SQUARESPACE, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)
The following discussion and analysis of our financial condition and results of
operations should be read together with our unaudited condensed consolidated
financial statements and the related notes and the other financial information
included elsewhere in this Quarterly Report and our audited consolidated
financial statements and the related notes and the discussion under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for the fiscal year ended December 31, 2021 included in the Annual
Report on Form 10-K filed with the Securities and Exchange Commission ("SEC") on
March 7, 2022. This discussion contains forward-looking statements that involve
risks and uncertainties. Our actual business, financial condition and results of
operations could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including those
discussed below and elsewhere in this Quarterly Report on Form 10-Q,
particularly under "Part 2. Item 1A. Risk Factors." Our historical results are
not necessarily indicative of the results that may be expected for any period in
the future.
Overview
Squarespace is an all-in-one platform with everything to sell anything,
providing customers in over 200 countries and territories with all the tools
they need to sell physical products, digital content, classes, appointments,
reservations and more. Powered by best-in-class design for a consistent brand
experience across all touchpoints, our suite of fully integrated products
enables anyone to manage their projects and businesses through websites,
domains, e-commerce, marketing tools, and scheduling, along with tools for
managing a social media presence with Unfold and hospitality services via Tock.
We primarily derive revenue from monthly and annual subscriptions to our
presence and commerce solutions. Subscription revenue accounted for 91.7% of our
total revenue for both the three and nine months ended September 30, 2022 and
92.1% and 92.5% of our total revenue for the three and nine months ended
September 30, 2021, respectively. Payments for our subscription plans are
generally collected at the beginning of the subscription period and we generally
recognize the associated revenue ratably over the term of the customer contract.
Non-subscription revenue primarily consists of commerce transaction fees
received through revenue sharing arrangements with payment processors that
handle our customers' commerce transactions, payment processing fees received in
exchange for use of our hospitality services as well as revenue we generate from
third-party services we offer that provide additional functionality to our
customers.
We generated revenue of $217.7 million and $638.2 million for the three and nine
months ended September 30, 2022, respectively, and net income of $10.1 million
and net loss of $18.3 million for the three and nine months ended September 30,
2022, respectively. We generated revenue of $201.0 million and $576.6 million
for the three and nine months ended September 30, 2021, respectively, and net
income of $2.8 million and net loss of $232.8 million for the three and nine
months ended September 30, 2021, respectively. We believe we have a stable and
predictable business model driven by customer acquisition and the adoption by
our customers over time of higher value offerings and add-on subscriptions. Our
platform serves all types of customers, from small and medium-sized businesses
("SMBs") and independent creators, such as restaurants, photographers, wedding
planners, artists, musicians and bloggers, to iconic brands. No individual
unique subscription accounted for more than 1% of our total bookings for the
three and nine months ended September 30, 2022 and 2021.
Key factors affecting our performance
Get new and keep existing unique subscriptions
Acquiring and retaining unique subscriptions to our platform is the primary driver of our revenue growth. The number of unique subscriptions to our platform was in line with the previous quarter, remaining at 4.2 million unique subscriptions as of September 30, 2022 representing an increase of 4.1% relative to September 30, 2021. In order to support the acquisition of new unique subscriptions, we intend to continue to invest in our direct response marketing efforts, develop new points of entry to our platform and expand internationally. We view this spending as a long-term investment in our business to attract new unique subscriptions.
Expand our commerce offering
We believe that our commerce offerings significantly expand our addressable
market. Our comprehensive commerce offerings enable our customers to sell
anything online, attracting a differentiated set of commerce-oriented brands to
our platform. On March 31, 2021, we acquired Tock, which expanded our commerce
offerings by adding a platform for reservations, take-out, delivery and events
for the hospitality industry.
For the three and nine months ended September 30, 2022, our platform processed
approximately $1,411.0 million and $4,502.8 million of gross merchandise value
("GMV"), respectively, representing an increase of 2.5% and 11.4% from the same
period in 2021, respectively. GMV represents the total dollar value of orders
processed through our platform in the period, net of refunds and fraudulent
orders.
We continue to invest and innovate our commerce offerings to enable customers to
build the most impactful online stores, deepen our functionality in physical
commerce and establish leadership in commerce services and hospitality
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services. Our commerce revenue was $67.7 million and $197.7 million for the three and nine months ended September 30, 2022, representing 13.2% and 19.6% growth from the same period in 2021, respectively. We believe the adoption of our commerce offerings by new and existing customers will help drive our long-term revenue growth.
product innovation investment
We rely on hiring and retaining a talented product development workforce. The success of our customers relies on the innovation tied to this workforce and our ability to remain agile to address customer needs. Our research and product development expenses were $54.3 million and $170.5 million for the three and nine months ended September 30, 2022, respectively, representing 11.4% and 22.0% growth over the same periods in 2021.
foreign currency fluctuations
As of September 30, 2022, we had customers in over 200 countries and territories and our international customers represented approximately 30% of our total bookings. As foreign currency exchange rates change, translation of the statements of operations of our international businesses into U.S. dollars may affect year-over-year comparability of our operating results.
Key Components of Operating Results
income
We primarily derive revenue from annual and monthly subscriptions. Typically, annual and monthly subscriptions represent 70% and 30% of total subscriptions, respectively. Revenue is also derived from non-subscription services, including fixed percentages or fixed-fees earned on revenue share arrangements with third-parties and on sales made through our customers' sites. In addition, we earn fixed-fees on sales through certain hospitality offerings and payment processing fees received in exchange for use of our hospitality services. Payments received for subscriptions in advance of fulfillment of our performance obligations are recorded as deferred revenue. Subscription plans automatically renew unless advanced notice is provided to us. We primarily recognize subscription revenue ratably on a straight-line basis, net of a reserve for refunds. Transaction fee revenue, payment processing revenue and revenue generated from third-parties is recognized at a point in time, when the sale has been completed.
We break down revenue by product type according to the following definitions:
Presence revenue Presence revenue primarily consists of fixed-fee subscriptions to our plans that offer core platform functionalities, currently branded "Personal" and "Business" plans in our offerings. Presence revenue also consists of fixed-fee subscriptions related to additional entry points for starting online such as domain managed services and social media stories. Additionally, presence revenue is derived from third-party solutions related to email services and access to third-party content to enhance online presence. For customers in need of a larger scale solution, we have an enterprise offering where revenue is recognized over the life of the contract.
business income
Commerce revenue primarily consists of fixed-fee subscriptions to our plans that offer all the features of presence plans as well as additional features that support end to end commerce transactions, currently branded "Basic" and "Advanced" in our plan offerings. Commerce revenue also includes fixed-fee subscriptions to a number of other tools that support running an online business such as marketing, member areas, scheduling and hospitality tools. Non-subscription revenue is derived from fixed-fees earned on revenue share arrangements with commerce partners as well as fixed transaction fees earned on GMV processed through Business plan sites and certain hospitality offerings. Commerce revenue also includes payment processing fees received in exchange for use of our hospitality services.
cost of revenue
Cost of revenue consists primarily of credit card and payment processing fees,
domain registration fees, and web hosting costs. Cost of revenue also includes
customer support employee-related expenses, amortization and depreciation, and
allocated shared costs. Employee-related expenses consist of salaries, taxes,
benefits and stock-based compensation. We expect that cost of revenue may
fluctuate as a percentage of total revenue from period to period based on the
subscriptions purchased and non-subscription transactions during that particular
period.
