TENABLE HOLDINGS, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K, or this Form 10-K. This Form 10-K 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 I, Item 1A of this Form 10-K and in our other filings with theSEC . 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. OnDecember 2, 2019 , we acquiredIndegy Ltd. ("Indegy") to expand our Operational Technology ("OT") specific capabilities. The results of operations ofIndegy were not material to our consolidated statement of operations for 2019. 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 IoT and 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 2019, 2018 and 2017 was$354.6 million ,$267.4 million and$187.7 million , respectively, representing year-over-year growth of 33% and 42%, respectively. Our net loss in 2019, 2018 and 2017 was$99.0 million ,$73.5 million and$41.0 million , respectively, as we continue to invest in our business and market opportunity. 38
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Financial Highlights
Below are our key financial results:
Year Ended December 31,
(in thousands, except per share data) 2019 2018 2017
Revenue $ 354,586 $ 267,360 $ 187,727
Loss from operations (90,799 ) (72,581 ) (40,760 )
Net loss (99,013 ) (73,521 ) (41,022 )
Net loss per share attributable to common
stockholders, basic and diluted (1.03 ) (1.38 ) (1.88 )
Net cash used in operating activities (10,744 ) (2,559 ) (6,266 )
Purchases of property and equipment (20,674 ) (5,733 ) (2,755 )
Factors Affecting Our Performance
Product Leadership
Our enterprise platform provides 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 our 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.
Retaining and Expanding Revenue from Existing Customers
Our enterprise platform offerings utilize IT asset-based or IP address-based
pricing models. Once enterprise customers have licensed our platform offerings,
they typically seek broader coverage over their traditional IT assets, including
networking infrastructure, desktops and on-premises servers. As customers launch
new applications or migrate existing applications to the cloud and deploy web
applications, containers, internet of things, or IoT, and operational
technology, or OT, they often increase the scope of their subscriptions and/or
add additional perpetual licenses to our enterprise platforms.
We are also focused on upselling customers from Nessus Professional to our
enterprise platform offerings. Nessus 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.
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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, economic conditions or overall changes in our 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 customersrepresenting 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
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.
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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 as ofJanuary 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 atJanuary 1, 2017 increased calculated current billings by$16.7 million in 2017,$11.8 million in 2018 and$5.6 million in 2019 and is expected to increase our calculated current billings by$1.9 million in 2020. The following table presents a reconciliation of revenue, the most directly comparable financial measure calculated in accordance with GAAP, to calculated current billings: Year Ended December 31, (in thousands) 2019 2018 2017 Revenue$ 354,586 $ 267,360 $ 187,727 Deferred revenue (current), end of period 274,348 213,644 154,898 Deferred revenue (current), beginning of period(1)(2) (214,069 ) (154,898 ) (107,006 ) Calculated current billings$ 414,865 $ 326,106 $ 235,619 _______________ (1) Deferred revenue (current), beginning of period for 2019 includes$0.4 million related toIndegy's deferred revenue at the acquisition date, which is not included in the deferred revenue (current), end of period for 2018. (2) In connection with adopting ASC 606, we recorded$19.0 million of current deferred revenue onJanuary 1, 2017 related to perpetual license revenue recognized in prior periods. Free Cash Flow We use the non-GAAP measure of free cash flow, which we define as GAAP net cash flows from operating activities reduced by purchases of property and equipment. We believe free cash flow is an important liquidity measure of the cash (if any) that is available, after purchases of property and equipment, for investment in our business and to make acquisitions. We believe that free cash flow is useful to investors as a liquidity measure because it measures our ability to generate or use cash. Our use of free cash flow has limitations as an analytical tool and you should not consider it in isolation or as a substitute for an analysis of our results under GAAP. First, free cash flow is not a substitute for net cash flows from operating activities. Second, other companies may calculate free cash flow or similarly titled non-GAAP financial 41
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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 used in operating activities and our other GAAP financial measures.
The following table presents a reconciliation of net cash used in operating
activities, the most directly comparable financial measure calculated in
accordance with GAAP, to free cash flow:
Year Ended December 31,
(in thousands) 2019 2018 2017
Net cash used in operating activities
$ (31,418 ) $ (8,292 ) $ (9,021 )
_______________
(1) Free cash flow in 2019 included non-recurring cash payments totaling$13.1 million associated with theIndegy acquisition, including$6.7 million for income taxes on the transfer of acquired intellectual property,$3.1 million for other costs related to the intellectual property transfer,$1.8 million for the settlement of unvested acquiree equity awards, and$1.5 million for acquisition-related expenses. Capital expenditures related to our new headquarters in 2019 were$11.4 million . Contributions to our employee stock purchase plan in 2019 and 2018 impacted free cash flow by$(0.9) million and$6.3 million , respectively. 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: Year Ended December
31,
2019 2018 2017
Number of new enterprise platform customers added in period(1) 1,511 1,178 1,017 _______________ (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 December 31, 2019 2018 2017 Number of customers with$100,000 and greater in annual contract value at end of period 641 453
265
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 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.
