UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________
FORM 10-Q
__________________
ý | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Quarterly Period Ended June 30, 2018
or
o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from _____ to _____
Commission file number 001-38600
__________________
TENABLE HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
__________________
Delaware | 47-5580846 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | |
7021 Columbia Gateway Drive, Suite 500, Columbia, Maryland, 21046
(Address of principal executive offices, including zip code)
(410) 872-0555
(Registrant’s telephone number, including area code)
__________________
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨ No ý
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See 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 | o | Accelerated filer | o | |
Non-accelerated filer | ý | (Do not check if a smaller reporting company) | ||
Emerging growth company | ý | Smaller reporting company | o | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ý | ||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
The number of shares of the Registrant's common stock outstanding as of August 31, 2018 was 93,033,759.
TENABLE HOLDINGS, INC.
TABLE OF CONTENTS
Page | ||
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TENABLE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
June 30, 2018 | December 31, 2017 | ||||||
(in thousands, except share and per share data) | (unaudited) | ||||||
Assets | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | $ | |||||
Accounts receivable (net of allowance for doubtful accounts of $261 and $160 at June 30, 2018 and December 31, 2017, respectively) | |||||||
Deferred commissions | |||||||
Prepaid expenses and other current assets | |||||||
Total current assets | |||||||
Property and equipment, net | |||||||
Construction in progress | |||||||
Deferred commissions (net of current portion) | |||||||
Intangible assets, net | |||||||
Goodwill | |||||||
Other assets | |||||||
Total assets | $ | $ | |||||
Liabilities, Redeemable Convertible Preferred Stock and Stockholders’ Deficit | |||||||
Current liabilities: | |||||||
Accounts payable | $ | $ | |||||
Accrued expenses | |||||||
Accrued compensation | |||||||
Deferred revenue | |||||||
Other current liabilities | |||||||
Total current liabilities | |||||||
Deferred revenue (net of current portion) | |||||||
Financing obligation | |||||||
Other liabilities | |||||||
Total liabilities | |||||||
Commitments and contingencies (Note 4) | |||||||
Redeemable convertible Series A preferred stock (par value: $0.01; 15,848 shares authorized, issued, and outstanding with liquidation preference of $50,000 at June 30, 2018 and December 31, 2017) | |||||||
Redeemable convertible Series B preferred stock (par value: $0.01; 42,000 shares authorized, 39,538 issued and outstanding with liquidation preference of $230,008 at June 30, 2018 and December 31, 2017) | |||||||
Stockholders’ deficit: | |||||||
Common stock (par value: $0.01; 93,848 and 93,855 shares authorized at June 30, 2018 and December 31, 2017; 24,951 and 24,472 shares issued and outstanding at June 30, 2018 and December 31, 2017) | |||||||
Additional paid-in capital | |||||||
Accumulated deficit | ( | ) | ( | ) | |||
Total stockholders’ deficit | ( | ) | ( | ) | |||
Total liabilities, redeemable convertible preferred stock and stockholders’ deficit | $ | $ | |||||
The accompanying notes are an integral part of these consolidated financial statements.
