S-1/A
Table of Contents

As filed with the Securities and Exchange Commission on July 24, 2018

Registration Statement No. 333-226002

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

Amendment No. 2

to

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

TENABLE HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   7372  

47-5580846

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

7021 Columbia Gateway Drive, Suite 500

Columbia, Maryland 21046

(410) 872-0555

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Amit Y. Yoran

President and Chief Executive Officer

Tenable Holdings, Inc.

7021 Columbia Gateway Drive, Suite 500

Columbia, Maryland 21046

(410) 872-0555

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Eric Jensen

Brian F. Leaf

Madison A. Jones

Cooley LLP

11951 Freedom Drive

Reston, Virginia 20190

(703) 456-8000

 

Stephen A. Riddick

General Counsel
Tenable Holdings, Inc.
7021 Columbia Gateway Drive, Suite 500

Columbia, Maryland 21046

(410) 872-0555

 

Michael C. Labriola

Mark R. Fitzgerald

Megan J. Baier

Mark G.C. Bass

Wilson Sonsini Goodrich & Rosati, P.C.

1700 K Street, NW, Fifth Floor

Washington, DC 20006

(202) 973-8800

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box.  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering.  ☐

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

 

Large Accelerated Filer      Accelerated Filer  
Non-accelerated Filer      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 7(a)(2)(B) of the Securities Act.  ☒

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

  Amount to be
Registered(1)
  Proposed Maximum
Offering Price Per
Share
  Proposed Maximum
Aggregate Offering
Price(2)
 

Amount of

Registration Fee(3)

Common Stock, $0.01 par value per share

  12,535,000   $22.00   $275,770,000   $34,334

 

 

(1)

Estimated pursuant to Rule 457(a) under the Securities Act of 1933, as amended. Includes shares that the underwriters have the option to purchase.

(2)

Estimated solely for purposes of calculating the registration fee.

(3)

The registrant previously paid $25,027 of this registration fee.

 

 

The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment that specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any state where the offer or sale is not permitted.

 

PRELIMINARY PROSPECTUS

(Subject to Completion) Issued July 24, 2018

10,900,000 Shares

 

LOGO

COMMON STOCK

 

 

Tenable Holdings, Inc. is offering 10,900,000 shares of its common stock. This is our initial public offering, and no public market currently exists for our shares of common stock. We anticipate that the initial public offering price will be between $20.00 and $22.00 per share.

 

 

We have applied to list our common stock on the Nasdaq Global Select Market under the symbol “TENB.”

 

 

We are an “emerging growth company” as defined under the U.S. federal securities laws and, as such, may elect to comply with certain reduced public company reporting requirements for this and future filings. Investing in our common stock involves risks. See “Risk Factors” beginning on page 15.

 

 

PRICE $                A SHARE

 

 

 

      

Price to

Public

      

Underwriting

Discounts

and
Commissions(1)

      

Proceeds to
Tenable

 

Per Share

       $                   $                   $           

Total

       $                              $                              $                      

 

(1) See “Underwriting” for a description of the compensation payable to the underwriters.

We have granted the underwriters the right to purchase up to an additional 1,635,000 shares of common stock to cover over-allotments.

Arthur W. Coviello, Jr., Kimberly L. Hammonds and A. Brooke Seawell, each a member of our board of directors, have indicated an interest in purchasing, directly or through associated entities, up to an aggregate of approximately $1.2 million of shares of our common stock in this offering (or an aggregate of 57,142 shares based on the midpoint of the price range set forth on the cover page of this prospectus) at the initial public offering price. To the extent these affiliates purchase any such shares from us, the number of shares to be sold to the underwriters will accordingly be reduced. Because these indications of interest are not binding agreements or commitments to purchase, the underwriters could determine to sell more, less or no shares to any of these potential investors and any of these potential investors could determine to purchase more, less or no shares in this offering. The underwriters will receive the same discount from any shares sold to these potential investors as they will from any other shares sold to the public in this offering. Any shares purchased by such potential investors will be subject to lock-up restrictions described in “Shares Eligible for Future Sale.”

The Securities and Exchange Commission and state securities regulators have not approved or disapproved of these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares of common stock to purchasers on                , 2018.

 

 

 

Morgan Stanley    J.P. Morgan    Allen & Company LLC    Deutsche Bank Securities
Stifel
William Blair    BTIG

                , 2018


Table of Contents

LOGO

tenable® Empowering organization to understand and reduce their cybersecurity risk


Table of Contents

LOGO

Cyber Exposure Transforming how security is managed and measured 300 276 416 435 Cyber Exposure Trend 13.121 Total Assets Locations with High Cyber Exposure 5569 4932 Seattle 300 Los Angeles 270 New York 276 London 416 Shanghai 435 270 EXPOSURE SCORES Urgent Issues 3 CVE DESCRIPTION CVE-2016-4000 MS15-054: Vulnerability Microsoft CVE-2017-8896 MS14-052: Vulnerability in Group CVE-2016-7830 Wireshark 1.12.x<1.12.8 pcapng File 502 331 Cyber Exposure Score 700 Industry Average 600 500 400 300 200 100 0 1/1/18 2/1/18 3/1/18 4/1/18 5/1/18 6/1/18 Network Infrastructure Web Application Mobile Device IT Cloud IoT Laptop and Desktop Cloud Container Infrastructure Industrial Control System Enterprise IoT Unified visibility across the modern attack surface Translating vulnerability data into actionable business insights Server


Table of Contents

TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1  

Risk Factors

     15  

Special Note Regarding Forward-Looking Statements

     43  

Industry and Market Data

     45  

Use of Proceeds

     46  

Dividend Policy

     47  

Capitalization

     48  

Dilution

     50  

Selected Consolidated Financial Data

     53  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     58  

Business

     84  

Management

     105  
     Page  

Executive Compensation

     113  

Certain Relationships and Related Party Transactions

     130  

Principal Stockholders

     133  

Description of Capital Stock

     137  

Shares Eligible for Future Sale

     142  

Material U.S. Federal Income Tax Considerations for Non-U.S. Holders

     145  

Underwriting

     149  

Legal Matters

     156  

Experts

     156  

Where You Can Find Additional
Information

     156  

Index to Consolidated Financial Statements

     F-1  
 

 

 

You should rely only on the information contained in this document and any free writing prospectus we may authorize to be delivered or made available to you. We and the underwriters have not authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectus prepared by us or on our behalf. We and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date, regardless of the time of delivery of this prospectus or any sale of shares of our common stock.

Through and including                , 2018 (25 days after the date of this prospectus), all dealers that effect transactions in our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions.

For investors outside the United States: We and the underwriters have not done anything that would permit this offering or the possession or distribution of this prospectus in any jurisdiction where action for those purposes is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of common stock and the distribution of this prospectus outside of the United States.

 

i


Table of Contents

PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in our common stock, you should carefully read this entire prospectus, including our consolidated financial statements and the related notes and the information set forth under the sections titled “Risk Factors,” “Special Note Regarding Forward-Looking Statements,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in each case included elsewhere in this prospectus. Unless the context otherwise requires, we use the terms “Tenable,” “company,” “our,” “us,” and “we” in this prospectus to refer to Tenable Holdings, Inc. and, where appropriate, our consolidated subsidiaries.

TENABLE

Overview

We are the first and only provider of solutions for a new category of cybersecurity that we call Cyber Exposure. Cyber Exposure is a discipline for managing and measuring cybersecurity risk in the digital era. We are building on our deep technology expertise in the traditional vulnerability assessment and management market and expanding that market to include modern attack surfaces and provide analytics that translate vulnerability data into business insight.

Digital transformation is driving radical change. As organizations modernize their IT infrastructure and adopt cloud or hybrid cloud architectures that are no longer housed in the confines of their corporate networks, they have less visibility and control over the security of these assets. Organizations are also increasingly implementing modern solutions, such as Internet of Things, or IoT, devices and application containers, to enable the rapid development and deployment of new products, services and business models, as well as to drive operational efficiencies. Further, safety-critical Operational Technology, or OT, such as Industrial Control Systems, are now network-connected and need to be secured from cybersecurity threats. This digital transformation increases IT complexity and cybersecurity risk as attack surfaces expand. We refer to an organization’s inability to see the breadth of the modern attack surface and analyze the level of cyber exposure as the Cyber Exposure Gap.

While other functions in an organization, such as finance and operations, have a system to help them manage and measure risk, to date, cybersecurity risk has not been adequately measured and understood. Our platform is built to be the Cyber Exposure Command Center for an organization’s Chief Information Security Officer, or CISO. Our platform provides the CISO with unified visibility into the organization’s state of security and enables security teams to prioritize and focus remediation efforts. Our platform also translates vulnerability data into actionable business metrics and insights that boards of directors and executives can understand and use to make strategic decisions. We believe our Cyber Exposure solutions are transforming how security is managed and measured and will help organizations more rapidly embrace digital transformation.

Our enterprise platform offerings include Tenable.io and SecurityCenter. Tenable.io is our software as a service, or SaaS, offering that manages and measures cyber exposure across a range of traditional IT assets, such as networking infrastructure, desktops and on-premises servers and modern IT assets, such as cloud workloads, containers, web applications, IoT and OT assets. SecurityCenter is built to manage and measure cyber exposure across traditional IT assets and can be run on-premises, in the cloud or in a hybrid environment. Our enterprise platform offerings provide broad visibility into Cyber Exposure issues such as vulnerabilities, misconfigurations, internal and regulatory compliance violations and other indicators of the state of an organization’s security. We also provide deep analytics to help organizations measure trends in their cyber exposure over time. Our platform



 

1


Table of Contents

integrates and analyzes data from our native collectors alongside IT asset, vulnerability and threat data from third-party systems and applications to prioritize security issues for remediation and focus an organization’s resources based on risk and business criticality. We also plan to release Tenable.io Lumin, an application that will provide enhanced risk-based prioritization of issues and benchmarking against industry peers and best-in-class performers.

We believe that our long history in vulnerability management provides us with a significant competitive advantage in closing the Cyber Exposure Gap. We have been an integral part of the cybersecurity market for nearly two decades, initially by helping organizations assess their IT environments for vulnerabilities. Our co-founder is the creator of Nessus, one of the most widely deployed vulnerability assessment solutions in the cybersecurity industry, which underpins our enterprise platform. Since the introduction of Nessus in 1998, an extensive community of Nessus users has emerged. We continue to cultivate knowledge and affinity within this user base, which, when combined with our enterprise customers and our Tenable Research team of cybersecurity and data science experts, creates powerful network effects in the form of a continuous feedback loop of data and insights. We use these learnings to expand our assessment capabilities and coverage, continually optimize our solutions and inform our product strategy and innovation priorities. These data and insights will also fuel and strengthen our benchmarking capabilities over time. We believe the breadth and scale of our data asset is a sustainable advantage and, as the size of our network increases, the value of our data and insights increases and extends our competitive barrier.

We believe we have a differentiated business model in the cybersecurity industry that combines the adoption benefits of our free version of Nessus, Nessus Home, and our paid version of Nessus, Nessus Professional, both of which serve as on-ramps for customers and potential customers to our enterprise platform. Our free version of Nessus has had approximately two million cumulative unique downloads over the past 20 years, which we believe has created broad familiarity and affinity with our products, as well as mindshare among the overwhelming majority of security practitioners. Among our approximately 19,000 Nessus Professional customers, we believe we have significant opportunity to drive adoption of our enterprise platform offerings.

As of December 31, 2016 and 2017, we had over 21,000 and 24,000 customers, respectively, who licensed our Tenable.io, SecurityCenter or Nessus Professional products. This includes over 3,100 and 4,400 enterprise platform customers at those respective dates, which we define as a customer that has a current license for Tenable.io or SecurityCenter for an annual amount of $5,000 or greater. Our customers are located in over 160 countries and include enterprises of all sizes and government agencies around the world. As of December 31, 2017, 53% of the Fortune 500 and 29% of the Global 2000 organizations licensed paid versions of our various products, including enterprise platform customers in 30 of the Fortune 500 and 58 of the Global 2000 organizations.

We have experienced rapid growth in recent periods. Our enterprise platform offerings are primarily sold on an annual prepaid subscription basis. In 2016 and 2017, our total revenue was $124.4 million and $187.7 million, respectively, representing a year-over-year growth rate of 51%. In the three months ended March 31, 2017 and 2018, our total revenue was $40.5 million and $59.1 million, respectively, representing a year-over-year growth rate of 46%. In both 2016 and 2017, our recurring revenue, which includes revenue from subscription arrangements for software and cloud-based solutions and maintenance associated with perpetual licenses, represented 86% of our total revenue. In the three months ended March 31, 2017 and 2018, our recurring revenue represented 85% and 89%, respectively, of our total revenue. Our net loss was $37.2 million, $41.0 million and $15.9 million in 2016, 2017 and the three months ended March 31, 2018, respectively. Our net cash (used in) provided by operating activities was $(2.8) million, $(6.3) million and $0.5 million in 2016, 2017 and the three months ended March 31, 2018, respectively, and our free cash flow, a non-GAAP measure, was $(8.6) million, $(9.0) million and $(1.1) million, respectively, for those periods. We have not raised any primary institutional capital prior to this offering. See “Management’s Discussion and Analysis of Financial Condition and Results of



 

2


Table of Contents

Operations” for further description and analysis of our financial results and “Selected Consolidated Financial Data—Non-GAAP Financial Measures” for a discussion of how we calculate free cash flow, including a reconciliation to the most directly comparable GAAP measure.

Industry Background

Digital Transformation Increases IT Complexity and Cybersecurity Risk

Organizations of all sizes across industries are embracing digital transformation in order to seek competitive advantages. While digital transformation creates new opportunities, the underlying technologies and platforms that enable this transformation dramatically increase IT complexity and overall cybersecurity risk by creating a significantly expanding attack surface for hackers to exploit. These areas include:

 

   

Modernization of IT infrastructure and adoption of cloud computing. As organizations modernize their legacy IT infrastructure and adopt cloud or hybrid cloud architectures that are no longer housed in the confines of their corporate networks, they have less visibility and control over the security of these assets.

 

   

The growth of applications. The number of applications and frequency of releases have grown substantially in recent years, and often these applications are developed outside of traditional development processes, sometimes bypassing traditional security controls.

 

   

The rise of DevOps. The increased need for application development velocity has resulted in the rise of DevOps, software development practices and tools that increase an organization’s ability to rapidly deliver applications and services. In a DevOps model, new application features can be deployed on an hourly to daily basis. These critical and short-lived assets are deployed rapidly, creating blind spots for security teams and building security into these development processes is extremely difficult.

 

   

The proliferation of IoT devices in the enterprise. Organizations are seeing a significant rise in IoT devices. While such connected devices serve as a way to collect and transmit operational data to enhance business operations, they also create new points of attack for hackers due to their connectivity with business-critical systems.

 

   

IT / OT convergence. Operational Technology, such as Industrial Control Systems used in industries like manufacturing, were not originally designed with network connectivity and IT security in mind. However, as organizations are being driven to connect all aspects of their infrastructure, OT assets are becoming increasingly connected, and a cyberattack on an OT asset is not just a matter of business disruption; it can also be a public safety concern.

Cybersecurity Risk is Business Risk, Yet Organizations Lack the Insight to Guide Decisions

Cybersecurity risk is no longer a tactical technology issue for IT professionals alone, but rather a strategic business issue. Executives and boards of directors are struggling to effectively understand and manage their organizations’ cybersecurity risk in response to mandates from insurers, regulators, stockholders and consumers.

Boards seek to understand how secure their organization is, where the greatest risks are, how much they should be investing to reduce risk and how their organization compares to their industry peers and best-in-class organizations. As boards focus their attention on understanding and benchmarking their cyber exposure, CISOs need solutions that translate vulnerability data into actionable business insights so that they and their boards can proactively understand, measure and manage cybersecurity risk.

Existing Solutions Fall Short of Addressing Cyber Exposure

Many organizations have implemented vulnerability assessment and management tools that scan traditional IT systems on scheduled intervals and present raw lists of technical issues.



 

3


Table of Contents

These traditional solutions fall short on two key dimensions:

 

   

Lack of visibility across the breadth of the modern attack surface. Many tools were designed before the rise of cloud, containers, “bring your own device,” or BYOD, devices and IoT and focus instead on traditional IT systems such as networking infrastructure, desktops and on-premises servers. These tools do not address the dynamic nature of modern IT assets, or fully assess IoT devices and OT systems.

 

   

Inability to translate vulnerability data into business insights. Traditional tools lack both the prioritization and deep analytics that security teams, the CISOs, executives and boards of directors need to assess and benchmark their cybersecurity risk to make informed business decisions based on this raw technical security data.

In addition to traditional vulnerability management tools, organizations typically deploy many security tools, such as protection and detection and response technologies, which address different parts of security, but do not address the Cyber Exposure problem specifically. These point solutions are designed to collect, understand and react to threat activity, but do not answer fundamental strategic questions about the organization’s state of security.

Our Solution

Our vision is to empower every organization to understand and reduce their cybersecurity risk. We are the first and only Cyber Exposure platform designed to provide broad visibility and deep insights into cyber exposure across the entire modern attack surface.

Our platform is built to serve as the Cyber Exposure Command Center, enabling organizations to answer foundational and strategic questions such as:

 

   

Where are we exposed?

 

   

Where should we prioritize based on risk?

 

   

Are we reducing our exposure over time?

 

   

How do we compare to our peers?

Our enterprise platform offerings include Tenable.io and SecurityCenter. With our platform, our customers are able to gain visibility into their cyber exposure, prioritize remediation efforts based on risk and business criticality and benchmark cybersecurity risk in order to guide strategic decision making. Our solutions deliver the following key business benefits for our customers:

 

   

Visibility across a breadth of assets. We provide customers with broad visibility into the full range of attack surfaces within a single platform. Our solutions cover traditional IT assets, such as networking infrastructure, desktops and on-premises servers, as well as modern IT assets, such as cloud, containers, web applications, BYOD devices, IoT and OT assets that reside both inside and outside of a customer’s corporate network. Our solutions provide a range of continuous discovery and assessment techniques applied to the entire scope of a customer’s IT infrastructure.

 

   

Depth of analytics to prioritize issues and measure cybersecurity risk. Once asset discovery and assessment information is obtained, our platform is designed to give our customers a comprehensive and objective understanding of their cybersecurity posture and where they are exposed. Our solutions integrate and analyze our natively collected data alongside third-party data to rapidly prioritize security issues. Our analytics use our deep knowledge base, built over 20 years, to provide customers with a quantitative assessment of their cyber exposure.



 

4


Table of Contents

Competitive Strengths

We believe we have the following strengths that drive value to our customers and provide sustainable advantage for us:

 

   

Deeply trusted brand among large global Nessus community. Nessus is a widely adopted vulnerability assessment solution, with approximately two million cumulative unique downloads globally over the past 20 years. This community has developed a deep trust and affinity for Nessus, which we believe is a competitive advantage difficult to replicate.

 

   

Our data asset drives significant network effects. The combination of our extensive community of Nessus users, our approximately 19,000 Nessus Professional customers and our Tenable Research team provides a continuous feedback loop of data, insight and learnings, which we use to expand our assessment capabilities and coverage.

 

   

Differentiated business model. We believe that our business model is a key differentiator in our market and creates a strong competitive moat by combining the adoption benefits of free software with the economic benefits of a proprietary software business model. Through the large and growing base of Nessus users, we are able to create familiarity with our products and gain mindshare among security practitioners. Among our approximately 19,000 Nessus Professional customers, we believe we have a significant opportunity to convert customers to our enterprise platform products, Tenable.io and SecurityCenter.

 

   

Powerful assessment capabilities. Our platform provides broad vulnerability assessment capabilities that cover the full range of IT assets and cloud environments. We built the majority of these assessment capabilities natively into our platform from the ground up, which have been optimized and enhanced over the course of the past 20 years in close collaboration with the security community. In addition, we partner with other companies that possess deep expertise in specific markets and asset types.

Our Opportunity

We address what we refer to as the Cyber Exposure market, which includes traditional and modern attack surfaces. We estimate our total addressable market will reach approximately $16 billion in 2019. See “Business—Our Opportunity.”

Growth Strategy

In order to maintain our market leadership in Cyber Exposure and to capture our large market opportunity, key elements of our growth strategy include:

 

   

Continue to acquire new enterprise platform customers.

 

   

Expand asset coverage within our customer base.

 

   

Invest in our technology platform and expand use cases.

 

   

Accelerate international expansion.

Selected Risks Affecting Our Business

Investing in our common stock involves risk. You should carefully consider all the information in this prospectus prior to investing in our common stock. These risks are discussed more fully in the section entitled “Risk Factors” immediately following this prospectus summary. These risks and uncertainties include, but are not limited to, the following:

 

   

We have a history of losses and may not achieve or maintain profitability in the future.



 

5


Table of Contents
   

We may not be able to sustain our revenue growth rate in the future.

 

   

We may not be able to scale our business quickly enough to meet our customers’ growing needs.

 

   

If our solutions fail to detect vulnerabilities or incorrectly detect vulnerabilities, or if they contain undetected errors or defects, our brand and reputation could be harmed.

 

   

Our future quarterly results of operations are likely to fluctuate significantly due to a wide range of factors, which makes our future results difficult to predict.

 

   

We face intense competition.

 

   

If we do not continue to innovate and offer solutions that address the dynamic cybersecurity landscape, we may not remain competitive.

 

   

Our business and results of operations depend substantially on our customers renewing their subscriptions with us and expanding the number of assets under their subscriptions. Any decline in our customer renewals, terminations or failure to convince our customers to expand their use of subscription offerings would harm our business, results of operations and financial condition.

 

   

Our brand, reputation and ability to attract, retain and serve our customers are dependent in part upon the reliable performance of our solutions and network infrastructure.

 

   

We rely on third parties to maintain and operate certain elements of our network infrastructure.

 

   

We rely on our third-party channel partner network of distributors and resellers to generate a substantial amount of our revenue.

 

   

Concentration of ownership among our existing directors, executive officers and holders of 5% or more of our outstanding common stock may prevent new investors from influencing significant corporate decisions, including the ability to influence the outcome of director elections and other matters requiring stockholder approval.

Ownership of our Capital Stock

Prior to this offering, our directors, executive officers and greater than 5% stockholders, together with their respective affiliates, beneficially own, in the aggregate, approximately 73.1 million shares of our common stock, or approximately 89% of our outstanding common stock. Upon the completion of this offering, these persons and entities will beneficially own, in the aggregate, approximately 79% of our outstanding common stock, assuming no exercise of the underwriters’ option to purchase additional shares of our common stock in this offering.

Recent Developments (Preliminary and Unaudited)

Set forth below are certain estimated preliminary and unaudited financial results and other business metrics for the three months ended June 30, 2018. We have provided ranges, rather than specific amounts, for the preliminary financial results described below primarily because our financial closing procedures for the three months ended June 30, 2018 are not yet completed and, as a result, our actual results may differ materially from these estimates. The following information reflects our preliminary estimates with respect to such results based on currently available information, is not a comprehensive statement of our financial results and is subject to completion of our financial closing procedures. These results may change, and those changes may be material. This information should be read in conjunction with our consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for prior periods included elsewhere in this prospectus.

The following estimates of our preliminary financial results and business metrics contain forward-looking statements and may differ from actual results. Please refer to “Special Note Regarding Forward-Looking Statements.” These estimates should not be viewed as a substitute for our full interim or annual financial statements prepared in accordance with U.S. generally accepted accounting principles, or GAAP. Further, our



 

6


Table of Contents

preliminary estimated results are not necessarily indicative of the results to be expected for the remainder of 2018 or any future period as a result of various factors, including, but not limited to, those discussed in the sections titled “Risk Factors” and “Special Note Regarding Forward-Looking Statements.” Accordingly, you should not place undue reliance upon these preliminary estimates.

The following estimated preliminary and unaudited financial results and other business metrics have been prepared by, and are the responsibility of, management. Our independent registered public accounting firm, Ernst & Young LLP, has not audited, reviewed or performed any procedures with respect to the preliminary financial results. Accordingly, Ernst & Young LLP does not express an opinion or any other form of assurance with respect thereto.

 

     Three Months 
Ended
June 30, 2017
    Three Months Ended
June 30, 2018
 
    Low End of
Range
    High End of
Range
 
           (estimated)  
    

(unaudited, in millions)

 

Revenue

   $ 44.1     $ 62.3     $ 63.3  

Loss from operations

     (9.2     (18.4     (17.4

Stock-based compensation

     1.8       3.0       3.0  

Amortization of intangible assets

     0.2       0.2       0.2  
  

 

 

   

 

 

   

 

 

 

Non-GAAP loss from operations(1)

   $ (7.2   $ (15.2   $ (14.2
  

 

 

   

 

 

   

 

 

 

Revenue

   $ 44.1     $ 62.3     $ 63.3  

Deferred revenue (current), end of period

     122.2       174.2       174.2  

Deferred revenue (current), beginning of period

     (110.6     (160.5     (160.5
  

 

 

   

 

 

   

 

 

 

Calculated current billings(1)

   $ 55.7     $ 76.0     $ 77.0  
  

 

 

   

 

 

   

 

 

 

 

(1)

Non-GAAP loss from operations and calculated current billings are financial measures not calculated in accordance with GAAP. For definitions of non-GAAP loss from operations and calculated current billings, as well as the reasons that we believe that non-GAAP loss from operations and calculated current billings are useful metrics, see “Selected Consolidated Financial Data—Non-GAAP Financial Measures.”

In our selected preliminary consolidated financial data above, the increase in revenue from the three months ended June 30, 2017 to the three months ended June 30, 2018 was primarily driven by an increase in sales of enterprise subscriptions to new and existing customers. The increase in loss from operations and non-GAAP loss from operations from the three months ended June 30, 2017 to the three months ended June 30, 2018 was primarily due to an increase in personnel costs and an increase in public cloud hosting expenses related to Tenable.io, partially offset by an increase in revenue.

The following tables summarize other preliminary business metrics for the periods indicated:

New Enterprise Platform Customer Acquisition

 

     Three Months Ended June 30,  
     2017      2018  

Number of new enterprise platform customers(1)

     217        282  

 

(1)

We define an enterprise platform customer as a customer that has licensed Tenable.io or SecurityCenter for an annual amount of $5,000 or greater. New enterprise platform customers represent new customer logos during the periods presented and do not include customer conversions from Nessus Professional to enterprise platforms.



 

7


Table of Contents
     As of June 30,  
     2017      2018  

Number of customers with $100,000 and greater in annual contract value

     181        340  

Dollar-Based Net Expansion Rate

Our dollar-based net expansion rate for the trailing 12 months ended June 30, 2018 was 121%. If we had included in the numerator the annual contract value of incremental payments related to perpetual licenses and services from existing customers, our trailing 12-month dollar-based net expansion rate would have increased by over 10 percentage points at June 30, 2018. For a definition of our dollar-based net expansion rate and a description of how we calculate this metric, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting Our Performance—Retaining and Expanding Revenue from Existing Customers.”

Corporate Information

Tenable Network Security, Inc., our predecessor, was incorporated under the laws of the State of Delaware in 2002. In 2015, in connection with the sale of 39,538,354 shares of Series B redeemable convertible preferred stock to investors, we entered into the series of transactions below, which we refer to collectively as our Series B financing or our recapitalization. Tenable Holdings, Inc. was incorporated in Delaware in October 2015, and in November 2015, Tenable Network Security, Inc. was merged into our wholly-owned indirect subsidiary and in 2017 was renamed as Tenable, Inc. As part of the Series B financing, we entered into contribution agreements with certain stockholders of Tenable, Inc. pursuant to which they contributed shares of Tenable, Inc. to us in exchange for the same class and number of shares of Tenable Holdings, Inc. As a result, we issued an aggregate of 20,670,193 shares of common stock and 15,847,500 shares of Series A redeemable convertible preferred stock to these stockholders and paid aggregate cash consideration of $229.1 million.

Pursuant to the merger agreement, each outstanding share of common stock of Tenable, Inc. held by accredited investors (other than the shares contributed to us and shares held by dissenting stockholders) was, at such holder’s election, converted into the right to receive a combination of cash consideration and shares of our common stock. Shares held by non-accredited investors, and, at their election, shares held by certain accredited investors, were automatically converted into cash. We used the proceeds from the Series B financing to purchase these shares and make the payments referenced above. None of the proceeds from the sale of Series B redeemable convertible preferred stock were retained by us. See “Certain Relationships and Related Party Transactions—Sale of Series B Redeemable Convertible Preferred Stock and Stock Repurchases.” Additionally, at the effective time of the merger, each outstanding option granted by Tenable, Inc. was assumed by us and converted into an option to acquire our common stock and continued to be subject to the same terms and conditions applicable to the options. As a result, outstanding Tenable, Inc. options were assumed by us and converted into options to purchase an aggregate of 7,616,253 shares of our common stock.

