TENABLE HOLDINGS, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with (1) our consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q, or this Form 10-Q, and (2) our consolidated financial statements, related notes and management's discussion and analysis of financial condition and results of operations in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , or the 10-K, filed with theSecurities and Exchange Commission onFebruary 28, 2020 . This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements are often identified by the use of words such as "anticipate," "believe," "continue," "could," "estimate," "expect," "intend," "may," "plan," "project," "will," "would" or the negative or plural of these words or similar expressions or variations. Such forward-looking statements are subject to a number of risks, uncertainties, assumptions and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified herein, and those discussed in the section titled "Risk Factors," set forth in Part II, Item 1A of this Form 10-Q and in our other filings with theSEC . Such risks and uncertainties may be amplified by the COVID-19 pandemic and its potential impact on our business and the global economy. You should not rely upon forward-looking statements as predictions of future events. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. Overview We are a leading provider of solutions for a new category of cybersecurity that we call Cyber Exposure. Cyber Exposure is a discipline for managing, measuring and comparing cybersecurity risk in the digital era. Our enterprise platform enables broad visibility into an organization's cyber exposure across the modern attack surface and deep insights that help organizations translate vulnerability data into business insights to understand and reduce their cybersecurity risk. Our enterprise platform offerings include Tenable.io, which is our software as a service, or SaaS, offering and Tenable.sc, which is our on-premises offering, both of which provide organizations with applications purpose-built for areas of both traditional and modern attack surfaces, including IT infrastructure and applications, cloud environments and industrial Internet of things, or IoT, and operational technology, or OT, environments. These applications are designed with views, workflows and dashboards to help identify vulnerabilities, internal and regulatory compliance violations, misconfigurations and other cybersecurity issues, prioritize these issues for remediation, and provide insightful remediation guidance. Our enterprise platform offerings are primarily sold on a subscription basis with a one-year term. Our subscription terms are generally not longer than three years. These offerings are typically prepaid in advance. To a lesser extent, we generate ratably recognizable revenue from perpetual licenses and from the related ongoing maintenance. We sell and market our products and services through our field sales force that works closely with our channel partners, which includes a network of distributors and resellers, in developing sales opportunities. We use a two-tiered channel model whereby we sell our enterprise platform offerings to our distributors, which in turn sell to our resellers, which then sell to end users, which we call customers. Many of our enterprise platform customers initially use either our free or paid version of Nessus, one of the industry's most widely deployed vulnerability assessment solutions. Nessus, which is the technology that underpins our enterprise platform offerings, is designed to quickly and accurately identify vulnerabilities, configuration and compliance issues and malware. Our free version of Nessus, Nessus Essentials, allows for vulnerability assessment over a limited number of IP addresses. We believe many of our Nessus customers begin with Nessus Essentials and subsequently upgrade to Nessus Professional, the paid version of Nessus; however, we expect many users to continue to use Nessus Essentials. There have been more than two million cumulative unique downloads, which refers to an individual email address utilized to register for the use of Nessus Essentials. We believe that the cumulative number of unique downloads of the free version of Nessus is representative of our brand recognition among cybersecurity professionals and that continued 18 -------------------------------------------------------------------------------- Table of Contents growth in this number suggests broader awareness among potential customers. While we believe that the cumulative number of unique downloads may provide an indication of the growth and scale of our thought leadership and brand awareness, we do not expect this metric to necessarily correlate to future revenue growth opportunities, and we do not consider this metric a measure of our operating performance. We have experienced rapid growth in recent years. Revenue in the three months endedSeptember 30, 2020 and 2019 and the nine months endedSeptember 30, 2020 and 2019 was$112.3 million ,$91.9 million ,$322.1 million and$257.5 million , respectively, representing year-over-year growth of 22% and 25% in the quarterly and year-to-date periods, respectively. Our recurring revenue, which includes revenue from subscription arrangements for software and cloud-based solutions and maintenance associated with perpetual licenses, represented 94%, 92%, 93%, and 91% of revenue in the three months endedSeptember 30, 2020 and 2019 and the nine months endedSeptember 30, 2020 and 2019, respectively. Our net loss in the three months endedSeptember 30, 2020 and 2019 and the nine months endedSeptember 30, 2020 and 2019 was$5.9 million ,$17.6 million ,$40.8 million and$60.7 million , respectively, as we continue to invest in our business and market opportunity. COVID-19 Update We continue to monitor the impact of the COVID-19 pandemic on our customers, partners, employees and service providers. The full extent to which the COVID-19 pandemic will impact our business and operations will depend on future developments that are highly uncertain. While in the near term we may experience reductions in our billing and revenue growth rates, we are proactively managing our expenditures, including reductions of non-critical and discretionary expenses such as travel, meeting and facility usage costs, while preserving strategic investments in sales capacity and research and development. This has and may continue to result in improved leverage related to gross margins as well as sales and marketing, research and development, and general and administrative expenses as a percent of revenue. For additional information on the potential effects of the COVID-19 pandemic on our business, financial condition and results of operations, see the "Liquidity and Capital Resources" section below and "Risk Factors" in Part II, Item 1A of this Form 10-Q. Financial Highlights Below are our key financial results: Three Months Ended September 30, Nine Months Ended September 30, (in thousands, except per share data) 2020 2019 2020 2019 Revenue$ 112,282 $ 91,852 $ 322,139 $ 257,537 Loss from operations (3,465) (18,327) (35,702) (63,246) Net loss (5,858) (17,640) (40,795) (60,708) Net loss per share, basic and diluted (0.06) (0.18) (0.41) (0.64) Net cash provided by (used in) operating activities 24,807 (4,675) 46,298 (7,672) Purchases of property and equipment (8,069) (4,927) (19,073) (10,262) Factors Affecting Our Performance Product Leadership Our enterprise platform offerings provide visibility into the broadest range of traditional and modern IT assets across cloud and on-premises environments. We are intensely focused on continued innovation and ongoing development of our enterprise platform offerings that empower organizations to understand and reduce their cyber exposure. Additionally, we continue to expand the capabilities of our Nessus products, specifically as they relate to the ability to scan for and detect the rapidly expanding volume of vulnerabilities. 