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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________
FORM 10-Q
__________________
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 2020
or
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.
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. 
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 May 1, 2020 was 100,080,320.



TENABLE HOLDINGS, INC.
TABLE OF CONTENTS

 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2


PART I. FINANCIAL INFORMATION
Item 1.        Financial Statements
TENABLE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
 
March 31, 2020
 
December 31, 2019
(in thousands, except per share data)
(unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
107,769

 
$
74,363

Short-term investments
118,924

 
137,904

Accounts receivable (net of allowance for doubtful accounts of $399 and $764 at March 31, 2020 and December 31, 2019, respectively)
74,378

 
94,827

Deferred commissions
28,751

 
28,499

Prepaid expenses and other current assets
25,632

 
27,369

Total current assets
355,454

 
362,962

Property and equipment, net
30,534

 
26,847

Deferred commissions (net of current portion)
41,991

 
43,766

Operating lease right-of-use assets
41,283

 
42,847

Acquired intangible assets, net
14,929

 
15,508

Goodwill
54,138

 
54,138

Other assets
11,245

 
12,544

Total assets
$
549,574

 
$
558,612

 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
4,404

 
$
1,732

Accrued expenses
14,536

 
8,436

Accrued compensation
23,357

 
36,634

Deferred revenue
270,916

 
274,348

Operating lease liabilities
4,866

 
5,209

Other current liabilities
750

 
1,284

Total current liabilities
318,829

 
327,643

Deferred revenue (net of current portion)
87,175

 
88,779

Operating lease liabilities (net of current portion)
40,301

 
40,663

Other liabilities
2,893

 
2,622

Total liabilities
449,198

 
459,707

 
 
 
 
Stockholders’ equity:
 
 
 
Common stock (par value: $0.01; 500,000 shares authorized; 100,003 and 98,587 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively)
1,000

 
986

Additional paid-in capital
687,311

 
662,990

Accumulated other comprehensive income
163

 
50

Accumulated deficit
(588,098
)
 
(565,121
)
Total stockholders’ equity
100,376

 
98,905

Total liabilities and stockholders’ equity
$
549,574

 
$
558,612

The accompanying notes are an integral part of these consolidated financial statements.

3


TENABLE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
Three Months Ended March 31,
(in thousands, except per share data)
2020
 
2019
Revenue
$
102,648

 
$
80,301

Cost of revenue
18,701

 
13,226

Gross profit
83,947

 
67,075

Operating expenses:
 
 
 
Sales and marketing
59,855

 
52,689

Research and development
26,831

 
21,935

General and administrative
18,933

 
15,136

Total operating expenses
105,619

 
89,760

Loss from operations
(21,672
)
 
(22,685
)
Interest income, net
734

 
1,556

Other expense, net
(960
)
 
(214
)
Loss before income taxes
(21,898
)
 
(21,343
)
Provision for income taxes
1,079

 
97

Net loss
$
(22,977
)
 
$
(21,440
)
 
 
 
 
Net loss per share, basic and diluted
$
(0.23
)
 
$
(0.23
)
Weighted-average shares used to compute net loss per share, basic and diluted
98,855

 
93,738

The accompanying notes are an integral part of these consolidated financial statements.

4


TENABLE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
 
Three Months Ended March 31,
(in thousands)
2020
 
2019
Net loss
$
(22,977
)
 
$
(21,440
)
Other comprehensive income, net of tax:
 
 
 
Unrealized gains on available-for-sale securities
113

 
21

Other comprehensive income
113

 
21

Comprehensive loss
$
(22,864
)
 
$
(21,419
)


5


TENABLE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
 
 
 
 
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Income
 
 
 
Total
Stockholders’
Equity
 
Common Stock
 
 
 
Accumulated Deficit
 
(in thousands)
Shares
 
Amount
 
 
 
 
Balance at December 31, 2019
98,587

 
$
986

 
$
662,990

 
$
50

 
$
(565,121
)
 
$
98,905

Exercise of stock options
635

 
6

 
3,972

 

 

 
3,978

Vesting of restricted stock units
403

 
4

 
(4
)
 

 

 

Issuance of common stock under employee stock purchase plan
378

 
4

 
7,303

 

 

 
7,307

Stock-based compensation

 

 
13,050

 

 

 
13,050

Other comprehensive income

 

 

 
113

 

 
113

Net loss

 

 

 

 
(22,977
)
 