Our principal executive offices are located at 7021 Columbia Gateway Drive, Suite 500, Columbia, Maryland 21046. Our telephone number is (410) 872-0555. Our website address is www.tenable.com. The information contained on, or that can be accessed through, our website is not incorporated by reference into this prospectus, and you should not consider any information contained on, or that can be accessed through, our website as part of this prospectus or in deciding whether to purchase our common stock.

“Tenable,” “Nessus,” “Tenable.io” and the Tenable logo, and other trademarks or service marks of Tenable Holdings, Inc. appearing in this prospectus are the property of Tenable Holdings, Inc. This prospectus contains additional trade names, trademarks and service marks of others, which are the property of their respective owners. Solely for convenience, trademarks and trade names referred to in this prospectus may appear without the ® or TM symbols.



 

8


Table of Contents

Implications of Being an Emerging Growth Company

We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other burdens that are otherwise applicable generally to public companies. These provisions include:

 

   

a requirement to have only two years of audited financial statements and only two years of related selected financial data and management’s discussion and analysis of financial condition and results of operations disclosure;

 

   

an exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act;

 

   

an exemption from implementation of new or revised financial accounting standards until they would apply to private companies and from compliance with any new requirements adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotation;

 

   

reduced disclosure obligations regarding executive compensation arrangements; and

 

   

no requirement to seek nonbinding advisory votes on executive compensation or golden parachute arrangements.

We may take advantage of some or all these provisions until we are no longer an emerging growth company. We are choosing to irrevocably “opt out” of the extended transition periods available under the JOBS Act for complying with new or revised accounting standards, but we intend to take advantage of the other exemptions discussed above. Accordingly, the information contained herein may be different than the information you receive from other public companies in which you hold stock.

We will remain an emerging growth company until the earlier to occur of (1) the last day of the fiscal year (a) following the fifth anniversary of the closing of this offering, (b) in which we have total annual gross revenue of at least $1.07 billion or (c) in which we are deemed to be a “large accelerated filer,” under the rules of the U.S. Securities and Exchange Commission, or SEC, which means the market value of our equity securities that is held by non-affiliates exceeds $700 million as of the prior June 30th, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.



 

9


Table of Contents

THE OFFERING

 

Common stock offered by us

  

10,900,000 shares

Common stock to be outstanding after this offering

  

91,079,454 shares

Over-allotment option of common stock offered by us

  

1,635,000 shares

Use of proceeds

  

We estimate that we will receive net proceeds of approximately $209.0 million (or approximately $240.9 million if the underwriters exercise their over-allotment option in full), assuming an initial public offering price of $21.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriter discounts and commissions and estimated offering expenses payable by us. The principal purposes of this offering are to increase our financial flexibility, create a public market for our common stock and facilitate our future access to the capital markets. We expect to use the net proceeds of this offering for working capital and other general corporate purposes. We may use a portion of the proceeds from this offering for acquisitions or strategic investments in complementary businesses or technologies, although we do not currently have any plans for any such acquisitions or investments. These expectations are subject to change. See “Use of Proceeds” for additional information.

Directed share program

  

At our request, the underwriters have reserved up to 654,000 shares of common stock offered by this prospectus, or up to 6% of the shares of common stock offered by this prospectus, for sale, at the initial public offering price, to our directors and to friends, professional contacts and family members of our executive officers and directors. If purchased by these persons, these shares will not be subject to a lock-up restriction, except for shares purchased by our directors, which will be subject to restrictions described in “Shares Eligible for Future Sale.” The number of shares of common stock available for sale to the general public will be reduced by the number of reserved shares sold to these individuals. Any reserved shares that are not so purchased will be offered by the underwriters to the general public on the same basis as the other shares offered by this prospectus. See “Underwriting.” As described on the cover of this prospectus, some of our directors have indicated an interest in purchasing shares in this offering, which purchases would be part of the directed share program.



 

10


Table of Contents

Risk factors

  

See “Risk Factors” and the other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common stock.

Proposed Nasdaq Global Select Market symbol

  

“TENB”

The number of shares of our common stock that will be outstanding after this offering is based on 80,179,454 shares of common stock outstanding as of March 31, 2018, and excludes:

 

   

15,217,352 shares of common stock issuable upon the exercise of options outstanding as of March 31, 2018, at a weighted-average exercise price of $4.93 per share;

 

   

2,557,234 shares of common stock reserved for future issuance as of March 31, 2018 under our 2016 Stock Incentive Plan, which shares will cease to be available for issuance at the time our 2018 Equity Incentive Plan becomes effective and will be added to, and become available for issuance under, our 2018 Equity Incentive Plan;

 

   

736,500 shares of common stock issuable upon the exercise of options granted under our 2016 Stock Incentive Plan subsequent to March 31, 2018, at an exercise price of $14.06 per share;

 

   

4,012,148 shares of common stock issuable upon the exercise of options granted under our 2016 Stock Incentive Plan subsequent to March 31, 2018, at an exercise price of $16.21 per share;

 

   

973,800 shares of common stock issuable upon the settlement of restricted stock units granted under our 2016 Stock Incentive Plan subsequent to March 31, 2018;

 

   

9,900,000 shares of common stock reserved for future issuance pursuant to our 2018 Equity Incentive Plan, which will become effective prior to the closing of this offering; and

 

   

4,000,000 shares of common stock reserved for future issuance under our 2018 Employee Stock Purchase Plan, which will become effective prior to the closing of this offering.

Unless otherwise indicated, this prospectus reflects and assumes the following:

 

   

the conversion of all outstanding shares of our convertible preferred stock into an aggregate of 55,385,854 shares of our common stock immediately prior to the closing of this offering;

 

   

no exercise of outstanding options or settlement of outstanding restricted stock units after March 31, 2018;

 

   

no repurchase of outstanding shares of common stock after March 31, 2018;

 

   

no exercise by the underwriters of their over-allotment option to purchase additional shares of our common stock; and

 

   

the filing and effectiveness of our amended and restated certificate of incorporation in Delaware and the adoption of our amended and restated bylaws, each of which will occur immediately prior to the closing of this offering.

Arthur W. Coviello, Jr., Kimberly L. Hammonds and A. Brooke Seawell, each a member of our board of directors, have indicated an interest in purchasing, directly or through associated entities, up to an aggregate of approximately $1.2 million of shares of our common stock in this offering (or an aggregate of 57,142 shares based on the midpoint of the price range set forth on the cover page of this prospectus) at the initial public offering price as part of the directed share program described elsewhere in this prospectus. To the extent these affiliates purchase any such shares from us, the number of shares to be sold to the underwriters will accordingly be reduced. Because these indications of interest are not binding agreements or commitments to purchase, the underwriters could determine to sell more, less or no shares to any of these potential investors and any of these potential investors could determine to purchase more, less or no shares in this offering. The underwriters will receive the same discount from any shares sold to these potential investors as they will from any other shares sold to the public in this offering. Any shares purchased by our directors as part of the directed share program will be subject to lock-up restrictions described in “Shares Eligible for Future Sale.”



 

11


Table of Contents

SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA

We derived the summary consolidated statements of operations data for the years ended December 31, 2016 and 2017 from our audited consolidated financial statements included elsewhere in this prospectus. In order to provide additional historical financial information, we have included supplemental consolidated statements of operations data for the year ended December 31, 2015, which is derived from the consolidated statement of operations and comprehensive loss for the year ended December 31, 2015 from our audited financial statements not included in this prospectus. We derived the summary consolidated statements of operations data for the three months ended March 31, 2017 and 2018 and the summary consolidated balance sheet data as of March 31, 2018 from the unaudited consolidated financial statements included elsewhere in this prospectus. Our unaudited interim consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements and reflect, in the opinion of management, all adjustments of a normal, recurring nature that are necessary for a fair presentation of our unaudited interim consolidated financial statements. Our historical results are not necessarily indicative of the results to be expected in the future, and our operating results for the three months ended March 31, 2018 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 2018.

When you read this summary consolidated financial data, it is important that you read it together with the historical consolidated financial statements and related notes to those statements, as well as “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included elsewhere in this prospectus.

 

     Year Ended December 31,              Three Months Ended March 31,    
     2015      2016      2017            2017      2018  
    

(in thousands, except per share data)

 

Consolidated Statements of Operations Data:

                

Revenue(1)

   $ 93,466      $ 124,371      $ 187,727        $ 40,481      $ 59,107  

Cost of revenue(2)

     10,914        14,219        25,588          4,438        8,728  
  

 

 

    

 

 

    

 

 

      

 

 

    

 

 

 

Gross profit

     82,552        110,152        162,139          36,043        50,379  

Operating expenses:

                

Sales and marketing(1)(2)

     60,635        85,736        116,299          26,168        39,588  

Research and development(2)

     25,288        40,085        57,673          12,458        17,185  

General and administrative(2)

     15,348        20,164        28,927          6,163        9,055  

Recapitalization costs(3)

     67,039                                
  

 

 

    

 

 

    

 

 

      

 

 

    

 

 

 

Total operating expenses

     168,310        145,985        202,899          44,789        65,828  
  

 

 

    

 

 

    

 

 

      

 

 

    

 

 

 

Loss from operations

     (85,758      (35,833      (40,760        (8,746      (15,449

Other expense, net

     189        532        91          29        8  
  

 

 

    

 

 

    

 

 

      

 

 

    

 

 

 

Loss before income taxes

     (85,947      (36,365      (40,851        (8,775      (15,457

(Benefit from) provision for income taxes

     (2,188      843        171          51        431  
  

 

 

    

 

 

    

 

 

      

 

 

    

 

 

 

Net loss

     (83,759      (37,208      (41,022        (8,826      (15,888

Accretion of Series A and B redeemable convertible preferred stock

     29        763        763          187        188  
  

 

 

    

 

 

    

 

 

      

 

 

    

 

 

 

Net loss attributable to common stockholders

   $ (83,788    $ (37,971    $ (41,785      $ (9,013    $ (16,076
  

 

 

    

 

 

    

 

 

      

 

 

    

 

 

 

Net loss per share attributable to common stockholders, basic and diluted(4)

   $ (1.45    $ (1.81    $ (1.88      $ (0.42    $ (0.68
  

 

 

    

 

 

    

 

 

      

 

 

    

 

 

 

Weighted-average shares used to compute net loss per share attributable to common stockholders, basic and diluted

     57,654        20,974        22,211          21,257        23,495  
  

 

 

    

 

 

    

 

 

      

 

 

    

 

 

 

Pro forma net loss per share, basic and diluted (unaudited)(5)

         $ (0.53         $ (0.20
        

 

 

         

 

 

 

Weighted-average shares used in computing pro forma net loss per share, basic and diluted (unaudited)

           77,597             78,881  
        

 

 

         

 

 

 


 

12


Table of Contents

 

(1) We adopted Accounting Standards Codification Topic 606, Revenue From Contracts With Customers, or ASC 606, on January 1, 2017 using the modified retrospective method. The 2015 and 2016 consolidated statements of operations were not adjusted for the adoption of ASC 606. See Note 2 to our consolidated financial statements included elsewhere in this prospectus for details on the impact of adopting ASC 606.
(2) Includes stock-based compensation expense as follows:

 

     Year Ended December 31,      Three Months Ended March 31,  
         2015              2016              2017              2017              2018      
    

(in thousands)

 

Cost of revenue

   $ 52      $ 223      $ 281      $ 54      $ 77  

Sales and marketing

     866        969        1,579        270        602  

Research and development

     252        602        1,782        394        527  

General and administrative

     509        738        4,118        908        1,193  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 1,679      $ 2,532      $ 7,760      $ 1,626      $ 2,399  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
(3) We recorded a charge of $67.0 million primarily resulting from the repurchase price paid to common stockholders exceeding the estimated fair value of the common stock on the date of the Series B financing.
(4) See Note 9 to our consolidated financial statements appearing elsewhere in this prospectus for further details on the calculation of basic and diluted net loss per share attributable to common stockholders.
(5) Pro forma basic and diluted net loss per share represents net loss divided by the pro forma weighted-average shares of common stock outstanding. Pro forma weighted-average shares outstanding reflects the conversion of all outstanding shares of preferred stock (using the if-converted method) into common stock as though the conversion had occurred on the first day of the relevant period.

 

     As of March 31, 2018  
     Actual     Pro forma(1)     Pro forma as
adjusted(2)(3)
 
     (in thousands)  

Consolidated Balance Sheet Data:

      

Cash and cash equivalents

   $ 26,424     $ 26,424       235,401  

Working capital (deficit)(4)

     (81,983     (81,983     127,101  

Total assets

     155,645       155,645       364,515  

Deferred revenue, current and non-current

     230,614       230,614       230,614  

Redeemable convertible preferred stock

     277,923              

Accumulated deficit

     (408,475     (408,475     (408,475

Total stockholders’ (deficit) equity

     (384,863     (106,940     102,037  

 

(1) Pro forma consolidated balance sheet data reflects the conversion of all outstanding shares of preferred stock into common stock immediately prior to the closing of this offering as if such conversion had occurred on March 31, 2018.
(2) Pro forma as adjusted consolidated balance sheet data reflects the pro forma items described immediately above and our sale of 10,900,000 shares of common stock in this offering at an assumed initial public offering price of $21.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
(3)

Pro forma as adjusted consolidated balance sheet data is illustrative only and will change based on the actual initial public offering price and other terms of this offering determined at pricing. Each $1.00 increase or decrease in the assumed initial public offering price of $21.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease pro forma as adjusted cash and cash equivalents, working capital (deficit), total assets and total stockholders’ (deficit) equity by approximately $10.1 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and



 

13


Table of Contents
  estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. A 1,000,000 share increase or decrease in the number of shares offered by us would increase or decrease pro forma as adjusted cash and cash equivalents, total assets and total stockholders’ (deficit) equity by approximately $19.5 million, assuming that the assumed initial offering price to the public remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
(4) We define working capital (deficit) as total current assets less total current liabilities. See our consolidated financial statements included elsewhere in this prospectus for further details regarding our current assets and current liabilities. Changes in working capital (deficit) reflect increases in deferred revenue and deferred commissions as a result of our subscription model and our adoption of ASC 606.


 

14


Table of Contents

RISK FACTORS

Investing in our common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with all of the other information in this prospectus, including our consolidated financial statements and related notes, before deciding whether to purchase shares of our common stock. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that affect us. If any of the following risks are realized, our business, financial condition, results of operations and prospects could be materially and adversely affected. In that event, the price of our common stock could decline, and you could lose part or all of your investment.

Risks Related to Our Business and Industry

We have a history of losses and may not achieve or maintain profitability in the future.

We have historically incurred net losses, including net losses of $37.2 million, $41.0 million and $15.9 million in 2016, 2017 and the three months ended March 31, 2018, respectively. As of March 31, 2018, we had an accumulated deficit of $408.5 million. Because the market for our offerings is highly competitive and rapidly evolving and these solutions have not yet reached widespread adoption, it is difficult for us to predict our future results of operations. While we have experienced significant revenue growth in recent periods, we are not certain whether or when we will obtain a high enough volume of sales of our offerings to sustain or increase our growth or achieve or maintain profitability in the future. We also expect our costs to increase in future periods, which could negatively affect our future operating results if our revenue does not increase at a greater rate. In particular, we expect to continue to expend substantial financial and other resources on:

 

   

research and development related to our offerings, including investments in our research and development team;

 

   

sales and marketing, including a significant expansion of our sales organization, both domestically and internationally;

 

   

continued international expansion of our business; and

 

   

general and administrative expense, including legal and accounting expenses related to being a public company.

These investments may not result in increased revenue or growth in our business. If we are unable to increase our revenue at a rate sufficient to offset the expected increase in our costs, our business, financial position and results of operations will be harmed and we may not be able to achieve or maintain profitability over the long term. Additionally, we may encounter unforeseen operating expenses, difficulties, complications, delays and other unknown factors that may result in losses in future periods. If our revenue growth does not meet our expectations in future periods, our financial performance may be harmed, and we may not achieve or maintain profitability in the future.

We may not be able to sustain our revenue growth rate in the future.

From 2016 to 2017, our revenue grew from $124.4 million to $187.7 million, representing year-over-year growth of 51%. Our adoption of ASC 606 as of January 1, 2017 contributed three percentage points to that growth rate. From the three months ended March 31, 2017 to the three months ended March 31, 2018, our revenue grew from $40.5 million to $59.1 million, representing year-over-year growth of 46%. This growth was primarily from an increase in subscription revenue. Although we have experienced rapid growth historically and currently have high customer renewal rates, we may not continue to grow as rapidly in the future due to a decline in our renewal rates, failure to attract new customers or other factors. Any success that we may experience in the future will depend in large part on our ability to, among other things:

 

   

maintain and expand our customer base;

 

   

increase revenue from existing customers through increased or broader use of our offerings within their organizations;

 

15


Table of Contents
   

improve the performance and capabilities of our offerings through research and development;

 

   

continue to develop and expand our enterprise platform;

 

   

maintain the rate at which customers purchase and renew subscriptions to our enterprise platform offerings;

 

   

continue to successfully expand our business domestically and internationally; and

 

   

successfully compete with other companies.

If we are unable to maintain consistent revenue or revenue growth, our stock price could be volatile, and it may be difficult to achieve and maintain profitability. You should not rely on our revenue for any prior quarterly or annual periods as any indication of our future revenue or revenue growth.

We may be unable to rapidly and efficiently adjust our cost structure in response to significant revenue declines, which could adversely affect our operating results.

We recognize substantially all of our revenue ratably over the term of our subscriptions and, to a lesser extent, perpetual licenses ratably over an expected period of benefit and, as a result, downturns in sales may not be immediately reflected in our operating results.

We recognize substantially all of our revenue ratably over the terms of our subscriptions with customers, which generally occurs over a one-year period and, for our perpetual licenses, over a five-year expected period of benefit. As a result, a substantial portion of the revenue that we report in each period will be derived from the recognition of deferred revenue relating to agreements entered into during previous periods. Consequently, a decline in new sales or renewals in any one period may not be immediately reflected in our revenue results for that period. This decline, however, will negatively affect our revenue in future periods. Accordingly, the effect of significant downturns in sales and market acceptance of our solutions and potential changes in our rate of renewals may not be fully reflected in our results of operations until future periods. This also makes it difficult for us to rapidly increase our revenue growth through additional sales in any period, as revenue from new customers generally will be recognized over the term of the applicable agreement.

We may not be able to scale our business quickly enough to meet our customers’ growing needs.

As usage of our enterprise platform grows, and as customers expand in size or expand the number of IT assets or IP addresses under their subscriptions, we may need to devote additional resources to improving our technology architecture, integrating with third-party systems and maintaining infrastructure performance. In addition, we will need to appropriately scale our sales and marketing headcount, as well as grow our third-party channel partner network, to serve our growing customer base. If we are unable to scale our business appropriately, it could reduce the attractiveness of our solutions to customers, resulting in decreased sales to new customers, lower renewal rates by existing customers or the issuance of service credits or requested refunds, each of which could hurt our revenue growth and our reputation. Even if we are able to upgrade our systems and expand our personnel, any such expansion will be expensive and complex, requiring management time and attention. We could also face inefficiencies or operational failures as a result of our efforts to scale our infrastructure. Moreover, there are inherent risks associated with upgrading, improving and expanding our information technology systems. We cannot be sure that the expansion and improvements to our infrastructure and systems will be fully or effectively implemented on a timely basis, if at all. These efforts may reduce revenue and our margins and adversely impact our financial results.

If our enterprise platform offerings do not interoperate with our customers’ network and security infrastructure or with third-party products, websites or services, our results of operations may be harmed.

Our enterprise platform offerings, Tenable.io and SecurityCenter, must interoperate with our customers’ existing network and security infrastructure. These complex systems are developed, delivered and maintained by

 

16


Table of Contents

the customer and a myriad of vendors and service providers. As a result, the components of our customers’ infrastructure have different specifications, rapidly evolve, utilize multiple protocol standards, include multiple versions and generations of products and may be highly customized. We must be able to interoperate and provide our security offerings to customers with highly complex and customized networks, which requires careful planning and execution between our customers, our customer support teams and our channel partners. Further, when new or updated elements of our customers’ infrastructure or new industry standards or protocols, such as HTTP/2, are introduced, we may have to update or enhance our cloud platform and our other solutions to allow us to continue to provide service to customers. Our competitors or other vendors may refuse to work with us to allow their products to interoperate with our solutions, which could make it difficult for our cloud platform to function properly in customer networks that include these third-party products.

We may not deliver or maintain interoperability quickly or cost-effectively, or at all. These efforts require capital investment and engineering resources. If we fail to maintain compatibility of our cloud platform and our other solutions with our customers’ network and security infrastructures, our customers may not be able to fully utilize our solutions, and we may, among other consequences, lose or fail to increase our market share and experience reduced demand for our services, which would materially harm our business, operating results and financial condition.

If our solutions fail to detect vulnerabilities or incorrectly detect vulnerabilities, or if they contain undetected errors or defects, our brand and reputation could be harmed.

If our solutions fail to detect vulnerabilities in our customers’ cybersecurity infrastructure, or if our solutions fail to identify to new and increasingly complex methods of cyberattacks, our business and reputation may suffer. There is no guarantee that our solutions will detect all vulnerabilities, especially in light of the rapidly changing security landscape to which we must respond. Additionally, our solutions may falsely detect vulnerabilities or threats that do not actually exist. For example, our solutions rely on information provided by an active community of users who contribute new exploits, attacks and vulnerabilities. If the information from these third parties is inaccurate, the potential for false indications of security vulnerabilities increases. These false positives, while typical in the industry, may impair the perceived reliability of our offerings and may therefore adversely impact market acceptance of our products and could result in negative publicity, loss of customers and sales and increased costs to remedy any problem.

Our solutions may also contain undetected errors or defects when first introduced or as new versions are released. We have experienced these errors or defects in the past in connection with new solutions and product upgrades and we expect that these errors or defects will be found from time to time in the future in new or enhanced solutions after commercial release. Defects may cause our solutions to be vulnerable to attacks, cause them to fail to detect vulnerabilities, or temporarily interrupt customers’ networking traffic. Any errors, defects, disruptions in service or other performance problems with our solutions may damage our customers’ business and could hurt our reputation. If our solutions or fail to detect vulnerabilities for any reason, we may incur significant costs, the attention of our key personnel could be diverted, our customers may delay or withhold payment to us or elect not to renew or other significant customer relations problems may arise. We may also be subject to liability claims for damages related to errors or defects in our solutions. A material liability claim or other occurrence that harms our reputation or decreases market acceptance of our solutions may harm our business and operating results.

An actual or perceived security breach or theft of the sensitive data of one of our customers, regardless of whether the breach is attributable to the failure of our solutions, could adversely affect the market’s perception of our brand and our offerings and subject us to legal claims.

 

17


Table of Contents

Our future quarterly results of operations are likely to fluctuate significantly due to a wide range of factors, which makes our future results difficult to predict.

Our revenue and results of operations have historically varied from period to period, and we expect that they will continue to do so as a result of a number of factors, many of which are outside of our control, including:

 

   

the level of demand for our enterprise platform;

 

   

the introduction of new products and product enhancements by existing competitors or new entrants into our market, and changes in pricing for solutions offered by us or our competitors;

 

   

the rate of renewal of subscriptions, and extent of expansion of IT assets under such subscriptions, with existing customers;

 

   

the mix of customers licensing our products on a subscription basis as compared to a perpetual license;

 

   

large customers failing to renew their subscriptions;

 

   

the size, timing and terms of our subscription agreements with new customers;

 

   

our ability to interoperate our solutions with our customers’ network and security infrastructure;

 

   

the timing and growth of our business, in particular through our hiring of new employees and international expansion;

 

   

network outages, security breaches, technical difficulties or interruptions with our solutions;

 

   

changes in the growth rate of the markets in which we compete;

 

   

the length of the license term, amount prepaid and other material terms of subscriptions to our solutions sold during a period;

 

   

customers delaying purchasing decisions in anticipation of new developments or enhancements by us or our competitors or otherwise;

 

   

changes in customers’ budgets;

 

   

seasonal variations related to sales and marketing and other activities, such as expenses related to our customers;

 

   

our ability to increase, retain and incentivize the channel partners that market and sell our solutions;

 

   

our ability to integrate our solutions with our ecosystem partners’ technology;

 

   

our brand and reputation;

 

   

the timing of our adoption of new or revised accounting pronouncements applicable to public companies and the impact on our results of operations;

 

   

our ability to control costs, including our operating expenses;

 

   

our ability to hire, train and maintain our direct sales force;

 

   

unforeseen litigation and intellectual property infringement;

 

   

fluctuations in our effective tax rate; and

 

   

general economic and political conditions, both domestically and internationally, as well as economic conditions specifically affecting industries in which our customers operate.

Any one of these or other factors discussed elsewhere in this prospectus, or the cumulative effect of some of these factors, may result in fluctuations in our revenue and operating results, meaning that quarter-to-quarter comparisons of our revenue, results of operations and cash flows may not necessarily be indicative of our future performance and may cause us to miss our guidance and analyst expectations and may cause our stock price to decline.

 

18


Table of Contents

In addition, we have historically experienced seasonality in entering into agreements with customers. We typically enter into a significantly higher percentage of agreements with new customers, as well as renewal agreements with existing customers, in the third and fourth quarters. The increase in customer agreements for the third quarter is primarily attributable to U.S. government and related agencies, and the increase in the fourth quarter is primarily attributable to large enterprise account buying patterns typical in the software industry. We expect that seasonality will continue to affect our operating results in the future and may reduce our ability to predict cash flow and optimize the timing of our operating expenses.

We face intense competition.

The market for cybersecurity solutions is fragmented, intensely competitive and constantly evolving. We compete with a range of established and emerging cybersecurity software and services vendors, as well as homegrown solutions. With the introduction of new technologies and market entrants, we expect the competitive environment to remain intense going forward. Our competitors include: vulnerability management and assessment vendors, including Qualys and Rapid7; diversified security software and services vendors, including IBM; endpoint security vendors with nascent vulnerability assessment capabilities, including Tanium and CrowdStrike; and providers of point solutions that compete with some of the features present in our solutions. We also compete against internally-developed efforts that often use open source solutions.

Some of our actual and potential competitors have significant advantages over us, such as longer operating histories, significantly greater financial, technical, marketing or other resources, stronger brand and business user recognition, larger intellectual property portfolios and broader global distribution and presence. In addition, our industry is evolving rapidly and is becoming increasingly competitive. Larger and more established companies may focus on cybersecurity and could directly compete with us. Smaller companies could also launch new products and services that we do not offer and that could gain market acceptance quickly.

Our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements. With the introduction of new technologies, the evolution of our offerings and new market entrants, we expect competition to intensify in the future. In addition, some of our larger competitors have substantially broader product offerings and can bundle competing products and services with other software offerings. As a result, customers may choose a bundled product offering from our competitors, even if individual products have more limited functionality than our solutions. These competitors may also offer their products at a lower price as part of this larger sale, which could increase pricing pressure on our offerings and cause the average sales price for our offerings to decline. These larger competitors are also often in a better position to withstand any significant reduction in capital spending, and will therefore not be as susceptible to economic downturns. One component of our enterprise platform involves assessing Cyber Exposure in a public cloud environment. We are dependent upon the public cloud providers to allow our solutions to access their cloud offerings. If one or more cloud providers elected to offer exclusively their own cloud security product or otherwise eliminate the ability of our solutions to access their cloud on behalf of our customers, our business and financial results could be harmed.

Furthermore, our current and potential competitors may establish cooperative relationships among themselves or with third parties that may further enhance their resources and products and services offerings in the markets we address. In addition, current or potential competitors may be acquired by third parties with greater available resources. As a result of such relationships and acquisitions, our current or potential competitors might be able to adapt more quickly to new technologies and customer needs, devote greater resources to the promotion or sale of their products and services, initiate or withstand substantial price competition, take advantage of other opportunities more readily or develop and expand their product and service offerings more quickly than we do. For all of these reasons, we may not be able to compete successfully against our current or future competitors.

 

19


Table of Contents

If we do not continue to innovate and offer solutions that address the dynamic cybersecurity landscape, we may not remain competitive.

