TENABLE HOLDINGS, INC. 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 endedDecember 31, 2019 , or the 10-K, filed with theSecurities and Exchange Commission onFebruary 28, 2020 . This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements are often identified by the use of words such as "anticipate," "believe," "continue," "could," "estimate," "expect," "intend," "may," "plan," "project," "will," "would" or the negative or plural of these words or similar expressions or variations. Such forward-looking statements are subject to a number of risks, uncertainties, assumptions and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified herein, and those discussed in the section titled "Risk Factors," set forth in Part II, Item 1A of this Form 10-Q and in our other filings with theSEC . Such risks and uncertainties may be amplified by the COVID-19 pandemic and its potential impact on our business and the global economy. You should not rely upon forward-looking statements as predictions of future events. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. Overview We are a leading provider of solutions for a new category of cybersecurity that we call Cyber Exposure. Cyber Exposure is a discipline for managing, measuring and comparing cybersecurity risk in the digital era. Our enterprise platform enables broad visibility into an organization's cyber exposure across the modern attack surface and deep insights that help organizations translate vulnerability data into business insights to understand and reduce their cybersecurity risk. Our enterprise platform offerings include Tenable.io, which is our software as a service, or SaaS, offering and Tenable.sc, which is our on-premises offering, both of which provide organizations with applications purpose-built for areas of both traditional and modern attack surfaces, including IT infrastructure and applications, cloud environments and industrial Internet of things, or IoT, and operational technology, or OT, environments. These applications are designed with views, workflows and dashboards to help identify vulnerabilities, internal and regulatory compliance violations, misconfigurations and other cybersecurity issues, prioritize these issues for remediation, and provide insightful remediation guidance. Our enterprise platform offerings are primarily sold on a subscription basis with a one-year term. Our subscription terms are generally not longer than three years. These offerings are typically prepaid in advance. To a lesser extent, we generate ratably recognizable revenue from perpetual licenses and from the related ongoing maintenance. We sell and market our products and services through our field sales force that works closely with our channel partners, which includes a network of distributors and resellers, in developing sales opportunities. We use a two-tiered channel model whereby we sell our enterprise platform offerings to our distributors, which in turn sell to our resellers, which then sell to end users, which we call customers. Many of our enterprise platform customers initially use either our free or paid version of Nessus, one of the industry's most widely deployed vulnerability assessment solutions. Nessus, which is the technology that underpins our enterprise platform offerings, is designed to quickly and accurately identify vulnerabilities, configuration and compliance issues and malware. Our free version of Nessus, Nessus Essentials, allows for vulnerability assessment over a limited number of IP addresses. We believe many of our Nessus customers begin with Nessus Essentials and subsequently upgrade to Nessus Professional, the paid version of Nessus; however, we expect many users to continue to use Nessus Essentials. We have experienced rapid growth in recent years. Revenue in the three months endedMarch 31, 2020 and 2019 was$102.6 million and$80.3 million , respectively, representing respective year-over-year growth of 28%. Our net loss in the three months endedMarch 31, 2020 and 2019 was$23.0 million and$21.4 million , respectively, as we continue to invest in our business and market opportunity. 17
--------------------------------------------------------------------------------
Table of Contents
COVID-19 Update
We are closely monitoring the impact of the COVID-19 pandemic on our customers,
partners, employees and service providers. The extent to which the COVID-19
pandemic will impact our business and operations will depend on future
developments that are highly uncertain. While in the near-term we may experience
reductions in our billing and revenue growth rates, we are proactively managing
expenditures, including reductions of non-critical and discretionary expenses,
while preserving strategic investment in sales capacity and research and
development. This may result in improved leverage related to gross margins as
well as sales and marketing, research and development, and general and
administrative expenses as a percent of revenue. For additional information on
the potential effects of the COVID-19 pandemic on our business, financial
condition and results of operations, see the "Liquidity and Capital Resources"
section below and "Risk Factors" in Part II, Item 1A of this Form 10-Q.