(22,977
)
Balance at March 31, 2020
100,003

 
$
1,000

 
$
687,311

 
$
163

 
$
(588,098
)
 
$
100,376

 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2018
93,126

 
$
931

 
$
586,940

 
$

 
$
(466,108
)
 
$
121,763

Exercise of stock options
2,638

 
26

 
9,852

 

 

 
9,878

Issuance of common stock under employee stock purchase plan
439

 
5

 
8,574

 

 

 
8,579

Stock-based compensation

 

 
9,408

 

 

 
9,408

Other comprehensive income

 

 

 
21

 

 
21

Net loss

 

 

 

 
(21,440
)
 
(21,440
)
Balance at March 31, 2019
96,203

 
$
962

 
$
614,774

 
$
21

 
$
(487,548
)
 
$
128,209

The accompanying notes are an integral part of these consolidated financial statements.

6


TENABLE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Three Months Ended March 31,
(in thousands)
2020
 
2019
Cash flows from operating activities:
 
 
 
Net loss
$
(22,977
)
 
$
(21,440
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
2,678

 
1,622

Stock-based compensation
13,035

 
9,319

Deferred income taxes
41

 

Other
474

 
(284
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
20,813

 
11,104

Prepaid expenses and other current assets
1,663

 
1,374

Deferred commissions
1,523

 
(377
)
Other assets
2,155

 
54

Accounts payable and accrued expenses
3,669

 
3,372

Accrued compensation
(13,277
)
 
(7,233
)
Deferred revenue
(5,036
)
 
2,002

Other current liabilities
(535
)
 
(429
)
Other liabilities
266

 
42

Net cash provided by (used in) operating activities
4,492

 
(874
)
 
 
 
 
Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(614
)
 
(2,306
)
Purchases of short-term investments
(58,831
)
 
(53,915
)
Sales and maturities of short-term investments
78,175

 
41,750

Net cash provided by (used in) investing activities
18,730

 
(14,471
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Principal payments under finance lease obligations
(4
)
 
(4
)
Proceeds from stock issued in connection with the employee stock purchase plan
7,307

 
8,579

Proceeds from the exercise of stock options
3,978

 
9,878

Net cash provided by financing activities
11,281

 
18,453

Effect of exchange rate changes on cash and cash equivalents and restricted cash
(1,097
)
 
(258
)
Net increase in cash and cash equivalents and restricted cash
33,406

 
2,850

Cash and cash equivalents and restricted cash at beginning of period
74,665

 
165,378

Cash and cash equivalents and restricted cash at end of period
$
108,071

 
$
168,228

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest
$
41

 
$
24

Cash paid for income taxes
1,203

 
416

Supplemental cash flow information related to leases:
 
 
 
Operating cash payments for operating leases
$
1,263

 
$
1,195

Supplemental disclosure of non-cash flow investing and financing activities:
 
 
 
Construction in progress
$
5,107

 
$
186

The accompanying notes are an integral part of these consolidated financial statements.

7


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 2019 Annual Report on Form 10-K ("10-K") filed with the Securities and Exchange Commission on February 28, 2020. 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 three months ended March 31, 2020 are not necessarily indicative of the operating results expected for the year ending December 31, 2020 or any other future period.
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, the useful lives of long-lived assets, the fair value of acquired intangible 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.
Significant Accounting Policies
Our significant accounting policies are described in our 10-K. During the three months ended March 31, 2020, there were no material changes to our significant accounting policies other than those described below.
Recently Adopted Accounting Pronouncements
We adopted Accounting Standards Update ("ASU") No. 2016-13 — Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, effective January 1, 2020 using the modified retrospective approach. The new standard replaces the previous incurred loss impairment methodology with a methodology that reflects current expected credit losses for financial assets, including trade receivables, which are not measured at fair value, through net income. Under the new standard, our allowance for doubtful accounts reflects our best estimate of expected future credit losses based on various factors, including our historical collection experience, age of accounts receivable balances, current conditions, reasonable and supportable forecasts of future economic conditions, as well as other factors that may impact our ability to collect our accounts receivable. Additionally, the new standard requires us to

8


evaluate impairments of available-for-sale debt securities due to credit-related and non-credit-related factors. Identified credit-related impairments are recognized as a charge in the statement of operations. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.
2. Revenue Recognition
Disaggregation of Revenue
The following table presents a summary of revenue:
 