The cybersecurity market is characterized by very rapid technological advances, changes in customer requirements, frequent new product introductions and enhancements and evolving industry standards. Our success also depends on continued innovation to provide features that make our solutions responsive to the cybersecurity landscape. While we continue to invest significant resources in research and development in order to ensure that our solutions continue to address the cyber security risks that our customers face, the introduction of solutions and services embodying new technologies could render our existing solutions or services obsolete or less attractive to customers. In addition, developing new solutions and product enhancements is expensive and time-consuming, and there is no assurance that such activities will result in significant cost savings, revenue or other expected benefits. For example, we plan to release a new product, Tenable.io Lumin, and there can be no assurance that product will offer the benefits we expect or generate customer interest. We may also face delays or uncertainty in our release timing for Tenable.io Lumin that may be costly or reduce the benefits of Lumin. If we spend significant time and effort on research and development and are unable to generate an adequate return on our investment, our business and results of operations may be materially and adversely affected. Further, we may not be able to successfully anticipate or adapt to changing technology or customer requirements or the dynamic threat landscape on a timely basis, or at all, which would impair our ability to execute on our business strategy.

Our business and results of operations depend substantially on our customers renewing their subscriptions with us and expanding the number of IT assets or IP addresses under their subscriptions. Any decline in our customer renewals, terminations or failure to convince our customers to expand their use of subscription offerings would harm our business, results of operations, and financial condition.

Our subscription offerings are term-based and a majority of our subscription contracts entered into in 2017 and 2018 were for one year in duration. In order for us to maintain or improve our results of operations, it is important that a high percentage of our customers renew their subscriptions with us when the existing subscription term expires, and renew on the same or more favorable terms. Our customers have no obligation to renew their subscriptions, and we may not be able to accurately predict customer renewal rates. In addition, the growth of our business depends in part on our customers expanding their use of subscription offerings and related services. Historically, some of our customers have elected not to renew their subscriptions with us for a variety of reasons, including as a result of changes in their strategic IT priorities, budgets, costs and, in some instances, due to competing solutions. Our retention rate may also decline or fluctuate as a result of a number of other factors, including our customers’ satisfaction or dissatisfaction with our software, the increase in the contract value of subscription and support contracts from new customers, the effectiveness of our customer support services, our pricing, the prices of competing products or services, mergers and acquisitions affecting our customer base, global economic conditions, and the other risk factors described in this prospectus. Additionally, many of our customers, including certain top customers, have the right to terminate their agreements with us for convenience and for other reasons. We cannot assure you that customers will maintain their agreements with us, renew subscriptions or increase their usage of our software. If our customers do not maintain or renew their subscriptions or renew on less favorable terms, or if we are unable to expand our customers’ use of our software, our business, results of operations, and financial condition may be harmed.

In addition, while customers are typically invoiced in advance, including multi-year contracts, and our contracts generally do not provide for refunds during the subscription or maintenance period, a small number of customers could take the position that provisions in their customer agreements give them the right to terminate their agreement with us, or allege a material breach of their agreement with us, due to or in connection with the sale of our common stock. Early termination of these customer agreements for these reasons would generally only allow us to retain fees already paid by the customer for services rendered prior to the termination. Termination of these agreements, or allegations that we have breached one of these agreements with them, could decrease our customer revenue and increase legal and administrative costs.

 

20


Table of Contents

Our brand, reputation and ability to attract, retain and serve our customers are dependent in part upon the reliable performance of our solutions and network infrastructure.

We have experienced, and may in the future experience, disruptions, outages and other performance problems due to a variety of factors, including infrastructure changes, human or software errors, capacity constraints and fraud or cybersecurity attacks. In some instances, we may not be able to identify the cause or causes of these performance problems within an acceptable period of time.

Prolonged delays or unforeseen difficulties in connection with adding capacity or upgrading our network architecture when required may cause our service quality to suffer. Problems with the reliability or security of our systems could harm our reputation. Damage to our reputation and the cost of remedying these problems could negatively affect our business, financial condition, and operating results.

Any disruptions or other performance problems with our solutions could harm our reputation and business and may damage our customers’ businesses. Interruptions in our service delivery might reduce our revenue, cause us to issue credits to customers, subject us to potential liability and cause customers to not renew their purchases of our solutions.

We must maintain and enhance our brand.

We believe that developing and maintaining widespread awareness of our brand in a cost-effective manner is critical to achieving widespread acceptance of our enterprise platform and attracting new customers. Brand promotion activities may not generate customer awareness or increase revenue and, even if they do, any increase in revenue may not offset the expenses we incur in building our brand. If we fail to successfully promote and maintain our brand, or incur substantial expenses, we may fail to attract or retain customers necessary to realize a sufficient return on our brand-building efforts, or to achieve the widespread brand awareness that is critical for broad customer adoption of our solutions.

We rely on third parties to maintain and operate certain elements of our network infrastructure.

We utilize data centers located in North America, Europe and Asia to operate and maintain certain elements of our own network infrastructure. Some elements of this complex system are operated by third parties that we do not control and that could require significant time to replace. We expect this dependence on third parties to continue. For example, Tenable.io is hosted on Amazon Web Services, or AWS, which provides us with computing and storage capacity. Interruptions in our systems or the third-party systems on which we rely, particularly AWS, whether due to system failures, computer viruses, physical or electronic break-ins or other factors, could affect the security or availability of our solutions, network infrastructure and website.

Our existing data center facilities and third-party hosting providers have no obligations to renew their agreements with us on commercially reasonable terms or at all, and certain of the agreements governing these relationships may be terminated by either party at any time, with no or limited notice. For example, our agreement with AWS allows AWS to terminate the agreement with 30 days’ written notice. Although we expect that we could receive similar services from other third parties, if any of our arrangements with third parties, including AWS, are terminated, we could experience interruptions on our platform and in our ability to make our platform available to customers, as well as downtime, delays and additional expenses in arranging alternative cloud infrastructure services.

It is possible that our customers and potential customers would hold us accountable for any breach of security affecting third parties’ infrastructure. We may incur significant liability from those customers and from third parties with respect to any such breach. Because our agreement with AWS limits their liability for damages, we may not be able to recover a material portion of our liabilities to our customers and third parties from AWS in the event of any breach affecting AWS systems.

 

21


Table of Contents

If we continue to grow, we may not be able to manage our growth effectively.

We have recently experienced a period of rapid growth in our headcount and operations. In particular, we grew from 751 employees as of December 31, 2016 to 984 employees as of December 31, 2017 and to 1,054 employees as of March 31, 2018. We have also significantly increased the size of our customer base over the last several years. We anticipate that we will continue to significantly expand our operations and headcount in the near term. Our growth has placed, and future growth will place, a significant strain on our management, administrative, operational and financial infrastructure. Our success will depend in part on our ability to manage this growth effectively. To manage the expected growth of our operations and personnel, we will need to continue to improve our operational, financial and management controls and our reporting systems and procedures. Failure to effectively manage our growth could result in difficulty or delays in deploying our solutions and services to customers, declines in quality or customer satisfaction, increases in costs, difficulties in introducing new features or other operational difficulties. Any of these difficulties could adversely impact our business performance and results of operations.

Our rapid growth also makes it difficult to evaluate our future prospects. Our ability to forecast our future operating results is subject to a number of uncertainties, including our ability to plan for and model future growth. If our assumptions regarding these uncertainties, which we use to plan our business, are incorrect or change in reaction to changes in our markets, or if we do not address these risks successfully, our operating and financial results could differ materially from our expectations, our business could suffer and the trading price of our stock may decline.

Organizations may be reluctant to purchase our enterprise platform offerings that are cloud-based due to the actual or perceived vulnerability of cloud solutions.

Some organizations, including those in the defense industry and highly regulated industries such as healthcare and financial services, have historically been reluctant to use cloud-based solutions for cybersecurity because they have concerns regarding the risks associated with the reliability or security of the technology delivery model associated with these solutions. If we or other software companies with cloud-based offerings experience security incidents, breaches of customer data, disruptions in service delivery or other problems, the market for cloud-based solutions as a whole may be negatively impacted, which in turn would negatively impact our revenue and our growth prospects.

Our sales cycle is long and unpredictable.

The timing of sales of our offerings is difficult to forecast because of the length and unpredictability of our sales cycle, particularly with large enterprises and with respect to certain of our solutions. We sell our solutions primarily to IT departments that are managing a growing set of user and compliance demands, which has increased the complexity of customer requirements to be met and confirmed during the sales cycle and prolonged our sales cycle. Our average sales cycle with an enterprise customer is approximately four months. Further, the length of time that potential customers devote to their testing and evaluation, contract negotiation and budgeting processes varies significantly, depending on the size of the organization and nature of the product or service under consideration. In addition, we might devote substantial time and effort to a particular unsuccessful sales effort, and as a result, we could lose other sales opportunities or incur expenses that are not offset by an increase in revenue, which could harm our business. 

We rely on our third-party channel partner network of distributors and resellers to generate a substantial amount of our revenue.

Our success is dependent in part upon establishing and maintaining relationships with a variety of channel partners that we utilize to extend our geographic reach and market penetration. We use a two-tiered, indirect fulfillment model whereby we sell our products and services to our distributors, which in turn sell to our resellers, which then sell to our end users, which we call customers. We anticipate that we will continue to rely

 

22


Table of Contents

on this two-tiered sales model in order to help facilitate sales of our offerings as part of larger purchases in the United States and to grow our business internationally. In 2016, 2017 and the three months ended March 31, 2017 and 2018, we derived 80%, 83%, 80% and 86%, respectively, of our revenue from subscriptions and perpetual licenses sold through channel partners, and the percentage of revenue derived from channel partners may increase in future periods. Ingram Micro, Inc., a distributor, accounted for 42%, 45%, 41% and 45% of our revenue in 2016, 2017 and the three months ended March 31, 2017 and 2018, respectively, and 51% of our accounts receivable as of each of December 31, 2016 and 2017 and 45% as of March 31, 2018. At December 31, 2017, our channel partners accounted for over 20% of our new enterprise customer sales. Our agreements with our channel partners, including our agreement with Ingram Micro, are non-exclusive and do not prohibit them from working with our competitors or offering competing solutions, and some of our channel partners may have more established relationships with our competitors. Similarly, our channel partners have no obligations to renew their agreements with us on commercially reasonable terms or at all, and certain of the agreements governing these relationships may be terminated by either party at any time, with no or limited notice. For example, our agreement with Ingram Micro allows Ingram Micro to terminate the agreement in their discretion upon 30 days’ written notice to us. If our channel partners choose to place greater emphasis on products of their own or those offered by our competitors or a result of an acquisition, competitive factors or other reasons do not continue to market and sell our solutions in an effective manner or at all, our ability to grow our business and sell our solutions, particularly in key international markets, may be adversely affected. In addition, our failure to recruit additional channel partners, or any reduction or delay in their sales of our solutions and professional services or conflicts between channel sales and our direct sales and marketing activities may harm our results of operations. Finally, even if we are successful, our relationships with channel partners may not result in greater customer usage of our solutions and professional services or increased revenue.

A portion of our revenue is generated from subscriptions and perpetual licenses sold to domestic governmental entities, foreign governmental entities and other heavily regulated organizations, which are subject to a number of challenges and risks.

A portion of our revenue is generated from subscriptions and perpetual licenses sold to governmental entities in the United States. Additionally, many of our current and prospective customers, such as those in the financial services, energy, insurance and healthcare industries, are highly regulated and may be required to comply with more stringent regulations in connection with subscribing to and implementing our enterprise platform. Selling licenses to these entities can be highly competitive, expensive and time-consuming, often requiring significant upfront time and expense without any assurance that we will successfully complete a sale. Governmental demand and payment for our enterprise platform may also be impacted by public sector budgetary cycles and funding authorizations, with funding reductions or delays adversely affecting public sector demand for our enterprise platform. In addition, governmental entities have the authority to terminate contracts at any time for the convenience of the government, which creates risk regarding revenue anticipated under our existing government contracts.

Further, governmental and highly regulated entities often require contract terms that differ from our standard customer arrangements, including terms that can lead to those customers obtaining broader rights in our solutions than would be expected under a standard commercial contract and terms that can allow for early termination. The U.S. government will be able to terminate any of its contracts with us either for its convenience or if we default by failing to perform in accordance with the contract schedule and terms. Termination for convenience provisions would generally enable us to recover only our costs incurred or committed, settlement expenses, and profit on the work completed prior to termination. Termination for default provisions do not permit these recoveries and would make us liable for excess costs incurred by the U.S. government in procuring undelivered items from another source. Contracts with governmental and highly regulated entities may also include preferential pricing terms. In the United States, federal government agencies may promulgate regulations, and the President may issue executive orders, requiring federal contractors to adhere to different or additional requirements after a contract is signed. If we do not meet applicable requirements of law or contract, we could be subject to significant liability from our customers or regulators. Even if we do meet these requirements, the

 

23


Table of Contents

additional costs associated with providing our enterprise platform to government and highly regulated customers could harm our operating results. Moreover, changes in the underlying statutory and regulatory conditions that affect these types of customers could harm our ability to efficiently provide them access to our enterprise platform and to grow or maintain our customer base. In addition, engaging in sales activities to foreign governments introduces additional compliance risks, including risks specific to the U.S. Foreign Corrupt Practices Act of 1977, as amended, or the FCPA, the U.K. Bribery Act 2010 and other similar statutory requirements prohibiting bribery and corruption in the jurisdictions in which we operate.

Some of our revenue is derived from contracts with U.S. government entities, as well as subcontracts with higher-tier contractors. As a result, we are subject to federal contracting regulations, including the Federal Acquisition Regulation, or the FAR. Under the FAR, certain types of contracts require pricing that is based on estimated direct and indirect costs, which are subject to change.

In connection with our U.S. government contracts, we may be subject to government audits and review of our policies, procedures, and internal controls for compliance with contract terms, procurement regulations, and applicable laws. In certain circumstances, if we do not comply with the terms of a contract or with regulations or statutes, we could be subject to contract termination or downward contract price adjustments or refund obligations, could be assessed civil or criminal penalties, or could be debarred or suspended from obtaining future government contracts for a specified period of time. Any such termination, adjustment, sanction, debarment or suspension could have an adverse effect on our business.

In the course of providing our solutions and professional services to governmental entities, our employees and those of our channel partners may be exposed to sensitive government information. Any failure by us or our channel partners to safeguard and maintain the confidentiality of such information could subject us to liability and reputational harm, which could materially and adversely affect our results of operations and financial performance.

We may need to reduce our prices or change our pricing model to remain competitive.

Subscriptions and perpetual licenses to our enterprise platform are generally priced based on the number of IP addresses that can be monitored, or the total IT assets that can be monitored. We expect that we may need to change our pricing from time to time. As competitors introduce new products that compete with ours or reduce their prices, we may be unable to attract new customers or retain existing customers based on our historical pricing. We also must determine the appropriate price to enable us to compete effectively internationally. Moreover, mid- to large-size enterprises may demand substantial price discounts as part of the negotiation of sales contracts. As a result, we may be required or choose to reduce our prices or change our pricing model, which could adversely affect our business, operating results and financial condition.

Our pricing model subjects us to various challenges that could make it difficult for us to derive expected value from our customers.

Our enterprise platform offerings are generally priced based on the number of IT assets or IP addresses that a customer chooses to monitor. As the amount of IT assets or IP addresses within our customers’ organizations grows, we may face pressure from our customers regarding our pricing, which could adversely affect our revenue and operating margins.

Our subscription agreements and perpetual licenses generally provide that we can audit our customers’ use of our offerings to ensure compliance with the terms of such agreement or license and monitor an increase in IT assets and IP addresses being monitored. However, a customer may resist or refuse to allow us to audit their usage, in which case we may have to pursue legal recourse to enforce our rights under the agreement or license, which would require us to spend money, distract management and potentially adversely affect our relationship with our customers and users.

 

24


Table of Contents

If our enterprise platform offerings do not achieve sufficient market acceptance, our results of operations and competitive position will suffer.

We spend substantial amounts of time and money to research and develop and enhance our enterprise platform offerings to meet our customers’ rapidly evolving demands. In addition, we invest in efforts to continue to add capabilities to our existing products and enable the continued detection of new network vulnerabilities. We typically incur expenses and expend resources upfront to market, promote and sell our new and enhanced offerings. Therefore, when we develop and introduce new or enhanced offerings, they must achieve high levels of market acceptance in order to justify the amount of our investment in developing and bringing them to market. For example, if Tenable.io does not garner widespread market adoption and implementation, our operating results and competitive position could suffer.

Further, we may make enhancements to our offerings that our customers do not like, find useful or agree with. We may also discontinue certain features, begin to charge for certain features that are currently free or increase fees for any of our features or usage of our offerings.

Our new offerings or enhancements and changes to our existing offerings could fail to attain sufficient market acceptance for many reasons, including:

 

   

failure to predict market demand accurately in terms of functionality and to supply offerings that meets this demand in a timely fashion;

 

   

defects, errors or failures;

 

   

negative publicity about their performance or effectiveness;

 

   

delays in releasing our new offerings or enhancements to our existing offerings to the market;

 

   

introduction or anticipated introduction of competing products by our competitors;

 

   

poor business conditions for our customers, causing them to delay IT purchases; and

 

   

reluctance of customers to purchase cloud-based offerings.

If our new or enhanced offerings do not achieve adequate acceptance in the market, our competitive position will be impaired, and our revenue will be diminished. The adverse effect on our operating results may be particularly acute because of the significant research, development, marketing, sales and other expenses we will have incurred in connection with the new or enhanced offerings.

Our strategy of offering and deploying our solutions in the cloud, on-premises environments or using a hybrid approach causes us to incur increased expenses and may pose challenges to our business.

We offer and sell our enterprise platform for use in the cloud, on-premises environments or using a hybrid approach using the customer’s own infrastructure. Our cloud offering enables our customers to eliminate the burden of provisioning and maintaining infrastructure and to scale their usage of our solutions quickly, while our on-premises offering allows for the customer’s complete control over data security and software infrastructure. Historically, our solutions were developed in the context of the on-premises offering, and we have less operating experience offering and selling subscriptions to our solutions via our cloud offering. Although a substantial majority of our revenue has historically been generated from customers using our solutions on an on-premises basis, our customers are increasingly adopting our cloud offering. We expect that our customers will continue to move to our cloud offering and that it will become more central to our distribution model. We expect our gross profit to increase in absolute dollars and our gross margin to decrease to the extent that revenue from our cloud-based subscriptions increases as a percentage of total revenue, although our gross margin could fluctuate from period to period. To support both on-premises environments and cloud instances of our product, our support team must be trained on and learn multiple environments in which our solution is deployed, which is more expensive than supporting only a cloud offering. Moreover, we must engineer our software for an on-premises environment,

 

25


Table of Contents

cloud offering and hybrid installation, which we expect will cause us additional research and development expense that may impact our operating results. As more of our customers transition to the cloud, we may be subject to additional competitive pressures, which may harm our business. We are directing a significant portion of our financial and operating resources to implement a robust and secure cloud offering for our customers, but even if we continue to make these investments, we may be unsuccessful in growing or implementing our cloud offering in a way that competes successfully against our current and future competitors and our business, results of operations and financial condition could be harmed.

Our customers’ increased usage of our cloud-based offerings requires us to continually improve our computer network and infrastructure to avoid service interruptions or slower system performance.

As usage of our cloud-based offerings grows and as customers use them for more complicated applications, increased assets and with increased data requirements, we will need to devote additional resources to improving our platform architecture and our infrastructure in order to maintain the performance of our cloud offering. Any failure or delays in our computer systems could cause service interruptions or slower system performance. If sustained or repeated, these performance issues could reduce the attractiveness of our enterprise platform to customers. These performance issues could result in lost customer opportunities and lower renewal rates, any of which could hurt our revenue growth, customer loyalty and reputation.

A component of our growth strategy is dependent on our continued international expansion, which adds complexity to our operations.

We market and sell our solutions and professional services throughout the world and have personnel in many parts of the world. International operations generated 31% and 33% of our revenue in 2017 and the three months ended March 31, 2018, respectively. Our growth strategy is dependent, in part, on our continued international expansion. We expect to conduct a significant amount of our business with organizations that are located outside the United States, particularly in Europe and Asia. We cannot assure that our expansion efforts into international markets will be successful in creating further demand for our solutions and professional services outside of the United States or in effectively selling our solutions and professional services in the international markets that we enter. Our current international operations and future initiatives will involve a variety of risks, including:

 

   

increased management, infrastructure and legal costs associated with having international operations;

 

   

reliance on channel partners;

 

   

trade and foreign exchange restrictions;

 

   

economic or political instability in foreign markets, including instability related to the United Kingdom’s referendum in June 2016 in which voters approved an exit from the European Union, commonly referred to as “Brexit”;

 

   

greater difficulty in enforcing contracts, accounts receivable collection and longer collection periods;

 

   

changes in regulatory requirements, including, but not limited to data privacy, data protection and data security regulations;

 

   

difficulties and costs of staffing, managing and potentially reorganizing foreign operations;

 

   

the uncertainty and limitation of protection for intellectual property rights in some countries;

 

   

costs of compliance with foreign laws and regulations and the risks and costs of non-compliance with such laws and regulations;

 

   

costs of compliance with U.S. laws and regulations for foreign operations, including the FCPA, import and export control laws, tariffs, trade barriers, economic sanctions and other regulatory or contractual limitations on our ability to sell or provide our solutions in certain foreign markets, and the risks and costs of non-compliance;

 

26


Table of Contents
   

requirements to comply with foreign privacy, data protection and information security laws and regulations and the risks and costs of noncompliance;

 

   

heightened risks of unfair or corrupt business practices in certain geographies and of improper or fraudulent sales arrangements that may impact financial results and result in restatements of, and irregularities in, financial statements;

 

   

the potential for political unrest, acts of terrorism, hostilities or war;

 

   

management communication and integration problems resulting from cultural differences and geographic dispersion;

 

   

costs associated with language localization of our solutions; and

 

   

costs of compliance with multiple and possibly overlapping tax structures.

Our business, including the sales of our solutions and professional services by us and our channel partners, may be subject to foreign governmental regulations, which vary substantially from country to country and change from time to time. Our failure, or the failure by our channel partners, to comply with these regulations could adversely affect our business. Further, in many foreign countries it is common for others to engage in business practices that are prohibited by our internal policies and procedures or U.S. regulations applicable to us. Although we have implemented policies and procedures designed to comply with these laws and policies, there can be no assurance that our employees, contractors, channel partners and agents have complied, or will comply, with these laws and policies. Violations of laws or key control policies by our employees, contractors, channel partners or agents could result in delays in revenue recognition, financial reporting misstatements, fines, penalties or the prohibition of the importation or exportation of our solutions and could have a material adverse effect on our business and results of operations. If we are unable to successfully manage the challenges of international expansion and operations, our business and operating results could be adversely affected.

We rely on the performance of highly skilled personnel, including senior management and our engineering, professional services, sales and technology professionals.

We believe our success has depended, and continues to depend, on the efforts and talents of our senior management team and our highly skilled team members, including our sales personnel, professional services personnel and software engineers. We do not maintain key man insurance on any of our executive officers or key employees. From time to time, there may be changes in our senior management team resulting from the termination or departure of our executive officers and key employees. Our senior management and key employees are employed on an at-will basis, which means that they could terminate their employment with us at any time. The loss of any of our senior management or key employees could adversely affect our ability to build on the efforts they have undertaken and to execute our business plan, and we may not be able to find adequate replacements. We cannot ensure that we will be able to retain the services of any members of our senior management or other key employees.

Our ability to successfully pursue our growth strategy also depends on our ability to attract, motivate and retain our personnel. Competition for well-qualified employees in all aspects of our business, including sales personnel, professional services personnel and software engineers, is intense. Our recruiting efforts focus on elite universities and our primary recruiting competition are well-known, high-paying firms. Our continued ability to compete effectively depends on our ability to attract new employees and to retain and motivate existing employees. If we do not succeed in attracting well-qualified employees or retaining and motivating existing employees, our business would be adversely affected.

We must effectively develop and expand our sales and marketing capabilities.

Our ability to increase our customer base and achieve broader market acceptance of our Cyber Exposure solutions will depend to a significant extent on our ability to expand our sales and marketing operations. We plan

 

27


Table of Contents

to continue expanding our sales force and our third-party channel partner network of distributors and resellers both domestically and internationally; however, there is no assurance that we will be successful in attracting and retaining talented sales personnel or strategic partners or that any new sales personnel or strategic partners will be able to achieve productivity in a reasonable period of time or at all. We also plan to dedicate significant resources to sales and marketing programs, including through electronic marketing campaigns and trade event sponsorship and participation. All of these efforts will require us to invest significant financial and other resources and our business will be harmed if our efforts do not generate a correspondingly significant increase in revenue.

We must offer high-quality support.

Our customers rely on our personnel for support of our enterprise platform. High-quality support is important for the renewal of our agreements with existing customers and to our existing customers expanding the number of IP addresses or IT assets under their subscriptions. The importance of high-quality support will increase as we expand our business and pursue new customers. If we do not help our customers quickly resolve issues and provide effective ongoing support, our ability to sell new software to existing and new customers would suffer and our reputation with existing or potential customers would be harmed.

Our growth depends in part on the success of our strategic relationships with third parties.

In order to grow our business, we anticipate that we will continue to depend on relationships with strategic partners to provide broader customer coverage and solution delivery capabilities. We depend on partnerships with market leading technology companies to maintain and expand our Cyber Exposure ecosystem by integrating third party data into our platform. For example, we developed our Industrial Security solution in partnership with Siemens. Identifying partners, and negotiating and documenting relationships with them, requires significant time and resources. Our agreements with our strategic partners generally are non-exclusive and do not prohibit them from working with our competitors or offering competing solutions. Our competitors may be effective in providing incentives to third parties to favor their products or services or to prevent or reduce subscriptions to our services. If our partners choose to place greater emphasis on products of their own or those offered by our competitors or do not effectively market and sell our product, our ability to grow our business and sell software and professional services may be adversely affected. In addition, acquisitions of our partners by our competitors could result in a decrease in the number of our current and potential customers, as our partners may no longer facilitate the adoption of our solutions by potential customers.

If we are unsuccessful in establishing or maintaining our relationships with third parties, our ability to compete in the marketplace or to grow our revenue could be impaired and our operating results may suffer. Even if we are successful, we cannot assure you that these relationships will result in increased customer usage of our solutions or increased revenue.

Catastrophic events may disrupt our business.

Our corporate headquarters are located in Columbia, Maryland. The area around Washington, D.C. could be subject to terrorist attacks. Additionally, we rely on our network and third-party infrastructure and enterprise applications, internal technology systems and our website for our development, marketing, operational support, hosted services and sales activities. In the event of a major hurricane, earthquake or catastrophic event such as fire, power loss, telecommunications failure, cyberattack, war or terrorist attack, we may be unable to continue our operations and may endure system interruptions, reputational harm, delays in our software development, lengthy interruptions in our services, breaches of data security and loss of critical data, all of which could have an adverse effect on our future operating results.

 

28


Table of Contents

Future acquisitions could disrupt our business and adversely affect our business operations and financial results.

We have in the past acquired products and technologies from other parties, and we may choose to expand our current business by acquiring additional businesses or technologies in the future. Acquisitions involve many risks, including the following:

 

   

an acquisition may negatively affect our financial results because it may require us to incur charges or assume substantial debt or other liabilities, may cause adverse tax consequences or unfavorable accounting treatment, may expose us to claims and disputes by third parties, including intellectual property claims and disputes, or may not generate sufficient financial return to offset additional costs and expenses related to the acquisition;

 

   

we may encounter difficulties or unforeseen expenditures in integrating the business, technologies, products, personnel or operations of any company that we acquire, particularly if key personnel of the acquired company decide not to work for us;

 

   

an acquisition may disrupt our ongoing business, divert resources, increase our expenses and distract our management;

 

   

an acquisition may result in a delay or reduction of customer purchases for both us and the company acquired due to customer uncertainty about continuity and effectiveness of service from either company;

 

   

we may encounter difficulties in, or may be unable to, successfully sell any acquired solutions;

 

   

an acquisition may involve the entry into geographic or business markets in which we have little or no prior experience or where competitors have stronger market positions;

 

   

our use of cash to pay for an acquisition would limit other potential uses for our cash; and

 

   

if we incur debt to fund such acquisition, such debt may subject us to material restrictions on our ability to conduct our business as well as financial maintenance covenants.

The occurrence of any of these risks could have a material adverse effect on our business operations and financial results. In addition, we may only be able to conduct limited due diligence on an acquired company’s operations. Following an acquisition, we may be subject to unforeseen liabilities arising from an acquired company’s past or present operations and these liabilities may be greater than the warranty and indemnity limitations that we negotiate. Any unforeseen liability that is greater than these warranty and indemnity limitations could have a negative impact on our financial condition. 

We may require additional capital to support business growth, and this capital might not be available on acceptable terms, if at all.

