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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
———————————————
FORM 10-Q
———————————————
(Mark One)
 
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
OR
 
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
            
Commission File Number 001-38253
———————————————
FORESCOUT TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
———————————————
Delaware
 
51-0406800
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
190 West Tasman Drive
San Jose
California
95134
(Address of principal executive offices, including zip code)
(408213-3191
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.001 per share
FSCT
The NASDAQ Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
 
 
Emerging growth company
 
 
If an emerging growth company, indicate by checkmark if the registrant has not elected to use the extended transition period for complying with any new or revised financial accounting standards providing pursuant to Section 7(a)(2)(B) of the Securities Act
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes     No  

The number of shares outstanding of the registrant’s common stock as of August 1, 2019 was 46,210,958.





TABLE OF CONTENTS

 
 
 
 
 
 
 
 
 
Page
 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 6.
 
 


2


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q 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 (the “Exchange Act”), which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “would,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:

the evolution of the cyberthreat landscape facing enterprises in the United States and other countries;

developments and trends in the domestic and international markets for network security products and related services;

our expectations regarding the size of our target market;

our ability to educate prospective end-customers about our technical capabilities and the use and benefits of our products, and to achieve increased market acceptance of our solution;

our beliefs and objectives regarding our prospects and our future results of operations and financial condition;

the effects of increased competition in our target markets and our ability to compete effectively;

our business plan and our ability to manage our growth effectively;

our investment in our sales force and our expectations concerning the productivity and efficiency of our expanding sales force as our sales representatives become more seasoned;

our growth strategy to maintain and extend our technology leadership, expand and diversify our end-customer base, deepen our existing end-customer relationships, and attract and retain highly skilled security professionals;

our ability to enhance our existing products and technologies and develop or acquire new products and technologies;

our plans to attract new end-customers, retain existing end-customers, and increase our annual revenue;

our expectations concerning renewal rates of Software Products subscription contracts and support and maintenance contracts (collectively known as “term contracts”) with end-customers;

our plans to expand our international operations;

our expectations regarding future acquisitions of, or investments in, complementary companies, services, or technologies;

our ability to continue to generate a significant portion of our revenue from public sector customers;

the effects on our business of evolving information security and data privacy laws and regulations, government export or import controls and any failure to comply with the U.S. Foreign Corrupt Practices Act and similar laws;

3



our ability to maintain, protect, and enhance our brand and intellectual property;

fluctuations in our quarterly results of operations and other operating measures;

our expectations regarding changes in our cost of revenue, gross margins, and operating costs and expenses;

our expectations regarding the portions of our revenue represented by license revenue, subscription revenue, and professional services revenue;

our expectations concerning the impact on our results of operations of development of our distribution programs and sales through our channel partners;

the impact on our revenue, gross margin, and profitability of future investments in the enhancement of Forescout eyeSight, Forescout eyeControl, Forescout eyeExtend, SilentDefense, and SilentDefense Command Center, and expansion of our sales and marketing programs;

the impact of the Tax Cuts and Jobs Act on our business;

our ability to successfully acquire and integrate companies and assets;

sufficiency of our existing liquidity sources to meet our cash needs; and

our potential use of foreign exchange forward contracts to hedge our foreign currency risk and our general use of our foreign currency.
We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q.
You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, operating results, cash flows, or prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors, including, but not limited to, those described in the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q and, in particular, the risks discussed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 and those discussed in other documents we file with the SEC. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.
The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information, or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements. You should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments we may make.


4

PART I. FINANCIAL INFORMATION


ITEM 1.
FINANCIAL STATEMENTS
FORESCOUT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except par value)

June 30, 2019
 
December 31, 2018
Assets
 
 

Current assets:

 

Cash and cash equivalents
$
46,872

 
$
66,895

Marketable securities
58,065

 
47,632

Accounts receivable
66,903

 
79,255

Inventory
2,093

 
1,501

Deferred commissions - current
11,716

 
12,543

Prepaid expenses and other current assets
13,180

 
13,353

Total current assets
198,829

 
221,179

Deferred commissions - non-current
21,848

 
22,831

Property and equipment, net
23,701

 
24,349

Operating lease right-of-use assets
22,271

 