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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 loss from operations, and operating margin, the most directly
comparable financial measure calculated in accordance with GAAP, to non-GAAP
operating margin:
Year Ended December 31,
(dollars in thousands) 2019 2018 2017
Loss from operations $ (90,799 ) $ (72,581 ) $ (40,760 )
Stock-based compensation 43,443 22,875 7,760
Acquisition-related expenses 3,970 - -
Amortization of acquired intangible assets 620 603 603
Non-GAAP loss from operations $ (42,766 ) $ (49,103 ) $ (32,397 )
Operating margin (26 )% (27 )% (22 )%
Non-GAAP operating margin (12 )% (18 )% (17 )%
Non-GAAP Net Loss, Non-GAAP Net Loss Per Share and Pro Forma Non-GAAP Net Loss
Per Share
We use non-GAAP net loss, which excludes the effect of the accretion of Series A
and B redeemable convertible preferred stock, stock-based compensation,
acquisition-related expenses and amortization of acquired intangible assets, as
well as the related tax impact, to calculate non-GAAP net loss per share and pro
forma non-GAAP net loss per share. Pro forma non-GAAP net loss per share is
calculated by giving effect to the conversion of our redeemable convertible
preferred stock into common stock as though the conversion occurred at the
beginning of each period presented prior to 2019. 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 attributable to common stockholders, the most comparable financial measures calculated in accordance with GAAP, to non-GAAP net loss, non-GAAP net loss per share and pro forma non-GAAP net loss per share:
Year Ended December 31,
(in thousands, except for per share amounts) 2019 2018 2017
Net loss attributable to common stockholders$ (99,013 ) $ (73,955 ) $ (41,785 ) Accretion of Series A and B redeemable convertible preferred stock - 434 763 Acquisition-related expenses 3,970 - - Tax impact of acquisition(1) 10,582 - - Stock-based compensation 43,443 22,875 7,760 Tax impact of stock-based compensation(2) (95 ) (218 ) (54 ) Amortization of acquired intangible assets(3) 620 603
603
Non-GAAP net loss$ (40,493 ) $ (50,261
)
Net loss per share attributable to common stockholders, basic and diluted$ (1.03 ) $ (1.38 ) $ (1.88 ) Accretion of Series A and B redeemable convertible preferred stock - 0.01 0.03 Acquisition-related expenses 0.04 - - Tax impact of acquisition(1) 0.11 - - Stock-based compensation 0.45 0.42 0.35 Tax impact of stock-based compensation(2) - - - Amortization of acquired intangible assets(3) 0.01 0.01
0.03
Non-GAAP net loss per share, basic and diluted
Weighted-average shares used to compute net loss per share attributable to common stockholders and non-GAAP net loss per share, basic and diluted 96,014 53,669
22,211
Pro forma adjustment to reflect the assumed conversion of our convertible redeemable preferred stock as of the beginning of the period - 31,107
55,386
Weighted-average shares used to compute pro forma non-GAAP net loss per share, basic and diluted 96,014 84,776
77,597
Pro forma non-GAAP net loss per share, basic and diluted$ (0.42 ) $ (0.59 ) $ (0.42 ) ________________ (1) The tax impact of the acquisition includes$6.3 million of current tax expense and$4.2 million of deferred tax expense related to the transfer of acquired intellectual property. (2) The tax impact of stock-based compensation is based on the tax treatment for applicable tax jurisdictions. (3) The tax impact of amortization of acquired intangible assets is not material. 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. 44
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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 toU.S. government and related agencies, and the increase in the fourth quarter is primarily attributable to large enterprise account buying patterns typical in the software industry. Our recent growth and the ratable nature of our subscription revenue makes this seasonality less apparent in our overall financial results. Cost of Revenue, Gross Profit and Gross Margin Cost of revenue includes personnel costs related to our technical support group that provides assistance to customers, including salaries, benefits, bonuses, payroll taxes and stock-based compensation. Cost of revenue also includes 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, 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. 45
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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 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, although
our sales and marketing expense may fluctuate as a percentage of our revenue
from period to period due to the timing and extent of these expenses.
Research and Development
Research and development expense consists of personnel costs, software used to
develop our products, travel and entertainment, consulting and professional fees
for third-party development resources as well as allocated overhead. Our
research and development expense supports our efforts to continue to add
capabilities to our existing products and enable the continued detection of new
network vulnerabilities.
We expect our research and development expense to continue to increase in
absolute dollars for the foreseeable future 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.
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 withhold 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. In 2019, the
provision for income taxes included the tax impact related to the transfer of
acquired intellectual property.
