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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, 2021
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)
6100 Merriweather Drive, Columbia, Maryland, 21044
(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 classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.01 per shareTENBThe 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 April 23, 2021 was 105,591,098.



TENABLE HOLDINGS, INC.
TABLE OF CONTENTS
Page
 

2

Table of Contents
PART I. FINANCIAL INFORMATION
Item 1.        Financial Statements
TENABLE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
March 31, 2021December 31, 2020
(in thousands, except per share data)(unaudited)
Assets
Current assets:
Cash and cash equivalents$228,386 $178,223 
Short-term investments
111,945 113,623 
Accounts receivable (net of allowance for doubtful accounts of $326 and $261 at March 31, 2021 and December 31, 2020, respectively)
82,822 115,342 
Deferred commissions31,936 32,143 
Prepaid expenses and other current assets42,570 44,462 
Total current assets 497,659 483,793 
Property and equipment, net 38,910 38,920 
Deferred commissions (net of current portion)45,364 46,733 
Operating lease right-of-use assets38,364 39,426 
Acquired intangible assets, net12,614 13,193 
Goodwill54,414 54,414 
Other assets 13,522 14,110 
Total assets $700,847 $690,589 
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued expenses$9,555 $5,731 
Accrued compensation26,787 35,509 
Deferred revenue325,113 328,819 
Operating lease liabilities4,298 3,815 
Other current liabilities1,097 1,028 
Total current liabilities 366,850 374,902 
Deferred revenue (net of current portion) 103,749 105,691 
Operating lease liabilities (net of current portion)53,201 54,529 
Other liabilities 5,108 4,802 
Total liabilities 528,908 539,924 
Stockholders’ equity:
Common stock (par value: $0.01; 500,000 shares authorized; 105,513 and 103,715 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively)
1,055 1,037 
Additional paid-in capital786,476 757,470 
Accumulated other comprehensive income8 10 
Accumulated deficit(615,600)(607,852)
Total stockholders’ equity171,939 150,665 
Total liabilities and stockholders’ equity$700,847 $690,589 
The accompanying notes are an integral part of these consolidated financial statements.
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Table of Contents
TENABLE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31,
(in thousands, except per share data)20212020
Revenue$123,189 $102,648 
Cost of revenue22,073 18,701 
Gross profit101,116 83,947 
Operating expenses:
Sales and marketing58,635 59,855 
Research and development26,838 26,831 
General and administrative21,445 18,933 
Total operating expenses106,918 105,619 
Loss from operations(5,802)(21,672)
Interest (expense) income, net(28)734 
Other expense, net(66)(960)
Loss before income taxes(5,896)(21,898)
Provision for income taxes1,852 1,079 
Net loss$(7,748)$(22,977)
Net loss per share, basic and diluted
$(0.07)$(0.23)
Weighted-average shares used to compute net loss per share, basic and diluted
104,531 98,855 
The accompanying notes are an integral part of these consolidated financial statements.
4

Table of Contents
TENABLE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
Three Months Ended March 31,
(in thousands)20212020
Net loss$(7,748)$(22,977)
Other comprehensive (loss) income, net of tax:
Unrealized (losses) gains on available-for-sale securities(2)113 
Other comprehensive (loss) income(2)113 
Comprehensive loss$(7,750)$(22,864)
The accompanying notes are an integral part of these consolidated financial statements.

5

Table of Contents
TENABLE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income
Total
Stockholders’
Equity
Common StockAccumulated Deficit
(in thousands)SharesAmount
Balance at December 31, 2020103,715 $1,037 $757,470 $10 $(607,852)$150,665 
Exercise of stock options607 6 4,009 — — 4,015 
Vesting of restricted stock units792 8 (8)— —  
Issuance of common stock under employee stock purchase plan399 4 8,042 — — 8,046 
Stock-based compensation— — 16,963 — — 16,963 
Other comprehensive loss— — — (2)— (2)
Net loss— — — — (7,748)(7,748)
Balance at March 31, 2021105,513 $1,055 $786,476 $8 $(615,600)$171,939 
Balance at December 31, 201998,587 $986 $662,990 $50 $(565,121)$98,905 
Exercise of stock options635 6 3,972 — — 3,978 
Vesting of restricted stock units403 4 (4)— —  
Issuance of common stock under employee stock purchase plan378 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, 2020100,003 $1,000 $687,311 $163 $(588,098)$100,376 
The accompanying notes are an integral part of these consolidated financial statements.
