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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________
FORM 10-Q
__________________
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| |
☒ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Quarterly Period Ended September 30, 2019
or
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☐ | 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)
__________________
Securities registered pursuant to Section 12(b) of the Act:
|
| | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, par value $0.01 per share | TENB | The Nasdaq Stock Market LLC |
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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| | | | |
Large accelerated filer | ☐ | | Accelerated filer | ☐ |
Non-accelerated filer | ☒ | | | |
Emerging growth company | ☒ | | Smaller reporting company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ý |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares of the Registrant's common stock outstanding as of November 8, 2019 was 98,187,608.
TENABLE HOLDINGS, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TENABLE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
|
| | | | | | | |
| September 30, 2019 | | December 31, 2018 |
(in thousands, except per share data) | (unaudited) | | |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 171,303 |
| | $ | 165,116 |
|
Short-term investments | 125,333 |
| | 118,119 |
|
Accounts receivable (net of allowance for doubtful accounts of $557 and $188 at September 30, 2019 and December 31, 2018, respectively) | 81,201 |
| | 68,261 |
|
Deferred commissions | 26,030 |
| | 23,272 |
|
Prepaid expenses and other current assets | 21,126 |
| | 22,020 |
|
Total current assets | 424,993 |
| | 396,788 |
|
Property and equipment, net | 18,525 |
| | 11,348 |
|
Deferred commissions (net of current portion) | 38,493 |
| | 36,162 |
|
Operating lease right-of-use assets | 40,346 |
| | 8,504 |
|
Other assets | 9,855 |
| | 7,810 |
|
Total assets | $ | 532,212 |
| | $ | 460,612 |
|
| | | |
Liabilities and Stockholders’ Equity | | | |
Current liabilities: | | | |
Accounts payable | $ | 795 |
| | $ | 171 |
|
Accrued expenses | 9,474 |
| | 5,554 |
|
Accrued compensation | 24,244 |
| | 29,594 |
|
Deferred revenue | 245,985 |
| | 213,644 |
|
Operating lease liabilities | 3,970 |
| | 4,262 |
|
Other current liabilities | 701 |
| | 1,079 |
|
Total current liabilities | 285,169 |
| | 254,304 |
|
Deferred revenue (net of current portion) | 83,390 |
| | 76,259 |
|
Operating lease liabilities (net of current portion) | 37,788 |
| | 6,055 |
|
Other liabilities | 2,677 |
| | 2,231 |
|
Total liabilities | 409,024 |
| | 338,849 |
|
| | | |
Stockholders’ equity: | | | |
Common stock (par value: $0.01; 500,000 shares authorized; 97,960 and 93,126 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively) | 980 |
| | 931 |
|
Additional paid-in capital | 648,964 |
| | 586,940 |
|
Accumulated other comprehensive income | 60 |
| | — |
|
Accumulated deficit | (526,816 | ) | | (466,108 | ) |
Total stockholders’ equity | 123,188 |
| | 121,763 |
|
Total liabilities and stockholders’ equity | $ | 532,212 |
| | $ | 460,612 |
|
The accompanying notes are an integral part of these consolidated financial statements.