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Results of Operations
The following tables set forth our consolidated results of operations for the
periods presented:
Year Ended December 31,
(in thousands) 2019 2018 2017
Revenue $ 354,586 $ 267,360 $ 187,727
Cost of revenue(1) 60,818 43,167 25,588
Gross profit 293,768 224,193 162,139
Operating expenses:
Sales and marketing(1) 228,035 173,344 116,299Research and development(1) 87,064 76,698 57,673 General and administrative(1) 69,468 46,732 28,927 Total operating expenses 384,567 296,774 202,899 Loss from operations
(90,799 ) (72,581 ) (40,760 )
Interest income (expense), net 5,830 2,355 (75 )
Other expense, net (680 ) (931 ) (16 )
Loss before income taxes (85,649 ) (71,157 ) (40,851 )
Provision for income taxes 13,364 2,364 171
Net loss $ (99,013 ) $ (73,521 ) $ (41,022 )
_______________(1) Includes stock-based compensation expense as follows:
Year Ended December 31,
(in thousands) 2019 2018 2017
Cost of revenue $ 2,817 $ 1,707 $ 281
Sales and marketing 16,032 6,911 1,579
Research and development 8,911 5,804 1,782
General and administrative 15,683 8,453 4,118
Total stock-based compensation expense
Comparison of 2019 and 2018
Revenue
Year Ended December 31, Change
(dollars in thousands) 2019 2018 ($) (%)
Revenue $ 354,586 $ 267,360 $ 87,226 33 %
The increase in revenue of $87.2 million was comprised of increases in
subscription revenue of $84.7 million and professional services and other
revenue of $3.0 million , net of a decrease in perpetual license and maintenance
revenue of $0.5 million . Revenue from existing customers comprised 84% of the
increase, while the remaining increase was due to revenue from new customers
since January 1, 2019 . International revenue increased $40.4 million , or 45%.
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Cost of Revenue, Gross Profit and Gross Margin
Year Ended December 31, Change
(dollars in thousands) 2019 2018 ($) (%)
Cost of revenue $ 60,818 $ 43,167 $ 17,651 41 %
Gross profit 293,768 224,193 69,575 31 %
Gross margin 83 % 84 %
The increase in cost of revenue of
headcount, including a
• a
associated with the increased adoption of Tenable.io, as well as the
launch of Tenable Lumin;
• a
increase in headcount and the overall increase in such costs on a
year-over-year basis;
• a
• a
• a
Operating Expenses
Sales and Marketing
Year Ended December 31, Change
(dollars in thousands) 2019 2018 ($) (%)
Sales and marketing
The increase in sales and marketing expense of$54.7 million was primarily due to: • a$32.1 million increase in personnel costs, largely associated with an
increase in headcount, including a
compensation;
• a
draws, due to increased sales and the amortization of deferred
commissions;
• a
costs and software subscriptions;
• a $3.4 million increase in allocated overhead costs driven by both the
increase in headcount and the overall increase in such costs on a
year-over-year basis; and
• a
including advertising, sponsorships, and brand awareness efforts aimed at
acquiring new customers.
Research and Development
Year Ended December 31, Change
(dollars in thousands) 2019 2018 ($) (%)
Research and development $ 87,064 $ 76,698 $ 10,366 14 %
The increase in research and development expense of $10.4 million was primarily
due to:
• an $8.1 million increase in personnel costs, largely associated with an
increase in headcount, including a
compensation, and net of
compensation capitalized related to internal use software;
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• a
to the development of new and future offerings;
• a
• a
in headcount and the overall increase in such costs on a year-over-year
basis, partially offset by
• a
General and Administrative
Year Ended December 31, Change
(dollars in thousands) 2019 2018 ($) (%)
General and administrative $ 69,468 $ 46,732 $ 22,736 49 %
The increase in general and administrative expense of
increase in headcount, including a
compensation;
• a $4.0 million increase in acquisition-related expenses, including $2.1
million related to the transfer of acquired intellectual property;
• a $3.7 million increase in professional fees, which includes costs
associated with being a public company; and
• a
in headcount and the overall increase in such costs on a year-over-year
basis.
Comparison of 2018 and 2017
Revenue
Year Ended December 31, Change
(dollars in thousands) 2018 2017 ($) (%)
Revenue $ 267,360 $ 187,727 $ 79,633 42 %
The increase in revenue of $79.6 million was comprised of increases in
subscription revenue of $72.9 million , perpetual license and maintenance revenue
of $4.3 million and professional services and other revenue of $2.4 million .
Revenue from existing customers comprised 68% of the increase, while the
remaining increase was due to revenue from new customers since January 1, 2018 .
International revenue increased $31.6 million , or 55%.
