MANDIANT, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. The following discussion focuses on our 2020 and 2019 financial condition and results of operations, including comparisons of the years endedDecember 31, 2020 and 2019. For discussion and analysis related to our financial condition and results of operations for fiscal year 2018, including comparisons of the years endedDecember 31, 2019 and 2018, refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for fiscal year 2019, which was filed with theSecurities and Exchange Commission onFebruary 21, 2020 . In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those contained in or implied by any forward-looking statements. Factors that could cause or contribute to these differences include those under "Risk Factors" included in Part I, Item 1A or in other parts of this Annual Report on Form 10-K. Overview We provide a broad portfolio of cybersecurity products, SaaS solutions and services that allow organizations to prepare for, prevent, respond to, investigate and remediate cyber attacks. Our product, subscription and support solutions include security controls for network, email, endpoint and cloud security, forensics solutions, our extended detection and response (XDR) SaaS solution, our security validation SaaS solution, threat intelligence and analytics solutions, our Helix security operations platform, and managed services. Our products, SaaS solutions and managed services are complemented by our technology-enabledMandiant consulting services, including incident response, security assessment and transformation services, training and education services and expertise on demand. InMarch 2020 , theWorld Health Organization declared the novel coronavirus disease (COVID-19) a global pandemic. We operate in geographic locations that have been impacted by COVID-19. The pandemic has impacted, and could further impact, our operations and the operations of our customers as a result of quarantines, various local, state and federal government public health orders, facility and business closures, and travel and logistics restrictions. While we instituted a global work-from-home policy and restricted employee travel to essential, business-critical trips toward the end of the first quarter of 2020, we were able to maintain strong customer relationships and deliver our technology-enabled managed and professional services to customers without interruption. As a result, we did not incur significant disruptions to our operations during the year endedDecember 31, 2020 . We anticipate governments and businesses may take additional actions or extend existing actions to respond to the risks of the COVID-19 pandemic. We continue to actively monitor the impacts and potential impacts of the COVID-19 pandemic in all aspects of our business. Although we are unable to predict the impact of the COVID-19 pandemic on our business, results of operations, liquidity or capital resources at this time, we expect we may be negatively affected if the pandemic and related public health measures result in substantial manufacturing or supply chain problems, disruptions in local and global economies, volatility in the global financial markets, overall reductions in demand, delays in payment, restrictions on the shipment of our products, or other ramifications from the COVID-19 pandemic. For a further discussion of the uncertainties and business risks associated with the COVID-19 pandemic, see the section entitled "Risk Factors" in Part I, Item 1A of this Annual Report on Form 10-K. OnApril 23, 2020 , the Board of Directors of the Company approved a restructuring plan to streamline the Company's operations to more closely align expenses to the Company's projected revenue, position the Company for improved operating performance and allow the Company to increase investment in strategic growth areas of the business. ThisApril 2020 restructuring plan resulted in the reduction of 6% of the Company's workforce as well as the exiting and downsizing of certain real estate facilities and the impairment of certain assets and consisted of severance, other one-time termination benefits and other restructuring related costs. These charges are primarily cash-based and have been recognized in the second quarter of 2020. This restructuring reduced total non-GAAP operating expenses by more than$26 million in 2020 compared to 2019. InAugust 2020 and inDecember 2020 , we implemented additional restructuring plans, predominantly related to facilities and obsolete assets in order to position the Company for improved operating performance. These August andDecember 2020 restructuring plans resulted in the reduction of approximately 1% of the Company's workforce. The actions associated with theApril 2020 restructuring plan were completed by the end of the second quarter of 2020 and the actions associated with theAugust 2020 andDecember 2020 restructuring plans were completed by the end of the third and fourth quarters of 2020, respectively. Our Business Model We generate revenue from sales ofFireEye products, our Mandiant SaaS and managed services and ourMandiant professional services. We disaggregate our revenue into two main categories: (i) product, subscription, and support and (ii) professional services. For the years endedDecember 31, 2020 , 2019 and 2018, product, subscription and support revenue as a percentage of total revenue was 77%, 80% and 83%, respectively. Revenue from professional services was 23%, 20% and 17% of total revenue forDecember 31, 2020 , 2019 and 2018, respectively. We further disaggregate revenue in the Product, subscription and support category into the Product and related subscription and support sub-category and Platform, cloud subscription and managed services sub-category.
Product, subscription and support
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Within the product, subscription and support category, we provide supplemental
data to distinguish between sales of our security control product solutions that
are deployed on-premise (or in hybrid on-premise/private cloud configurations),
and sales of our platform, cloud-based subscriptions and managed detection and
response services. Security control product solutions deployed on-premise (or in
hybrid on-premise/private cloud configurations) are included in the product and
related subscription and support sub-category. Our security validation, Helix
security operations platform, cloud-based security control products and cloud
visibility solutions, detection-on-demand, threat intelligence subscriptions and
detection and response managed services are included in the platform, cloud
subscription and managed services sub-category. For the years ended December 31,
2020 , 2019 and 2018, product and related subscription and support revenue as a
percentage of total revenue was 45%, 53% and 60%, respectively. Revenue from
platform, cloud subscription and managed services as a percent of total revenue
was 32%, 27% and 23% for the years ended December 31, 2020 , 2019 and 2018,
respectively.
Sales of our products, SaaS solutions and managed services initially increase
our deferred revenue. Deferred revenue from our product, subscription and
support sales totaled $845.3 million and $878.2 million as of December 31, 2020
and 2019, respectively. The decrease in deferred revenue from our product,
subscription and support sales was due primarily to a decrease in sales of our
appliance hardware and attached DTI cloud and support subscriptions compared
with prior periods.
Product and related subscription and support sub-category
Revenue in the product and related subscription and support sub-category
consists primarily of revenue from sales of our network, email and endpoint
security solutions that are deployed on the customer's premise, either as an
integrated security appliance or in distributed hybrid on-premise/private cloud
configurations. Both deployment options are available on pre-configured
appliance hardware or as virtual (software) sensors and include our detection
and MVX analysis technologies, our DTI cloud updates and support services.
Integrated and distributed solutions deployed on virtual sensors are offered as
an "all inclusive" subscription that includes our detection and MVX analysis
technologies, DTI cloud updates, and support services. There is no limit to the
number of virtual sensors a customer can deploy, and capacity can be distributed
throughout the customer's IT environment as needed. Subscription revenue is
recognized ratably over the contractual term, typically one to three years.
Customers purchasing our network and email security subscriptions have the
option of purchasing our appliance hardware at additional cost, but are not
required to do so.
Our network and email security solutions can also be deployed on pre-configured
appliance hardware purpose-built for our solutions. Integrated security
appliance hardware is delivered with our detection and MVX analysis technologies
pre-installed and require subscriptions to our DTI cloud updates and support
services, which are priced as a percentage of the appliance price per year.
Subscription terms are typically one to three years and include a material right
of renewal. Historically, the majority of on-premise network and email security
customers have purchased our security control products under this pricing model.
Since our network, email and endpoint security solutions require regular DTI
cloud and software updates to maintain detection efficacy, physical appliances
and virtual sensors, together with the related DTI cloud and support
subscriptions are considered a single performance obligation, whether deployed
as an integrated appliance, virtual sensor or in a distributed hybrid
on-premise/cloud configuration.
As a single performance obligation, revenue from sales of appliance hardware and
related subscriptions is recognized ratably over the contractual term, typically
one to three years. Such contracts typically contain a material right of renewal
option that allows the customer to renew their DTI cloud and support
subscriptions for an additional term at a discount to the original purchase
price of the single performance obligation. For contracts that contain a
material right of renewal option, the value of the performance obligation
allocated to the renewal is recognized ratably over the period between the end
of the initial contractual term and end of the estimated useful life of the
related appliance and license. A small portion of our revenue in the product and
related subscription and support revenue is derived from the sale of our network
forensics appliances and our central management system appliances. These
appliances are not dependent on regular security intelligence updates, and
revenue from these appliances is therefore recognized when ownership is
transferred to our customer, typically at shipment.
Platform, cloud subscriptions and managed services sub-category
Revenue in the platform, cloud subscription and managed services sub-category
consists primarily of revenue from sales of our cloud-based network, email and
endpoint security, our detection-on-demand service, our security validation
platform, our threat analytics platform (either standalone or within the Helix
security platform), our Helix security operations platform, our standalone
threat intelligence subscriptions and our managed services. The majority of
revenue from our platform, cloud subscription and managed services category is
recognized ratably over the contractual term, generally one to three years. A
small portion of our revenue in the platform, cloud subscription and managed
services category is derived from term licenses of our security validation
platform, and revenue from these sales is recognized when the license key is
issued to the customer.