TENABLE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(in thousands, except per share data) | 2019 | | 2018 | | 2019 | | 2018 |
Revenue | $ | 91,852 |
| | $ | 69,440 |
| | $ | 257,537 |
| | $ | 192,139 |
|
Cost of revenue | 15,245 |
| | 12,161 |
| | 42,389 |
| | 30,768 |
|
Gross profit | 76,607 |
| | 57,279 |
| | 215,148 |
| | 161,371 |
|
Operating expenses: | | | | | | | |
Sales and marketing | 56,699 |
| | 44,550 |
| | 165,403 |
| | 125,964 |
|
Research and development | 20,763 |
| | 20,553 |
| | 64,396 |
| | 55,529 |
|
General and administrative | 17,472 |
| | 13,272 |
| | 48,595 |
| | 32,868 |
|
Total operating expenses | 94,934 |
| | 78,375 |
| | 278,394 |
| | 214,361 |
|
Loss from operations | (18,327 | ) | | (21,096 | ) | | (63,246 | ) | | (52,990 | ) |
Interest income, net | 1,527 |
| | 894 |
| | 4,677 |
| | 845 |
|
Other expense, net | (240 | ) | | (185 | ) | | (576 | ) | | (605 | ) |
Loss before income taxes | (17,040 | ) | | (20,387 | ) | | (59,145 | ) | | (52,750 | ) |
Provision for income taxes | 600 |
| | 482 |
| | 1,563 |
| | 1,157 |
|
Net loss | (17,640 | ) | | (20,869 | ) | | (60,708 | ) | | (53,907 | ) |
Accretion of Series A and B redeemable convertible preferred stock | — |
| | (55 | ) | | — |
| | (434 | ) |
Net loss attributable to common stockholders | $ | (17,640 | ) | | $ | (20,924 | ) | | $ | (60,708 | ) | | $ | (54,341 | ) |
| | | | | | | |
Net loss per share attributable to common stockholders, basic and diluted | $ | (0.18 | ) | | $ | (0.28 | ) | | $ | (0.64 | ) | | $ | (1.34 | ) |
Weighted-average shares used to compute net loss per share attributable to common stockholders, basic and diluted | 96,709 |
| | 74,261 |
| | 95,433 |
| | 40,688 |
|
The accompanying notes are an integral part of these consolidated financial statements.
TENABLE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | 2019 | | 2018 | | 2019 | | 2018 |
Net loss | $ | (17,640 | ) | | $ | (20,869 | ) | | $ | (60,708 | ) | | $ | (53,907 | ) |
Other comprehensive (loss) income, net of tax: | | | | | | | |
Unrealized (losses) gains on available-for-sale securities | (20 | ) | | — |
| | 60 |
| | — |
|
Other comprehensive (loss) income | (20 | ) | | — |
| | 60 |
| | — |
|
Comprehensive loss | $ | (17,660 | ) | | $ | (20,869 | ) | | $ | (60,648 | ) | | $ | (53,907 | ) |
TENABLE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Redeemable Convertible Preferred Stock | | | | | | | | | Accumulated Other Comprehensive Income | | | | |
| Series A | | Series B | | | Common Stock | | Additional Paid-in Capital | | | | | Total Stockholders’ Equity (Deficit) |
(in thousands) | Shares | | Amount | | Shares | | Amount | | | Shares | | Amount | | | | Accumulated Deficit | |
Balance at June 30, 2019 | — |
| | $ | — |
| | — |
| | $ | — |
| | | 96,808 |
| | $ | 968 |
| | $ | 629,087 |
| | $ | 80 |
| | $ | (509,176 | ) | | $ | 120,959 |
|
Exercise of stock options | — |
| | — |
| | — |
| | — |
| | | 383 |
| | 4 |
| | 2,717 |
| | — |
| | — |
| | 2,721 |
|
Vesting of restricted stock units | — |
| | — |
| | — |
| | — |
| | | 431 |
| | 5 |
| | (5 | ) | | — |
| | — |
| | — |
|
Issuance of common stock under employee stock purchase plan | — |
| | — |
| | — |
| | — |
| | | 338 |
| | 3 |
| | 6,547 |
| | — |
| | — |
| | 6,550 |
|
Stock-based compensation | — |
| | — |
| | — |
| | — |
| | | — |
| | — |
| | 10,618 |
| | — |
| | — |
| | 10,618 |
|
Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | | — |
| | — |
| | — |
| | (20 | ) | | — |
| | (20 | ) |
Net loss | — |
| | — |
| | — |
| | — |
| | | — |
| | — |
| | — |
| | — |
| | (17,640 | ) | | (17,640 | ) |
Balance at September 30, 2019 | — |
| | $ | — |
| | — |
| | $ | — |
| | | 97,960 |
| | $ | 980 |
| | $ | 648,964 |
| | $ | 60 |
| | $ | (526,816 | ) | | $ | 123,188 |
|
| | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2018 | — |
| | $ | — |
| | — |
| | $ | — |
| | | 93,126 |
| | $ | 931 |
| | $ | 586,940 |