Financial Highlights
Below are our key financial results:
Three Months Ended March 31,
(in thousands, except per share data) 2020 2019
Revenue $ 102,648 $ 80,301
Loss from operations (21,672 ) (22,685 )
Net loss (22,977 ) (21,440 )
Net loss per share, basic and diluted (0.23 ) (0.23 )
Net cash provided by (used in) operating activities 4,492 (874 )
Purchases of property and equipment (614 ) (2,306 )
Factors Affecting Our Performance
Product Leadership
Our enterprise platform offerings provide visibility into the broadest range of
traditional and modern IT assets across cloud and on-premises environments. We
are intensely focused on continued innovation and ongoing development of our
enterprise platform offerings that empower organizations to understand and
reduce their cyber exposure. Additionally, we continue to expand the
capabilities of our Nessus products, specifically as they relate to the ability
to scan for and detect the rapidly expanding volume of vulnerabilities.
We intend to continue to invest in our engineering capabilities and marketing
activities to maintain our position in the highly-competitive market for
cybersecurity solutions. Our results of operations may fluctuate as we make
these investments to drive increased customer adoption and usage.
New Enterprise Platform Customer Acquisition
We believe that our customer base provides a significant opportunity to expand
sales of our enterprise platform offerings and that our ability to continue to
grow enterprise platform customers will increase future opportunities for
renewals and follow-on sales. We believe that we have significant room to
increase our market share.
We expect to grow our enterprise platform customers by continuing to expand our
sales organization and leveraging our channel partner network, which we believe
will allow us to identify new enterprise customers, enter new markets, including
internationally, as well as to convert more of our existing Nessus Professional
customers to enterprise platform customers.
We have increased our sales and marketing headcount in recent years and we will
continue to invest in our partner network and sales and marketing capability in
order to grow domestically and internationally.
18
--------------------------------------------------------------------------------
Table of Contents
Retaining and Expanding Revenue from Existing Customers
Our enterprise platform offerings utilize IT asset-based or IP address-based
pricing models. Once enterprise customers have licensed our platform offerings,
they typically seek broader coverage over their traditional IT assets, including
networking infrastructure, desktops and on-premises servers. As customers launch
new applications or migrate existing applications to the cloud and deploy web
applications, containers, IoT and OT, they often increase the scope of their
subscriptions and/or add additional perpetual licenses to our enterprise
platforms.
We are also focused on upselling customers from Nessus Professional to our
enterprise platform offerings. Nessus Professional customers are typically
organizations or independent security consultants that use Nessus Professional
for a single vulnerability assessment at a point in time. We seek to convert
these customers to our enterprise platform offerings, which provide continuous
visibility and insights into their attack surface, as their needs develop.
Further, we plan to expand existing platform capabilities and launch new
products, which we believe will drive new product purchases
and follow-on purchases over time, thereby contributing to customer renewals. We
believe that there is a significant opportunity to drive additional sales to
existing customers, and we expect to invest in sales and marketing and customer
success personnel and activities to achieve additional revenue growth from
existing customers. However, our ability to increase sales to existing customers
will depend on a number of factors, including satisfaction or dissatisfaction
with our products and services, competition, pricing, current economic
conditions or overall changes in our and our clients' spending levels.
We evaluate our ability to expand sales with our existing customers by assessing
our dollar-based net expansion rate. We calculate our dollar-based net expansion
rate as follows:
• Denominator: To calculate our dollar-based net expansion rate as of the
end of a reporting period, we first determine the annual recurring
revenue, or ARR, from all active subscriptions and maintenance from
perpetual licenses as of the last day of the same reporting period in the
prior year. This represents recurring payments that we expect to receive
in the next 12-month period from the cohort of customers that existed on
the last day of the same reporting period in the prior year.
• Numerator: We measure the ARR for that same cohort of customers
representing all subscriptions and maintenance from perpetual licenses
based on customer orders as of the end of the reporting period.
We calculate dollar-based net expansion rate by dividing the numerator by the
denominator.
