other current assets	37,627		29,711
Deferred contract acquisition costs, net	58,320		47,242
Total current assets	890,673		778,710
Property and equipment, net	102,029		101,221
Operating lease right-of-use assets	41,522		44,120
Finance lease right-of-use assets	4,612		—
Intangible assets, net	41,469		28,192
Goodwill	227,412		165,420
Marketable investments	—		885
Other assets	16,603		11,057
Deferred contract acquisition costs, net — less current portion	132,124		114,880
Total assets	$	1,456,444	$	1,244,485

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	28,528	$	23,629
Accrued and other current liabilities	59,511		53,092
Operating lease liabilities	11,454		10,626
Finance lease liabilities	1,617		—
Accrued federal fees	3,336		2,471
Sales tax liabilities	2,965		2,973
Deferred revenue	64,565		57,816
Convertible senior notes	—		169
Total current liabilities	171,976		150,776
Convertible senior notes — less current portion	741,169		738,376
Sales tax liabilities — less current portion	919		899
Operating lease liabilities — less current portion	38,336		41,389
Finance lease liabilities — less current portion	3,048		—
Other long-term liabilities	7,126		3,080
Total liabilities	962,574		934,520
Commitments and contingencies (Note 10)
Stockholders’ equity:

Common stock	73		71
Additional paid-in capital	887,087		635,668
Accumulated other comprehensive loss	(798)		(2,688)
Accumulated deficit	(392,492)		(323,086)
Total stockholders’ equity	493,870		309,965
Total liabilities and stockholders’ equity	$	1,456,444	$	1,244,485

See accompanying notes to the unaudited condensed consolidated financial statements.

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FIVE9, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE LOSS

(Unaudited, in thousands, except per share data)



	Three Months Ended				Nine Months Ended
	September 30, 2023		September 30, 2022		September 30, 2023		September 30, 2022
Revenue	$	230,105	$	198,342	$	671,426	$	570,501
Cost of revenue	111,080		94,111		320,197		271,207
Gross profit	119,025		104,231		351,229		299,294
Operating expenses:
Research and development	40,391		34,113		117,709		104,929
Sales and marketing	73,366		67,353		223,757		196,062
General and administrative	31,006		24,496		89,741		72,634
Total operating expenses	144,763		125,962		431,207		373,625
Loss from operations	(25,738)		(21,731)		(79,978)		(74,331)
Other income (expense), net:
Interest expense	(1,972)		(1,879)		(5,683)		(5,606)

Interest income and other	8,233		982		18,477		2,107
Total other income (expense), net	6,261		(897)		12,794		(3,499)
Loss before income taxes	(19,477)		(22,628)		(67,184)		(77,830)
Provision for income taxes	942		579		2,222		3,167
Net loss	$	(20,419)	$	(23,207)	$	(69,406)	$	(80,997)
Net loss per share:
Basic and diluted	$	(0.28)	$	(0.33)	$	(0.97)	$	(1.16)


Shares used in computing net loss per share:
Basic and diluted	72,356		70,232		71,751		69,656


Comprehensive Loss:
Net loss	$	(20,419)	$	(23,207)	$	(69,406)	$	(80,997)
Other comprehensive income (loss)	599		433		1,890		(3,814)
Comprehensive loss	$	(19,820)	$	(22,774)	$	(67,516)	$	(84,811)

See accompanying notes to the unaudited condensed consolidated financial statements.

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FIVE9, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Unaudited, in thousands)


	Common Stock		Additional Paid-In Capital					Accumulated Other Comprehensive Income (Loss)	Accumulated Deficit	Total Stockholders’ Equity
		Shares					Amount
Balance as of June 30, 2022		70,090	$	70	$	535,592				$	(4,534)	$	(286,226)	$	244,902


Issuance of common stock upon partial conversion of the 2023 convertible senior notes		—	—		(16)					—		—		(16)
Partial unwind of capped calls and retirement of common stock related to the 2023 convertible senior notes		—	—		5					—		—		5
Issuance of common stock upon exercise of stock options		68	—		2,353					—		—		2,353
Issuance of common stock upon vesting of restricted stock units		345	1		—					—		—		1

Stock-based compensation		—	—		44,974					—		—		44,974
Other comprehensive income		—	—		—					433		—		433
Net loss		—	—		—					—		(23,207)		(23,207)
Balance as of September 30, 2022		70,503	$	71	$	582,908				$	(4,101)	$	(309,433)	$	269,445