Cost of Revenue, Gross Profit and Gross Margin
Year Ended December 31, Change
(dollars in thousands) 2018 2017 ($) (%)
Cost of revenue $ 43,167 $ 25,588 $ 17,579 69 %
Gross profit 224,193 162,139 62,054 38 %
Gross margin 84 % 86 %
The increase in cost of revenue of
headcount, including a
• a
associated with the increased adoption of Tenable.io;
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• a
increase in headcount and the overall increase in such costs on a
year-over-year basis;
• a
• a
Operating Expenses
Sales and Marketing
Year Ended December 31, Change
(dollars in thousands) 2018 2017 ($) (%)
Sales and marketing
The increase in sales and marketing expense of$57.0 million was primarily due to: • a$29.2 million increase in personnel costs, largely associated with an
increase in headcount, including a
compensation;
• a
draws, due to increased sales and the amortization of deferred
commissions;
• a
including advertising, sponsorships and brand awareness efforts aimed at
acquiring new customers; and
• a
costs and the costs of software subscriptions.
Research and Development
Year Ended December 31, Change
(dollars in thousands) 2018 2017 ($) (%)
Research and development$ 76,698 $ 57,673 $ 19,025
33 %
The increase in research and development expense of$19.0 million was primarily due to: • a$15.1 million increase in personnel costs, largely associated with an
increase in headcount, including a
compensation, and net of
related to internal use software;
• a
to the development of new and future offerings;
• a
• a
in headcount and the overall increase in such costs on a year-over-year
basis.
General and Administrative
Year Ended December 31, Change
(dollars in thousands) 2018 2017 ($) (%)
General and administrative $ 46,732 $ 28,927 $ 17,805 62 %
The increase in general and administrative expense of
increase in headcount, including a
compensation;
• a $3.3 million increase in professional fees, which includes costs
associated with being a public company; and
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• a
Liquidity and Capital Resources AtDecember 31, 2019 , we had cash and cash equivalents consisting of bank deposits, money market funds and commercial paper of$74.4 million and short-term investments consisting of commercial paper,U.S. Treasury and agency obligations and corporate bonds of$137.9 million . Since inception and prior to our IPO, we financed our operations through cash provided by operations, including payments received from customers using our software products and services, and we did not raise any primary institutional capital. The proceeds of our Series A and Series B redeemable convertible preferred stock financings were used to repurchase shares of capital stock from former stockholders. Upon the completion of our IPO inJuly 2018 , we received net proceeds of$264.6 million . We have generated significant operating losses from our operations, as reflected by our accumulated deficit of$565.1 million atDecember 31, 2019 . We typically invoice our customers annually in advance and, to a lesser extent, multi-year in advance. Therefore, a substantial source of our cash is from such prepayments, which are included on our consolidated balance sheets as deferred revenue. Deferred revenue consists primarily of the unearned portion of billed fees for our subscriptions and perpetual licenses, which is subsequently recognized as revenue in accordance with our revenue recognition policy. AtDecember 31, 2019 , we had deferred revenue of$363.1 million , of which$274.3 million was recorded as a current liability and is expected to be recorded as revenue in the next 12 months, provided all other revenue recognition criteria are met. Our principal uses of cash in recent periods have been funding our operations, expansion of our sales and marketing and research and development activities, investments in infrastructure and acquiring complementary businesses and technology. We expect to continue incurring operating losses and generating negative cash flows from operations in the near-term; however, we believe that our existing cash and cash equivalents and short-term investments will be sufficient to fund our operating and capital needs for at least the next 12 months. Our future capital requirements will depend on many factors, including our revenue growth rate, subscription renewal activity, the timing and extent of spending to support further infrastructure and research and development efforts, the timing and extent of additional capital expenditures to invest in new and existing office spaces, the expansion of sales and marketing and international operating activities, the timing of introduction of new product capabilities and enhancements of our platform and the continuing market acceptance of our platform. Capital expenditures related to our new corporate headquarters were$11.4 million in 2019. In 2020, we expect capital expenditures related to our new corporate headquarters to be approximately$16.0 million and we expect to receive$12.5 million in tenant improvement reimbursements. We may in the future enter into arrangements to acquire or invest in complementary businesses, services and technologies, including intellectual property rights. We may be required to seek equity or debt financing. In the event that financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, or if we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, operating results and financial condition would be adversely affected. Credit Facility InMay 2017 , we entered into a$25.0 million revolving credit facility withSilicon Valley Bank . Pursuant to the terms of the revolving credit facility, we may issue up to$5.0 million of letters of credit, which reduce the total amount available for borrowing under such facility. The revolving credit facility terminates onMay 4, 2020 . To date, we have not borrowed any amounts under the revolving credit facility. Interest on borrowings under the revolving credit facility accrues at a variable rate tied to the prime rate or the LIBOR rate, at our election. Interest is payable quarterly in arrears. We are required to pay a quarterly commitment fee that accrues at a rate of 0.25% per annum on the unused portion of the borrowing commitment. The revolving credit facility contains customary conditions to borrowing, events of default and covenants, including restrictions on indebtedness, liens, acquisitions and investments, restricted payments and dispositions. If, as of the last 51