19 -------------------------------------------------------------------------------- Table of Contents We intend to continue to invest in our engineering capabilities and marketing activities to maintain our position in the highly-competitive market for cybersecurity solutions. Our results of operations may fluctuate as we make these investments to drive increased customer adoption and usage. New Enterprise Platform Customer Acquisition We believe that our customer base provides a significant opportunity to expand sales of our enterprise platform offerings and that our ability to continue to grow the number of enterprise platform customers will increase future opportunities for renewals and follow-on sales. We believe that we have significant room to increase our market share. We expect to grow our enterprise platform customers by continuing to expand our sales organization and leveraging our channel partner network, which we believe will allow us to identify new enterprise customers, enter new markets, including internationally, as well as to convert more of our existing Nessus Professional customers to enterprise platform customers. We have increased our sales and marketing headcount in recent years and we will continue to invest in our partner network and sales and marketing capability in order to grow domestically and internationally. Retaining and Expanding Revenue from Existing Customers Our enterprise platform offerings utilize IT asset-based or IP address-based pricing models. Once enterprise customers have licensed our platform offerings, they typically seek broader coverage over their traditional IT assets, including networking infrastructure, desktops and on-premises servers. As customers launch new applications or migrate existing applications to the cloud and deploy web applications, containers, IoT and OT, they often increase the scope of their subscriptions and/or add additional perpetual licenses to our enterprise platforms. We are also focused on upselling customers from Nessus Professional to our enterprise platform offerings. Nessus Professional customers are typically organizations or independent security consultants that use Nessus Professional for a single vulnerability assessment at a point in time. We seek to convert these customers to our enterprise platform offerings, which provide continuous visibility and insights into their attack surface, as their needs develop. Further, we plan to expand existing platform capabilities and launch new products, which we believe will drive new product purchases and follow-on purchases over time, thereby contributing to customer renewals. We believe that there is a significant opportunity to drive additional sales to existing customers, and we expect to invest in sales and marketing and customer success personnel and activities to achieve additional revenue growth from existing customers. However, our ability to increase sales to existing customers will depend on a number of factors, including satisfaction or dissatisfaction with our products and services, competition, pricing, current economic conditions or overall changes in our and our clients' spending levels. We evaluate our ability to expand sales with our existing customers by assessing our dollar-based net expansion rate. We calculate our dollar-based net expansion rate as follows: •Denominator: To calculate our dollar-based net expansion rate as of the end of a reporting period, we first determine the annual recurring revenue, or ARR, from all active subscriptions and maintenance from perpetual licenses as of the last day of the same reporting period in the prior year. This represents recurring payments that we expect to receive in the next 12-month period from the cohort of customers that existed on the last day of the same reporting period in the prior year. •Numerator: We measure the ARR for that same cohort of customers representing all subscriptions and maintenance from perpetual licenses based on customer orders as of the end of the reporting period. We calculate dollar-based net expansion rate by dividing the numerator by the denominator. Our dollar-based net expansion rate for the three-months endedSeptember 30, 2020 was approximately 110% and was impacted by a more moderate pace of IT asset and IP address expansion in the current economic environment. Our 20 -------------------------------------------------------------------------------- Table of Contents dollar-based net expansion rate may experience further decline or fluctuate from quarter to quarter if our existing customers choose to reduce or delay technology spending in response to economic conditions resulting from the COVID-19 pandemic, as well as a result of a number of factors, including our existing customers' satisfaction with our solutions, the pricing of our solutions and the ability of competing solutions and the pricing thereof. Investing in Business Growth Since our founding, we have invested significantly in growing our business. We intend to continue to invest in sales and marketing to grow our sales team, expand brand and Cyber Exposure awareness and optimize our channel partner network. We also intend to continue to invest in our research and development team to further our technological leadership position in Cyber Exposure and enhance the functionality of our solutions. Any investments we make in our sales and marketing and research and development teams will occur in advance of experiencing the benefits from such investments, so it may be difficult for us to determine if we are efficiently allocating resources in those areas. We may also explore acquisitions of businesses, technology and/or development personnel that will expand and enhance the functionality of our platform offerings. These investment activities could increase our net losses over the short term if our revenue growth does not increase at higher rates. However, we expect that these investments will ultimately benefit our results of operations. Key Operating and Financial Metrics To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, we use certain operating metrics and non-GAAP financial measures, as described below, to understand and evaluate our core operating and financial performance. These non-GAAP financial measures, which may be different than similarly titled measures used by other companies, are presented to enhance investors' overall understanding of our financial performance and should not be considered a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. We believe that these operating