6

Table of Contents
TENABLE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
(in thousands)20212020
Cash flows from operating activities:
Net loss$(7,748)$(22,977)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization2,816 2,678 
Stock-based compensation16,952 13,035 
Other313 515 
Changes in operating assets and liabilities:
Accounts receivable32,455 20,813 
Prepaid expenses and other assets5,427 5,958 
Accounts payable, accrued expenses and accrued compensation(6,003)(9,608)
Deferred revenue(5,648)(5,036)
Other current and noncurrent liabilities61 (886)
Net cash provided by operating activities38,625 4,492 
Cash flows from investing activities:
Purchases of property and equipment(1,061)(614)
Purchases of short-term investments(29,361)(58,831)
Sales and maturities of short-term investments31,000 78,175 
Net cash provided by investing activities578 18,730 
Cash flows from financing activities:
Proceeds from stock issued in connection with the employee stock purchase plan8,046 7,307 
Proceeds from the exercise of stock options4,015 3,978 
Other financing activities(3)(4)
Net cash provided by financing activities12,058 11,281 
Effect of exchange rate changes on cash and cash equivalents and restricted cash(1,068)(1,097)
Net increase in cash and cash equivalents and restricted cash50,193 33,406 
Cash and cash equivalents and restricted cash at beginning of period178,463 74,665 
Cash and cash equivalents and restricted cash at end of period$228,656 $108,071 
Supplemental disclosure of cash flow information:
Cash paid for interest$71 $41 
Cash paid for income taxes, net of refunds3,470 1,203 
Supplemental cash flow information related to leases:
Cash payments for operating leases
$1,518 $1,263 
The accompanying notes are an integral part of these consolidated financial statements.
7

Table of Contents
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 platform offerings provide broad visibility into security issues such as vulnerabilities, misconfigurations, internal and regulatory compliance violations and other indicators of the state of an organization’s security across IT infrastructure and applications, cloud environments and industrial internet of things and operational technology environments.
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 2020 Annual Report on Form 10-K ("10-K") filed with the Securities and Exchange Commission on February 23, 2021. 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, 2021 are not necessarily indicative of the operating results expected for the year ending December 31, 2021 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, 2021, there were no material changes to our significant accounting policies from those described in our 10-K.
Recently Adopted Accounting Pronouncements
We adopted Accounting Standards Update ("ASU") No. 2019-12 - Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, effective January 1, 2021. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements. This ASU eliminated previously allowed exceptions and clarified existing guidance in the accounting for income taxes, including in the areas of franchise taxes, the tax basis of goodwill and interim period effects of changes in tax laws.
8

Table of Contents
2. Revenue
Disaggregation of Revenue
The following table presents a summary of revenue:
Three Months Ended March 31,
(in thousands)20212020
Subscription revenue$107,402 $86,390 
Perpetual license and maintenance revenue12,405 13,419 
Professional services and other revenue3,382 2,839 
Revenue$123,189 $102,648 
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 92% and 91% of revenue through our channel network in the three months ended March 31, 2021 and 2020, respectively. One of our distributors accounted for 41% and 43% of revenue in the three months ended March 31, 2021 and 2020, respectively. That same distributor accounted for 41% of accounts receivable at March 31, 2021 and December 31, 2020.