3
TENABLE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
(in thousands, except per share data) | 2018 | 2017 | 2018 | 2017 | |||||||||||
Revenue | $ | $ | $ | $ | |||||||||||
Cost of revenue | |||||||||||||||
Gross profit | |||||||||||||||
Operating expenses: | |||||||||||||||
Sales and marketing | |||||||||||||||
Research and development | |||||||||||||||
General and administrative | |||||||||||||||
Total operating expenses | |||||||||||||||
Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Other (expense) income, net | ( | ) | ( | ) | |||||||||||
Loss before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Provision for income taxes | |||||||||||||||
Net loss and comprehensive loss | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Accretion of Series A and B redeemable convertible preferred stock | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Net loss attributable to common stockholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
Net loss per share attributable to common stockholders, basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
Weighted-average shares used to compute net loss per share attributable to common stockholders, basic and diluted | |||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
4
TENABLE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
(Unaudited)
Redeemable Convertible Preferred Stock | Additional | Total | |||||||||||||||||||||||||||||||
Series A | Series B | Common Stock | Paid-in | Accumulated | Stockholders’ | ||||||||||||||||||||||||||||
(in thousands) | Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||||||||||
Balance at December 31, 2017 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||
Accretion of Series A and B redeemable convertible preferred stock | — | — | — | — | ( | ) | — | ( | ) | ||||||||||||||||||||||||
Exercise of stock options | — | — | — | — | — | ||||||||||||||||||||||||||||
Repurchase of common stock | — | — | — | — | ( | ) | ( | ) | ( | ) | — | ( | ) | ||||||||||||||||||||
Stock-based compensation | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
Net loss | — | — | — | — | — | — | — | ( | ) | ( | ) | ||||||||||||||||||||||
Balance at June 30, 2018 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
5
TENABLE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30, | |||||||
(in thousands) | 2018 | 2017 | |||||
Cash flows from operating activities: | |||||||
Net loss | $ | ( | ) | $ | ( | ) | |
Adjustments to reconcile net loss to net cash provided by operating activities: | |||||||
Depreciation and amortization | |||||||
Stock-based compensation | |||||||
Deferred income taxes | |||||||
Other | ( | ) | |||||
Changes in operating assets and liabilities: | |||||||
Accounts receivable | ( | ) | |||||
Prepaid expenses and other current assets | ( | ) | |||||
Deferred commissions | ( | ) | ( | ) | |||
Other assets | |||||||
Accounts payable and accrued expenses | |||||||
Accrued compensation | ( | ) | ( | ) | |||
Deferred revenue | |||||||
Other current liabilities | ( | ) | ( | ) | |||
Other liabilities | ( | ) | ( | ) | |||
Net cash provided by operating activities | |||||||
Cash flows from investing activities: | |||||||
Purchases of property and equipment | ( | ) | ( | ) | |||
Net cash used in investing activities | ( | ) | ( | ) | |||
Cash flows from financing activities: | |||||||
Principal payments under capital lease obligations | ( | ) | ( | ) | |||
Credit facility issuance costs | ( | ) | |||||
Payments of deferred offering costs | ( | ) | |||||
Proceeds from the exercise of stock options | |||||||
Repurchases of common stock | ( | ) | ( | ) | |||
Net cash (used in) provided by financing activities | ( | ) | |||||
Effect of exchange rate changes on cash and cash equivalents and restricted cash | ( | ) | |||||
Net (decrease) increase in cash and cash equivalents and restricted cash | ( | ) | |||||
Cash and cash equivalents and restricted cash at beginning of period | |||||||
Cash and cash equivalents and restricted cash at end of period | $ | $ | |||||
Supplemental disclosure of cash flow information: | |||||||
Cash paid for interest | $ | $ | |||||
Cash paid for income taxes | $ | $ | |||||
Supplemental disclosure of non-cash investing and financing activities: | |||||||
Assets acquired under capital leases | $ | $ | |||||
Asset retirement obligations | $ | $ | |||||
Construction in progress | $ | $ | |||||
The accompanying notes are an integral part of these consolidated financial statements.
6
TENABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Business and Summary of Significant Accounting Policies
Business Description
Tenable Holdings, Inc. (the “Company,” “we,” "us," or “our”) is a provider of Cyber Exposure solutions, which is a discipline for managing and measuring cybersecurity risk in the digital era. Our enterprise software platform enables broad visibility into an organization’s cyber exposure across the modern attack surface and deep insights that help organizations translate technical data into business insights to understand and reduce their cybersecurity risk.
Basis of Presentation
The results for the six months ended June 30, 2018 are not necessarily indicative of the operating results expected for the year ended December 31, 2018.
Initial Public Offering
Our IPO closed on July 30, 2018, after quarter end. As a result, our consolidated financial statements as of June 30, 2018 and for the periods then ended do not reflect the sale of 12,535,000 shares of common stock at the IPO price of $23.00 for net proceeds of $265 million, after underwriting discounts and commissions and offering expenses, or the conversion of all outstanding shares of our redeemable convertible preferred stock into an aggregate of 55,385,854 shares of common stock.
Use of Estimates
Revenue Recognition
7
guidance we recognized perpetual license revenue upon delivery of the perpetual license. 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 we amortized such costs over the contract term.
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
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
(in thousands) | 2018 | 2017 | 2018 | 2017 | |||||||||||
Subscription revenue | $ | $ | $ | $ | |||||||||||
Perpetual license and maintenance revenue | |||||||||||||||
Professional services and other revenue | |||||||||||||||
Revenue | $ | $ | $ | $ | |||||||||||
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
8
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 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 is recorded net of any distributor or reseller margin.