metrics and non-GAAP financial measures provide useful information about our operating and financial performance, enhance the overall understanding of our past performance and future prospects and allow for greater transparency with respect to important metrics used by management for financial and operational decision-making. We present these operating metrics and non-GAAP financial measures to assist investors in seeing our operating and financial performance using a management view and because we believe that these measures provide an additional tool for investors to use in comparing our core operating and financial performance over multiple periods with other companies in our industry. Calculated Current Billings We use the non-GAAP measure of calculated current billings, which we believe is a key metric to measure our periodic performance. Given that most of our customers pay in advance, we typically recognize a majority of the related revenue ratably over time. We use calculated current billings to measure and monitor our ability to provide our business with the working capital generated by upfront payments from our customers. Calculated current billings consists of revenue recognized in a period plus the change in current deferred revenue in the corresponding period. We believe that calculated current billings, which excludes deferred revenue for periods beyond twelve months in a customer's contractual term, more closely correlates with annual contract value. Variability in total billings, depending on the timing of large multi-year contracts and the preference for annual billing versus multi-year upfront billing, may distort growth in one period over another. While we believe that calculated current billings provides valuable insight into the cash that will be generated from sales of our subscriptions, this metric may vary from period-to-period for a number of reasons, and therefore has a number of limitations as a quarter-to-quarter or year-over-year comparative measure. Calculated current billings in any one period may be impacted by the overall timing of sales, including early renewals, as well as the timing and amount of multi-year prepaid contracts, which could favorably or unfavorably impact year-over-year comparisons. For example, an increasing number of large sales transactions, for which the timing has and will continue to vary, may occur in quarters subsequent to or in advance of those that we anticipate. Our calculation of calculated current billings may be different from 21 -------------------------------------------------------------------------------- Table of Contents other companies that report similar financial measures. Because of these and other limitations, you should consider calculated current billings along with revenue and our other GAAP financial results. The adoption of Accounting Standards Codification Topic 606, Revenue From Contracts With Customers atJanuary 1, 2017 resulted in a$55.0 million increase in deferred revenue primarily related to the deferral of perpetual license revenue. This cumulative adjustment to deferred revenue atJanuary 1, 2017 increased calculated current billings by$16.7 million ,$11.8 million and$5.6 million in 2017, 2018 and 2019, respectively, and is expected to increase our calculated current billings by$1.9 million in 2020. The following table presents a reconciliation of revenue, the most directly comparable financial measure calculated in accordance with GAAP, to calculated current billings: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2020 2019 2020 2019 Revenue$ 112,282 $ 91,852 $ 322,139 $ 257,537 Add: Deferred revenue (current), end of period 296,360 245,985 296,360 245,985 Less: Deferred revenue (current), beginning of period (274,953) (227,227) (274,348) (213,644) Calculated current billings$ 133,689 $ 110,610
Free Cash Flow
We use the non-GAAP measure of free cash flow, which we define as GAAP net cash
flows from operating activities reduced by purchases of property and equipment.
We believe free cash flow is an important liquidity measure of the cash (if any)
that is available, after purchases of property and equipment, for investment in
our business and to make acquisitions. We believe that free cash flow is useful
to investors as a liquidity measure because it measures our ability to generate
or use cash.
Our use of free cash flow has limitations as an analytical tool and you should
not consider it in isolation or as a substitute for an analysis of our results
under GAAP. First, free cash flow is not a substitute for net cash flows from
operating activities. Second, other companies may calculate free cash flow or
similarly titled non-GAAP financial measures differently or may use other
measures to evaluate their performance, all of which could reduce the usefulness
of free cash flow as a tool for comparison. Additionally, the utility of free
cash flow is further limited as it does not reflect our future contractual
commitments and does not represent the total increase or decrease in our cash
balance for a given period. Because of these and other limitations, you should
consider free cash flow along with net cash provided by (used in) operating
activities and our other GAAP financial measures.
The following table presents a reconciliation of net cash provided by (used in)
operating activities, the most directly comparable financial measure calculated
in accordance with GAAP, to free cash flow:
Three Months Ended September
30, Nine Months Ended September 30,
(in thousands) 2020 2019 2020 2019
Net cash provided by (used in) operating
activities $ 24,807 $ (4,675) $ 46,298 $ (7,672)
Purchases of property and equipment (8,069) (4,927) (19,073) (10,262)
Free cash flow(1) $ 16,738 $ (9,602) $ 27,225 $ (17,934)
_______________
(1) Free cash flow included reductions related to employee stock purchase plan
activity of $2.3 million and $3.7 million in the three months ended September
30, 2020 and 2019, respectively, and $2.7 million and $4.7 million in the nine
months ended September 30, 2020 and 2019, respectively. The three and nine
months ended September 30, 2020 included $5.6 million and $14.2 million ,
respectively, in proceeds from lease incentives as well as $6.8 million and
$16.6 million , respectively, in capital expenditures for our new headquarters.
The three and nine months ended September 30, 2019 included $2.4 million in
capital expenditures for our new headquarters. The nine months ended September
30, 2020 also included $0.7 million of acquisition-related payments for Indegy .
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Enterprise Platform Customers
We believe that our customer base provides a significant opportunity to expand
sales of our enterprise platform offerings. The following tables summarize key
components of our customer base:
Three Months Ended
2020 2019 Change (%)
Number of new enterprise platform customers added in
period(1) 335 387 (13)%
_______________
(1) We define an enterprise platform customer as a customer that has licensed
Tenable.io or Tenable.sc for an annual amount of $5,000 or greater. New
enterprise platform customers represent new customer logos during the periods
presented and do not include customer conversions from Nessus Professional to
enterprise platforms.