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, 2021 and 2020, we recognized revenue of $114.9 million and $95.3 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, 2021, the future estimated revenue related to unsatisfied performance obligations was $441.1 million, of which approximately 75% is expected to be recognized as revenue over the succeeding twelve months, and the remainder is 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)20212020
Beginning balance$78,876 $72,265 
Capitalization of contract acquisition costs7,224 6,121 
Amortization of deferred contract acquisition costs(8,800)(7,644)
Ending balance$77,300 $70,742 
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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, 2021
(in thousands)Amortized CostUnrealized GainUnrealized LossEstimated Fair Value
Cash equivalents:
Money market funds$65,968 $— $— $65,968 
Total cash equivalents$65,968 $— $— $65,968 
Short-term investments:
Commercial paper$69,833 $ $ $69,833 
Supranational bonds4,502  (1)4,501 
U.S. Treasury and agency obligations37,602 9  37,611 
Total short-term investments$111,937 $9 $(1)$111,945 
December 31, 2020
(in thousands)Amortized CostUnrealized GainUnrealized LossEstimated Fair Value
Cash equivalents:
Money market funds$44,153 $— $— $44,153 
Commercial paper4,500 — — 4,500 
Total cash equivalents$48,653 $— $— $48,653 
Short-term investments:
Commercial paper$71,425 $ $ $71,425 
Corporate bonds4,502 3  4,505 
U.S. Treasury and agency obligations37,686 7  37,693 
Total short-term investments$113,613 $10 $ $113,623 
At March 31, 2021, all of our short-term investments had maturities within the next twelve months.
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:
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.
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The following tables summarize assets that are measured at fair value on a recurring basis:
March 31, 2021
(in thousands)Level 1Level 2Level 3Total
Cash and cash equivalents
Money market funds$65,968 $ $ $65,968 
$65,968 $ $ $65,968 
Short-term investments
Commercial paper$ $69,833 $ $69,833 
Supranational bonds 4,501  4,501 
U.S. Treasury and agency obligations 37,611  37,611 
$ $111,945 $ $111,945 
December 31, 2020
(in thousands)Level 1Level 2Level 3Total
Cash and cash equivalents
Money market funds$44,153 $ $ $44,153 
Commercial paper 4,500  4,500 
$44,153 $4,500 $ $48,653 
Short-term investments
Commercial paper$ $71,425 $ $71,425 
Corporate bonds 4,505  4,505 
U.S. Treasury and agency obligations 37,693  37,693 
$ $113,623 $ $113,623 
We did not have any liabilities measured and recorded at fair value at March 31, 2021 or December 31, 2020.
5. Property and Equipment, Net
Property and equipment, net consisted of the following:
(in thousands)
March 31, 2021December 31, 2020
Computer software and equipment
$23,794$22,930
Furniture and fixtures
6,0276,011
Leasehold improvements
27,14026,210
Right-of-use assets under finance leases
1,3441,571
Total
58,30556,722
Less: accumulated depreciation and amortization
(19,395)(17,802)
Property and equipment, net
$38,910$38,920
Depreciation and amortization related to property and equipment was $2.2 million and $2.0 million in the three months ended March 31, 2021 and 2020, respectively.
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6. Goodwill and Acquired Intangible Assets
At March 31, 2021 and December 31, 2020, our goodwill balance was $54.4 million.
Acquired intangible assets subject to amortization are as follows:
March 31, 2021December 31, 2020
(in thousands)Gross Carrying AmountAccumulated AmortizationNet Carrying AmountGross Carrying AmountAccumulated AmortizationNet Carrying Amount
Acquired technology$17,325 $(4,777)$12,548 $17,325 $(4,224)$13,101 
Trade name200 (134)66 200 (108)92 
$17,525 $(4,911)$12,614 $17,525 $(4,332)$13,193 
Amortization of acquired intangible assets was $0.6 million in each of the three months ended March 31, 2021 and 2020.
At March 31, 2021, estimated future amortization of acquired intangible assets is as follows:
(in thousands)
Year ending December 31,
2021(1)
$1,727 
2022
2,214 
2023
2,214 
2024
2,214 
2025
2,214 
Thereafter
2,031 
Total
$12,614 
_______________
(1)    Represents the nine months ending December 31, 2021.
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)
20212020
Operating lease cost
$1,869 $2,484 
Finance lease cost
Amortization of ROU assets
$2 $110 
Interest on lease liabilities
1 2 
Total finance lease cost
$3 $112 
Rent expense for short-term leases in the three months ended March 31, 2021 and 2020 was not material.
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Supplemental information related to leases was as follows:
March 31, 2021December 31, 2020
Operating leases
Weighted average remaining lease term
10.0 years10.0 years
Weighted average discount rate
5.6%5.6%
During the three months ended March 31, 2021 and 2020, we did not obtain any right of use assets in exchange for lease liabilities.