While our dollar-based net expansion rate may decline or fluctuate from quarter
to quarter based on the result of a number of factors, including our existing
customers' satisfaction with our solutions, the pricing of our solutions and the
ability of competing solutions and the pricing thereof, our dollar-based net
expansion rate has historically exceeded, and we expect that it will continue to
exceed, 110%.
Investing in Business Growth
Since our founding, we have invested significantly in growing our business. We
intend to continue to invest in sales and marketing to grow our sales team,
expand brand and Cyber Exposure awareness and optimize our channel partner
network. We also intend to continue to invest in our research and development
team to further our technological leadership position in Cyber Exposure and
enhance the functionality of our solutions. Any investments we make in our sales
and marketing and research and development teams will occur in advance of
experiencing the benefits from such investments, so it may be difficult for us
to determine if we are efficiently allocating resources in those areas. We may
also explore acquisitions of businesses, technology and/or development personnel
that will expand and enhance the functionality of our platform offerings. These
investment activities could increase our net losses over the short term if our
revenue growth does not increase at higher rates. However, we expect that these
investments will ultimately benefit our results of operations.
Key Operating and Financial Metrics
To supplement our consolidated financial statements, which are prepared and
presented in accordance with GAAP, we use certain operating metrics and non-GAAP
financial measures, as described below, to understand and evaluate our core
operating and financial performance. These non-GAAP financial measures, which
may be different than similarly titled measures used by other companies, are
presented to enhance investors' overall understanding of our financial
19
--------------------------------------------------------------------------------
Table of Contents
performance and should not be considered a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. We believe that these operating metrics and non-GAAP financial measures provide useful information about our operating and financial performance, enhance the overall understanding of our past performance and future prospects and allow for greater transparency with respect to important metrics used by management for financial and operational decision-making. We present these operating metrics and non-GAAP financial measures to assist investors in seeing our operating and financial performance using a management view and because we believe that these measures provide an additional tool for investors to use in comparing our core operating and financial performance over multiple periods with other companies in our industry. Calculated Current Billings We use the non-GAAP measure of calculated current billings, which we believe is a key metric to measure our periodic performance. Given that most of our customers pay in advance, we typically recognize a majority of the related revenue ratably over time. We use calculated current billings to measure and monitor our ability to provide our business with the working capital generated by upfront payments from our customers. Calculated current billings consists of revenue recognized in a period plus the change in current deferred revenue in the corresponding period. We believe that calculated current billings, which excludes deferred revenue for periods beyond twelve months in a customer's contractual term, more closely correlates with annual contract value and that the variability in total billings, depending on the timing of large multi-year contracts and the preference for annual billing versus multi-year upfront billing, may distort growth in one period over another. While we believe that calculated current billings provides valuable insight into the cash that will be generated from sales of our subscriptions, this metric may vary from period-to-period for a number of reasons, and therefore has a number of limitations as a quarter-to-quarter or year-over-year comparative measure. For example, calculated current billings include amounts that have not yet been recognized as revenue; an increasing number of large sales transactions, for which the timing has and will continue to vary, may occur in quarters subsequent to or in advance of those that we anticipate; and our calculation of current billings may be different from other companies that report similar financial measures. Additionally, calculated current billings in any one period may be impacted by the timing of customer renewals, including early renewals, which could favorably or unfavorably impact year-over-year comparisons. Because of these and other limitations, you should consider calculated current billings along with revenue and our other GAAP financial results. Our adoption of Accounting Standards Codification Topic 606, Revenue From Contracts With Customers atJanuary 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 ,$11.8 million and$5.6 million in 2017, 2018 and 2019, respectively, and is expected to increase our calculated current billings by$1.9 million in 2020. The following table presents a reconciliation of revenue, the most directly comparable financial measure calculated in accordance with GAAP, to calculated current billings: Three Months Ended March 31, (in thousands) 2020 2019 Revenue$ 102,648 $ 80,301 Add: Deferred revenue (current), end of period 270,916 214,508 Less: Deferred revenue (current), beginning of period (274,348 ) (213,644 ) Calculated current billings$ 99,216 $ 81,165
