Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-Q

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(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, 2020




☐	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

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FORESCOUT TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

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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)

(408) 213-3191

(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 July 31, 2020 was 49,712,035.

TABLE OF CONTENTS






		Page
	PART I - FINANCIAL INFORMATION	6
Item 1.	Financial Statements	6
	Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019	6
	Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2020 and 2019	7
	Condensed Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended June 30, 2020 and 2019	8
	Condensed Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended June 30, 2020 and 2019	9
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2020 and 2019	10
	Notes to Condensed Consolidated Financial Statements	11
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36
Item 4.	Controls and Procedures	37

	PART II - OTHER INFORMATION	38
Item 1.	Legal Proceedings	38
Item 1A.	Risk Factors	41
Item 6.	Exhibits	43
	Signatures

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:


•	our proposed acquisition by entities affiliated with Advent International Corporation (“Advent”), including the proposed tender offer in connection therewith;


•	the effect of the COVID-19 pandemic and related actions by individuals, governments, and private industry on our business, markets, and the economy


•	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;


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


•	fluctuations in our quarterly results of operations and other operating measures (including developments and volatility arising from COVID-19 and customer uncertainty related to the acquisition);


•	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;


•	our expectations of material future costs related to restructuring plans;


•	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 our filings with the SEC and, in particular, those risks discussed in Part I, Item 1A of our Annual Report on Form 10-K, as amended, for the fiscal year ended December 31, 2019 and in Part II, Item 1A of this Quarterly Report on Form 10-Q. 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.

PART I. FINANCIAL INFORMATION



ITEM 1.	FINANCIAL STATEMENTS

FORESCOUT TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands, except par value)



	June 30, 2020			December 31, 2019
Assets
Current assets:
Cash and cash equivalents	$	54,947		$	69,030
Marketable securities	2,021			29,181
Accounts receivable	63,924			84,168
Inventory	1,418			372
Deferred commissions - current	13,350			12,843
Prepaid expenses and other current assets	11,383			17,024
Total current assets	147,043			212,618
Deferred commissions - non-current	20,848			23,036
Property and equipment, net	20,718			23,835
Operating lease right-of-use assets	27,265			29,626
Restricted cash - non-current	1,554			1,555
Intangible assets, net	17,339			19,367
Goodwill	98,018			98,018
Other assets	6,946			8,172
Total assets	$	339,731		$	416,227

Liabilities and stockholders' equity
Current liabilities:
Accounts payable	$	11,899		$	10,692
Accrued compensation	29,770			34,007
Accrued expenses	16,381			16,279
Deferred revenue - current	104,191			112,232
Notes payable - current	4,550			8,248
Operating lease liabilities - current	5,812			5,840
Total current liabilities	172,603			187,298
Deferred revenue - non-current	67,274			75,366
Operating lease liabilities - non-current	29,211			32,125
Other liabilities	23,638			23,893
Total liabilities	292,726			318,682

Stockholders' equity:
Common stock, $0.001 par value; 1,000,000 shares authorized;
49,550 and 48,064 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively	50			48
Additional paid-in capital	762,187			727,922
Accumulated other comprehensive loss	(678		)	(633		)
Accumulated deficit	(714,554		)	(629,792		)
Total stockholders’ equity	47,005			97,545
Total liabilities and stockholders' equity	$	339,731		$	416,227

See Notes to Condensed Consolidated Financial Statements.