Balance as of June 30, 2023		72,180	$	72	$	832,197				$	(1,397)	$	(372,073)	$	458,799


Issuance of common stock upon exercise of stock options		57	—		1,334					—		—		1,334
Issuance of common stock upon vesting of restricted stock units		459	1		(1)					—		—		—
Issuance of common stock under ESPP		—	—		—					—		—		—
Stock-based compensation		—	—		53,557					—		—		53,557
Other comprehensive income		—	—		—					599		—		599
Net loss		—	—		—					—		(20,419)		(20,419)
Balance as of September 30, 2023		72,696	$	73	$	887,087				$	(798)	$	(392,492)	$	493,870

See accompanying notes to the unaudited condensed consolidated financial statements.

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FIVE9, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Unaudited, in thousands)


	Common Stock		Additional Paid-In Capital					Accumulated Other Comprehensive Income (Loss)	Accumulated Deficit	Total Stockholders’ Equity
		Shares					Amount
Balance as of December 31, 2021		68,488	$	68	$	439,787				$	(287)	$	(228,436)	$	211,132


Issuance of common stock upon partial conversion of the 2023 convertible senior notes		574	—		(275)					—		—		(275)
Partial unwind of capped calls and retirement of common stock related to the 2023 convertible senior notes		(119)	—		8					—		—		8
Issuance of common stock upon exercise of stock options		419	1		5,357					—		—		5,358
Issuance of common stock upon vesting of restricted stock units		1,044	2		—					—		—		2
Issuance of common stock under ESPP		97	—		8,338					—		—		8,338
Stock-based compensation		—	—		129,693					—		—		129,693
Other comprehensive loss		—	—		—					(3,814)		—		(3,814)
Net loss		—	—		—					—		(80,997)		(80,997)
Balance as of September 30, 2022		70,503	$	71	$	582,908				$	(4,101)	$	(309,433)	$	269,445

Balance as of December 31, 2022		71,047	$	71	$	635,668				$	(2,688)	$	(323,086)	$	309,965
Issuance of common stock upon partial conversion of the 2023 convertible senior notes		2	—		—					—		—		—
Settlement at maturity of the outstanding capped calls and retirement of common stock related to the 2023 convertible senior notes		(371)	—		74,453					—		—		74,453
Issuance of common stock upon exercise of stock options		436	—		8,315					—		—		8,315
Issuance of common stock upon vesting of restricted stock units		1,378	2		(1)					—		—		1
Issuance of common stock under ESPP		204	—		9,444					—		—		9,444
Stock-based compensation		—	—		159,208					—		—		159,208
Other comprehensive income		—	—		—					1,890		—		1,890
Net loss		—	—		—					—		(69,406)		(69,406)
Balance as of September 30, 2023		72,696	$	73	$	887,087				$	(798)	$	(392,492)	$	493,870

See accompanying notes to the unaudited condensed consolidated financial statements.

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FIVE9, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)


	Nine Months Ended
	September 30, 2023		September 30, 2022
Cash flows from operating activities:
Net loss	$	(69,406)	$	(80,997)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	35,553		33,650
Amortization of operating lease right-of-use assets	9,234		7,491
Amortization of deferred contract acquisition costs	40,088		29,245
(Accretion of discount) amortization of premium on marketable investments	(7,684)		1,006
Provision for credit losses	795		812
Stock-based compensation	156,721		128,682






Amortization of discount and issuance costs on convertible senior notes	2,793		2,796


Deferred taxes	438		2,076
Change in fair of value of contingent consideration	—		260
Payment of contingent consideration liability in excess of acquisition-date fair value	—		(5,900)

Other	669		503
Changes in operating assets and liabilities:
Accounts receivable	(6,661)		(5,337)
Prepaid expenses and other current assets	(6,537)		(2,228)
Deferred contract acquisition costs	(68,410)		(62,835)
Other assets	(4,892)		(213)
Accounts payable	5,562		1,008
Accrued and other current liabilities	(2,006)		796
Accrued federal fees and sales tax liabilities	877		(2,001)
Deferred revenue	1,544		9,519
Other liabilities	3,616		(2,208)
Net cash provided by operating activities	92,294		56,125
Cash flows from investing activities:
Purchases of marketable investments	(544,713)		(250,278)
Proceeds from sales of marketable investments	971		600
Proceeds from maturities of marketable investments	415,117		321,311
Purchases of property and equipment	(19,941)		(46,028)
Capitalization of software development costs	(5,820)		(2,420)
Cash paid to acquire Aceyus	(80,588)		—