Maturities of operating lease liabilities at March 31, 2021 were as follows:
(in thousands)
Year ending December 31,
2021(1)
$2,397 
2022
8,007 
2023
7,676 
2024
7,830 
2025
7,394 
Thereafter
44,490 
Total lease payments
77,794 
Less: Imputed interest
(20,295)
Total
$57,499 
_______________
(1)    Represents the nine months ending December 31, 2021.
8. Debt
In July 2020, we entered into a $45.0 million senior secured credit facility (“2020 Credit Facility”) with Silicon Valley Bank in connection with the expiration of our $25.0 million revolving credit facility. The 2020 Credit Facility bears interest at either LIBOR plus 2%, with a 1% LIBOR floor, or the base rate plus 1%, and terminates on July 24, 2022. A commitment fee of 0.35% per annum is payable quarterly in arrears based on the unused portion. The obligations under the 2020 Credit Facility are secured by a lien on our tangible and intangible property except intellectual property and certain subsidiaries and by a pledge of all of the equity interests of our material direct and indirect domestic subsidiaries and 65% of each class of capital stock of any material first-tier foreign subsidiaries, subject to limited exceptions. The 2020 Credit Facility includes a $45.0 million uncommitted expansion, as well as a $10.0 million sublimit for the issuance of letters of credit and a swingline sub-facility of up to $10.0 million, and has a financial covenant requiring a minimum consolidated quick ratio of at least 1.5:1.0 on the last day of each quarter.
During the three months ended March 31, 2021, there were no amounts outstanding under the 2020 Credit Facility. At March 31, 2021, we were in compliance with the financial covenant and our borrowing capacity was reduced by $5.5 million related to standby letters of credit.
9. Stock-Based Compensation
Under the evergreen provision in our 2018 Equity Incentive Plan ("2018 Plan"), in January 2021 we reserved an additional 5,185,762 shares of our common stock for issuance. At March 31, 2021, there were 20,955,023 shares available for grant under the 2018 Plan.
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Stock-based compensation expense included in the consolidated statements of operations was as follows:
Three Months Ended March 31,
(in thousands)
20212020
Cost of revenue
$937$747
Sales and marketing
6,2964,496
Research and development
4,1562,948
General and administrative
5,5634,844
Total stock-based compensation expense
$16,952$13,035
At March 31, 2021, the unrecognized stock-based compensation expense related to unvested restricted stock units ("RSUs") was $186.1 million, which is expected to be recognized over an estimated remaining weighted average period of 3.2 years.
At March 31, 2021, the unrecognized stock-based compensation expense related to outstanding stock options was $8.1 million, which is expected to be recognized over an estimated remaining weighted average period of 1.1 years.
Restricted Stock and RSUs
A summary of our restricted stock and RSU activity is presented below:
Restricted StockRSUs
(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, 202099$4.25 4,490$28.13 
Granted
 2,24443.88 
Vested
(99)4.25 (792)27.92 
Forfeited
 (226)29.63 
Unvested balance at March 31, 2021 5,71634.28 
Stock Options
A summary of our stock option activity is presented below:
(in thousands, except for exercise prices and years)
Number
of Shares
Weighted
Average
Exercise Price
Weighted-Average Remaining Contractual Term (in years)
Aggregate Intrinsic Value
Outstanding at December 31, 20209,441$8.56 6.4$412,547
Granted
 
Exercised
(607)6.61 23,631
Forfeited/canceled
(20)14.74 
Outstanding at March 31, 20218,8148.68 6.2242,384
Exercisable at March 31, 20216,5456.70 5.9192,978
At March 31, 2021, there were 8.8 million stock options that were vested and expected to vest.
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2018 Employee Stock Purchase Plan
Under the evergreen provision in our 2018 Employee Stock Purchase Plan ("2018 ESPP"), in January 2021 we reserved an additional 1,555,728 shares of our common stock for issuance. At March 31, 2021, there were 6,587,717 shares reserved for issuance under the 2018 ESPP.
In the three months ended March 31, 2021, employees purchased 399,187 shares of our common stock at a weighted average price of $20.16 per share, resulting in $8.0 million of cash proceeds.