Concentrations
We sell our products and services through a channel network of distributors and resellers, along with our own sales teams. We derived 87 % of revenue through our channel network in each of the three and six months ended June 30, 2018, and 82 % and 81 % of revenue in the three and six months ended June 30, 2017, respectively. One of our distributors accounted for 46 % of revenue in each of the three and six months ended June 30, 2018, compared with 42 % of revenue in each of the three and six months ended June 30, 2017. That same distributor accounted for 48 % of accounts receivable at June 30, 2018.
Contract Balances
We generally bill our customers in advance and accounts receivable are recorded when we have the right to invoice the customer. Contract liabilities consist of deferred revenue and include customer billings and payments received in advance of performance under the contract. In the three and six months ended June 30, 2018 and 2017, we recognized revenue of $51.7 million, $99.2 million, $39.6 million and $68.3 million, respectively, that was included in the deferred revenue balance at the beginning of each of the respective periods.
Remaining Performance Obligations
At June 30, 2018, the future estimated revenue related to unsatisfied performance obligations was $252.0 million, with 71 % expected to be recognized as revenue over the succeeding twelve months , and the remainder expected to be recognized over the four years thereafter.
Deferred Commissions
Sales commissions, including related incremental fringe benefit costs, are considered to be incremental costs of obtaining a contract. Sales commissions on initial sales are not commensurate with sales commissions on contract renewals and therefore are recognized over an estimated period of benefit, which ranges between three and four years for
9
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
(in thousands) | 2018 | 2017 | 2018 | 2017 | |||||||||||
Beginning balance | $ | $ | $ | $ | |||||||||||
Capitalization of contract acquisition costs | |||||||||||||||
Amortization of deferred contract acquisition costs | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Ending balance | $ | $ | $ | $ | |||||||||||
Construction in Progress
In October 2017, we entered into a lease for our new corporate headquarters, which is currently being constructed in Columbia, Maryland. The lease has an anticipated start date in the third quarter of 2019 with a 12 -year initial term and $68.2 million of lease payments. Under current accounting guidance for build-to-suit lease arrangements, we concluded that we are the deemed owner of the building during the construction period. Accordingly, we recorded a construction-in-progress asset of $12.3 million and $2.3 million, for which there is a corresponding construction financing obligation of $11.8 million and $1.8 million, in each case net of a $0.5 million deposit, recorded in the consolidated balance sheets at June 30, 2018 and December 31, 2017, respectively. We will continue to increase the construction-in-progress asset and corresponding long-term liability as additional building costs are incurred by the landlord during the construction period. Upon completion of the construction, we will evaluate whether or not this arrangement meets the criteria for sale-leaseback accounting treatment.
Deferred Offering Costs
Our deferred offering costs consist of legal, accounting and other fees incurred in connection with our IPO. These costs have been deferred and are included in "Other assets" in the consolidated balance sheet and will be offset against the IPO proceeds. We deferred $2.7 million of offering costs as of June 30, 2018. No amounts were deferred as of December 31, 2017.
Recent Accounting Pronouncements Not Yet Adopted
10
2. Property and Equipment, Net
(in thousands) | June 30, 2018 | December 31, 2017 | |||||
Computer software and equipment | $ | $ | |||||
Furniture and fixtures | |||||||
Leasehold improvements | |||||||
Equipment under capital leases | |||||||
Total | |||||||
Less: accumulated depreciation and amortization | ( | ) | ( | ) | |||
Property and equipment, net | $ | $ | |||||
3. Debt
On May 4, 2017, we entered into a $25.0 million revolving credit facility (“Credit Facility”) with Silicon Valley Bank, which is available for use until May 4, 2020. The Credit Facility is intended to be used to fund working capital and to provide increased liquidity and financial flexibility and bears interest at either LIBOR plus 2 %, or the lender's prime rate plus 1 %. In addition, we pay quarterly in arrears 0.25 % of the average unused portion. The Credit Facility is secured by a first priority security interest in all of our assets, with a negative pledge on our Intellectual Property, as defined in the credit agreement.
4. Commitments and Contingencies
Operating and Capital Leases
We have entered into various non-cancelable operating leases, primarily related to office real estate, that expire through 2022 and generally contain renewal options for up to five years . Rent expense was $1.3 million, $2.4 million, $0.9 million and $1.6 million in the three and six months ended June 30, 2018 and 2017, respectively.