At September 30,
2020 2019 Change (%)
Number of customers with $100,000 and greater in
annual contract value at end of period 771 589 31%
Non-GAAP Income (Loss) from Operations and Non-GAAP Operating Margin
We use non-GAAP income (loss) from operations along with non-GAAP operating
margin as key indicators of our financial performance. We define these non-GAAP
financial measures as their respective GAAP measures, excluding the effects of
stock-based compensation, acquisition-related expenses and amortization of
acquired intangible assets. Acquisition-related expenses include transaction
expenses and costs related to the transfer of acquired intellectual property.
We believe that these non-GAAP financial measures provide useful information
about our core operating results over multiple periods. There are a number of
limitations related to the use of the non-GAAP financial measures as compared to
GAAP loss from operations and operating margin, including that non-GAAP income
(loss) from operations and non-GAAP operating margin exclude stock-based
compensation expense, which has been, and will continue to be for the
foreseeable future, a significant recurring expense in our business and an
important part of our compensation strategy.
The following table presents a reconciliation of loss from operations, the most
directly comparable financial measure calculated in accordance with GAAP, to
non-GAAP income (loss) from operations, and operating margin, the most directly
comparable financial measure calculated in accordance with GAAP, to non-GAAP
operating margin:
Three Months Ended September 30, Nine Months Ended September 30,
(dollars in thousands) 2020 2019 2020 2019
Loss from operations $ (3,465) $ (18,327) $ (35,702) $ (63,246)
Stock-based compensation 15,300 10,499 44,001 31,191
Acquisition-related expenses - - 339 -
Amortization of acquired intangible assets 579 125 1,736 427
Non-GAAP income (loss) from operations $ 12,414 $ (7,703) $ 10,374 $ (31,628)
Operating margin (3) % (20) % (11) % (25) %
Non-GAAP operating margin 11 % (8) % 3 % (12) %
Non-GAAP Net Income (Loss) and Non-GAAP Earnings (Loss) Per Share We use non-GAAP net income (loss), which excludes the effect of stock-based compensation, acquisition-related expenses and amortization of acquired intangible assets, as well as the related tax impact, to calculate non-GAAP
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Table of Contents earnings (loss) per share. We believe that these non-GAAP measures provide important information to management and investors because they facilitate comparisons of our core operating results over multiple periods. The following table presents a reconciliation of net loss and net loss per share, the most comparable financial measures calculated in accordance with GAAP, to non-GAAP net income (loss) and non-GAAP earnings (loss) per share:
Three Months Ended September
30, Nine Months Ended September 30,
(in thousands, except for per share amounts) 2020 2019 2020 2019
Net loss $ (5,858) $ (17,640) $ (40,795) $ (60,708)
Stock-based compensation 15,300 10,499 44,001 31,191
Tax impact of stock-based compensation(1) 497 273 1,132 (255)
Acquisition-related expenses - - 339 -
Amortization of acquired intangible assets(2) 579 125 1,736 427
Non-GAAP net income (loss) $ 10,518 $ (6,743) $ 6,413 $ (29,345)
Net loss per share, diluted $ (0.06) $ (0.18) $ (0.41) $ (0.64)
Stock-based compensation 0.15 0.11 0.44 0.33
Tax impact of stock-based compensation(1) - - 0.01 -
Acquisition-related expenses - - - -
Amortization of acquired intangible assets(2) 0.01 - 0.02 -
Adjustment to diluted earnings per share(3) (0.01) - - -
Non-GAAP earnings (loss) per share, diluted
Weighted-average shares used to compute GAAP net loss per share, diluted 101,736 96,709 100,272 95,433 Weighted-average shares used to compute non-GAAP earnings (loss) per share, diluted(4) 111,224 96,709 109,046 95,433
________________
(1) The tax impact of stock-based compensation is based on the tax treatment
for the applicable tax jurisdictions.
(2) The tax impact of amortization of acquired intangible assets is not
material.
(3) An adjustment may be necessary to reconcile GAAP net loss per share, which
excludes potentially dilutive shares, to non-GAAP earnings per share, which
includes potentially dilutive shares.
(4) In periods in which there is a non-GAAP net loss, basic and diluted
weighted average shares outstanding are the same, as potentially dilutive shares
would be antidilutive.
Components of Our Results of Operations
Revenue
We generate revenue from subscription arrangements for our software and
cloud-based solutions, perpetual licenses, maintenance associated with perpetual
licenses and professional services.
Our subscription arrangements generally have annual or multi-year contractual
terms to use our software or cloud-based solutions, including ongoing software
updates during the contractual period. Revenue is recognized ratably over the
subscription term given the critical utility provided by the ongoing updates
that are released throughout the contract period.
Our perpetual licenses are generally sold with one or more years of maintenance,
which includes ongoing software updates. Given the critical utility provided by
the ongoing software updates and updated ability to identify network
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vulnerabilities included in maintenance, we combine the perpetual license and
the maintenance into a single performance obligation. Perpetual license
arrangements generally contain a material right related to the customer's
ability to renew maintenance at a price that is less than the initial license
fee. We apply a practical alternative to allocating a portion of the transaction
price to the material right performance obligation and estimate a hypothetical
transaction price which includes fees for expected maintenance renewals based on
the estimated economic life of perpetual license contracts. We allocate the
transaction price between the cybersecurity subscription provided in the initial
contract and the material right related to expected contract renewals based on
the hypothetical transaction price. We recognize the amount allocated to the
combined license and maintenance performance obligation over the initial
contractual period, which is generally one year. We recognize the amount
allocated to the material right over the expected maintenance renewal period,
which begins at the end of the initial contractual term and is generally four
years. We have estimated the five-year economic life of perpetual license
contracts based on historical contract attrition, expected renewal periods, the
lifecycle of our technology and other factors. This estimate may change over
time.