Payments of initial direct costs	—		(282)
Cash paid for an equity investment in a privately-held company	—		(2,000)
Net cash (used in) provided by investing activities	(234,974)		20,903
Cash flows from financing activities:


Repayment of outstanding 2023 convertible senior notes at maturity	(169)		—
Cash received from the settlement at maturity of the outstanding capped calls associated with the 2023 convertible senior notes	74,453		—
Repurchase of a portion of 2023 convertible senior notes, net of costs	—		(34,057)
Proceeds from exercise of common stock options	8,315		5,358
Proceeds from sale of common stock under ESPP	9,444		8,338



Payment of contingent consideration liability up to acquisition-date fair value	—		(18,100)
Payment of holdback related to an acquisition	(500)		—
Payments of finance leases	(496)		—


Net cash provided by (used in) financing activities	91,047		(38,461)
Net (decrease) increase in cash, cash equivalents and restricted cash	(51,633)		38,567
Cash, cash equivalents and restricted cash:
Beginning of period	180,987		91,391
End of period	$	129,354	$	129,958
Supplemental disclosures of cash flow data:
Cash paid for interest	$	1,956	$	1,870
Cash paid for income taxes	$	1,124	$	932
Non-cash investing and financing activities:

Equipment and software purchased and unpaid at period-end	$	11,419	$	13,372
Capitalization of leasehold improvements and furniture and fixtures through non-cash lease incentive	$	—	$	109
Acquisition and related transaction costs accrued at period-end	$	330	$	—
Stock-based compensation included in capitalized software development costs	$	2,487	$	1,011


Reconciliation of Cash, Cash Equivalents and Restricted Cash to the Condensed Consolidated Balance Sheets - Beginning of Period:
Cash and cash equivalents	$	180,520	$	90,878
Restricted cash in other assets	467		513
Total cash, cash equivalents and restricted cash	$	180,987	$	91,391

Reconciliation of Cash, Cash Equivalents and Restricted Cash to the Condensed Consolidated Balance Sheets - End of Period:
Cash and cash equivalents	$	127,828	$	129,492
Restricted cash in other assets	1,526		466
Total cash, cash equivalents and restricted cash	$	129,354	$	129,958

See accompanying notes to the unaudited condensed consolidated financial statements.

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FIVE9, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

1. Description of Business and Summary of Significant Accounting Policies

Five9, Inc. and its wholly-owned subsidiaries (the “Company”) is a provider of cloud software for contact centers. The Company was incorporated in Delaware in 2001 and is headquartered in San Ramon, California. The Company has offices in Europe, Asia and Australia, which primarily provide research, development, sales, marketing, and client support services.

Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. In the opinion of management, the condensed consolidated financial statements reflect all adjustments, which are normal and recurring in nature, necessary for fair financial statement presentation. All intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates

The preparation of condensed consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. The significant estimates made by management affect revenue and related reserves, as well as the fair value of assets acquired and liabilities assumed through business combinations. Management periodically evaluates such estimates and they are adjusted prospectively based upon such periodic evaluation. Actual results could differ from those estimates.

Significant Accounting Policies

There have been no material changes from the significant accounting policies previously disclosed in Part II, Item 8, of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022 as filed with the SEC on February 24, 2023.

Recent Accounting Pronouncements Not Yet Effective

The Company has reviewed or is in the process of evaluating all issued, but not yet effective, accounting pronouncements and does not believe the future adoption of any such accounting pronouncements will cause a material impact on its condensed consolidated financial position, operating results or statements of cash flows.