| | $ | — |
| | $ | (466,108 | ) | | $ | 121,763 |
|
Exercise of stock options | — |
| | — |
| | — |
| | — |
| | | 3,625 |
| | 36 |
| | 15,412 |
| | — |
| | — |
| | 15,448 |
|
Vesting of restricted stock units | — |
| | — |
| | — |
| | — |
| | | 432 |
| | 5 |
| | (5 | ) | | — |
| | — |
| | — |
|
Issuance of common stock under employee stock purchase plan | — |
| | — |
| | — |
| | — |
| | | 777 |
| | 8 |
| | 15,121 |
| | — |
| | — |
| | 15,129 |
|
Stock-based compensation | — |
| | — |
| | — |
| | — |
| | | — |
| | — |
| | 31,496 |
| | — |
| | — |
| | 31,496 |
|
Other comprehensive income | — |
| | — |
| | — |
| | — |
| | | — |
| | — |
| | — |
| | 60 |
| | — |
| | 60 |
|
Net loss | — |
| | — |
| | — |
| | — |
| | | — |
| | — |
| | — |
| | — |
| | (60,708 | ) | | (60,708 | ) |
Balance at September 30, 2019 | — |
| | $ | — |
| | — |
| | $ | — |
| | | 97,960 |
| | $ | 980 |
| | $ | 648,964 |
| | $ | 60 |
| | $ | (526,816 | ) | | $ | 123,188 |
|
| | | | | | | | | | | | | | | | | | | | |
Balance at June 30, 2018 | 15,848 |
| | $ | 49,946 |
| | 39,538 |
| | $ | 228,168 |
| | | 24,951 |
| | $ | 250 |
| | $ | 26,651 |
| | $ | — |
| | $ | (425,625 | ) | | $ | (398,724 | ) |
Accretion of Series A and B redeemable convertible preferred stock | — |
| | 2 |
| | — |
| | 53 |
| | | — |
| | — |
| | (55 | ) | | — |
| | — |
| | (55 | ) |
Exercise of stock options | — |
| | — |
| | — |
| | — |
| | | 168 |
| | 1 |
| | 404 |
| | — |
| | — |
| | 405 |
|
Stock-based compensation | — |
| | — |
| | — |
| | — |
| | | — |
| | — |
| | 8,836 |
| | — |
| | — |
| | 8,836 |
|
Issuance of common stock in connection with initial public offering, net of underwriting discounts and commissions and other offering expenses | — |
| | — |
| | — |
| | — |
| | | 12,535 |
| | 125 |
| | 264,674 |
| | — |
| | — |
| | 264,799 |
|
Conversion of redeemable convertible preferred stock to common stock upon initial public offering | (15,848 | ) | | (49,948 | ) | | (39,538 | ) | | (228,221 | ) | | | 55,386 |
| | 554 |
| | 277,615 |
| | — |
| | — |
| | 278,169 |
|
Net loss | — |
| | — |
| | — |
| | — |
| | | — |
| | — |
| | — |
| | — |
| | (20,869 | ) | | (20,869 | ) |
Balance at September 30, 2018 | — |
| | $ | — |
| | — |
| | $ | — |
| | | 93,040 |
| | $ | 930 |
| | $ | 578,125 |
| | $ | — |
| | $ | (446,494 | ) | | $ | 132,561 |
|
| | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2017 | 15,848 |
| | $ | 49,935 |
| | 39,538 | | $ | 227,800 |
| | | 24,472 |
| | $ | 246 |
| | $ | 20,676 |
| | $ | — |
| | $ | (392,587 | ) | | $ | (371,665 | ) |
Accretion of Series A and B redeemable convertible preferred stock | — |
| | 13 |
| | — |
| | 421 |
| | | — |
| | — |
| | (434 | ) | | — |
| | — |
| | (434 | ) |
Exercise of stock options | — |
| | — |
| | — |
| | — |
| | | 654 |
| | 6 |
| | 1,409 |
| | — |
| | — |
| | 1,415 |
|
Repurchase of common stock | — |
| | — |
| | — |
| | — |
| | | (7 | ) | | (1 | ) | | (74 | ) | | — |
| | — |
| | (75 | ) |
Stock-based compensation | — |
| | — |
| | — |
| | — |
| | | — |
| | — |
| | 14,259 |
| | — |
| | — |
| | 14,259 |
|
Issuance of common stock in connection with initial public offering, net of underwriting discounts and commissions and other offering expenses | — |
| | — |
| | — |
| | — |
| | | 12,535 |
| | 125 |
| | 264,674 |
| | — |
| | — |
| | 264,799 |
|
Conversion of redeemable convertible preferred stock to common stock upon initial public offering | (15,848 | ) | | (49,948 | ) | | (39,538 | ) | | (228,221 | ) | | | 55,386 |
| | 554 |
| | 277,615 |
| | — |
| | — |
| | 278,169 |
|
Net loss | — |
| | — |
| | — |
| | — |
| | | — |
| | — |
| | — |
| | — |
| | (53,907 | ) | | (53,907 | ) |
Balance at September 30, 2018 | — |
| | $ | — |
| | — |
| | $ | — |
| | | 93,040 |
| | $ | 930 |
| | $ | 578,125 |
| | $ | — |
| | $ | (446,494 | ) | | $ | 132,561 |
|
The accompanying notes are an integral part of these consolidated financial statements.