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Operating expenses:
Research and Product Development
Research and product development expenses are primarily employee-related expenses, costs associated with continuously developing new solutions and enhancing and maintaining our technology platform as well as allocated shared costs. These costs are expensed as incurred. Employee-related expenses consist of salaries, taxes, benefits and stock-based compensation. In addition, we capitalize employee-related expenses relating to software development costs incurred in connection with adding functionality to our platform, as well as internal-use projects during the application development stage. These capitalized software development costs are deferred and amortized ratably over three years. Marketing and sales Marketing and sales expenses include costs related to advertisements used to drive customer acquisition, employee-related expenses related to our brand and sales of hospitality services, customer acquisition and creative assets, affiliate fees on customer referrals, sales commissions, and allocated shared costs. Depending on the nature of the advertising, costs are expensed at the time a commercial initially airs, when a promotion first appears in the media or as incurred. Affiliate fees on customer referrals are deferred and recognized ratably over the expected period of our relationship with the new customer. In addition, we capitalize sales commissions paid to internal sales personnel relating to obtaining customer contracts for hospitality services. These capitalized sales commissions are deferred and amortized ratably over the expected life of the new customer.
General and Administrative
General and administrative expenses are primarily employee-related expenses associated with supporting business operations as well as expenses required to comply with government regulations in the markets in which we operate. The functional elements included in general and administrative are finance, people, legal, information technology and overall corporate support. Employee-related expenses consist of salaries, taxes, benefits and stock-based compensation.
interest expense
Interest expense primarily consists of the interest expense related to our debt facilities. For further discussion on our interest expense related to our debt facilities, see "Liquidity and Capital Resources, Indebtedness."
Other income, net
Other income, net is primarily comprised of net investment income and realized and unrealized foreign currency gains and losses. See "Item 3. Quantitative and Qualitative Disclosures About Market Risk, Foreign Currency Exchange Risk."
(Provision) / Benefit from Income Tax
We are subject to income taxation and file U.S. federal income tax returns as
well as income tax returns in the various U.S. states and foreign jurisdictions
in which we conduct business. For interim periods, we historically utilized the
estimated annual effective tax rate method under which we determined our
(provision for)/benefit from income taxes based on the current estimate of our
annual effective tax rate. For the three and nine months ended September 30,
2022, we utilized the discrete effective tax rate method, as allowed under ASC
740, Income Taxes - Interim Reporting, when the application of the estimated
annual tax rate method is impractical and does not provide a reasonable estimate
of the annual effective tax rate. The discrete method treats the year-to-date
period as if it were the annual period and determines the interim income taxes
on that basis. We determined that since small changes in estimated annual
pre-tax income/(loss) would result in significant changes in the estimated
annual effective tax rate and significant variations in the customary
relationship between the (provision for)/benefit from income taxes and pre-tax
accounting income/(loss), the historical method would not provide a reliable
estimate of our effective tax rate for the three and nine months ended
September 30, 2022. We will reevaluate the use of this method each interim
period until we believe a return to the estimated annual effective rate method
is deemed appropriate.
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Business results
The following table sets forth our condensed consolidated operating information tables for the three and nine months ended September 30, 2022
and 2021.
Three Months Ended September 30, Nine Months Ended September 30,
($ in thousands) 2022 2021 2022 2021
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenue $ 217,696 $ 200,962 $ 638,160 $ 576,618
Cost of revenue(1) 38,907 32,868 112,549 92,777
Gross profit 178,789 168,094 525,611 483,841
Operating expenses:
Research and product
development(1) 54,312 48,769 170,469 139,692
Marketing and sales(1) 74,248 80,249 255,897 249,005
General and administrative(1) 38,507 32,091 113,678 336,337
Total operating expenses 167,067 161,109 540,044 725,034
Operating income/(loss) 11,722 6,985 (14,433) (241,193)
Interest expense (5,209) (2,491) (10,977) (8,578)
Other income, net 6,869 2,101 14,597 4,493
Income/(loss) before (provision
for)/benefit from income taxes 13,382 6,595 (10,813) (245,278)
(Provision for)/benefit from
income taxes (3,277) (3,756) (7,446) 12,439
Net income/(loss) $ 10,105 $ 2,839 $ (18,259) $ (232,839)
__________________
(1) Includes the following stock-based compensation:
Three Months Ended September 30, Nine Months Ended September 30,
($ in thousands) 2022 2021 2022 2021
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Cost of revenue $ 1,000 $ 440 $ 2,470 $ 1,095
Research and product
development 9,462 8,782 31,138 23,820
Marketing and sales 2,252 1,716 6,246 4,457
General and administrative 11,380 12,796 35,197 254,727
Total stock-based
compensation $ 24,094 $ 23,734 $ 75,051 $ 284,099
The following table sets forth our condensed consolidated statement of operations information as a percentage of total revenue for the three and nine months ended September 30, 2022 and 2021.
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenue 100.0 % 100.0 % 100.0 % 100.0 %
Cost of revenue 17.9 % 16.4 % 17.6 % 16.1 %
Gross profit 82.1 % 83.6 % 82.4 % 83.9 %
Operating expenses:
Research and product development 24.9 % 24.3 % 26.7 % 24.2 %
Marketing and sales 34.1 % 39.9 % 40.1 % 43.2 %
General and administrative 17.7 % 16.0 % 17.8 % 58.3 %
Total operating expenses 76.7 % 80.2 % 84.6 % 125.7 %
Operating income/(loss) 5.4 % 3.4 % (2.2) % (41.8) %
Interest expense (2.4) % (1.2) % (1.7) % (1.5) %
Other income, net 3.2 % 1.0 % 2.3 % 0.8 %
Income/(loss) before (provision
for)/benefit from income taxes 6.2 % 3.2 % (1.6) % (42.5) %
(Provision for)/benefit from
income taxes (1.5) % (1.9) % (1.2) % 2.2 %
Net income/(loss) 4.7 % 1.3 % (2.8) % (40.3) %
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The following table sets forth our condensed consolidated revenue by geographic
location and our condensed consolidated revenue by geographic location as
a percentage of total revenue for the three and nine months ended September 30,
2022 and 2021.