At March 31, 2021, there was $1.3 million of employee contributions to the 2018 ESPP included in accrued compensation. At March 31, 2021, the unrecognized stock-based compensation expense related to our 2018 ESPP was $4.3 million, which is expected to be recognized over an estimated weighted average period of 0.7 years.
The fair value of the 2018 ESPP purchase rights was estimated on the offering or modification dates using a Black-Scholes option-pricing model and the following assumptions:
Three Months Ended March 31,
20212020
Expected term (in years)
0.52.0
0.52.0
Expected volatility
52.0% — 59.4%
41.6% — 47.9%
Risk-free interest rate
0.1%
0.8% — 0.9%
Expected dividend yield
As we now have sufficient history as a public company, in the three months ended March 31, 2021 we began using the volatility of our common stock to calculate expected volatility. Previously, we used the volatility of the common stock of similar peer companies.
10. Net Loss Per Share
The following table sets forth the computation of basic and diluted net loss per share:
Three Months Ended March 31,
(in thousands, except per share data)20212020
Net loss$(7,748)$(22,977)
Weighted-average shares used to compute net loss per share
104,531 98,855 
Net loss per share, basic and diluted
$(0.07)$(0.23)
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)20212020
Stock options8,814 12,114 
RSUs5,716 5,450 
Shares to be issued under the 2018 ESPP58 87 
Restricted stock 396 
Total14,588 18,047 
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11. Income Taxes
The provision for income taxes included income taxes in certain foreign jurisdictions in which we conduct business and the related withholding taxes on sales with customers. The provision for the three months ended March 31, 2021 was impacted by discrete items, including $2.8 million of current expense from the restructuring of our research and development operations in Israel partially offset by $2.6 million of discrete benefits, primarily related to a Supreme Court decision in India on the taxability of software license payments to nonresidents and the associated withholding taxes.
12. 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)20212020
The Americas$80,595 $69,314 
Europe, Middle East and Africa29,266 23,550 
Asia Pacific13,328 9,784 
Revenue$123,189 $102,648 
Customers located in the United States accounted for 59% and 62% of revenue in the three months ended March 31, 2021 and 2020, 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, 2021December 31, 2020
United States$35,714 $35,406 
International3,196 3,514 
Property and equipment, net$38,910 $38,920 
13. Subsequent Events
In April 2021, we acquired Alsid SAS ("Alsid"), a leader in active directory security. Active directory is the basis for managing user permissions across on-premises and hybrid cloud deployments and is foundational to the security of cloud workloads, security remote work, and adopting zero trust architectures. We acquired Alsid for a total purchase price of $98 million in cash, subject to customary purchase price adjustments.
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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, 2020, or the 10-K, filed with the Securities and Exchange Commission on February 23, 2021. This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or 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 Cyber Exposure solutions. Cyber Exposure is a discipline for managing, measuring and comparing cybersecurity risk in the digital era.
Our enterprise platform offerings include Tenable.io, which is our cloud-delivered software as a service, or SaaS, offering and Tenable.sc, which is our on-premises offering, both of which provide organizations with a risk-based view of traditional and modern attack surfaces. These applications are designed with views, workflows and dashboards to deliver a complete and continuous view of all assets, both known and previously unknown, and any associated vulnerabilities, internal and regulatory compliance violations, misconfigurations and other cybersecurity issues, prioritize these issues for remediation based on risk assessment and predictive analytics, and provide insightful remediation guidance.
Our enterprise platform offerings also include Tenable.ot, which is our on-premises solution that provides threat detection and mitigation, asset tracking, vulnerability management, and configuration control capabilities to protect operational technology, or OT, environments, including industrial networks. Tenable.ot is sold as a stand-alone solution and integrates with Tenable.io and Tenable.sc.
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 recognize revenue ratably 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 most widely deployed vulnerability assessment solutions in the cybersecurity industry. Nessus, which is the technology that underpins our enterprise platform offerings, is designed to quickly and accurately identify security vulnerabilities, configuration 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 a significant number of users to continue to use Nessus Essentials.