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,
	2020			2019			2020			2019
Revenue:
License	$	37,577		$	38,831		$	52,376		$	76,511
Subscription	37,612			34,822			75,138			68,621
Professional services	4,687			4,627			9,515			8,716
Total revenue	79,876			78,280			137,029			153,848
Cost of revenue:
License	6,282			5,622			11,701			13,229
Subscription	7,041			5,599			14,054			10,806
Professional services	6,148			6,235			13,313			12,421
Total cost of revenue	19,471			17,456			39,068			36,456
Total gross profit	60,405			60,824			97,961			117,392
Operating expenses:
Research and development	21,514			19,440			44,760			37,937
Sales and marketing	38,988			56,173			86,276			112,096
General and administrative	21,733			15,838			46,214			32,051
Restructuring	859			—			3,371			—
Total operating expenses	83,094			91,451			180,621			182,084
Loss from operations	(22,689		)	(30,627		)	(82,660		)	(64,692		)
Interest expense	(118		)	(142		)	(353		)	(235		)
Other income (expense), net	572			505			(29		)	1,122
Loss before income taxes	(22,235		)	(30,264		)	(83,042		)	(63,805		)
Income tax provision	1,288			496			1,720			1,207
Net loss	$	(23,523	)	$	(30,760	)	$	(84,762	)	$	(65,012	)
Net loss per share, basic and diluted	$	(0.48	)	$	(0.68	)	$	(1.73	)	$	(1.45	)
Weighted-average shares used to compute net loss per share, basic and diluted	49,371			45,494			48,982			44,848

See Notes to Condensed Consolidated Financial Statements.

FORESCOUT TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited, in thousands)



	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Net loss	$	(23,523	)	$	(30,760	)	$	(84,762	)	$	(65,012	)
Other comprehensive (loss) income, net of tax:
Change in fair value adjustment on marketable securities	10			60			(45		)	135
Foreign currency translation adjustments	—			1,602			—			(452		)
Comprehensive loss	$	(23,513	)	$	(29,098	)	$	(84,807	)	$	(65,329	)

See Notes to Condensed Consolidated Financial Statements.

FORESCOUT TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited, in thousands)



	Six Months Ended June 30, 2020
	Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Loss			Accumulated Deficit			Total Stockholders' Equity
	Shares	Amount		Additional Paid-In Capital		Accumulated Other Comprehensive Loss			Accumulated Deficit			Total Stockholders' Equity
Balance as of December 31, 2019	48,064	$	48	$	727,922	$	(633	)	$	(629,792	)	$	97,545
Other comprehensive loss, net of tax	—	—		—		(55		)	—			(55		)
Stock-based compensation	—	—		13,478		—			—			13,478
Issuance of common stock in connection with employee equity incentive plans	976	1		2,899		—			—			2,900
Net loss	—	—		—		—			(61,239		)	(61,239		)
Balance as of March 31, 2020	49,040	$	49	$	744,299	$	(688	)	$	(691,031	)	$	52,629
Other comprehensive income, net of tax	—	—		—		10			—			10
Stock-based compensation	—	—		12,522		—			—			12,522
Issuance of common stock in connection with employee equity incentive plans	510	1		5,366		—			—			5,367
Net loss	—	—		—		—			(23,523		)	(23,523		)
Balance as of June 30, 2020	49,550	$	50	$	762,187	$	(678	)	$	(714,554	)	$	47,005



	Six Months Ended June 30, 2019
	Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Loss			Accumulated Deficit			Total Stockholders' Equity
	Shares	Amount		Additional Paid-In Capital		Accumulated Other Comprehensive Loss			Accumulated Deficit			Total Stockholders' Equity
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

See Notes to Condensed Consolidated Financial Statements.

FORESCOUT TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)



	Six Months Ended June 30,
	2020			2019
Cash flows from operating activities:
Net loss	$	(84,762	)	$	(65,012	)
Adjustments to reconcile net loss to net cash used in operating activities
Stock-based compensation	25,625			27,893
Depreciation and amortization	6,465			5,790
Other	655			(8		)
Changes in operating assets and liabilities
Accounts receivable	20,244			12,177
Inventory	(1,293		)	(593		)
Deferred commissions	1,681			1,809
Prepaid expenses and other current assets	5,142			318
Other assets	536			551
Accounts payable	1,297			(2,509		)
Accrued compensation	(4,237		)	(905		)
Accrued expenses	152			407
Deferred revenue	(16,133		)	1,495
Other liabilities	(143		)	(160		)
Net cash used in operating activities	(44,771		)	(18,747		)
Cash flows from investing activities:
Purchases of property and equipment	(1,355		)	(3,402		)
Purchases of marketable securities	—			(63,569		)
Proceeds from maturities of marketable securities	27,000			53,354
Net cash provided by (used in) investing activities	25,645			(13,617		)
Cash flows from financing activities:
Proceeds from revolving credit facility	16,000			—
Repayment of revolving credit facility	(16,000		)	—
Repayments of notes payable	(3,750		)	(3,749		)
Proceeds from sales of shares through employee equity incentive plans	11,583			20,726
Payment related to shares withheld for taxes on vesting of restricted stock units	(3,316		)	(4,302		)
Others	25			—
Net cash provided by financing activities	4,542			12,675
Effect of exchange rate changes on cash and cash equivalents	—			(4		)
Net change in cash, cash equivalents, and restricted cash for period	(14,584		)	(19,693		)
Cash, cash equivalents, and restricted cash at beginning of period	71,591			69,012
Cash, cash equivalents, and restricted cash at end of period	$	57,007		$	49,319