Professional services and other revenue is primarily comprised of advisory
services and training related to the deployment and optimization of our
products. These services do not result in significant customization of our
products. Professional services and other revenue is recognized as the services
are performed.
We have historically experienced, and expect in the future to experience,
seasonality in entering into agreements with customers. We typically enter into
a significantly higher percentage of agreements with new customers, as well as
renewal agreements with existing customers, in the third and fourth quarters of
the year. The increase in customer agreements in the third quarter is primarily
attributable to U.S. government and related agencies, and the increase in the
fourth quarter is primarily attributable to large enterprise account buying
patterns typical in the software industry. The ratable nature of our
subscription revenue makes this seasonality less apparent in our overall
financial results.
Cost of Revenue, Gross Profit and Gross Margin
Cost of revenue includes personnel costs related to our technical support group
that provides assistance to customers, including salaries, benefits, bonuses,
payroll taxes, stock-based compensation and any severance. Cost of revenue also
includes cloud infrastructure costs, the costs related to professional services
and training, depreciation, amortization of acquired and developed technology
and allocated overhead costs, which consist of information technology and
facilities.
We intend to continue to invest additional resources in our cloud-based platform
and customer support team as we grow our business. The level and timing of
investment in these areas could affect our cost of revenue in the future.
Gross profit, or revenue less cost of revenue, and gross margin, or gross profit
as a percentage of revenue, have been and will continue to be affected by
various factors, including the timing of our acquisition of new customers and
our renewals of and follow-on sales to existing customers, the costs associated
with operating our cloud-based platform, the extent to which we expand our
customer support team and the extent to which we can increase the efficiency of
our technology and infrastructure through technological improvements.
We expect our gross profit to increase in absolute dollars but our gross margin
to decrease, as we expect revenue from our cloud-based subscriptions to increase
as a percentage of revenue, although our gross margin could fluctuate from
period to period depending on the interplay of all of these factors.
Operating Expenses
Our operating expenses consist of sales and marketing, research and development
and general and administrative expenses. Personnel costs are the most
significant component of operating expenses and consist of salaries, benefits,
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bonuses, payroll taxes, stock-based compensation and any severance. Operating
expenses also include depreciation and amortization as well as allocated
overhead costs, including IT and facilities costs.
Sales and Marketing
Sales and marketing expense consists of personnel costs, sales commissions,
marketing programs, travel and entertainment, expenses for conferences and
events and allocated overhead costs. We capitalize sales commissions, including
related incremental fringe benefit costs, and recognize the expense over an
estimated period of benefit, which ranges between three and four years for
subscription arrangements and five years for perpetual license arrangements.
Sales commissions on contract renewals are capitalized and amortized ratably
over the contract term, with the exception of contracts with renewal periods
that are one year or less, in which case the incremental costs are expensed as
incurred. Sales commissions on professional services arrangements are expensed
as incurred as the contractual periods of these arrangements are generally less
than one year.
We intend to continue to make investments in our sales and marketing teams to
grow revenue, further penetrate the market and expand our global customer base.
We expect our sales and marketing expense to increase in absolute dollars
annually and to be our largest operating expense category for the foreseeable
future. However, as our revenue increases, we expect our sales and marketing
expense to decrease as a percentage of our revenue over the long term. Our sales
and marketing expense may fluctuate from period to period due to the timing and
extent of these expenses, including sales commissions, which may fluctuate
depending on the mix of sales and related expense recognition.
Research and Development
Research and development expense consists of personnel costs, software used to
develop our products, travel and entertainment, consulting and professional fees
for third-party development resources as well as allocated overhead. Our
research and development expense supports our efforts to continue to add
capabilities to our existing products and enable the continued detection of new
network vulnerabilities.
We expect our research and development expense to continue to increase annually
in absolute dollars for the foreseeable future as we continue to invest in
research and development efforts to enhance the functionality of our cloud-based
platform. However, we expect our research and development expense to decrease as
a percentage of our revenue over the long term, although our research and
development expense may fluctuate from period to period due to the timing and
extent of these expenses.
General and Administrative
General and administrative expense consists of personnel costs for our
executive, finance, legal, human resources and administrative departments.
Additional expenses include travel and entertainment, professional fees,
insurance, allocated overhead and acquisition-related costs.
We expect our general and administrative expense to continue to increase
annually in absolute dollars for the foreseeable future due to additional costs
associated with accounting, compliance, insurance and investor relations as a
public company. However, we expect our general and administrative expense to
decrease as a percentage of our revenue over the long term, although our general
and administrative expense may fluctuate from period to period due to the timing
and extent of these expenses.
Interest (Expense) Income, Net
Interest (expense) income, net consists primarily of interest income earned on
cash and cash equivalents and short-term investments and interest expense in
connection with our credit facility, including unused and letter of credit fees.
Other Expense, Net
Other expense, net consists primarily of foreign currency remeasurement and
transaction gains and losses.