Restricted cash - non-current
1,293

 
1,266

Intangible assets, net
17,369

 
19,002

Goodwill
92,045

 
92,482

Other assets
6,889

 
7,369

Total assets
$
384,245

 
$
388,478

 
 
 
 
Liabilities and stockholders' equity

 

Current liabilities:

 

Accounts payable
$
9,563

 
$
12,118

Accrued compensation
31,739

 
32,649

Accrued expenses
14,087

 
14,558

Deferred revenue - current
103,365

 
101,900

Notes payable - current
7,375

 
7,331

Operating lease liabilities - current
5,240

 

Total current liabilities
171,369

 
168,556

Deferred revenue - non-current
69,779

 
69,618

Notes payable - non-current
4,550

 
8,248

Operating lease liabilities - non-current
24,376

 

Other liabilities
7,056

 
14,335

Total liabilities
277,130

 
260,757

 
 
 
 
Stockholders' equity:

 

Common stock, $0.001 par value; 1,000,000 shares authorized;

 

45,903 and 43,403 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively
46

 
43

Additional paid-in capital
683,957

 
639,237

Accumulated other comprehensive loss
(619
)
 
(302
)
Accumulated deficit
(576,269
)
 
(511,257
)
Total stockholders’ equity
107,115

 
127,721

Total liabilities and stockholders' equity
$
384,245

 
$
388,478

 

See Notes to Condensed Consolidated Financial Statements.

5


FORESCOUT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share amounts)

Three Months Ended
June 30,
 
Six Months Ended
June 30,

2019

2018
 
2019

2018
Revenue:



 



License
$
38,831


$
34,323

 
$
76,511


$
64,103

Subscription
34,822

 
28,986

 
68,621


55,345

Professional services
4,627

 
4,285

 
8,716

 
7,843

Total revenue
78,280


67,594

 
153,848


127,291

Cost of revenue:
 
 
 
 



License
5,622


4,919

 
13,229


12,055

Subscription
5,599

 
3,732

 
10,806

 
7,533

Professional services
6,235


6,062

 
12,421


11,611

Total cost of revenue
17,456


14,713

 
36,456


31,199

Total gross profit
60,824


52,881

 
117,392


96,092

Operating expenses:
 
 
 
 



Research and development
19,440


14,803

 
37,937


29,490

Sales and marketing
56,173


45,039

 
112,096


87,318

General and administrative
15,838


13,260

 
32,051


26,992

Total operating expenses
91,451


73,102

 
182,084


143,800

Loss from operations
(30,627
)

(20,221
)
 
(64,692
)

(47,708
)
Interest expense
(142
)

(225
)
 
(235
)

(468
)
Other income, net 
505


513

 
1,122


1,175

Loss before income taxes
(30,264
)

(19,933
)
 
(63,805
)

(47,001
)
Income tax provision
496


473

 
1,207


1,601

Net loss
$
(30,760
)

$
(20,406
)
 
$
(65,012
)

$
(48,602
)
Net loss per share, basic and diluted
$
(0.68
)

$
(0.50
)
 
$
(1.45
)

$
(1.23
)
Weighted-average shares used to compute net loss per share, basic and diluted
45,494


40,457

 
44,848


39,394


See Notes to Condensed Consolidated Financial Statements.


6


FORESCOUT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited, in thousands)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019

2018
 
2019
 
2018
Net loss
$
(30,760
)

$
(20,406
)
 
$
(65,012
)
 
$
(48,602
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Change in unrealized gains (losses) on marketable securities
60


76

 
135

 
(170
)
Foreign currency translation adjustments
1,602

 

 
(452
)
 

Comprehensive loss
$
(29,098
)

$
(20,330
)
 
$
(65,329
)
 
$
(48,772
)

See Notes to Condensed Consolidated Financial Statements.


