MANDIANT, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year endedDecember 31, 2021 . The following discussion and analysis contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements include, but are not limited to, statements regarding:
•the evolution of the threat landscape facing our customers and prospects;
•our ability, and the effects of our efforts, to educate the market regarding the advantages of our security solutions;
•our ability to continue to grow revenues, in particular annual recurring revenues from cloud and subscriptions;
•our future financial and operating results;
•our business plan and our ability to effectively manage our growth and associated investments;
•our beliefs and objectives for future operations;
•our ability to attract and retain customers and to expand our solutions footprint within each of these customers;
•our expectations concerning customer retention rates as well as expectations for the value of subscriptions and services renewals;
•our ability to maintain our competitive technological advantages against new entrants in our industry;
•our ability to timely and effectively scale and adapt our existing technology;
•our ability to innovate new offerings and bring them to market in a timely manner;
•our ability to maintain, protect, and enhance our brand and intellectual property;
•our ability to expand internationally;
•the effects of increased competition in our market and our ability to compete effectively;
•cost of revenue, including changes in costs associated with customer support;
•trends in operating expenses, including changes in research and development, sales and marketing, and general and administrative expenses;
•anticipated income tax rates;
•potential attrition and other impacts associated with restructuring;
•sufficiency of cash to meet cash needs for at least the next 12 months;
•our ability to generate cash flows from operations and free cash flows;
•our ability to capture new, and renew existing, contracts with
•our expectations concerning relationships with third parties, including channel partners and logistics providers;
•economic and industry trends or trend analysis;
•the impact of the COVID-19 pandemic and related public health measures on our business and the global economy;
•the attraction, training, integration and retention of qualified employees and key personnel;
•future acquisitions of or investments in complementary companies, products, subscriptions or technologies;
•our expectations, beliefs, plans, intentions and strategies related to our
acquisition of
•our expectations, beliefs, plans, intentions and strategies related to our divestiture of the FireEye Products business to a consortium led bySymphony Technology Group ("STG") including our expectations related to the transition services agreement and the impact of the divestiture on our remaining business;
•our expectations, beliefs, plans, intentions and strategies related to
•costs and any benefits of our divestiture of the FireEye Products business; and
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--------------------------------------------------------------------------------•the effects of seasonal trends on our results of operations.
As well as other statements regarding our future operations, financial condition and prospects, and business strategies. Forward-looking statements generally can be identified by words such as "anticipates," "believes," "estimates," "expects," "intends," "plans," "predicts," "projects," "will be," "will continue," "will likely result," and similar expressions. These forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties, which could cause our actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Quarterly Report on Form 10-Q, and in particular, the risks discussed under the caption "Risk Factors" in Item 1A of Part II of this Quarterly Report on Form 10-Q and those discussed in other documents we file with theSEC . We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. Investors and others should note that we announce material financial information to our investors using our investor relations Web site (http://investors.mandiant.com/),SEC filings, press releases, public conference calls and webcasts. We use these channels, as well as social media, to communicate with the public about our company, our services and other issues. It is possible that the information we post on social media could be deemed to be material information. OverviewMandiant, Inc. and its wholly owned subsidiaries (collectively, the "Company", "Mandiant", "we", "us", or "our") provide a broad portfolio of cybersecurity solutions and services that allow organizations to prepare for, prevent, respond to, investigate and remediate cyber-attacks. Our portfolio includes threat intelligence, security validation, attack surface management and automated alert investigation integrated in the Mandiant Advantage platform, managed services and consulting services. OnMarch 7, 2022 , we entered into an Agreement and Plan of Merger (the "Merger Agreement") withGoogle LLC ("Google") andDupin Inc. , a wholly owned subsidiary ofMandiant, Inc. (the "Merger"), withMandiant, Inc. surviving the merger as a wholly owned subsidiary ofMandiant's common stock (except as otherwise set forth in the Merger Agreement) will be canceled and automatically converted into the right to receive$23.00 in cash, without interest and less any applicable withholding taxes. Completion of the Merger is subject to the satisfaction (or waiver where permissible pursuant to applicable law) of certain terms and conditions set forth in the Merger Agreement, including (i) adoption of the Merger Agreement by the holders of our common stock and convertible preferred stock (on an as-converted to common stock basis), voting together as a single class; (ii) the absence of an injunction, judgment, order or other legal restraint, law or any action of any governmental authority preventing, materially restraining or materially impairing the consummation of the Merger or the conversion of our convertible preferred stock into common stock in connection with the Merger; and (iii) the expiration or termination