We also lease computer and office equipment under non-cancelable capital leases that expire through 2022. The total obligations for capital lease arrangements were $1.2 million and $1.5 million at June 30, 2018 and December 31, 2017, respectively.
11
(in thousands) | |||
Years ending December 31: | |||
2018 | $ | ||
2019 | |||
2020 | |||
2021 | |||
2022 | |||
Thereafter | |||
Total future minimum lease payments | $ | ||
5. Redeemable Convertible Preferred Stock and Common Stock
Redeemable Convertible Preferred Stock
In October 2012, Tenable, Inc. (now a wholly owned subsidiary of Tenable Holdings, Inc.) issued 15,847,500 shares of Series A redeemable convertible preferred stock at a price of $3.155067 per share, for an aggregate purchase price of $50 million, less $0.1 million in transaction costs. In December 2015, we issued 15,847,500 shares, par value of $0.01 , of Series A redeemable convertible preferred stock (“Series A”) in exchange for Series A Convertible Preferred Stock of Tenable, Inc., in connection with a recapitalization. This exchange was made on a one for one basis. In addition, we authorized 42,000,000 shares and issued 39,538,354 shares, par value of $0.01 , of Series B Convertible Preferred Stock (“Series B”) to certain investors at a price of $5.81735 per share. The gross purchase price was $230.0 million and we incurred transaction costs of $3.7 million. These proceeds were used to repurchase 39,387,322 shares of Tenable, Inc.’s common stock from its former stockholders in connection with the recapitalization.
Series A and Series B (together, the “Redeemable Convertible Preferred Stock”) automatically convert into common stock at the then applicable conversion rate in the event of the closing of a qualifying firm commitment underwritten public offering, which is defined as an offering of our common stock to the public at a price of at least $17.45 per share, that results in gross proceeds of at least $75 million. In addition, each share of a series of Redeemable Convertible Preferred Stock will automatically convert into common stock at the then applicable conversion rate for such series upon the vote or written consent of holders of at least 60 % of such series. See Note 10 to our consolidated financial statements for details regarding the automatic conversion of the Redeemable Convertible Preferred Stock in connection with our IPO in July 2018.
We accreted the Redeemable Convertible Preferred Stock to the redemption price at the redemption date using the effective interest method.
Common Stock
12
6. Stock-Based Compensation
We have various stock incentive plans under which we have issued stock-based awards. Stock options granted under our stock incentive plans have a maximum term of ten years , generally vest over a period of three to four years , and the exercise price cannot be less than the fair market value on the date of grant. In February 2018 and June 2018, the Board of Directors approved increases of 3.0 million and 4.0 million shares available for grant under the 2016 Stock Incentive Plan ("2016 Plan"), respectively. There were 1,118,311 shares available for grant at June 30, 2018.
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
(in thousands) | 2018 | 2017 | 2018 | 2017 | |||||||||||
Cost of revenue | $ | $ | $ | $ | |||||||||||
Sales and marketing | |||||||||||||||
Research and development | |||||||||||||||
General and administrative | |||||||||||||||
Total stock-based compensation expense | $ | $ | $ | $ | |||||||||||
At June 30, 2018, the total unrecognized stock-based compensation expense related to outstanding stock options was $55.7 million, which is expected to be recognized over an estimated remaining weighted average period of 3.5 years.
At June 30, 2018, the unrecognized stock-based compensation expense related to unvested awards of restricted stock was $4.2 million, which is expected to be recognized over an estimated remaining period of 2.5 years.
At June 30, 2018, the unrecognized stock-based compensation expense related to unvested restricted stock units was $15.8 million, which is expected to be recognized over an estimated remaining period of 2.1 years.
Stock Options
(in thousands, except for per share data and years) | Number of Shares | Weighted Average Exercise Price | Weighted-Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value | |||||||
Outstanding at December 31, 2017 | $ | $ | |||||||||
Granted | |||||||||||
Exercised | ( | ||||||||||
Forfeited/canceled | ( | ||||||||||
Outstanding at June 30, 2018 | |||||||||||
Exercisable at June 30, 2018 | |||||||||||
At June 30, 2018, there were 19.5 million stock options that were vested and expected to vest, with a weighted average exercise price of $7.58 per share, a weighted average remaining contractual term of 8.5 years and an aggregate intrinsic value of $168.5 million.