TENABLE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
| | | | | | | |
| Nine Months Ended September 30, |
(in thousands) | 2019 | | 2018 |
Cash flows from operating activities: | | | |
Net loss | $ | (60,708 | ) | | $ | (53,907 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | | | |
Depreciation and amortization | 4,604 |
| | 4,580 |
|
Stock-based compensation | 31,191 |
| | 14,206 |
|
Other | (787 | ) | | 771 |
|
Changes in operating assets and liabilities: | | | |
Accounts receivable | (13,309 | ) | | (8,190 | ) |
Prepaid expenses and other current assets | 820 |
| | 941 |
|
Deferred commissions | (5,089 | ) | | (2,708 | ) |
Other assets | (2,386 | ) | | 315 |
|
Accounts payable and accrued expenses | 3,892 |
| | 1,930 |
|
Accrued compensation | (5,350 | ) | | 1,252 |
|
Deferred revenue | 39,472 |
| | 39,880 |
|
Other current liabilities | (195 | ) | | (4 | ) |
Other liabilities | 173 |
| | (71 | ) |
Net cash used in operating activities | (7,672 | ) | | (1,005 | ) |
| | | |
Cash flows from investing activities: | | | |
Purchases of property and equipment | (10,262 | ) | | (4,140 | ) |
Purchases of short-term investments | (179,703 | ) | | (34,114 | ) |
Sales and maturities of short-term investments | 174,485 |
| | — |
|
Net cash used in investing activities | (15,480 | ) | | (38,254 | ) |
| | | |
Cash flows from financing activities: | | | |
Proceeds from initial public offering, net of underwriting discounts and commissions | — |
| | 268,531 |
|
Payments of costs related to initial public offering | — |
| | (3,732 | ) |
Principal payments under finance lease obligations | (12 | ) | | (389 | ) |
Proceeds from stock issued in connection with the employee stock purchase plan | 15,129 |
| | — |
|
Proceeds from the exercise of stock options | 15,448 |
| | 1,415 |
|
Repurchases of common stock | — |
| | (75 | ) |
Net cash provided by financing activities | 30,565 |
| | 265,750 |
|
Effect of exchange rate changes on cash and cash equivalents and restricted cash | (1,226 | ) | | (675 | ) |
Net increase in cash and cash equivalents and restricted cash | 6,187 |
| | 225,816 |
|
Cash and cash equivalents and restricted cash at beginning of period | 165,378 |
| | 27,472 |
|
Cash and cash equivalents and restricted cash at end of period | $ | 171,565 |
| | $ | 253,288 |
|
| | | |
Supplemental disclosure of cash flow information: | | | |
Cash paid for interest | $ | 73 |
| | $ | 85 |
|
Cash paid for income taxes | 1,507 |
| | 920 |
|
Supplemental cash flow information related to leases: | | | |
Operating cash payments for operating leases | $ | 3,297 |
| | $ | 3,098 |
|
Operating cash payments for finance leases | 5 |
| | 29 |
|
Supplemental disclosure of non-cash investing and financing activities: | | | |
Asset retirement obligations | $ | 121 |
| | $ | 67 |
|
The accompanying notes are an integral part of these consolidated financial statements.
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, measuring and comparing 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 accompanying consolidated financial statements include the accounts of Tenable Holdings, Inc. and our wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
The consolidated financial statements have been prepared in conformity with United States generally accepted accounting principles (“GAAP”) for interim financial information. The consolidated statements are unaudited and should be read in conjunction with the consolidated financial statements and related notes included in our 2018 Annual Report on Form 10-K ("10-K") filed with the Securities and Exchange Commission on March 1, 2019. The consolidated financial statements have been prepared on a basis consistent with the audited annual consolidated financial statements included in the 10-K and, in the opinion of management, include all adjustments of a normal recurring nature necessary to fairly state our financial position, our results of operations, and cash flows.