of the waiting period under the United States Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and clearance under the regulatory laws of certain non-United States jurisdictions. The Merger is expected to close in calendar year 2022, subject to the satisfaction (or waiver where permissible pursuant to applicable law) of certain conditions. Upon consummation of the Merger,Mandiant's common stock will no longer be listed on any public market. The foregoing summary of the Merger Agreement and the transactions contemplated thereby does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the Merger Agreement, which is filed as Exhibit 2.1 of our Current Report on Form 8-K filed onMarch 9, 2022 and incorporated by reference herein. OnOctober 8, 2021 , we completed the previously announced sale of the FireEye Products business toMagenta Buyer LLC ("Trellix"), which is backed by a consortium led bySymphony Technology Group , in exchange for total cash consideration of$1.2 billion , subject to certain purchase price adjustments, and assumption of certain liabilities of the FireEye Products business as specified in the Asset Purchase Agreement, as amended by an Amendment to the Asset Purchase Agreement entered into onOctober 8, 2021 . As a result, all historical periods presented in our condensed consolidated financial statements and other portions of this Quarterly Report on Form 10-Q have been conformed to present the FireEye Products business as discontinued operations. InMarch 2020 , theWorld Health Organization declared the novel coronavirus disease (COVID-19) a global pandemic. 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, supply chain shortages, vaccination mandates, and travel and logistics restrictions. With our COVID-19 safety plans, work-from-home and return-to-office policies and restricted employee travel to essential, business-critical trips, we have been able to maintain strong customer relationships and deliver 31 --------------------------------------------------------------------------------
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 three months ended
InJanuary 2022 , theU.S. Supreme Court struck down theU.S. Department of Labor's Occupational Safety and Health Administration ("OSHA") Emergency Temporary Standard (the "ETS") requiring that all employers with at least 100 employees ensure that theirU.S. employees are fully vaccinated for COVID-19. Following that ruling,OSHA chose to withdraw the vaccine ETS altogether. In addition, the federal district court inGeorgia stayed the enforcement of the mandatory employee COVID-19 vaccination requirement found inPresident Biden's Executive Order forU.S. government contractors and their subcontractors (the "Executive Order"). As a result, we revised our COVID-19 policy to only require COVID-19 vaccination for employees or visitors that will be entering any ofMandiant's U.S. office locations. We are also complying with the other aspects of the Executive Order for federal government contractors at our covered contractor workplaces that have not been stayed by the federal courts. Our implementation and enforcement of vaccination requirements could be difficult, costly, and potentially result in employee attrition, including attrition of key employees, disruptions in workforce performance, and difficulty securing future labor needs, any of which could have a material adverse effect on our business, financial condition, and results of operations. 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, including any recurrence of the virus or its variants, 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 further 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, 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 Quarterly Report on Form 10-Q. Our Business Model We generate revenue from Mandiant Solutions. Pursuant to the sale of the FireEye Products business to a consortium led by STG, the revenue from the FireEye Products business has been included within discontinued operations in our condensed consolidated financial statements for all historical periods presented. We disaggregate our revenue from Mandiant Solutions into two main categories: (i) platform, cloud subscription and managed services and (ii) professional services. For the three months endedMarch 31, 2022 and 2021, platform, cloud subscription and managed services revenue as a percentage of total revenue was 44% and 49%, respectively. Revenue from professional services was 56% and 51% for the three months endedMarch 31, 2022 and 2021, respectively.
Platform, cloud subscription and managed services
The majority of our platform, cloud subscription and managed services revenue is generated from sales of subscriptions to our Mandiant Advantage platform and modules (including Security Validation, Threat Intelligence and Automated Defense and Attack Surface Management) and managed services that are delivered through the cloud. A majority of the revenue in this category is recognized ratably over the contractual term, generally one to three years. While our threat intelligence and automated defense modules are only available through the cloud, a portion of our revenue in the platform, cloud subscription and managed services category is derived from term licenses of our Security Validation module deployed on premise, and revenue from these sales is recognized when the license key is issued to the customer. Revenue from the sale of our on-premise Security Validation term licenses continues to decline as we encourage our new and existing customers to migrate their solution to the cloud-based Mandiant Advantage platform for greater flexibility and integration with our Threat Intelligence Attack Surface Management and Automated Defense modules. An increasing number of new Security Validation customers are purchasing subscriptions for the cloud-based Mandiant Advantage Security Validation module, and we expect an increasing number of Security Validation customers to renew on the cloud-based Mandiant Advantage module. Deferred revenue from platform, cloud and managed services as ofMarch 31, 2022 andDecember 31, 2021 was$263.6 million and$271.0 million , respectively.