Three Months Ended September 30, Change Nine Months Ended September 30, Change
($ in thousands, except percentages) 2022 2021 Amount % 2022 2021 Amount %
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
United States $ 157,409 $ 130,133 $ 27,276 21.0 % $ 456,583 $ 398,693 $ 57,890 14.5 %
International 60,287 70,829 (10,542) (14.9) % 181,577 177,925 3,652 2.1 %
Total revenue $ 217,696 $ 200,962 $ 16,734 8.3 % $ 638,160 $ 576,618 $ 61,542 10.7 %
Percentage of total revenue:
United States 72.3 % 64.8 % 71.5 % 69.1 %
International 27.7 % 35.2 % 28.5 % 30.9 %
Total revenue 100 % 100 % 100 % 100 %
During the three months ended September 30, 2021, we identified certain revenues
which should have been classified as international revenues during the first and
second quarter of 2021. Accordingly, in the third quarter of 2021, we
reclassified approximately $4.1 million and $5.1 million related to the first
and second quarter, respectively, out of United States and into international
revenue. Using the updated classification, the year-over-year change for the
three months ended September 30, 2021 would have been a decrease of 2.2% for
international and an increase of 13.0% for the United States, respectively. In
addition, for the three months ended September 30, 2021 the international
percentage of total revenue would have been 30.7% and the United States
percentage of total revenue would have been 69.3%. No amounts were reclassified
related to fiscal 2022.
End of three months comparison September 30, 2022 and 2021
Revenue
Three Months Ended
September 30, 2022 Change
($ in thousands, except percentages) 2022 2021 Amount %
(Unaudited) (Unaudited)
Presence $ 149,995 $ 141,152 $ 8,843 6.3 %
Commerce 67,701 59,810 7,891 13.2 %
Total revenue $ 217,696 $ 200,962 $ 16,734 8.3 %
Percentage of total revenue:
Presence 68.9 % 70.2 %
Commerce 31.1 % 29.8 %
Total revenue 100 % 100 %
Presence revenue
Presence revenue increased $8.8 million, or 6.3%, for the three months ended
September 30, 2022 compared to the same period in 2021. This increase was
primarily the result of the growth of our unique subscriptions, driven by strong
retention of existing subscriptions and continued acquisition of new
subscriptions.
business income
business income increase $7.9 millionor 13.2%, as of three months
September 30, 2022 compared to the same period in 2021. This increase was primarily due to growth in our unique subscriptions in commercial products, as well as growth in our hospitality services.
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Cost of Revenue and Gross Profit
Three Months Ended
September 30, 2022
Change
($ in thousands, except percentages) 2022 2021 Amount %
(Unaudited) (Unaudited)
Cost of revenue $ 38,907 $ 32,868 $ 6,039 18.4 %
Gross profit $ 178,789 $ 168,094 $ 10,695 6.4 %
Percentage of total revenue:
Cost of revenue 17.9 % 16.4 %
Gross profit 82.1 % 83.6 %
Cost of revenue
Cost of revenue increased $6.0 million, or 18.4%, for the three months ended
September 30, 2022 compared to the same period in 2021. The increase was
primarily driven by increased payment processing fees and hosting costs
associated with our growing subscription base as well as payroll and associated
benefit expenses for customer support.
gross profit
Gross profit increased $10.7 million, or 6.4%, for the three months ended September 30, 2022 compared to the same period in 2021. As a percentage of total revenue, gross profit was 82.1% and 83.6% for the three months ended September 30, 2022 and 2021, respectively.
Operating expenses:
Research and Product Development
Three Months Ended
September 30, 2022
Change
($ in thousands, except percentages) 2022 2021
quantity%
(Unaudited) (Unaudited)
Research and Product Development $54,312 $48,769 $5,543 11.4 % as a percentage of total revenue
24.9 % 24.3 %
Research and product development expenses increased $5.5 million, or 11.4%, for
the three months ended September 30, 2022 compared to the same period in 2021.
The increase is primarily due to payroll and associated benefit expenses related
to increased headcount, partially offset by capitalized internally developed
software costs, in support of our product development roadmap.
Marketing and sales
Three Months Ended
September 30, 2022 Change
($ in thousands, except percentages) 2022 2021 Amount %
(Unaudited) (Unaudited)
Marketing and sales $ 74,248 $ 80,249 $ (6,001) (7.5) %
Percentage of total revenue 34.1 % 39.9 %
Reduced marketing and sales expenses $6 millionor 7.5%, as of three months September 30, 2022 Compared to the same period in 2021, it was primarily due to a decrease in our brand spending channels, partially offset by higher expenses related to our direct response channel and an increase in the number of employees supporting our expanded marketing operations.
General and administrative
Three Months Ended
September 30, 2022 Change
($ in thousands, except percentages) 2022 2021 Amount %
(Unaudited) (Unaudited)
General and administrative $ 38,507 $ 32,091 $ 6,416 20.0 %
Percentage of total revenue 17.7 % 16.0 %
General and administrative expenses increased $6.4 millionor 20.0%, as of three months September 30, 2022 Compared to the same period in 2021, mainly due to higher payroll expenses related to the increase in the number of employees,
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Indirect tax expense as well as rental expense increased due to impairment of certain operating lease right-of-use assets.
Interest expense
Three Months Ended
September 30, 2022 Change
($ in thousands, except percentages) 2022 2021 Amount %
(Unaudited) (Unaudited)
Interest expense $ (5,209) $ (2,491) $ 2,718 109.1 %
Percentage of total revenue (2.4) % (1.2) %
Interest expense increased $2.7 million, or 109.1%, for the three months ended
September 30, 2022 compared to the same period in 2021 due to higher interest
rates, driven by increased LIBOR rates, on our total debt outstanding related to
our amended credit agreement.
Other income, net
Three Months Ended
September 30, 2022 Change
($ in thousands, except percentages) 2022 2021 Amount %
(Unaudited) (Unaudited)
Other income, net $ 6,869 $ 2,101 $ 4,768 226.9 %
Percentage of total revenue 3.2 % 1.0 %
Other income, net was in a net income position of $6.9 million for the three
months ended September 30, 2022 compared to a net income position of $2.1
million during the same period in 2021. The increase is primarily due to
favorable foreign exchange rates for the three months ended September 30, 2022
compared to the same period in 2021.
(Provision) / Benefit from Income Tax
For the three months ended September 30, 2022 and 2021, we recorded an income tax expense of $3.3 million and $3.8 million, respectively, which resulted in an effective tax rate of (24.5)% and (57.0)%, respectively. Our effective income tax rate for the three months ended September 30, 2022 differed from the statutory rate of 21% primarily due to the change in the valuation allowance for deferred tax assets related primarily to the capitalization of research and development expenditures, nondeductible executive compensation, unrecognized tax benefits, and nondeductible expenses, partially offset by research and development tax credits, windfall on stock-based compensation, and deduction from foreign-derived intangible income. The provision for income taxes for the three months ended September 30, 2022 also reflects a provision of the Tax Cuts and Jobs Act of 2017 becoming effective as of January 1, 2022 that requires companies to capitalize and amortize research and development expenditures rather than deduct the costs as incurred. Unless the law is changed or repealed, we expect our effective tax rate and cash payments to change significantly as compared to fiscal 2021.