The results for the nine months ended September 30, 2019 are not necessarily indicative of the operating results expected for the year ending December 31, 2019 or any other future period.
Initial Public Offering
On July 30, 2018, we completed our initial public offering ("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. All of the shares sold in the IPO were sold by the Company. We received net proceeds of $264.6 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 Redeemable Convertible Preferred Stock ("Series A") and 39,538,354 shares of our Series B Redeemable Convertible Preferred Stock ("Series B") automatically converted into an aggregate of 55,385,854 shares of our common stock. Our Amended and Restated Certificate of Incorporation adopted in connection with the IPO authorizes a total of 500,000,000 shares of common stock and 10,000,000 shares of preferred stock.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates include, but are not limited to, the determination of the estimated economic life of perpetual licenses for revenue recognition, the estimated period of benefit for deferred commissions, useful lives of long-lived assets, the valuation of stock-based compensation, including the estimated underlying fair value of our common stock prior to our IPO, the incremental borrowing rate for operating leases, and the valuation of deferred tax assets. We base these estimates on historical experience and on various other assumptions that we believe to be reasonable. Actual results could differ significantly from these estimates.
Revenue Recognition
We recognize revenue in order to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. To achieve this, 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 software and cloud-based solutions, perpetual licenses, maintenance associated with perpetual licenses, and professional services and other revenue. 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.
The following table presents a summary of revenue:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | 2019 | | 2018 | | 2019 | | 2018 |
Subscription revenue | $ | 75,503 |
| | $ | 53,511 |
| | $ | 209,610 |
| | $ | 146,568 |
|
Perpetual license and maintenance revenue | 13,797 |
| | 13,864 |
| | 40,877 |
| | 40,753 |
|
Professional services and other revenue | 2,552 |
| | 2,065 |
| | 7,050 |
| | 4,818 |
|
Revenue | $ | 91,852 |
| | $ | 69,440 |
| | $ | 257,537 |
| | $ | 192,139 |
|
Subscription Revenue
Subscription arrangements generally have annual or multi-year contractual terms for the use of 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 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 and market our products and services 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 products and services to our distributors, which in turn sell to resellers, which then sell to end-users. We derived 91%, 88%, 90%, and 87% of revenue through our channel network in the three months ended September 30, 2019 and 2018 and the nine months ended September 30, 2019 and 2018, respectively. One of our distributors accounted for 43% of revenue in the three and nine months ended September 30, 2019 and 46% of revenue in the three and nine months ended September 30, 2018. That same distributor accounted for 40% and 46% of accounts receivable at September 30, 2019 and December 31, 2018, respectively.
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 months ended September 30, 2019 and 2018 and the nine months ended September 30, 2019 and 2018, we recognized revenue of $84.6 million, $62.5 million, $184.3 million and $133.3 million, respectively, that was included in the deferred revenue balance at the beginning of each of the respective periods.
Remaining Performance Obligations
At September 30, 2019, the future estimated revenue related to unsatisfied performance obligations was $333.4 million, with 74% expected to be recognized as revenue over the succeeding twelve months, and the remainder expected to be recognized over the four years thereafter.
Investments
We currently invest in commercial paper, corporate bonds and U.S. treasury and agency obligations. Our investments are classified as available-for-sale and recorded at fair value, with unrealized gains and losses reported in accumulated
other comprehensive income within stockholders’ equity (deficit). We periodically review our investment portfolio to determine whether investments have indicators of possible impairment.
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 subscription arrangements and five years for perpetual license arrangements. We estimate 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.
The following summarizes the activity of deferred incremental costs of obtaining a contract in the periods presented:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | 2019 | | 2018 | | 2019 | | 2018 |
Beginning balance | $ | 61,866 |
| | $ | 50,805 |
| | $ | 59,434 |
| | $ | 50,176 |
|
Capitalization of contract acquisition costs | 9,612 |
| | 7,138 |
| | 24,846 |
| | 16,985 |
|
Amortization of deferred contract acquisition costs | (6,955 | ) | | (5,059 | ) | | (19,757 | ) | | (14,277 | ) |
Ending balance | $ | 64,523 |
| | $ | 52,884 |
| | $ | 64,523 |
| | $ | 52,884 |
|
Amortization of deferred contract acquisition costs is included in sales and marketing expense in the consolidated statements of operations.