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2. Revenue

Contract Balances

The following table provides information about accounts receivable, net, deferred contract acquisition costs, net, contract assets and contract liabilities from contracts with customers (in thousands):


	September 30, 2023		December 31, 2022
Accounts receivable, net	$	94,436	$	87,494

Deferred contract acquisition costs, net:
Current	$	58,320	$	47,242
Non-current	132,124		114,880
Total deferred contract acquisition costs, net	$	190,444	$	162,122

Contract assets and contract liabilities:
Contract assets (included in prepaid expenses and other current assets)	$	2,878	$	3,401
Contract liabilities (deferred revenue)	(64,565)		(57,816)
Noncurrent contract liabilities (deferred revenue) (included in other long-term liabilities)	(1,558)		(1,178)
Net contract liabilities	$	(63,245)	$	(55,593)

The Company receives payments from customers based upon billing cycles. Invoice payment terms are usually 30 days or less. Accounts receivable are recorded when the right to consideration becomes unconditional.

Deferred contract acquisition costs are recorded when incurred and are amortized over an estimated customer benefit period of five years.

The Company’s contract assets consist of unbilled amounts typically resulting from professional services revenue recognition when it exceeds the total amounts billed to the customer. The Company’s contract liabilities consist of advance payments and billings in excess of revenue recognized.

In the three and nine months ended September 30, 2023, the Company recognized revenue of $4.3 million and $45.8 million, respectively, related to its contract liabilities at December 31, 2022.

Remaining Performance Obligations

As of September 30, 2023, the aggregate amount of the total transaction price allocated in contracts with original duration of greater than one year to the remaining performance obligations was $1,046.3 million. The Company expects to recognize revenue on approximately three-fourths of the remaining performance obligations over the next 24 months, with the balance recognized thereafter. The Company excludes amounts for remaining performance obligations that are part of contracts with an original expected duration of one year or less. Such remaining performance obligations represent unsatisfied or partially unsatisfied performance obligations.

3. Investments and Fair Value Measurements

Marketable Investments

The Company’s marketable investments have been classified and accounted for as available-for-sale. The Company’s intent is that all marketable investments are available for use in its current operations, including marketable investments with maturity dates greater than one year from September 30, 2023. The Company’s

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marketable investments as of September 30, 2023 and December 31, 2022 were as follows (in thousands):



	September 30, 2023
Short-Term Marketable Investments	Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Certificates of deposit	$	1,206	$	—	$	—	$	1,206
U.S. treasury securities	263,979		10		(903)		263,086
U.S. agency securities	267,458		—		(659)		266,799
Commercial paper	31,412		1		(10)		31,403

Corporate bonds	10,056		—		(88)		9,968
Total	$	574,111	$	11	$	(1,660)	$	572,462



	December 31, 2022
Short-Term Marketable Investments	Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Certificates of deposit	$	747	$	—	$	(13)	$	734
U.S. treasury securities	186,776		8		(1,382)		185,402
U.S. agency and government-sponsored securities	197,597		29		(1,660)		195,966
Commercial paper	25,386		—		—		25,386
Municipal bonds	22,764		—		(145)		22,619
Corporate bonds	3,658		—		(22)		3,636
Total	$	436,928	$	37	$	(3,222)	$	433,743

	December 31, 2022
Long-term Marketable Investments	Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value


U.S. agency securities	$	885	$	—	$	—	$	885


Total	$	885	$	—	$	—	$	885

The following table presents the gross unrealized losses and the fair value for those marketable investments that were in an unrealized loss position for less than 12 months as of September 30, 2023 and December 31, 2022 (in thousands):


	September 30, 2023				December 31, 2022

	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value
Certificates of deposit	$	—	$	—	$	(13)	$	734
U.S. treasury securities	(903)		123,889		(1,382)		126,534
U.S. agency securities	(659)		266,183		(1,660)		172,458
Commercial paper	(10)		28,284		—		—
Municipal bonds	—		—		(145)		12,623
Corporate bonds	(88)		9,969		(22)		3,636
Total	$	(1,660)	$	428,325	$	(3,222)	$	315,985

Although the Company had certain available-for-sale debt securities in an unrealized loss position as of September 30, 2023, no impairment loss was recorded since it did not intend to sell them, did not anticipate a need to sell them, and the decline in fair value was not due to any credit-related factors.

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The amortized cost and fair value of the Company’s marketable investments by contractual maturity as of September 30, 2023 were as follows (in thousands):


	Cost		Fair Value
Due within one year	$	456,826	$	456,282
Due after one year through two years	117,285		116,180
Total	$	574,111	$	572,462

Fair Value Measurements

The Company carries cash equivalents and marketable investments at fair value. Fair value is based on the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:

Level 1 — Observable inputs, which include unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2 — Observable inputs other than Level 1 inputs, such as quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 — Unobservable inputs that are supported by little or no market activity and that are based on management’s assumptions, including fair value measurements determined by using pricing models, discounted cash flow methodologies or similar techniques.