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Provision for Income Taxes
Provision for income taxes consists of income taxes in certain foreign
jurisdictions in which we conduct business and the related withholding taxes on
sales with customers. We have recorded deferred tax assets for which a full
valuation allowance has been provided, including net operating loss
carryforwards and tax credits. We expect to maintain this full valuation
allowance for the foreseeable future as it is more likely than not that some or
all of those deferred tax assets may not be realized based on our history of
losses.
Results of Operations
The following tables set forth our consolidated results of operations:
Three Months Ended September 30, Nine Months Ended September 30,
(in thousands) 2020 2019 2020 2019
Revenue $ 112,282 $ 91,852 $ 322,139 $ 257,537
Cost of revenue(1) 19,394 15,245 57,237 42,389
Gross profit 92,888 76,607 264,902 215,148
Operating expenses:
Sales and marketing(1) 53,045 56,699 168,343 165,403
Research and development(1) 25,128 20,763 77,269 64,396
General and administrative(1) 18,180 17,472 54,992 48,595
Total operating expenses 96,353 94,934 300,604 278,394
Loss from operations (3,465) (18,327) (35,702) (63,246)
Interest (expense) income, net (12) 1,527 1,177 4,677
Other expense, net (561) (240) (1,819) (576)
Loss before income taxes (4,038) (17,040) (36,344) (59,145)
Provision for income taxes 1,820 600 4,451 1,563
Net loss $ (5,858) $ (17,640) $ (40,795) $ (60,708)
_______________(1) Includes stock-based compensation expense as follows:
Three Months Ended September 30, Nine Months Ended September 30,
(in thousands) 2020 2019 2020 2019
Cost of revenue $ 826 $ 694 $ 2,403 $ 2,088
Sales and marketing 4,806 3,521 14,677 11,102
Research and development 3,953 2,124 10,794 6,595
General and administrative 5,715 4,160 16,127 11,406
Total stock-based compensation expense
10,499
Comparison of the Three Months EndedSeptember 30, 2020 and 2019 Revenue Three Months Ended September 30, Change (dollars in thousands) 2020 2019 ($) (%) Revenue $ 112,282$ 91,852 $ 20,430 22 % 27
-------------------------------------------------------------------------------- Table of Contents The increase in revenue of$20.4 million was comprised of increases in subscription revenue of$21.3 million and professional services and other revenue of$0.5 million , net of a decrease in perpetual license and maintenance revenue of$1.4 million . Revenue from existing customers comprised 25% of the increase, while the remaining increase was due to revenue from new customers sinceOctober 1, 2019 . International revenue increased$10.1 million , or 29%. Cost of Revenue, Gross Profit and Gross Margin Three Months Ended September 30, Change (dollars in thousands) 2020 2019 ($) (%) Cost of revenue$ 19,394 $ 15,245 $ 4,149 27 % Gross profit 92,888 76,607 16,281 21 % Gross margin 83 % 83 % The increase in cost of revenue of$4.1 million was primarily due to: •a$1.9 million increase in personnel costs primarily due to support for cloud-based products; •a$1.7 million increase in third-party cloud infrastructure costs largely associated with the increased adoption of Tenable.io and Tenable Lumin; •a$0.5 million increase in the amortization of acquired intangible assets; and •a$0.3 million increase in the amortization of internal use software; partially offset by •a$0.3 million decrease in travel and meeting costs. Operating Expenses Sales and Marketing Three Months Ended September 30, Change (dollars in thousands) 2020 2019 ($) (%) Sales and marketing $ 53,045$ 56,699 $ (3,654) (6) % The decrease in sales and marketing expense of$3.7 million was primarily due to: •a$2.4 million decrease in selling expenses, including a$2.3 million decrease in travel and meeting costs; •a$2.1 million decrease in marketing expenses, primarily related to a reduction in field marketing activities; and •a$1.0 million decrease in sales commission draws; partially offset by •a$1.6 million increase in personnel costs largely associated with an increase in headcount, including a$1.3 million increase in stock-based compensation. Research and Development Three Months Ended September 30,
Change
(dollars in thousands) 2020 2019 ($) (%) Research and development $ 25,128$ 20,763
The increase in research and development expense of$4.4 million was primarily due to: •a$4.9 million increase in personnel costs, including a$1.8 million increase in stock-based compensation and a$0.7 million decrease in development costs that were capitalized for internal use software; and •a$0.5 million increase in allocated overhead costs, driven by both the increase in headcount and the overall increase in such costs on a year-over-year basis; partially offset by •a$0.8 million decrease in travel and meeting costs; and 28 -------------------------------------------------------------------------------- Table of Contents •a$0.4 million decrease in third-party cloud infrastructure costs related to the development of new and future product offerings. General and Administrative Three Months EndedSeptember 30 ,
Change
(dollars in thousands) 2020 2019 ($) (%) General and administrative $ 18,180$ 17,472
The increase in general and administrative expense of$0.7 million was primarily due to: •a$2.2 million increase in personnel costs largely associated with an increase in headcount, including a$1.4 million increase in stock-based compensation; and •a$0.1 million increase in allocated overhead costs; partially offset by •a$1.4 million decrease in professional fees; and •a$0.4 million decrease in travel and meeting costs. Comparison of the Nine Months EndedSeptember 30, 2020 and 2019 Revenue Nine Months Ended September 30, Change (dollars in thousands) 2020 2019 ($) (%) Revenue$ 322,139 $ 257,537 $ 64,602 25 % The increase in revenue of$64.6 million was comprised of increases in subscription revenue of$65.6 million and professional services and other revenue of$1.8 million , partially offset by a decrease in perpetual license and maintenance revenue of$2.8 million . Revenue from existing customers comprised 49% of the increase, while the remaining increase was due to revenue from new customers sinceOctober 1, 2019 . International revenue increased$31.3 million , or 33%. Cost of Revenue, Gross Profit and Gross Margin Nine Months Ended September 30, Change (dollars in thousands) 2020 2019 ($) (%) Cost of revenue$ 57,237 $ 42,389 $ 14,848 35 % Gross profit 264,902 215,148 49,754 23 % Gross margin 82 % 84 % The increase in cost of revenue of$14.8 million was primarily due to: •a$6.1 million increase in third-party cloud infrastructure costs largely associated with the increased adoption of Tenable.io, as well as the launch of Tenable Lumin; •a$6.0 million increase in personnel costs primarily due to support for cloud-based products; •a$1.3 million increase in the amortization of acquired intangible assets; •a$1.1 million increase in the amortization of internal use software; and •a$0.6 million increase in allocated overhead costs driven by both the increase in headcount and the overall increase in such costs on a year-over-year basis; partially offset by •a$0.8 million decrease in travel and meeting costs. 29 --------------------------------------------------------------------------------