Professional services
In addition to our platform, cloud subscription and managed services, we offer professional services, including incident response and other strategic security consulting services, to our customerswho 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 ofMarch 31, 2022 andDecember 31, 2021 was$136.4 million and$139.3 million , respectively.
Discontinued Operations
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Revenue from discontinued operations was generated primarily from sales of
network, email, endpoint security, Helix SIEM and Cloudvisory solutions deployed
on a customer's premises, either as an integrated security appliance or a
distributed hybrid on-premise/private cloud configurations. As a single
performance obligation, revenue from sales of appliance hardware and related
subscriptions was recognized ratably over the contractual term, typically one to
three years. Such contracts typically contained a material right of renewal
option that allows the customer to renew their Dynamic Threat Intelligence
("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 contained a material right of renewal option, the value of the performance
obligation allocated to the renewal was 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 related to discontinued
operations was derived from the sale of our network forensics appliances and our
central management system appliances. These appliances were not dependent on
regular security intelligence updates, and revenue from these appliances was
therefore recognized when ownership was transferred to our customer, typically
at shipment.
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).
Three Months Ended or as of
March 31,
2022 2021
Platform, cloud subscription and managed services revenue $ 57,629 $ 55,999
Professional services revenue 72,515 58,689
Total revenue $ 130,144 $ 114,688
Year-over-year percentage increase 13 % 24 %
Gross margin percentage 45 % 48 %
Deferred revenue (current and non-current) $ 399,989 $ 280,291
Annualized recurring revenue $ 287,041 $ 236,062
Billings (non-GAAP) $ 119,805 $ 110,726 Net cash used in operating activities - continuing operations
- 36,433
Net cash provided by (used in) operating activities $ (23,335) $ 20,861
Free cash flow (non-GAAP) - continuing operations $
(32,337)
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.
Our deferred revenue consists of the unamortized balance of deferred revenue
from previously invoiced sales of our security validation platforms, threat
intelligence, consulting services and managed detection and response services
and excludes deferred revenue from discontinued operations. 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 March 31,
2022 2021
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 managed services 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
revenue or deferred revenue. 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 consumption-based contracts or professional services except
for service level
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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. A table for our ARR is
provided below (in thousands):
As of March 31,
2022 2021
Platform, cloud subscription and managed services
11,879 7,206
Total annualized recurring revenue$ 287,041 $
236,062
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 as well as commitments for
future services engagements. Calculated billings are impacted by changes in
average contract length, thereby reducing the usefulness of comparisons to prior
periods. Unlike subscription revenue, which is recognized ratably over a
contract term, services revenue is recognized when services are delivered,
making calculated services billings less useful as a measure of current business
activity. A reconciliation of billings to revenue, the most directly comparable
financial measure calculated and presented in accordance with GAAP, is provided
below (in thousands):
Three Months Ended March 31,
2022 2021
Revenue $ 130,144 $ 114,688
Add: deferred revenue, end of period 399,989 280,291
Less: deferred revenue, beginning of period (410,328) (284,253) Billings (non-GAAP)$ 119,805 $ 110,726
We have provided disaggregation of billings below (in thousands):
Three Months Ended
2022 2021
Platform, cloud subscription and managed services $ 50,213 $ 52,335
Professional services 69,592 58,391
Billings (non-GAAP) $ 119,805 $ 110,726
Net cash used in operating activities. We monitor net cash used in operating
activities as a measure of our overall business performance. Our net cash used
in operating activities performance is driven in large part by sales of our
offerings in the platform, cloud subscription, managed services category and
professional services and from up-front payments for both subscriptions and
services. Monitoring net cash used in 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 used in operating activities, the most directly comparable GAAP financial
measure, less purchases of property and equipment. 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, can be used by us for strategic
opportunities, including investing in our business, making strategic
acquisitions, debt repayment, strengthening our balance sheet and share
repurchases. 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
(used in) operating activities is provided below (in thousands):
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Three Months Ended
2022 2021
Net cash used in operating activities - continuing operations $
(23,335)
Less: purchase of property and equipment (9,002) (5,627) Free cash flow (non-GAAP) - continuing operations$ (32,337) $ (21,199) Net cash used in investing activities - continuing operations$ (343,357) $ (168,167) Net cash used in financing activities - continuing operations $
(15,799)