Professional Services
56
-------------------------------------------------------------------------------- In addition to our product, subscription and support solutions, we offer professional services, including incident response and other strategic security consulting services, to our customers who have experienced a cybersecurity breach or desire assistance assessing and increasing the resilience of their IT environments to cyber attack. The majority our professional services are offered on a time and materials basis, through a fixed fee arrangement, or on a retainer basis. Revenue from professional services is recognized as services are delivered. Revenue from our Expertise-on-Demand subscription and some pre-paid professional services is deferred, and revenue is recognized when services are delivered. Deferred revenue from professional services as ofDecember 31, 2020 and 2019 was$111.2 million and$96.4 million , respectively. 57 -------------------------------------------------------------------------------- Key Business Metrics We monitor our key business metrics set forth below to help us evaluate growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts, and assess operational efficiencies. We discuss revenue and gross margin below under "Components of Operating Results." Deferred revenue, annualized recurring revenue, billings (a non-GAAP metric), net cash flow provided by (used in) operating activities, and free cash flow (a non-GAAP metric) are discussed immediately below the following table (in thousands, except percentages). Year Ended or as of December 31, 2020 2019 2018
Product, subscription and support revenue
$ 687,382 Professional services revenue 215,639 180,316 143,568 Total revenue$ 940,584 $ 889,152 $ 830,950 Year-over-year percentage increase 6 % 7 % 7 % Gross margin percentage 64 % 65 %
67 %
Deferred revenue (current and non-current)
$ 934,828 Annualized recurring revenue$ 637,610 $ 591,923 $ 553,918 Billings (non-GAAP)$ 919,810 $ 926,141 $ 855,678 Net cash provided by operating activities$ 94,895 $ 67,537 $ 17,381 Free cash flow (non-GAAP)$ 68,569 $ 21,932 $ 10,125 Deferred revenue. Our deferred revenue consists of amounts that we have the right to invoice but have not yet been recognized into revenue as of the end of the respective period. We monitor our deferred revenue balance because it represents a significant portion of revenue to be recognized in future periods. The majority of our deferred revenue consists of the unamortized balance of deferred revenue from previously invoiced sales of our security appliance hardware and non-cancelable contracts for subscriptions to our network, email and endpoint security solutions, Helix and security validation platforms, threat intelligence, managed detection and response services and support and maintenance contracts. Invoiced amounts for such contracts can be for multiple years, and we classify our deferred revenue as current or non-current depending on when we expect to recognize the related revenue. If the deferred revenue is expected to be recognized within 12 months it is classified as current, otherwise, the deferred revenue is classified as non-current. A table for our deferred revenue is provided below (in thousands): As of December 31, 2020 2019 2018
Deferred revenue, current
Annualized recurring revenue. Annualized recurring revenue ("ARR") is an
operating metric and represents the annualized revenue run-rate of active term
licenses, subscriptions, and support contracts at the end of a reporting period.
ARR should be viewed independently of revenue and deferred revenue as ARR is an
operating metric and is not intended to be combined with or replace these items.
ARR is not a forecast of future revenue, which can be impacted by contract start
and end dates and renewal rates, and does not include revenue from appliance
hardware, perpetual software, consumption-based contracts or professional
services except for service level agreement payments. We consider ARR a useful
measure of the value of the recurring components of our business because it
reflects both our ability to attract new customers for our solutions and our
success at retaining and expanding our relationships with existing customers.
Further, ARR is not impacted by variations in contract length, enabling more
meaningful comparison to prior periods as we align our invoicing practices to
growing customer preference for annual billing on multi-year contracts. We
started including ARR from service level agreement payments in our ARR
calculation starting in 2020 once they became material. ARR calculations for
2019 and 2018 have been updated for comparative purposes.
We disaggregate ARR by the same sub-categories we use for disaggregation of
billings and revenue in the table below (in thousands):
As of
2020 2019 2018
Product and related subscription and support$ 297,530 $ 307,718 $ 340,480 Platform, cloud subscription and managed services 340,080 284,205 213,438 Total annualized recurring revenue$ 637,610 $ 591,923 $ 553,918 58
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Billings. Billings are a non-GAAP financial metric that we define as revenue
recognized in accordance with generally accepted accounting principles ("GAAP")
plus the change in deferred revenue from the beginning to the end of the period,
excluding deferred revenue assumed through acquisitions. We monitor billings as
a supplement to revenue (the corresponding GAAP measure), because billings
impact our deferred revenue, which is an important indicator of the health and
visibility of trends in our business and represents a significant percentage of
future revenue. However, it is important to note that other companies, including
companies in our industry, may not use billings, may define billings
differently, may have different billing frequencies, or may use other financial
measures to evaluate their performance, all of which could reduce the usefulness
of billings as a comparative measure. Additionally, the calculated billings
metric represents the total contract value we have the right to invoice, which
includes multi-year subscriptions to our solutions. Calculated billings are
impacted by changes in average contract length, thereby reducing the usefulness
of comparisons to prior periods.
A reconciliation of billings to revenue, the most directly comparable financial
measure calculated and presented in accordance with GAAP, is provided below (in
thousands):
Year Ended December 31,
2020 2019 2018
Revenue $ 940,584 $ 889,152 $ 830,950
Add: Deferred revenue, end of period 956,457 974,567 934,828
Less: Deferred revenue, beginning of period (974,567)
(934,828) (910,100)
Less: Deferred revenue assumed through acquisitions (2,664) (2,750) - Billings (non-GAAP)$ 919,810 $ 926,141 $ 855,678
We have provided disaggregation of billings below (in thousands):
Year Ended
2020 2019 2018
Product and related subscription and support
Platform, cloud subscription and managed services 330,965 282,238 243,903 Product, subscription and support
689,394 716,771 695,876
Professional services 230,416 209,370 159,802
Billings (non-GAAP) $ 919,810 $ 926,141 $ 855,678
Net cash provided by operating activities. We monitor net cash provided by
operating activities as a measure of our overall business performance. Our net
cash provided by operating activities performance is driven in large part by
sales of our products and from up-front payments for both subscriptions and
support and maintenance services. Monitoring net cash provided by operating
activities enables us to analyze our financial performance without the non-cash
effects of certain items, such as depreciation, amortization and stock-based
compensation costs, thereby allowing us to better understand and manage the cash
needs of our business.