The Company determined the fair value of its Level 1 financial instruments, which are traded in active markets, using quoted market prices for identical instruments.

Marketable investments classified within Level 2 of the fair value hierarchy are valued based on other observable inputs, including broker or dealer quotations or alternative pricing sources. When quoted prices in active markets for identical assets or liabilities are not available, the Company relies on non-binding quotes from its investment managers, which are based on proprietary valuation models of independent pricing services. These models generally use inputs such as observable market data, quoted market prices for similar instruments, historical pricing trends of a security as relative to its peers. To validate the fair value determination provided by its investment managers, the Company reviews the pricing movement in the context of overall market trends and trading information from its investment managers. The Company performs routine procedures such as comparing prices obtained from independent source to ensure that appropriate fair values are recorded.

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The following tables set forth the Company’s assets measured at fair value by level within the fair value hierarchy (in thousands):


	September 30, 2023
	Level 1		Level 2		Level 3		Total
Assets
Cash equivalents
Money market funds	$	34,026	$	—	$	—	$	34,026
Certificates of deposit	—		249		—		249
U.S. treasury securities	11,970		—		—		11,970




Total cash equivalents	$	45,996	$	249	$	—	$	46,245

Marketable investments
Certificates of deposit	$	—	$	1,206	$	—	$	1,206
U.S. treasury securities	263,086		—		—		263,086
U.S. agency securities and government sponsored securities	—		266,799		—		266,799
Commercial paper	—		31,403		—		31,403

Corporate bonds	—		9,968		—		9,968
Total marketable investments	$	263,086	$	309,376	$	—	$	572,462



	December 31, 2022
	Level 1		Level 2		Level 3		Total
Assets
Cash equivalents
Money market funds	$	37,560	$	—	$	—	$	37,560
U.S. treasury securities	19,700		—		—		19,700


Total cash equivalents	$	57,260	$	—	$	—	$	57,260

Marketable investments (short and long-term)
Certificates of deposit	$	—	$	734	$	—	$	734
U.S. treasury securities	185,402		—		—		185,402
U.S. agency and government-sponsored securities	—		196,851		—		196,851
Commercial paper	—		25,386		—		25,386
Municipal bonds	—		22,619		—		22,619
Corporate bonds	—		3,636		—		3,636
Total marketable investments	$	185,402	$	249,226	$	—	$	434,628

As of December 31, 2022, the estimated fair value of the Company’s outstanding 2023 convertible senior notes was $0.3 million. The 2023 convertible senior notes matured on May 1, 2023. As of September 30, 2023 and December 31, 2022, the estimated fair value of the Company's outstanding 2025 convertible senior notes was $698.5 million and $687.1 million, respectively. The fair values were determined based on the quoted price of the convertible senior notes in an inactive market on the last trading day of the reporting period and have been classified as Level 2 in the fair value hierarchy. See Note 6 for further information on the Company’s convertible senior notes.

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In February 2022, the Company made a $2.0 million equity investment in a privately-held company that it does not have the ability to exercise significant influence over. The Company elected the measurement alternative for an equity security without a readily determinable fair value. Accordingly, this investment is accounted for at its cost minus impairment, if any, and is classified within Level 3. If the Company identifies observable price changes in orderly transactions for such investment or a similar investment, it will measure the investment at fair value as of the date that the observable transactions or events occurred.

Except for the $2.0 million equity investment described above, there were no assets or liabilities measured at fair value on a non-recurring basis as of September 30, 2023 and December 31, 2022.

The fair value of the Company’s other financial instruments, including accounts receivable, accounts payable and other current liabilities, approximate their carrying value due to the relatively short maturity of those instruments. The carrying amounts of the Company’s operating and finance leases approximate their fair value, which is the present value of expected future cash payments based on assumptions about current interest rates and the creditworthiness of the Company.