Three Months Ended March 31,
(in thousands)
2020
 
2019
Subscription revenue
$
86,390

 
$
64,737

Perpetual license and maintenance revenue
13,419

 
13,527

Professional services and other revenue
2,839

 
2,037

Revenue
$
102,648

 
$
80,301


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%, and 90% of revenue through our channel network in the three months ended March 31, 2020 and 2019, respectively. One of our distributors accounted for 43% and 44% of revenue in the three months ended March 31, 2020 and 2019, respectively. That same distributor accounted for 41% and 40% of accounts receivable at March 31, 2020 and December 31, 2019, 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 March 31, 2020 and 2019, we recognized revenue of $95.3 million and $74.6 million, respectively, that was included in the deferred revenue balance at the beginning of each of the respective periods.
Remaining Performance Obligations
At March 31, 2020, the future estimated revenue related to unsatisfied performance obligations was $363.9 million, with approximately 75% 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
The following summarizes the activity of deferred incremental costs of obtaining a contract:
 
Three Months Ended March 31,
(in thousands)
2020
 
2019
Beginning balance
$
72,265

 
$
59,434

Capitalization of contract acquisition costs
6,121

 
6,626

Amortization of deferred contract acquisition costs
(7,644
)
 
(6,249
)
Ending balance
$
70,742

 
$
59,811



9


3. Cash and Cash Equivalents and Short-Term Investments
The following tables summarize the amortized cost, unrealized gain and loss and estimated fair value of cash equivalents and short-term investments:
 
March 31, 2020
(in thousands)
Amortized Cost
 
Unrealized Gain
 
Unrealized Loss
 
Estimated Fair Value
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
40,395

 
$

 
$

 
$
40,395

Total cash equivalents
$
40,395

 
$

 
$

 
$
40,395

 
 
 
 
 
 
 
 
Short-term investments:
 
 
 
 
 
 
 
Commercial paper
$
52,984

 
$

 
$

 
$
52,984

Corporate bonds
20,775

 
6

 
(109
)
 
20,672

U.S. Treasury and agency obligations
45,002

 
266

 

 
45,268

Total short-term investments
$
118,761

 
$
272

 
$
(109
)
 
$
118,924

 
December 31, 2019
(in thousands)
Amortized Cost
 
Unrealized Gain
 
Unrealized Loss
 
Estimated Fair Value
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
13,588

 
$

 
$

 
$
13,588

Commercial paper
8,987

 

 

 
8,987

Total cash equivalents
$
22,575

 
$

 
$

 
$
22,575

 
 
 
 
 
 
 
 
Short-term investments:
 
 
 
 
 
 
 
Commercial paper
$
61,371

 
$

 
$

 
$
61,371

Corporate bonds
23,856

 
14

 
(1
)
 
23,869

U.S. Treasury and agency obligations
52,627

 
38

 
(1
)
 
52,664

Total short-term investments
$
137,854

 
$
52

 
$
(2
)
 
$
137,904


Gross unrealized losses were not material at March 31, 2020 and December 31, 2019, respectively. At March 31, 2020, we considered the extent to which any unrealized losses on our short-term investments were driven by credit risk and other factors, including market risk, and if it is more-likely-than-not that we would have to sell the security before the recovery of the amortized cost basis. Based on our assessment, we do not believe any unrealized losses represent credit losses at March 31, 2020.
At March 31, 2020, all of our short-term investments had maturities within the next twelve months.
At March 31, 2020 and December 31, 2019, cash and cash equivalents included $0.4 million of restricted cash, that was related to collateral for a lease and credit card deposits, and excluded $0.3 million of restricted cash, that was related to an account established as collateral for a lease arrangement and was included in other assets on the consolidated balance sheets.
4. 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:

10


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:
 
March 31, 2020
(in thousands)
Level 1
 
Level 2
 
Level 3
 
Total
Cash and cash equivalents
 
 
 
 
 
 
 
Money market funds
$
40,395

 
$

 
$

 
$
40,395

 
$
40,395

 
$

 
$

 
$
40,395

 
 
 
 
 
 
 
 
Short-term investments
 
 
 
 
 
 
 
Commercial paper
$

 
$
52,984

 
$

 
$
52,984

Corporate bonds

 
20,672

 

 
20,672

U.S. Treasury and agency obligations

 
45,268

 

 
45,268

 
$

 
$
118,924

 
$

 
$
118,924

 
December 31, 2019
(in thousands)
Level 1
 
Level 2
 
Level 3
 
Total
Cash and cash equivalents
 
 
 