Free cash flow. Free cash flow is a non-GAAP financial measure we define as net
cash provided by operating activities, the most directly comparable GAAP
financial measure, less purchases of property and equipment and demonstration
units. We consider free cash flow to be a liquidity measure that provides useful
information to management and investors about the amount of cash generated by
our business that, after the purchases of property and equipment and
demonstration units, can be used by us for strategic opportunities, including
investing in our business, making strategic acquisitions and strengthening our
balance sheet. However, it is important to note that other companies, including
companies in our industry, may not use free cash flow, may calculate free cash
flow differently, or may use other financial measures to evaluate their
performance, all of which could reduce the usefulness of free cash flow as a
comparative measure. A reconciliation of free cash flow to cash flow provided by
operating activities is provided below (in thousands):
Year Ended
2020 2019 2018
Cash flow provided by operating activities $ 94,895 $ 67,537 $ 17,381
Add: deemed repayment of convertible senior notes
attributable to accreted debt discount - - $ 43,575 Less: purchase of property and equipment and demonstration units
(26,326) (45,605) (50,831)
Free cash flow (non-GAAP) $ 68,569 $ 21,932 $ 10,125
Net cash used in investing activities $ (72,158) $ (169,036) $ (48,517)
Net cash provided by financing activities $ 319,114 $ 26,273 $ 260,074
59
-------------------------------------------------------------------------------- Factors Affecting our Performance Market Adoption. We rely on market education to raise awareness of today's cyber attacks and articulate the need for our products, solutions and services. Our prospective customers often do not have a specific portion of their IT budgets allocated for our advanced security solutions. Additionally, the markets for security validation software such as ourMandiant security validation platform (formerly Verodin Security Instrumentation Platform), security operations platforms such as FireEye Helix, and our Mandiant Defense extended detection and response solution (formerly Respond Analyst) are in the early stages of development. We invest heavily in sales and marketing efforts to increase market awareness, educate prospective customers and drive adoption of our products, solutions and services. This market education is critical to creating new IT budget dollars or allocating more of existing IT budget dollars to advanced threat protection, security validation, security operations management solutions, and extended detection and response. The degree to which prospective customers recognize the mission critical need for our solutions will drive our ability to acquire new customers and increase renewals and follow-on sales opportunities, which, in turn, will affect our future financial performance. Sales Productivity. Our sales organization consists of in-house sales teams who work in collaboration with external channel partners to identify new sales prospects, sell additional products, subscriptions and services, and provide post-sale support. Our direct sales teams are organized by territory to target large enterprise and government customers who typically have sales cycles that can last several months or more. We have also expanded our inside sales teams to work with channel partners to expand our customer base of small and medium enterprises, or SMEs, as well as manage renewals of subscription and support contracts. Newly hired sales and marketing employees typically require several months to establish prospect relationships and achieve full sales productivity. In addition, although we believe our investments in market education have increased awareness of us and our solutions globally, sales teams in certain international markets may face local markets with limited awareness of us and our solutions, or have specific requirements that are not available with our solutions. These factors will influence the timing and overall levels of sales productivity, impacting the rate at which we will be able to convert prospects to sales and drive revenue growth. Customer Acquisition and Retention. Since we expect that our existing customers are likely to expand their deployments and purchase additional solutions from us over time, we believe new customer acquisition and retention of existing customers is important to expanding the value of our installed base, which we monitor through our key business metrics, including annualized recurring revenue. We believe our ability to maintain strong customer retention and drive new customer acquisition will have a material impact on future sales of our security solutions and services and therefore our future financial performance. Follow-On Sales. To grow our revenue, it is important that our customers make additional purchases of our products, subscriptions and services. After the initial sale to a new customer, we focus on expanding our relationship with the customer to sell additional products, subscriptions and services. Sales to our existing customer base can take the form of incremental sales of our solutions, managed services, and professional services either to expand their deployment of our technologies, to extend their internal security resources with our managed and professional security services, or continuously measure the effectiveness of their security controls. Our opportunity to expand our customer relationships through follow-on sales will increase as we add new customers, broaden our security solutions portfolio with additional subscriptions and services and enhance the functionality of our existing solutions. Follow-on sales lead to increased revenue over the lifecycle of a customer relationship and can significantly increase the return on our sales and marketing investments. With many of our large enterprise and government customers, we have realized follow-on sales that were multiples of the value of their initial purchases. Components of Operating Results Revenue We generate revenue from the sales of our products, subscriptions and services. Revenue is recognized when a contract has been entered into with a customer, the performance obligation(s) is (are) identified, the transaction price is determined and has been allocated to the performance obligation(s) and only then for each performance obligation after we have satisfied that performance obligation. •Product, subscription and support revenue. Our product, subscription and support revenue is generated from sales of our network, email, and endpoint security solutions deployed on the customer's premise (or in a hybrid on-premise/private cloud deployment), as well as our cloud-based security solutions, threat intelligence subscriptions, security validation and Helix security platforms, and managed detection and response services. We combine our virtual sensors and physical appliances and software licenses with mandatory subscriptions to our DTI cloud updates and support services as a single performance obligation. As a result, we recognize revenue for this single performance obligation ratably over the contractual term. Contracts containing this single performance obligation typically contain a material right of renewal option. For contracts that contain a material right of renewal option, the allocated value of the performance obligation is recognized ratably over the period between the end of the initial contractual term and the end of the estimated useful life of the related appliance and license. Significant judgment is required in estimating the useful life of our intelligence dependent appliances and assessing the material rights associated with such products. 60 -------------------------------------------------------------------------------- Revenue from our security validation and platform solutions, subscriptions to our cloud-based security and intelligence solutions, and our managed detection and response services is recognized ratably over the contractual term, typically one to three years. •Professional services revenue. Professional services, which includes incident response, security assessments, and other strategic security consulting services, are offered on a time-and-material basis, through a fixed fee arrangement, or on a retainer basis. We recognize the associated revenue as the services are delivered. Some professional services and our Expertise-on-Demand subscription are prepaid, and revenue is deferred until services are delivered. In the fourth quarter of 2020, we experienced an attack from a highly sophisticated threat actor that targeted and accessed certain Red Team assessment tools that we use to test our customers' security. This security incident did not have a material impact to our revenues in the fourth quarter or for the year endedDecember 31, 2020 . In addition, we do not expect the incident to materially impact our revenues going forward. Cost of Revenue Our total cost of revenue consists of cost of product, subscription and support revenue and cost of professional services revenue. •Cost of product, subscription and support revenue. Cost of product, subscription and support revenue primarily consists of costs paid to our third-party contract manufacturers for our appliances, other costs in our manufacturing operations department, personnel costs associated with maintaining our threat intelligence, managed detection and response services, and global customer support operations, and hosting costs paid to third party cloud platform providers. Personnel costs associated with our manufacturing operations department, our threat intelligence, our managed detection and response services and our global customer support organization consist of salaries, benefits, bonuses and stock-based compensation. Overhead costs consist of certain facilities, depreciation and information technology costs. Our cost of product, subscription and support revenue also includes product testing costs, shipping costs and allocated overhead costs. If revenue from sales of product, subscriptions and support declines, the cost of product, subscription and support revenue may increase as a percentage of product, subscription and support revenue due to the fixed nature of a portion of these costs. Additionally, our appliance related cost of goods sold is capitalized and amortized on a systematic basis that is consistent with the pattern of transfer to which the asset relates. •Cost of professional services revenue. Cost of professional services revenue primarily consists of personnel costs for our services organization and allocated overhead costs. If sales of our professional services decline or we are unable to maintain our chargeability rates, our cost of professional services revenue may increase as a percentage of professional services revenue. Gross Margin Gross margin, or gross profit as a percentage of revenue, has been and will continue to be affected by a variety of factors, including our average selling prices, the mix between products, subscription and support and services sold, the mix of revenue among products, subscriptions and services and manufacturing costs. We expect our gross margins to fluctuate slightly over time depending on these factors. Operating Expenses Our operating expenses consist of research and development, sales and marketing and general and administrative expenses. Personnel costs are the most significant component of operating expenses and consist of salaries, benefits, bonuses, stock-based compensation and, with regard to sales and marketing expense, sales commissions. Operating expenses also include allocated overhead costs consisting of certain facilities, depreciation and information technology costs. In the fourth quarter of 2020, we experienced an attack from a highly sophisticated threat actor that targeted and accessed certain Red Team assessment tools that we use to test our customers' security. This security incident did not have a material impact to our operating expenses in the fourth quarter or for the year endedDecember 31, 2020 . In addition, we do not expect the incident to materially impact our operating expenses in future periods. •Research and development. Research and development expense consists primarily of personnel costs and allocated overhead. Research and development expense also includes prototype related expenses. We expect research and development expense to increase in terms of absolute dollars and remain relatively flat or decrease slightly as a percentage of total revenue. •Sales and marketing. Sales and marketing expense consists primarily of personnel costs, incentive commission costs and allocated overhead. Commission costs are capitalized and amortized based on the useful life amortization period, taking into consideration the pattern of transfer to which the asset relates and the expected renewal periods during which renewal commissions are not commensurate with the initial commissions paid. When initial commissions are higher than (not-commensurate with) renewal commissions, we recognize the incremental portion of initial commissions over an estimated renewal period. The commensurate portion will be recognized over the same period as the initial revenue arrangement to which it relates. 61 -------------------------------------------------------------------------------- Sales and marketing expense also includes costs for market development programs, promotional and other marketing activities, travel, depreciation of proof-of-concept evaluation units and outside consulting costs. These costs are recognized as incurred. We expect sales and marketing expense to increase in absolute dollars and remain relatively flat or decrease slightly as a percentage of total revenue. •General and administrative. General and administrative expense consists of personnel costs, professional service costs and allocated overhead. General and administrative personnel include our executive, finance, human resources, facilities and legal organizations. Professional service costs consist primarily of legal, auditing, accounting and other consulting costs. We expect general and administrative expense to stay relatively flat in terms of absolute dollars and remain relatively flat or decrease slightly as a percentage of total revenue. •Restructuring Charges. InApril 2020 ,August 2020 andDecember 2020 , we implemented restructuring plans designed to align our resources with the strategic initiatives of the business. These restructuring plans resulted in a reduction of 7% of our total workforce as well as the exiting and downsizing of certain real estate facilities and the impairment of certain assets. The expenses incurred primarily consisted of employee severance charges and other termination benefits, as well as real estate and related fixed asset charges for the consolidation or exiting of certain leased facilities. Interest Income Interest income consists of interest earned on our cash and cash equivalent and investment balances. We have historically invested our cash in money-market funds and other short-term, high quality securities. We expect interest income to vary each reporting period depending on our average cash and cash equivalent and investment balances during the respective reporting periods, types and mix of investments and market interest rates. Interest Expense Interest expense consists primarily of interest at the stated rate (coupon) and amortization of discounts and issuance costs relating to our convertible notes. We expect interest expense to decrease slightly as a result of the repurchase of Series A Notes in June of 2020. Other Income (Expense), Net Other income (expense), net includes gains or losses on the disposal of fixed assets, gains or losses from our equity-method investment, gains or losses on the extinguishment of convertible notes, foreign currency re-measurement gains and losses and foreign currency transaction gains and losses. We expect other income (expense), net to fluctuate primarily as a result of foreign exchange rate movements. Provision for (Benefit from) Income Taxes Provision for income taxes relates primarily to income taxes payable in foreign jurisdictions where we conduct business, withholding taxes, and state income taxes inthe United States . The provision is offset by tax benefits primarily related to the reversal of valuation allowances previously established against our deferred tax assets. Should the tax benefits exceed the provision, then a net tax benefit from income taxes is reflected for the period. Income in certain countries may be taxed at statutory tax rates that are lower than theU.S. statutory tax rate. As a result, our overall effective tax rate over the long-term may be lower than theU.S. federal statutory tax rate due to net income being subject to foreign income tax rates that are lower than theU.S. federal statutory rate. 62
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Results of Operations
The following tables summarize our results of operations for the periods
presented and as a percentage of our total revenue for those periods. The
period-to-period comparison of results is not necessarily indicative of results
for future periods.