7



FORESCOUT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited, in thousands)

 
Six Months Ended June 30, 2019
 
Common Stock
 
Additional Paid-In Capital
 
Accumulated Other Comprehensive Loss
 
Accumulated Deficit
 
Total Stockholders' Equity
 
Shares
 
Amount
 
 
Balance as of December 31, 2018
43,403

 
$
43

 
$
639,237

 
$
(302
)
 
$
(511,257
)
 
$
127,721

Other comprehensive loss, net of tax

 

 

 
(1,979
)
 

 
(1,979
)
Stock-based compensation

 

 
13,828

 

 

 
13,828

Issuance of common stock in connection with employee equity incentive plans
1,706

 
2

 
9,407

 

 

 
9,409

Vesting of early exercised stock options
24

 

 
202

 

 

 
202

Net loss

 

 

 

 
(34,252
)
 
(34,252
)
Balance as of March 31, 2019
45,133

 
$
45

 
$
662,674

 
$
(2,281
)
 
$
(545,509
)
 
$
114,929

Other comprehensive income, net of tax

 

 

 
1,662

 

 
1,662

Stock-based compensation

 

 
14,065

 

 

 
14,065

Issuance of common stock in connection with employee equity incentive plans
746

 
1

 
7,014

 

 

 
7,015

Vesting of early exercised stock options
24

 

 
204

 

 

 
204

Net loss

 

 

 

 
(30,760
)
 
(30,760
)
Balance as of June 30, 2019
45,903

 
$
46

 
$
683,957

 
$
(619
)
 
$
(576,269
)
 
$
107,115


 
Six Months Ended June 30, 2018
 
Common Stock
 
Additional Paid-In Capital
 
Accumulated Other Comprehensive Loss
 
Accumulated Deficit
 
Total Stockholders' Equity
 
Shares
 
Amount
 
 
Balance as of December 31, 2017
38,122

 
$
38

 
$
551,986

 
$
(112
)
 
$
(436,421
)
 
$
115,491

Other comprehensive loss, net of tax

 

 

 
(246
)
 

 
(246
)
Stock-based compensation

 

 
13,590

 

 

 
13,590

Issuance of common stock in connection with employee equity incentive plans
567

 
1

 
3,621

 

 

 
3,622

Issuance of common stock in connection with public offering, net of underwriter discounts and commissions and offering costs
500

 

 
12,572

 

 

 
12,572

Vesting of early exercised stock options
25

 

 
219

 

 

 
219

Net loss

 

 

 

 
(28,196
)
 
(28,196
)
Balance as of March 31, 2018
39,214

 
$
39

 
$
581,988

 
$
(358
)
 
$
(464,617
)
 
$
117,052

Other comprehensive income, net of tax

 

 

 
76

 

 
76

Stock-based compensation

 

 
12,936

 

 

 
12,936

Issuance of common stock in connection with employee equity incentive plans
2,256

 
3

 
4,606

 

 

 
4,609

Vesting of early exercised stock options
24

 

 
210

 

 

 
210

Issuance of common stock upon exercise of common stock warrants
67

 

 

 

 

 

Net loss

 

 

 

 
(20,406
)
 
(20,406
)
Balance as of June 30, 2018
41,561

 
$
42

 
$
599,740

 
$
(282
)
 
$
(485,023
)
 
$
114,477


See Notes to Condensed Consolidated Financial Statements.

8


FORESCOUT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)

Six Months Ended
June 30,

2019

2018
Cash flows from operating activities:



Net loss
$
(65,012
)

$
(48,602
)
Adjustments to reconcile net loss to net cash provided by operating activities




Stock-based compensation
27,893


26,526

Depreciation and amortization
5,790


3,529

Other
(8
)

28

Changes in operating assets and liabilities




Accounts receivable
12,177


30,442

Inventory
(593
)

1,887

Deferred commissions
1,809


506

Prepaid expenses and other current assets
318


(2,208
)
Other assets
551


(41
)
Accounts payable
(2,509
)

(6,006
)
Accrued compensation
(905
)

143

Accrued expenses
407


(685
)
Deferred revenue
1,495


12,281

Other liabilities
(160
)

1,236

Net cash (used in) provided by operating activities
(18,747
)

19,036

Cash flows from investing activities:



Purchases of property and equipment
(3,402
)

(4,832
)
Purchases of marketable securities
(63,569
)

(46,121
)
Proceeds from maturities of marketable securities
53,354


49,400

Net cash used in investing activities
(13,617
)

(1,553
)
Cash flows from financing activities:



Repayments of notes payable
(3,749
)

(3,750
)
Proceeds from sales of shares through employee equity incentive plans
20,726


17,823

Payment related to shares withheld for taxes on vesting of restricted stock units
(4,302
)
 