We expect that our existing cash and cash equivalents, together with the net proceeds that we receive in this offering, will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. However, we intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges, including the need to develop new features or enhance our product, improve our operating infrastructure or acquire complementary businesses and technologies. Accordingly, we may need to engage in equity or debt financings to secure additional funds. If we raise additional funds through future issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Our loan and security agreement with Silicon Valley Bank includes restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions, and any debt financing that we secure in the future could have similar restrictive

 

29


Table of Contents

covenants. We may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly impaired, and our business may be adversely affected.

The nature of our business requires the application of complex revenue recognition rules. Significant changes in current principles will affect our consolidated financial statements and changes in financial accounting standards or practices may cause adverse, unexpected financial reporting fluctuations and harm our results of operations.

The accounting rules and regulations that we must comply with are complex and subject to interpretation by the Financial Accounting Standards Board, or FASB, the Securities and Exchange Commission, or SEC, and various bodies formed to promulgate and interpret appropriate accounting principles. In addition, many companies’ accounting disclosures are being subjected to heightened scrutiny by regulators and the public. Further, the accounting rules and regulations are continually changing in ways that could impact our financial statements.

For example, in May 2014, the FASB issued new accounting guidance on revenue recognition in the form of ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), or ASC 606. The core principle of ASC 606 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. We early adopted ASC 606 as of January 1, 2017. The most significant impact of adopting ASC 606 was the deferral of perpetual license revenue over an estimated economic life, including estimated maintenance renewal periods, whereas under previous guidance we recognized perpetual license revenue upon delivery of the perpetual license. The impact of the adoption of ASC 606 on our 2017 revenue was a net increase of $3.5 million after giving effect to the recognition of perpetual license revenue from prior year sales and the deferral of perpetual license revenue from 2017 sales. Additionally, the incremental costs of obtaining a contract with a customer are deferred and will be amortized over a longer estimated period of benefit, whereas under previous guidance such costs were recognized immediately or amortized over the contract term.

If our estimates or judgments relating to our critical accounting policies prove to be incorrect or financial reporting standards or interpretations change, our results of operations could be adversely affected.

The preparation of financial statements in conformity with generally accepted accounting principles in the United States, or U.S. GAAP, requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as provided in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The results of these estimates form the basis for making judgments about the carrying values of assets, liabilities and equity, and the amount of revenue and expenses that are not readily apparent from other sources. Significant assumptions and estimates used in preparing our consolidated financial statements include estimated economic life of perpetual licenses for revenue recognition, the estimated period of benefit for deferred commissions, income taxes and the related valuation allowance and stock-based compensation. Our results of operations may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our results of operations to fall below the expectations of securities analysts and investors, resulting in a decline in the trading price of our common stock.

Additionally, we regularly monitor our compliance with applicable financial reporting standards and review new pronouncements and drafts thereof that are relevant to us. As a result of new standards, changes to existing standards and changes in their interpretation, we might be required to change our accounting policies, alter our operational policies and implement new or enhance existing systems so that they reflect new or amended financial reporting standards, or we may be required to restate our published financial statements. Such changes

 

30


Table of Contents

to existing standards or changes in their interpretation may have an adverse effect on our reputation, business, financial position and profit, or cause an adverse deviation from our revenue and operating profit target, which may negatively impact our financial results.

Our operating results may be negatively affected if we are required to pay additional state sales tax, value added, or other transaction taxes, and we could be subject to liability with respect to all or a portion of past or future sales.

We currently collect and remit sales and use, value added and other transaction taxes in certain of the jurisdictions where we do business based on our assessment of the amount of taxes owed by us in such jurisdictions. However, in some jurisdictions in which we do business, we do not believe that we owe such taxes, and therefore we currently do not collect and remit such taxes in those jurisdictions or record contingent tax liabilities in respect of those jurisdictions.

Further, due to uncertainty in the application and interpretation of applicable tax laws in various jurisdictions, we may be exposed to sales and use, value added or other transaction tax liability. A successful assertion that we are required to pay additional taxes in connection with sales of our solutions, or the imposition of new laws or regulations requiring the payment of additional taxes, would create increased costs and administrative burdens for us. If we are subject to additional taxes and determine to offset such increased costs by collecting and remitting sales taxes from our customers, or otherwise passing those costs through to our customers, companies may be discouraged from using our solutions. Any increased tax burden may decrease our ability or willingness to compete in relatively burdensome tax jurisdictions, result in substantial tax liabilities related to past sales or otherwise harm our business and operating results.

Our ability to use net operating losses to offset future taxable income may be subject to certain limitations.

As of December 31, 2017 we had federal, state and foreign net operating loss carryforwards, or NOLs, of $103.7 million, $38.6 million, and $18.4 million, respectively, available to offset future taxable income, which begin to expire in 2030. A lack of future taxable income would adversely affect our ability to utilize these NOLs before they expire.

In addition, under the provisions of the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, substantial changes in our ownership may limit the amount of pre-change NOLs that can be utilized annually in the future to offset taxable income. Section 382 of the Internal Revenue Code imposes limitations on a company’s ability to use NOLs if a company experiences a more-than-50-percent ownership change over a three-year testing period. Based upon our analysis as of December 31, 2017, we have determined that we do not expect these limitations to impair our ability to use our NOLs prior to expiration. However, if changes in our ownership occur in the future, our ability to use our NOLs may be further limited. For these reasons, we may not be able to utilize a material portion of the NOLs, even if we achieve profitability.

Uncertainties in the interpretation and application of the 2017 Tax Cuts and Jobs Act could materially affect our tax obligations and effective tax rate.

Forecasts of our income tax position and effective tax rate for financial accounting purposes are complex and subject to uncertainty because our income tax position for each year combines the effects of a mix of profits earned and losses incurred by us in various tax jurisdictions with a broad range of income tax rates, as well as changes in the valuation of deferred tax assets and liabilities, the impact of various accounting rules and changes to these rules and tax laws, the results of examinations by various tax authorities, and the impact of any acquisition, business combination or other reorganization or financing transaction. To forecast our global tax rate, we estimate our pre-tax profits and losses by jurisdiction and forecast our tax expense by jurisdiction. If the mix of profits and losses, our ability to use tax credits, our assessment of the need for valuation allowances, or

 

31


Table of Contents

effective tax rates by jurisdiction is different than those estimated, our actual tax rate could be materially different than forecasted, which could have a material impact on our results of business, financial condition and results of operations.

On December 22, 2017, U.S. Federal tax reform was enacted with the signing of the Tax Cuts and Jobs Act, or TCJA. Notable provisions of the TCJA include significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction for interest expense to 30% of adjusted earnings (except for certain small businesses), limitation of the deduction for net operating losses to 80% of current year taxable income and elimination of net operating loss carrybacks, one time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, elimination of U.S. tax on foreign earnings (subject to certain important exceptions), immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and credits.

While the changes from the TCJA are generally effective beginning in 2018, U.S. GAAP accounting for income taxes requires the effect of a change in tax laws or rates to be recognized in income from continuing operations for the period that includes the enactment date. Due to the complexities involved in accounting for the enactment of the TCJA, the Securities and Exchange Commission published Staff Accounting Bulletin No. 118, which allows us to record provisional amounts in earnings for the year ended December 31, 2017. Where reasonable estimates can be made, the provisional accounting should be based on such estimates. When no reasonable estimate can be made, the provisional accounting may be based on the tax law in effect before the TCJA. We are required to complete our tax accounting for the TCJA in the period when we have obtained, prepared, and analyzed the information to complete the income tax accounting, or by December 22, 2018, whichever date comes first.

We have not completed our accounting for the tax effects of enactment of the TCJA; however, as we describe in Note 10 to our consolidated financial statements appearing elsewhere in this prospectus, we have made reasonable estimates of the effects of the TCJA in certain cases in our financial statements that are included as a component of income tax expense. The U.S. Department of Treasury has broad authority to issue regulations and interpretative guidance that may significantly impact how we will apply the law and impact our results of operations in the period issued. As additional regulatory guidance is issued by the applicable taxing authorities, as accounting treatment is clarified, as we perform additional analysis on the application of the law, and as we refine estimates in calculating the effect, our final analysis, which will be recorded in the period completed, may be different from our current provisional amounts, which could materially affect our tax obligations and effective tax rate.

We are subject to anti-corruption laws, anti-bribery and similar laws with respect to our domestic and international operations, and non-compliance with such laws can subject us to criminal and/or civil liability and materially harm our business and reputation.

We are subject to the FCPA, the U.S. domestic bribery statute contained in 18 U.S.C. § 201, the U.S. Travel Act, the U.K. Bribery Act 2010, and other anti-corruption laws in countries in which we conduct activities. Anti-corruption laws are interpreted broadly and prohibit our company from authorizing, offering, or providing, directly or indirectly, improper payments or benefits to recipients in the public or private sector. We use third-party law firms, accountants, and other representatives for regulatory compliance, sales, and other purposes in several countries. We sell directly and indirectly, via third-party representatives, to the U.S. and non-U.S. government sectors, and our employees and third-party representatives interact with government officials. We can be held liable for the corrupt or other illegal activities of these third-party representatives, our employees, contractors, and other agents, even if we do not explicitly authorize such activities. Noncompliance with these laws could subject us to whistleblower complaints, investigations, sanctions, settlements, prosecution, other enforcement actions, disgorgement of profits, significant fines, damages, other civil and criminal penalties or injunctions, suspension and/or debarment from contracting with certain persons, the loss of export privileges,

 

32


Table of Contents

reputational harm, adverse media coverage, and other collateral consequences. If any subpoenas or investigations are launched, or governmental or other sanctions are imposed, or if we do not prevail in any possible civil or criminal litigation, our reputation, business, results of operations and financial condition could be materially harmed. In addition, responding to any action will likely result in a materially significant diversion of management’s attention and resources and significant defense costs and other professional fees. Enforcement actions and sanctions could further harm our business, results of operations, and financial condition. Moreover, as an issuer of securities, we also are subject to the accounting and internal controls provisions of the FCPA. These provisions require us to maintain accurate books and records and a system of internal controls sufficient to detect and prevent corrupt conduct. Failure to abide by these provisions may have an adverse effect on our business, operations or financial condition.

We are subject to governmental export and import controls and economic and trade sanctions that could impair our ability to conduct business in international markets and subject us to liability if we are not in compliance with applicable laws and regulations.

The United States and other countries maintain and administer export and import laws and regulations. Our products are subject to U.S. export control and import laws and regulations, including the U.S. Export Administration Regulations, U.S. Customs regulations, and various economic and trade sanctions administered by the U.S. Treasury Department’s Office of Foreign Assets Control. We are required to comply with these laws and regulations. If we fail to comply with such laws and regulations, we and certain of our employees could be subject to substantial civil or criminal penalties, including the possible loss of export or import privileges; fines, which may be imposed on us and responsible employees or managers; and, in extreme cases, the incarceration of responsible employees or managers. Obtaining the necessary authorizations, including any required license, for a particular sale may be time-consuming, is not guaranteed and may result in the delay or loss of sales opportunities. In addition, changes in our solutions, or changes in applicable export or import laws and regulations may create delays in the introduction and sale of our products in international markets or, in some cases, prevent the export or import of our solutions to certain countries, governments or persons altogether. Any change in export or import laws and regulations or economic or trade sanctions, shift in the enforcement or scope of existing laws and regulations, or change in the countries, governments, persons or technologies targeted by such laws and regulations could also result in decreased use of our products, or in our decreased ability to export or sell our products to existing or potential customers. Any decreased use of our products or limitation on our ability to export or sell our products would likely adversely affect our business, financial condition, and results of operations.

Furthermore, we incorporate encryption technology into certain of our solutions. Various countries regulate the import of certain encryption technology, including import permitting and licensing requirements, and have enacted laws that could limit our ability to distribute our solutions or could limit our customers’ ability to implement our solutions in those countries. Encrypted products and the underlying technology may also be subject to export control restrictions. Governmental regulation of encryption technology and regulation of imports or exports of encryption solutions, or our failure to obtain required import or export approval for our solutions, could harm our international sales and adversely affect our revenue. Compliance with applicable laws and regulations regarding the export and import of our solutions, including with respect to new solutions or changes in existing solutions, may create delays in the introduction of our solutions in international markets, prevent our customers with international operations from deploying our solutions globally or, in some cases, could prevent the export or import of our solutions to certain countries, governments, entities or persons altogether.

Moreover, U.S. export control laws and economic sanctions programs prohibit the shipment of certain products and services to countries, governments and persons that are subject to U.S. economic embargoes and trade sanctions. Any violations of such economic embargoes and trade sanction regulations could have negative consequences, including government investigations, penalties and reputational harm.

 

33


Table of Contents

Risks Related to Government Regulation, Data Collection and Intellectual Property

Our business could be adversely affected if our employees cannot obtain and maintain required security clearances or we cannot establish and maintain a required facility security clearance.

Certain U.S. government contracts may require our employees to maintain various levels of security clearances, and may require us to maintain a facility security clearance, to comply with Department of Defense, or DoD, requirements. The DoD has strict security clearance requirements for personnel who perform work in support of classified programs. Obtaining and maintaining security clearances for employees involves a lengthy process, and it is difficult to identify, recruit and retain employees who already hold security clearances. If our employees are unable to obtain security clearances in a timely manner, or at all, or if our employees who hold security clearances are unable to maintain their clearances or terminate employment with us, then a customer requiring classified work could terminate an existing contract or decide not to renew the contract upon its expiration. To the extent we are not able to obtain or maintain a facility security clearance, we may not be able to bid on or win new classified contracts, and existing contracts requiring a facility security clearance could be terminated.

Any failure to protect our proprietary technology and intellectual property rights could substantially harm our business and operating results.

Our success and ability to compete depend in part on our ability to protect our proprietary technology and intellectual property. To safeguard these rights, we rely on a combination of patent, trademark, copyright and trade secret laws and contractual protections in the United States and other jurisdictions, all of which provide only limited protection and may not now or in the future provide us with a competitive advantage.

As of March 31, 2018, we had 14 issued patents and three patent applications pending in the United States relating to our technology. We cannot assure you that any patents will issue from any patent applications, that patents that issue from such applications will give us the protection that we seek or that any such patents will not be challenged, invalidated or circumvented. Any patents that may issue in the future from our pending or future patent applications may not provide sufficiently broad protection and may not be enforceable in actions against alleged infringers. Obtaining and enforcing software patents in the United States is becoming increasingly challenging. Any patents we have obtained or may obtain in the future may be found to be invalid or unenforceable in light of recent and future changes in the law. We have registered the “Tenable,” “Nessus” and “Tenable.io” names and our Tenable logo in the United States and certain other countries. We have registrations and/or pending applications for additional marks in the United States; however, we cannot assure you that any future trademark registrations will be issued for pending or future applications or that any registered trademarks will be enforceable or provide adequate protection of our proprietary rights. While we have copyrights in our software we do not typically register such copyrights with the Copyright Office. This failure to register the copyrights in our software may preclude us from obtaining statutory damages for infringement under certain circumstances. We also license software from third parties for integration into our software, including open source software and other software available on commercially reasonable terms. We cannot assure you that such third parties will maintain such software or continue to make it available.

In order to protect our unpatented proprietary technologies and processes, we rely on trade secret laws and confidentiality and invention assignment agreements with our employees, consultants, strategic partners, vendors and others. Despite our efforts to protect our proprietary technology and trade secrets, unauthorized parties may attempt to misappropriate, copy, reverse engineer or otherwise obtain and use them. In addition, others may independently discover our trade secrets, in which case we would not be able to assert trade secret rights, or develop similar technologies and processes. Further, several agreements may give customers limited rights to access portions of our proprietary source code, and the contractual provisions that we enter into may not prevent unauthorized use or disclosure of our proprietary technology or intellectual property rights and may not provide an adequate remedy in the event of unauthorized use or disclosure of our proprietary technology or intellectual property rights. Moreover, policing unauthorized use of our technologies, trade secrets and intellectual property

 

34


Table of Contents

is difficult, expensive and time-consuming, particularly in foreign countries where the laws may not be as protective of intellectual property rights as those in the United States and where mechanisms for enforcement of intellectual property rights may be weak. To the extent that we expand our activities outside of the United States, our exposure to unauthorized copying and use of our solutions and proprietary information may increase. We may be unable to determine the extent of any unauthorized use or infringement of our solutions, technologies or intellectual property rights.

There can be no assurance that the steps that we take will be adequate to protect our proprietary technology and intellectual property, that others will not develop or patent similar or superior technologies, solutions or services, or that our trademarks, patents, and other intellectual property will not be challenged, invalidated or circumvented by others. Furthermore, effective trademark, patent, copyright, and trade secret protection may not be available in every country in which our software is available or where we have employees or independent contractors. In addition, the legal standards relating to the validity, enforceability, and scope of protection of intellectual property rights in internet and software-related industries are uncertain and still evolving.

In order to protect our intellectual property rights, we may be required to spend significant resources to monitor and protect these rights. Litigation brought to protect and enforce our intellectual property rights could be costly, time-consuming and distracting to management and could result in the impairment or loss of portions of our intellectual property. Furthermore, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims and countersuits attacking the validity and enforceability of our intellectual property rights. Our failure to secure, protect and enforce our intellectual property rights could seriously adversely affect our brand and adversely impact our business.

We may be subject to intellectual property rights claims by third parties, which are extremely costly to defend, could require us to pay significant damages and could limit our ability to use certain technologies.

Companies in the software and technology industries, including some of our current and potential competitors, own significant numbers of patents, copyrights, trademarks and trade secrets and frequently enter into litigation based on allegations of infringement or other violations of intellectual property rights. In addition, many of these companies have the capability to dedicate substantially greater resources to enforce their intellectual property rights and to defend claims that may be brought against them. The litigation may involve patent holding companies or other adverse patent owners that have no relevant product revenue and against which our patents may therefore provide little or no deterrence. In the past, we have been subject to allegations of patent infringement that were unsuccessful, and we expect in the future to be subject to claims that we have misappropriated, misused, or infringed other parties’ intellectual property rights, and, to the extent we gain greater market visibility or face increasing competition, we face a higher risk of being the subject of intellectual property infringement claims, which is not uncommon with respect to enterprise software companies. We may in the future be subject to claims that employees or contractors, or we, have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of our competitors or other parties. To the extent that intellectual property claims are made against our customers based on their usage of our technology, we have certain obligations to indemnify and defend such customers from those claims. The term of our contractual indemnity provisions often survives termination or expiration of the applicable agreement. Large indemnity payments, defense costs or damage claims from contractual breach could harm our business, results of operations and financial condition.

There may be third-party intellectual property rights, including issued or pending patents that cover significant aspects of our technologies or business methods. Any intellectual property claims, with or without merit, could be very time-consuming, could be expensive to settle or litigate, could divert our management’s attention and other resources and could result in adverse publicity. These claims could also subject us to making substantial payments for legal fees, settlement payments, and other costs or damages, potentially including treble damages if we are found to have willfully infringed patents or copyrights. These claims could also result in our

 

35


Table of Contents

having to stop making, selling, offering for sale, or using technology found to be in violation of a third party’s rights. We might be required to seek a license for the third-party intellectual property rights, which may not be available on reasonable terms or at all. Even if a license is available to us, we may be required to pay significant upfront fees, milestones or royalties, which would increase our operating expenses. Moreover, to the extent we only have a license to any intellectual property used in our solutions, there may be no guarantee of continued access to such intellectual property, including on reasonable terms. As a result, we may be required to develop alternative non-infringing technology, which could require significant effort and expense. If a third party is able to obtain an injunction preventing us from accessing such third-party intellectual property rights, or if we cannot license or develop technology for any infringing aspect of our business, we would be forced to limit or stop sales of our software or cease business activities covered by such intellectual property, and may be unable to compete effectively. Any of these results would adversely affect our business, results of operations, financial condition and cash flows.

Portions of our solutions utilize open source software, and any failure to comply with the terms of one or more of these open source licenses could negatively affect our business.

Our software contains software made available by third parties under so-called “open source” licenses. From time to time, there have been claims against companies that distribute or use open source software in their products and services, asserting that such open source software infringes the claimants’ intellectual property rights. We could be subject to suits by parties claiming that what we believe to be licensed open source software infringes their intellectual property rights. Use and distribution of open source software may entail greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or other contractual protections regarding infringement claims or the quality of the code. In addition, certain open source licenses require that source code for software programs that are subject to the license be made available to the public and that any modifications or derivative works to such open source software continue to be licensed under the same terms. Further, certain open source licenses also include a provision that if we enforce any patents against the software programs that are subject to the license, we would lose the license to such software. If we were to fail to comply with the terms of such open source software licenses, such failures could result in costly litigation, lead to negative public relations or require that we quickly find replacement software which may be difficult to accomplish in a timely manner.

Although we monitor our use of open source software in an effort both to comply with the terms of the applicable open source licenses and to avoid subjecting our software to conditions we do not intend, the terms of many open source licenses have not been interpreted by U.S. courts, and there is a risk that these licenses could be construed in a way that could impose unanticipated conditions or restrictions on our ability to commercialize our product or operate our business. By the terms of certain open source licenses, we could be required to release the source code of our software and to make our proprietary software available under open source licenses, if we combine or distribute our software with open source software in a certain manner. In the event that portions of our software are determined to be subject to an open source license, we could be required to publicly release the affected portions of our source code, re-engineer all, or a portion of, that software or otherwise be limited in the licensing of our software, each of which could reduce or eliminate the value of our product. Many of the risks associated with usage of open source software cannot be eliminated, and could negatively affect our business, results of operations and financial condition.

Risks Related to Our Common Stock and this Offering

Our stock price may be volatile, and you may lose some or all of your investment.

There has been no public market for our common stock prior to this offering. The initial public offering price for the shares of our common stock will be determined by negotiations between us and the representatives of the underwriters and may not be indicative of the market price of our common stock following this offering. The market price of our common stock following this offering may fluctuate substantially and may be lower than

 

36


Table of Contents

the initial public offering price. The market price of our common stock following this offering will depend on a number of factors, including those described in this “Risk Factors” section, many of which are beyond our control and may not be related to our operating performance. These fluctuations could cause you to lose all or part of your investment in our common stock, since you might not be able to sell your shares at or above the price you paid in this offering. Factors that could cause fluctuations in the market price of our common stock include the following:

 

   

actual or anticipated changes or fluctuations in our operating results;

 

   

the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;

 

   

announcements by us or our competitors of new products or new or terminated significant contracts, commercial relationships or capital commitments;

 

   

industry or financial analyst or investor reaction to our press releases, other public announcements and filings with the SEC;

 

   

rumors and market speculation involving us or other companies in our industry;

 

   

price and volume fluctuations in the overall stock market from time to time;

 

   

changes in operating performance and stock market valuations of other technology companies generally, or those in our industry in particular;

 

   

the expiration of market stand-off or contractual lock-up agreements and sales of shares of our common stock by us or our stockholders;

 

   

failure of industry or financial analysts to maintain coverage of us, changes in financial estimates by any analysts who follow our company, or our failure to meet these estimates or the expectations of investors;

 

   

actual or anticipated developments in our business or our competitors’ businesses or the competitive landscape generally;

 

   

litigation involving us, our industry or both, or investigations by regulators into our operations or those of our competitors;

 

   

developments or disputes concerning our intellectual property rights or our solutions, or third-party proprietary rights;

 

   

announced or completed acquisitions of businesses or technologies by us or our competitors;

 

   

new laws or regulations or new interpretations of existing laws or regulations applicable to our business;

 

   

any major changes in our management or our board of directors;

 

   

general economic conditions and slow or negative growth of our markets; and

 

   

other events or factors, including those resulting from war, incidents of terrorism or responses to these events.

Recently, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry fluctuations, as well as general economic, political, regulatory and market conditions, may negatively impact the market price of our common stock. If the market price of our common stock after this offering does not exceed the initial public offering price, you may lose some or all of your investment. In the past, companies that have experienced volatility in the market price of their securities have been subject to securities class action litigation. We may be the target of this type of litigation in the future, which could result in substantial costs and divert our management’s attention.

 

37


Table of Contents

No public market for our common stock currently exists, and an active public trading market may not develop or be sustained following this offering.

Prior to this offering, there has been no public market or active private market for our common stock. Application has been made to list our common stock on the Nasdaq Global Select Market; however, an active public trading market may not develop following the completion of this offering or, if developed, may not be sustained. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair value of your shares. An inactive market may also impair our ability to raise capital to continue to fund operations by selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration. We cannot predict the prices at which our common stock will trade. The initial public offering price of our common stock will be determined by negotiations between us and the underwriters and may not bear any relationship to the market price at which our common stock will trade after this offering or to any other established criteria of the value of our business and prospects.

If securities or industry analysts do not publish research or reports about our business, or publish negative reports about our business, our stock price and trading volume could decline.

The trading market for our common stock will depend, in part, on the research and reports that securities or industry analysts publish about us or our business. We do not control these analysts or the content and opinions included in their reports. As a new public company, we may be slow to attract research coverage and the analysts who publish information about our common stock will have had relatively little experience with our company, which could affect their ability to accurately forecast our results and make it more likely that we fail to meet their estimates. If our financial performance fails to meet analyst estimates or one or more of the analysts who cover us downgrade our shares or change their opinion of our shares, our share price would likely decline. In addition, the stock prices of many companies in the technology industry have declined significantly after those companies have failed to meet, or significantly exceed, the financial guidance publicly announced by the companies or the expectations of analysts. If our financial results fail to meet, or exceed, our announced guidance or the expectations of analysts or public investors, analysts could downgrade our common stock or publish unfavorable research about us. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.

Sales of substantial amounts of our common stock in the public markets, or the perception that they might occur, could reduce the price that our common stock might otherwise attain and may dilute your voting power and your ownership interest in us.

After this offering, there will be 91,079,454 shares of our common stock outstanding, assuming no exercise of the underwriters’ over-allotment option. Sales of a substantial number of shares of our common stock in the public market after this offering, or the perception that these sales might occur, could depress the market price of our common stock, impair our ability to raise capital through the sale of additional equity securities and make it more difficult for you to sell your common stock at a time and price that you deem appropriate. Of our issued and outstanding shares of our common stock, all of the shares sold in this offering will be freely transferable without restrictions or further registration under the Securities Act of 1933, as amended, or the Securities Act, except for any shares acquired by our affiliates, as defined in Rule 144 under the Securities Act. The remaining shares outstanding after this offering will be restricted as a result of securities laws, lock-up agreements or other contractual restrictions that restrict transfers for 180 days after the date of this prospectus.

Additionally, following the completion of this offering, stockholders holding approximately 70,927,042 shares of our common stock outstanding, will, after the expiration of the lock-up periods specified above, have the right, subject to various conditions and limitations, to include their shares of our common stock in registration statements relating to our securities. If the offer and sale of these shares are registered, they will be freely

 

38


Table of Contents

tradable without restriction under the Securities Act. Shares of common stock sold under such registration statements can be freely sold in the public market. In the event such registration rights are exercised and a large number of shares of common stock are sold in the public market, such sales could reduce the trading price of our common stock. See “Description of Capital Stock—Registration Rights” and “Shares Eligible for Future Sale—Lock-Up Agreements” for a more detailed description of these registration rights and the lock-up period.

We intend to file a registration statement on Form S-8 under the Securities Act to register the total number of shares of our common stock that may be issued under our equity incentive plans. See “Shares Eligible for Future Sale—Form S-8 Registration Statements” for a more detailed description of the shares of common stock that will be available for future sale upon the registration and issuance of such shares, subject to any applicable vesting or lock-up period or other restrictions provided under the terms of the applicable plan and/or the option agreements entered into with the option holders.

In addition, in the future we may issue common stock or other securities convertible into shares of our common stock from time to time in connection with a financing, acquisition, investment or otherwise. The number of new shares of our common stock issued in connection with raising additional capital could constitute a material portion of the then outstanding shares of our common stock, which could result in substantial dilution to our existing stockholders and cause the market price of our common stock to decline.

Concentration of ownership among our existing directors, executive officers and holders of 5% or more of our outstanding common stock may prevent new investors from influencing significant corporate decisions, including the ability to influence the outcome of director elections and other matters requiring stockholder approval.

Following this offering, our directors, executive officers and holders of more than 5% of our common stock, some of whom are represented on our board of directors, together with their affiliates will beneficially own approximately 79% of the voting power of our outstanding capital stock, without giving effect to potential purchases in this offering by these stockholders. As a result, these stockholders will, immediately following this offering, be able to determine the outcome of matters submitted to our stockholders for approval, including the election of directors and approval of significant corporate transactions. Some of these persons or entities may have interests that are different from yours, and this ownership could affect the value of your shares of common stock if, for example, these stockholders elect to delay, defer or prevent a change in corporate control, merger, consolidation, takeover or other business combination. This concentration of ownership may also adversely affect the market price of our common stock.