Year Ended December 31,
2020 2019 2018
(In thousands)
Revenue:
Product, subscription and support
Professional services 215,639 180,316 143,568
Total revenue 940,584 889,152 830,950
Cost of revenue:
Product, subscription and support 217,255 210,432
188,301
Professional services 116,772 98,460 84,174
Total cost of revenue 334,027 308,892 272,475
Total gross profit 606,557 580,260 558,475
Operating expenses:
Research and development 252,771 271,326 254,142
Sales and marketing 380,998 396,822 380,962
General and administrative 101,452 111,881 105,773
Restructuring charges 26,507 10,265 -
Total operating expenses 761,728 790,294 740,877
Operating loss (155,171) (210,034) (182,402)
Interest income 11,325 22,017 16,033
Interest expense (60,066) (61,927) (56,426)
Other expense, net (497) (1,775) (14,804)
Loss before income taxes (204,409) (251,719) (237,599)
Provision for income taxes 2,894 5,690 5,524
Net loss $ (207,303) $ (257,409) $ (243,123)
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Year Ended December 31,
2020 2019 2018
(Percent of total revenue)
Revenue:
Product, subscription and support 77 % 80 % 83 %
Professional services 23 20 17
Total revenue 100 100 100
Cost of revenue:
Product, subscription and support 23 24 23
Professional services 12 11 10
Total cost of revenue 36 35 33
Total gross profit 64 65 67
Operating expenses:
Research and development 27 31 31
Sales and marketing 41 45 46
General and administrative 11 13 13
Restructuring charges 3 1 -
Total operating expenses 81 89 89
Operating loss (16) (24) (22)
Interest income 1 2 2
Interest expense (6) (7) (7)
Other expense, net - - (2)
Loss before income taxes (22) (29) (29)
Provision for income taxes - 1 1
Net loss (22) % (29) % (29) %
64
-------------------------------------------------------------------------------- Comparison of the Years EndedDecember 31, 2020 and 2019 Revenue Year Ended December 31, 2020 2019 Change % of Total % of Total Amount Revenue Amount Revenue Amount % (Dollars in thousands) Revenue: Product, subscription and support$ 724,945 77 %$ 708,836 80 %$ 16,109 2 % Professional services 215,639 23 180,316 20 35,323 20 Total revenue$ 940,584 100 %$ 889,152 100 %$ 51,432 6 % Product, subscription and services by type: Product and related subscription and support$ 422,812 45 %$ 467,823 53 %$ (45,011) (10) % Platform, cloud subscription and managed services 302,133 32 241,013 27 61,120 25 Total product, subscription and support$ 724,945 77 %$ 708,836 80 %$ 16,109 2 % Revenue by geographic region: United States$ 584,696 62 %$ 554,856 63 %$ 29,840 5 % EMEA 158,560 17 155,357 17 3,203 2 APAC 140,492 15 131,361 15 9,131 7 Other 56,836 6 47,578 5 9,258 19 Total revenue$ 940,584 100 %$ 889,152 100 %$ 51,432 6 % Product, subscription and support revenue increased by$16.1 million , or 2%, during the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 . The increase was comprised of platform, cloud subscription and managed services of$61.1 million offset by a decrease in product and related subscription and support revenue of$45.0 million . The increase in platform, cloud subscription and managed services reflected increased amortization of deferred revenue associated with increased sales of our threat intelligence subscriptions, our cloud-based email and endpoint security, our validation platform solutions, our Helix platform, and our Managed Defense managed security service. The decrease in product and related subscription and support revenue was primarily due to a decrease in the product and related subscription and support deferred revenue, from which revenue is recognized. The decrease in deferred revenue reflected a decrease in sales of our on-premise solutions as customers migrate to cloud-based solutions. Professional services revenue increased by$35.3 million , or 20%, during the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 . The increase was primarily driven by an increase in number of engagements enabled by an increase in professional services personnel as compared to the same period in 2019. Our international revenue increased$21.6 million , or 6%, during the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 . The increase reflects growth in sales from certain international regions compared to prior periods as a result of an increase in revenue recognized from a build-up of deferred revenue from prior periods. 65 --------------------------------------------------------------------------------
Cost of Revenue and Gross Margin
Year Ended December 31,
2020 2019 Change
Gross Gross
Amount Margin Amount Margin Amount %
(Dollars in thousands)Cost of revenue:
Product, subscription and support$ 217,255 $ 210,432 $ 6,823 3 % Professional services 116,772 98,460 18,312 19 Total cost of revenue$ 334,027 $ 308,892 $ 25,135 8 % Gross margin: Product, subscription and support 70 % 70 % Professional services 46 % 45 % Total gross margin 64 % 65 % The cost of product, subscription and support revenue increased$6.8 million , or 3%, during the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 . The increase in cost of product, subscription and support revenue was primarily driven by a$14.0 million increase in personnel costs due to increased headcount and an$11.0 million increase in third-party hosting costs associated with higher sales of cloud-based solutions which were partially offset by a$9.1 million decrease in intangible amortization, a$4.0 million decrease in depreciation and a$1.6 million decrease in travel and entertainment expense which we attribute to the COVID-19 pandemic. The cost of professional services revenue increased$18.3 million , or 19%, during the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 . The increase in cost of professional services revenue was primarily driven by an$18.6 million increase in personnel costs due to increased headcount, and a$4.7 million increase in stock-based compensation expense which were partially offset by a$7.2 million decrease in travel and entertainment expense which we attribute to the COVID-19 pandemic. Gross margin was lower for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 . Operating Expenses Year Ended December 31, 2020 2019 Change % of Total % of Total Amount Revenue Amount Revenue Amount % (Dollars in thousands) Operating expenses: Research and development$ 252,771 27 %$ 271,326 31 %$ (18,555) (7) % Sales and marketing 380,998 41 396,822 45 (15,824) (4) General and administrative 101,452 11 111,881 13 (10,429) (9) Restructuring 26,507 3 10,265 1 16,242 158 Total operating expenses$ 761,728 81 %$ 790,294 89 %$ (28,566) (4) % Includes stock-based compensation expense of: Research and development$ 45,867 $ 45,476 Sales and marketing 49,662 49,198 General and administrative 25,176 29,966 Restructuring 314 - Total$ 121,019 $ 124,640 Research and Development Research and development expense decreased$18.6 million , or 7%, during the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 . The decrease was primarily due to a$9.0 million decrease in personnel costs due to lower headcount, a$2.9 million decrease in travel and entertainment expense which we attribute to the COVID-19 pandemic, a$2.6 million decrease in 66 -------------------------------------------------------------------------------- third party hosting services, a$1.0 million decrease in professional services and a$1.1 million decrease in telecommunication and software costs. Sales and Marketing Sales and marketing expense decreased by$15.8 million , or 4%, during the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 . The decrease was primarily due to a decrease in personnel costs of$13.0 million due to lower headcount, a$15.0 million decrease in travel and entertainment expense which we attribute to the COVID-19 pandemic, a$5.0 million decrease in marketing programs, partially offset by a$1.0 million increase in intangible amortization and a$14.0 million increase in commissions. General and Administrative General and administrative expense decreased$10 million , or 9%, during the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 . The decrease was primarily due to a$2.0 million decrease in personnel costs due to lower headcount, a$1.0 million decrease in travel and entertainment expense which we attribute to the COVID-19 pandemic, a$2.0 million decrease in professional services costs and a$5.0 million decrease in stock-based compensation. Interest Income Year Ended December 31, Change 2020 2019 Amount % (Dollars in thousands) Interest income$ 11,325 $ 22,017 $ (10,692) (49) % Interest income decreased for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 , primarily due to a lower rate of return on balances in our cash and cash equivalents and investments and overall decrease in our investment balance. Interest Expense Year Ended December 31, Change 2020 2019 Amount % (Dollars in thousands) Interest expense (60,066) (61,927)$ 1,861 (3) % Interest expense for the year endedDecember 31, 2020 decreased compared to the year endedDecember 31, 2019 as a portion of our convertible senior notes were repurchased inJune 2020 . Interest expense pertains primarily to cash coupon payments and the amortization of discount and issuance costs related to our convertible senior notes. Other Expense, Net Year Ended December 31, Change 2020 2019 Amount % (Dollars in thousands) Other expense, net (497) (1,775)$ 1,278 (72) %
The decrease in other expense, net during the year ended
Year Ended December 31,
2020 2019
(Dollars in thousands)
Provision for income taxes $ 2,894 $ 5,690
Effective tax rate (1.4) % (2.3) %
The provision for income taxes decreased for the year ended December 31, 2020
compared to the year ended December 31, 2019 . The decrease in the provision for
income taxes for the twelve months ended December 31, 2020 was primarily due to
lower foreign
67
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taxes and reversal of a valuation allowance in connection with the acquisitions.