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 solutions and services. Although our security validation and automated defense solutions address significant challenges experienced by customers when implementing effective cybersecurity safeguards - challenges that include an expanding attack surface from remote workers and digital transformation, proliferation of nation state-sponsored attackers, and an acute shortage of cybersecurity talent - the markets for these solutions are in the early stages of development. As a result, our prospective customers may not have a specific portion of their IT budgets allocated for our advanced security solutions. We invest heavily in sales and marketing efforts to increase market awareness, educate prospective customers and drive adoption of our solutions and services. Additionally, our consultants use our technology in their engagements, allowing customers to witness the features and capabilities of our solutions in their IT environments. This market education is critical to creating new IT budget dollars or allocating more of existing IT budget dollars to cybersecurity in general and specifically our security validation and security automation solutions. 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 teamswho work in collaboration with external channel partners to identify new sales prospects, sell additional solutions, subscriptions and services, and provide post-sale support. Our direct sales teams are organized by territory to target large enterprise and government customerswho 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 customer-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 thereafter of existing customers is essential 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 solutions and services. After the initial sale to a new customer, we focus on expanding our relationship with the customer to sell additional modules available on the Mandiant Advantage platform as well as add additional services. Sales to our existing customer base can take the form of incremental sales of our solutions, managed services, and consulting services either to expand their deployment of our technologies, to extend their internal security resources with our managed and professional security services, or to continuously measure the effectiveness of their security controls. Our opportunity to expand our customer relationships through follow-on sales will increase as we demonstrate the utility of our solutions, 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
As a result of the sale of the FireEye Products business, all historical periods
presented in this Form 10-Q have been conformed to present the FireEye Products
business as discontinued operations. We report the financial results of
discontinued operations separately from continuing operations to distinguish the
financial impact of disposal transactions from ongoing operations. The results
of
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--------------------------------------------------------------------------------operations and cash flows of a discontinued operation are restated for all comparative periods presented. Refer to Note 2, "Discontinued Operations," to our condensed consolidated financial statements for further information.
Revenue
We generate revenue from the sales of ourMandiant solutions 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. •Platform, cloud subscription and managed services revenue. The majority of our platform, cloud subscription and managed services revenue is generated from sales of subscriptions to our Mandiant Advantage platform and modules (security validation, threat intelligence, and automated defense) and to our managed services that are delivered through the cloud and are recognized over the term of the contract. A small portion of our security validation platform licenses deployed on premise, historically, were recognized when the license key was issued to the customer. BeginningJanuary 1, 2022 , due to a change in product licensing that requires all licenses (deployed on premise or in the cloud) to connect to the cloud-based Mandiant Advantage platform in order to be functional, revenue related to all security validation platform licenses is recognized over the contract term. •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.
Cost of Revenue
Our total cost of revenue consists of cost of cloud and managed service revenue and cost of professional services revenue.
•Cost of platform, cloud subscription and managed services revenue. Cost of platform, cloud subscription and managed services revenue primarily consists of personnel costs associated with maintaining our threat intelligence and delivering our managed services, hosting costs paid to third party cloud platform providers, and allocated overhead costs. Personnel costs associated with maintaining our threat intelligence and delivering our managed services consist of salaries, benefits, bonuses and stock-based compensation. Overhead costs consist of certain facilities, depreciation and information technology costs. If revenue from sales of our cloud and managed services declines, the cost of platform, cloud subscription and managed services revenue may increase as a percentage of cloud and managed services revenue due to the fixed nature of a portion of these costs. •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 or billing 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 the mix between platform, cloud subscription and managed services and professional services revenue, the mix of incident response and other strategic security consulting, and the amount of reimbursable travel expenses. We expect our gross margins to fluctuate slightly depending on these factors, but increase over time with expected growth and higher mix of platform, cloud subscription and managed services revenue compared to professional services revenue. Although the FireEye Products business revenue is included in discontinued operations for the three months endedMarch 31, 2021 , indirect overhead costs are not allocated to the discontinued operations as they are not direct costs of the FireEye Product business, resulting in a decrease in gross margins.
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.
Operating expenses for continuing operations include the full cost of resources
shared by
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--------------------------------------------------------------------------------the Transition Services Agreement ("TSA"). These costs are not included in operating expenses and are instead included in other income and expense.