(9,592
)
Proceeds from public offerings, net

 
13,818

Payments of deferred offering costs


(1,542
)
Net cash provided by financing activities
12,675


16,757

Effect of exchange rate changes on cash and cash equivalents
(4
)
 

Net change in cash, cash equivalents, and restricted cash for period
(19,693
)

34,240

Cash, cash equivalents, and restricted cash at beginning of period
69,012


67,357

Cash, cash equivalents, and restricted cash at end of period
$
49,319


$
101,597



Reconciliation of cash, cash equivalents, and restricted cash within the condensed consolidated balance sheets to the amounts shown in the statements of cash flows above:
 
 
 
Cash and cash equivalents
$
46,872

 
$
99,560

Restricted cash included in prepaid expenses and other current assets
1,154

 
351

Restricted cash - non-current
1,293

 
1,686

Total cash, cash equivalents, and restricted cash
$
49,319

 
$
101,597



See Notes to Condensed Consolidated Financial Statements.

9


FORESCOUT TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1. Description of Business and Summary of Significant Accounting Policies
Company and Background
Forescout Technologies, Inc. (the “Company”) was incorporated in the State of Delaware and commenced operations in April 2000. The Company designs, develops, and markets device visibility, control, and orchestration software that helps organizations gain complete situational awareness of all devices in their interconnected environment and orchestrate actions to mitigate both their cyber and operational risk.
The Company offers its solution across two product groups: (i) products for visibility and control capabilities, and (ii) products for orchestration capabilities. The Company’s products for visibility and control capabilities consist of eyeSight, eyeControl, and SilentDefense. eyeSight and eyeControl provide for visibility and control capabilities across the extended enterprise, from campus to data center to hybrid cloud to operational technology (“OT”) devices, while SilentDefense provides for visibility and control capabilities deeper within the OT portion of the network. The Company’s products for orchestration capabilities are comprised of its portfolio of eyeExtend family of products.
The Company offers its solution across two product types: (i) software products and (ii) hardware products. The Company’s software products include eyeSight, eyeControl, eyeExtend, SilentDefense, and SilentDefense Command Center (“Software Products”). The Company’s hardware products include hardware that is sold separately for use with the Company’s Software Products and appliances that are embedded with the Company’s software (“Hardware Products”).
The Company sells its Software Products, Hardware Products, support and maintenance contracts, and professional services to end-customers through distributors and resellers, who are supported by the Company’s sales and marketing organization, and to a lesser extent directly to end-customers.
Basis of Presentation
The accompanying condensed consolidated financial statements are unaudited and have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) using accounting policies that are consistent with those used in the preparation of the Company’s audited consolidated financial statements for the year ended December 31, 2018. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles ("GAAP") have been condensed or omitted as permitted by the SEC's rules and regulations. The Company’s condensed consolidated financial statements include the results of Forescout Technologies, Inc. and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
The condensed consolidated financial statements are unaudited and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the Company’s quarterly results. The condensed consolidated balance sheet as of December 31, 2018 was derived from the audited consolidated financial statements at that date but does not include all the disclosures required by GAAP for the annual financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
Prior to the first quarter of fiscal 2019, the Company presented revenue and cost of revenue on the condensed consolidated statements of operations as (i) product and (ii) maintenance and professional services. Under the new presentation of revenue and cost of revenue included in the condensed consolidated statements of operations beginning in the first quarter of fiscal 2019, product has been retitled as license revenue, and maintenance and professional services is now presented as two separate line items on the condensed consolidated statements of operations as (i) subscription and (ii) professional services. The related prior period financial data were adjusted to reflect the new presentation of the Company’s revenue and cost of revenue. There is no impact on total revenue and total cost of revenue.