 
 
 
 
Money market funds
$
13,588

 
$

 
$

 
$
13,588

Commercial paper

 
8,987

 

 
8,987

 
$
13,588

 
$
8,987

 
$

 
$
22,575

 
 
 
 
 
 
 
 
Short-term investments
 
 
 
 
 
 
 
Commercial paper
$

 
$
61,371

 
$

 
$
61,371

Corporate bonds

 
23,869

 

 
23,869

U.S. Treasury and agency obligations

 
52,664

 

 
52,664

 
$

 
$
137,904

 
$

 
$
137,904


We did not have any liabilities measured and recorded at fair value at March 31, 2020 or December 31, 2019.

11


5. Property and Equipment, Net
Property and equipment, net consisted of the following:
(in thousands)
March 31, 2020
 
December 31, 2019
Computer software and equipment
$
21,763

 
$
21,234

Furniture and fixtures
4,618

 
4,504

Leasehold improvements
21,701

 
16,953

Right-of-use assets under finance leases
1,866

 
1,866

Total
49,948

 
44,557

Less: accumulated depreciation and amortization
(19,414
)
 
(17,710
)
Property and equipment, net
$
30,534

 
$
26,847


Depreciation and amortization related to property and equipment was $2.0 million and $1.5 million in the three months ended March 31, 2020 and 2019, respectively.
6. Goodwill and Acquired Intangible Assets
On December 2, 2019, we acquired Indegy, Ltd. We have not yet finalized the allocation of the purchase price, which may change as additional information becomes available related to any working capital adjustment and income taxes.
At March 31, 2020 and December 31, 2019, our goodwill balance was $54.1 million, respectively.
Acquired intangible assets subject to amortization are as follows:
 
March 31, 2020
 
December 31, 2019
(in thousands)
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Acquired technology
$
17,325

 
$
(2,563
)
 
$
14,762

 
$
17,325

 
$
(2,009
)
 
$
15,316

Trade name
200

 
(33
)
 
167

 
200

 
(8
)
 
192

 
$
17,525

 
$
(2,596
)
 
$
14,929

 
$
17,525

 
$
(2,017
)
 
$
15,508


Amortization of acquired intangible assets was $0.6 million and $0.2 million in the three months ended March 31, 2020 and 2019, respectively.
At March 31, 2020, estimated future amortization of acquired intangible assets is as follows:
(in thousands)
 
Year ending December 31,
 
2020(1)
$
1,735

2021
2,306

2022
2,214

2023
2,214

2024
2,214

Thereafter
4,246

Total
$
14,929

_______________
(1)    Represents the nine months ending December 31, 2020.

12


7. Leases
We have operating leases for office facilities and finance leases for computer and office equipment. The components of lease expense were as follows:
 
Three Months Ended March 31,
(in thousands)
2020
 
2019
Operating lease cost
$
2,484

 
$
981

 
 
 
 
Finance lease cost
 
 
 
Amortization of ROU assets
$
110

 
$
153

Interest on lease liabilities
2

 
2

Total finance lease cost
$
112

 
$
155


Rent expense for short-term leases in the three months ended March 31, 2020 and 2019 was not material.
Supplemental information related to leases was as follows:
 
March 31, 2020
 
December 31, 2019
Operating leases
 
 
 
Weighted average remaining lease term
9.9 years
 
10.0 years
Weighted average discount rate
5.8%
 
5.8%
 
Three Months Ended March 31,
(in thousands)
2020
 
2019
ROU assets obtained in exchange for lease obligations
 
 
 
Operating leases
$

 
$
2,198

Finance leases

 
11


Maturities of operating lease liabilities at March 31, 2020 were as follows:
(in thousands)
 
Year ending December 31,
 
2020(1)
$
3,866

2021
6,749

2022
6,985

2023
6,993

2024
7,129

Thereafter
50,935

Total lease payments
82,657

Less: Imputed interest
(22,985
)
Less: Tenant incentives
(14,505
)
Total
$
45,167

_______________
(1)    Represents the nine months ending December 31, 2020.
8. Debt
There were no amounts outstanding under our $25.0 million revolving credit facility (“Credit Facility”) with Silicon Valley Bank in the three months ended March 31, 2020 or in 2019. Our borrowing capacity at March 31, 2020 was reduced by $2.5 million related to a standby letter of credit for the security deposit on our new headquarters lease.