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	$	54,947	$	46,872
Restricted cash included in prepaid expenses and other current assets	506		1,154
Restricted cash - non-current	1,554		1,293
Total cash, cash equivalents, and restricted cash	$	57,007	$	49,319

See Notes to Condensed Consolidated Financial Statements.

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, eyeSegment, eyeControl, and SilentDefense; eyeSight, eyeSegment, 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, eyeSegment, 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.

Proposed Merger

On February 6, 2020, the Company entered into an Agreement and Plan of Merger (the “Original Merger Agreement”) with Ferrari Group Holdings, L.P., a Delaware limited partnership (“Parent”), and Ferrari Merger Sub, Inc., a Delaware corporation and an indirect wholly owned subsidiary of Parent (“Merger Sub”). Parent and Merger Sub are affiliates of Advent International Corporation (“Advent”).

On July 15, 2020, the Company, Parent and Merger Sub entered into an Amended and Restated Agreement and Plan of Merger (the “Amended and Restated Merger Agreement”) in order to amend and restate the Original Merger Agreement.

The Amended and Restated Merger Agreement provides that, subject to the terms of the Amended and Restated Merger Agreement, Merger Sub will commence a tender offer (the “Offer”) to purchase each issued and outstanding share of the Company’s common stock for $29.00 per share, net to the seller in cash, without interest and subject to any withholding taxes (the “Offer Price”). The closing of the Offer is subject to certain limited customary conditions, including the tender by Company shareholders of at least one share more than 50% of the Company’s issued and outstanding shares. If the Offer is successful, then following consummation of the Offer, Merger Sub will be merged with and into the Company, with the Company surviving as a wholly owned subsidiary of Parent (the “Merger”). The Amended and Restated Merger Agreement contemplates that the Merger will be effected pursuant to Section 251(h) of the Delaware General Corporation Law (the “DGCL”), which would not require a vote of the Company’s stockholders in order to consummate the Merger. At the effective time of the Merger each issued and outstanding share of the Company’s common stock (except for certain shares specified in the Amended and Restated Merger Agreement), whether or not tendered in accordance with the Offer, will be canceled and converted into the right to receive the Offer Price.

On July 20, 2020, Merger Sub commenced the Offer. The Offer is scheduled to expire at the end of the day, one minute after 11:59 p.m., Eastern time, on August 14, 2020, unless the Offer is extended or earlier terminated.

Concurrently with the execution of the Amended and Restated Merger Agreement, Forescout, Parent and Merger Sub entered into a settlement agreement to resolve pending litigation between them. Pursuant to the settlement agreement, the parties have agreed to release their respective claims made in connection with the litigation.

COVID-19

Due to the COVID-19 pandemic, there has been uncertainty and disruption in the global economy and financial markets, which has decreased, and may further decrease, demand for a broad variety of goods and services, while also disrupting sales channels and marketing activities for an unknown period of time until the pandemic is contained. At this point, the extent to which COVID-19 may impact our financial condition or results of operations is uncertain.

Basis of Presentation

The accompanying condensed consolidated financial statements 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, 2019. 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, 2019 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, 2019.