In the six months ended June 30, 2018, we granted stock options to employees that vest over three to four years and had a weighted average grant date fair value of $6.73 per share. Estimating the fair value of stock options using the Black-Scholes option-pricing model require assumptions as to the fair value of our underlying common stock, the
13
estimated term of the option, the risk free interest rate, the expected volatility of the price of our common stock, and the expected dividend yield. The fair value of each stock option was estimated on the grant date based on the following assumptions:
Six Months Ended June 30, 2018 | |
Expected term (in years) | |
Expected volatility | 41.3% — 43.3% |
Risk-free interest rate | 2.7% — 2.9% |
Expected dividend yield | |
Restricted Stock and Restricted Stock Units
We did no t grant any restricted stock awards in the six months ended June 30, 2018.
7. Net Loss Per Share Attributable to Common Stockholders
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
(in thousands, except per share data) | 2018 | 2017 | 2018 | 2017 | |||||||||||
Net loss attributable to common stockholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
Weighted-average shares used to compute net loss per share attributable to common stockholders, basic and diluted | |||||||||||||||
Net loss per share attributable to common stockholders, basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
Three and Six Months Ended June 30, | |||||
(in thousands) | 2018 | 2017 | |||
Redeemable convertible preferred stock | |||||
Stock options | |||||
Restricted shares | |||||
Restricted stock units | |||||
Total | |||||
14
8. Income Taxes
On December 22, 2017, the Tax Cuts and Jobs Act was enacted into law, which contains several significant changes, including reducing the corporate income tax rate from 35% to 21% effective January 1, 2018, imposing a one-time repatriation tax on accumulated foreign earnings (“transition tax”) and instituting the global intangible low taxed income (“GILTI”) regime and the base erosion anti-abuse tax.
9. Geographic Information
We operate as one operating segment. Our chief executive officer, who is our chief operating decision maker, reviews financial information on a consolidated basis for purposes of making operating decisions, allocating resources, and evaluating financial performance.
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
(in thousands) | 2018 | 2017 | 2018 | 2017 | |||||||||||
Americas | $ | $ | $ | $ | |||||||||||
Europe, Middle East and Africa | |||||||||||||||
Asia Pacific | |||||||||||||||
Revenue | $ | $ | $ | $ | |||||||||||
Customers located in the United States accounted for 67 %, 67 %, 70 % and 71 % of revenue in the three and six months ended June 30, 2018 and 2017, respectively. No other country accounted for 10% or more of revenue in the periods presented.
(in thousands) | June 30, 2018 | December 31, 2017 | |||||
United States | $ | $ | |||||
International | |||||||
Property and equipment, net | $ | $ | |||||
10. Subsequent Events
Initial Public Offering
On July 30, 2018, we completed our IPO in which we issued and sold 12,535,000 shares of common stock at a price to the public of $23.00 per share, including 1,635,000 shares of common stock purchased by our underwriters from the full exercise of their over-allotment option. None of our existing stockholders sold shares at the time of our IPO. We received net proceeds of $265 million after deducting underwriting discounts and commissions and other offering expenses.
Upon the completion of our IPO, all 15,847,500 shares of our Series A and 39,538,354 shares of our Series B automatically converted into an aggregate of 55,385,854 shares of our common stock. Our newly-adopted Amended and
15
Restated Certificate of Incorporation authorizes a total of 500,000,000 shares of common stock and 10,000,000 shares of preferred stock.
June 30, 2018 | |||||||||||
(in thousands) | Actual | Pro Forma Adjustments | Pro Forma | ||||||||
Assets | |||||||||||
Total current assets | $ | $ | $ | ||||||||
Total noncurrent assets | ( | ) | |||||||||
Total assets | $ | $ | $ | ||||||||
Liabilities, redeemable convertible preferred stock and stockholders' (deficit) equity | |||||||||||
Total liabilities | $ | $ | ( | ) | $ | ||||||
Redeemable convertible Series A preferred stock | ( | ) | |||||||||
Redeemable convertible Series B preferred stock | ( | ) | |||||||||
Stockholders' (deficit) equity | |||||||||||
Common stock | |||||||||||
Additional paid-in capital | |||||||||||
Accumulated deficit | ( | ) | ( | ) | |||||||
Total stockholders' (deficit) equity | ( | ) | |||||||||
Total liabilities, redeemable convertible preferred stock and stockholders' (deficit) equity | $ | $ | $ | ||||||||
Stock-Based Compensation
Compensation expense for our RSUs is recognized on a straight-line basis over the requisite service period as long as the performance condition in the form of a specified liquidity event is deemed probable. In July 2018, in connection with the completion of our IPO, we determined that the performance condition was probable and we recorded cumulative stock-based compensation expense of $0.7 million. The remaining unrecognized stock-based compensation expense of $15.1 million related to the RSUs will be recorded over the remaining requisite service period.