10


The preparation of interim condensed consolidated financial statements in conformity with GAAP requires management to make use of estimates and assumptions that affect the reported amounts in the condensed consolidated financial statements and accompanying notes. These estimates form the basis of judgments made about carrying values of assets and liabilities, which are not readily apparent from other sources. The areas where management has made estimates requiring judgment include, but are not limited to, the best estimate of standalone selling prices for license and related support, the period over which deferred sales commissions are amortized to expense, accruals, stock-based compensation, provision for income taxes including related reserves, identified intangibles and goodwill, purchase price allocation of an acquired business, and incremental borrowing rate for operating leases. Actual results could differ materially from those estimates.
Summary of Significant Accounting Policies 
Effective January 1, 2019, the Company adopted the requirements of Accounting Standards Update (“ASU”) No. 2016-02, Leases (“ASU 2016-02”), ASU No. 2018-10, Codification Improvements to Topic 842, Leases (“ASU 2018-10”), and ASU No. 2018-11, Targeted Improvements (“ASU 2018-11”), (collectively “Topic 842”), as discussed in detail in Note 5. All amounts and disclosures set forth in this Quarterly Report on Form 10-Q have been updated to comply with Topic 842. The Company adopted Topic 842 effective January 1, 2019 using the transition method to apply the new lease standards at the adoption date and recognized a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The adoption had a material impact on the total assets and total liabilities reported on the Company’s condensed consolidated balance sheets resulting in an increase in long-term assets and total liabilities of approximately $20.3 million as of January 1, 2019. The adoption of this standard did not have a material impact on the Company’s condensed consolidated statements of operations.
Except for the impact of the adoption of Topic 842, there have been no changes to the Company’s significant accounting policies described in the Annual Report on Form 10-K for the year ended December 31, 2018 that have had a material impact on the Company’s condensed consolidated financial statements and related notes.

11


Note 2. Revenue, Deferred Revenue and Deferred Commissions
Disaggregation of Revenue
The Company generates revenue from the sale of Software Products, Hardware Products, support and maintenance contracts, and professional services. All revenue recognized in the condensed consolidated statements of operations is considered to be revenue from contracts with customers. The following table depicts the disaggregation of revenue according to revenue type and is consistent with how the Company evaluates its financial performance (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Revenue:
 
 
 
 
 
 
 
License
 
 
 
 
 
 
 
Software Products
 
 
 
 
 
 
 
Perpetual license
$
20,675

 
$
24,493

 
$
46,434

 
$
40,295

Term license
11,190

 

 
11,514

 

Hardware Products
6,966

 
9,830

 
18,563

 
23,808

Subscription
34,822

 
28,986

 
68,621

 
55,345

Professional services
4,627

 
4,285

 
8,716

 
7,843

Total revenue
$
78,280

 
$
67,594

 
$
153,848

 
$
127,291


License Revenue
License revenue consists of sales of Software Products and Hardware Products. Software Products are sold with either a perpetual license or a term license. License revenue includes the value allocated to license within Software Products subscription contracts. License revenue is recognized at the time of transfer of control, which is generally upon delivery of access to software downloads or shipment, provided that all other revenue recognition criteria have been met.
Subscription Revenue
Subscription revenue is derived from support and maintenance contracts and the value allocated to support and maintenance within Software Products subscription contracts. Support and maintenance contracts have terms that are generally either one or three years, but can be up to five years. Software Products subscription contracts are available in terms of either one or three years. Subscription revenue is recognized ratably over the term of the contract and any unearned subscription revenue is included in deferred revenue.
Professional Services Revenue
Professional services revenue is derived primarily from customer fees for optional installation of the Company’s products or training. Generally, the Company recognizes revenue for professional services as the services are rendered.
Revenue from Contracts with Customers
Contract Assets and Contract Liabilities
A contract asset is a right to consideration in exchange for products or services that the Company has transferred to a customer when that right is conditional and is not just subject to the passage of time. The Company’s payment terms typically range between 30 to 90 days. The Company has no material contract assets. A contract liability is an obligation to transfer products or services for which the Company has received consideration, or for which an amount of consideration is due from the customer. Contract liabilities include customer deposits under non-cancelable contracts included in accrued expenses, and current and non-current deferred revenue balances. The Company’s contract balances are reported in a net contract asset or liability position on a contract-by-contract basis at the end of each reporting period.
Significant changes in contract liabilities during the periods presented are as follows (in thousands):