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day of any quarter, the outstanding balance of the revolving credit facility exceeds$5.0 million , there are financial covenants that require us to maintain a minimum level of earnings before income taxes, interest, depreciation and amortization adjusted to add changes in deferred revenue in the period and a minimum current ratio level. We were in compliance with all covenants under the revolving credit facility atDecember 31, 2019 . Letter of Credit OnJanuary 9, 2020 , we entered into a$2.5 million standby letter of credit ("Letter of Credit") for the security deposit on our new headquarters lease. The Letter of Credit bears interest at 2% per annum and expires one year from the issue date, with automatic renewals for additional one year terms until the final expiration date ofFebruary 2032 . The Letter of Credit reduces the amount available for borrowing under our revolving credit facility. Cash Flows The following table summarizes our cash flows for the periods presented: Year Ended December 31, (in thousands) 2019 2018
2017
Net cash used in operating activities$ (10,744 ) $ (2,559 ) $ (6,266 ) Net cash used in investing activities (113,050 ) (123,221 ) (2,755 ) Net cash provided by financing activities 34,161 264,749
2,091
Effect of exchange rate changes on cash and cash equivalents and restricted cash (1,080 ) (1,063 ) (68 ) Net (decrease) increase in cash and cash equivalents and restricted cash$ (90,713 ) $ 137,906
Operating Activities In 2019, net cash used in operating activities was$10.7 million , which primarily consisted of our$99.0 million net loss, adjusted for stock-based compensation expense of$41.6 million and depreciation and amortization of$6.9 million , as well as a net cash inflow of$36.3 million from changes in operating assets and liabilities. The net inflow from changes in operating assets and liabilities was primarily due to a$72.8 million increase in deferred revenue primarily due to increased subscription sales, as a majority of our customers are invoiced in advance, partially offset by a$25.9 million increase in accounts receivable and a$12.8 million increase in deferred commissions. In 2018, net cash used in operating activities was$2.6 million , which primarily consisted of our$73.5 million net loss, adjusted for stock-based compensation expense of$22.9 million and depreciation and amortization of$6.2 million , as well as a net cash inflow of$41.4 million from changes in operating assets and liabilities. The net inflow from changes in operating assets and liabilities was primarily due to a$64.1 million increase in deferred revenue, primarily due to increased subscription sales, as a majority of our customers are invoiced in advance, partially offset by a$17.4 million increase in accounts receivable. In 2017, net cash used in operating activities was$6.3 million , which primarily consisted of our$41.0 million net loss, adjusted for stock-based compensation expense of$7.8 million and depreciation and amortization of$4.7 million , as well as a net cash inflow of$23.1 million from changes in operating assets and liabilities. The net inflow from operating assets and liabilities was primarily due to an increase of$63.4 million in deferred revenue, including the cumulative impact of adopting ASC 606, from increased subscription sales as a majority of our customers are invoiced in advance, partially offset by a$14.8 million increase in accounts receivable. In addition, deferred commissions increased$20.1 million , including the cumulative impact of adopting ASC 606. Investing Activities From 2018 to 2019, net cash used in investing activities decreased by$10.2 million , primarily due to a decrease in our purchase, net of sales, of investments of$100.0 million , partially offset by cash paid for acquisitions of$74.9 million and capital expenditures for our new corporate headquarters of$11.4 million . 52
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From 2017 to 2018, net cash used in investing activities increased by$120.5 million , primarily due to our purchase of short-term investments of commercial paper,U.S. Treasury securities and corporate bonds of$117.5 million . Financing Activities From 2018 to 2019, net cash provided by financing activities decreased by$230.6 million , primarily due to proceeds from our IPO, net of underwriting discounts and commissions, of$268.5 million , less payments of offering costs related to our IPO of$3.9 million in 2018, partially offset by proceeds from the exercise of stock options of$19.0 million and stock issued in connection with the employee stock purchase plan of$15.1 million in 2019. From 2017 to 2018, net cash provided by financing activities increased by$262.7 million , primarily due to proceeds from our IPO, net of underwriting discounts and commissions, less payments of offering costs related to our IPO. Contractual Obligations The following table summarizes our contractual obligations atDecember 31, 2019 : Less than 1 More than 5 (in thousands) Total year 1 - 3 years 3 - 5 years years Operating lease commitments$ 84,454 $ 5,308 $ 13,988 $ 14,207 $ 50,951 Non-cancellable purchase obligations 5,693 3,589 2,104 - - Total contractual obligations$ 90,147 $ 8,897 $ 16,092 $ 14,207 $ 50,951 Not included in the table above is$7.2 million of unrecognized tax benefits and$1.2 million of asset retirement obligations, because the timing of future cash outflows is uncertain. Off-Balance Sheet Arrangements AtDecember 31, 2019 , we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Critical Accounting Policies and Estimates Our financial statements are prepared in accordance withU.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, as well as related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates. The critical accounting estimates, assumptions and judgments that we believe have the most significant impact on our consolidated financial statements are described below. Revenue Recognition We early adopted ASC 606 onJanuary 1, 2017 using the modified retrospective method and applying the guidance to all contracts as ofJanuary 1, 2017 . The core principle of ASC 606 is that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve the core principle of ASC 606, we apply the following steps: • Identify the contract with a customer
• Identify the performance obligations in the contract
• Determine the transaction price
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• Allocate the transaction price to the performance obligations in the contract
• Recognize revenue when or as performance obligations are satisfied
In situations where we enter into a contractual arrangement that includes
non-standard terms and conditions, such as acceptance provisions and options to
purchase additional products and services, as well as contract modifications, we
apply judgment in identifying and assessing the impact on revenue recognition.