We have broad discretion to determine how to use the funds raised in this offering, and we may use them in ways that may not enhance our operating results or the price of our common stock.

The principal purposes of this offering are to increase our capitalization and financial flexibility, to create a public market for our stock and thereby enable access to the public equity markets for our employees and stockholders, to obtain additional capital and to increase our visibility in the marketplace. We currently intend to use a significant portion of the net proceeds from this offering for general corporate purposes, including for any of the purposes described in “Use of Proceeds.” However, we do not currently have any specific or preliminary plans for the net proceeds from this offering and will have broad discretion in how we use the net proceeds of this offering. We could spend the proceeds from this offering in ways that our stockholders may not agree with or that do not yield a favorable return. You will not have the opportunity as part of your investment decision to assess whether the net proceeds are being used appropriately. Investors in this offering will need to rely upon the judgment of our management with respect to the use of proceeds. If we do not use the net proceeds that we receive in this offering effectively, our business, financial condition, results of operations and prospects could be harmed, and the market price of our common stock could decline.

 

39


Table of Contents

The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified board members.

As a public company, we will be subject to the reporting and corporate governance requirements of the Exchange Act, the listing requirements of the Nasdaq Stock Market and other applicable securities rules and regulations, including the Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act. Compliance with these rules and regulations will increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources, particularly after we are no longer an “emerging growth company” as defined in the JOBS Act. Among other things, the Exchange Act requires that we file annual, quarterly and current reports with respect to our business and results of operations and maintain effective disclosure controls and procedures and internal control over financial reporting. In order to improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight may be required. As a result, management’s attention may be diverted from other business concerns, which could harm our business, financial condition, results of operations and prospects. Although we have already hired and are in the process of hiring, additional personnel to help comply with these requirements, we may need to further expand our legal and finance departments in the future, which will increase our costs and expenses.

In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time-consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expense and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies, regulatory authorities may initiate legal proceedings against us and our business and prospects may be harmed. As a result of disclosure of information in the filings required of a public company and in this prospectus, our business and financial condition will become more visible, which may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business, financial condition, results of operations and prospects could be materially harmed, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and materially harm our business, financial condition, results of operations and prospects.

We also expect that being a public company and these new rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified executive officers and members of our board of directors, particularly to serve on our audit committee and compensation committee.

In addition, as a result of our disclosure obligations as a public company, we will have reduced strategic flexibility and will be under pressure to focus on short-term results, which may materially and adversely affect our ability to achieve long-term profitability.

We do not intend to pay dividends for the foreseeable future and, as a result, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.

We have never declared or paid any cash dividends on our common stock and do not intend to pay any cash dividends in the foreseeable future. We anticipate that we will retain all of our future earnings for use in the

 

40


Table of Contents

development of our business and for general corporate purposes. Any determination to pay dividends in the future will be at the discretion of our board of directors. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investments. In addition, our loan and security agreement with Silicon Valley Bank contains restrictive covenants that prohibit us, subject to certain exceptions, from paying dividends on our common stock.

If you purchase shares of our common stock in this offering, you will incur immediate and substantial dilution in the book value of your shares.

Investors purchasing common stock in this offering will pay a price per share that substantially exceeds the historical net tangible book value per share, which was $(17.60) per share of common stock as of March 31, 2018. As a result of the dilution to investors purchasing shares in this offering, investors may receive significantly less than the purchase price paid in this offering, if anything, in the event of our liquidation.

Furthermore, if the underwriters exercise their over-allotment option in full, outstanding options are exercised, we issue awards to our employees under our equity incentive plans or we otherwise issue additional shares of our common stock, you could experience further dilution. See “Dilution” for more information.

Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us more difficult, limit attempts by our stockholders to replace or remove members of our board of directors and our current management and could negatively impact the market price of our common stock.

Our amended and restated certificate of incorporation and amended and restated bylaws that will be in effect upon completion of this offering contain provisions that could delay or prevent a change in control of our company. These provisions could also make it difficult for stockholders to elect directors that are not nominated by the current members of our board of directors or take other corporate actions, including effecting changes in our management. These provisions include:

 

   

a classified board of directors with three-year staggered terms, which could delay the ability of stockholders to change the membership of a majority of our board of directors;

 

   

the ability of our board of directors to issue shares of preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquirer;

 

   

the exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of our board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors;

 

   

a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our stockholders;

 

   

the requirement that a special meeting of stockholders may be called only by the chairperson of our board of directors, chief executive officer or president (in the absence of a chief executive officer) or a majority vote of our board of directors, which could delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors;

 

   

the requirement for the affirmative vote of holders of at least 66 2/3% of the voting power of all of the then outstanding shares of the voting stock, voting together as a single class, to amend the provisions of our amended and restated certificate of incorporation relating to the issuance of preferred stock and management of our business or our amended and restated bylaws, which may inhibit the ability of an acquirer to affect such amendments to facilitate an unsolicited takeover attempt;

 

   

the ability of our board of directors, by majority vote, to amend our amended and restated bylaws, which may allow our board of directors to take additional actions to prevent an unsolicited takeover and inhibit the ability of an acquirer to amend our amended and restated bylaws to facilitate an unsolicited takeover attempt; and

 

41


Table of Contents
   

advance notice procedures with which stockholders must comply to nominate candidates to our board of directors or to propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of us.

These provisions may prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us for a certain period of time. See “Description of Capital Stock—Anti-Takeover Provisions.”

Our amended and restated certificate of incorporation to be effective in connection with the closing of this offering will provide that the Court of Chancery of the State of Delaware or the U.S. federal district courts will be the exclusive forums for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or other employees.

Our amended and restated certificate of incorporation to be effective in connection with the closing of this offering provides that the Court of Chancery of the State of Delaware is the sole and exclusive forum for any derivative action or proceeding brought on our behalf, any action asserting a breach of fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders, any action asserting a claim against us arising pursuant to any provisions of the Delaware General Corporation Law, our amended and restated certificate of incorporation or our amended and restated bylaws, or any action asserting a claim against us that is governed by the internal affairs doctrine. Our amended and restated certificate of incorporation further provides that the U.S. federal district courts will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act. These choice of forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits. Some companies that adopted a similar federal district court forum selection provision are currently subject to a suit in the Chancery Court of Delaware by stockholders who assert that the provision is not enforceable. If a court were to find either choice of forum provision contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our results of operations and financial condition.

We are an “emerging growth company” and we cannot be certain if the reduced reporting and disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We may take advantage of these exemptions until we are no longer an emerging growth company. We would cease to be an emerging growth company upon the earliest to occur of: (1) the first fiscal year following the fifth anniversary of our initial public offering; (2) the first fiscal year after our annual gross revenue is $1.07 billion or more; (3) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt securities; or (4) as of the end of any fiscal year in which the market value of our common stock held by non-affiliates exceeded $700.0 million as of the end of the second quarter of that fiscal year. We cannot predict if investors will find our common stock less attractive if we choose to rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

 

42


Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that involve substantial risks and uncertainties. The forward-looking statements are contained principally in the sections of this prospectus entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” but are also contained elsewhere in this prospectus. In some cases, you can identify forward-looking statements by the words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “objective,” “ongoing,” “plan,” “predict,” “project,” “potential,” “should,” “will,” or “would,” or the negative of these terms, or other comparable terminology intended to identify statements about the future. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements. In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. The forward-looking statements and opinions contained in this prospectus are based upon information available to us as of the date of this prospectus and, while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. Forward-looking statements include statements about:

 

   

our market opportunity;

 

   

the effects of increased competition as well as innovations by new and existing competitors in our market;

 

   

our ability to adapt to technological change, release new products and product features and effectively enhance, innovate and scale our enterprise platform and solutions;

 

   

our ability to effectively manage or sustain our growth and to achieve profitability;

 

   

our ability to maintain and expand our customer base, including by attracting new customers;

 

   

our relationships with third parties, including channel partners;

 

   

potential acquisitions and integration of complementary businesses and technologies;

 

   

our expected use of proceeds;

 

   

our ability to maintain, or strengthen awareness of, our brand;

 

   

perceived or actual problems with the security, integrity, reliability, compatibility and quality of our platform and solutions;

 

   

future revenue, hiring plans, expenses, capital expenditures, capital requirements and stock performance;

 

   

our ability to attract and retain qualified employees and key personnel and further expand our overall headcount;

 

   

our ability to stay abreast of new or modified laws and regulations that currently apply or become applicable to our business both in the United States and internationally;

 

   

our ability to maintain, protect and enhance our intellectual property;

 

   

costs associated with defending intellectual property infringement and other claims; and

 

   

the future trading prices of our common stock and the impact of securities analysts’ reports on these prices.

We caution you that the foregoing list may not contain all of the forward-looking statements made in this prospectus.

 

43


Table of Contents

You should refer to the “Risk Factors” section of this prospectus for a discussion of important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this prospectus will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame or at all. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. The Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act of 1933, as amended, or the Securities Act, do not protect any forward-looking statements that we make in connection with this offering.

You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

 

44


Table of Contents

INDUSTRY AND MARKET DATA

Information contained in this prospectus concerning our industry and the market in which we operate, including our general expectations and market position, market opportunity and market size is based on information from various sources, including independent industry publications by International Data Corporation, or IDC, Gartner, Inc., or Gartner, and Cisco. In presenting this information, we have also made assumptions based on such data and other similar sources, and on our knowledge of, and in our experience to date in, the markets for our services. This information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. Although neither we nor the underwriters have independently verified the accuracy or completeness of any third-party information, we believe the market position, market opportunity and market size information included in this prospectus is reliable. The industry in which we operate is subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the “Risk Factors” section. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

The Gartner report described herein, or the Gartner Report, represents research opinion or viewpoints published, as part of a syndicated subscription service, by Gartner, and are not representations of fact. Each Gartner Report speaks as of its original publication date (and not as of the date of this prospectus) and the opinions expressed in the Gartner Report are subject to change without notice.

This prospectus makes various references to the following research opinions published by IDC:

 

   

IDC, Worldwide Security and Vulnerability Management Forecast, 2017–2021, dated January 2018.

 

   

IDC, Container Infrastructure Market Assessment: Bridging Legacy and Cloud-Native Architectures — x86 Software Containers Forecast, 2017–2021, dated March 2018.

 

   

IDC, IDC Quarterly Server Tracker, Forecast Installed Base, dated 31 October 2017.

 

   

IDC, IDC Quarterly Personal Computing Device Tracker - Tablet Forecast, Q4 2017.

 

   

IDC, Worldwide Business Use Smartphone Forecast, 2018–2022, dated March 2018.

 

45


Table of Contents

USE OF PROCEEDS

We estimate that the net proceeds from our issuance and sale of 10,900,000 shares of our common stock in this offering will be approximately $209.0 million, or approximately $240.9 million if the underwriters exercise their over-allotment option in full, based upon an assumed initial public offering price of $21.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

Each $1.00 increase or decrease in the assumed initial public offering price of $21.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease the net proceeds to us from this offering by approximately $10.1 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. A 1,000,000 share increase or decrease in the number of shares offered by us would increase or decrease the net proceeds to us from this offering by approximately $19.5 million, assuming that the assumed initial offering price to the public remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We do not expect that a change in the initial price to the public or the number of shares by these amounts would have a material effect on the uses of the proceeds from this offering, although it may accelerate the time at which we will need to seek additional capital.

The principal purposes of this offering are to increase our financial flexibility, create a public market for our common stock and facilitate our future access to the capital markets. Although we have not yet determined with certainty the manner in which we will allocate the net proceeds of this offering, we expect to use the net proceeds from this offering for working capital and other general corporate purposes, including continuing to invest in sales and marketing and in our solutions and increasing international expansion.

We may also use a portion of the proceeds from this offering for acquisitions or strategic investments in complementary businesses or technologies, although we do not currently have any plans for any such acquisitions or investments. We have not allocated specific amounts of net proceeds for any of these purposes.

The expected use of net proceeds from this offering represents our intentions based upon our present plans and business conditions. We cannot predict with certainty all of the particular uses for the proceeds of this offering or the amounts that we will actually spend on the uses set forth above. Accordingly, our management will have significant flexibility in applying the net proceeds of this offering. The timing and amount of our actual expenditures will be based on many factors, including cash flows from operations and the anticipated growth of our business. Pending their use, we intend to invest the net proceeds of this offering in a variety of capital-preservation investments, including short- and intermediate-term, interest-bearing, investment-grade securities and government securities.

 

46


Table of Contents

DIVIDEND POLICY

We have never declared or paid any dividends on our common stock. In addition, our loan and security agreement with Silicon Valley Bank contains restrictive covenants that prohibit us, subject to certain exceptions, from paying dividends on our common stock, and future debt securities or other financing arrangements could contain similar or more restrictive negative covenants. We currently intend to retain all available funds and any future earnings for the operation and expansion of our business. Accordingly, following this offering, we do not anticipate declaring or paying cash dividends in the foreseeable future. The payment of any future dividends will be at the discretion of our board of directors and will depend on our results of operations, capital requirements, financial condition, prospects, contractual arrangements, any limitations on payment of dividends present in our current and future debt agreements, and other factors that our board of directors may deem relevant.

 

47


Table of Contents

CAPITALIZATION

The following table sets forth our cash and cash equivalents and our capitalization as of March 31, 2018:

 

    on an actual basis;

 

    on a pro forma basis to reflect (1) the conversion of all outstanding shares of our preferred stock into an aggregate of 55,385,854 shares of common stock as if such conversion had occurred on March 31, 2018 and (2) the filing of our amended and restated certificate of incorporation immediately prior to the completion of this offering; and

 

    on a pro forma as adjusted basis to reflect the pro forma items described immediately above and the sale of 10,900,000 shares of common stock in this offering at an assumed initial public offering price of $21.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

You should read this table together with “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes appearing elsewhere in this prospectus.

 

     As of March 31, 2018  
     Actual      Pro Forma      Pro Forma As
Adjusted(1)
 
     (in thousands, except per share data)  

Cash and cash equivalents

   $ 26,424      $ 26,424      $ 235,401  
  

 

 

    

 

 

    

 

 

 

Redeemable convertible preferred stock:

        

Redeemable convertible Series A preferred stock, $0.01 par value per share; 15,848 shares authorized, issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

   $ 49,940      $      $  

Redeemable convertible Series B preferred stock, $0.01 par value per share; 42,000 shares authorized, 39,538 issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

     227,983                

Stockholders’ (deficit) equity:

        

Preferred stock, $0.01 par value per share; no shares authorized, issued and outstanding, actual; 10,000 shares authorized, pro forma and pro forma as adjusted; no shares issued and outstanding, pro forma and pro forma as adjusted

                    

Common stock, $0.01 par value per share; 93,855 shares authorized, actual; 24,794 shares issued and outstanding, actual; 500,000 shares authorized, pro forma; 80,179 shares issued and outstanding, pro forma; 500,000 shares authorized, pro forma as adjusted; 91,079 shares issued and outstanding, pro forma as adjusted

     249        803        911  

Additional paid-in capital

     23,363        300,732        509,601  

Accumulated deficit

     (408,475      (408,475      (408,475
  

 

 

    

 

 

    

 

 

 

Total stockholders’ (deficit) equity

     (384,863      (106,940      102,037  
  

 

 

    

 

 

    

 

 

 

Total capitalization

   $ (106,940    $ (106,940    $ 102,037  
  

 

 

    

 

 

    

 

 

 

 

48


Table of Contents

 

(1) The pro forma as adjusted information set forth above is illustrative only and will change based on the actual initial public offering price and other terms of this offering determined at pricing. Each $1.00 increase or decrease in the assumed initial public offering price of $21.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders’ (deficit) equity and total capitalization by approximately $10.1 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. A 1,000,000 share increase or decrease in the number of shares offered by us would increase or decrease pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders’ (deficit) equity and total capitalization by approximately $19.5 million, assuming that the assumed initial offering price to the public remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The outstanding share information in the table above excludes:

 

    15,217,352 shares of common stock issuable upon the exercise of options outstanding as of March 31, 2018, at a weighted-average exercise price of $4.93 per share;

 

    2,557,234 shares of common stock reserved for future issuance as of March 31, 2018 under our 2016 Stock Incentive Plan, which shares will cease to be available for issuance at the time our 2018 Equity Incentive Plan becomes effective and will be added to, and become available for issuance under, our 2018 Equity Incentive Plan;

 

    736,500 shares of common stock issuable upon the exercise of options granted under our 2016 Stock Incentive Plan subsequent to March 31, 2018, at an exercise price of $14.06 per share;

 

    4,012,148 shares of common stock issuable upon the exercise of options granted under our 2016 Stock Incentive Plan subsequent to March 31, 2018, at an exercise price of $16.21 per share;

 

    973,800 shares of common stock issuable upon the settlement of restricted stock units granted under our 2016 Stock Incentive Plan subsequent to March 31, 2018;

 

    9,900,000 shares of common stock reserved for future issuance pursuant to our 2018 Equity Incentive Plan, which will become effective prior to the closing of this offering; and

 

    4,000,000 shares of common stock reserved for future issuance under our 2018 Employee Stock Purchase Plan, which will become effective prior to the closing of this offering.

 

49


Table of Contents

DILUTION

If you invest in our common stock, your interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after the closing of this offering.

Our historical net tangible book value as of March 31, 2018 was $(436.5) million, or $(17.60) per share of common stock. Our historical net tangible book value per share represents our total tangible assets less our total liabilities and preferred stock (which is not included within stockholders’ deficit), divided by the number of shares of common stock outstanding as of March 31, 2018.

Our pro forma net tangible book value as of March 31, 2018 was $(158.5) million, or $(1.98) per share of common stock. Pro forma net tangible book value per share represents our total tangible assets less our total liabilities, divided by the number of shares of common stock outstanding as of March 31, 2018, after giving effect to the conversion of all outstanding shares of our preferred stock into an aggregate of 55,385,854 shares of common stock immediately prior to the closing of this offering as if such conversion had occurred on March 31, 2018.

Our pro forma as adjusted net tangible book value represents our pro forma net tangible book value, plus the effect of the sale of 10,900,000 shares of common stock in this offering at an assumed initial public offering price of $21.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Our pro forma as adjusted net tangible book value as of March 31, 2018 was $50.4 million, or $0.55 per share of common stock. This amount represents an immediate increase in pro forma net tangible book value of $2.53 per share to our existing stockholders and an immediate dilution of $20.45 per share to investors participating in this offering. We determine dilution per share to investors participating in this offering by subtracting pro forma as adjusted net tangible book value per share after this offering from the assumed initial public offering price per share paid by investors participating in this offering.

The following table illustrates this dilution on a per share basis to new investors:

 

Assumed initial public offering price per share

      $ 21.00  

Historical net tangible book value per share as of March 31, 2018

   $ (17.60   

Increase per share attributable to the pro forma transactions described above

     15.62     
  

 

 

    

Pro forma net tangible book value per share as of March 31, 2018

     (1.98   

Increase in pro forma net tangible book value per share attributable to new investors purchasing shares from us in this offering

     2.53     
  

 

 

    

Pro forma as adjusted net tangible book value per share after giving effect to this offering

        0.55  

Dilution in pro forma as adjusted net tangible book value per share to new investors in this offering

      $ 20.45  
     

 

 

 

The pro forma as adjusted dilution information discussed above is illustrative only and will change based on the actual initial public offering price and other terms of this offering determined at pricing. Each $1.00 increase or decrease in the assumed initial public offering price of $21.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease the pro forma as adjusted net tangible book value per share by $0.11 per share and the dilution per share to investors participating in this offering by $0.11 per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are

 

50


Table of Contents

offering. A 1,000,000 share increase in the number of shares offered by us, as set forth on the cover page of this prospectus, would increase the pro forma as adjusted net tangible book value per share by $0.21 and decrease the dilution per share to investors participating in this offering by $0.21, assuming the assumed initial public offering price of $21.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. A 1,000,000 share decrease in the number of shares offered by us, as set forth on the cover page of this prospectus, would decrease the pro forma as adjusted net tangible book value per share after this offering by $0.22 and increase the dilution per share to new investors participating in this offering by $0.22, assuming the assumed initial public offering price of $21.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

If the underwriters exercise their over-allotment option in full to purchase an additional 1,635,000 shares of our common stock in this offering, the pro forma as adjusted net tangible book value of our common stock would increase to $0.89 per share, representing an immediate increase to existing stockholders of $2.87 per share and an immediate dilution of $20.11 per share to investors participating in this offering.

The following table summarizes as of March 31, 2018, on the pro forma as adjusted basis described above, the number of shares of our common stock, the total consideration and the average price per share (1) paid to us by our existing stockholders and (2) to be paid by investors purchasing our common stock in this offering at an assumed initial public offering price of $21.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

     Shares Purchased     Total Consideration     Weighted-
Average Price
Per Share
 
     Number      Percent     Amount     Percent        

Existing stockholders

     80,179,454        88.0   $ 285,056,050 (1)      55.5   $ 3.56  
           

New investors

     10,900,000        12.0       228,900,000       44.5       21.00  
  

 

 

    

 

 

   

 

 

   

 

 

   

Total

     91,079,454        100.0     $ 513,956,050       100.0    
  

 

 

    

 

 

   

 

 

   

 

 

   

 

(1) We received aggregate consideration of $280.0 million for the issuance of our Series A and Series B redeemable convertible preferred stock. The proceeds from the sale of such shares of preferred stock were used to repurchase shares of our common stock.

The outstanding share information used in the computations above excludes:

 

    15,217,352 shares of common stock issuable upon the exercise of options outstanding as of March 31, 2018, at a weighted-average exercise price of $4.93 per share;

 

    2,557,234 shares of common stock reserved for future issuance as of March 31, 2018 under our 2016 Stock Incentive Plan, which shares will cease to be available for issuance at the time our 2018 Equity Incentive Plan becomes effective and will be added to, and become available for issuance under, our 2018 Equity Incentive Plan;

 

    736,500 shares of common stock issuable upon the exercise of options granted under our 2016 Stock Incentive Plan subsequent to March 31, 2018, at an exercise price of $14.06 per share;

 

    4,012,148 shares of common stock issuable upon the exercise of options granted under our 2016 Stock Incentive Plan subsequent to March 31, 2018, at an exercise price of $16.21 per share;

 

    973,800 shares of common stock issuable upon the settlement of restricted stock units granted under our 2016 Stock Incentive Plan subsequent to March 31, 2018;

 

51


Table of Contents
   

9,900,000 shares of common stock reserved for future issuance pursuant to our 2018 Equity Incentive Plan, which will become effective prior to the closing of this offering; and

 

   

4,000,000 shares of common stock reserved for future issuance under our 2018 Employee Stock Purchase Plan, which will become effective prior to the closing of this offering.

To the extent that outstanding options or warrants are exercised, new options or other securities are issued under our equity incentive plans, or we issue additional shares of common stock in the future, there will be further dilution to investors participating in this offering. In addition, we may choose to raise additional capital because of market conditions or strategic considerations, even if we believe that we have sufficient funds for our current or future operating plans. If we raise additional capital through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our stockholders.

 

52


Table of Contents

SELECTED CONSOLIDATED FINANCIAL DATA

We derived the selected consolidated statements of operations data for the years ended December 31, 2016 and 2017 and the selected consolidated balance sheet data as of December 31, 2016 and 2017 from our audited consolidated financial statements included elsewhere in this prospectus. In order to provide additional historical financial information, we have included supplemental consolidated statements of operations data for the year ended December 31, 2015, which is derived from the consolidated statement of operations and comprehensive loss for the year ended December 31, 2015, and consolidated balance sheet data as of December 31, 2015, in each case from our audited financial statements not included elsewhere in this prospectus. We derived the selected consolidated statements of operations data for the three months ended March 31, 2017 and 2018 and the selected consolidated balance sheet data as of March 31, 2018 from the unaudited consolidated financial statements included elsewhere in this prospectus. Our unaudited interim consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements and reflect, in the opinion of management, all adjustments of a normal, recurring nature that are necessary for a fair presentation of our unaudited interim consolidated financial statements. Our historical results are not necessarily indicative of the results to be expected in the future, and our operating results for the three months ended March 31, 2018, are not necessarily indicative of the results that may be expected for the entire year ending December 31, 2018.

When you read this selected consolidated financial data, it is important that you read it together with the historical consolidated financial statements and related notes to those statements, as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included elsewhere in this prospectus.

 

     Year Ended December 31,        Three Months Ended March 31,    
     2015      2016      2017      2017      2018  
    

(in thousands, except per share data)

 

Consolidated Statements of Operations Data:

              

Revenue(1)

   $ 93,466      $ 124,371      $ 187,727      $ 40,481      $ 59,107  

Cost of revenue(2)

     10,914        14,219        25,588        4,438        8,728  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

     82,552        110,152        162,139        36,043        50,379  

Operating expenses:

              

Sales and marketing(1)(2)

     60,635        85,736        116,299        26,168        39,588  

Research and development(2)

     25,288        40,085        57,673        12,458        17,185  

General and administrative(2)

     15,348        20,164        28,927        6,163        9,055  

Recapitalization costs(3)

     67,039                              
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses

     168,310        145,985        202,899        44,789        65,828  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loss from operations

     (85,758      (35,833      (40,760      (8,746      (15,449

Other expense, net

     189        532        91        29        8  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loss before income taxes

     (85,947      (36,365      (40,851      (8,775      (15,457

(Benefit from) provision for income taxes

     (2,188      843        171        51        431  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net loss

     (83,759      (37,208      (41,022      (8,826      (15,888

Accretion of Series A and B redeemable convertible preferred stock

     29        763        763        187        188  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net loss attributable to common stockholders

   $ (83,788    $ (37,971    $ (41,785    $ (9,013    $ (16,076
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net loss per share attributable to common stockholders, basic and diluted(4)

   $ (1.45    $ (1.81    $ (1.88    $ (0.42    $ (0.68
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average shares used to compute net loss per share attributable to common stockholders, basic and diluted

     57,654        20,974        22,211        21,257        23,495  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Pro forma net loss per share, basic and diluted (unaudited)(5)

         $ (0.53       $ (0.20
        

 

 

       

 

 

 

Weighted-average shares used in computing pro forma net loss per share, basic and diluted (unaudited)

           77,597           78,881  
        

 

 

       

 

 

 

 

53


Table of Contents

 

(1)

We adopted Accounting Standards Codification Topic 606, Revenue From Contracts With Customers, or ASC 606, on January 1, 2017 using the modified retrospective method. The 2015 and 2016 consolidated statements of operations were not adjusted for the adoption of ASC 606. See Note 2 to our consolidated financial statements included elsewhere in this prospectus for details on the impact of adopting ASC 606.

(2)

Includes stock-based compensation expense as follows:

 

     Year Ended December 31,      Three Months Ended March 31,  
     2015      2016      2017      2017      2018  
    

(in thousands)

 

Cost of revenue

   $ 52      $ 223      $ 281      $ 54      $ 77  

Sales and marketing

     866        969        1,579        270        602  

Research and development

     252        602        1,782        394        527  

General and administrative

     509        738        4,118        908        1,193  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 1,679      $ 2,532      $ 7,760      $ 1,626      $ 2,399  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(3)

We recorded a charge of $67.0 million primarily resulting from the repurchase price paid to common stockholders exceeding the estimated fair value of the common stock on the date of the Series B financing.

(4)

See Note 9 to our consolidated financial statements appearing elsewhere in this prospectus for further details on the calculation of basic and diluted net loss per share attributable to common stockholders.

(5)

Pro forma basic and diluted net loss per share represents net loss divided by the pro forma weighted-average shares of common stock outstanding. Pro forma weighted-average shares outstanding reflects the conversion of all outstanding shares of our preferred stock (using the if-converted method) into common stock as though the conversion had occurred on the first day of the relevant period.

 

     As of December 31,      As of March 31,  
     2015      2016      2017      2018  
     (in thousands)  

Consolidated Balance Sheet Data:

           

Cash and cash equivalents

   $ 43,743      $ 34,470      $ 27,210      $ 26,424  

Working capital (deficit)(1)

     13,862        (18,538      (69,091      (81,983

Total assets

     83,993        105,494        164,337        155,645  

Deferred revenue, current and non-current

     63,218        107,447        225,818        230,614  

Redeemable convertible preferred stock

     276,209        276,972        277,735        277,923  

Accumulated deficit

     (275,939      (313,147      (392,587      (408,475

Total stockholders’ deficit

     (266,862      (301,918      (371,665      (384,863

 

(1)

We define working capital (deficit) as total current assets less total current liabilities. See our consolidated financial statements included elsewhere in this prospectus for further details regarding our current assets and current liabilities. Changes in working capital (deficit) reflect increases in deferred revenue and deferred commissions as a result of our subscription model and our adoption of ASC 606.