Due to cumulative losses, we maintain a full valuation allowance on all of our
U.S. and certain foreign deferred tax assets. The tax expense for the years
ended December 31, 2020 and 2019 was primarily comprised of income taxes in
foreign jurisdictions and withholding taxes.
Quarterly Results of Operations
The following unaudited quarterly statements of operations data for each of the
eight quarters in the period ended December 31, 2020 and 2019 have been prepared
on a basis consistent with our audited annual financial statements included in
this Annual Report on Form 10-K and include, in our opinion, all normal
recurring adjustments necessary for the fair presentation of the financial
information contained in those statements. Our historical results are not
necessarily indicative of the results that may be expected in the future. The
following quarterly financial data should be read in conjunction with our
audited financial statements and the related notes included in this Annual
Report on Form 10-K.
Three Months Ended
December 31, September 30, December 31, September 30,
2020 2020 June 30, 2020 March 31, 2020 2019 2019 June 30, 2019 March 31, 2019
(Dollars in thousands)
Revenue:
Product, subscription and support
$ 177,305 $ 174,083 $ 185,008 $ 179,823 $ 174,102 $ 169,903 Professional services 57,781 54,624 52,595 50,639 50,078 46,091 43,506 40,641 Total revenue 247,502 238,460 229,900 224,722 235,086 225,914 217,608 210,544 Cost of revenue: Product, subscription and support 55,160 54,933 54,026 53,136 54,494 54,272 53,198 48,468 Professional Services 31,883 29,473 26,967 28,450 26,217 24,948 24,195 23,100 Total cost of revenue 87,043 84,406 80,993 81,586 80,711 79,220 77,393 71,568 Total gross profit 160,459 154,054 148,907 143,136 154,375 146,694 140,215 138,976 Operating expenses: Research and development 63,009 61,662 60,596 67,503 67,537 68,857 67,538 67,394 Sales and marketing 96,796 93,961 90,042 100,200 93,077 98,355 101,494 103,896 General and administrative 25,646 23,096 25,281 27,429 28,862 27,717 27,926 27,376 Restructuring charges 1,487 1,488 12,558 10,974 (15) 6,481 - 3,799 Total operating expenses 186,938 180,207 188,477 206,106 189,461 201,410 196,958 202,465 Operating loss (26,479) (26,153) (39,570) (62,970) (35,086) (54,716) (56,743) (63,489) Interest income 1,875 2,164 2,863 4,424 4,758 5,275 6,137 5,848 Interest expense (14,511) (14,353) (15,356) (15,846) (15,703) (15,554) (15,407) (15,263)
Other income (expense), net 454 157 (119) (989) (757) 40 (770) (288) Loss before income taxes (38,661) (38,185) (52,182) (75,381) (46,788) (64,955) (66,783) (73,192) Provision for income taxes (58) 933 1,094 925 2,428 541 540 2,182 Net loss$ (38,603) $ (39,118)
(1,050) - - - - - - -
Accretion of series A convertible
preferred stock (4,653) - - - - - - -
Net loss attributable to common
stockholders, basic and diluted $ (44,306) $ (39,118) $ (53,276) $ (76,306) $ (49,216) $ (65,496) $ (67,323) $ (75,374)
Net loss per share attributable to
common stockholders, basic and
diluted $ (0.19) $ (0.17) $ (0.24) $ (0.35) $ (0.23) $ (0.31) $ (0.33) $ (0.38)
Weighted average shares used to
compute net loss per share, basic
and diluted 229,203 224,807 221,352 217,789 214,565 212,207 204,109 197,819
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Three Months Ended
December 31, September 30, June 30, March 31, December 31, September 30, June 30,
2020 2020 2020 2020 2019 2019 2019 March 31, 2019
(Percent of total revenue)
Revenue:
Product, subscription and
support 77% 77 % 77 % 77 % 79 % 80 % 80 % 81
Professional services 23 23 23 23 21 20 20 19
Total revenue 100 100 100 100 100 100 100 100
Cost of revenue:
Product, subscription and
support 22 23 23 24 23 24 24 23
Professional services 13 12 12 13 11 11 11 11
Total cost of revenue 35 35 35 37 34 35 35 34
Total gross profit 65 65 65 63 66 65 65 66
Operating expenses:
Research and development 25 26 26 30 29 30 31 32
Sales and marketing 39 39 39 45 40 44 47 49
General and administrative 10 10 11 12 12 12 13 13
Restructuring charges 1 1 5 5 - 3 - 2
Total operating expenses 75 76 81 92 81 89 91 96
Operating loss (11) (11) (16) (29) (15) (24) (26) (30)
Interest income 1 1 1 2 2 2 3 3
Interest expense (6) (6) (7) (7) (7) (7) (7) (7)
Other income (expense), net - - - - - - - -
Loss before income taxes (16) (16) (22) (34) (20) (29) (30) (34)
Provision for income taxes - - - - 1 - - 1
Net loss (16)% (16) % (22) % (34) % (21) % (29) % (30) % (35)
Quarterly Revenue Trends
Our quarterly revenue increased year-over-year for all periods presented,
reflecting increased amortization of revenue from higher deferred revenue
compared with the year-ago period, as well as increased capacity in professional
services. The increase in deferred revenue was due to increased sales of our
cloud-based security solutions, as well as our threat intelligence and managed
detection and response services, partially offset by decreases in deferred
revenue related to prior sales of appliance-based security solutions with
attached subscriptions.
Sequentially, our subscription and services revenues continued to increase each
quarter presented. The sequential growth was due to increased amortization of
deferred revenue associated with higher deferred revenue, which was primarily
due to growth in sales of cloud-based security solutions, threat intelligence,
and managed detection and response services, as well as increased professional
services revenue.
We expect the decline in deferred revenue associated with on-premise
appliance-based solutions (and the related attached subscriptions and support)
to continue, with the decrease offset by increases in deferred revenue from
sales of new "all-inclusive" subscriptions to our network, email and endpoint
security solutions (with or without appliance hardware), as well as from
increases in sales of our platform, cloud subscriptions and managed services and
professional services.
Quarterly Gross Margin Trends
Consistent with increases in our quarterly revenue, quarterly gross profit
increased year-over-year for all periods presented. Total gross margin, or gross
profit as a percentage of revenue, decreased year-over-year in the first and
fourth quarters of 2020, however remained flat for the second and third quarters
of 2020. Gross margin increased year-over-year in the first quarter of 2019.