13


In April 2020, the maturity date of the Credit Facility was extended by 60 days until July 3, 2020. Additionally, the Credit Facility was amended to increase the maximum amount of letters of credit that may be issued from $5.0 million to $6.5 million.
9. Stock-Based Compensation
Under the evergreen provision in our 2018 Equity Incentive Plan ("2018 Plan"), we reserved an additional 4,929,361 shares of our common stock for issuance in January 2020. At March 31, 2020, there were 17,555,416 shares available for grant under the 2018 Plan.
Stock-based compensation expense included in the consolidated statements of operations was as follows:
 
Three Months Ended March 31,
(in thousands)
2020
 
2019
Cost of revenue
$
747

 
$
652

Sales and marketing
4,496

 
3,366

Research and development
2,948

 
2,030

General and administrative
4,844

 
3,271

Total stock-based compensation expense
$
13,035

 
$
9,319


At March 31, 2020, the unrecognized stock-based compensation expense related to unvested restricted stock units was $134.5 million, which is expected to be recognized over an estimated remaining weighted average period of 3.4 years.
At March 31, 2020, the total unrecognized stock-based compensation expense related to outstanding stock options was $20.3 million, which is expected to be recognized over an estimated remaining weighted average period of 1.9 years.
At March 31, 2020, the unrecognized stock-based compensation expense related to unvested awards of restricted stock was $1.3 million, which is expected to be recognized over an estimated remaining period of 0.8 years.
Restricted Stock and Restricted Stock Units
A summary of our restricted stock and restricted stock units activity is presented below:
 
Restricted Stock
 
Restricted Stock Units
(in thousands, except for per share data)
Number
of Shares
 
Weighted
Average
Grant Date Fair Value
 
Number
of Shares
 
Weighted
Average
Grant Date Fair Value
Unvested balance at December 31, 2019
495

 
$
4.25

 
2,894

 
$
26.34

Granted

 

 
3,082

 
28.00

Vested
(99
)
 
4.25

 
(403
)
 
29.14

Forfeited

 

 
(123
)
 
26.16

Unvested balance at March 31, 2020
396

 
4.25

 
5,450

 
27.07



14


Stock Options
A summary of our stock option activity is presented below:
(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, 2019
12,939

 
$
8.38

 
7.1
 
$
201,608

Granted

 

 

 


Exercised
(635)

 
6.27

 

 
12,383

Forfeited/canceled
(190)

 
10.78

 

 


Outstanding at March 31, 2020
12,114

 
8.45

 
7.0
 
162,596

Exercisable at March 31, 2020
6,783

 
6.12

 
6.5
 
106,847


At March 31, 2020, there were 12.1 million stock options that were vested and expected to vest.
2018 Employee Stock Purchase Plan
Under the evergreen provision in our 2018 Employee Stock Purchase Plan ("2018 ESPP"), we reserved an additional 1,478,808 shares of our common stock for issuance in January 2020. At March 31, 2020, there were 5,721,517 shares reserved for issuance under the 2018 ESPP.
In the three months ended March 31, 2020, employees purchased 377,378 shares of our common stock at a weighted average price of $19.36 per share, resulting in $7.3 million of cash proceeds.
At March 31, 2020, there was $1.7 million of employee contributions to the 2018 ESPP included in accrued compensation. The unrecognized stock-based compensation expense related to our 2018 ESPP was $8.7 million, which is expected to be recognized over the remaining weighted average period of 0.8 years.
The fair value of the 2018 ESPP purchase rights was estimated on the offering or modification dates using a Black-Scholes option-pricing model and the following assumptions:
 
Three Months Ended March 31,
 
2020
 
2019
Expected term (in years)
0.5 — 2.0
 
0.5 — 2.0
Expected volatility
41.6% — 47.9%
 
35.4% — 44.6%
Risk-free interest rate
0.8% — 0.9%
 
2.5% — 2.6%
Expected dividend yield
 

10. Net Loss Per Share
The following table sets forth the computation of basic and diluted net loss per share:
 
Three Months Ended March 31,
(in thousands, except per share data)
2020
 
2019
Net loss
$
(22,977
)
 
$
(21,440
)
 
 
 
 
Weighted-average shares used to compute net loss per share
98,855

 
93,738

Net loss per share, basic and diluted
$
(0.23
)
 
$
(0.23
)


15


The following potentially dilutive securities have been excluded from the diluted per share calculations because they would have been antidilutive:
 