Free Cash Flow We use the non-GAAP measure of free cash flow, which we define as GAAP net cash flows from operating activities reduced by purchases of property and equipment. We believe free cash flow is an important liquidity measure of the cash (if any) that is available, after purchases of property and equipment, for investment in our business and to make
20
--------------------------------------------------------------------------------
Table of Contents
acquisitions. We believe that free cash flow is useful to investors as a liquidity measure because it measures our ability to generate or use cash. Our use of free cash flow has limitations as an analytical tool and you should not consider it in isolation or as a substitute for an analysis of our results under GAAP. First, free cash flow is not a substitute for net cash flows from operating activities. Second, other companies may calculate free cash flow or similarly titled non-GAAP financial measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of free cash flow as a tool for comparison. Additionally, the utility of free cash flow is further limited as it does not reflect our future contractual commitments and does not represent the total increase or decrease in our cash balance for a given period. Because of these and other limitations, you should consider free cash flow along with net cash provided by (used in) operating activities and our other GAAP financial measures. The following table presents a reconciliation of net cash provided by (used in) operating activities, the most directly comparable financial measure calculated in accordance with GAAP, to free cash flow:
Three Months Ended March 31,
(in thousands) 2020 2019
Net cash provided by (used in) operating activities
(614 ) (2,306 )
Free cash flow(1) $ 3,878 $ (3,180 ) _______________
(1) Free cash flow included a reduction related to employee stock purchase plan activity of$3.7 million and$4.9 million in the three months endedMarch 31, 2020 and 2019, respectively. The three months endedMarch 31, 2020 also included$0.7 million of acquisition-related payments forIndegy and$0.1 million of capital expenditures for our new headquarters. Enterprise Platform Customers We believe that our customer base provides a significant opportunity to expand sales of our enterprise platform offerings. The following tables summarize key components of our customer base: Three Months Ended March 31, 2020 2019 Change (%) Number of new enterprise platform customers added in period(1) 319 311 3%
_______________
(1) We define an enterprise platform customer as a customer that has licensed
Tenable.io or Tenable.sc for an annual amount of
At March 31,
2020 2019 Change (%)
Number of customers with $100,000 and greater in
annual contract value at end of period 665 494 35%
Non-GAAP Loss from Operations and Non-GAAP Operating Margin We use non-GAAP loss from operations along with non-GAAP operating margin as key indicators of our financial performance. We define these non-GAAP financial measures as their respective GAAP measures, excluding the effects of stock-based compensation, acquisition-related expenses and amortization of acquired intangible assets. Acquisition-related expenses include transaction expenses and costs related to the transfer of acquired intellectual property. We believe that these non-GAAP financial measures provide useful information about our core operating results over multiple periods. There are a number of limitations related to the use of the non-GAAP financial measures as compared to GAAP loss from operations and operating margin, including that non-GAAP loss from operations and non-GAAP operating
21
--------------------------------------------------------------------------------
Table of Contents
margin exclude stock-based compensation expense, which has been, and will continue to be for the foreseeable future, a significant recurring expense in our business and an important part of our compensation strategy. The following table presents a reconciliation of loss from operations, the most directly comparable financial measure calculated in accordance with GAAP, to non-GAAP loss from operations, and operating margin, the most directly comparable financial measure calculated in accordance with GAAP, to non-GAAP operating margin:
Three Months Ended March 31,
(dollars in thousands) 2020 2019
Loss from operations $ (21,672 ) $ (22,685 )
Stock-based compensation 13,035 9,319
Acquisition-related expenses 339 -
Amortization of acquired intangible assets 579 151
Non-GAAP loss from operations $ (7,719 ) $ (13,215 )
Operating margin (21 )% (28 )%
Non-GAAP operating margin (8 )% (16 )%
Non-GAAP Net Loss and Non-GAAP Net Loss Per Share
We use non-GAAP net loss, which excludes the effect of stock-based compensation,
acquisition-related expenses and amortization of acquired intangible assets, as
well as the related tax impact, to calculate non-GAAP net loss per share. We
believe that these non-GAAP measures provide important information to management
and investors because they facilitate comparisons of our core operating results
over multiple periods.