We generate revenue from subscription arrangements for our software and
cloud-based solutions, perpetual licenses, maintenance associated with perpetual
licenses and professional services and other revenue.
Subscription Revenue
Our subscription arrangements generally have annual or multi-year contractual
terms and allow customers to use our software or cloud solutions, including
ongoing software updates and the ability to identify the latest cybersecurity
vulnerabilities. Revenue is recognized ratably over the subscription term given
the critical utility provided by the ongoing updates that are released
throughout the contract period.
Perpetual License and Maintenance Revenue
Our perpetual licenses are generally sold with one or more years of maintenance,
which include ongoing software updates and the ongoing ability to identify the
latest cybersecurity vulnerabilities. Given the critical utility provided by the
ongoing software updates and updated ability to identify network vulnerabilities
included in maintenance, we combine the perpetual license and the maintenance
into a single performance obligation. Perpetual license arrangements generally
contain a material right related to the customer's ability to renew maintenance
at a price that is less than the initial license fee. We apply a practical
alternative to allocating a portion of the transaction price to the material
right performance obligation and estimate a hypothetical transaction price which
includes fees for expected maintenance renewals based on the estimated economic
life of the perpetual license contracts. We allocate the transaction price
between the cybersecurity subscription provided in the initial contract and the
material right related to expected contract renewals based on the hypothetical
transaction price. We recognize the amount allocated to the combined license and
maintenance performance obligation over the initial contractual period, which is
generally one year. We recognize the amount allocated to the material right over
the expected maintenance renewal period, which begins at the end of the initial
contractual term and is generally four years. We have estimated the five-year
economic life of perpetual license contracts based on historical contract
attrition, expected renewal periods, the lifecycle of the our technology and
other factors. While we believe that the estimates we have made are reasonable
and appropriate, different assumptions and estimates could materially impact our
reported financial results.
Professional Services and Other Revenue
Professional services and other revenue is primarily comprised of advisory
services and training related to the deployment and optimization of our
products. These services do not result in significant customization of our
products. Professional services and other revenue is recognized as the services
are performed.
Contracts with Multiple Performance Obligations
In cases where our contracts with customers contain multiple performance
obligations, the contract transaction price is allocated on a relative
standalone selling price basis. We typically determine standalone selling price
based on observable selling prices of our products and services.
Variable Consideration
We record revenue from sales at the net sales price, which is the transaction
price, including estimates of variable consideration when applicable. Certain of
our customers may be entitled to receive credits and in certain circumstances,
refunds, if service level commitments are not met. We have not historically
experienced significant incidents affecting the ability to meet these service
level commitments and any estimated refunds related to these agreements have not
been material.
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Sales through our channel partner network of distributors and resellers are
generally discounted as compared to the price that we would sell to an end user.
Revenue for sales through our channel network, which is fixed, is recorded net
of any distributor or reseller margin.
Deferred Commissions
Sales commissions, including related incremental fringe benefit costs, are
considered to be incremental costs of obtaining a contract, and therefore are
deferred over an estimated period of benefit, which ranges between three and
four years for subscription arrangements and five years for perpetual license
arrangements. We have estimated the period of benefit based on the expected
contract term including renewal periods, the lifecycle of our technology and
other factors. Sales commissions on contract renewals are capitalized and
amortized ratably over the contract term, with the exception of contracts with
renewal periods that are one year or less, in which case the incremental costs
are expensed as incurred. While we believe that the estimates we have made are
reasonable and appropriate, different assumptions and estimates could materially
impact our reported financial results.
Stock-Based Compensation
Stock-based compensation expense related to our stock options, restricted stock,
restricted stock units, or RSUs, and purchase rights issued under our 2018
Employee Stock Purchase Plan, or the 2018 ESPP, is calculated based on the fair
value of the awards granted and is recognized on a straight-line basis over the
requisite service period, which is generally two to four years, with the
exception of RSUs that include performance-based vesting conditions and are
expensed using the accelerated attribution method. We account for forfeitures as
they occur.