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There have been more than 2.5 million cumulative unique downloads, which refers to an individual email address utilized to register for the use of Nessus Essentials. We believe that the cumulative number of unique downloads of the free version of Nessus is representative of our brand recognition among cybersecurity professionals and that continued growth in this number suggests broader awareness among potential customers. While we believe that the cumulative number of unique downloads may provide an indication of the growth and scale of our thought leadership and brand awareness, we do not expect this metric to necessarily correlate to future revenue growth opportunities, and we do not consider this metric a measure of our operating performance.
Revenue in the three months ended March 31, 2021 and 2020 was $123.2 million and $102.6 million, respectively, representing year-over-year growth of 20%. Our recurring revenue, which includes revenue from subscription arrangements for software and cloud-based solutions and maintenance associated with perpetual licenses, represented 94%, and 93% of revenue in the three months ended March 31, 2021 and 2020, respectively. Our net loss in the three months ended March 31, 2021 and 2020 was $7.7 million and $23.0 million, respectively, as we continue to invest in our business and market opportunity. Our cash flows from operating activities were $38.6 million and $4.5 million in the three months ended March 31, 2021 and 2020, respectively.
COVID-19 Update
We continue to monitor the impact of the COVID-19 pandemic on our customers, partners, employees and service providers. While in the near term we may experience reductions in our billing and revenue growth rates, we are proactively managing our expenditures, including reductions of non-critical and discretionary expenses such as travel, meeting and facility usage costs, while preserving strategic investments in sales capacity and research and development. This has and may continue to 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. The full extent to which the COVID-19 pandemic will impact our business and operations will depend on future developments that are highly uncertain. We expect to incur additional costs when we resume business-related travel and employees return to our office locations, the timing and extent of which remains unknown. 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)20212020
Revenue$123,189 $102,648 
Loss from operations(5,802)(21,672)
Net loss(7,748)(22,977)
Net loss per share, basic and diluted
(0.07)(0.23)
Net cash provided by operating activities38,625 4,492 
Purchases of property and equipment(1,061)(614)
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.
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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 the number of 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 will continue to invest in our partner network and sales and marketing capability in order to grow domestically and internationally.
Retaining and Expanding Revenue from Existing Customers
Our enterprise platform offerings utilize IT asset-based or IP address-based pricing models. Once enterprise customers have licensed our platform offerings, they typically seek broader coverage over their traditional IT assets, including networking infrastructure, desktops and on-premises servers. As customers launch new applications or migrate existing applications to the cloud and deploy web applications, containers, IoT and OT, they often increase the scope of their subscriptions and/or add additional perpetual licenses to our enterprise platforms.
We are also focused on upselling customers from Nessus Professional to our enterprise platform offerings. Nessus 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 existing customers by assessing our dollar-based net expansion rate on a last twelve months, or LTM, basis. We have historically calculated 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.
Our dollar-based net expansion rate for the three-months ended March 31, 2021 exceeded 110% on an LTM basis, which was impacted by a more moderate pace of IT asset and IP address expansion in the current economic
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environment, and declined from the comparable prior year period. Our dollar-based net expansion rate may decline further or fluctuate from quarter to quarter if our existing customers choose to reduce or delay technology spending in response to economic conditions resulting from the COVID-19 pandemic, or as a result of a number of other factors, including our existing customers' satisfaction with our solutions, the pricing of our solutions and the ability of competing solutions and the pricing thereof.
We have recently utilized an alternative dollar-based net expansion rate to assess our ability to expand sales with existing customers and evaluate the performance of our sales team. This alternative dollar-based net expansion rate is based on the methodology described above, but excludes the annual contract value of prior period multiyear sales from ARR in the numerator and the denominator of the calculation. We believe this methodology more closely aligns with the renewal and expansion goals established for our sales team, because it measures net expansion by customers with contracts up for renewal during the period. Applying this methodology would have increased the dollar-based net expansion rate by three to five percentage points for the three months ended March 31, 2020, June 30, 2020, September 30, 2020, December 31, 2020 and March 31, 2021.
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 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. Variability in total
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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. Calculated current billings in any one period may be impacted by the overall timing of sales, including early renewals, as well as the timing and amount of multi-year prepaid contracts, which could favorably or unfavorably impact year-over-year comparisons. For example, 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. Our calculation of calculated current billings may be different from other companies that report similar financial measures. Because of these and other limitations, you should consider calculated current billings along with revenue and our other GAAP financial results.