The following table presents a reconciliation of net loss and net loss per
share, the most comparable financial measures calculated in accordance with
GAAP, to non-GAAP net loss and non-GAAP net loss per share:
Three Months Ended March 31,
(in thousands, except for per share amounts) 2020 2019
Net loss $ (22,977 ) $ (21,440 )
Acquisition-related expenses 339 -
Stock-based compensation 13,035 9,319
Tax impact of stock-based compensation(1) 198 (649 )
Amortization of acquired intangible assets(2) 579 151
Non-GAAP net loss $ (8,826 ) $ (12,619 )
Net loss per share, basic and diluted $ (0.23 ) $ (0.23 )
Acquisition-related expenses - -
Stock-based compensation 0.13 0.10
Tax impact of stock-based compensation(1) - -
Amortization of acquired intangible assets(2) 0.01 -
Non-GAAP net loss per share, basic and diluted $ (0.09 ) $ (0.13 ) Weighted-average shares used to compute net loss per share, basic and diluted
98,855 93,738
________________
(1) The tax impact of stock-based compensation is based on the tax treatment for the applicable tax jurisdictions. (2) The tax impact of amortization of acquired intangible assets is not material.
22
--------------------------------------------------------------------------------
Table of Contents
Components of Our Results of Operations Revenue We generate revenue from subscription arrangements for our software and cloud-based solutions, perpetual licenses, maintenance associated with perpetual licenses and professional services. Our subscription arrangements generally have annual or multi-year contractual terms to use our software or cloud-based solutions, including ongoing software updates during the contractual period. Revenue is recognized ratably over the subscription term given the critical utility provided by the ongoing updates that are released throughout the contract period. Our perpetual licenses are generally sold with one or more years of maintenance, which includes ongoing software updates. Given the critical utility provided by the ongoing software updates and updated ability to identify network vulnerabilities included in maintenance, we combine the perpetual license and the maintenance into a single performance obligation. Perpetual license arrangements generally contain a material right related to the customer's ability to renew maintenance at a price that is less than the initial license fee. We apply a practical alternative to allocating a portion of the transaction price to the material right performance obligation and estimate a hypothetical transaction price which includes fees for expected maintenance renewals based on the estimated economic life of perpetual license contracts. We allocate the transaction price between the cybersecurity subscription provided in the initial contract and the material right related to expected contract renewals based on the hypothetical transaction price. We recognize the amount allocated to the combined license and maintenance performance obligation over the initial contractual period, which is generally one year. We recognize the amount allocated to the material right over the expected maintenance renewal period, which begins at the end of the initial contractual term and is generally four years. We have estimated the five-year economic life of perpetual license contracts based on historical contract attrition, expected renewal periods, the lifecycle of our technology and other factors. This estimate may change over time. Professional services and other revenue is primarily comprised of advisory services and training related to the deployment and optimization of our products. These services do not result in significant customization of our products. Professional services and other revenue is recognized as the services are performed. We have historically experienced, and expect in the future to experience, seasonality in entering into agreements with customers. We typically enter into a significantly higher percentage of agreements with new customers, as well as renewal agreements with existing customers, in the third and fourth quarters of the year. The increase in customer agreements in the third quarter is primarily attributable 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. 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. 23
--------------------------------------------------------------------------------
Table of Contents
We expect our gross profit to increase in absolute dollars but our gross margin
to decrease, as we expect revenue from our cloud-based subscriptions to increase
as a percentage of revenue, although our gross margin could fluctuate from
period to period depending on the interplay of all of these factors.
Operating Expenses
Our operating expenses consist of sales and marketing, research and development
and general and administrative expenses. Personnel costs are the most
significant component of operating expenses and consist of salaries, benefits,
bonuses, payroll taxes and stock-based compensation expense. Operating expenses
also include depreciation and amortization as well as allocated overhead costs,
including IT and facilities costs.