Our estimated annual effective income tax rate for the three months ended
September 30, 2021 Unlike the statutory rate of 21%, it is primarily due to non-deductible executive compensation, non-deductible transaction expenses, minimum taxes, partially offset by windfall earnings from stock-based compensation and the R&D tax credit.
Comparison at the end of nine months September 30, 2022 and 2021
Revenue
Nine Months Ended
September 30, 2022 Change
($ in thousands, except percentages) 2022 2021 Amount %
(Unaudited) (Unaudited)
Presence $ 440,471 $ 411,300 $ 29,171 7.1 %
Commerce 197,689 165,318 32,371 19.6 %
Total revenue $ 638,160 $ 576,618 $ 61,542 10.7 %
Percentage of total revenue:
Presence 69.0 % 71.3 %
Commerce 31.0 % 28.7 %
Total revenue 100 % 100 %
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income exists
Presence revenue increased $29.2 million, or 7.1%, for the nine months ended September 30, 2022 compared to the same period in 2021. This increase was primarily the result of the growth of our unique subscriptions, driven by strong retention of existing subscriptions and continued acquisition of new subscriptions.
business income
Commerce revenue increased $32.4 million, or 19.6%, for the nine months ended September 30, 2022 compared to the same period in 2021. This increase was primarily a result of the growth of our unique subscriptions across our commerce offerings, as well as the addition and subsequent growth of our hospitality services.
Cost of Revenue and Gross Profit
Nine Months Ended
September 30, 2022
Change
($ in thousands, except percentages) 2022 2021 Amount %
(Unaudited) (Unaudited)
Cost of revenue $ 112,549 $ 92,777 $ 19,772 21.3 %
Gross profit $ 525,611 $ 483,841 $ 41,770 8.6 %
Percentage of total revenue:
Cost of revenue 17.6 % 16.1 %
Gross profit 82.4 % 83.9 %
Cost of revenue
Cost of revenue increased $19.8 million, or 21.3%, for the nine months ended
September 30, 2022 compared to the same period in 2021. The increase was
primarily driven by increased payment processing fees and hosting costs
associated with our growing subscription base as well as payroll and associated
benefit expenses for customer support associated with hospitality services.
gross profit
Gross profit increased $41.8 million, or 8.6%, for the nine months ended September 30, 2022 compared to the same period in 2021. As a percentage of total revenue, gross profit was 82.4% and 83.9% for the nine months ended September 30, 2022 and 2021, respectively.
Operating expenses:
Research and Product Development
Nine Months Ended
September 30, 2022
Change
($ in thousands, except percentages) 2022 2021
quantity%
(Unaudited) (Unaudited)
Research and Product Development $170,469 $139,692 $30,777 22.0 % as a percentage of total revenue
26.7 % 24.2 %
Research and product development expenses increased $30.8 million, or 22.0%, for
the nine months ended September 30, 2022 compared to the same period in 2021.
The increase is primarily due to payroll and associated benefit expenses related
to increased headcount, partially offset by capitalized internally developed
software costs, in support of our product development roadmap and the addition
of hospitality services.
Marketing and sales
Nine Months Ended
September 30, 2022 Change
($ in thousands, except percentages) 2022 2021 Amount %
(Unaudited) (Unaudited)
Marketing and sales $ 255,897 $ 249,005 $ 6,892 2.8 %
Percentage of total revenue 40.1 % 43.2 %
Increased marketing and sales expenses $6.9 millionor 2.8%, as of 9 months September 30, 2022 Compared to the same period in 2021, mainly due to payroll and related benefits related to the increase in headcount
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Supports our expanded marketing operations, including hospitality services, and the addition of multiple direct response channels.
General and administrative
Nine Months Ended
September 30, 2022 Change
($ in thousands, except percentages) 2022 2021 Amount %
(Unaudited) (Unaudited)
General and administrative $ 113,678 $ 336,337 $ (222,659) (66.2) %
Percentage of total revenue 17.8 % 58.3 %
General and administrative expenses decreased $222.7 million, or 66.2%, for the
nine months ended September 30, 2022 compared to the same period in 2021,
primarily due to one-time expenses related to our Direct Listing in May 2021,
which included a $229.3 million expense for stock-based compensation associated
with the vesting conditions of a grant to our CEO of shares of Class B common
stock upon consummation of the listing and professional fees of $25.3 million,
partially offset by increased indirect tax expense, as well as increased payroll
and benefits expense associated with increased headcount.
Interest expense
Nine Months Ended
September 30, 2022 Change
($ in thousands, except percentages) 2022 2021 Amount %
(Unaudited) (Unaudited)
Interest expense $ (10,977) $ (8,578) $ 2,399 28.0 %
Percentage of total revenue (1.7) % (1.5) %
Interest expense increased $2.4 million, or 28.0%, for the nine months ended
September 30, 2022 compared to the same period in 2021 due to higher interest
rates, driven by increased LIBOR rates, on our total debt outstanding related to
our amended credit agreement.
Other income/(loss), net
Nine Months Ended
September 30, 2022 Change
($ in thousands, except percentages) 2022 2021 Amount %
(Unaudited) (Unaudited)
Other income, net $ 14,597 $ 4,493 $ 10,104 224.9 %
Percentage of total revenue 2.3 % 0.8 %
Other income, net was in a net income position of $14.6 million for the nine
months ended September 30, 2022 compared to a net income position of $4.5
million during the same period in 2021. The increase is primarily due to
favorable foreign exchange rates for the nine months ended September 30, 2022
compared to the same period in 2021.
(Provision) / Benefit from Income Tax
nine months ended September 30, 2022 and 2021, we recorded income tax expense $7.4 million and income tax benefits $12.4 millionresulting in effective tax rates of 68.9% and (5.1)%, respectively.
Our effective income tax rate for the nine months ended September 30, 2022 differed from the statutory rate of 21% primarily due to the change in the valuation allowance for deferred tax assets related primarily to the capitalization of research and development expenditures, nondeductible executive compensation, global intangible low-taxed income, unrecognized tax benefits, and the nondeductible expenses, partially offset by research and development tax credits, windfall on stock-based compensation, and deduction from foreign-derived intangible income. The provision for income taxes for the nine months ended September 30, 2022 also reflects a provision of the Tax Cuts and Jobs Act of 2017 becoming effective as of January 1, 2022 that requires companies to capitalize and amortize research and development expenditures rather than deduct the costs as incurred. Unless the law is changed or repealed, we expect our effective tax rate and cash payments to change significantly as compared to fiscal 2021.
Our estimated annual effective income tax rate for the nine months ended
September 30, 2021 Unlike the statutory rate of 21%, it is primarily due to non-deductible executive compensation, non-deductible transaction expenses, minimum taxes, partially offset by windfall earnings from stock-based compensation and the R&D tax credit.