2018 Equity Incentive Plan
In June 2018 our board of directors adopted, and in July 2018 our stockholders approved, our 2018 Equity Incentive Plan ("2018 Plan"), which reserves 9.9 million shares of our common stock that may be issued as stock-based awards. The 2018 Plan became effective upon the execution of the underwriting agreement related to our IPO, at which point no further grants were made under our 2016 Plan. Any shares subject to stock options or other stock awards granted under our 2016 Plan, 2012 Stock Incentive Plan or 2002 Stock Incentive Plan that would have otherwise returned to such plan (such as upon the expiration or termination of a stock award prior to vesting) were added to, and are available for issuance under, our 2018 Plan.
2018 Employee Stock Purchase Plan
16
Item 2. 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 (1) our consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q, or this Form 10-Q, and (2) our consolidated financial statements, related notes and management's discussion and analysis of financial condition and results of operations in our final prospectus for our initial public offering, or IPO, dated as of July 25, 2018 and filed with the Securities and Exchange Commission pursuant to Rule 424(b)(4) of the Securities Act of 1933, as amended, or the Securities Act, on July 26, 2018, or the Prospectus.
This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements are often identified by the use of words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “will,” “would” or the negative or plural of these words or similar expressions or variations. Such forward-looking statements are subject to a number of risks, uncertainties, assumptions and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified herein, and those discussed in the section titled “Risk Factors,” set forth in Part II, Item 1A of this Form 10-Q and in our other filings with the SEC. You should not rely upon forward-looking statements as predictions of future events. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.
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 software as a service, or 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 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.
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 solutions. 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.
We have experienced rapid growth in recent years. Revenue in the three months ended June 30, 2018 and 2017 and the six months ended June 30, 2018 and 2017 was $63.6 million, $44.1 million, $122.7 million and $84.6 million, respectively, representing year-over-year growth of 44% and 45% in the quarterly and year-to-date periods, respectively. Our net loss in the three months ended June 30, 2018 and 2017 and the six months ended June 30, 2018 and 2017 was $17.2 million, $9.2 million, $33.0 million and $18.0 million, respectively, as we continue to invest in our business and market opportunity.
17
Initial Public Offering
Our IPO closed on July 30, 2018. As a result, our condensed consolidated financial statements as of June 30, 2018 and for the periods then ended do not reflect the sale of 12,535,000 shares of common stock at the IPO price of $23.00 for net proceeds to us of $265 million, after underwriting discounts and commissions and offering expenses, or the conversion of all outstanding shares of our redeemable convertible preferred stock into an aggregate of 55,385,854 shares of common stock.
Financial Highlights
Below are our key financial results for the three and six months ended June 30, 2018:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
(in thousands, except per share data) | 2018 | 2017 | 2018 | 2017 | |||||||||||
Revenue | $ | 63,592 | $ | 44,149 | $ | 122,699 | $ | 84,630 | |||||||
Loss from operations | (16,445 | ) | (9,229 | ) | (31,894 | ) | (17,975 | ) | |||||||
Net loss | (17,150 | ) | (9,214 | ) | (33,038 | ) | (18,040 | ) | |||||||
Net loss per share attributable to common stockholders, basic and diluted | (0.73 | ) | (0.43 | ) | (1.41 | ) | (0.85 | ) | |||||||
Net cash provided by (used in) operating activities | 242 | (1,019 | ) | 746 | 168 | ||||||||||
Purchases of property and equipment | (1,382 | ) | (221 | ) | (2,978 | ) | (681 | ) | |||||||
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.
We continue to expand the capabilities of our enterprise platform offerings, as well as our Nessus products, specifically as it relates to the ability to scan for and detect the rapidly expanding volume of vulnerabilities.