Sales and Marketing
Sales and marketing expense consists of personnel costs, sales commissions,
marketing programs, travel and entertainment, expenses for conferences and
events and allocated overhead costs. We capitalize sales commissions, including
related incremental fringe benefit costs, and recognize the expense over an
estimated period of benefit, which ranges between three and four years for
subscription arrangements and five years for perpetual license arrangements.
Sales commissions on contract renewals are capitalized and amortized ratably
over the contract term, with the exception of contracts with renewal periods
that are one year or less, in which case the incremental costs are expensed as
incurred. Sales commissions on professional services arrangements are expensed
as incurred as the contractual period of these arrangements are generally less
that one year.
We intend to continue to make investments in our sales and marketing teams to
grow revenue, further penetrate the market and expand our global customer base.
We expect our sales and marketing expense to continue to increase in absolute
dollars and to be our largest operating expense category for the foreseeable
future. However, as our revenue increases, we expect our sales and marketing
expense to decrease as a percentage of our revenue over the long term. Our sales
and marketing expense may fluctuate as a percentage of our revenue from period
to period due to the timing and extent of these expenses, including sales
commissions, which may fluctuate depending on the mix of sales and related
expense recognition.
Research and Development
Research and development expense consists of personnel costs, software used to
develop our products, travel and entertainment, consulting and professional fees
for third-party development resources as well as allocated overhead. Our
research and development expense supports our efforts to continue to add
capabilities to our existing products and enable the continued detection of new
network vulnerabilities.
We expect our research and development expense to continue to increase in
absolute dollars for the foreseeable future as we continue to invest in research
and development efforts to enhance the functionality of our cloud-based
platform. However, we expect our research and development expense to decrease as
a percentage of our revenue over the long term, although our research and
development expense may fluctuate as a percentage of our revenue from period to
period due to the timing and extent of these expenses.
General and Administrative
General and administrative expense consists of personnel costs for our
executive, finance, legal, human resources and administrative departments.
Additional expenses include travel and entertainment, professional fees,
insurance, allocated overhead and acquisition-related costs.
We expect our general and administrative expense to continue to increase in
absolute dollars for the foreseeable future due to additional costs associated
with accounting, compliance, insurance and investor relations as a public
company. However, we expect our general and administrative expense to decrease
as a percentage of our revenue over the long term, although our general and
administrative expense may fluctuate as a percentage of our revenue from period
to period due to the timing and extent of these expenses.
24
--------------------------------------------------------------------------------
Table of Contents
Interest Income, Net
Interest income, net consists primarily of interest income earned on cash and
cash equivalents and short-term investments and interest expense in connection
with fees for our unused revolving credit facility.
Other Expense, Net
Other expense, net consists primarily of foreign currency remeasurement and
transaction gains and losses.
Provision for Income Taxes
Provision for income taxes consists of income taxes in certain foreign
jurisdictions in which we conduct business and the related withholding taxes on
sales with customers. We have recorded deferred tax assets for which a full
valuation allowance has been provided, including net operating loss
carryforwards and tax credits. We expect to maintain this full valuation
allowance for the foreseeable future as it is more likely than not that some or
all of those deferred tax assets may not be realized based on our history of
losses.