Non-GAAP Financial Measures

To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, we use certain non-GAAP financial measures, as described below, to understand and evaluate our core operating performance. These non-GAAP financial measures, which may be different than similarly titled measures used by other companies, are presented to enhance investors’ overall understanding of our financial performance and should not be considered a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP.

We believe that these non-GAAP financial measures provide useful information about our financial performance, enhance the overall understanding of our past performance and future prospects and allow for greater transparency with respect to important metrics used by management for financial and operational decision-making. We are

 

54


Table of Contents

presenting these non-GAAP metrics to assist investors in seeing our financial performance using a management view and because we believe that these measures provide an additional tool for investors to use in comparing our core financial performance over multiple periods with other companies in our industry.

Calculated Current Billings

We use the non-GAAP measure of calculated current billings, which we believe is a key metric to measure our periodic performance. Given that most of our customers pay in advance, we typically recognize a majority of the related revenue ratably over time. We use calculated current billings to measure and monitor our ability to provide our business with the working capital generated by upfront payments from our customers.

Calculated current billings consists of our total revenue recognized in a period plus the change in current deferred revenue in the corresponding period. We believe that current billings, which excludes deferred revenue for periods beyond twelve months in a customer’s contractual term, more closely correlates with annual contract value and that the variability in total billings, depending on the timing of large multi-year contracts and the preference for annual billing versus multi-year upfront billing, may distort growth in one period over another. While we believe that calculated current billings provides valuable insight into the cash that will be generated from sales of our subscriptions, this metric may vary from period-to-period for a number of reasons, and therefore has a number of limitations as a quarter-to-quarter or year-over-year comparative measure. For example, billings include amounts that have not yet been recognized as revenue; an increasing number of large sales transactions, for which the timing has and will continue to vary, may occur in quarters subsequent to or in advance of those that we anticipate; and our calculation of current billings may be different from other companies that report similar financial measures. Additionally, calculated current billings in any one period may be impacted by the timing of customer renewals, including early renewals, which could favorably or unfavorably impact year-over-year comparisons. Because of these and other limitations, you should consider calculated current billings along with revenue and our other GAAP financial results.

The following table presents a reconciliation of revenue, the most directly comparable financial measure calculated in accordance with GAAP, to calculated current billings, for each of the periods presented:

 

     Year Ended December 31,      Three Months Ended March 31,  
     2015      2016      2017      2017      2018  
     (in thousands)  

Revenue

   $ 93,466      $ 124,371      $ 187,727      $ 40,481      $ 59,107  

Deferred revenue (current), end of period

     54,721        88,011        154,898        110,605        160,503  

Deferred revenue (current), beginning of period(1)

     (33,163      (54,721      (107,006      (107,006      (154,898
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Calculated current billings

   $ 115,024      $ 157,661      $ 235,619      $ 44,080      $ 64,712  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

In connection with adopting ASC 606, we recorded $19.0 million of current deferred revenue on January 1, 2017, related to perpetual license revenue recognized in prior periods. See Note 2 to our consolidated financial statements for additional details.

Non-GAAP Loss from Operations and Non-GAAP Operating Margin

We use non-GAAP loss from operations, which excludes the effect of stock-based compensation, amortization of intangible assets and recapitalization costs, as a key indicator of our financial performance, along with non-GAAP operating margin, which is calculated as non-GAAP loss from operations divided by our total revenue for the period. We believe that these non-GAAP financial measures provide useful information about our core operating results over multiple periods. There are a number of limitations related to the use of the non-GAAP financial measures as compared to GAAP loss from operations and operating margin, including that

 

55


Table of Contents

non-GAAP loss from operations and non-GAAP operating margin exclude stock-based compensation expense, which has been, and will continue to be for the foreseeable future, a significant recurring expense in our business and an important part of our compensation strategy.

The following table presents a reconciliation of loss from operations, the most directly comparable financial measure calculated in accordance with GAAP, to non-GAAP loss from operations, and operating margin, the most directly comparable financial measure calculated in accordance with GAAP, to non-GAAP operating margin, for each of the periods presented:

 

     Year Ended December 31,     Three Months Ended March 31,  
     2015     2016     2017            2017                   2018         

Loss from operations

   $ (85,758   $ (35,833 )    $ (40,760 )    $ (8,746 )    $ (15,449

Stock-based compensation

     1,679       2,532       7,760       1,626       2,399  

Amortization of intangible assets

     3       178       603       151       151  

Recapitalization costs

     67,039                          
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP loss from operations

   $ (17,037   $ (33,123   $ (32,397   $ (6,969   $ (12,899
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating margin

     (92 )%      (29 )%      (22 )%      (22 )%      (26 )% 

Non-GAAP operating margin

     (18 )%      (27 )%      (17 )%      (17 )%      (22 )% 

Non-GAAP Net Loss and Non-GAAP Net Loss Per Share

We use non-GAAP net loss, which excludes the effect of the accretion of our Series A and B redeemable convertible preferred stock, stock-based compensation expense, amortization of intangible assets and recapitalization costs, as well as the related tax impact, to calculate non-GAAP net loss per share. We believe that these non-GAAP measures provide important information to management and investors because they facilitate comparisons of our core operating results over multiple periods.

The following table presents a reconciliation of net loss, and net loss per share attributable to common stockholders, the most comparable financial measures calculated in accordance with GAAP, to non-GAAP net loss and non-GAAP net loss per share for each of the periods presented:

 

     Year Ended December 31,     Three Months Ended
March 31,
 
     2015     2016     2017     2017     2018  
     (in thousands)  

Net loss attributable to common stockholders

   $ (83,788   $ (37,971   $ (41,785   $ (9,013   $ (16,076

Accretion of Series A and B redeemable convertible preferred stock

     29       763       763       187       188  

Stock-based compensation

     1,679       2,532       7,760       1,626       2,399  

Tax impact of stock-based compensation(1)

     (17     (22     (54     (10     (23

Amortization of intangible assets(1)

     3       178       603       151       151  

Recapitalization costs(1)

     67,039       —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP net loss

   $ (15,055   $ (34,520   $ (32,713   $ (7,059   $ (13,361
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to common stockholders, basic and diluted

   $ (1.45   $ (1.81   $ (1.88   $ (0.42   $ (0.68

Accretion of Series A and B redeemable convertible preferred stock

     —         0.03       0.03       0.01       0.01  

Stock-based compensation

     0.03       0.12       0.35       0.08       0.10  

Tax impact of stock-based compensation(1)

     —         —         —         —         —    

Amortization of intangible assets(1)

     —         0.01       0.03       —         —    

Recapitalization costs(1)

     1.16       —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP net loss per share, basic and diluted

   $ (0.26   $ (1.65   $ (1.47   $ (0.33   $ (0.57
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares used to compute net loss per share attributable to common stockholders and non-GAAP net loss per share, basic and diluted

     57,654       20,974       22,211       21,257       23,495  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

56


Table of Contents

 

(1)

The tax effect of the adjustments to net loss attributable to common stockholders is based on the tax treatment for applicable tax jurisdictions. There was no tax effect related to the amortization of intangible assets or recapitalization costs as they were incurred in the United States in periods in which we had a net operating loss for which we maintained a full valuation allowance.

Free Cash Flow

We use the non-GAAP measure of free cash flow, which we define as GAAP net cash flows from operating activities reduced by purchases of property and equipment. We believe free cash flow is an important liquidity measure of the cash (if any) that is available, after purchases of property and equipment, for operational expenses, investment in our business, and to make acquisitions. Free cash flow is useful to investors as a liquidity measure because it measures our ability to generate or use cash. Once our business needs and obligations are met, cash can be used to maintain a strong balance sheet and invest in future growth.

The following table summarizes our cash flows for the periods presented and presents a reconciliation of net cash from operating activities, the most directly comparable financial measure calculated in accordance with GAAP, to free cash flow, for each of the periods presented:

 

     Year Ended December 31,    

Three Months Ended

March 31,

 
     2015     2016     2017     2017     2018  
    

(in thousands)

 

Net cash (used in) provided by operating activities

   $ (2,076   $ (2,785   $ (6,266   $ 1,187     $ 504  

Purchases of property and equipment

     (2,672     (5,776     (2,755     (460     (1,596
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Free cash flow

   $ (4,748   $ (8,561   $ (9,021   $ 727     $ (1,092
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Our use of free cash flow has limitations as an analytical tool and you should not consider it in isolation or as a substitute for an analysis of our results under GAAP. First, free cash flow is not a substitute for net cash used in operating activities. Second, other companies may calculate free cash flow or similarly titled non-GAAP financial measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of free cash flow as a tool for comparison. Additionally, the utility of free cash flow is further limited as it does not reflect our future contractual commitments and does not represent the total increase or decrease in our cash balance for a given period. Because of these and other limitations, you should consider free cash flow along with our GAAP financial measures.

 

57


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the section titled “Selected Consolidated Financial Data” and our consolidated financial statements and related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such difference include, but are not limited to, those identified below and those discussed in the section titled “Risk Factors” included elsewhere in this prospectus.

Overview

We are the first and only provider of solutions for a new category of cybersecurity that we call Cyber Exposure. Cyber Exposure is a discipline for managing and measuring cybersecurity risk in the digital era. Our enterprise platform enables broad visibility into an organization’s cyber exposure across the modern attack surface and deep insights that help organizations translate vulnerability data into business insights to understand and reduce their cybersecurity risk.

Our enterprise platform offerings include Tenable.io and SecurityCenter. Tenable.io is our SaaS offering that manages and measures cyber exposure across a range of traditional and modern IT assets. SecurityCenter was built to manage and measure cyber exposure across traditional IT assets and can be run on-premises, in the customer’s cloud or in a hybrid environment. We also plan to release Tenable.io Lumin, an application that will provide enhanced risk-based prioritization of issues and benchmarking against industry peers and best-in-class performers.

Our enterprise platform offerings are primarily sold on a subscription basis with terms ranging from one to three years, primarily one year. These offerings are typically prepaid in advance. To a lesser extent, we generate ratably recognizable revenue from perpetual licenses and from the related ongoing maintenance. Revenue from perpetual license sales is recognized ratably over a five-year estimated economic life in accordance with ASC 606. Revenue from our enterprise platform offerings accounted for 58%, 67%, 64% and 72% of total revenue in 2016, 2017 and the three months ended March 31, 2017 and 2018, respectively.

Many of our enterprise platform customers initially use either our free or paid version of Nessus, one of the industry’s most widely deployed vulnerability assessment solution. Nessus, which is the technology that underpins our enterprise platform offerings, is designed to quickly and accurately identify vulnerabilities, configuration and compliance issues and malware. Our free version of Nessus, Nessus Home, allows for vulnerability assessment over a limited number of IP addresses. We believe many of our Nessus customers begin with Nessus Home and subsequently upgrade to Nessus Professional, the paid version of Nessus; however, we expect many users to continue to use Nessus Home. Revenue from Nessus Professional accounted for 39%, 31%, 34% and 26% of total revenue in 2016, 2017 and the three months ended March 31, 2017 and 2018, respectively. Nessus Professional revenue as a percentage of total revenue has decreased as customers have increasingly adopted our enterprise platform offerings.

 

58


Table of Contents

The following graphic illustrates the number of cumulative free Nessus unique downloads from 2004 through 2017:

 

LOGO

 

(1)

Each unique download refers to an individual email address utilized to register for the use of Nessus Home.

We believe that the cumulative number of unique downloads of the free version of Nessus is representative of our brand recognition among cybersecurity professionals and that continued growth in this number suggests broader awareness among potential customers. While we believe that the cumulative number of unique downloads may provide an indication of the growth and scale of our thought leadership and brand awareness, we do not expect this metric to necessarily correlate to future revenue growth opportunities, and we do not consider this metric a measure of our operating performance.

The following are key company milestones:

1998: Initial release of free version of Nessus under an open source license by co-founder Renaud Deraison

2002: Tenable founded

2003: Launched SecurityCenter enterprise platform

2005: Closed sourced Nessus (source code no longer published)

2008: Launched paid Nessus offering

2012: Enhanced SecurityCenter platform offering to include passive network monitoring

2015: Introduced enterprise subscription model and increased investment in sales and marketing to accelerate sales growth and customer acquisition

2017: Launched Tenable.io enterprise platform offering

2018: Announced Tenable.io Lumin

We sell and market our enterprise platform offerings through our field sales force that works closely with our channel partners, which includes a network of distributors and resellers, in developing sales opportunities. We use a two-tiered channel model whereby we sell our enterprise platform offerings to our distributors, which in turn sell to our resellers, which then sell to end users, which we call customers. Nessus Professional is also sold by our channel partners without the direct involvement of our sales force, as well as through our own e-commerce store. One of our distributors, Ingram Micro, Inc., accounted for 42%, 45%, 41% and 45% of revenue

 

59


Table of Contents

in 2016, 2017 and the three months ended March 31, 2017 and 2018, respectively. No customer accounted for more than 2% of revenue in 2016, 2017 or the three months ended March 31, 2017 or 2018.

Our enterprise platform offerings are generally priced based on the number of IT assets or IP addresses that a customer chooses to monitor. Subscriptions to Nessus Professional are generally priced on a per-license basis.

We believe the market for our solutions is large and growing as cybersecurity continues to become more strategic for organizations. We have made substantial investments in developing our platform offerings and expanding our sales and marketing footprint globally. Worldwide, we have offices in 12 countries, and our total employee base has grown from 751 as of December 31, 2016 to 984 as of December 31, 2017 and 1,054 as of March 31, 2018. Our international revenue represented 31% of our revenue for both 2016 and 2017 and 29% and 33% of our revenue for the three months ended March 31, 2017 and 2018, respectively. In the near future, we intend to continue to invest heavily to grow our business to take advantage of our market opportunity rather than optimizing for profitability or cash flow.

We have experienced rapid growth in recent years. Revenue in 2016, 2017 and the three months ended March 31, 2017 and 2018 was $124.4 million, $187.7 million, $40.5 million and $59.1 million, respectively, representing year-over-year growth of 51% and 46% for the annual and quarterly periods, respectively. Our net loss in 2016, 2017 and the three months ended March 31, 2018 was $37.2 million, $41.0 million and $15.9 million, respectively, as we continue to invest in our business and market opportunity.

Factors Affecting Our Performance

Product Leadership

We offer the first and only Cyber Exposure platform to provide visibility into the broadest range of traditional and modern IT assets across cloud and on-premises environments. We are intensely focused on continued innovation that empowers organizations to understand and reduce their cyber exposure. This includes ongoing development of our enterprise platform offerings. In February 2017, we released Tenable.io, our SaaS offering that is designed to provide broad visibility and insights across a broad range of traditional and modern IT assets and cloud environments. Throughout 2017, we introduced new features to Tenable.io, including web application scanning and container security.

In 2017, we introduced Industrial Security, an Operational Technology-specific offering that we developed in partnership with Siemens in order to provide continuous visibility and protection of Industrial Control Systems.

We also offer SecurityCenter, which manages vulnerabilities across traditional IT assets and provides automated assessment of security frameworks and compliance regulations. We continue to expand the capabilities of SecurityCenter, as well as our Nessus products, specifically as it relates to the ability to scan for and detect the rapidly expanding volume of vulnerabilities.

In addition, we plan to release Tenable.io Lumin, an application that will provide enhanced risk-based prioritization of issues and benchmarking against industry peers and best-in-class performers.

We intend to continue to invest in our engineering capabilities and marketing activities to maintain our position in the highly-competitive market for cybersecurity solutions. Our results of operations may fluctuate as we make these investments to drive increased customer adoption and usage.

 

60


Table of Contents

New Enterprise Platform Customer Acquisition

We believe that our customer base provides a significant opportunity to expand sales of our enterprise platform offerings. The following tables summarize key components of our customer base for the periods indicated:

 

     Year Ended
December 31,
     Three Months Ended
March 31, 2018
 
     2015      2016      2017  

Number of new enterprise platform customers(1)

     493        786        1,017        301  

 

(1)

We define an enterprise platform customer as a customer that has licensed Tenable.io or SecurityCenter for an annual amount of $5,000 or greater. New enterprise platform customers represent new customer logos during the periods presented and do not include customer conversions from Nessus Professional to enterprise platforms.

 

     As of December 31,      As of
March 31,
2018
 
     2015      2016      2017  

Number of customers with $100,000 and greater in annual contract value

     45        124        265        307  

We believe our ability to continue to grow our enterprise platform customers will increase future opportunities for renewals and follow-on sales. We believe that we have significant room to capture additional market share.

We expect to grow our enterprise platform customers by continuing to expand our sales organization and leveraging channel partner network, which we believe will allow us to identify new enterprise customers, enter new markets, including internationally, as well as to convert more of our existing Nessus Professional customers to enterprise platform customers.

We have increased our sales and marketing headcount in recent years and we will continue to invest significantly in our partner network and sales and marketing capability in order to grow domestically and internationally.

Retaining and Expanding Revenue from Existing Customers

Our enterprise platform offerings utilize IT asset-based or IP address-based pricing models. Once enterprise customers have licensed our platform offerings, they typically seek broader coverage over their traditional IT assets, including networking infrastructure, desktops and on-premises servers. As customers launch new applications or migrate existing applications to the cloud and deploy web applications, containers, IoT and OT, they often increase the scope of their subscriptions and/or add additional perpetual licenses to our enterprise platforms.

We are also focused on upselling customers from Nessus Professional to our enterprise platform offerings. Nessus customers are typically organizations or independent security consultants that use Nessus for a single vulnerability assessment at a point in time. We seek to convert our Nessus Professional users to customers of our enterprise platform offerings, which provide continuous visibility and insights into their attack surface.

Further, we plan to expand existing platform capabilities and launch new products, such as Tenable.io Lumin, which we believe will drive new product purchases and follow-on purchases over time, thereby contributing to customer renewals. We believe that there is a significant opportunity to drive additional sales to existing customers, and we expect to invest in sales and marketing and customer success personnel and activities to achieve additional revenue growth from existing customers.

The chart below illustrates enterprise platform annual recurring revenue, or ARR, from each customer cohort over the years presented, and illustrates how our customers spend more with us over time. We define

 

61


Table of Contents

enterprise platform ARR as subscription and maintenance payments we would contractually expect to receive from enterprise platform customers over the following 12 months. Each cohort represents customers that made their initial purchase from us during a given year. For example, the 2014 cohort represents all customers that made their initial purchase from us between January 1, 2014 and December 31, 2014.

 

LOGO

We believe our ability to expand sales with customers is most effectively measured by our dollar-based net expansion rate. We utilize dollar-based net expansion rate to measure the long-term value of our customer relationships because it is driven by our ability to retain and expand the revenue generated from our existing customers.

We calculate our dollar-based net expansion rate as follows:

 

   

Denominator: To calculate our dollar-based net expansion rate as of the end of a reporting period, we first establish the ARR from all active subscriptions and maintenance from perpetual licenses as of the last day of the same reporting period in the prior year. This represents recurring payments that we expect to receive in the next 12-month period from the cohort of customers that existed on the last day of the same reporting period in the prior year.

 

   

Numerator: We measure the ARR for that same cohort of customers representing all subscriptions and maintenance from perpetual licenses based on customer orders as of the end of the reporting period.

We calculate dollar-based net expansion rate by dividing the numerator by the denominator.

The following table summarizes our dollar-based net expansion rate for the trailing twelve months at December 31, 2016, 2017 and March 31, 2018;

 

     Trailing 12 Months Ended  
     December 31,     March 31,  
     2016     2017     2018  

Dollar-based net expansion rate

     125     121     124

If we had included in the numerator the annual contract value of incremental payments related to perpetual licenses and services from existing customers, our trailing 12-month dollar-based net expansion rate would have increased by over 10 percentage points at December 31, 2016, 2017 and March 31, 2018.

 

62


Table of Contents

Our ability to increase sales to existing customers will depend on a number of factors, including satisfaction or dissatisfaction with our products and services, competition, pricing, economic conditions or overall changes in our spending levels. Our dollar-based net expansion rate may fluctuate due to a number of factors, including the performance of our products, the rate of ARR expansion of our existing customers, potential changes in our rate of renewals and other factors described in this prospectus.

Investing in Business Growth

Since our founding, we have invested significantly in growing our business. In 2015, in order to accelerate customer acquisition and revenue growth, we accelerated our investments in our sales and marketing and research and development teams. We have financed this growth and our operations through sales of our software solutions and have not raised any primary institutional capital prior to this offering. The proceeds from our convertible preferred stock financings were fully used to repurchase shares of our capital stock. We intend to continue to invest in sales and marketing to grow our sales team, expand brand and Cyber Exposure awareness and optimize our channel partner network. We also intend to continue to invest in our research and development team to further our technological leadership position in Cyber Exposure and enhance the functionality of our solutions. Any investments we make in our sales and marketing and research and development teams will occur in advance of experiencing the benefits from such investments, so it may be difficult for us to determine if we are efficiently allocating resources in those areas. Our sales and marketing and research and development expense increased $30.6 million and $17.6 million, respectively, from 2016 to 2017 and $13.4 million and $4.7 million, respectively, from the three months ended March 31, 2017 to the three months ended March 31, 2018. These investment activities could increase our net losses over the short term if our revenue growth does not increase at higher rates. However, we expect that these investments will benefit our results of operations.

Components of Our Results of Operations

Revenue

We generate revenue from subscription arrangements for our software and cloud-based solutions, perpetual licenses, maintenance associated with perpetual licenses and professional services. We begin to recognize revenue when control of our software or services is transferred to the customer, which for sales made through distributors is concurrent with the transfer to the end user.

Our subscription arrangements generally have annual or multi-year contractual terms and allow customers to use our software or cloud-based solutions, including ongoing software updates during the contractual period. Revenue is recognized ratably over the subscription term given the critical utility provided by the ongoing updates that are released throughout the contract period.

Our perpetual licenses are generally sold with one or more years of maintenance, which includes ongoing software updates. Given the critical utility provided by the ongoing software updates and updated ability to identify network vulnerabilities included in maintenance, we combine the perpetual license and the maintenance into a single performance obligation. Perpetual license arrangements generally contain a material right related to the customer’s ability to renew maintenance at a price that is less than the initial license fee. We apply a practical alternative to allocating a portion of the transaction price to the material right performance obligation and estimate a hypothetical transaction price which includes fees for expected maintenance renewals based on the estimated economic life of perpetual license contracts. We allocate the transaction price between the cybersecurity subscription provided in the initial contract and the material right related to expected contract renewals based on the hypothetical transaction price. We recognize the amount allocated to the combined license and maintenance performance obligation over the initial contractual period, which is generally one year. We recognize the amount allocated to the material right over the expected maintenance renewal period, which begins at the end of the initial contractual term and is generally four years. We have estimated the five-year economic life of perpetual license contracts based on historical contract attrition, expected renewal periods, the lifecycle of our technology and other factors. This estimate may change over time.

 

63


Table of Contents

Professional services and other revenue is primarily comprised of advisory services and training related to the deployment and optimization of our products. These services do not result in significant customization of our products. Professional services and other revenue is recognized as the services are performed.

On January 1, 2017, we early adopted ASC 606 under the modified retrospective method, applying the guidance to all contracts as of January 1, 2017. Under the modified retrospective method, periods prior to January 1, 2017 were not restated. The most significant impact of adopting ASC 606 was the deferral of perpetual license revenue over an estimated economic life, as discussed above, including estimated maintenance renewal periods, whereas under previous guidance we recognized perpetual license revenue upon delivery of the perpetual license. The impact of the adoption of ASC 606 on 2017 revenue was a net increase of $3.5 million after giving effect to the recognition of perpetual license revenue from prior year sales and the deferral of perpetual license revenue from 2017 sales.

Cost of Revenue

Cost of revenue includes personnel costs related to our technical support group that provides assistance to customers, including salaries, benefits, bonuses, payroll taxes and stock-based compensation. Cost of revenue also includes public cloud hosting costs for Tenable.io, the costs related to professional services and training, depreciation and amortization and allocated overhead costs, which consist of information technology and facilities.

We intend to continue to invest additional resources in our cloud-based platform and our customer support team as we grow our business. The level and timing of investment in these areas could affect our cost of revenue in the future.

Gross Profit and Gross Margin

Gross profit, or revenue less cost of revenue and gross margin, or gross profit as a percentage of revenue, have been and will continue to be affected by various factors, including the timing of our acquisition of new customers and our renewals of and follow-on sales to existing customers, the costs associated with operating our cloud-based platform, the extent to which we expand our customer support team and the extent to which we can increase the efficiency of our technology and infrastructure through technological improvements. We expect our gross profit to increase in absolute dollars but our gross margin to decrease, as we expect revenue from our cloud-based subscriptions to increase as a percentage of revenue, although our gross margin could fluctuate from period to period depending on the interplay of all of these factors.

Operating Expenses

Our operating expenses consist of sales and marketing, research and development and general and administrative expenses. Personnel costs are the most significant component of operating expenses and consist of salaries, benefits, bonuses, payroll taxes and stock-based compensation expense. Operating expenses also include depreciation and amortization as well as allocated overhead costs including IT and facilities costs.

Sales and Marketing

Sales and marketing expense consists of personnel costs, sales commissions that are recognized as expense over the period of benefit, marketing programs, travel and entertainment, expenses for conferences and events and allocated overhead costs.

Under ASC 606, sales commissions, including related incremental fringe benefit costs, on initial sales are not commensurate with sales commissions on contract renewals and therefore are deferred over an estimated period of benefit, which ranges between three and four years for subscription arrangements and five years for

 

64


Table of Contents

perpetual license arrangements. Sales commissions on contract renewals are capitalized and amortized ratably over the contract term, with the exception of contracts with renewal periods that are one year or less, in which case the incremental costs are expensed as incurred. In periods prior to January 1, 2017, sales commissions for subscriptions were capitalized and amortized over the corresponding period in which the related revenue was recognized. Commissions on perpetual license sales were recognized upon the delivery of the license. In 2017, commission expense was reduced by $8.8 million as a result of the adoption of ASC 606.

We intend to continue to make significant investments in our sales and marketing teams to grow revenue, further penetrate the market and expand our global customer base. We expect our sales and marketing expense to continue to increase in absolute dollars and to be our largest operating expense category for the foreseeable future. However, as our revenue increases, we expect our sales and marketing expense to decrease as a percentage of our revenue over the long term, although our sales and marketing expense may fluctuate as a percentage of our revenue from period to period due to the timing and extent of these expenses.

Research and Development

Research and development expense consists of personnel costs, software used to develop our products, travel and entertainment, consulting and professional fees for third-party development resources as well as allocated overhead. Our research and development expense supports our efforts to continue to add capabilities to our existing products and enable the continued detection of new network vulnerabilities. We expect our research and development expense to continue to increase in absolute dollars for the foreseeable future, particularly in 2018, as we continue to invest in research and development efforts to enhance the functionality of our cloud-based platform. However, we expect our research and development expense to decrease as a percentage of our revenue over the long term, although our research and development expense may fluctuate as a percentage of our revenue from period to period due to the timing and extent of these expenses.

General and Administrative

General and administrative expense consists of personnel costs for our executive, finance, legal, human resources and administrative departments. Additional expenses include travel and entertainment, professional fees, insurance and allocated overhead. We expect our general and administrative expense to continue to increase in absolute dollars for the foreseeable future, in particular in 2018, due to additional costs associated with accounting, compliance, insurance and investor relations as we become a public company. However, we expect our general and administrative expense to decrease as a percentage of our revenue over the long term, although our general and administrative expense may fluctuate as a percentage of our revenue from period to period due to the timing and extent of these expenses.

Other Expense, Net

Other income (expense), net consists primarily of net foreign currency remeasurement and transaction gains and losses, income earned on cash and cash equivalents and interest expense in connection with unused line of credit fees on our revolving credit facility.

Provision for Income Taxes

Provision for income taxes consists primarily of income taxes in certain foreign jurisdictions in which we conduct business. We have recorded deferred tax assets for which a full valuation allowance has been provided, including net operating loss carryforwards and tax credits. We expect to maintain this full valuation allowance for the foreseeable future as it is more likely than not that some or all of those deferred tax assets may not be realized based on our history of losses.