Gross margin declined year-over-year in the second, third and fourth quarters of
2019 due to an increase in professional services revenue as a percentage of
total revenue and increased public cloud hosting costs associated with higher
sales of cloud-based solutions and the transition of in-house data centers to a
third party cloud platform. We expect the cost of hosting our solutions on
third-party cloud platforms will increase in absolute dollars as revenue from
our cloud-based solutions increases, which could result in fluctuations in our
quarterly gross margins in the future.
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Quarterly Expense Trends
For 2019 and 2020, total operating expenses were highest in the first quarter
and trended down sequentially as employee-related payroll costs declined.
Liquidity and Capital Resources
As of December 31,
2020 2019
(In thousands)
Cash and cash equivalents $ 676,454 $ 334,603
Short-term investments $ 624,824 $ 704,955
Year Ended December 31,
2020 2019 2018
(In thousands)
Cash provided by operating activities $ 94,895 $ 67,537 $ 17,381
Cash used in investing activities (72,158) (169,036) (48,517)
Cash provided by financing activities 319,114 26,273 260,074
Net increase (decrease) in cash and cash equivalents
As ofDecember 31, 2020 , our cash and cash equivalents of$676.5 million were held for working capital, capital expenditures, investment in technology, debt servicing and business acquisition purposes, of which approximately$100.7 million was held outside ofthe United States . We consider the undistributed earnings of our foreign subsidiaries as ofDecember 31, 2020 to be indefinitely reinvested outsidethe United States on the basis of estimates that future domestic cash generation will be sufficient to meet future domestic cash needs and our plan for reinvestment of our foreign subsidiaries' undistributed earnings. During the three months endedJune 30, 2018 , we issued$600.0 million aggregate principal amount of the 2024 Notes and received net proceeds of$584.4 million after deducting the initial purchasers' discount and the issuance costs. In conjunction with the issuance of the 2024 Notes, we used approximately$65.2 million of the net proceeds to enter into the capped call transactions. In addition, we used approximately$330.4 million of the net proceeds to repurchase a portion of the principal amount outstanding of the Series A Notes. Refer to Note 10 contained in the "Notes to Consolidated Financial Statements" included in Part II, Item 8 of this Annual Report on Form 10-K for more information on the 2024 Notes, the capped call transactions and the Series A Notes. InDecember 2020 , we issued and sold 400,000 shares of a newly designated 4.5% Series A Convertible Preferred Stock, par value$0.0001 per share, at a price of$1,000 per share, for an aggregate purchase price of$400.0 million . InNovember 2020 , we acquiredRespond Software , a cybersecurity investigation automation company. In connection with this acquisition, we paid cash consideration of$116.1 million and assumed$5.0 million in net tangible liabilities. InJanuary 2020 , we acquired Cloudvisory, a provider of cloud visibility and control solutions. Total consideration for the acquisition was$13.2 million in cash. We also assumed$0.3 million in net tangible liabilities. InMay 2019 , we acquired Verodin, a security instrumentation platform company. As consideration for the acquisition, we paid$143.7 million in cash, issued 8,404,609 shares of our common stock with an estimated fair value of$119.7 million and recognized$1.5 million of the fair value of assumed stock options attributable to pre-combination services. Our principal sources of liquidity are existing cash and cash equivalents and short-term investments and any cash inflow from operations, which we believe will be sufficient to meet our anticipated cash needs for at least the next 12 months. While we have experienced delays in collections which we attribute to the COVID-19 pandemic, we believe we will be able to manage liquidity to meet our anticipated cash needs for at least the next 12 months. Our future capital requirements will depend on many factors, including our growth rate, the timing and extent of spending to support development efforts, the efficiency of our marketing and sales activities, the introduction of new and enhanced product and service offerings, the cost of any future acquisitions of technology or businesses, and the continuing market acceptance of our products. In the event that additional financing is required from outside sources, we may not be able to raise such financing on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, operating results and financial condition would be adversely affected. Operating Activities During the year endedDecember 31, 2020 , our operating activities provided cash of$94.9 million . We incurred a net loss of$207.3 million , which included net non-cash expenses of$305.4 million , primarily consisting of stock-based compensation charges and depreciation, amortization expense and non-cash interest expense related to convertible senior notes. Our net change in operating 70 -------------------------------------------------------------------------------- assets and liabilities provided cash of$3.2 million , primarily related to a decrease in deferred revenue of$20.8 million , a decrease in accounts payable of$18.9 million , an increase in prepaid expenses of$3.6 million , an increase in accounts receivable of$16.7 million , a decrease in accrued liabilities of$6.7 million , a decrease in long term liabilities of$16.5 million , an increase in inventories of$3.3 million and an increase in accrued compensation of$36.2 million . During the year endedDecember 31, 2019 , our operating activities provided cash of$67.5 million . We incurred a net loss of$257.4 million , which included net non-cash expenses of$305.5 million , primarily consisting of stock-based compensation charges, depreciation and amortization expense. Our net change in operating assets and liabilities used cash of$19.5 million , primarily related to reductions in deferred revenue of$37.0 million , an increase in accounts payables of$4.7 million , an increase in prepaid expenses of$7.0 million , which was partially offset by a decrease in accounts receivable of$12.1 million , a decrease in accrued liabilities of$3.1 million , a decrease in long term liabilities of$9.8 million and a decrease in accrued compensation of$4.3 million . During the year endedDecember 31, 2018 , our operating activities provided cash of$17.4 million . We incurred a net loss of$243.1 million , which included net non-cash expenses of$298.0 million , primarily consisting of stock-based compensation charges, depreciation, amortization expense and loss on the repurchase of our Series A Notes. As required under ASU 2016-15, we classified$43.6 million of the$330.4 million Series A Notes cash repayment as an amount deemed repayment of Series A Notes accreted debt discount as a cash outflow for operating activities. Our net change in operating assets and liabilities provided cash of$6.1 million , primarily related to reductions in deferred revenue of$24.7 million , due to amortization, an increase in prepaid expenses of$13.8 million due to prepayment of commissions, an increase in accounts receivable of$11.6 million due to increased sales and a decrease in accounts payables of$8.2 million . Investing Activities Cash used in investing activities during the year endedDecember 31, 2020 was$72.2 million , primarily for capital expenditures to purchase property and equipment and demonstration units of$26.3 million ,$123.7 million net of cash acquired for the acquisition of Cloudvisory andRespond Software and$1.0 million used for the purchase of an investment in a privately held company offset by$29.2 million provided by the sale of short term investments and net maturities of short-term investments of$50.0 million . Cash used in investing activities during the year endedDecember 31, 2019 was$169.0 million , primarily for capital expenditures to purchase property and equipment and demonstration units of$45.6 million , net maturities of short-term investments of$3.4 million and cash used in the acquisition of Verodin. Cash used in investing activities during the year endedDecember 31, 2018 was$48.5 million , primarily for capital expenditures to purchase property and equipment and demonstration units, net purchases of short-term investments and cash used to acquire The Email Laundry. Financing Activities During the year endedDecember 31, 2020 , financing activities provided$319.1 million in cash, primarily from proceeds of$395.3 million received from the issuance of Series A Convertible Preferred Stock, proceeds of$22.2 million from employee purchases of shares under our 2013 Employee Stock Purchase Plan ("ESPP") and$7.3 million from exercises of employee stock options primarily offset by the repurchase of convertible senior notes of$96.4 million and payments related to shares withheld for taxes. During the year endedDecember 31, 2019 , financing activities provided$26.3 million in cash, primarily from proceeds of$22.1 million from employee purchases of shares under our ESPP and$4.2 million from exercises of employee stock options. During the year endedDecember 31, 2018 , financing activities provided$260.1 million in cash, primarily from proceeds of$584.4 million received from the issuance of our 2024 Notes,$20.8 million from employee purchases of shares under our ESPP and$6.9 million from exercises of employee stock options. These proceeds were partially offset by the$286.8 million cash outflow attributable to the aggregate principal of the Series A Notes repurchased and$65.2 million for the purchase of the privately negotiated capped calls that cap the dilutive effects related to our 2024 Notes if the stock price exceeds the conversion price of the 2024 Notes. 71 --------------------------------------------------------------------------------
Contractual Obligations and Commitments
The following summarizes our contractual obligations and commitments as of
Payments Due by Period
Less Than More Than
Total 1 Year 1 - 3 Years 3 - 5 Years 5 Years
(In thousands)
Convertible Notes $ 1,134,278 $ 12,959 $ 25,919 $ 1,095,400 $ -
Operating leases 70,609 16,537 22,647 17,054 14,371
Purchase obligations 16,227 6,858 9,342 27 -
Contract manufacturer commitments 5,996 5,996 - - -
Total $ 1,227,110 $ 42,350 $ 57,908 $ 1,112,481 $ 14,371
Total future payments related to our Convertible Notes of $1,134 million shown
in the table above is composed of $23.4 million principal amount of Series A
Notes, $460 million principal amount of Series B Notes, $600 million principal
amount of 2024 Notes and future interest payments of $50.8 million . Although the
2035 Notes have a stated maturity of June 1, 2035 , they have been reflected in
the table above assuming repurchase on June 1, 2020 in the case of the Series A
Notes and June 1, 2022 in the case of the Series B Notes (the first date holders
have the right to require us to repurchase all or any portion of their
Convertible Senior Notes) at 100% of the principal amount plus accrued and
unpaid interest as of these dates.