•Research and development. Research and development expense consists primarily of personnel costs and allocated overhead. Research and development expense also includes certain costs associated with delivering our threat intelligence through our Mandiant Advantage platform that were included in cost of goods sold before the Mandiant Advantage platform became generally available. We expect research and development expense to increase in terms of absolute dollars and slightly decrease 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 over the expected period of benefit, taking into consideration the pattern of transfer to which the asset relates and the expected renewal period. When commissions paid for initial contracts are higher than those paid for renewal contracts, the initial commissions are not commensurate and as such, are recognized over the expected period of benefit, which we generally estimate to be four years. Renewal commissions are generally amortized over the renewal period. Sales and marketing expense also includes costs for market development programs, promotional and other marketing activities, travel, and outside consulting costs. These costs are recognized as incurred. We expect sales and marketing expense to increase in absolute dollars and 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 remain relatively flat in terms of absolute dollars and decrease as a percentage of total revenue. •Restructuring Charges. In the fiscal years 2021 and 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 our total workforce as well as the exiting and downsizing of certain real estate facilities, including the decommissioning of ourMilpitas, California office space and relocation of our corporate headquarters toReston, Virginia , 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 as a result of the expected repurchase of our Series B Notes in June of 2022 as well as due to the adoption of ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity's Own Equity as ofJanuary 1, 2022 as described in Note 1 to the accompanying condensed consolidated financial statements.
Other Income, Net
Other income, 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, net, to fluctuate primarily as a result of foreign exchange rate movements.
Provision for (Benefit from) Income Taxes
Provision for (benefit from) 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.
Net Income (Loss) from Discontinued Operations
As more fully described in Note 2 to the accompanying condensed consolidated financial statements, onOctober 8, 2021 , we completed the sale of the FireEye Products business and received approximately$1.2 billion in cash. As a result, the historical results 37 --------------------------------------------------------------------------------
of operations for the FireEye Products business have been included within discontinued operations in our condensed consolidated financial statements.
Results of Operations
The following table summarizes 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.
Three Months Ended
2022 2021
% of total % of total
Amount Revenue Amount Revenue
(Dollars in thousands)
Revenue:
Platform, cloud subscription and managed services $ 57,629 44 % $ 55,999 49 %
Professional services 72,515 56 58,689 51
Total revenue 130,144 100 114,688 100
Cost of revenue:
Platform, cloud subscription and managed services 30,121 23 26,613 23
Professional services 42,081 32 32,472 28
Total cost of revenue 72,202 55 59,085 52
Total gross profit 57,942 45 55,603 48
Operating expenses:
Research and development 44,461 34 41,905 37
Sales and marketing 69,409 53 61,213 53
General and administrative 32,413 25 25,351 22
Restructuring charges 1,040 1 - -
Total operating expenses 147,323 113 128,469 112
Operating loss (89,381) (69) (72,866) (64)
Interest income 1,751 1 1,644 1
Interest expense (4,314) (3) (14,624) (13)
Other income, net 719 1 571 -
Loss before income taxes from continuing
operations $ (91,225) (70) $ (85,275) (74)
Provision for income taxes 789 1 1,180 1
Loss from continuing operations $ (92,014) (71) $ (86,455) (75)
Net income from discontinued operations, net of
income taxes - - 35,809 31
Net loss $ (92,014) (71) % $ (50,646) (44) %
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Comparison of the Three Months Ended
Continuing operations
Revenue
Three Months Ended March 31,
2022 2021 Change
% of Total % of Total
Amount Revenue Amount Revenue Amount %
(Dollars in thousands)
Revenue:
Platform, cloud subscription and
managed services $ 57,629 44 % $ 55,999 49 % $ 1,630 3 %
Professional services 72,515 56 58,689 51 13,826 24
Total revenue $ 130,144 100 % $ 114,688 100 % $ 15,456 13 %
Revenue by geographic region:
U.S. $ 85,350 66 % $ 77,796 68 % $ 7,554 10 %
EMEA 21,122 16 17,017 15 4,105 24
APAC 14,128 11 11,704 10 2,424 21
Other 9,544 7 8,171 7 1,373 17
Total revenue $ 130,144 100 % $ 114,688 100 % $ 15,456 13 %
Platform, cloud subscription and managed services revenue increased by $1.6
million , or 3%, during the three months ended March 31, 2022 compared to the
three months ended March 31, 2021 . The increase in platform, cloud subscription
and managed services revenue reflected increased recognition of deferred revenue
associated with sales of the threat intelligence and security validation modules
of the Mandiant Advantage platform and our Managed Defense managed security
service, partially offset by a decrease in up-front revenue recognized on our
on-premise security validation solution, which was recognized ratably during the
three months ended March 31, 2022 .