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Quarterly Operating Results
The following tables set forth selected unaudited quarterly statements of
operations data for each of the eight fiscal quarters ended September 30, 2022,
as well as the percentage of revenues that each line item represents for each
quarter. The information for each of these quarters has been prepared in
accordance with generally accepted accounting principles in the United States
("GAAP") on the same basis as our audited historical condensed consolidated
financial information and includes, in the opinion of management, all
adjustments, consisting only of normal recurring adjustments, necessary for the
fair statement of the results of operations for these periods. This data should
be read in conjunction with our condensed consolidated financial statements
included elsewhere in this Quarterly Report on Form 10-Q. These quarterly
results are not necessarily indicative of our results of operations to be
expected for any future period.
Three Months Ended (Unaudited)
September 30, June 30, March 31, December 31, September 30, June 30, March 31, December 31,
($ in thousands) 2022 2022 2022 2021 2021 2021 2021 2020
Revenue $ 217,696 $ 212,702
$207,762 $207,420 $200,962 $196,010 $179,646 $172,300
cost of revenue (1)
38,907 36,993 36,649 33,854 32,868 32,501 27,408 26,171 Gross profit 178,789 175,709 171,113 173,566 168,094 163,509 152,238 146,129 Operating expenses: Research and product development(1) 54,312 58,829 57,328 50,679 48,769 48,912 42,011 57,409 Marketing and sales(1) 74,248 68,743 112,906 90,960 80,249 70,784 97,972 73,549 General and administrative(1) 38,507 39,190 35,981 31,608 32,091 284,730 19,516 17,077 Total operating expenses 167,067 166,762 206,215 173,247 161,109 404,426 159,499 148,035 Operating income/(loss) 11,722 8,947 (35,102) 319 6,985 (240,917) (7,261) (1,906) Interest expense (5,209) (3,319) (2,449) (2,503) (2,491) (2,827) (3,260) (1,997) Other income, net 6,869 6,217 1,511 2,138 2,101 (1,201) 3,593 (4,076) Income/(loss) before (provision for)/benefit from income taxes 13,382 11,845 (36,040) (46) 6,595 (244,945) (6,928) (7,979) (Provision for)/benefit from income taxes (3,277) 52,651 (56,820) (16,264) (3,756) 10,413 5,782 12,236 Net income/(loss) $ 10,105 $ 64,496
$ (92,860) $ (16,310) $2,839 $ (234,532) $ (1,146) $4,257
Net income/(loss) attributable to Class A, Class B and Class C common stockholders, basic(2) $ 10,105 $ 64,496 $ (92,860) $ (16,310) $ 2,839 $ (234,532) $ (2,115) $ (275,439) Net income/(loss) attributable to Class A, Class B and Class C common stockholders, dilutive(2) $ 10,105 $ 64,496 $ (92,860) $ (16,310) $ 2,839 $ (234,532) $ (2,115) $ (275,439) Net income/(loss) per share attributable to Class A, Class B, and Class C common stockholders, basic $ 0.07 $ 0.46 $ (0.67) $ (0.12) $ 0.02 $ (3.22) $ (0.11) $ (14.98) Net income/(loss) per share attributable to Class A, Class B, and Class C common stockholders, dilutive $ 0.07 $ 0.45 $ (0.67) $ (0.12) $ 0.02 $ (3.22) $ (0.11) $ (14.98) Weighted-average shares used in computing net income/(loss) per share attributable to Class A, Class B, and Class C stockholders, basic 137,832,634 140,082,038 139,423,228 138,970,923 138,625,579 72,900,951 19,012,323 18,383,523 Weighted-average shares used in computing net income/(loss) per share attributable to Class A, Class B, and Class C stockholders, dilutive 139,667,719 142,133,303
139,423,228 138,970,923 143,251,717 72,900,951 19,012,323 18,383,523
__________________
(1) Includes the following stock-based compensation:
Three Months Ended (Unaudited)
September 30, June 30, March 31, December 31, September 30, June 30, March 31, December 31,
($ in thousands) 2022 2022 2022 2021 2021 2021 2021 2020
Cost of revenue $ 1,000 $ 846 $ 624 $ 450 $ 440 $ 380 $ 275 $ 212
Research and product development 9,462 11,508 10,168 9,210 8,782 8,245 6,793 6,151
Marketing and sales 2,252 2,395 1,599 1,472 1,716 1,569 1,172 839
General and administrative(a) 11,380 12,111 11,706 12,693 12,796 240,319 1,612
1,229
Total stock-based compensation $ 24,094 $ 26,860 $
24,097 $23,825 $23,734 $250,513 $9,852 $
8,431
a.In conjunction with our Direct Listing in May 2021, we incurred certain
stock-based compensation expense associated with the vesting conditions of a
grant to our CEO of shares of Class B common stock upon completion of the
listing which resulted in a one time expense of $229.3 million. In addition, we
incurred professional fees of $25.3 million associated with the Direct Listing.
We expect to continue to incur additional expenses as a result of operating as a
public company, including costs to comply with the rules and regulations
applicable to companies listed on a U.S. securities exchange and costs related
to compliance and reporting obligations pursuant to the rules and regulations of
the SEC. In addition, as a public company, we expect to incur additional costs
associated with accounting, compliance, insurance and investor relations.
(2) Preferred shares of the Company do not participate in periods of net loss.
Therefore, in periods of net loss, or when undistributed earnings of the Company
are negative, there is no additional allocation of undistributed earnings to
preferred shareholders included within the calculation of net (loss)/income
attributable to Class A, Class B and Class C common stockholders.
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The following table sets forth our condensed consolidated statement of operations information as a percentage of total revenue for the following three-month periods.
Three Months Ended (Unaudited)
September 30, June 30, March 31, December 31, September 30, June 30, March 31, December 31,
($ in thousands) 2022 2022 2022 2021 2021 2021 2021 2020
Revenue 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Cost of revenue(1) 17.9 % 17.4 % 17.6 % 16.3 % 16.4 % 16.6 % 15.3 % 15.2 %
Gross profit 82.1 % 82.6 % 82.4 % 83.7 % 83.6 % 83.4 % 84.7 % 84.8 %
Operating expenses:
Research and product
development(1) 24.9 % 27.7 % 27.6 % 24.4 % 24.3 % 25.0 % 23.4 % 33.3 %
Marketing and sales(1) 34.1 % 32.3 % 54.3 % 43.9 % 39.9 % 36.1 % 54.5 % 42.7 %
General and administrative(1) 17.7 % 18.4 % 17.3 % 15.2 % 16.0 % 145.3 % 10.9 % 9.9 %
Total operating expenses 76.7 % 78.4 % 99.2 % 83.5 % 80.2 % 206.4 % 88.8 % 85.9 %
Operating income/(loss) 5.4 % 4.2 % (16.8) % 0.2 % 3.4 % (123.0) % (4.1) % (1.1) %
Interest expense (2.4) % (1.6) % (1.2) % (1.2) % (1.2) % (1.4) % (1.8) % (1.2) %
Other income, net 3.2 % 2.9 % 0.7 % 1.0 % 1.0 % (0.6) % 2.0 % (2.4) %
Income/(loss) before (provision
for)/benefit from income taxes 6.2 % 5.5 % (17.3) % - % 3.2 % (125.0) % (3.9) % (4.7) %
(Provision for)/benefit from
income taxes (1.5) % 24.8 % (27.3) % (7.8) % (1.9) % 5.3 % 3.2 % 7.1 %
Net income/(loss) 4.7 % 30.3 % (44.6) % (7.8) % 1.3 % (119.7) % (0.7) % 2.4 %
Quarterly Trends
Our business is impacted by seasonal fluctuations. We typically register a
greater number of new unique subscriptions during the first quarter of a year.