The following table presents a reconciliation of revenue, the most directly comparable financial measure calculated in accordance with GAAP, to calculated current billings:
Three Months Ended March 31,
(in thousands)20212020
Revenue$123,189 $102,648 
Add: Deferred revenue (current), end of period325,113 270,916 
Less: Deferred revenue (current), beginning of period(328,819)(274,348)
Calculated current billings$119,483 $99,216 
Free Cash Flow
We use the non-GAAP measure of free cash flow, which we define as GAAP net cash flows from operating activities reduced by purchases of property and equipment. We believe free cash flow is an important liquidity measure of the cash (if any) that is available, after purchases of property and equipment, for investment in our business and to make acquisitions. We believe that free cash flow is useful to investors as a liquidity measure because it measures our ability to generate or use cash.
Our use of free cash flow has limitations as an analytical tool and you should not consider it in isolation or as a substitute for an analysis of our results under GAAP. First, free cash flow is not a substitute for net cash 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 operating activities and our other GAAP financial measures.
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The following table presents a reconciliation of net cash provided by operating activities, the most directly comparable financial measure calculated in accordance with GAAP, to free cash flow:
Three Months Ended March 31,
(in thousands)20212020
Net cash provided by operating activities$38,625 $4,492 
Purchases of property and equipment(1,061)(614)
Free cash flow(1)
$37,564 $3,878 
_______________
(1)    Free cash flow for the periods presented was impacted by:
Three Months Ended March 31,
(in millions)20212020
Employee stock purchase plan activity$(5.0)$(3.7)
Acquisition-related expenses(1.7)(0.7)
Tax payment on intra-entity asset transfer2.8 — 
Capital expenditures related to new headquarters(0.2)(0.1)
Free cash flow for the three months ended March 31, 2021 was benefited by approximately $5 million as a result of the accelerated timing of payments for insurance and professional fees in the three months ended December 31, 2020.
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,
20212020Change (%)
Number of new enterprise platform customers added in period(1)
3313194%
_______________
(1)    We define an enterprise platform customer as a customer that has licensed Tenable.io, Tenable.sc or Tenable.ot 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,
20212020Change (%)
Number of customers with $100,000 and greater in annual contract value at end of period
86666530%
Non-GAAP Income (Loss) from Operations and Non-GAAP Operating Margin
We use non-GAAP income (loss) from operations along with non-GAAP operating margin as key indicators of our financial performance. We define these non-GAAP financial measures as their respective GAAP measures, excluding the effects of stock-based compensation, acquisition-related expenses and amortization of acquired intangible assets. Acquisition-related expenses include transaction expenses and costs related to the transfer of acquired intellectual property.
We believe that these non-GAAP financial measures provide useful information about our core operating results over multiple periods. There are a number of limitations related to the use of the non-GAAP financial measures as compared to GAAP loss from operations and operating margin, including that non-GAAP income (loss) from operations and non-GAAP operating margin exclude stock-based compensation expense, which has been, and will continue to be, a significant recurring expense in our business and an important part of our compensation strategy.
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The following table presents a reconciliation of loss from operations, the most directly comparable financial measure calculated in accordance with GAAP, to non-GAAP income (loss) from operations, and operating margin, the most directly comparable financial measure calculated in accordance with GAAP, to non-GAAP operating margin:
Three Months Ended March 31,
(dollars in thousands)20212020
Loss from operations$(5,802)$(21,672)
Stock-based compensation16,952 13,035 
Acquisition-related expenses2,158 339 
Amortization of acquired intangible assets579 579 
Non-GAAP income (loss) from operations$13,887 $(7,719)
Operating margin(5)%(21)%
Non-GAAP operating margin11 %(8)%
Non-GAAP Net Income (Loss) and Non-GAAP Earnings (Loss) Per Share
We use non-GAAP net income (loss), which excludes the effect of stock-based compensation, acquisition-related expenses, amortization of acquired intangible assets, as well as the related tax impact, and the tax impact of intra-entity asset transfers resulting from the internal restructuring of legal entities, to calculate non-GAAP earnings (loss) per share. We believe that these non-GAAP measures provide important information to management and investors because they facilitate comparisons of our core operating results over multiple periods.