Professional services revenue increased by $13.8 million , or 24%, during the
three months ended March 31, 2022 compared to the three months ended March 31,
2021 . The increase was primarily driven by an increase in number of engagements
enabled by an increase in professional services personnel and an increase in
chargeability and billable hours as compared to the same period in 2021.
Our international revenue increased $7.9 million , or 21%, during the three
months ended March 31, 2022 compared to the three months ended March 31, 2021 .
The increase primarily reflects an increase in the number of professional
services engagements in all international regions compared to prior periods as
well as slight growth in sales of our platform, cloud subscription and managed
services.
Cost of Revenue and Gross Margin
Three Months Ended March 31,
2022 2021 Change
Gross Gross
Amount Margin Amount Margin Amount %
(Dollars in thousands)
Cost of revenue:
Platform, cloud subscription and
managed services $ 30,121 $ 26,613 $ 3,508 13 %
Professional services 42,081 32,472 9,609 30
Total cost of revenue $ 72,202 $ 59,085 $ 13,117 22 %
Gross margin:
Platform, cloud subscription and
managed services 48 % 52 %
Professional services 42 % 45 %
Total gross margin 45 % 48 %
The cost of platform, cloud subscription and managed services revenue increased
by $3.5 million , or 13%, during the three months ended March 31, 2022 compared
to the three months ended March 31, 2021 . The increase in cost of platform,
cloud
39
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subscription and managed services revenue was primarily due to an increase of
$3.0 million in payroll costs due to an increase in headcount as well as annual
salary increases, an increase of $0.9 million pertaining to hosting services, an
increase of $0.8 million in stock-based compensation, an increase of
$0.4 million in consulting costs and an increase of$0.3 million in software
costs, partially offset by a $0.8 million decrease in shared services, such as
facility and IT support costs from our restructuring and cost optimization
plans.
The cost of professional services revenue increased by $9.6 million , or 30%,
during the three months ended March 31, 2022 compared to the three months ended
March 31, 2021 . The increase in cost of professional services revenue was
primarily due to an increase of $7.4 million in payroll due to an increase in
headcount as well as annual salary increases, an increase of $2.2 million in
stock-based compensation expense, an increase of $1.5 million related to
technology fees and fleet support pertaining to our reseller agreement with
Trellix, which was not in place during the three months ended March 31, 2021 , an
increase of $0.6 million in travel expense to support the increase in customer
engagements and an increase of $0.4 million in consulting costs, partially
offset by a $2.4 million decrease in shared services, such as facility and IT
support costs from our restructuring and cost optimization plans.
Gross margin percentage decreased 3 percentage points during the three months
ended
Operating Expenses
Three Months Ended March 31,
2022 2021 Change
% of Total % of Total
Amount Revenue Amount Revenue Amount %
(Dollars in thousands)
Operating expenses:
Research and development $ 44,461 34 % $ 41,905 37 % $ 2,556 6 %
Sales and marketing 69,409 53 61,213 53 8,196 13
General and administrative 32,413 25 25,351 22 7,062 28
Restructuring charges 1,040 1 - - 1,040 100
Total operating expenses $ 147,323 113 % $ 128,469 112 % $ 18,854 15 %
Includes stock-based compensation
expense of:
Research and development $ 9,194 $ 8,423
Sales and marketing 10,631 9,890
General and administrative 7,530 7,088
Total $ 27,355 $ 25,401
Research and Development
Research and development expense increased by $2.6 million , or 6%, during the
three months ended March 31, 2022 compared to the three months ended March 31,
2021 . The increase was primarily due to an increase of $2.4 million in employee
costs due to an increase in headcount as well as annual salary increases, an
increase of $2.9 million in consulting expenses and an increase of $0.8 million
in stock-based compensation expense, partially offset by a $3.9 million decrease
in shared services, such as facility and IT support costs from our restructuring
and cost optimization plans.
Sales and Marketing
Sales and marketing expense increased by $8.2 million , or 13%, during the three
months ended March 31, 2022 compared to the three months ended March 31, 2021 .
The increase was primarily due to an increase of $5.7 million in commission and
employee expenses due to an increase in headcount, and an increase of
$4.5 million in marketing program expense and company rebranding costs,
partially offset by a $2.1 million decrease in intangible amortization.