Three Months Ended March 31,
(in thousands)
2020
 
2019
Stock options
12,114

 
15,632

Restricted stock units
5,450

 
2,934

Restricted shares
396

 
791

Shares to be issued under the 2018 ESPP
87

 
65

Total
18,047

 
19,422


11. 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.
Revenue by region, based on the address of the end user as specified in our subscription, license or service agreements, was as follows:
 
Three Months Ended March 31,
(in thousands)
2020
 
2019
Americas
$
69,314

 
$
56,091

Europe, Middle East and Africa
23,550

 
17,307

Asia Pacific
9,784

 
6,903

Revenue
$
102,648

 
$
80,301


Customers located in the United States accounted for 62%, and 65% of revenue in the three months ended March 31, 2020 and 2019, respectively. No other country accounted for 10% or more of revenue in the periods presented.
Our property and equipment, net by geographic area is summarized as follows:
(in thousands)
March 31, 2020
 
December 31, 2019
United States
$
25,734

 
$
21,464

International
4,800

 
5,383

Property and equipment, net
$
30,534

 
$
26,847



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 Annual Report on Form 10-K for the year ended December 31, 2019, or the 10-K, filed with the Securities and Exchange Commission on February 28, 2020. 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. Such risks and uncertainties may be amplified by the COVID-19 pandemic and its potential impact on our business and the global economy. 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 a leading provider of solutions for a new category of cybersecurity that we call Cyber Exposure. Cyber Exposure is a discipline for managing, measuring and comparing 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, which is our software as a service, or SaaS, offering and Tenable.sc, which is our on-premises offering, both of which provide organizations with applications purpose-built for areas of both traditional and modern attack surfaces, including IT infrastructure and applications, cloud environments and industrial Internet of things, or IoT, and operational technology, or OT, environments. These applications are designed with views, workflows and dashboards to help identify vulnerabilities, internal and regulatory compliance violations, misconfigurations and other cybersecurity issues, prioritize these issues for remediation, and provide insightful remediation guidance.
Our enterprise platform offerings are primarily sold on a subscription basis with a one-year term. Our subscription terms are generally not longer than three years. 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.
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 enterprise platform offerings to our distributors, which in turn sell to our resellers, which then sell to end users, which we call customers.
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 Essentials, allows for vulnerability assessment over a limited number of IP addresses. We believe many of our Nessus customers begin with Nessus Essentials and subsequently upgrade to Nessus Professional, the paid version of Nessus; however, we expect many users to continue to use Nessus Essentials. 
We have experienced rapid growth in recent years. Revenue in the three months ended March 31, 2020 and 2019 was $102.6 million and $80.3 million, respectively, representing respective year-over-year growth of 28%. Our net loss in the three months ended March 31, 2020 and 2019 was $23.0 million and $21.4 million, respectively, as we continue to invest in our business and market opportunity.

17


COVID-19 Update
We are closely monitoring the impact of the COVID-19 pandemic on our customers, partners, employees and service providers. The extent to which the COVID-19 pandemic will impact our business and operations will depend on future developments that are highly uncertain. While in the near-term we may experience reductions in our billing and revenue growth rates, we are proactively managing expenditures, including reductions of non-critical and discretionary expenses, while preserving strategic investment in sales capacity and research and development. This may result in improved leverage related to gross margins as well as sales and marketing, research and development, and general and administrative expenses as a percent of revenue. For additional information on the potential effects of the COVID-19 pandemic on our business, financial condition and results of operations, see the "Liquidity and Capital Resources" section below and “Risk Factors” in Part II, Item 1A of this Form 10-Q.
Financial Highlights
Below are our key financial results:
 
Three Months Ended March 31,
(in thousands, except per share data)
2020
 
2019
Revenue
$
102,648

 
$
80,301

Loss from operations
(21,672
)
 
(22,685
)
Net loss
(22,977
)
 
(21,440
)
Net loss per share, basic and diluted
(0.23
)
 
(0.23
)
Net cash provided by (used in) operating activities
4,492

 
(874
)
Purchases of property and equipment
(614
)
 