12


 
Three Months Ended June 30, 2019
 
Contract Liabilities
Balance as of March 31, 2019
$
178,785

Additions
73,328

Gross revenue recognized
(78,280
)
Balance as of June 30, 2019
$
173,833

 
Six Months Ended June 30, 2019
 
Contract Liabilities
Balance as of December 31, 2018
$
172,031

Additions
155,650

Gross revenue recognized
(153,848
)
Balance as of June 30, 2019
$
173,833


During the three months ended June 30, 2019, the Company recognized revenue of $33.9 million that was included in the contract liabilities balance as of March 31, 2019. During the six months ended June 30, 2019, the Company recognized revenue of $59.4 million that was included in the contract liabilities balance as of December 31, 2018.
During the three months ended June 30, 2018, the Company recognized revenue of $43.3 million that was included in the contract liabilities balance as of March 31, 2018. During the six months ended June 30, 2019, the Company recognized revenue of $47.9 million that was included in the contract liabilities balance as of December 31, 2017.
Performance Obligations
Contracted not recognized revenue was $174.0 million as of June 30, 2019, of which the Company expects to recognize approximately 60% of the revenue over the next 12 months and the remainder thereafter.
Note 3. Fair Value Measurements
Financial assets are recorded at fair value on the condensed consolidated balance sheets and are categorized based upon the level of judgment associated with inputs used to measure their fair value.
The accounting guidance establishes a fair value hierarchy based on the independence of the source and objective evidence of the inputs used. There are three fair value hierarchies based upon the level of inputs that are significant to fair value measurement:
Level 1—Observable inputs that reflect quoted prices in active markets for identical assets or liabilities.
Level 2—Observable inputs that reflect quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets or liabilities in active markets, inputs other than quoted prices that are observable for the assets or liabilities, or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3—Inputs that are generally unobservable and are supported by little or no market activity, and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability.

13


There have been no transfers between fair value measurement levels during the periods presented. The following table presents the fair value of the Company’s financial assets according to the fair value hierarchy (in thousands):
 
June 30, 2019
 
December 31, 2018
 
  Level 1
 
Level 2
 
Level 3
 
  Level 1
 
Level 2
 
Level 3
Financial Assets
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents:
 
 
 
 
 
 
 
 
 
 
 
      Cash
$
36,459

 
$

 
$

 
$
46,017

 
$

 
$

      Money market accounts
10,413

 

 

 
20,878

 

 

Total cash and cash equivalents
46,872

 

 

 
66,895

 

 

Marketable securities:
 
 
 
 
 
 
 
 
 
 
 
      Commercial paper

 
15,894

 

 

 
3,991

 

      Corporate debt securities

 
30,182

 

 

 
35,640

 

      U.S. government securities

 
11,989

 

 

 
8,001

 

Total marketable securities

 
58,065

 

 

 
47,632

 

Restricted cash (current and non-current)
2,447

 

 

 
2,117

 

 

Total financial assets
$
49,319

 
$
58,065

 
$

 
$
69,012

 
$
47,632

 
$


Note 4. Marketable Securities
The following table summarizes the amortized cost, unrealized gains and losses, and fair value of the Company’s marketable securities as of June 30, 2019 and December 31, 2018 (in thousands):
 
June 30, 2019
 
December 31, 2018
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
Marketable securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial paper
$
15,894

 
$

 
$

 
$
15,894

 
$
3,991

 
$

 
$

 
$
3,991

Corporate debt securities
30,118

 
64

 

 
30,182

 
35,730

 

 
(90
)
 
35,640

U.S. government securities
11,974

 
15

 

 
11,989

 
8,012

 

 
(11
)
 
8,001

Total marketable securities
$
57,986

 
$
79

 
$

 
$
58,065

 
$
47,733

 
$

 
$
(101
)
 
$
47,632


The following table summarizes the amortized cost and fair value of the Company’s available-for-sale securities as of June 30, 2019 and December 31, 2018 by the contractual maturity date (in thousands):
 
June 30, 2019
 
December 31, 2018
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Due within one year
$
55,963

 
$
56,041

 
$
47,733

 
$
47,632

Due between one and five years
2,023

 
2,024

 

 

     Total
$
57,986

 
$
58,065

 
$
47,733

 
$
47,632


The Company had no marketable securities in an unrealized loss position as of June 30, 2019. The Company had 13 marketable securities in an unrealized loss position as of December 31, 2018. For individual marketable securities that were in an unrealized loss position as of December 31, 2018, the fair value and gross unrealized loss for these securities aggregated by investment category and length of time in a continuous unrealized loss position are presented in the following table (in thousands):