General and Administrative
General and administrative expense increased by$7.1 million , or 28%, during the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 . The increase was primarily due to an increase of$4.6 million in consulting and professional services expense and an increase of$2.3 million in employee costs primarily due to retention bonuses and annual salary increases. 40 --------------------------------------------------------------------------------
Restructuring Charges
During the three months endedMarch 31, 2022 , we incurred restructuring charges of approximately$1.0 million , which primarily related to the provision for restructuring charges as well as certain facilities exit costs and right-of-use asset write-offs. We did not incur restructuring charges during the three months endedMarch 31, 2021 . Interest Income Three Months Ended March 31, Change 2022 2021 Amount % (Dollars in thousands) Interest income$ 1,751 $ 1,644 $ 107 7 % Interest income increased for the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 , due primarily to a higher rate of return on balances in our cash and cash equivalents and investments. Interest Expense Three Months Ended March 31, Change 2022 2021 Amount % (Dollars in thousands) Interest expense$ 4,314 $ 14,624 $ (10,310) (71) % Interest expense decreased for the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 primarily due to the adoption of ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity's Own Equity, which eliminates the debt discount amortization in 2022. Interest expense pertains primarily to interest accrued as well as the amortization of issuance costs related to our convertible notes. Other Income, Net Three Months Ended March 31, Change 2022 2021 Amount % (Dollars in thousands) Other income, net $ 719$ 571 $ 148 26 % Other income, net, increased for the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 primarily due to billing of services under theTSA related to the sale of the FireEye Products business. We recognize any difference between the cost to support theTSA and any billings for our services rendered under theTSA in other income, net.
Provision for Income Taxes
Three Months Ended March 31,
2022 2021
(Dollars in thousands)
Provision for income taxes $ 789 $ 1,180
Effective tax rate (0.9) % (1.4) %
The provision for income taxes decreased for the three months ended March 31,
2022 compared to the three months ended March 31, 2021 . The decrease in the
provision for income taxes for the three months ended March 31, 2022 was
primarily due to lower foreign taxes and a decrease in unfavorable tax
adjustments from business combinations in the three months ended March 31, 2022
compared to the three months ended March 31, 2021 .
Discontinued Operations
41
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Three Months Ended March 31, Change
2022 2021 Amount %
(Dollars in thousands)
Net income from discontinued operations $ - $ 35,809 $ (35,809) (100) %
On October 8, 2021 , we completed the sale of the FireEye Products business and
received approximately $1.2 billion in cash. As a result, the historical results
of operations for the FireEye Products business have been included within
discontinued operations in our condensed consolidated financial statements. See
Note 2, contained in the "Notes to Condensed Consolidated Financial Statements"
in Part I, Item I of this Quarterly Report on Form 10-Q for additional
information.
There was no net income from discontinued operations during the three months
ended March 31, 2022 as the sale of the FireEye Products business was completed
in the fourth quarter of 2021.
Liquidity and Capital Resources
As of
March 31, 2022 December 31, 2021
(In thousands)
Cash and cash equivalents
Short-term investments $ 1,359,105 $ 1,039,339
Three Months Ended March 31,
2022 2021
(In thousands)
Net cash used in operating activities - continuing operations $ (23,335) $ (15,572)
Net cash provided by operating activities - discontinued
operations - 36,433
Net cash provided by (used in) operating activities (23,335) 20,861
Net cash used in investing activities - continuing operations (343,357)
(168,167)
Net cash used in investing activities - discontinued operations - (4,392)
Net cash used in investing activities (343,357) (172,559)
Net cash used in financing activities (15,799) (7,783)
Net decrease in cash and cash equivalents $
(382,491)
As ofMarch 31, 2022 , our cash and cash equivalents of$772.0 million were held for working capital, capital expenditures, investment in technology, debt servicing and business acquisition purposes, of which approximately$87.6 million was held outside ofthe United States . We consider the undistributed earnings of our foreign subsidiaries as ofMarch 31, 2022 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.