(2,306
)
Factors Affecting Our Performance
Product Leadership
Our enterprise platform offerings 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 and ongoing development of our enterprise platform offerings that empower organizations to understand and reduce their cyber exposure. Additionally, we continue to expand the capabilities of our Nessus products, specifically as they relate 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 enterprise platform customers will increase future opportunities for renewals and follow-on sales. We believe that we have significant room to increase our 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 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, IoT and OT, they often increase the scope of their subscriptions and/or add additional perpetual licenses to our enterprise platforms.
We are also focused on upselling customers from Nessus Professional to our enterprise platform offerings. Nessus Professional customers are typically organizations or independent security consultants that use Nessus Professional for a single vulnerability assessment at a point in time. We seek to convert these customers to our enterprise platform offerings, which provide continuous visibility and insights into their attack surface, as their needs develop.
Further, we plan to expand existing platform capabilities and launch new products, 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. However, 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, current economic conditions or overall changes in our and our clients' spending levels.
We evaluate our ability to expand sales with our existing customers by assessing our dollar-based net expansion rate. We calculate our dollar-based net expansion rate as follows:
Denominator: To calculate our dollar-based net expansion rate as of the end of a reporting period, we first determine the annual recurring revenue, or ARR, from all active subscriptions and maintenance from perpetual licenses as of the last day of the same reporting period in the prior year. This represents recurring payments that we expect to receive in the next 12-month period from the cohort of customers that existed on the last day of the same reporting period in the prior year.
Numerator: We measure the ARR for that same cohort of customers representing all subscriptions and maintenance from perpetual licenses based on customer orders as of the end of the reporting period.
We calculate dollar-based net expansion rate by dividing the numerator by the denominator.
While our dollar-based net expansion rate may decline or fluctuate from quarter to quarter based on the result of a number of factors, including our existing customers' satisfaction with our solutions, the pricing of our solutions and the ability of competing solutions and the pricing thereof, our dollar-based net expansion rate has historically exceeded, and we expect that it will continue to exceed, 110%.
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. We may also explore acquisitions of businesses, technology and/or development personnel that will expand and enhance the functionality of our platform offerings. 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 ultimately 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 and financial 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

19


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.
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.
Our adoption of Accounting Standards Codification Topic 606, Revenue From Contracts With Customers at January 1, 2017 resulted in a $55.0 million increase in deferred revenue primarily related to the deferral of perpetual license revenue. This cumulative adjustment to deferred revenue at January 1, 2017 increased calculated current billings by $16.7 million, $11.8 million and $5.6 million in 2017, 2018 and 2019, respectively, and is expected to increase our calculated current billings by $1.9 million in 2020.
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 March 31,
(in thousands)
2020
 
2019
Revenue
$
102,648

 
$
80,301

Add: Deferred revenue (current), end of period
270,916

 
214,508

Less: Deferred revenue (current), beginning of period
(274,348
)
 
(213,644
)
Calculated current billings
$
99,216

 
$
81,165

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

20


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 flows from 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 net cash provided by (used in) operating activities and our other GAAP financial measures.
The following table presents a reconciliation of net cash provided by (used in) operating activities, the most directly comparable financial measure calculated in accordance with GAAP, to free cash flow:
 
Three Months Ended March 31,
(in thousands)
2020
 
2019
Net cash provided by (used in) operating activities
$
4,492

 
$
(874
)
Purchases of property and equipment
(614
)
 
(2,306
)
Free cash flow(1)
$
3,878

 
$
(3,180
)
_______________
(1)    Free cash flow included a reduction related to employee stock purchase plan activity of $3.7 million and $4.9 million in the three months ended March 31, 2020 and 2019, respectively. The three months ended March 31, 2020 also included $0.7 million of acquisition-related payments for Indegy and $0.1 million of capital expenditures for our new headquarters.
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 March 31,
 
2020
 
2019
 
Change (%)
Number of new enterprise platform customers added in period(1)
319
 
311
 
3%
_______________
(1)    We define an enterprise platform customer as a customer that has licensed Tenable.io or Tenable.sc 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 March 31,
 
2020
 
2019
 
Change (%)
Number of customers with $100,000 and greater in annual contract value at end of period
665
 
494
 
35%
Non-GAAP Loss from Operations and Non-GAAP Operating Margin
We use non-GAAP loss from operations along with non-GAAP operating margin as key indicators of our financial performance. We define these non-GAAP financial measures as their respective GAAP measures, excluding the effects of stock-based compensation, acquisition-related expenses and amortization of acquired intangible assets. Acquisition-related expenses include transaction expenses and costs related to the transfer of acquired intellectual property.
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

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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 March 31,
(dollars in thousands)
2020
 