14


 
December 31, 2018
 
Less Than 12 Months
 
Greater Than 12 Months
 
Total
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
Corporate debt securities
$
4,020

 
$
(3
)
 
$
31,620

 
$
(87
)
 
$
35,640

 
$
(90
)
U.S. government securities

 

 
8,001

 
(11
)
 
8,001

 
(11
)
Total
$
4,020

 
$
(3
)
 
$
39,621

 
$
(98
)
 
$
43,641

 
$
(101
)
Unrealized losses related to these marketable securities are due to interest rate fluctuations as opposed to credit quality. In addition, the Company does not intend to sell and it is not likely that the Company would be required to sell these marketable securities before recovery of their amortized cost basis, which may be at maturity. As a result, there are no other-than-temporary impairments for these marketable securities as of June 30, 2019 or December 31, 2018.
Note 5. Leases
The Company has operating leases for corporate offices, vehicles, and office equipment. The leases have remaining lease terms of up to seven years, some of which may include options to extend the leases for up to five years.
Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company recognizes lease expense for these leases on a straight-line basis over the lease term. The Company elected the practical expedients to combine the lease components (e.g., fixed payments including rent, real estate taxes, and insurance costs) and the non-lease components (e.g., common-area maintenance costs) for all classes of underlying assets, and to not reassess prior conclusions related to contracts containing leases, lease classification, and initial direct costs.
The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, current operating lease liabilities, and non-current operating lease liabilities on our condensed consolidated balance sheets. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the lease payments over the lease term at commencement date. As most of the Company’s leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. The lease terms may include options to extend the lease when it is reasonably certain that the Company will exercise that option. Lease expense is recognized on a straight-line basis over the lease term.
Lease Cost (in thousands)
 
Three Months Ended June 30, 2019
 
Six Months Ended June 30, 2019
Operating lease cost (1)
 
$
2,030

 
$
4,473

_____________________    
(1)    Includes short-term leases and variable lease costs, which are immaterial.


15


Maturities of lease liabilities as of June 30, 2019 were as follows (in thousands):
Years Ending December 31,
 
Operating Leases (a)
2019 (excluding the six months ended June 30, 2019)
 
$
3,759

2020
 
6,701

2021
 
5,349

2022
 
4,576

2023
 
4,540

Thereafter
 
11,933

Total lease payments
 
$
36,858

Less: Imputed interest
 
7,242

Present value of lease liabilities
 
$
29,616

_____________________    
(a)    Operating lease payments exclude $4.7 million of legally binding minimum lease payments for leases signed but not yet commenced.
Lease Term and Discount Rate
 
June 30, 2019
Operating leases
 
 
Weighted-average remaining lease term
 
6 years

Weighted-average discount rate
 
7.1
%

Other information (in thousands)
 
Three Months Ended June 30, 2019
 
Six Months Ended June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities
 
 
 
 
Operating cash flows from operating leases
 
$
1,961

 
$
3,779

Leased assets obtained in exchange for new operating lease liabilities
 
$
2,785

 
$
4,402


Note 6. Equity Award Plans
Stock-Based Compensation
Stock-based compensation expense included in the accompanying condensed consolidated statements of operations is as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Cost of revenue:
 
 
 
 
 
 
 
License
$
89


$
54


$
172


$
107

Subscription
470

 
371

 
913

 
750

Professional services
421


352


822


746

Research and development
2,691


2,513


5,769


4,860

Sales and marketing
7,198


5,850


13,684


12,030

General and administrative
3,196


3,796


6,533


8,033

     Total
$
14,065


$
12,936


$
27,893


$
26,526



16


Stock Options
The following table summarizes option activity under the Company’s 2000 Stock Option and Incentive Plan and the Company’s 2017 Equity Incentive Plan, and related information (in thousands, except per share and contractual life amounts):
 
Options Outstanding
 
Number
of
Shares
 
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Life (Years)
 
Aggregate
Intrinsic
Value
Balance—December 31, 2018
6,013

 
$
11.65

 
6.4
 
$
86,624

     Options exercised
(1,586
)
 
$
10.20

 

 

     Options forfeited
(145
)
 
$
18.31

 

 