Leases
We early adopted Accounting Standards Codification Topic 842, Leases ("ASC 842"), as of January 1, 2018 using the modified retrospective method. We determine if an arrangement contains a lease and the classification of that lease, if applicable, at inception. We have elected to not recognize a lease liability or right-of-use ("ROU") asset for short-term leases (leases with a term of twelve months or less). For contracts with lease and non-lease components, we have elected to not allocate the contract consideration, and account for the lease and non-lease components as a single lease component. Additionally, we enter into arrangements to use shared office spaces and other facilities, and have determined that these arrangements do not contain leases as we do not have the right to use an identified asset. Operating leases are included in operating lease ROU assets, operating lease liabilities and operating lease liabilities (net of current portion) in our consolidated balance sheets. Finance leases are included in property and equipment, other current liabilities and other liabilities in our consolidated balance sheets.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments under the lease. Operating lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. The implicit rate within our operating leases is generally not determinable and we use our incremental borrowing rate at the lease commencement date to determine the present value of lease payments. The determination of our incremental borrowing rate requires judgment and is estimated for each lease based on the rate we would have to pay for a collateralized loan with the same term and payments as the lease. We consider various factors, including our current borrowing rate, level of collateralization, estimated credit rating and currency of the lease. The operating lease ROU asset also includes any lease prepayments, offset by lease incentives. Certain of our leases include options to extend or terminate the lease. Options to extend or terminate a lease are considered in connection with calculating the ROU asset and related lease liability when it is reasonably certain that we will exercise that option.
Lease expense for lease payments is recognized on a straight-line basis over the term of the lease.
Recent Accounting Pronouncements Not Yet Adopted
In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-13 — Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU amends guidance on reporting credit losses for assets held at amortized cost basis and available-for-sale debt securities to require that credit losses on available-for-sale debt securities be presented as an allowance rather than as a write-down. The measurement of credit losses for newly recognized financial assets and subsequent changes in the allowance for credit losses are recorded in the statements of operations. This guidance is effective for us beginning January 1, 2020, and will be adopted using the modified-retrospective method. We are currently evaluating the potential impact of this standard on our consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-15 — Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. Under this ASU, implementation costs related to a cloud computing arrangement that is a service contract will be capitalized consistent with the requirements for capitalizing internal-use software development costs. The capitalized implementation costs are subsequently expensed over the term of the hosting arrangement. This guidance is effective for us beginning January 1, 2020, and will be adopted on a prospective basis. We are currently evaluating the potential impact of this standard.
2. Cash and Cash Equivalents and Short-Term Investments
At September 30, 2019 and December 31, 2018, cash and cash equivalents excluded $0.3 million of restricted cash, which is related to an account established as collateral for a lease arrangement and was included in other assets on the consolidated balance sheets.