On
OnMay 29, 2021 , we entered into an Asset Purchase Agreement, pursuant to which we agreed to sell the FireEye Products business to a consortium led by STG in exchange for total cash consideration of$1.2 billion and assumption of certain liabilities of the FireEye Products business as specified in the Asset Purchase Agreement. The proceeds were received when the transaction closed onOctober 8, 2021 . 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 services. In the event that additional financing is required from outside 42 -------------------------------------------------------------------------------- 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. Under the terms of the Merger Agreement, we have agreed to various covenants and agreements, including, among others, agreements to conduct our business in the ordinary course during the period between the execution of the Merger Agreement and the effective time of the Merger. Outside of certain limited exceptions, we may not take, authorize, commit, resolve, or agree to do certain actions without
Operating Activities
During the three months endedMarch 31, 2022 , our operating activities used cash of$23.3 million . We incurred a net loss of$92.0 million , which included net non-cash expenses of$57.3 million , primarily consisting of stock-based compensation charges, depreciation and amortization expense and non-cash interest expense related to our convertible notes. Our net change in operating assets and liabilities provided cash of$11.4 million , which primarily related to cash sourced from a reduction in accounts receivable of$42.1 million due to collections of billings made near the end of the prior year and an increase in accounts payable and accrued liabilities of$2.5 million , partially offset by a decrease in accrued compensation of$18.9 million primarily due to payments of prior year commissions and a reduction of commission rates pertaining to existing customer contract renewals, a decrease in deferred revenue of$10.3 million , a decrease in other long-term liabilities of$2.6 million and an increase in prepaid expenses and other assets of$1.4 million . During the three months endedMarch 31, 2021 , our operating activities from continuing operations used cash of$15.6 million . We incurred a loss from continuing operations of$86.5 million , which included net non-cash expenses of$68.4 million , primarily consisting of stock-based compensation charges, depreciation and amortization expense and non-cash interest expense related to our convertible notes. Our net change in operating assets and liabilities provided cash of$2.5 million , primarily related to cash sourced from a reduction in accounts receivable of$13.4 million due to increased collections, an increase in accounts payable and accrued liabilities of$8.0 million and a decrease in prepaid expenses and other assets of$4.5 million , partially offset by a decrease in accrued compensation of$12.4 million , a decrease in other long-term liabilities of$7.1 million and a decrease in deferred revenue of$4.0 million . Cash provided by operating activities from discontinued operations was$36.4 million . Investing Activities Cash used in investing activities during the three months endedMarch 31, 2022 was$343.4 million . This was primarily due to$333.9 million net spending on short-term investments as purchases exceeded maturities and sales and$9.0 million used for capital expenditures to purchase property and equipment. Cash used in investing activities from continuing operations during the three months endedMarch 31, 2021 was$168.2 million . This was primarily due to$163.0 million net spending on short-term investments as purchases exceeded maturities and sales and$5.6 million used for capital expenditures to purchase property and equipment. Cash used in investing activities from discontinued operations was$4.4 million . Financing Activities During the three months endedMarch 31, 2022 , financing activities used$15.8 million in cash, primarily for prior year share repurchases of$11.5 million that settled in the current year and payment related to shares withheld for taxes of$5.8 million , partially offset by$1.5 million received from exercises of employee stock options. During the three months endedMarch 31, 2021 , financing activities used$7.8 million in cash, primarily for payment related to shares withheld for taxes of$8.8 million , partially offset by$1.1 million received from exercises of employee stock options.
Contractual Obligations and Commitments
There have been no significant changes to our contractual obligations and commitments discussed in our Annual Report on Form 10-K for the year endedDecember 31, 2021 except for those disclosed in Note 10 Convertible Senior Notes and Note 11 Commitments and Contingencies contained in the "Notes to Condensed Consolidated Financial Statements" in Part I, Item I of this Quarterly Report on Form 10-Q.
Off-Balance Sheet Arrangements
As of
43
--------------------------------------------------------------------------------Use of Estimates
Our condensed consolidated financial statements have been prepared in accordance withU.S. generally accepted accounting principles. The preparation of these condensed 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.
Summary of Significant Accounting Policies
Discontinued Operations
If the disposal of the component of an entity (or group of components) represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results, it meets the criteria for discontinued operations. The results of discontinued operations, as well as any gain or loss on the disposal transaction, are presented separately, net of tax, from the results of continuing operations for all periods presented. The expenses included in the results of discontinued operations are the direct operating expenses incurred by the discontinued segment that may be reasonably segregated from the costs of the ongoing operations of the Company. The operating results for historical periods have been included in discontinued operations in our condensed consolidated statements of operations. The condensed consolidated statement of cash flows presents combined cash flows from continuing operations with cash flows from discontinued operations within each cash flow statement category for all historical periods presented.
See Note 2, "Discontinued Operations," contained in the "Notes to Condensed Consolidated Financial Statements" in Part I, Item I of this Quarterly Report on Form 10-Q for additional information.
Recent Accounting Pronouncements
See Note 1, "Description of Business and Summary of Significant Accounting Policies," contained in the "Notes to Condensed Consolidated Financial Statements" in Part I, Item I of this Quarterly Report on Form 10-Q 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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