 

65


Table of Contents

Results of Operations

The following tables set forth our consolidated results of operations for the periods presented in dollars and as a percentage of revenue:

 

     Year Ended
December 31,
    Three Months Ended
March 31,
 
     2016     2017     2017     2018  
    

(dollars in thousands)

 

Revenue

   $ 124,371     $ 187,727     $ 40,481     $ 59,107  

Cost of revenue(1)

     14,219       25,588       4,438       8,728  
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     110,152       162,139       36,043       50,379  

Operating expenses:

        

Sales and marketing(1)

     85,736       116,299       26,168       39,588  

Research and development(1)

     40,085       57,673       12,458       17,185  

General and administrative(1)

     20,164       28,927       6,163       9,055  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     145,985       202,899       44,789       65,828  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (35,833     (40,760     (8,746     (15,449

Other expense, net

     532       91       29       8  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (36,365     (40,851     (8,775     (15,457

Provision for income taxes

     843       171       51       431  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (37,208   $ (41,022   $ (8,826   $ (15,888
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Includes stock-based compensation expense as follows:

 

     Year Ended
December 31,
     Three Months
Ended March 31,
 
     2016      2017      2017      2018  
    

(dollars in thousands)

 

Cost of revenue

   $ 223      $ 281      $ 54      $ 77  

Sales and marketing

     969        1,579        270        602  

Research and development

     602        1,782        394        527  

General and administrative

     738        4,118        908        1,193  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 2,532      $ 7,760      $ 1,626      $ 2,399  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

66


Table of Contents

The following table sets forth our consolidated statements of operations data expressed as a percentage of total revenue:

 

     Year Ended
December 31,
    Three Months Ended
March 31,
 
         2016             2017             2017             2018      
                    

Percentage of Revenue Data:

        

Revenue

     100     100     100     100

Cost of revenue

     11       14       11       15  
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     89       86       89       85  

Operating expenses:

        

Sales and marketing

     69       62       65       67  

Research and development

     32       31       31       29  

General and administrative

     16       15       15       15  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     117       108       111       111  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (29     (22     (22     (26

Other expense, net

     0       0       0       0  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (29     (22     (22     (26

Provision for income taxes

     1       0       0       1  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (30 )%      (22 )%      (22 )%      (27 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Comparison of the Three Months Ended March 31, 2017 and 2018

Revenue

 

     Three Months Ended
March 31,
     Change  
         2017              2018          $      %  
     (dollars in thousands)  

Revenue

   $ 40,481      $ 59,107      $ 18,626        46

The increase in revenue of $18.6 million was comprised of increases in subscription revenue of $16.6 million, perpetual licenses and maintenance revenue of $1.5 million and professional services and other revenue of $0.5 million. Revenue from existing customers comprised 45% of the increase in revenue, while the remaining increase was due to revenue from new customers since April 1, 2017. The increase in professional services revenue resulted from the growth of our installed customer base. International revenue increased $7.5 million, or 63%.

Cost of Revenue, Gross Profit and Gross Margin

 

     Three Months Ended
March 31,
    Change  
         2017             2018         $      %  
     (dollars in thousands)  

Cost of revenue

   $ 4,438     $ 8,728     $ 4,290        97

Gross profit

   $ 36,043     $ 50,379     $ 14,336        40

Gross margin

     89     85     

The increase in cost of revenue of $4.3 million was primarily due to a $2.0 million increase in third-party cloud infrastructure costs largely associated with the increased adoption of Tenable.io and a $1.9 million increase in personnel costs primarily associated with an increase in headcount. In addition, depreciation and amortization increased $0.2 million primarily from the amortization of purchased technology.

 

67


Table of Contents

Operating Expenses

Sales and Marketing

 

     Three Months Ended
March 31,
     Change  
         2017              2018          $      %  
     (dollars in thousands)  

Sales and marketing

   $ 26,168      $ 39,588      $ 13,420        51

The increase in sales and marketing expense of $13.4 million was primarily due to a $6.2 million increase in personnel costs largely associated with an increase in headcount. Stock-based compensation accounted for $0.3 million of the increase in personnel costs. Expenses for demand generation programs, including advertising, sponsorships and brand awareness efforts aimed at acquiring new customers and our inaugural user conference held in February 2018, increased $2.6 million. Selling expenses, including travel and meeting costs as well as the costs of software subscriptions, increased $1.7 million. In addition, sales commissions increased $2.8 million from increased sales and the amortization of deferred commissions.

Research and Development

 

     Three Months Ended
March 31,
     Change  
         2017              2018          $      %  
     (dollars in thousands)  

Research and development

   $ 12,458      $ 17,185      $ 4,727        38

The increase in research and development expense of $4.7 million was primarily due to a $3.3 million increase in personnel costs largely associated with an increase in headcount, which is net of $0.5 million of development costs capitalized related to internal use software in the three months ended March 31, 2018. Stock-based compensation accounted for $0.1 million of the increase in personnel costs. Other expenses, including travel costs, increased $0.7 million, largely related to our inaugural user conference. In addition, third-party cloud infrastructure costs increased $0.5 million related to the development of new and future offerings and allocated overhead increased $0.2 million driven by both the increase in headcount and the overall increase in such costs on a year-over-year basis.

General and Administrative

 

     Three Months Ended
March 31,
     Change  
         2017              2018          $      %  
     (dollars in thousands)  

General and administrative

   $ 6,163      $ 9,055      $ 2,892        47

The increase in general and administrative expense of $2.9 million was primarily due to a $1.3 million increase in personnel costs largely associated with an increase in headcount. Stock-based compensation accounted for $0.3 million of the increase in personnel costs. In addition, professional fees increased $0.9 million and allocated overhead increased $0.1 million driven by both the increase in headcount and the overall increase in such costs on a year-over-year basis. Other expenses primarily including software subscriptions and travel costs increased $0.3 million.

 

68


Table of Contents

Comparison of 2016 and 2017

Revenue

 

     Year Ended
December 31,
     Change  
         2016              2017          $      %  
     (dollars in thousands)  

Revenue

   $ 124,371      $ 187,727      $ 63,356        51

The increase in revenue of $63.4 million in 2017 was comprised of subscription revenue of $52.5 million, perpetual licenses and maintenance revenue of $10.0 million and professional services and other revenue of $0.9 million. Revenue from existing customers comprised 68% of the increase in revenue, while the remaining increase was due to revenue from new customers. The increase in professional services revenue resulted from the growth of our installed customer base. The impact of the ASC 606 adoption on 2017 revenue was a net increase of $3.5 million. International revenue increased $19.3 million, or 50%, consistent with our overall revenue growth rate.

Cost of Revenue, Gross Profit and Gross Margin

 

     Year Ended
December 31,
    Change  
         2016             2017         $      %  
     (dollars in thousands)  

Cost of revenue

   $ 14,219     $ 25,588     $ 11,369        80

Gross profit

   $ 110,152     $ 162,139     $ 51,987        47

Gross margin

     89     86     

The increase in cost of revenue of $11.4 million was primarily due to a $5.4 million increase in third-party cloud infrastructure costs largely associated with the increased adoption of Tenable.io and a $4.0 million increase in personnel costs primarily associated with an increase in headcount. Stock-based compensation accounted for $0.1 million of the increase in personnel costs. In addition, depreciation and amortization increased $0.9 million primarily from the amortization of purchased technology and allocated overhead increased $0.8 million driven by both the increase in headcount and the overall increase in such costs on a year-over-year basis.

Operating Expenses

Sales and Marketing

 

     Year Ended
December 31,
     Change  
         2016              2017          $      %  
     (dollars in thousands)  

Sales and marketing

   $ 85,736      $ 116,299      $ 30,563        36

The increase in sales and marketing expense of $30.6 million was primarily due to a $17.3 million increase in personnel costs largely associated with an increase in headcount. Stock-based compensation accounted for $0.6 million of the increase in personnel costs. Expenses for demand generation programs, including advertising, sponsorships and brand awareness efforts aimed at acquiring new customers increased $4.0 million. Selling expenses, including travel and meeting costs as well as the costs of software subscriptions, increased $3.9 million. In addition, sales commissions increased $2.7 million from increased sales and the amortization of deferred commissions, net of an $8.8 million reduction in commissions expense as a result of the adoption of ASC 606. Allocated overhead increased $2.1 million driven by both the increase in headcount and the overall increase in such costs on a year-over-year basis.

 

69


Table of Contents

Research and Development

 

     Year Ended
December 31,
     Change  
         2016              2017          $      %  
     (dollars in thousands)  

Research and development

   $ 40,085      $ 57,673      $ 17,588        44

The increase in research and development expense of $17.6 million was primarily due to a $12.7 million increase in personnel costs largely associated with an increase in headcount. Stock-based compensation accounted for $1.2 million of the increase in personnel costs. Other expenses primarily including event and travel costs increased $2.0 million. In addition, third-party cloud infrastructure costs increased $1.7 million related to the development of new and future offerings and allocated overhead increased $1.2 million driven by both the increase in headcount and the overall increase in such costs on a year-over-year basis.

General and Administrative

 

     Year Ended
December 31,
     Change  
         2016              2017          $      %  
     (dollars in thousands)  

General and administrative

   $ 20,164      $ 28,927      $ 8,763        43

The increase in general and administrative expense of $8.8 million was primarily due to a $5.6 million increase in personnel costs largely associated with an increase in headcount. Stock-based compensation accounted for $3.4 million of the increase in personnel costs. In addition, professional fees increased $1.0 million and allocated overhead increased $0.6 million driven by both the increase in headcount and the overall increase in such costs on a year-over-year basis.

Quarterly Results of Operations

The following tables summarize our unaudited quarterly consolidated statements of operations data for each of the nine quarters through the period ended March 31, 2018. The information for each of these quarters has been prepared on the same basis as our audited annual consolidated financial statements and reflect, in the opinion of management, all adjustments of a normal, recurring nature that are necessary for the fair presentation of the results of operations for these periods. This data should be read in conjunction with our consolidated financial statements included elsewhere in this prospectus. Historical results are not necessarily indicative of the results that may be expected in the future, and the quarterly results for the three months ended March 31, 2018 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2018 or any other period.

 

70


Table of Contents
    Three Months Ended  
    March 31,
2016
    June 30,
2016
    September 30,
2016
    December 31,
2016
    March 31,
2017
    June 30,
2017
    September 30,
2017
    December 31,
2017
    March 31,
2018
 
    (in thousands)  

Revenue(1)

  $ 25,591     $ 28,850     $ 33,733     $ 36,197     $ 40,481     $ 44,149     $ 48,980     $ 54,117     $ 59,107  

Cost of revenue(2)

    3,072       3,392       3,621       4,134       4,438       5,348       7,424       8,378       8,728  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    22,519       25,458       30,112       32,063       36,043       38,801       41,556       45,739       50,379  

Operating expenses:

                 

Sales and marketing(1)(2)

    20,237       19,581       21,883       24,035       26,168       27,773       29,574       32,784       39,588  

Research and development(2)

    7,951       10,161       10,706       11,267       12,458       13,713       15,869       15,633       17,185  

General and administrative(2)

    4,258       5,209       5,029       5,668       6,163       6,544       7,275       8,945       9,055  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    32,446       34,951       37,618       40,970       44,789       48,030       52,718       57,362       65,828  

Loss from operations

    (9,927     (9,493     (7,506     (8,907     (8,746     (9,229     (11,162     (11,623     (15,449

Other expense, net

    (3     200       79       256       29       (56     92       26       8  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

    (9,924     (9,693     (7,585     (9,163     (8,775     (9,173     (11,254     (11,649     (15,457

Provision for income taxes

    10       132       31       670       51       41       59       20       431  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (9,934   $ (9,825   $ (7,616   $ (9,833   $ (8,826   $ (9,214   $ (11,313   $ (11,669   $ (15,888
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

We adopted Accounting Standards Codification Topic 606, Revenue From Contracts With Customers, or ASC 606, on January 1, 2017 using the modified retrospective method. The 2016 consolidated statements of operations were not adjusted for the adoption of ASC 606. See Note 2 to our consolidated financial statements included elsewhere in this prospectus for details on the impact of adopting ASC 606.

(2)

Includes stock-based compensation expense as follows:

 

    Three Months Ended  
    March 31,
2016
    June 30,
2016
    September 30,
2016
    December 31,
2016
    March 31,
2017
    June 30,
2017
    September 30,
2017
    December 31,
2017
    March 31,
2018
 
    (in thousands)  

Cost of revenue

  $ 20     $ 27     $ 93     $ 83     $ 54     $ 50     $ 63     $ 114     $ 77  

Sales and marketing

    143       243       312       271       270       358       409       542       602  

Research and development

    54       44       194       310       394       452       510       426       527  

General and administrative

    116       127       207       288       908       989       1,046       1,175       1,193  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stock-based compensation expense

  $ 333     $ 441     $ 806     $ 952     $ 1,626     $ 1,849     $ 2,028     $ 2,257     $ 2,399  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

71


Table of Contents

The following table sets forth our consolidated statement of operations data for the nine quarters in the period ended March 31, 2018 expressed as a percentage of total revenue:

 

    Three Months Ended  
    March 31,
2016
    June 30,
2016
    September 30,
2016
    December 31,
2016
    March 31,
2017
    June 30,
2017
    September 30,
2017
    December 31,
2017
    March 31,
2018
 

Revenue

    100     100     100     100     100     100     100     100     100

Cost of revenue

    12       12       11       11       11       12       15       15       15  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    88       88       89       89       89       88       85       85       85  

Operating expenses:

                 

Sales and marketing

    79       68       65       66       65       63       60       61       67  

Research and development

    31       35       32       31       31       31       32       29       29  

General and administrative

    17       18       15       16       15       15       15       17       15  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    127       121       112       113       111       109       108       106       111  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (39     (33     (22     (25     (22     (21     (23     (21     (26

Other expense, net

    0       1       0       1       0       0       0       0       0  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

    (39     (34     (22     (25     (22     (21     (23     (22     (26
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Provision for income taxes

    0       0       0       2       0       0       0       0       1  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (39 )%      (34 )%      (23 )%      (27 )%      (22 )%      (21 )%      (23 )%      (22 )%      (27 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Quarterly Revenue Trends

Our quarterly revenue increased sequentially for all periods presented due primarily to an increase in the sales of subscription services and, to a lesser extent, perpetual licenses and maintenance revenue. We have historically experienced, and expect in the future to experience, seasonality in entering into agreements with customers. We typically enter into a significantly higher percentage of agreements with new customers, as well as renewal agreements with existing customers, in the third and fourth quarters of the year. The increase in customer agreements for the third quarter is primarily attributable to U.S. government and related agencies, and the increase in the fourth quarter is primarily attributable to large enterprise account buying patterns typical in the software industry. Our recent growth and the ratable nature of our subscription revenue makes this seasonality less apparent in our overall financial results.

Quarterly Cost of Revenue, Gross Profit and Gross Margin Trends

Cost of revenue increased sequentially as a result of the increase in our revenue. Gross profit increased sequentially for all periods presented primarily due to growth in revenue. Gross margins began to decrease in the second half of 2017 as we began making investments in building a public cloud infrastructure and a DevOps organization to support Tenable.io.

Quarterly Expense Trends

Total operating expenses generally increased sequentially for all periods presented primarily due to the addition of personnel in connection with the expansion of our business.

 

72


Table of Contents

Liquidity and Capital Resources

Since our inception, we have financed our operations through cash provided by operations, including payments received from customers using our software products and services, and we have not raised any primary institutional capital prior to this offering. The proceeds of our Series A and Series B redeemable convertible preferred stock financings were used to repurchase shares of capital stock from former stockholders. We had cash and cash equivalents consisting of bank deposits and money market funds of $26.4 million at March 31, 2018, of which $8.9 million was held by foreign subsidiaries. We have generated significant operating losses from our operations as reflected by our accumulated deficit of $408.5 million at March 31, 2018.

We typically invoice our customers annually in advance and, to a lesser extent, multi-year in advance. Therefore, a substantial source of our cash is from such prepayments, which are included on our consolidated balance sheets as deferred revenue. Deferred revenue consists primarily of the unearned portion of billed fees for our subscriptions and perpetual licenses, which is subsequently recognized as revenue in accordance with our revenue recognition policy. At March 31, 2018, we had deferred revenue of $230.6 million, of which $160.5 million was recorded as a current liability and is expected to be recorded as revenue in the next 12 months, provided all other revenue recognition criteria are met.

Our principal uses of cash in recent periods have been funding our operations, expansion of our sales and marketing and research and development activities and investments in infrastructure. We expect to continue incurring operating losses and generating negative cash flows from operations in the near-term; however, we believe that our existing cash and cash equivalents, together with amounts available under the revolving credit facility, will be sufficient to fund our operating and capital needs for at least the next 12 months. Our future capital requirements will depend on many factors, including our revenue growth rate, subscription renewal activity, the timing and extent of spending to support further infrastructure and research and development efforts, the timing and extent of additional capital expenditures to invest in new and existing office spaces, such as our new corporate headquarters, the expansion of sales and marketing and international operating activities, the timing of introduction of new product capabilities and enhancements of our platform and the continuing market acceptance of our platform.

We may in the future enter into arrangements to acquire or invest in complementary businesses, services and technologies, including intellectual property rights. We may be required to seek equity or debt financing. In the event that financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, or if we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, operating results and financial condition would be adversely affected.

Credit Facility

In May 2017, we entered into a $25.0 million revolving credit facility with Silicon Valley Bank. Pursuant to the terms of the revolving credit facility, we may issue up to $5.0 million of letters of credit, which reduce the total amount available for borrowing under such facility. The revolving credit facility terminates on May 4, 2020. To date, we have not borrowed any amounts under the revolving credit facility.

Interest on borrowings under the revolving credit facility accrues at a variable rate tied to the prime rate or the LIBOR rate, at our election. Interest is payable quarterly in arrears. We are required to pay an annual commitment fee that accrues at a rate of 0.25% per annum on the unused portion of the borrowing commitment.

The revolving credit facility contains customary conditions to borrowing, events of default and covenants, including restrictions on indebtedness, liens, acquisitions and investments, restricted payments and dispositions. If, as of the last day of any quarter, the outstanding balance of the revolving credit facility exceeds $5 million, there are financial covenants that require us to maintain a minimum level of earnings before income taxes,

 

73


Table of Contents

interest, depreciation and amortization adjusted to add changes in deferred revenue for the period and a minimum current ratio level. We were in compliance with all covenants under the revolving credit facility at March 31, 2018.

Cash Flows

The following table summarizes our cash flows for the periods presented:

 

     Year Ended
December 31,
     Three Months Ended
March 31,
 
         2016              2017              2017              2018      
     (in thousands)  

Net cash (used in) provided by operating activities

   $ (2,785    $ (6,266    $ 1,187      $ 504  

Net cash used in investing activities

     (7,851      (2,755      (460      (1,596

Net cash provided by financing activities

     1,363        2,091        1,408        363  

Effect of exchange rate changes on cash and cash equivalents

            (68      7        (57
  

 

 

    

 

 

    

 

 

    

 

 

 

Net (decrease) increase in cash, cash equivalents and restricted cash

   $ (9,273    $ (6,998    $ 2,142      $ (786
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating Activities

Our principal source of operating cash is cash collections from our customers for software subscriptions and perpetual licenses. Our primary uses of cash from operating activities are for employee-related expenditures, infrastructure-related costs and marketing expenses. Net cash used in operating activities is impacted by our net loss adjusted for certain non-cash items, including stock-based compensation, depreciation and amortization, as well as the effect of changes in operating assets and liabilities.

In the three months ended March 31, 2018, net cash provided by operating activities was $0.5 million, which primarily consisted of our $15.9 million loss, adjusted for stock-based compensation expense of $2.4 million and depreciation and amortization of $1.5 million, as well as a net cash inflow of $12.5 million from changes in operating assets and liabilities. The net inflow from changes in operating assets and liabilities was primarily due to a $7.8 million decrease in accounts receivable due to collections from customers and a $4.8 million increase in deferred revenue primarily due to increased subscription sales as a majority of our customers are invoiced in advance. In addition, quarterly bonuses and commissions earned in the fourth quarter of 2017 were paid in the first quarter of 2018.

In the three months ended March 31, 2017, net cash provided by operating activities was $1.2 million, which primarily consisted of our $8.8 million loss, adjusted for stock-based compensation expense of $1.6 million and depreciation and amortization of $1.0 million, as well as a net cash inflow of $7.3 million from changes in operating assets and liabilities. The net inflow from changes in operating assets and liabilities was primarily due to a $5.2 million decrease in accounts receivable due to collections from customers and a $4.9 million increase in deferred revenue primarily due to increased subscription sales. In addition, quarterly bonuses and commissions earned in the fourth quarter of 2016 were paid in the first quarter of 2017.

In 2017, net cash used in operating activities was $6.3 million, which primarily consisted of our $41.0 million net loss, adjusted for stock-based compensation expense of $7.8 million and depreciation and amortization of $4.7 million, as well as a net cash inflow of $23.1 million from operating assets and liabilities. The net inflow from operating assets and liabilities was primarily due to an increase of $63.4 million in deferred revenue, including the cumulative impact of adopting the new revenue recognition guidance, from increased

 

74


Table of Contents

subscription sales as a majority of our customers are invoiced in advance partially offset by a $14.8 million increase in accounts receivable. In addition, deferred commissions increased $20.1 million, including the cumulative impact of adopting the new revenue recognition guidance. The increase in net cash used in operating activities in 2017 compared to 2016 was primarily due to an increase in our net loss, adjusted for stock-based compensation and depreciation and amortization, as well as a lower net cash inflow from changes in operating assets and liabilities.

In 2016, net cash used in operating activities was $2.8 million, which primarily consisted of our $37.2 million net loss, adjusted for depreciation and amortization of $3.1 million and stock-based compensation expense of $2.5 million, as well as a net cash inflow of $27.9 million from changes in operating assets and liabilities. The net inflow from operating assets and liabilities was primarily due to an increase of $44.2 million in deferred revenue from increased subscription sales as a majority of our customers are invoiced in advance partially offset by a $13.6 million increase in accounts receivable.

Investing Activities

Net cash used in investing activities is primarily impacted by purchases of property and equipment, particularly for making improvements to existing and new office spaces and purchasing furniture and equipment.

In the three months ended March 31, 2018 and 2017, net cash used in investing activities was $1.6 million and $0.5 million, respectively. The increase in cash used in investing activities was primarily due to the capitalization of development costs related to internal use software in 2018.

In 2017, net cash used in investing activities was $2.8 million, which primarily consisted of capital expenditures related to leasehold improvements for office build-outs. The decrease in cash used in investing activities in 2017 compared to 2016 was primarily due to a reduction in capital expenditures for infrastructure equipment and leasehold improvements.

In 2016, net cash used in investing activities was $7.9 million, which primarily consisted of capital expenditures related to our infrastructure and leasehold improvements for office build-outs, as well as our acquisition of a company for $2.1 million.

Financing Activities

Net cash provided by financing activities is primarily impacted by proceeds from the exercise of stock options, capital lease obligations for our infrastructure equipment and repurchases of common stock.

In the three months ended March 31, 2018 and 2017, net cash provided by financing activities was $0.4 million and $1.4 million, which primarily consisted of proceeds from the exercise of stock options.

In 2017, net cash provided by financing activities was $2.1 million, which primarily consisted of $3.0 million of proceeds from the exercise of stock options offset by principal payments of capital lease obligations, credit facility issuance costs and repurchases of common stock. The increase in cash provided by financing activities in 2017 compared to 2016 was primarily due to an increase of proceeds from the exercise of stock options.

In 2016, net cash provided by financing activities was $1.4 million, which primarily consisted of $1.0 million in proceeds from the state of Maryland as an economic incentive.

 

75


Table of Contents

Contractual Obligations

The following table summarizes our contractual obligations at December 31, 2017:

 

     Total      Less than
1 year
     1-3 years      3-5 years      More than
5 years
 
     (in thousands)  

Operating lease commitments(1)

   $ 82,940      $ 3,825      $ 7,631      $ 13,632      $ 57,852  

Capital lease commitments

     1,697        572        1,073        52         

Non-cancellable purchase obligations

     9,440        5,632        3,808                
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual obligations

   $ 94,077      $ 10,029      $ 12,512      $ 13,684      $ 57,852  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Consists of future non-cancelable minimum rental payments under operating leases for our offices including $68.2 million of future lease payments related to the lease of our new headquarters, which is currently being constructed. These lease payments are expected to commence in the first quarter of 2021.

Not included in the table above is a $1.8 million financing obligation related to our build-to-suit lease for our future corporate headquarters, $1.2 million of unrecognized tax benefits and $0.8 million of asset retirement obligations, because the timing of future cash outflows is uncertain.

In October 2017, we entered into a new lease agreement for office space in Columbia, Maryland to serve as our new corporate headquarters. We currently anticipate to incur approximately $6 million of capital expenditures in excess of the tenant improvement reimbursement associated with the build-out. We plan to take possession of our new corporate headquarters in mid-2019, at which time we will begin to record rent expense. We expect to start making recurring rental payments under the lease in the first quarter of 2021. Included in the operating lease commitments above are total expected minimum obligations under the lease agreement of $68.2 million, which exclude $16.0 million of expected tenant improvement reimbursements and incentives from the landlord and variable operating expenses. We have also excluded a $2.5 million security deposit, which may be increased to $5.0 million, that is expected to be paid in advance of occupancy. At our option, we may deposit cash or provide an unconditional letter of credit, which would reduce the borrowing capacity under our revolving credit facility.

We are contractually obligated for our current corporate headquarters through May 2021. However, unless we transfer our contractual obligation, we will continue to include the committed lease payments for our current corporate headquarters in the table above.

Off-Balance Sheet Arrangements

At December 31, 2017 and March 31, 2018, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risks in the ordinary course of our business, including interest rate, foreign currency exchange and inflation risks.

Interest Rate Risk

We had cash and cash equivalents of $26.4 million at March 31, 2018, consisting of cash deposits and money market funds. The primary objectives of our investment activities are the preservation of capital, the fulfillment of liquidity needs and the fiduciary control of cash and investments. We do not enter into investments for trading or speculative purposes. Due to the short-term nature of these instruments, we believe that we do not have any material exposure to changes in fair value as a result of changes in interest rates.

 

76


Table of Contents

We have not had any amounts outstanding under the revolving credit facility since it was established in May 2017. Any borrowings under the revolving credit facility would bear interest at a variable rate tied to the prime rate or the LIBOR rate. We do not have any other long-term debt or financial liabilities with floating interest rates that would subject us to interest rate fluctuations.

A hypothetical 10% change in interest rates during any of the periods presented would not have had a material impact on our financial statements.

Foreign Currency Exchange Risk

Substantially all of our sales contracts are denominated in U.S. dollars, with a limited number of contracts denominated in foreign currencies. A portion of our operating expenses are incurred outside the United States, denominated in foreign currencies and subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the euro, British pound and Australian dollar. Additionally, fluctuations in foreign currency exchange rates may cause us to recognize remeasurement and transaction gains (losses) in our consolidated statements of operations. As the impact of foreign currency exchange rates has not been material to our historical operating results, we have not entered into derivative or hedging transactions, but we may do so in the future if our exposure to foreign currency becomes more significant.

Inflation Risk

We do not believe that inflation has had a material effect on our business, results of operations, or financial condition. Nonetheless, if our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs. Our inability or failure to do so could harm our business, results of operations, or financial condition.

Critical Accounting Policies and Estimates

Our financial statements are prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, as well as related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.

The critical accounting estimates, assumptions and judgments that we believe have the most significant impact on our consolidated financial statements are described below.

Revenue Recognition

We early adopted ASC 606 on January 1, 2017 using the modified retrospective method and applying the guidance to all contracts as of January 1, 2017.

The core principle of ASC 606 is that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve the core principle of ASC 606, we apply the following steps:

 

   

Identify the contract with a customer

 

   

Identify the performance obligations in the contract

 

   

Determine the transaction price

 

   

Allocate the transaction price to the performance obligations in the contract

 

   

Recognize revenue when or as performance obligations are satisfied

We generate revenue from subscription arrangements for our software and cloud-based solutions, perpetual licenses, maintenance associated with perpetual licenses and professional services and other revenue.

 

77


Table of Contents

Subscription Revenue

Our subscription arrangements generally have annual or multi-year contractual terms and allow customers to use our software or cloud solutions, including ongoing software updates and the ability to identify the latest cybersecurity vulnerabilities. Revenue is recognized ratably over the subscription term given the critical utility provided by the ongoing updates that are released throughout the contract period.