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, including but not limited to the potential impacts arising from the recent COVID-19 and public and private policies and initiatives aimed at reducing its transmission. 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. As the extent and duration of the impact from COVID-19 continue to evolve and additional information becomes available, the Company’s estimates and assumptions may change materially in future periods. Actual results could differ materially from those estimates.

Summary of Significant Accounting Policies

Restructuring cost

The Company records restructuring activities including costs for one-time termination benefits in accordance with ASC Topic 420 (“ASC 420”), Exit or Disposal Cost Obligations. A liability is recognized when management has committed to a restructuring plan and has communicated those actions to employees. Restructuring cost for employee workforce reductions are recorded upon employee notification for employees whose required continuing service period is 60 days or less and ratably over the employee’s continuing service period for employees whose required continuing service period is greater than 60 days. Employee termination benefits covered by existing benefit arrangements are

recorded in accordance with ASC Topic 712, Non-retirement Post-employment Benefits. These costs are recognized as restructuring charges in the condensed consolidated statement of operations when management has committed to a restructuring plan and the severance costs are probable and estimable. Refer to Note 5 for further details.

Credit losses

Effective January 1, 2020, the Company adopted the requirements of Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model which requires the use of forward-looking information to calculate credit loss estimates. It also eliminates the concept of other-than-temporary impairment and requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. These changes will result in earlier recognition of credit losses. The Company adopted ASU 2016-13 effective January 1, 2020 with the cumulative effect of adoption recorded as an adjustment to retained earnings. The effect on its consolidated financial statements and related disclosures is not material.

Except for the impact of the adoption of Topic 326, 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, 2019 that have had a material impact on the Company’s condensed consolidated financial statements and related notes.

Recently Issued and Not Yet Adopted Accounting Pronouncements

In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes that eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. It also clarifies and simplifies other aspects of the accounting for income taxes. The standard is effective for annual and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted. The Company is currently evaluating the timing and impact of the adoption of this standard on its consolidated financial statements.

Note 2. Revenue, Deferred Revenue and Deferred Commissions

Disaggregation of Revenue

The Company derives revenue from sale of Software Products, Hardware Products, term 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,
	2020		2019		2020		2019
Revenue:
License
Software Products
Perpetual license	$	12,167	$	20,675	$	21,526	$	46,434
Term license	19,167		11,190		19,820		11,514
Hardware Products	6,243		6,966		11,030		18,563
Subscription
Software as a service (“SaaS”)	167		—		293		—
Support and maintenance	37,445		34,822		74,845		68,621
Professional services	4,687		4,627		9,515		8,716
Total revenue	$	79,876	$	78,280	$	137,029	$	153,848

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, the value allocated to support and maintenance within Software Products subscription contracts, and software-as-a-service (“SaaS”) offering contracts. SaaS customers do not have the right to take possession of the cloud-based software. Subscription contracts have terms that are generally either one or three years, but can be up to five 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):



	Three Months Ended June 30, 2020
	Contract Liabilities
	Total
Balance as of March 31, 2020	$	180,674
Additions	71,019
License revenue recognized	(37,577		)
Subscription revenue recognized	(37,612		)
Professional services revenue recognized	(4,687		)
Balance as of June 30, 2020	$	171,817



	Six Months Ended June 30, 2020
	Contract Liabilities
	Total
Balance as of December 31, 2019	$	188,907
Additions	119,939
License revenue recognized	(52,376		)
Subscription revenue recognized	(75,138		)
Professional services revenue recognized	(9,515		)
Balance as of June 30, 2020	$	171,817

For the three and six months ended June 30, 2020 and 2019, a vast majority of subscription revenue and a minority of license revenue and professional services revenue were included in the contract liabilities balance at the beginning of each period.

Performance Obligations

Contracted not recognized revenue was $172.1 million as of June 30, 2020, of which the Company expects to recognize approximately 61% 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.