Results of Operations
The following tables set forth our consolidated results of operations:
Three Months Ended March 31,
(in thousands) 2020 2019
Revenue $ 102,648 $ 80,301
Cost of revenue(1) 18,701 13,226
Gross profit 83,947 67,075
Operating expenses:
Sales and marketing(1) 59,855 52,689
Research and development(1) 26,831 21,935
General and administrative(1) 18,933 15,136
Total operating expenses 105,619 89,760
Loss from operations (21,672 ) (22,685 )
Interest income, net 734 1,556
Other expense, net (960 ) (214 )
Loss before income taxes (21,898 ) (21,343 )
Provision for income taxes 1,079 97
Net loss $ (22,977 ) $ (21,440 )
_______________(1) Includes stock-based compensation expense as follows:
Three Months Ended March 31,
(in thousands) 2020 2019
Cost of revenue $ 747 $ 652
Sales and marketing 4,496 3,366
Research and development 2,948 2,030
General and administrative 4,844 3,271
Total stock-based compensation expense $ 13,035 $ 9,319
25
--------------------------------------------------------------------------------
Table of Contents
Comparison of the Three Months EndedMarch 31, 2020 and 2019 Revenue Three Months Ended March 31, Change (dollars in thousands) 2020 2019 ($) (%) Revenue$ 102,648 $ 80,301 $ 22,347 28 %
The increase in revenue of
Three Months Ended March 31, Change
(dollars in thousands) 2020 2019 ($) (%)
Cost of revenue $ 18,701 $ 13,226 $ 5,475 41 %
Gross profit 83,947 67,075 16,872 25 %
Gross margin 82 % 84 %
The increase in cost of revenue of
associated with the increased adoption of Tenable.io, as well as the
launch of Tenable Lumin;
• a
headcount, including a
• a
• a
• a
increase in headcount and the overall increase in such costs on a
year-over-year basis.
Operating Expenses
Sales and Marketing
Three Months Ended March 31, Change
(dollars in thousands) 2020 2019 ($) (%)
Sales and marketing $ 59,855 $ 52,689 $ 7,166 14 %
The increase in sales and marketing expense of $7.2 million was primarily due
to:
• a $4.7 million increase in personnel costs largely associated with an
increase in headcount, including a $1.1 million increase in stock-based
compensation;
• a $1.0 million increase in sales commissions, including sales commission
draws, due to increased sales and the amortization of deferred
commissions;
• a $0.9 million increase in allocated overhead costs, primarily facilities
costs, driven by both the increase in headcount and the overall increase
in such costs on a year-over-year basis;
26--------------------------------------------------------------------------------
Table of Contents
• a$0.3 million net increase in selling expenses, including travel and meeting costs and the costs of software subscriptions; and • a$0.1 million increase in expenses for demand generation programs, including advertising, sponsorships and brand awareness efforts aimed at acquiring new customers. Research and Development Three Months Ended March 31, Change (dollars in thousands) 2020 2019 ($) (%) Research and development$ 26,831 $ 21,935 $ 4,896 22 %
The increase in research and development expense of
increase in headcount, including a $1.2 million decrease in development
costs that were capitalized for internal use software and a $0.8 million
increase in stock-based compensation;
• a
• a
costs, driven by both the increase in headcount and the overall increase
in such costs on a year-over-year basis; partially offset by
• a
to the development of new and future offerings.
General and Administrative
Three Months Ended March 31, Change
(dollars in thousands) 2020 2019 ($) (%)
General and administrative $ 18,933 $ 15,136 $ 3,797 25 %
The increase in general and administrative expense of
increase in headcount, including a
compensation;
• a
facilities costs, driven by both the increase in headcount and the overall
increase in such costs on a year-over-year basis;
• a
external accounting and legal costs; and
• a
Liquidity and Capital Resources AtMarch 31, 2020 , we had cash and cash equivalents consisting of bank deposits and money market funds of$107.8 million and short-term investments consisting of commercial paper,U.S Treasury and agency obligations and corporate bonds of$118.9 million . Since our 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. We have generated significant operating losses from our operations as reflected by our accumulated deficit of$588.1 million atMarch 31, 2020 . 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 27
--------------------------------------------------------------------------------
Table of Contents
perpetual licenses, which is subsequently recognized as revenue in accordance with our revenue recognition policy. AtMarch 31, 2020 , we had deferred revenue of$358.1 million , of which$270.9 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, including the build-out of our new headquarters, and acquiring complementary businesses and technology. We expect to continue incurring operating losses. We have generated negative cash flows from operations and negative free cash flow in the past and may generate positive and negative cash flows from operations and free cash flow in the near-term. 