Table of Contents
Operating Expenses
Sales and Marketing
Nine Months Ended September 30, Change
(dollars in thousands) 2020 2019 ($) (%)
Sales and marketing $ 168,343 $ 165,403 $ 2,940 2 %
The increase in sales and marketing expense of $2.9 million was primarily due
to:
•a $10.4 million increase in personnel costs largely associated with an increase
in headcount, including a $3.6 million increase in stock-based compensation;
•a $1.1 million increase in sales commissions, due to increased sales and the
amortization of deferred commissions; and
•a $1.6 million increase in allocated overhead costs, primarily facilities
costs, driven by both the increase in headcount and the overall increase in such
costs on a year-over-year basis; partially offset by
•a $5.5 million decrease in expenses for marketing expenses, primarily related
to a reduction in field marketing activities; and
•a $5.3 million decrease in selling expenses, including a $4.8 million decrease
in travel and meeting costs.
Research and Development
Nine Months Ended September 30, Change
(dollars in thousands) 2020 2019 ($) (%)
Research and development $ 77,269 $ 64,396 $ 12,873 20 %
The increase in research and development expense of $12.9 million was primarily
due to:
•a $12.4 million increase in personnel costs largely associated with an increase
in headcount, including a $4.1 million increase in stock-based compensation and
a $2.7 million decrease in development costs that were capitalized for internal
use software; and
•a $1.8 million increase in allocated overhead costs, primarily facilities
costs, driven by both the increase in headcount and the overall increase in such
costs on a year-over-year basis; partially offset by
•a $1.1 million decrease in third-party cloud infrastructure costs related to
the development of new and future product offerings; and
•a $0.8 million decrease in travel and meeting costs.
General and Administrative
Nine Months Ended September 30, Change
(dollars in thousands) 2020 2019 ($) (%) General and administrative $ 54,992$ 48,595
The increase in general and administrative expense of$6.4 million was primarily due to: •a$7.0 million increase in personnel costs partially due to an increase in headcount, including a$4.5 million increase in stock-based compensation; and •a$1.1 million increase in allocated overhead costs, primarily facilities costs, driven by both the increase in headcount and the overall increase in such costs on a year-over-year basis; partially offset by •a$1.4 million decrease in professional fees; and •a$1.1 million decrease in travel and meeting costs. 30 -------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources AtSeptember 30, 2020 , we had cash and cash equivalents, which consisted of bank deposits and money market funds, of$141.4 million and short-term investments, which consisted of commercial paper,U.S. Treasury and agency obligations and corporate bonds, of$127.7 million . Since our inception and prior to our IPO, we financed our operations through cash provided by operations, including payments received from customers using our software products and services, and we did not raise any primary institutional capital. The proceeds of our Series A and Series B redeemable convertible preferred stock financings were used to repurchase shares of capital stock from former stockholders. We have generated significant operating losses from our operations as reflected by our accumulated deficit of$605.9 million atSeptember 30, 2020 . We typically invoice our customers annually in advance and, to a lesser extent, multi-year in advance. Therefore, a substantial source of our cash is from such prepayments, which are included on our consolidated balance sheets as deferred revenue. Deferred revenue consists primarily of the unearned portion of billed fees for our subscriptions and perpetual licenses, which is subsequently recognized as revenue in accordance with our revenue recognition policy. AtSeptember 30, 2020 , we had deferred revenue of$390.2 million , of which$296.4 million was recorded as a current liability and is expected to be recorded as revenue in the next 12 months, provided all other revenue recognition criteria are met. Our principal uses of cash in recent periods have been funding our operations, expansion of our sales and marketing and research and development activities, investments in infrastructure, including the build-out of our new headquarters, and acquiring complementary businesses and technology. We expect to continue incurring operating losses in the near term. Even though we generated positive cash flows from operations and free cash flow in the nine months endedSeptember 30, 2020 , we may not be able to sustain these cash flows in the near term. We believe that our existing cash and cash equivalents and short-term investments will be sufficient to fund our operating and capital needs for at least the next 12 months. Our future capital requirements will depend on many factors, including our revenue growth rate, subscription renewal activity, the timing and extent of spending to support further infrastructure and research and development efforts, the timing and extent of additional capital expenditures to invest in new and existing office spaces, the expansion of sales and marketing and international operating activities, the timing of our introduction of new product capabilities and enhancements of our platform and the continuing market acceptance of our platform. In the fourth quarter of 2020, we expect capital expenditures related to our new corporate headquarters to be approximately$2 