Balance—June 30, 2019
4,282

 
$
11.96

 
5.9
 
$
93,774

Options vested and exercisable—June 30, 2019
3,633

 
$
10.85

 
5.6
 
$
83,580


As of June 30, 2019, the total unrecognized compensation cost related to unvested options was $5.5 million, which is expected to be amortized on a straight-line basis over a weighted-average period of approximately 1.2 years.
The fair value of stock option awards granted to employees is estimated using the Black-Scholes option-pricing model. No stock option awards were granted during the three and six months ended June 30, 2019 and three months ended June 30, 2018. The assumptions used to determine the grant date fair value of employee stock options for the periods presented are as follows:
 
Six Months Ended June 30,
 
2018
Fair value of common stock
$29.92 – $30.97
Risk-free interest rate
2.4% – 2.8%
Expected term (in years)
6.1
Volatility
48%
Dividend yield
%
Restricted Stock Units (“RSUs”) and Performance Based Stock Units (“PSUs”)
The following table summarizes RSU and PSU activity under the Company’s 2000 Stock Option and Incentive Plan and the Company’s 2017 Equity Incentive Plan (the “2017 Plan”), and related information (in thousands, except per share and contractual life amounts):
 
RSUs and PSUs Outstanding
 
Number
of
Shares
 
Weighted-
Average
Grant Date Fair Value Per Share
 
Weighted-
Average
Remaining
Contractual
Life (Years)
 
Aggregate
Intrinsic
Value
Balance—December 31, 2018
5,709

 
$
28.01

 
1.8
 
$
148,389

    Granted
1,151

 
$
35.51

 
 
 

    Vested
(763
)
 
$
26.25

 
 
 


     Forfeited
(378
)
 
$
28.67

 
 
 
 
Balance—June 30, 2019
5,719

 
$
29.71

 
1.7
 
$
193,647


Beginning in 2019, the Company issued PSUs to select executives under the 2017 Plan. The majority of the PSUs vest over a period of four years from the date of grant subject to both the continued employment of the participant with the Company and the achievement of one or more pre-established financial performance goals. Stock-based compensation

17


expense for PSUs is recognized using the accelerated attribution method over the requisite service periods when it is probable that the performance condition will be achieved.
As of June 30, 2019, the total unrecognized compensation cost related to unvested RSUs and PSUs was $131.5 million, which is expected to be amortized over a weighted-average period of approximately 2.6 years.
Note 7. Income Taxes
The Company estimates its annual effective tax rate each quarter and specific events are discretely recognized as they occur. For the three and six months ended June 30, 2019, the Company recorded a tax provision of $0.5 million and $1.2 million, respectively, representing an effective tax rate of (1.6)% and (1.9)%, respectively. For the three and six months ended June 30, 2018, the Company recorded a tax provision of $0.5 million and $1.6 million, respectively, representing an effective tax rate of (2.4)% and (3.4)%, respectively. The Company’s effective tax rates for these periods were negative as it has maintained a valuation allowance on the U.S. losses. The key components of the income tax provision primarily consist of foreign income taxes, unrecognized tax benefits, and U.S. state minimum taxes. The effective tax rate increased for the three and six months ended June 30, 2019 as compared to the three and six months ended June 30, 2018 primarily due to an increase in worldwide loss before income taxes. The loss was primarily generated in the United States and does not impact the provision for income taxes as it was offset by a full valuation allowance.
Note 8. Net Loss Per Share
Basic net loss per share is computed by dividing net loss by basic weighted-average shares outstanding during the period. Diluted net loss per share is computed by dividing net loss by diluted weighted-average shares outstanding, including potentially dilutive securities, unless anti-dilutive.
The following table presents the computation of basic and diluted net loss per share (in thousands, except per share amounts):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Net loss
$
(30,760
)
 
$
(20,406
)
 
$
(65,012
)
 
$
(48,602
)
Weighted-average shares used to compute net loss per share, basic and diluted
45,494

 
40,457

 
44,848

 
39,394

Net loss per share, basic and diluted
$
(0.68
)
 
$
(0.50
)
 
$
(1.45
)
 
$
(1.23
)

The following securities were excluded from the computation of diluted net loss per share for the periods presented because their inclusion would reduce the net loss per share (in thousands):