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. In 2020, we expect capital expenditures related to our new corporate headquarters to be approximately$17.0 million and we expect to receive$12.5 million in tenant improvement reimbursements. The extent to which the COVID-19 pandemic will impact our business and operations will depend on future developments that are highly uncertain and cannot be predicted with confidence, such as the ultimate geographic spread of the disease, the duration of the outbreak, the duration and effect of business disruptions and the short-term effects and ultimate effectiveness of the travel restrictions, quarantines, social distancing requirements and business closures inthe United States and other countries to contain and treat the disease. We also do not yet know the full effects of COVID-19 pandemic may have on our partners, customers and service providers. Accordingly, the current results and financial conditions discussed herein may not be indicative of our future operating results and trends. See the section titled "Risk Factors" in Part II, Item 1A of this Form 10-Q. 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 ("Credit Facility") withSilicon Valley Bank . To date, we have not had any amounts outstanding under the Credit Facility. Our borrowing capacity is reduced by$2.5 million related to a standby letter of credit for the security deposit on our new headquarters lease. The 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 day of any quarter, the outstanding balance 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 atMarch 31, 2020 . InApril 2020 , the maturity date of the Credit Facility was extended by 60 days untilJuly 3, 2020 . Additionally, the Credit Facility was amended to increase the maximum amount of letters of credit that may be issued from$5.0 million to$6.5 million . 28
--------------------------------------------------------------------------------
Table of Contents
Cash Flows
The following table summarizes our cash flows for the periods presented:
Three Months Ended March 31,
(in thousands) 2020 2019
Net cash provided by (used in) operating activities
18,730 (14,471 )
Net cash provided by financing activities 11,281 18,453
Effect of exchange rate changes on cash and cash
equivalents and restricted cash (1,097 ) (258 )
Net increase in cash and cash equivalents and restricted cash
$ 33,406 $ 2,850 Operating Activities In the three months endedMarch 31, 2020 , net cash provided by operating activities was$4.5 million , which primarily consisted of our$23.0 million loss, adjusted for stock-based compensation expense of$13.0 million and depreciation and amortization of$2.7 million , as well as a net cash inflow of$11.2 million from changes in operating assets and liabilities. The net inflow from changes in operating assets and liabilities was primarily due to a$20.8 million decrease in accounts receivable due to collections from customers, partially offset by a$13.3 million decrease in accrued compensation, including$3.7 million related to employee stock purchase plan activity, and quarterly bonuses and commissions earned in the fourth quarter of 2019 that were paid in the first quarter of 2020. In the three months endedMarch 31, 2019 , net cash used in operating activities was$0.9 million , which primarily consisted of our$21.4 million loss, adjusted for stock-based compensation expense of$9.3 million and depreciation and amortization of$1.6 million , as well as a net cash inflow of$9.9 million from changes in operating assets and liabilities. The net inflow from changes in operating assets and liabilities was primarily due to an$11.1 million decrease in accounts receivable due to collections from customers and a$2.0 million increase in deferred revenue from increased subscription sales as a majority of our customers are invoiced in advance. The net inflow from changes in operating assets and liabilities was partially offset by a$7.2 million decrease in accrued compensation, including$4.9 million related to employee stock purchase plan activity, and quarterly bonuses and commissions earned in the fourth quarter of 2018 that were paid in the first quarter of 2019. Investing Activities Net cash provided by investing activities increased by$33.2 million , primarily due to a$31.5 million increase in sales and maturities, net of purchases, of short-term investments in commercial paper,U.S. Treasury and agency obligations and corporate bonds, in addition to a$1.7 million decrease in purchases of property and equipment. Financing Activities Net cash provided by financing activities decreased by$7.2 million , primarily due to$5.9 million and$1.3 million of decreases in proceeds from stock issued in connection with the exercise of stock options and the employee stock purchase plan, respectively. Contractual Obligations AtMarch 31, 2020 , there were no material changes in our contractual obligations and commitments from those disclosed in our 10-K. Off-Balance Sheet Arrangements AtMarch 31, 2020 , 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. 29
--------------------------------------------------------------------------------
Table of Contents
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. There have been no material changes to our critical accounting policies and estimates as described in our 10-K. Recently Issued Accounting Pronouncements Refer to Note 1 to our consolidated financial statements for more information regarding recently issued accounting pronouncements. 30
--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source