We believe this is related to, among other things, our customers' buying habits
and our increased marketing and sales spend in the first quarter of most years.
Our hospitality services have experienced a greater number of prepayments on
reservations around the time of major holidays and special occasions during the
first and fourth quarter of the year. In the future, seasonal trends may cause
fluctuations in our quarterly results, which may impact the predictability of
our business and operating results.
Liquidity and Capital Resources
To date, we have primarily funded our operations through operating cash flow.
As of September 30, 2022, we had cash and cash equivalents and investment in
marketable securities of $228.2 million and $17.7 million of available borrowing
capacity under our Revolving Credit Facility, as defined below. During July
2021, we were issued an additional letter of credit for $2.5 million relating to
a security deposit for a new operating lease in Chicago, IL. Additionally,
during September 2022, the letter of credit for our security deposit related to
the New York, NY headquarters was reduced by $2.4 million due to a scheduled
step-down per the lease agreement. See "Item 1. Financial Information, Item 1.
Financial Statements, Note 9. Debt." We believe our existing cash and cash
equivalents and investment in marketable securities will be sufficient to meet
our operating working capital and capital expenditure requirements over the next
12 months. We have also filed federal tax refund claims totaling approximately
$8.7 million of which $4.0 million relates to a research and development tax
credit carryback to 2018 and $4.7 million relates to a 2020 tax overpayment. We
do not expect to receive these refunds until later in 2022 or 2023. Our
principal commitments consist of payments for our Credit Facility, operating
leases and purchase commitments related to cloud-computing services. In
addition, as of September 30, 2022, we had accrued $10.3 million of unrecognized
tax benefits related to uncertain tax positions. On May 10, 2022, the board of
directors authorized a general share repurchase program of the Company's Class A
common stock of up to $200 million, with no fixed expiration. During the three
and nine months ended September 30, 2022, the Company repurchased 2.4 million
and 4.0 million shares for a total cash consideration of $50.4 million and $85.6
million, including commissions of $0.05 million and $0.08 million, through open
market purchases at an average price per share of $21.84 and $21.40,
respectively. As of September 30, 2022, approximately $114.4 million remained
available for stock repurchase. At this time, we are unable to reasonably
estimate the timing of the long-term payments or the amount by which the
liability will increase or decrease over time. Our future financing requirements
will depend on many factors, including our growth rate, subscription renewal
activity, the timing and extent of spending to support development of our
platform and products, the expansion of marketing and sales activities and any
future investments or acquisitions we may make. Although we currently are not a
party to any agreement and do not have any understanding with any third-parties
with respect to future investments in, or acquisitions of, businesses or
technologies, we may enter into these types of arrangements following the filing
of this Quarterly Report on Form 10-Q, which could also require us to seek
additional equity or debt financing. Additional funds may not be available on
terms favorable to us or at all, including as a result of disruptions in the
credit markets. See "Part 2. Item 1A. Risk Factors."
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The table below summarizes our operating, investing and financing activities for the nine months ended September 30, 2022 and 2021.
Nine Months Ended September 30, ($ in thousands) 2022
2021
Net cash provided by/(used in): Operating activities $ 125,117 $ 108,167 Investing activities $ (5,556) $ (203,694) Financing activities $ (110,945) $ 268,172
Net cash provided by operating activities
Net cash provided by operating activities in the nine months ended September 30, 2022 was $125.1 million, which reflected our net loss of $18.3 million, increased by non-cash items such as $75.1 million of stock-based compensation, $23.8 million of depreciation and amortization, and $2.3 million of non-cash lease expense. Cash provided by operating activities included $38.0 million in deferred revenue, $12.9 million in funds payable to customers, $6.0 million of accounts payable and accrued liabilities, which was offset by $11.5 million in prepaid expenses and other current assets and $3.1 million in accounts receivables and due from vendors. Net cash provided by operating activities in the nine months ended September 30, 2021 was $108.2 million, which reflected our net loss of $232.8 million, which was increased by certain non-cash items primarily consisting of $284.1 million of stock-based compensation and $23.9 million of depreciation and amortization, partially offset by $13.8 million of deferred income taxes. Cash provided by operating activities included $35.0 million in deferred revenue, $13.3 million in funds payable to customers, $8.5 million of deferred rent and lease incentives and $7.9 million in accounts payable and accrued liabilities, which was primarily offset by $18.9 million in prepaid expenses and other current assets.
Net cash used in investing activities
Net cash used in investing activities in the nine months ended September 30, 2022 was $5.6 million, which reflected $8.9 million spent in connection with the purchase of property and equipment, and $19.4 million used to purchase marketable securities offset by $22.7 million in proceeds from the sale and maturities of marketable securities. Net cash used in investing activities in the nine months ended September 30, 2021 was $203.7 million, which reflected $202.2 million, net of acquired cash, used to pay for the acquisition of Tock and $20.4 million used to purchase marketable securities, which was partially offset by $25.6 million in proceeds from the sale and maturities of marketable securities. We additionally spent $6.7 million in connection with the purchase of property and equipment.
Net cash provided by financing activities (used in)/provided
Net cash used in financing activities in the nine months ended September 30,
2022 was $110.9 million, which reflects $85.6 million cash spent on proceeds
from repurchase and retirement of Class A common stock, $17.3 million on stock
purchases related to equity incentive plans, and $10.2 million in principal
payments on our Term Loan, partially offset by $2.2 million in proceeds from the
exercise of stock options.
Net cash provided by financing activities in the nine months ended September 30,
2021 was $268.2 million, which primarily reflected $304.4 million in proceeds
from the issuance of 4,452,023 shares of Class C common stock, net of issuance
costs, coupled with $4.2 million of proceeds from the exercise of stock options.
These proceeds were partially offset by $29.9 million in stock purchases related
to equity incentive plans and $10.2 million in principal payments on our Term
Loan.