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.
New Enterprise Platform Customer Acquisition
We believe that our customer base provides a significant opportunity to expand sales of our enterprise platform offerings and that 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 our 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.
18
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, internet of things, or IoT, and operational technology, or 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.
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.
Investing in Business Growth
Since our founding, we have invested significantly in growing our business. 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. 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.
Key Operating and Financial Metrics
To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, we use certain operating metrics and 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 operating metrics and non-GAAP financial measures provide useful information about our operating and 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 present these operating metrics and non-GAAP financial measures to assist investors in seeing our operating and 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 operating and 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.
19
Calculated current billings consists of revenue recognized in a period plus the change in current deferred revenue in the corresponding period. We believe that calculated 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, calculated current 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:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
(in thousands) | 2018 | 2017 | 2018 | 2017 | |||||||||||
Revenue | $ | 63,592 | $ | 44,149 | $ | 122,699 | $ | 84,630 | |||||||
Deferred revenue (current), end of period | 174,277 | 122,190 | 174,277 | 122,190 | |||||||||||
Deferred revenue (current), beginning of period(1) | (160,503 | ) | (110,605 | ) | (154,898 | ) | (107,006 | ) | |||||||
Calculated current billings | $ | 77,366 | $ | 55,734 | $ | 142,078 | $ | 99,814 | |||||||
_______________
(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.
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 investment in our business and to make acquisitions. We believe that free cash flow is useful to investors as a liquidity measure because it measures our ability to generate or use cash.
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.
20
The following table summarizes our cash flows for the periods presented and presents a reconciliation of net cash provided by operating activities, the most directly comparable financial measure calculated in accordance with GAAP, to free cash flow:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
(in thousands) | 2018 | 2017 | 2018 | 2017 | |||||||||||
Net cash provided by operating activities | $ | 242 | $ | (1,019 | ) | $ | 746 | $ | 168 | ||||||
Purchases of property and equipment | (1,382 | ) | (221 | ) | (2,978 | ) | (681 | ) | |||||||
Free cash flow | $ | (1,140 | ) | $ | (1,240 | ) | $ | (2,232 | ) | $ | (513 | ) | |||
Enterprise Platform Customers
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:
Three Months Ended June 30, | |||||
2018 | 2017 | Change (%) | |||
Number of new enterprise platform customers added in period(1) | 282 | 217 | 30% | ||
_______________
(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. |
At June 30, | |||||
2018 | 2017 | Change (%) | |||
Number of customers with $100,000 and greater in annual contract value at end of period | 340 | 181 | 88% | ||
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 and amortization of intangible assets, 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 revenue in 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 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:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
(in thousands) | 2018 | 2017 | 2018 | 2017 | |||||||||||
Loss from operations | $ | (16,445 | ) | $ | (9,229 | ) | $ | (31,894 | ) | $ | (17,975 | ) | |||
Stock-based compensation | 3,024 | 1,849 | 5,423 | 3,475 | |||||||||||
Amortization of intangible assets | 151 | 151 | 302 | 302 | |||||||||||
Non-GAAP loss from operations | $ | (13,270 | ) | $ | (7,229 | ) | $ | (26,169 | ) | $ | (14,198 | ) | |||
Operating margin | (26 | )% | (21 | )% | (26 | )% | (21 | )% | |||||||
Non-GAAP operating margin | (21 | )% | (16 | )% | (21 | )% | (17 | )% | |||||||
21
Non-GAAP Net Loss, Non-GAAP Net Loss Per Share and Pro Forma Non-GAAP Net Loss Per Share