4. Financial Statement Components

Cash and cash equivalents consisted of the following (in thousands):


	September 30, 2023		December 31, 2022
Cash	$	81,583	$	123,260
Certificates of deposit	249		—
Money market funds	34,026		37,560
U.S. treasury securities	11,970		19,700

Total cash and cash equivalents	$	127,828	$	180,520

Accounts receivable, net consisted of the following (in thousands):


	September 30, 2023		December 31, 2022
Trade accounts receivable	$	83,122	$	77,621
Unbilled trade accounts receivable, net of advance client deposits	11,567		10,135
Allowance for credit losses	(253)		(262)
Accounts receivable, net	$	94,436	$	87,494

Prepaid expenses and other current assets consisted of the following (in thousands):


	September 30, 2023		December 31, 2022
Prepaid expenses	$	26,325	$	17,151
Other current assets	8,424		9,159
Contract assets	2,878		3,401

Prepaid expenses and other current assets	$	37,627	$	29,711

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Property and equipment, net consisted of the following (in thousands):


	September 30, 2023		December 31, 2022
Computer and network equipment	$	149,051	$	148,789
Computer software	56,498		50,955
Internal-use software development costs	14,419		6,111
Furniture and fixtures	4,690		3,326
Leasehold improvements	6,042		6,574
Property and equipment	230,700		215,755
Accumulated depreciation and amortization	(128,671)		(114,534)
Property and equipment, net	$	102,029	$	101,221

Depreciation and amortization expense associated with property and equipment was $9.3 million and $26.7 million for the three and nine months ended September 30, 2023, respectively. Depreciation and amortization expense associated with property and equipment was $8.3 million and $24.8 million for the three and nine months ended September 30, 2022, respectively.

Property and equipment capitalized under finance lease obligations consists primarily of computer and network equipment and was immaterial as of September 30, 2023 and December 31, 2022.

Other assets consisted of the following (in thousands):


	September 30, 2023		December 31, 2022
Other assets	$	11,069	$	5,081
Equity investment in a privately-held company	2,000		2,000
Deferred tax assets	3,534		3,976
Total	$	16,603	$	11,057

Accrued and other current liabilities consisted of the following (in thousands):


	September 30, 2023		December 31, 2022
Accrued expenses	$	20,051	$	19,343
Accrued compensation and benefits	39,460		33,749

Accrued and other current liabilities	$	59,511	$	53,092

Other long-term liabilities consisted of the following (in thousands):


	September 30, 2023		December 31, 2022
Deferred revenue	$	1,558	$	1,178
Deferred tax liabilities	463		157
Other long-term liabilities	5,105		1,745

Other long-term liabilities	$	7,126	$	3,080

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5. Goodwill and Intangible Assets

Goodwill of $62.6 million and intangible assets of $22.0 million were recorded as a result of the Company's acquisition of Aceyus, Inc. ("Aceyus") in August 2023. See Note 13 for further details. The following table summarizes the activity in the Company's goodwill and intangible asset balances during the nine months ended September 30, 2023 (in thousands):


	Goodwill		Intangible Assets
Beginning of the period, December 31, 2022	$	165,420	$	28,192
Addition (Aceyus)	61,992		22,150
Amortization	—		(8,873)
End of the period, September 30, 2023	$	227,412	$	41,469

The components of intangible assets were as follows (in thousands):



	September 30, 2023							December 31, 2022
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Weighted Average Remaining Amortization period (Years)	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Weighted Average Remaining Amortization period (Years)
Developed technology	$	75,314	$	(37,472)	$	37,842	5.3	$	56,214	$	(28,881)	$	27,333	3.2
Acquired workforce	470		(470)		—		0.0	470		(470)		—		0.0
Customer relationships	4,150		(1,002)		3,148		4.3	1,600		(741)		859		2.7
Trademarks	1,000		(521)		479		2.9	500		(500)		—		0.0
Total	$	80,934	$	(39,465)	$	41,469	5.2	$	58,784	$	(30,592)	$	28,192	3.2

Amortization expense related to intangible assets was $3.2 million and $8.9 million for the three and nine months ended September 30, 2023, respectively. Amortization expense related to intangible assets was $2.9 million and $8.8 million for the three and nine months ended September 30, 2022, respectively.