Indebtedness
On December 12, 2019, we entered into a credit agreement with various financial
institutions that provided for a $350.0 million term loan (the "Term Loan") and
a $25.0 million revolving credit facility ("Revolving Credit Facility"), which
included a $15.0 million letter of credit sub-facility. On December 11, 2020, we
amended the credit agreement (as amended, the "Credit Agreement") to increase
the size of the Term Loan to $550.0 million and extend the maturity date for the
Term Loan and the Revolving Credit Facility to December 11, 2025.
The original borrowings under the Term Loan were used to provide for the
repurchase, and subsequent retirement, of outstanding capital stock in 2019. The
additional borrowings were used to provide for a dividend on all outstanding
capital stock.
Borrowings under the Credit Agreement are subject to an interest rate equal to,
at our option, LIBOR or the bank's alternative base rate (the "ABR"), in either
case, plus an applicable margin. The ABR is the greater of the prime rate, the
federal funds effective rate plus the applicable margin or the LIBOR quoted rate
plus the applicable margin. The applicable margin is based on an indebtedness to
consolidated EBITDA ratio as prescribed under the Credit Agreement and ranges
from 1.25% to 2.25% on applicable LIBOR loans and 0.25% to 1.25% on ABR loans.
In addition, the Revolving Credit
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Facility is subject to an unused commitment fee, payable quarterly, of 0.20% to 0.25% of the unutilized commitments (subject to reduction in certain circumstances). Consolidated EBITDA is defined in the Credit Agreement and is not comparable to our definition of adjusted EBITDA used elsewhere in the Quarterly Report on Form 10-Q since the Credit Agreement allows for additional adjustments to net income/(loss) including the exclusion of transaction costs, changes in deferred revenue, and other costs that may be considered non-recurring. Further, consolidated EBITDA, as defined in the Credit Agreement, may be different from similarly titled EBITDA financial measures used by other companies. The definition of consolidated EBITDA is contained in Section 1.1 of the Credit Agreement. As of September 30, 2022, $519.7 million was outstanding under the Term Loan. The Term Loan requires scheduled quarterly principal payments beginning March 31, 2021 in aggregate annual amounts equal to 2.50% for 2021 and 2022, 7.50% for 2023 and 2024 and 10.00% for 2025, in each case, on the amended Term Loan principal amount, with the balance due at maturity. In addition, the Credit Agreement includes certain customary prepayment requirements for the Term Loan, which are triggered by events such as asset sales, incurrences of indebtedness and sale leasebacks. As of September 30, 2022, $7.3 million was outstanding under the Revolving Credit Facility in the form of outstanding letters of credit and $17.7 million remained available for borrowing by us. The outstanding letters of credit relate to security deposits for certain of our leased locations. The Credit Agreement contains certain customary affirmative covenants and events of default. The negative covenants in the Credit Agreement include, among others, limitations on our ability (subject to negotiated exceptions) to incur additional indebtedness or issue additional preferred stock, incur liens on assets, enter into agreements related to mergers and acquisitions, dispose of assets or pay dividends and distributions. In addition, commencing with the fiscal quarter ended December 31, 2020, we are required to maintain an indebtedness to consolidated EBITDA ratio of not more than 4.50, tested as of the last day of each fiscal quarter, with a step-down to 4.25 for the fiscal quarters ending March 31, 2022 and June 30, 2022, a further step-down to 4.00 for the fiscal quarters ending September 30, 2022 and December 31, 2022 and a final step-down to 3.75 for the fiscal quarter ending March 31, 2023 and each fiscal quarter thereafter (the "Financial Covenant"), subject to customary equity cure rights. The Financial Covenant is subject to a 0.50 step-up in the event of a material permitted acquisition, which we can elect to implement up to two times during the life of the facility. We did not elect to implement this step-up as a result of the acquisition of Tock. If we are not in compliance with the covenants under the Credit Agreement or we otherwise experience an event of default, the lenders would be entitled to take various actions, including acceleration of amounts due under the Credit Agreement. As of September 30, 2022, we were in compliance with all applicable covenants, including the Financial Covenant. The obligations under the Credit Agreement are guaranteed by our wholly-owned domestic subsidiaries and are secured by substantially all of the assets of the guarantors, subject to certain exceptions. Total interest expense related to our indebtedness was $5.2 million and $11.0 million for the three and nine months ended September 30, 2022, respectively, and $2.5 million and $8.6 million for the three and nine months ended September 30, 2021, respectively.
Key Performance Indicators and Non-GAAP Financial Measures
We review the following key performance indicators and non-GAAP financial
measures to evaluate our business, measure our performance, identify trends
affecting our business, formulate financial projections and make strategic
decisions. Increases or decreases in our key performance indicators and non-GAAP
financial measures may not correspond with increases or decreases in our revenue
and our key performance indicators and non-GAAP financial measures may be
calculated in a manner different from similar key performance indicators and
non-GAAP financial measures, respectively, used by other companies.
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Unique subscriptions (in
thousands) 4,179 4,016 4,179 4,016
Total bookings (in thousands) $225,460 $205,885
$ 673,911 $ 611,477 ARRR (in thousands) $ 861,399 $ 788,622 $ 861,399 $ 788,622 ARPUS $ 206.38 $ 198.27 $ 206.38 $ 198.27 Adjusted EBITDA (in thousands) $ 43,720 $ 38,393 $ 84,391 $ 92,130 Unlevered free cash flow (in thousands) $ 42,122 $ 47,251 $ 124,034 $ 109,287 GMV (in thousands) $ 1,411,002 $ 1,376,159 $ 4,502,828 $ 4,042,589
Unique subscription. Unique Subscriptions represent the number of Unique Sites, Independent Scheduling Subscriptions, Spread (Social), and Hospitality Subscriptions as of the end of a period. A Unique Site represents a single subscription and/or group of related subscriptions, including website subscriptions and/or domain subscriptions, and other subscriptions associated with a single website or domain. Each unique site contains at least one domain subscription or one website subscription. For example, active website subscriptions, custom domain subscriptions, and Google Workspace
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subscription that represent services for a single website would count as one
unique site, as all of these subscriptions work together and are in service of a
single entity's online presence. Unique subscriptions do not account for
one-time purchases in Unfold or for hospitality services. The total number of
unique subscriptions is a key indicator of the scale of our business and is a
critical factor in our ability to increase our revenue base.
Unique subscriptions increased 0.2 million, or 4.1%, as of September 30, 2022
compared to the same period in 2021. These increases were primarily a result of
the continued acquisition of new subscriptions and the retention of existing
subscriptions.
Total bookings. Total bookings includes cash receipts for all subscriptions
purchased, as well as payments due under the terms of contractual agreements for
obligations to be fulfilled. In the case of multi-year contracts, total bookings
only includes one year of committed revenue. Total bookings provides insight
into the sales of our solutions and the performance of our business because, for
a large portion of our business, we collect payment at the time of sale and
recognize revenue ratably over the term of our subscription agreements.