million . The full extent to which the COVID-19 pandemic will impact our business and operations will depend on future developments that are highly uncertain and cannot be predicted with confidence, such as the ultimate geographic spread of the disease, the duration of the outbreak, the duration and effect of business disruptions and the short-term effects and ultimate effectiveness of the travel restrictions, quarantines, social distancing requirements and business closures inthe United States and other countries to contain and treat the disease. We also do not yet know the full effects of COVID-19 pandemic may have on our partners, customers and service providers. Accordingly, the current results and financial conditions discussed herein may not be indicative of our future operating results and trends. See the section titled "Risk Factors" in Part II, Item 1A of this Form 10-Q. We may in the future enter into arrangements to acquire or invest in complementary businesses, services and technologies, including intellectual property rights. We may be required to seek equity or debt financing. In the event that financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, or if we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, operating results and financial condition would be adversely affected. Credit Facility InJuly 2020 , we entered into a new$45.0 million senior secured facility, or the 2020 Credit Facility, withSilicon Valley Bank in connection with the expiration of our$25.0 million revolving credit facility, or the 2017 Credit Facility. The 2020 Credit Facility bears interest at either LIBOR plus 2%, with a 1% LIBOR floor, or the base rate plus 1%, and terminates onJuly 24, 2022 . A commitment fee of 0.35% per annum is payable quarterly in arrears based on the unused portion. The 31 -------------------------------------------------------------------------------- Table of Contents 2020 Credit Facility includes a$45.0 million uncommitted expansion, including a$10.0 million sublimit for the issuance of letters of credit and a swingline subfacility of up to$10.0 million , and has a financial covenant requiring a minimum consolidated quick ratio of at least 1.5:1.0 on the last day of any quarter. In the nine months endedSeptember 30, 2020 , there were no amounts outstanding under our 2020 Credit Facility or, prior to its expiration, the 2017 Credit Facility. AtSeptember 30, 2020 , we were in compliance with the financial covenant and our borrowing capacity was reduced by$5.5 million related to standby letters of credit. We do not currently intend to draw on the 2020 Credit Facility. Cash Flows The following table summarizes our cash flows for the periods presented: Nine Months Ended September 30, (in thousands) 2020 2019 Net cash provided by (used in) operating activities $ 46,298$ (7,672) Net cash used in investing activities (8,455) (15,480) Net cash provided by financing activities 30,478 30,565
Effect of exchange rate changes on cash and cash equivalents and restricted cash
(1,359) (1,226)
Net increase in cash and cash equivalents and restricted cash $ 66,962
Operating Activities In the nine months endedSeptember 30, 2020 , net cash provided by operating activities was$46.3 million , which primarily consisted of our$40.8 million loss, adjusted for stock-based compensation expense of$44.0 million and depreciation and amortization of$8.0 million , as well as a net cash inflow of$34.1 million from changes in operating assets and liabilities. The net inflow from changes in operating assets and liabilities was primarily due to a$27.1 million increase in deferred revenue from increased subscription sales, as a majority of our customers are invoiced in advance, as well as$14.2 million in proceeds from lease incentives, and a$7.8 million decrease in accounts receivable due to collections from customers. This inflow was partially offset by a$8.4 million decrease in accrued compensation and a$4.1 million increase in prepaid expenses. In the nine months endedSeptember 30, 2019 , net cash used in operating activities was$7.7 million , which primarily consisted of our$60.7 million loss, adjusted for stock-based compensation expense of$31.2 million and depreciation and amortization of$4.6 million , as well as a net cash inflow of$18.0 million from changes in operating assets and liabilities. The net inflow from changes in operating assets and liabilities was primarily due to a$39.5 million increase in deferred revenue from increased subscription sales, as a majority of our customers are invoiced in advance. This inflow was partially offset by a$13.3 million increase in accounts receivable, a$5.4 million decrease in accrued compensation, including$4.7 million related to employee stock purchase plan activity, and a$5.1 million increase in deferred commissions. Investing Activities Net cash used in investing activities decreased by$7.0 million , primarily due to a$15.8 million increase in sales and maturities, net of purchases, of short-term investments in commercial paper,U.S. Treasury and agency obligations and corporate bonds, partially offset by a$8.8 million increase in purchases of property and equipment. Financing Activities Net cash provided by financing activities decreased by$0.1 million , primarily due to a$2.1 million decrease in proceeds from stock issued in connection with the employee stock purchase plan, which was partially offset by the$2.0 million of loan proceeds that we received from the state ofMaryland in 2020. 32 -------------------------------------------------------------------------------- Table of Contents Contractual Obligations AtSeptember 30, 2020 , there were no material changes in our contractual obligations and commitments from those disclosed in our 10-K. Off-Balance Sheet Arrangements AtSeptember 30, 2020 , we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Critical Accounting Policies and Estimates Our financial statements are prepared in accordance withU.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, as well as related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates. There have been no material changes to our critical accounting policies and estimates as described in our 10-K. Recently Issued Accounting Pronouncements Refer to Note 1 to our consolidated financial statements for more information regarding recently issued accounting pronouncements. 33
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