Estimating the fair value of stock options and purchase rights under the 2018
ESPP using the Black-Scholes option-pricing model requires assumptions as to the
fair value of our underlying common stock, the estimated term of the option, the
risk free interest rates, the expected volatility of the price of our common
stock and the expected dividend yield. The assumptions used to estimate the fair
value of the option awards reflect our best estimates. If any of the assumptions
change significantly, stock-based compensation for future awards may differ
significantly compared with the awards granted previously.
The assumptions and estimates are as follows:
• Fair Value of Common Stock. See "Common Stock Valuations" discussion below.
• Expected Term. This is the period of time that the options granted are
expected to remain unexercised. We employ the simplified method to
calculate the average expected term.
• Volatility. This is a measure of the amount by which a financial variable,
such as a share price, has fluctuated (historical volatility) or is
expected to fluctuate (expected volatility) during a period. As we do not
yet have sufficient history of our own volatility, we have identified
several public entities of similar size, complexity and stage of
development and estimate volatility based on the volatility of these
companies.
• Risk-Free Interest Rate. This is the U.S. Treasury rate, having a term
that most closely resembles the expected life of the stock option.
• Dividend Yield. We have not and do not expect to pay dividends on our
common stock.
Common Stock Valuations
Following our IPO, we use the market price of our common stock at the date of
grant as the fair value. Prior to our IPO, the lack of an active public market
for our common stock required our board of directors to exercise reasonable
judgment and consider a number of factors in order to make the best estimate of
fair value of our common stock, in accordance with the technical practice-aid
issued by the American Institute of Certified Public Accountants Practice Aid
entitled Valuation of Privately-Held Company Equity Securities Issued as
Compensation. Factors considered in connection with estimating the fair value of
our common stock underlying our award of restricted stock and stock option
awards when performing the fair value calculations with the Black Scholes
option-pricing model included:
• The results of independent third-party valuations of our common stock
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• Recent arm's length transactions involving the sale or transfer of our
common stock
• The rights, preferences and privileges of our Series A and Series Bredeemable convertible preferred stock relative to those of our common
stock
• Our historical financial results and future financial projections
• The market value of equity interests in substantially similar businesses,
which equity interests can be valued through nondiscretionary, objective
means
• The lack of marketability of our common stock
• The likelihood of achieving a liquidity event, such as an IPO given
prevailing market conditions
• Industry outlook
• General economic outlook including economic growth, inflation and
unemployment, interest rate environment and global economic trends
As described above, the exercise price of our stock option awards was determined
by our board of directors, with input from management, taking into account the
factors described above, using a combination of valuation methodologies with
varying weighting applied to each methodology as of the grant date.
Application of these approaches involved the use of estimates, judgment and
assumptions that were highly complex and subjective, such as those regarding our
expected future revenue, expenses and future cash flows, discount rates, market
multiples, the selection of comparable companies and the probability of possible
future events. Changes in any or all of these estimates and assumptions or the
relationships between those assumptions would have impacted our valuations as of
each valuation date and may have had a material impact on the valuation of our
common stock.
The fair value of each stock option was estimated on the grant date based on the
following assumptions:
Year Ended December 31,
2018 2017
Expected term (in years) 6.3 6.3Expected volatility 41.3% - 43.3% 45.2% - 47.0% Risk-free interest rate 2.7% - 2.9% 1.9% - 2.4% Expected dividend yield -
-
Expected forfeiture rate - -
The fair value of each 2018 ESPP purchase right was estimated on the offering or modification dates based on the following assumptions:
Year Ended December 31,
2019 2018
Expected term (in years) 0.5 - 2.0 0.6 - 2.1 Expected volatility 34.4% - 44.6% 31.9% - 33.5% Risk-free interest rate 1.5% - 2.5% 2.3% - 2.7% Expected dividend yield -
-
Business Combinations
We account for business combinations by recognizing the fair value of acquired
assets and liabilities. The excess purchase consideration over the fair value of
acquired assets and liabilities is recorded as goodwill. When determining the
fair value of assets acquired and liabilities assumed, we make estimates and
assumptions, especially with respect to intangible assets. Estimates in valuing
certain identifiable intangible assets require significant judgment and include,
but are not limited to, expected long-term market growth, future expected
operating expenses, costs of capital, and appropriate discount rates. Our
estimate of fair value is based upon assumptions we believe to be reasonable,
but which are inherently uncertain and, as a result, actual results may differ
from estimates. During the measurement period, we