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 as of June 30, 2020 and December 31, 2019 (in thousands):



	June 30, 2020						December 31, 2019
	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents:
Cash	$	40,752	$	—	$	—	$	62,188	$	—	$	—
Money market accounts	14,195		—		—		6,842		—		—
Total cash and cash equivalents	54,947		—		—		69,030		—		—
Marketable securities:
Commercial paper	—		—		—		—		1,998		—
Corporate debt securities	—		2,021		—		—		24,168		—
U.S. government securities	—		—		—		—		3,015		—
Total marketable securities	—		2,021		—		—		29,181		—
Restricted cash (current and non-current)	2,060		—		—		2,561		—		—
Total financial assets	$	57,007	$	2,021	$	—	$	71,591	$	29,181	$	—

Note 4. Marketable Securities

The following table summarizes the Company’s marketable securities by significant investment categories as of June 30, 2020 and December 31, 2019 (in thousands):



	June 30, 2020						December 31, 2019
	Amortized Cost		Unrealized Gains		Fair Value		Amortized Cost		Unrealized Gains		Fair Value
Marketable securities:
Available-for-sale:
Commercial paper	$	—	$	—	$	—	$	1,998	$	—	$	1,998
Corporate debt securities	2,017		4		2,021		24,122		46		24,168
U.S. government securities	—		—		—		3,012		3		3,015
Total marketable securities	$	2,017	$	4	$	2,021	$	29,132	$	49	$	29,181

The following table summarizes the amortized cost and fair value of the Company’s available-for-sale securities as of June 30, 2020 and December 31, 2019 by the contractual maturity date (in thousands):



	June 30, 2020				December 31, 2019
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due within one year	$	2,017	$	2,021	$	29,132	$	29,181
Total	$	2,017	$	2,021	$	29,132	$	29,181

The Company had no marketable securities in unrealized loss position as of June 30, 2020 and December 31, 2019.

Note 5. Restructuring

Q2 2020 Restructuring Plan

In the second quarter of fiscal year 2020, the Company initiated a restructuring plan (the “Q2 2020 Restructuring Plan”) as the Company continues to make adjustments to its overall expense plan and workforce to further align with

its strategy and partially in response to the impact of COVID-19 on business operations. The Q2 2020 Restructuring Plan includes reductions in force of approximately 60 employees across various functions, of which a majority were notified by June 30, 2020 and is expected to be substantially completed by September 30, 2020.

Q1 2020 Restructuring Plan

In the first quarter of fiscal year 2020, the Company initiated a restructuring plan (the “Q1 2020 Restructuring Plan”) as part of the Company’s effort to realign its cost structure in both its go-to-market and engineering organizations. The Q1 2020 Restructuring Plan included reductions in force of approximately 90 employees within the sales, marketing, and engineering functions and was largely completed by March 31, 2020 with no material future costs expected to be incurred.

The following table summarizes the activity related to the accrual for restructuring charges (in thousands):



	Workforce Reduction Cost
Accrual balance as at December 31, 2019	$	—
Restructuring charges	3,371
Cash payments	(2,841		)
Accrual balance as at June 30, 2020	$	530

The accrued restructuring balance as at June 30, 2020 is included in accrued expenses on the Company’s condensed consolidated balance sheets.

For the three and six months ended June 30, 2020, the Company recognized restructuring charges of $0.9 million and $3.4 million.

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,
	2020		2019		2020		2019
Cost of revenue:
License	$	114	$	89	$	236	$	172
Subscription	482		470		1,006		913
Professional services	301		421		817		822
Research and development	3,417		2,691		7,100		5,769
Sales and marketing	4,795		7,198		10,599		13,684
General and administrative	2,658		3,196		5,867		6,533
Total	$	11,767	$	14,065	$	25,625	$	27,893

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, 2019	3,066		$	12.33	5.6	$	62,759
Options exercised	(636	)	$	12.31
Options forfeited	(32	)	$	21.46
Balance—June 30, 2020	2,398		$	12.22	5.2	$	22,035
Options vested and exercisable—June 30, 2020	2,287		$	11.77	5.1	$	21,874

As of June 30, 2020, the total unrecognized compensation cost related to unvested options was $1.1 million, which is expected to be amortized on a straight-line basis over a weighted-average period of approximately 0.9 years.