2019
Loss from operations
$
(21,672
)
 
$
(22,685
)
Stock-based compensation
13,035

 
9,319

Acquisition-related expenses
339

 

Amortization of acquired intangible assets
579

 
151

Non-GAAP loss from operations
$
(7,719
)
 
$
(13,215
)
 
 
 
 
Operating margin
(21
)%
 
(28
)%
Non-GAAP operating margin
(8
)%
 
(16
)%
Non-GAAP Net Loss and Non-GAAP Net Loss Per Share
We use non-GAAP net loss, which excludes the effect of stock-based compensation, acquisition-related expenses and amortization of acquired intangible assets, as well as the related tax impact, to calculate non-GAAP net loss per share. We believe that these non-GAAP measures provide important information to management and investors because they facilitate comparisons of our core operating results over multiple periods.
The following table presents a reconciliation of net loss and net loss per share, the most comparable financial measures calculated in accordance with GAAP, to non-GAAP net loss and non-GAAP net loss per share:
 
Three Months Ended March 31,
(in thousands, except for per share amounts)
2020
 
2019
Net loss
$
(22,977
)
 
$
(21,440
)
Acquisition-related expenses
339

 

Stock-based compensation
13,035

 
9,319

Tax impact of stock-based compensation(1)
198

 
(649
)
Amortization of acquired intangible assets(2)
579

 
151

Non-GAAP net loss
$
(8,826
)
 
$
(12,619
)
 
 
 
 
Net loss per share, basic and diluted
$
(0.23
)
 
$
(0.23
)
Acquisition-related expenses

 

Stock-based compensation
0.13

 
0.10

Tax impact of stock-based compensation(1)

 

Amortization of acquired intangible assets(2)
0.01

 

Non-GAAP net loss per share, basic and diluted
$
(0.09
)
 
$
(0.13
)
 
 
 
 
Weighted-average shares used to compute net loss per share, basic and diluted
98,855

 
93,738

________________
(1)    The tax impact of stock-based compensation is based on the tax treatment for the applicable tax jurisdictions.
(2)    The tax impact of amortization of acquired intangible assets is not material.

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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.
Our subscription arrangements generally have annual or multi-year contractual terms 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. 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 cloud infrastructure costs, the costs related to professional services and training, depreciation, amortization of acquired and developed technology 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 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 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.

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We expect our gross profit to increase in absolute dollars but our gross margin to decrease, as we expect revenue from our cloud-based subscriptions to increase as a percentage of revenue, although our gross margin could fluctuate from period to period depending on the interplay of all of these factors.
Operating Expenses
Our operating expenses consist of sales and marketing, research and development and general and administrative expenses. Personnel costs are the most significant component of operating expenses and consist of salaries, benefits, bonuses, payroll taxes and stock-based compensation expense. Operating expenses also include depreciation and amortization as well as allocated overhead costs, including IT and facilities costs.
Sales and Marketing
Sales and marketing expense consists of personnel costs, sales commissions, marketing programs, travel and entertainment, expenses for conferences and events and allocated overhead costs. We capitalize sales commissions, including related incremental fringe benefit costs, and recognize the expense over an estimated period of benefit, which ranges between three and four years for subscription arrangements and five years for perpetual license arrangements. Sales commissions on contract renewals are capitalized and amortized ratably over the contract term, with the exception of contracts with renewal periods that are one year or less, in which case the incremental costs are expensed as incurred. Sales commissions on professional services arrangements are expensed as incurred as the contractual period of these arrangements are generally less that one year.
We intend to continue to make 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. 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, including sales commissions, which may fluctuate depending on the mix of sales and related expense recognition.
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 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, allocated overhead and acquisition-related costs.
We expect our general and administrative expense to continue to increase in absolute dollars for the foreseeable future 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.

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Interest Income, Net
Interest income, net consists primarily of interest income earned on cash and cash equivalents and short-term investments and interest expense in connection with fees for our unused revolving credit facility.
Other Expense, Net
Other expense, net consists primarily of foreign currency remeasurement and transaction gains and losses.
Provision for Income Taxes
Provision for income taxes consists of income taxes in certain foreign jurisdictions in which we conduct business and the related withholding taxes on sales with customers. 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:
 
Three Months Ended March 31,
(in thousands)
2020
 
2019
Revenue
$
102,648

 
$
80,301

Cost of revenue(1)
18,701

 
13,226

Gross profit
83,947