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The following table presents a reconciliation of net loss and net loss per share, the most comparable financial measures calculated in accordance with GAAP, to non-GAAP net income (loss) and non-GAAP earnings (loss) per share:
Three Months Ended March 31,
(in thousands, except for per share amounts)20212020
Net loss$(7,748)$(22,977)
Stock-based compensation16,952 13,035 
Tax impact of stock-based compensation(1)
(4)198 
Acquisition-related expenses(2)
2,158 339 
Amortization of acquired intangible assets(2)
579 579 
Tax impact of intra-entity asset transfer(3)
2,808 — 
Non-GAAP net income (loss)$14,745 $(8,826)
Net loss per share, diluted
$(0.07)$(0.23)
Stock-based compensation0.16 0.13 
Tax impact of stock-based compensation(1)
— — 
Acquisition-related expenses(2)
0.02 — 
Amortization of acquired intangible assets(2)
— 0.01 
Tax impact of intra-entity asset transfer(3)
0.03 — 
Adjustment to diluted earnings per share(4)
(0.01)— 
Non-GAAP earnings (loss) per share, diluted$0.13 $(0.09)
Weighted-average shares used to compute GAAP net loss per share, diluted
104,53198,855
Weighted-average shares used to compute non-GAAP earnings (loss) per share, diluted(5)
113,93498,855
________________
(1)    The tax impact of stock-based compensation is based on the tax treatment for the applicable tax jurisdictions.
(2)    The tax impacts of acquisition-related expenses and amortization of acquired intangible assets are not material.
(3)    The tax impact of the intra-entity asset transfer is related to the internal restructuring of Indegy, resulting in a current tax payment based on the applicable Israeli tax rate.
(4)    An adjustment may be necessary to reconcile GAAP net loss per share, which excludes potentially dilutive shares, to non-GAAP earnings per share, which includes potentially dilutive shares.
(5)    In periods in which there is a non-GAAP net loss, basic and diluted weighted average shares outstanding are the same, as potentially dilutive shares would be antidilutive.
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
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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, stock-based compensation and any severance. 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.
We expect our gross profit to increase in absolute dollars but our gross margin to decrease over time, as we expect revenue from our cloud-based subscriptions to increase as a percentage of revenue. However, our gross margin could fluctuate from period to period depending on the interplay of all of these factors, particularly as it relates to cloud infrastructure costs.
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,
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bonuses, payroll taxes, stock-based compensation and any severance. 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 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 periods of these arrangements are generally less than 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 increase in absolute dollars annually 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 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 annually 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 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 annually 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 from period to period due to the timing and extent of these expenses.
Interest (Expense) Income, Net
Interest (expense) income, net consists primarily of interest income earned on cash and cash equivalents and short-term investments and interest expense in connection with our credit facility, including unused commitment fees and letter of credit fees.
Other Expense, Net
Other expense, net consists primarily of foreign currency remeasurement and transaction gains and losses.
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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.
The provision for the three months ended March 31, 2021 was impacted by discrete items, including expense from the restructuring of our research and development operations in Israel and benefits, primarily related to a Supreme Court decision in India on the taxability of software license payments to nonresidents and the associated withholding taxes.
Results of Operations
The following tables set forth our consolidated results of operations:
Three Months Ended March 31,
(in thousands)20212020
Revenue$123,189 $102,648 
Cost of revenue(1)
22,073 18,701 
Gross profit101,116 83,947 
Operating expenses:
Sales and marketing(1)
58,635 59,855 
Research and development(1)
26,838 26,831 
General and administrative(1)
21,445 18,933 
Total operating expenses106,918 105,619 
Loss from operations(5,802)(21,672)
Interest (expense) income, net(28)734 
Other expense, net(66)(960)
Loss before income taxes(5,896)(21,898)
Provision for income taxes1,852 1,079 
Net loss$(7,748)$(22,977)
_______________
(1)    Includes stock-based compensation expense as follows:
Three Months Ended March 31,
(in thousands)
20212020
Cost of revenue
$937$747
Sales and marketing
6,2964,496
Research and development
4,1562,948
General and administrative
5,5634,844
Total stock-based compensation expense
$16,952