Due to the uncertainty with respect to the timing of future cash flows
associated with our unrecognized tax benefits as of December 31, 2020 , we are
unable to make reasonably reliable estimates of the period of cash settlement
with the respective taxing authorities. Therefore, approximately $2.0 million of
unrecognized tax benefits classified as "Other long-term liabilities" in the
accompanying consolidated balance sheets as of December 31, 2020 , have been
excluded from the contractual obligations table above.
Off-Balance Sheet Arrangements
As of December 31, 2020 , we did not have any relationships with unconsolidated
entities or financial partnerships, such as structured finance or special
purpose entities, which were established for the purpose of facilitating
off-balance sheet arrangements or other purposes.
Segment Information
We have one primary business activity and operate in one reportable segment.
Concentration
For the years ended December 31, 2019 and 2018, one distributor represented 13%
and 20%, respectively, of the Company's total revenue, but did not represent 10%
or greater of the Company's total revenue for the year ended December 31, 2020 ,
and one reseller represented 15%, 14% and 15%, respectively, of the Company's
total revenue. Additionally, another distributor represented 12% and 10%,
respectively, of the Company's total revenue for the years ended December 31,
2020 and 2019, but did not represent 10% or greater of the Company's total
revenue for the year ended December 31, 2018 .
Our agreements with the distributors and reseller were made in the ordinary
course of our business and may be terminated with or without cause by either
party with advance notice. Although we believe we would experience some
short-term disruption in the distribution of our products and subscriptions and
services if these agreements were terminated, we believe such termination would
not have a long-term material adverse effect on our financial results and that
alternative resellers and other channel partners exist who would be able to
deliver our products to our end-customers.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance with U.S.
generally accepted accounting principles. The preparation of these consolidated
financial statements requires us to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenue, expenses, and related
disclosures. We base our estimates on historical experience and on various other
assumptions that we believe are reasonable under the circumstances. We evaluate
our estimates and assumptions on an ongoing basis. Actual results may differ
from these estimates. To the extent that there are material differences between
these estimates and our actual results, our future financial statements will be
affected.
The critical accounting policies requiring estimates, assumptions, and judgments
that we believe have the most significant impact on our consolidated financial
statements are described below.
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Revenue from Contracts with Customers
Revenue is recognized when all of the following criteria are met:
•Identification of the contract, or contracts, with a customer - A contract with
a customer exists when (i) we enter into an enforceable contract with a customer
that defines each party's rights regarding the goods or services to be
transferred and identifies the payment terms related to these goods or services,
(ii) the contract has commercial substance and the parties are committed to
perform, and (iii) we determine that collection of substantially all
consideration to which it will be entitled in exchange for goods or services
that will be transferred is probable based on the customer's intent and ability
to pay the promised consideration.
•Identification of the performance obligations in the contract - Performance
obligations promised in a contract are identified based on the goods or services
that will be transferred to the customer that are both capable of being
distinct, whereby the customer can benefit from the goods or service either on
its own or together with other resources that are readily available from third
parties or from us, and are distinct in the context of the contract, whereby the
transfer of the goods or services is separately identifiable from other promises
in the contract. To the extent a contract includes multiple promised goods or
services, we apply judgment to determine whether promised goods or services are
capable of being distinct and distinct in the context of the contract. If these
criteria are not met the promised goods or services are accounted for as a
combined performance obligation.
•Determination of the transaction price - The transaction price is determined
based on the consideration to which we will be entitled in exchange for
transferring goods or services to the customer adjusted for estimated variable
consideration, if any. We typically estimate the transaction price impact of
discounts offered to the customers for early payments on receivables or rebates
based on channel partner sales achievements. Constraints are applied when
estimating variable considerations based on historical experience where
applicable.
•Allocation of the transaction price to the performance obligations in the
contract - If the contract contains a single performance obligation, the entire
transaction price is allocated to the single performance obligation. Contracts
that contain multiple performance obligations require an allocation of the
transaction price to each performance obligation based on a relative standalone
selling price ("SSP") basis. Determination of SSP requires judgment. We
determine standalone selling price taking into account available information
such as historical selling prices of the performance obligation, geographic
location, overall strategic pricing objective, market conditions and internally
approved pricing guidelines related to the performance obligations.
•Recognition of revenue when, or as, we satisfy performance obligations - We
satisfy performance obligations either over time or at a point in time as
discussed in further detail below. Revenue is recognized at or over the time the
related performance obligation is satisfied by transferring a promised good or
service to a customer.
Nature of Products and Services
We generate revenue from the sales of physical and virtual security appliances
(products), software, subscriptions, support and maintenance contracts and
professional services to end-customers, primarily through our indirect
relationships through our partners or direct relationships through our direct
sales-force. We account for our performance obligations in accordance with ASC
606 and all related interpretations.
Our security appliance deliverables include proprietary operating system
software, which together with regular security intelligence updates and support
and maintenance, deliver the essential functionality of our appliance-based
security products. We deliver our appliances and software licenses with the
related intelligence subscription and support as a single performance
obligation. As a result, we recognize revenue for this single performance
obligation ratably over the contractual term. Contracts containing this single
performance obligation typically contain a material right of renewal option. For
contracts that contain a material right of renewal option, the allocated value
of the performance obligation is recognized ratably over the period between the
end of the initial contractual term and the end of the estimated useful life of
the related appliance and license.
Revenue from subscriptions to our cloud-based solutions, which allow customers
to use our hosted security software over a contracted period without taking
possession of the software, and managed services where we provide managed
detection and response services for our customers, are recognized over the
contractual term. We also recognize a small portion of our revenue from
appliances and software that are not dependent on regular threat intelligence
updates. Revenue from these solutions is therefore recognized when ownership is
transferred to our customers, typically upon shipment.
Professional services, which include incident response, security assessments,
and other strategic security consulting services are offered on a
time-and-materials basis or through fixed fee arrangements, and we recognize the
associated revenue as the services are delivered.
Stock-Based Compensation
Compensation expense related to stock-based transactions, including employee and
non-employee director stock options, is measured and recognized in the financial
statements based on the fair value of the awards granted. The fair value of each
option award is estimated on the grant date using the Black-Scholes
option-pricing model and a single option award approach. The fair value of
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stock options granted to non-employees is remeasured as the stock options vest,
and the resulting change in value, if any, is recognized in the statement of
operations during the period the related services are rendered. Stock-based
compensation expense is recognized over the requisite service periods of the
awards, which is generally four years.
Our use of the Black-Scholes option-pricing model requires the input of highly
subjective assumptions, including the fair value of the underlying common stock
prior to our IPO in September 2013 , the expected term of the option, the
expected volatility of the price of our common stock, risk-free interest rates,
and the expected dividend yield of our common stock. The assumptions used in our
option-pricing model represent management's best estimates. These estimates
involve inherent uncertainties and the application of management's judgment. If
factors change and different assumptions are used, our stock-based compensation
expense could be materially different in the future. These assumptions and
estimates are as follows:
•Fair Value of Common Stock. Because our common stock was not publicly traded
until September 20, 2013 , we were required to estimate the fair value of common
stock for grants made prior to that date, as discussed in "Common Stock
Valuations" below.
•Risk-Free Interest Rate. We base the risk-free interest rate used in the
Black-Scholes option-pricing model on the implied yield available on U.S.
Treasury zero-coupon issues with a remaining term equivalent to that of the
options for each option group.
•Expected Term. The expected term represents the period that our stock-based
awards are expected to be outstanding. We base the expected term assumption on
our historical exercise behavior combined with estimates of the post-vesting
holding period.