As of September 30, 2023, the expected future amortization expense for intangible assets was as follows (in thousands):


Period	Expected Future Amortization Expense
Remaining 2023	$	3,143
2024	10,591
2025	8,660
2026	7,201
2027	2,898
Thereafter	8,976
Total	$	41,469

6. Debt

2025 Convertible Senior Notes and Related Capped Call Transactions

In May and June 2020, the Company issued $747.5 million aggregate principal amount of 2025 convertible senior notes in a private offering, which aggregate principal amount included the exercise in full of the initial purchasers’ option to purchase up to an additional $97.5 million principal amount of the 2025 convertible senior notes. The 2025 convertible senior notes mature on June 1, 2025 and bear interest at a fixed rate of 0.500% per

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annum, payable semiannually in arrears on June 1 and December 1 of each year, beginning on December 1, 2020. The total net proceeds from the issuance of the 2025 convertible senior notes, after deducting initial purchasers' discounts and commissions and estimated debt issuance costs, were approximately $728.8 million.

Each $1,000 principal amount of the 2025 convertible senior notes is initially convertible into 7.4437 shares of the Company’s common stock (the “2025 Conversion Option”), which is equivalent to an initial conversion price of approximately $134.34 per share of common stock, subject to adjustment upon the occurrence of specified events. The initial conversion price represents a premium of approximately 30% to the $103.34 per share closing price of the Company’s common stock on The Nasdaq Global Market on May 21, 2020. The 2025 convertible senior notes are convertible, in multiples of $1,000 principal amount, at the option of the holders prior to the close of business on the business day immediately preceding March 1, 2025, only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on September 30, 2020 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business day period after any five consecutive trading day period (the “2025 Measurement Period”) in which the trading price (as defined in the 2025 Indenture governing the 2025 convertible senior notes) per $1,000 principal amount of the 2025 convertible senior notes for each trading day of the 2025 Measurement Period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate in effect on each such trading day; (3) if the Company calls any or all of the 2025 convertible senior notes for redemption, at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate events. On or after March 1, 2025 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their 2025 convertible senior notes, in multiples of $1,000 principal amount, at the option of the holder regardless of the foregoing circumstances.

Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election. If the Company undergoes a fundamental change (as defined in the indenture governing the 2025 convertible senior notes), subject to certain conditions, holders may require the Company to repurchase for cash all or any portion of their 2025 convertible senior notes, in principal amounts of $1,000 or a multiple thereof, at a fundamental change repurchase price equal to 100% of the principal amount of the 2025 convertible senior notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the fundamental change repurchase date. In addition, following certain corporate events or if the Company issues a notice of redemption, it will, under certain circumstances, increase the conversion rate for holders who elect to convert their notes in connection with such corporate event or during the relevant redemption period.

There have been no changes to the initial conversion price of the 2025 convertible senior notes since issuance. The closing market price of the Company's common stock of $64.30 per share on September 29, 2023, the last trading day during the three months ended September 30, 2023, was below $174.64 per share, which represents 130% of the initial conversion price of $134.34 per share. Additionally, the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day, September 29, 2023, was not greater than or equal to 130% of the initial conversion price. As such, during the three months ended September 30, 2023, the conditions allowing holders of the 2025 convertible senior notes to convert were not met. The 2025 convertible senior notes are therefore not convertible during the three months ending December 31, 2023.

The 2025 convertible senior notes became redeemable at the Company's option on June 6, 2023. The Company may redeem for cash all or any portion of the 2025 convertible senior notes, at its option, prior to March 1, 2025, if the last reported sale price of its common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending not more than two trading days immediately preceding the date on which the Company provides notice of redemption at a redemption price equal to 100% of the principal amount of the 2025 convertible senior notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. No sinking fund is provided for the 2025 convertible senior notes. During the three months ended September 30, 2023, the conditions allowing the Company to redeem for cash all or any portion of the 2025 convertible senior notes were not met.

The 2025 convertible senior notes are the Company’s senior unsecured obligations and rank senior in right of payment to any of the Company’s indebtedness that is expressly subordinated in right of payment to the 2025 convertible senior notes; equal in right of payment to any of the Company’s unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of the Company’s secured indebtedness to the extent of

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the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities (including trade payables) of the Company’s subsidiaries.

The net carrying amount of the 2025 convertible senior notes as of September 30, 2023 and as of December 31, 2022 was as follows (in thousands):


	September 30, 2023		December 31, 2022
Principal	$	747,500	$	747,500

Unamortized issuance costs	(6,331)		(9,124)
Net carrying amount	$	741,169	$	738,376

Interest expense related to the 2025 convertible senior notes was as follows (in thousands):