Perpetual License and Maintenance Revenue

Our perpetual licenses are generally sold with one or more years of maintenance, which include ongoing software updates and the ongoing ability to identify the latest cybersecurity vulnerabilities. Given the critical utility provided by the ongoing software updates and updated ability to identify network vulnerabilities included in maintenance, we combine the perpetual license and the maintenance into a single performance obligation. Perpetual license arrangements generally contain a material right related to the customer’s ability to renew maintenance at a price that is less than the initial license fee. We apply a practical alternative to allocating a portion of the transaction price to the material right performance obligation and estimate a hypothetical transaction price which includes fees for expected maintenance renewals based on the estimated economic life of the perpetual license contracts. We allocate the transaction price between the cybersecurity subscription provided in the initial contract and the material right related to expected contract renewals based on the hypothetical transaction price. We recognize the amount allocated to the combined license and maintenance performance obligation over the initial contractual period, which is generally one year. We recognize the amount allocated to the material right over the expected maintenance renewal period, which begins at the end of the initial contractual term and is generally four years. We have estimated the five-year economic life of perpetual license contracts based on historical contract attrition, expected renewal periods, the lifecycle of the our technology and other factors. While we believe that the estimates we have made are reasonable and appropriate, different assumptions and estimates could materially impact our reported financial results.

Professional Services and Other Revenue

Professional services and other revenue is primarily comprised of advisory services and training related to the deployment and optimization of our products. These services do not result in significant customization of our products. Professional services and other revenue is recognized as the services are performed.

Contracts with Multiple Performance Obligations

In cases where our contracts with customers contain multiple performance obligations, the contract transaction price is allocated on a relative standalone selling price basis. We typically determine standalone selling price based on observable selling prices of our products and services.

Variable Consideration

We record revenue from sales at the net sales price, which is the transaction price, including estimates of variable consideration when applicable. Certain of our customers may be entitled to receive credits and in certain circumstances, refunds, if service level commitments are not met. We have not historically experienced significant incidents affecting the ability to meet these service level commitments and any estimated refunds related to these agreements have not been material.

Sales through our channel partner network of distributors and resellers are generally discounted as compared to the price that we would sell to an end user. Revenue for sales through our channel network, which is fixed, is recorded net of any distributor or reseller margin.

 

78


Table of Contents

Legacy Revenue Accounting Policies

For periods prior to January 1, 2017, we recognized revenue when all the following criteria were met: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred, (3) the fee is fixed or determinable and (4) collectability is reasonably assured.

We recognized subscription revenue ratably over the term of the subscription period in accordance with ASC 605, Revenue Recognition. When subscription arrangements involved multiple elements that qualified as separate units of accounting, we allocated arrangement consideration at the inception of the arrangement to all deliverables based on the relative selling price method in accordance with the selling price hierarchy, which included (i) vendor-specific objective evidence, or VSOE, if available, (ii) third-party evidence, or TPE, if VSOE was not available, and (iii) best estimate of selling price, or BESP, if neither VSOE nor TPE were available. When VSOE could not be established for deliverables within subscription arrangements, we utilized BESP in our allocation of arrangement consideration, as it generally could not establish TPE. BESP was determined by considering multiple factors including, but not limited to, prices charged for similar offerings, market conditions, competitive landscape and pricing practices.

We recognized perpetual license revenue upon delivery of the license in accordance with ASC 985-605, Software—Revenue Recognition. We established VSOE of fair value for substantially all products and services with the exception of new subscription agreements and perpetual licenses. VSOE was established for maintenance and support based upon actual renewals and historical pricing when sold separately. Revenue from maintenance agreements was deferred and recognized ratably over the term of the maintenance period. The VSOE of fair value for professional services was based on the price for these same services when they were sold separately.

Other services revenue was recognized as the services were performed.

Deferred Commissions

In connection with our adoption of ASC 606, sales commissions, including related incremental fringe benefit costs, are considered to be incremental costs of obtaining a contract, and therefore are deferred over an estimated period of benefit, which ranges between three and four years for subscription arrangements and five years for perpetual license arrangements. We have estimated the period of benefit based on the expected contract term including renewal periods, the lifecycle of our technology and other factors. Sales commissions on contract renewals are capitalized and amortized ratably over the contract term, with the exception of contracts with renewal periods that are one year or less, in which case the incremental costs are expensed as incurred. While we believe that the estimates we have made are reasonable and appropriate, different assumptions and estimates could materially impact our reported financial results.

Prior to January 1, 2017, we capitalized sales commissions for subscriptions and recognized the expense over the corresponding period in which the related revenue was recognized. Commissions on perpetual license sales were recognized upon the delivery of the license.

Stock-Based Compensation

Stock-based compensation expense is calculated based on the fair value of the awards granted and is recognized on a straight-line basis over the requisite service period of the awards, which is generally three to four years. The fair value of each option award is estimated on the grant date using the Black-Scholes option pricing model, which requires us to make assumptions and judgements, including the fair value of the underlying common stock, expected term, expected volatility and risk-free interest rates. The fair value of restricted stock is based on the estimated fair value of our common stock at the date of the grant.

 

79


Table of Contents

Prior to January 1, 2017, we recognized stock-based compensation expense net of estimated forfeitures. We adopted Accounting Standards Update, or ASU, No. 2016-09—Compensation-Stock Compensation (Topic 718): Improvement to Employee Share-based Payment Accounting, or ASU 2016-09, on January 1, 2017 and made an accounting policy election to account for forfeitures as they occur. This election was applied on a modified retrospective basis, resulting in a cumulative-effect adjustment to increase accumulated deficit by $0.1 million.

ASU 2016-09 also requires excess tax benefits and tax deficiencies be recorded in the income statement as opposed to additional paid-in capital when the awards vest or are settled, and we applied this on a prospective basis beginning on January 1, 2017. In addition, ASU 2016-09 eliminated the requirement that excess tax benefits be realized before they can be recorded. As a result, on January 1, 2017, we recorded a $1.9 million deferred tax asset attributable to excess tax benefits from stock-based compensation, which had not been previously recognized, with a corresponding increase to the valuation allowance.

Estimating the fair value of stock options using the Black-Scholes option-pricing model requires assumptions as to the fair value of our underlying common stock, the estimated term of the option, the risk free interest rates, the expected volatility of the price of our common stock and the expected dividend yield. The assumptions used to estimate the fair value of the option awards reflect our best estimates. If any of the assumptions change significantly, stock-based compensation for future awards may differ significantly compared with the awards granted previously.

The assumptions and estimates are as follows:

 

   

Fair Value of Common Stock—see “Common Stock Valuations” discussion below.

 

   

Expected Term—This is the period of time that the options granted are expected to remain unexercised. We employ the simplified method to calculate the average expected term.

 

   

Volatility—This is a measure of the amount by which a financial variable, such as a share price, has fluctuated (historical volatility) or is expected to fluctuate (expected volatility) during a period. As we do not yet have sufficient history of our own volatility, we have identified several public entities of similar size, complexity and stage of development and estimate volatility based on the volatility of these companies.

 

   

Risk-Free Interest Rate—This is the U.S. Treasury rate, having a term that most closely resembles the expected life of the stock option.

 

   

Dividend Yield—We have not and do not expect to pay dividends on our common stock.

Common Stock Valuations

Prior to our initial public offering, the lack of an active public market for our common stock requires our board of directors to exercise reasonable judgement and consider a number of factors in order to make the best estimate of fair value of our common stock, in accordance with the technical practice-aid issued by the American Institute of Certified Public Accountants Practice Aid entitled Valuation of Privately-Held Company Equity Securities Issued as Compensation. Factors considered in connection with estimating the fair value of our common stock underlying our award of restricted stock and stock option awards when performing the fair value calculations with the Black Scholes option-pricing model included:

 

   

The results of independent third-party valuations of our common stock

 

   

Recent arm’s length transactions involving the sale or transfer of our common stock

 

   

The rights, preferences and privileges of our Series A and Series B redeemable convertible preferred stock relative to those of our common stock

 

   

Our historical financial results and future financial projections

 

   

The market value of equity interests in substantially similar businesses, which equity interests can be valued through nondiscretionary, objective means

 

80


Table of Contents
   

The lack of marketability of our common stock

 

   

The likelihood of achieving a liquidity event, such as an initial public offering given prevailing market conditions

 

   

Industry outlook

 

   

General economic outlook including economic growth, inflation and unemployment, interest rate environment and global economic trends

As described above, the exercise price of our stock option awards was determined by our board of directors, with input from management, taking into account the factors described above, using a combination of valuation methodologies with varying weighting applied to each methodology as of the grant date.

Application of these approaches involves the use of estimates, judgment and assumptions that are highly complex and subjective, such as those regarding our expected future revenue, expenses and future cash flows, discount rates, market multiples, the selection of comparable companies and the probability of possible future events. Changes in any or all of these estimates and assumptions or the relationships between those assumptions impact our valuations as of each valuation date and may have a material impact on the valuation of our common stock.

The following table summarizes by grant date the number of shares of common stock subject to stock options and awards of restricted stock granted from January 1, 2017 through March 31, 2018, as well as the associated per share exercise price for options granted and the estimated fair value per share of our common stock on the grant date.

 

Grant Date

   Number of
Shares
Underlying
Equity
Awards
Granted
     Exercise
Price per
Share for
Options
Granted
    Fair
Value
per
Share
 

January 18, 2017

     5,110,571      $ 4.25     $ 4.25  

January 18, 2017

     1,582,685        —   (1)       4.25  

February 23, 2017

     87,000        4.25       4.25  

February 27, 2017

     1,170,000        4.25       4.25  

May 23, 2017

     716,000        5.96       5.96  

June 26, 2017

     559,500        7.75       7.75  

July 26, 2017

     49,000        7.75       7.75  

September 19, 2017

     373,500        7.75       7.75  

September 20, 2017

     10,000        7.75       7.75  

September 25, 2017

     25,000        7.75       7.75  

October 26, 2017

     410,500        9.66       9.66  

December 7, 2017

     348,000        9.66       9.66  

December 21, 2017

     83,000        9.66       9.66  

December 29, 2017

     80,000        9.66       9.66  

February 21, 2018

     722,000        10.97       10.97  

March 14, 2018

     443,000        10.97       10.97  

 

(1) 

Represents award of restricted stock.

On May 8, 2018 we granted stock options to purchase 736,500 shares of our common stock at an exercise price of $14.06 per share. On June 21, 2018, we granted options to purchase 4,012,148 shares of our common stock at $16.21 per share and restricted stock units for 973,800 shares of our common stock. The restricted stock units vest upon the satisfaction of both a service-based vesting condition and a performance-based vesting condition. The performance-based vesting condition will be satisfied upon the expiration of the lock-up period

 

81


Table of Contents

following the completion of an initial public offering of our common stock. If the performance condition is met, then 50% of the restricted stock units will vest in August 2019, with the remainder vesting in August 2020, in each case based on the employee’s continued service through the applicable vesting date. The estimated future stock-based compensation expense of $15.8 million will be recognized only if it is probable the performance-based vesting condition will be met, at which time the cumulative expense will be recognized for the portion related to prior service and the remaining stock-based compensation expense will be recognized over the remaining service period. We may use the sell to cover method in connection with the vesting of restricted stock units, whereby certain of the restricted stock units are converted to shares of common stock and sold such that the proceeds approximate the applicable employee’s tax withholding obligation.

Following this offering, it will not be necessary for the board of directors to estimate the fair value of our common stock, as the shares will be traded in the public market.

Based upon the initial public offering price of $21.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, the aggregate intrinsic value of outstanding stock options as of March 31, 2018 was $244.5 million, with $86.2 million related to vested stock options, and the value of restricted stock outstanding as of March 31, 2018 was $33.2 million.

Income Taxes

We are subject to federal, state and local taxes in the United States as well as numerous international jurisdictions. These foreign jurisdictions have different statutory tax rates than the United States. Earnings generated by our international entities are related to transfer pricing requirements as applicable under local jurisdiction tax laws.

We record a provision for income taxes under the asset and liability method, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities, net operating loss carryforwards and tax credit carryforwards. Deferred tax assets and liabilities are measured using the tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. A valuation allowance is provided if it is more likely than not that some or all of the deferred tax assets will not be realized. We have valuation allowances in all jurisdictions against deferred tax assets net of deferred tax liabilities that will reverse and provide a source of taxable income. Our evaluation of valuation allowances could change in the future and the impact could have a material impact on our financial statements.

We recognize tax benefits from an uncertain tax position if it is more likely than not to be sustained upon audit by the relevant taxing authority. Interest and penalties associated with such uncertain tax positions are classified as a component of income tax expense.

The Tax Cuts and Jobs Act, or the 2017 Tax Act, was enacted into law, which contains several significant changes to how corporations are taxed in the United States, including the reduction of the corporate income tax rate from 35% to 21% effective January 1, 2018. The new legislation also includes a variety of other changes, such as a one-time repatriation tax on accumulated foreign earnings, or transition tax, acceleration of business asset expensing and reduction in the amount of executive pay that could qualify as a tax deduction.

The 2017 Tax Act also included international tax provisions that will affect the Company, including the favorable tax regime for taxing foreign derived intangible income. Additional international provisions include the global intangible low taxed income, or GILTI, regime and the base erosion anti-abuse tax.

Depending on the jurisdiction, distributions of earnings could be subject to withholding taxes at rates applicable to the distributing jurisdiction. As we intend to continue to reinvest the earnings of foreign subsidiaries indefinitely, we have not provided for a U.S. income tax liability and foreign withholding taxes on undistributed foreign earnings of foreign subsidiaries.

 

82


Table of Contents

We have not yet completed the accounting for the tax effects of the enactment of the 2017 Tax Act, but have made a reasonable estimate of the effects on existing deferred tax balances and the one-time transition tax. We will continue to evaluate our transition tax obligation and application of GILTI and we have not yet made an election with regard to GILTI. Subsequent adjustments resulting from additional analysis may be recorded in 2018 when our analysis is expected to be completed and any adjustments may materially impact our provision for income taxes in the period in which the adjustments are made.

Emerging Growth Company Status

We are an emerging growth company, as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

Recently Issued Accounting Pronouncements

Refer to Note 2 to our consolidated financial statements included elsewhere in this prospectus for more information regarding recently issued accounting pronouncements.

 

83


Table of Contents

BUSINESS

Overview

We are the first and only provider of solutions for a new category of cybersecurity that we call Cyber Exposure. Cyber Exposure is a discipline for managing and measuring cybersecurity risk in the digital era. We are building on our deep technology expertise in the traditional vulnerability assessment and management market and expanding that market to include modern attack surfaces and provide analytics that translate vulnerability data into business insight.

Digital transformation is driving radical change. As organizations modernize their IT infrastructure and adopt cloud or hybrid cloud architectures that are no longer housed in the confines of their corporate networks, they have less visibility and control over the security of these assets. Organizations are also increasingly implementing modern solutions, such as Internet of Things, or IoT, devices and application containers, to enable the rapid development and deployment of new products, services and business models, as well as to drive operational efficiencies. Further, safety-critical Operational Technology, or OT, such as Industrial Control Systems, are now network-connected and need to be secured from cybersecurity threats. This digital transformation increases IT complexity and cybersecurity risk as attack surfaces expand. We refer to an organization’s inability to see the breadth of the modern attack surface and analyze the level of cyber exposure as the Cyber Exposure Gap.

While other functions in an organization, such as finance and operations, have a system to help them manage and measure risk, to date, cybersecurity risk has not been adequately measured and understood. Our platform is built to be the Cyber Exposure Command Center for an organization’s Chief Information Security Officer, or CISO. Our platform provides the CISO with unified visibility into the organization’s state of security and enables security teams to prioritize and focus their remediation efforts. Our platform also translates vulnerability data into actionable business metrics and insights that boards of directors and executives can understand and use to make strategic decisions. We believe our Cyber Exposure solutions are transforming how security is managed and measured and will help organizations more rapidly embrace digital transformation.

Our enterprise platform offerings include Tenable.io and SecurityCenter. Tenable.io is our software as a service, or SaaS, offering that manages and measures cyber exposure across a range of traditional IT assets, such as networking infrastructure, desktops and on-premises servers, and modern IT assets, such as cloud workloads, containers, web applications, IoT and OT assets. SecurityCenter is built to manage and measure cyber exposure across traditional IT assets and can be run on-premises, in the cloud or in a hybrid environment. Our platform offerings provide broad visibility into security issues such as vulnerabilities, misconfigurations, internal and regulatory compliance violations and other indicators of the state of an organization’s security. We also provide deep analytics to help organizations measure trends in their cyber exposure over time. Our platform integrates and analyzes data from our native collectors alongside IT asset, vulnerability and threat data from third-party systems and applications to prioritize security issues for remediation and focus an organization’s resources based on risk and business criticality. We also plan to release Tenable.io Lumin, an application that will provide enhanced risk-based prioritization of issues and benchmarking against industry peers and best-in-class performers.

We believe that our long history in vulnerability management provides us with a significant competitive advantage in closing the Cyber Exposure Gap. We have been an integral part of the cybersecurity market for nearly two decades, initially by helping organizations assess their IT environments for vulnerabilities. Our co-founder is the creator of Nessus, one of the most widely deployed vulnerability assessment solutions in the cybersecurity industry, which underpins our enterprise platform offerings. Since the introduction of Nessus in 1998, an extensive community of Nessus users has emerged. We continue to cultivate knowledge and affinity within this user base, which, when combined with our enterprise customers and our Tenable Research team of cybersecurity and data science experts, creates powerful network effects in the form of a continuous feedback loop of data and insights. We use these learnings to expand our assessment capabilities and coverage, continually

 

84


Table of Contents

optimize our solutions and inform our product strategy and innovation priorities. These data and insights will also fuel and strengthen our benchmarking capabilities over time. We believe the breadth and scale of our data asset is a sustainable advantage and, as the size of our network increases, the value of our data and insights increases and extends our competitive barrier.

We believe we have a differentiated business model in the cybersecurity industry that combines the adoption benefits of our free version of Nessus, Nessus Home, and our paid version of Nessus, Nessus Professional, both of which serve as on-ramps for customers and potential customers to migrate to our enterprise platform. Our free version of Nessus has had approximately two million cumulative unique downloads over the past 20 years, which we believe has created broad familiarity and affinity with our products, as well as mindshare among the overwhelming majority of security practitioners. Among our approximately 19,000 Nessus Professional customers, we believe we have significant opportunity to drive adoption of our enterprise platform offerings.

As of December 31, 2016 and 2017, we had over 21,000 and 24,000 customers, respectively, who licensed our Tenable.io, SecurityCenter or Nessus Professional products. This includes over 3,100 and 4,400 enterprise platform customers at those respective dates, which we define as a customer that has a current license for Tenable.io or SecurityCenter for an annual amount of $5,000 or greater. Our customers are located in over 160 countries and include enterprises of all sizes and government agencies around the world. As of December 31, 2017, 53% of the Fortune 500 and 29% of the Global 2000 organizations licensed paid versions of our various products, including enterprise platform customers in 30 of the Fortune 500 and 58 of the Global 2000 organizations. In 2017, our billings to large enterprises, mid-size enterprises and small enterprises were 55%, 21% and 24% respectively. We define large enterprises as customers with greater than 2,500 employees, mid-size enterprises as customers with 250 to 2,500 employees and small enterprises as customers with fewer than 250 employees.

We have experienced rapid growth in recent periods. Our enterprise platform offerings are primarily sold on an annual prepaid subscription basis. In 2016 and 2017, our total revenue was $124.4 million and $187.7 million, respectively, representing a year-over-year growth rate of 51%. In the three months ended March 31, 2017 and 2018, our total revenue was $40.5 million and $59.1 million, respectively, representing a year-over-year growth rate of 46%. In both 2016 and 2017, our recurring revenue, which includes revenue from subscription arrangements for software and cloud-based solutions and maintenance associated with perpetual licenses, represented 86% of our total revenue. In the three months ended March 31, 2017 and 2018, our recurring revenue represented 85% and 89%, respectively, of our total revenue. Our net loss was $37.2 million, $41.0 million and $15.9 million in 2016, 2017 and the three months ended March 31, 2018, respectively. Our net cash (used in) provided by operating activities was $(2.8) million, $(6.3) million and $0.5 million in 2016, 2017 and the three months ended March 31, 2018, respectively, and our free cash flow, a non-GAAP measure, was $(8.6) million, $(9.0) million and $(1.1) million, respectively, for those periods. We have not raised any primary institutional capital prior to this offering. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further description and analysis of our financial results and “Selected Consolidated Financial Data—Non-GAAP Financial Measures” for a discussion of how we calculate free cash flow, including a reconciliation to the most directly comparable GAAP measure.

 

85


Table of Contents

Industry Background

Digital Transformation Increases IT Complexity and Cybersecurity Risk

Organizations of all sizes across industries are embracing digital transformation in order to seek competitive advantages. New digital technologies and modern compute platforms enable organizations to rapidly deliver new products and services, create agile business models and revenue streams and enhance levels of operational efficiency. While digital transformation creates new opportunities, the underlying technologies and platforms that enable this transformation dramatically increase IT complexity and overall cybersecurity risk by creating a significantly expanding attack surface for hackers to exploit. These areas include:

 

   

Modernization of IT infrastructure and adoption of cloud computing. The cost and agility benefits of cloud computing make it a desirable platform for organizations of all sizes. According to Cisco, the number of discrete cloud workloads is expected to increase from 262 million to 534 million between 2017 and 2021, representing a 19% compound annual growth rate. However, as organizations modernize their legacy IT infrastructure and adopt cloud or hybrid cloud architectures that are no longer housed in the confines of their corporate networks, organizations have less visibility and control over the security of these assets. Cloud workloads are dynamic in nature, making it increasingly

  difficult for organizations to accurately account for their assets, as well as to understand and monitor their overall cyber exposure at any given time. Furthermore, organizations want the flexibility to move workloads among multiple public and hybrid cloud environments, limiting the effectiveness of security tools provided by individual public cloud providers.

 

   

The growth of applications. The number of applications and frequency of releases have grown substantially in recent years. Furthermore, these applications are often developed outside of traditional development processes, sometimes bypassing traditional security controls. These applications store and transmit sensitive company and customer data, making them critical IT assets to protect. As more applications are released, the potential attack surface expands and requires additional protection. In addition, the need for users to access applications from anywhere means more IT assets that are connected to the Internet, further increasing organizations’ vulnerability to cyberattacks.

 

   

The rise of DevOps. The increased need for application development velocity has resulted in the rise of DevOps, or software development practices and tools that increase an organization’s ability to rapidly deliver applications and services. In a DevOps model, which allows new application features to be deployed on an hourly to daily basis, building security into the application development process is extremely difficult. Technologies like microservices, which structure an application as a collection of loosely coupled services, and application containers, which are lightweight, portable pieces of software used to package applications and services, have emerged to support DevOps processes. IDC, a market research firm, estimates that the installed base of container instances will grow from 0.5 billion in 2017 to 3.0 billion in 2021, representing a 58% compound annual growth rate. These critical and short-lived assets are deployed rapidly, creating the need for new approaches that eliminate blind spots for security teams.

 

   

The proliferation of IoT devices in the enterprise. Organizations are seeing a significant rise in the Internet of Things, or IoT, a set of physical devices embedded with software and sensors that enable these assets to connect to the Internet and exchange data. According to Gartner, there will be an estimated 9.1 billion IoT devices deployed in the enterprise by 2021.(1) These connected devices range from HVAC systems to electric generators. While they serve as a way to collect and transmit operational data to enhance business operations, they also create new points of attack for hackers due to their connectivity with many business-critical systems. For example, video conferencing systems can be hacked to eavesdrop into confidential discussions, HVAC systems can be breached to gain access to customer data on central servers, and manufacturing equipment can be compromised to shut down the plant or business operations of a company.

 

(1) 

Gartner, Forecast Analysis: Internet of Things — Services, Worldwide, 2017 Update, dated December 28 2017.

 

86


Table of Contents
   

IT / OT convergence. While IoT devices are relatively new technologies, OT, such as Industrial Control Systems used in industries like manufacturing, power generation and oil and gas processing, have existed for years. These critical systems were not originally designed with network connectivity and IT security in mind and instead were intended to be isolated from cybersecurity threats and the broader network. However, as organizations are being driven to connect all aspects of their infrastructure, OT assets are increasingly being connected to IT networks, even though the tools and approaches used for IT security were not designed to protect OT assets. Due to the nature of these assets, a cyberattack on an OT asset is not just a matter of business disruption; it can also be a public safety concern, making their security a critical issue for organizations.

Cybersecurity Risk is Business Risk, Yet Organizations Lack the Insight to Guide Decisions

Cybersecurity risk is no longer a tactical technology issue for IT professionals alone, but rather a strategic business issue. The rapid expansion of attack surfaces caused by digital transformation has increased cybersecurity risk for organizations of all sizes. This is evidenced by the wave of high profile breaches over the past few years, which are not only increasing in severity, but also resulting from cybersecurity breaches across a range of digital assets, from web applications to cloud workloads to IoT and OT assets. Recent breaches have resulted in CEOs testifying in front of Congressional committees about their cybersecurity operations and risk management practices. Executives and boards of directors are struggling to effectively understand and manage their organizations’ cybersecurity risk in response to mandates from insurers, regulators, shareholders and consumers. For example, the Securities and Exchange Commission recently released new interpretive guidance on cybersecurity risk disclosure and initiated enforcement actions, further focusing attention on this problem.

CISOs are increasingly being asked to present to executives and boards of directors on the state of their organization’s security readiness. Boards seek to understand how secure their organization is, where the greatest risks are, how much they should be investing to reduce risk and how their organization compares to their industry peers and best-in-class organizations. However, CISOs who are relying on existing tools can often only produce vulnerability data that may list thousands to millions of potential security problems with no business insight or prioritization based on risk and business criticality. As boards focus their attention on understanding and benchmarking their cyber exposure, CISOs need solutions that translate this vulnerability data into actionable business insights that help to answer strategic questions as to how secure an organization is, thereby allowing boards to proactively understand and exercise the appropriate oversight of cybersecurity risk.

Existing Solutions Fall Short of Addressing Cyber Exposure

Many organizations have implemented vulnerability assessment and management tools that scan networks for vulnerabilities on traditional IT systems on scheduled intervals and present raw lists of technical issues.

These traditional solutions fall short on two key dimensions:

 

   

Lack of visibility across the breadth of the modern attack surface. Many solutions were designed before the rise of cloud, containers, BYOD devices and IoT, and focus instead on traditional IT systems such as networking infrastructure, desktops and on-premises servers. With the increase in software release frequency, along with the dynamic nature of cloud workloads and containers, assets must be assessed in a more continuous manner. Many traditional solutions are unable to keep pace with assessing dynamic assets and cloud environments, which is hindering cloud adoption. In addition, many IoT devices and OT systems cannot be assessed with traditional methods, such as active scanning and agent-based scanning, because they do not respond to general inbound communications, do not communicate via the IP protocol or do not allow the installation of agents. Additionally, many OT systems can be knocked offline by active scanning, thus precluding its use with critical infrastructure.

 

   

Inability to translate vulnerability data into business insights. The proliferation of digital technologies and compute platforms, coupled with the rise in the number of vulnerabilities, leave even the most

 

87


Table of Contents
 

sophisticated and heavily-resourced security teams lacking the context to prioritize remediation efforts. Simply relying on a raw list of issues is no longer sufficient for either IT prioritization or translation of vulnerabilities into business insights. Traditional tools lack both the prioritization and deep analytics that security teams, the CISO, executives and boards of directors can use to assess the business impact of cybersecurity risk, benchmark their cybersecurity against industry peers and make more informed business decisions.

We believe these shortfalls of traditional solutions will continue to drive increased demand for Cyber Exposure solutions as organizations seek a unified platform to secure a broad range of IT assets and cloud environments, as well as the ability to translate vulnerability data into business insights.

In addition to traditional vulnerability management tools, organizations typically have dozens to hundreds of security tools deployed that address different parts of security but do not address the Cyber Exposure problem specifically. These include:

 

   

Protection technologies, such as firewall, anti-virus and intrusion prevention technologies designed to build a fence around an enterprise and protect organizations from an outside attack; and

 

   

Detection and response technologies, such as endpoint security, network access control and security information and event management, or SIEM, tools designed to rapidly detect, contain and remediate an issue once it has been identified.

These point solutions are designed to collect, understand and react to threat activity and take action based on it. Such technologies were not designed to answer fundamental strategic questions about the organization’s state of security.

We believe that market adoption of Cyber Exposure will reduce the relevance of traditional vulnerability management tools as well as some point security software solutions in adjacent markets that were not designed to address Cyber Exposure. We believe continued market adoption will shift investment from traditional solutions to Cyber Exposure solutions, and that we will be able to increase our share of these existing markets over time.

Our Solution

Our vision is to empower every organization to understand and reduce their cybersecurity risk. We are the first and only platform designed to provide broad visibility and deep insights into cyber exposure across the entire modern attack surface, as a result of which we believe our platform can become the system of record for cybersecurity.

Our enterprise platform is built to serve as the Cyber Exposure Command Center, enabling organizations to answer foundational and strategic questions such as:

 

   

Where are we exposed?

 

   

Where should we prioritize based on risk?

 

   

Are we reducing our exposure over time?