•Volatility. We determine the price volatility factor based on the historical
volatilities of our publicly traded peer group as we do not have a significant
trading history for our common stock. Industry peers consist of several public
companies in the technology industry that are similar to us in size, stage of
life cycle, and financial leverage. We used the same set of peer group companies
in all the relevant valuation estimates. We did not rely on implied volatilities
of traded options in our industry peers' common stock because the volume of
activity was relatively low. We intend to continue to consistently apply this
process using the same or similar public companies until a sufficient amount of
historical information regarding the volatility of our own common stock share
price becomes available, or unless circumstances change such that the identified
companies are no longer similar to us, in which case, more suitable companies
whose share prices are publicly available would be utilized in the calculation.
•Dividend Yield. The expected dividend assumption is based on our current
expectations about our anticipated dividend policy. Consequently, we used an
expected dividend yield of zero.
In addition to the assumptions used in the Black-Scholes option-pricing model,
we also estimated a forfeiture rate to calculate the stock-based compensation
expense for our awards prior to January 1, 2016 . Beginning January 1, 2016 , we
began recognizing forfeitures as they occur with the adoption of ASU 2016-09.
We estimate the fair value of the rights to acquire stock under our ESPP using
the Black-Scholes option pricing formula. Our ESPP typically provides for
consecutive twelve-month offering periods and we use our peer group volatility
data in the valuation of ESPP shares. We recognize such compensation expense on
a straight-line basis over the requisite service period.
We account for the fair value of restricted stock units ("RSUs") using the
closing market price of our common stock on the date of grant. For new-hire
grants, RSUs generally vest ratably on an annual basis over four years. For
annual refresh grants, RSUs generally vest ratably on an annual, or combination
of annual and quarterly, basis over two to four years.
We account for the fair value of performance stock units ("PSUs") using the
closing market price of our common stock on the date of grant. We begin
recognizing compensation expense when we conclude that it is probable that the
performance conditions will be achieved. We reassess the probability of vesting
at each reporting period and adjust our compensation cost based on this
probability assessment.
We will continue to use judgment in evaluating the assumptions related to our
stock-based compensation on a prospective basis. As we continue to accumulate
additional data related to our common stock, we may have refinements to our
estimates which could materially impact our future stock-based compensation
expense.
Income Taxes
We account for income taxes using the asset and liability method, which requires
the recognition of deferred tax assets and liabilities for the expected future
tax consequences of events that have been recognized in our financial statements
or tax returns. In addition, deferred tax assets are recorded for the future
benefit of utilizing net operating losses and research and development credit
carryforwards. Valuation allowances are provided when necessary to reduce
deferred tax assets to the amount expected to be realized. We recognize taxes on
Global Intangible Low-Taxed Income ("GILTI") as a current period expense when
incurred.
We apply the authoritative accounting guidance prescribing a threshold and
measurement attribute for the financial recognition and measurement of a tax
position taken or expected to be taken in a tax return. We recognize liabilities
for uncertain tax positions
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based on a two-step process. The first step is to evaluate the tax position for
recognition by determining if the weight of available evidence indicates that it
is more likely than not that the position will be sustained on audit, including
resolution of related appeals or litigation processes, if any. The second step
requires us to estimate and measure the tax benefit as the largest amount that
is more than 50% likely to be realized upon ultimate settlement.
Significant judgment is required in evaluating our uncertain tax positions and
determining our provision for income taxes. Although we believe our reserves are
reasonable, no assurance can be given that the final tax outcome of these
matters will not be different from that which is reflected in our historical
income tax provisions and accruals. We adjust these reserves in light of
changing facts and circumstances, such as the closing of a tax audit or the
refinement of an estimate. To the extent that the final tax outcome of these
matters is different than the amounts recorded, such differences may impact the
provision for income taxes in the period in which such determination is made.
Significant judgment is also required in determining any valuation allowance
recorded against deferred tax assets. In assessing the need for a valuation
allowance, we consider all available evidence, including scheduled reversal of
deferred tax liabilities, past operating results, the feasibility of tax
planning strategies and estimates of future taxable income. Estimates of future
taxable income are based on assumptions that are consistent with our plans.
Assumptions represent management's best estimates and involve inherent
uncertainties and the application of management's judgment. Should actual
amounts differ from our estimates, the amount of our tax expense and liabilities
could be materially impacted.
We do not provide for a U.S. income tax liability and foreign withholding taxes
on undistributed foreign earnings of our foreign subsidiaries as a result of
cumulative and current overall foreign loss. The earnings of non-U.S.
subsidiaries are currently expected to be indefinitely reinvested in non-U.S.
operations.
Contract Manufacturer Liabilities
We outsource most of our manufacturing, repair, and supply chain management
operations to our independent contract manufacturers and payments to them are a
significant portion of our product, subscription and support cost of revenue.
Although we could be contractually obligated to purchase manufactured products,
we generally do not own the manufactured products. Product title transfers from
our independent contract manufacturers to us and immediately to our partners or
customers upon shipment. Our independent contract manufacturers assemble our
products using design specifications, quality assurance programs, and standards
that we establish, and they procure components and assemble our products based
on our demand forecasts. These forecasts represent our estimates of future
demand for our products based upon historical trends and analysis from our sales
and product management functions, as adjusted for overall market conditions. If
the actual component usage and product demand are significantly lower than
forecast, we accrue for costs for contractual manufacturing commitments in
excess of our forecasted demand, including costs for excess components or for
carrying costs incurred by our contract manufacturers. To date, we have not
incurred nor accrued any significant costs associated with this exposure.
Loss Contingencies
We are subject to the possibility of various loss contingencies arising in the
ordinary course of business. We consider the likelihood of loss or impairment of
an asset, or the incurrence of a liability, as well as our ability to reasonably
estimate the amount of loss, in determining loss contingencies. An estimated
loss contingency is accrued when it is probable that an asset has been impaired,
or a liability has been incurred and the amount of loss can be reasonably
estimated. If we determine that a loss is possible, and the range of the loss
can be reasonably determined, then we disclose the range of the possible loss.
We regularly evaluate current information available to us to determine whether
an accrual is required, an accrual should be adjusted, or a range of possible
loss should be disclosed.
Warranties
We generally provide a one-year warranty on hardware. We do not accrue for
potential warranty claims as a component of cost of product, subscription and
support revenue as all product warranty claims are satisfied under our support
and maintenance contracts.
Goodwill
Goodwill is the excess of the aggregate purchase price paid over the fair value
of the net tangible and identifiable intangible assets acquired. Goodwill is not
amortized and is tested for impairment at least annually or whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable. We have determined that we operate as one reporting unit and have
selected December 1 as the date to perform our annual impairment test. In the
valuation of our goodwill, we must make assumptions regarding estimated future
cash flows to be derived from our business. If these estimates or their related
assumptions change in the future, we may be required to record impairment for
these assets. The first step of the impairment test involves comparing the fair
value of the reporting unit to its net book value, including goodwill. If the
net book value exceeds its fair value, then we would perform the second step of
the goodwill impairment test to determine the amount of the impairment loss. The
impairment loss would be calculated by comparing implied fair value of goodwill
to its net book value. In calculating our implied fair value of goodwill, our
fair value would be allocated to all of the other assets and liabilities based
on their fair values. The excess of our fair value over the amount assigned to
our other assets and liabilities is the implied fair value of goodwill. An
impairment loss would be recognized when the carrying
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amount of goodwill exceeds its implied fair value. There was no impairment of
goodwill recorded for the years ended December 31, 2020 , 2019 or 2018, and our
reporting unit was not at risk of failing the first step of the impairment test
for any of these periods.
Business Combinations
We account for all of our acquisitions using the acquisition method of
accounting for business combinations. The fair value of purchase consideration
is allocated to the tangible assets acquired, liabilities assumed, and
intangible assets acquired, based on their estimated fair values. The excess of
the fair value of purchase consideration over the values of these identifiable
assets and liabilities is recorded as goodwill.
When determining the fair value of assets acquired and liabilities assumed,
management makes significant estimates and assumptions, especially with respect
to identifiable intangible assets. Significant assumptions in valuing certain
identifiable intangible assets include, but are not limited to, expected
long-term market growth, customer retention, future expected operating expenses,
costs of capital, and appropriate discount rates. Management's estimates of fair
value are based upon assumptions believed to be reasonable, but which are
inherently uncertain and unpredictable and, as a result, actual results may
differ from estimates.
Recent Accounting Pronouncements
See Note 1 Description of Business and Summary of Significant Accounting
Policies contained in the "Notes to Consolidated Financial Statements" in Part
II, Item 8 of this Annual Report on Form 10-K for a full description of the
recent accounting pronouncements and our expectation of their impact, if any, on
our results of operations and financial conditions.
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