Total bookings increased $19.6 million, or 9.5%, for the three months ended
September 30, 2022 compared to the same period in 2021 and increased $62.4
million, or 10.2%, for the nine months ended September 30, 2022. These increases
were primarily a result of an increase in our unique subscriptions, price
increases across several of our subscription plans, as well as the growth of our
hospitality services.
Annual run rate revenue ("ARRR"). We calculate ARRR as the monthly revenue from
subscription fees and revenue generated in conjunction with associated fees
(fees taken or assessed in conjunction with commerce transactions) in the last
month of the period multiplied by 12. We believe that ARRR is a key indicator of
our future revenue potential. However, ARRR should be viewed independently of
revenue, and does not represent our GAAP revenue on an annualized basis, as it
is an operating metric that can be impacted by subscription start and end dates
and renewal rates. ARRR is not intended to be a replacement or forecast of
revenue.
ARRR increased $72.8 millionor 9.2%, as of September 30, 2022 compared to the same period in 2021. This increase was primarily due to an increase in unique subscriptions and an increase in our hotel services.
Average revenue per unique subscription. We calculate ARPUS as the total revenue during the preceding 12-month period divided by the average of the number of total unique subscriptions at the beginning and end of the period. We believe ARPUS is a useful metric in evaluating our ability to sell higher-value plans and add-on subscriptions. ARPUS increased $8.11, or 4.1%, as of September 30, 2022 compared to the same period in 2021. The increase was primarily due to a shift in revenue mix toward commerce as well as the addition and the growth of our hospitality services.
Adjusted EBITDA. Adjusted EBITDA is a supplemental performance measure used by our management to evaluate our operating performance. We calculate Adjusted EBITDA as excluding interest expense, other income, net, income tax provisions/(benefits), depreciation and amortization, stock-based compensation expense and other net income/ (loss) results from continuing operations. Below is a reconciliation of Adjusted EBITDA to the most comparable GAAP measure of net income/(loss):
Three Months Ended September 30, Nine Months Ended September 30,
($ in thousands) 2022 2021 2022 2021
Net income/(loss) $ 10,105 $ 2,839 $ (18,259) $ (232,839)
Interest expense 5,209 2,491 10,977 8,578
Provision for/(benefit from)
income taxes 3,277 3,756 7,446 (12,439)
Depreciation and amortization 7,904 7,674 23,773 23,906
Stock-based compensation
expense 24,094 23,734 75,051 284,099
Other income, net (6,869) (2,101) (14,597) (4,493)
Direct listing costs - - - 25,318
Adjusted EBITDA 43,720 38,393 84,391 92,130
Adjusted EBITDA increased $5.3 million, or 13.9% for the three months ended
September 30, 2022 compared to the same period in 2021. The increase is
primarily due to increases in revenue and a reduction in marketing and sales
spend, partially offset by an increase in cash-based payroll and associated
benefits related to increases in headcount in research and development and
general and administrative expenses, as well as increases in indirect tax
expenses and rent expense due to the impairment of certain operating lease
right-of-use assets. Adjusted EBITDA decreased $7.7 million, or 8.4% for the
nine months ended September 30, 2022 compared to the same period in 2021. The
decrease is primarily due to an increase in cash-based payroll and benefit
related expenses driven by an increase in headcount in research and development
and the addition of hospitality services.
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Unlevered free cash flow. Unlevered free cash flow is a supplemental liquidity
measure that our management uses to evaluate our core operating business and our
ability to meet our current and future financing and investing needs. We define
unlevered free cash flow as cash flow from operating activities less cash paid
for capital expenditures increased by cash paid for interest expense net of the
associated tax benefit. The following is a reconciliation of unlevered free cash
flow to the most comparable GAAP measure, cash flows from operating activities:
Three Months Ended September 30, Nine Months Ended September 30,
($ in thousands) 2022 2021 2022 2021
Cash flows from operating
activities $ 41,434 $ 49,344 $ 125,117 $ 108,167
Cash paid of capital
expenditures (3,117) (4,329) (8,852) (6,744)
Free cash flow 38,317 45,015 116,265 101,423
Cash paid for interest, net
of the associated tax benefit 3,805 2,236 7,769 7,864
Unlevered free cash flow $ 42,122 $ 47,251 $ 124,034 $ 109,287
Unlevered free cash flow decreased $5.1 million, or 10.9%, for the three months
ended September 30, 2022 compared to the same period in 2021. This decrease was
primarily driven by a reduction in accounts payable and accrued liabilities due
to timing of payments. Unlevered free cash flow increased $14.7 million, or
13.5%, for the nine months ended September 30, 2022 compared to the same period
in 2021. The increase was primarily driven by a reduction in spend related to
costs associated with the Direct Listing, partially offset by increased spend in
research and development in support of our product development roadmap.
Gross Merchandise Value. GMV represents the value of merchandise, physical
goods, content and time sold, including hospitality services, net of refunds, on
our platform over a given period of time. GMV processed on our platform
increased $34.8 million, or 2.5%, for the three months ended September 30, 2022
compared to the same period in 2021 and increased $460.2 million, or 11.4%, for
the nine months ended September 30, 2022 compared to the same period in 2021.
Critical Accounting Policies and Estimates
The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that affect the amounts reported in the condensed consolidated financial statements. Management's estimates are based on historical experience and on various other market-specific and relevant assumptions that management believes to be reasonable under the circumstances. Actual results could differ from those estimates. Our critical accounting policies are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021. Our critical accounting policies have not significantly changed during the nine months ended September 30, 2022. See "Part 1. Financial Information, Item 1. Financial Statements, Note 2. Summary of Significant Accounting Policies" elsewhere in this Quarterly Report on Form 10-Q for more information.
recently issued accounting standards
A discussion of recent accounting pronouncements is included in Note 2 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
what it means to be a person Emerging Growth Companies
As a company with less than $1.235 billion in revenue during our last fiscal year, we qualify as an "emerging growth company" as defined in the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include that:
• We are required to include only reduced disclosures in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”;
• Pursuant to Section 404(b), we are not required to engage auditors to report on our internal control over financial reporting;
• We are not required to submit certain executive compensation matters to shareholder advisors for voting, such as “salary say”, “frequency say” and “golden parachute say”; and
•we are not required to disclose certain executive compensation related items
such as the correlation between executive compensation and performance and
comparisons of the chief executive officer's compensation to our median employee
compensation.
We may take advantage of these provisions until the last day of the fiscal year
following the fifth anniversary of the effectiveness of the registration
statement on Form S-1 filed with the SEC on May 19, 2021 or such earlier time
that we are no longer an emerging growth company.
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Under the JOBS Act, emerging growth companies also can delay adopting new or revised accounting standards until such time as those standards would otherwise apply to private companies. We currently take advantage of this exemption. For risks related to our status as an emerging growth company, see "Part II. Item 1A.Risk Factors, Risks Related to our Business and Industry". We are an "emerging growth company" and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our Class A common stock less attractive to investors.
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