We use non-GAAP net loss, which excludes the effect of the accretion of Series A and B redeemable convertible preferred stock, stock-based compensation and amortization of intangible assets, as well as the related tax impact, to calculate non-GAAP net loss per share and pro forma non-GAAP net loss per share. Pro forma non-GAAP net loss per share is calculated by giving effect to the conversion of our redeemable convertible preferred stock into common stock as though the conversion occurred at the beginning of each period presented. 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, non-GAAP net loss per share and pro forma non-GAAP net loss per share:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
(in thousands, except for per share amounts) | 2018 | 2017 | 2018 | 2017 | |||||||||||
Net loss attributable to common stockholders | $ | (17,341 | ) | $ | (9,405 | ) | $ | (33,417 | ) | $ | (18,418 | ) | |||
Accretion of Series A and B redeemable convertible preferred stock | 191 | 191 | 379 | 378 | |||||||||||
Stock-based compensation | 3,024 | 1,849 | 5,423 | 3,475 | |||||||||||
Tax impact of stock-based compensation(1) | (25 | ) | (12 | ) | (48 | ) | (22 | ) | |||||||
Amortization of intangible assets(1) | 151 | 151 | 302 | 302 | |||||||||||
Non-GAAP net loss | $ | (14,000 | ) | $ | (7,226 | ) | $ | (27,361 | ) | $ | (14,285 | ) | |||
Net loss per share attributable to common stockholders, basic and diluted | $ | (0.73 | ) | $ | (0.43 | ) | $ | (1.41 | ) | $ | (0.85 | ) | |||
Accretion of Series A and B redeemable convertible preferred stock | 0.01 | 0.01 | 0.02 | 0.02 | |||||||||||
Stock-based compensation | 0.12 | 0.08 | 0.22 | 0.16 | |||||||||||
Tax impact of stock-based compensation(1) | 0.00 | 0.00 | 0.00 | 0.00 | |||||||||||
Amortization of intangible assets(1) | 0.01 | 0.01 | 0.01 | 0.01 | |||||||||||
Non-GAAP net loss per share, basic and diluted | $ | (0.59 | ) | $ | (0.33 | ) | $ | (1.16 | ) | $ | (0.66 | ) | |||
Weighted-average shares used to compute net loss per share attributable to common stockholders and non-GAAP net loss per share, basic and diluted | 23,750 | 22,060 | 23,623 | 21,661 | |||||||||||
Pro forma adjustment to reflect assumed conversion of our convertible redeemable preferred stock as of the beginning of the period | 55,386 | 55,386 | 55,386 | 55,386 | |||||||||||
Weighted-average shares used to compute pro forma non-GAAP net loss per share, basic and diluted | 79,136 | 77,446 | 79,009 | 77,047 | |||||||||||
Pro forma non-GAAP net loss per share | $ | (0.18 | ) | $ | (0.09 | ) | $ | (0.35 | ) | $ | (0.19 | ) | |||
________________
(1) The tax impact of the adjustments to net loss attributable to common stockholders is based on the tax treatment for applicable tax jurisdictions. There was no tax impact related to the amortization of intangible assets as it was incurred in the United States in periods in which we had a net operating loss for which we maintained a full valuation allowance.
22
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.
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.
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 in 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.
Cost of Revenue, Gross Profit and Gross Margin
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 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, 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
23
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
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.
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 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) Income, Net
Other (expense) income, 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.
24
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.
Results of Operations
The following tables set forth our consolidated results of operations for the periods presented:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
(in thousands) | 2018 | 2017 | 2018 | 2017 | |||||||||||
Revenue | $ | 63,592 | $ | 44,149 | $ | 122,699 | $ | 84,630 | |||||||
Cost of revenue(1) | 9,879 | 5,348 | 18,607 | 9,786 | |||||||||||
Gross profit | 53,713 | 38,801 | 104,092 | 74,844 | |||||||||||
Operating expenses: | |||||||||||||||
Sales and marketing(1) | 41,826 | 27,773 | 81,414 | 53,941 | |||||||||||
Research and development(1) | 17,791 | 13,713 | 34,976 | 26,171 | |||||||||||
General and administrative(1) | 10,541 | 6,544 | 19,596 | 12,707 | |||||||||||
Total operating expenses | 70,158 | 48,030 | 135,986 | 92,819 | |||||||||||
Loss from operations | (16,445 | ) | (9,229 | ) | (31,894 | ) | (17,975 | ) | |||||||
Other (expense) income, net | (461 | ) | 56 | (469 | ) | 27 | |||||||||
Loss before income taxes | (16,906 | ) | (9,173 | ) | (32,363 | ) | (17,948 | ) | |||||||
Provision for income taxes | 244 | 41 | 675 | 92 | |||||||||||
Net loss and comprehensive loss | $ | (17,150 | ) | $ | (9,214 | ) | $ | (33,038 | ) | $ | (18,040 | ) | |||
_______________
(1) Includes stock-based compensation expense as follows:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
(in thousands) | |||||||||||||||