The following tables summarize the amortized cost, unrealized gain and loss and estimated fair value of cash equivalents and short-term investments:
|
| | | | | | | | | | | | | | | |
| September 30, 2019 |
(in thousands) | Amortized Cost | | Unrealized Gain | | Unrealized Loss | | Estimated Fair Value |
Cash equivalents: | | | | | | | |
Money market funds | $ | 28,043 |
| | $ | — |
| | $ | — |
| | $ | 28,043 |
|
Commercial paper | 4,496 |
| | — |
| | — |
| | 4,496 |
|
Total cash equivalents | $ | 32,539 |
| | $ | — |
| | $ | — |
| | $ | 32,539 |
|
| | | | | | | |
Short-term investments: | | | | | | | |
Commercial paper | $ | 56,754 |
| | $ | — |
| | $ | — |
| | $ | 56,754 |
|
Corporate bonds | 15,993 |
| | 32 |
| | — |
| | 16,025 |
|
U.S. Treasury and agency obligations | 52,526 |
| | 35 |
| | (7 | ) | | 52,554 |
|
Total short-term investments | $ | 125,273 |
| | $ | 67 |
| | $ | (7 | ) | | $ | 125,333 |
|
|
| | | | | | | | | | | | | | | |
| December 31, 2018 |
(in thousands) | Amortized Cost | | Unrealized Gain | | Unrealized Loss | | Estimated Fair Value |
Cash equivalents: | | | | | | | |
Money market funds | $ | 38,022 |
| | $ | — |
| | $ | — |
| | $ | 38,022 |
|
Total cash equivalents | $ | 38,022 |
| | $ | — |
| | $ | — |
| | $ | 38,022 |
|
| | | | | | | |
Short-term investments: | | | | | | | |
Commercial paper | $ | 79,634 |
| | $ | — |
| | $ | — |
| | $ | 79,634 |
|
Corporate bonds | 16,119 |
| | — |
| | — |
| | 16,119 |
|
U.S. Treasury and agency obligations | 22,366 |
| | — |
| | — |
| | 22,366 |
|
Total short-term investments | $ | 118,119 |
| | $ | — |
| | $ | — |
| | $ | 118,119 |
|
For any investments that were in an unrealized loss position, we considered if we intended on selling the investments before maturity and if it is more-likely-than-not that we would have to sell the security before the recovery of the amortized cost basis. We concluded that there were no other-than-temporary impairments at September 30, 2019.
At September 30, 2019 and December 31, 2018, all of our short-term investments had maturities within the next twelve months.
3. Fair Value Measurements
We measure certain financial instruments at fair value using a fair value hierarchy. In the hierarchy, assets are classified based on the lowest level inputs used in valuation into the following categories:
| |
• | Level 1 — Quoted prices in active markets for identical assets and liabilities; |
| |
• | Level 2 — Observable inputs including quoted market prices for similar assets and liabilities in active markets, quoted prices for identical assets and liabilities in inactive markets, or inputs that are corroborated by observable market data; and |
| |
• | Level 3 — Unobservable inputs. |
The following tables summarize assets that are measured at fair value on a recurring basis:
|
| | | | | | | | | | | | | | | |
| September 30, 2019 |
(in thousands) | Level 1 | | Level 2 | | Level 3 | | Total |
Cash and cash equivalents | | | | | | | |
Money market funds | $ | 28,043 |
| | $ | — |
| | $ | — |
| | $ | 28,043 |
|
Commercial paper | — |
| | 4,496 |
| | — |
| | 4,496 |
|
| $ | 28,043 |
| | $ | 4,496 |
| | $ | — |
| | $ | 32,539 |
|
| | | | | | | |
Short-term investments | | | | | | | |
Commercial paper | $ | — |
| | $ | 56,754 |
| | $ | — |
| | $ | 56,754 |
|
Corporate bonds | — |
| | 16,025 |
| | — |
| | 16,025 |
|
U.S. Treasury and agency obligations | — |
| | 52,554 |
| | — |
| | 52,554 |
|
| $ | — |
| | $ | 125,333 |
| | $ | — |
| | $ | 125,333 |
|
|
| | | | | | | | | | | | | | | |
| December 31, 2018 |
(in thousands) | Level 1 | | Level 2 | | Level 3 | | Total |
Cash and cash equivalents | | | | | | | |
Money market funds | $ | 38,022 |
| | $ | — |
| | $ | — |
| | $ | 38,022 |
|
| $ | 38,022 |
| | $ | — |
| | $ | — |
| | $ | 38,022 |
|
| | | | | | | |
Short-term investments | | | | | | | |
Commercial paper | $ | — |
| | $ | 79,634 |
| | $ | — |
| | $ | 79,634 |
|
Corporate bonds | — |
| | 16,119 |
| | — |
| | 16,119 |
|
U.S. Treasury and agency obligations | — |
| | 22,366 |
| | — |
| | 22,366 |
|
| $ | — |
| | $ | 118,119 |
| | $ | — |
| | $ | 118,119 |
|
We did not have any liabilities measured and recorded at fair value at September 30, 2019 or December 31, 2018.
4. Property and Equipment, Net
Property and equipment, net consisted of the following:
|
| | | | | | | |
(in thousands) | September 30, 2019 | | December 31, 2018 |
Computer software and equipment | $ | 20,221 |
| | $ | 13,038 |
|
Furniture and fixtures |
|