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may make adjustments to the fair value of assets acquired and liabilities assumed, with offsetting adjustments to goodwill. Any adjustments made after the measurement period will be reflected in the consolidated statements of operations. Acquisition-related transaction costs are expensed as incurred. Income Taxes We are subject to federal, state and local taxes inthe United States as well as numerous international jurisdictions. These foreign jurisdictions have different statutory tax rates thanthe United States . Earnings generated by our international entities are related to transfer pricing requirements as applicable under local jurisdiction tax laws. We record a provision for income taxes under the asset and liability method, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities, net operating loss carryforwards and tax credit carryforwards. Deferred tax assets and liabilities are measured using the tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. A valuation allowance is provided if it is more likely than not that some or all of the deferred tax assets will not be realized. We have valuation allowances in all jurisdictions against deferred tax assets net of deferred tax liabilities that will reverse and provide a source of taxable income. Our evaluation of valuation allowances could change in the future and the impact could have a material impact on our financial statements. We recognize tax benefits from an uncertain tax position if it is more likely than not to be sustained upon audit by the relevant taxing authority. Interest and penalties associated with such uncertain tax positions are classified as a component of income tax expense. InDecember 2019 , subsequent to our acquisition ofIndegy Ltd. we transferred the acquiredIndegy intellectual property through an intercompany transaction. The valuation ofIndegy's intellectual property for tax purposes resulted in$6.3 million of current tax expense and$4.2 million of deferred tax expense inIsrael . The valuation of the intellectual property for tax purposes required significant judgment and assumptions with respect to forecasted operating results and discount rates. The Tax Cuts and Jobs Act, or the 2017 Tax Act, was enacted into law, which contains several significant changes to how corporations are taxed inthe United States , including the reduction of the corporate income tax rate from 35% to 21% effectiveJanuary 1, 2018 . The new legislation also includes a variety of other changes, such as a one-time repatriation tax on accumulated foreign earnings, or transition tax, acceleration of business asset expensing and reduction in the amount of executive pay that could qualify as a tax deduction. The 2017 Tax Act also included international tax provisions that will affect the Company, including the favorable tax regime for taxing foreign derived intangible income. Additional international provisions include the global intangible low taxed income, or GILTI, regime and the base erosion anti-abuse tax. Depending on the jurisdiction, distributions of earnings could be subject to withholding taxes at rates applicable to the distributing jurisdiction. As we intend to continue to reinvest the earnings of foreign subsidiaries indefinitely, we have not provided for aU.S. income tax liability and foreign withholding taxes on undistributed foreign earnings of foreign subsidiaries. Recently Issued Accounting Pronouncements Refer to Note 1 to our consolidated financial statements in this Annual Report on Form 10-K for more information regarding recently issued accounting pronouncements. Item 7A. Quantitative and Qualitative Disclosures about Market Risk We are exposed to market risks in the ordinary course of our business, including interest rate, foreign currency exchange and inflation risks. 57
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Interest Rate Risk AtDecember 31, 2019 , we had cash and cash equivalents of$74.4 million , consisting of cash deposits, money market funds and commercial paper. We also had short-term investments of$137.9 million , consisting of commercial paper,U.S. Treasury securities and corporate bonds. Our investments are carried at their fair market value with cumulative unrealized gains or losses recorded as a component of accumulated other comprehensive income within stockholders' equity. The primary objectives of our investment activities are the preservation of capital, the fulfillment of liquidity needs and the fiduciary control of cash and investments. We do not enter into investments for trading or speculative purposes. Interest-earning instruments carry a degree of interest rate risk; however, a hypothetical 10% change in interest rates during any of the periods presented would not have had a material impact on our financial statements. We have not had any borrowings outstanding under the revolving credit facility since it was established inMay 2017 . Any borrowings under the revolving credit facility would bear interest at a variable rate tied to the prime rate or the LIBOR rate. We do not have any other long-term debt or financial liabilities with floating interest rates that would subject us to interest rate fluctuations. OnJanuary 9, 2020 , we entered into a$2.5 million standby letter of credit ("Letter of Credit") for the security deposit on our new headquarters lease. The Letter of Credit bears interest at 2% per annum and expires one year from the issue date, with automatic renewals for additional one year terms until the final expiration date ofFebruary 2032 . The Letter of Credit reduces the amount available for borrowing under our revolving credit facility. Foreign Currency Exchange Risk Substantially all of our sales contracts are denominated inU.S. dollars, with a limited number of contracts denominated in foreign currencies. A portion of our operating expenses, including foreign denominated leases, are incurred outsidethe United States , denominated in foreign currencies and subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Euro, British Pound and Australian dollar. Additionally, fluctuations in foreign currency exchange rates may cause us to recognize remeasurement and transaction gains (losses) in our consolidated statements of operations. As the impact of foreign currency exchange rates has not been material to our historical operating results, we have not entered into derivative or hedging transactions, but we may do so in the future if our exposure to foreign currency becomes more significant. Inflation Risk We do not believe that inflation has had a material effect on our business, results of operations, or financial condition. Nonetheless, if our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs. Our inability or failure to do so could harm our business, results of operations, or financial condition. 58
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