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, 2019	6,391		$	31.37	1.7	$	209,621
Granted	253		$	29.80
Vested	(816	)	$	29.41
Forfeited	(668	)	$	32.02
Balance—June 30, 2020	5,160		$	31.53	1.5	$	109,383

The Company has 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 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, 2020, the total unrecognized compensation cost related to unvested RSUs and PSUs was $118.8 million, which is expected to be amortized over a weighted-average period of approximately 2.4 years.

Note 7. Income Taxes

The Company estimates its annual effective tax rate each quarter and specific events are discretely recognized as they occur under the provisions of ASC 740-270, Income Taxes: Interim Reporting. For the three and six months ended June 30, 2020, the Company recorded a tax provision of $1.3 million and $1.7 million, respectively, representing an effective tax rate of (5.8)% and (2.1)%, respectively. 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. 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 decreased for the three and six months ended June 30, 2020 as compared to the three and six months ended June 30, 2019 primarily due to a decrease 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.

In response to COVID-19, President Donald Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) on March 27, 2020. The CARES Act provides numerous tax provisions and other stimulus measures, including temporary changes regarding the prior and future utilization of net operating losses, temporary changes to the prior and future limitations on interest deductions, temporary suspension of certain payment requirements for the employer portion of Social Security taxes, technical corrections from prior tax legislation for tax depreciation of certain qualified improvement property, and the creation of certain refundable employee retention credits. The impact of the CARES Act does not have a material impact on the Company’s consolidated financial statements.

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,
	2020			2019			2020			2019
Net loss	$	(23,523	)	$	(30,760	)	$	(84,762	)	$	(65,012	)
Weighted-average shares used to compute net loss per share, basic and diluted	49,371			45,494			48,982			44,848
Net loss per share, basic and diluted	$	(0.48	)	$	(0.68	)	$	(1.73	)	$	(1.45	)

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):



	As of June 30,
	2020	2019
Options to purchase common stock	2,398	4,282
Unvested early exercised common shares	—	—
Unvested restricted stock units	5,160	5,719
Employee Stock Purchase Plan	—	172

Note 9. Subsequent Events

On February 6, 2020, the Company entered into the Original Merger Agreement with Parent and Merger Sub. Parent and Merger Sub are affiliates of Advent.

On July 15, 2020, the Company, Parent and Merger Sub entered into the Amended and Restated Merger Agreement in order to amend and restate the Original Merger Agreement. The Amended and Restated Merger Agreement provides that, subject to the terms of the Amended and Restated Merger Agreement, Merger Sub will commence the Offer to purchase each issued and outstanding share of the Company’s common stock for the Offer Price. The closing of the Offer is subject to

certain limited customary conditions, including the tender by Company shareholders of at least one share more than 50% of the Company’s issued and outstanding shares. If the Offer is successful, then following consummation of the Offer, Merger Sub will be merged with and into the Company, with the Company surviving as a wholly owned subsidiary of Parent. The Amended and Restated Merger Agreement contemplates that the Merger will be effected pursuant to Section 251(h) of the DGCL, which would not require a vote of the Company’s stockholders in order to consummate the Merger. At the effective time of the Merger, each issued and outstanding share of the Company’s common stock (except for certain shares specified in the Amended and Restated Merger Agreement), whether or not tendered in accordance with the Offer, will be canceled and converted into the right to receive the Offer Price.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our (1) unaudited condensed consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q, and (2) audited consolidated financial statements and notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for the year ended December 31, 2019 included in our Annual Report on Form 10-K for the year ended December 31, 2019. This discussion contains forward-looking statements based upon current plans, expectations and beliefs that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. See the section titled “Special Note Regarding Forward-Looking Statements.”

Unless expressly indicated or the context requires otherwise, the terms “Forescout,” “we,” “us,” and “our” in this document refer to Forescout Technologies, Inc., a Delaware corporation, and, where appropriate, its wholly owned subsidiaries.

Overview

We offer our solution across two product groups: (i) products for visibility and control capabilities, and (ii) products for orchestration capabilities. Our products for visibility and control capabilities consist of eyeSight, eyeSegment, eyeControl, and SilentDefense. Our eyeSight, eyeSegment, and eyeControl products provide for visibility and control capabilities across the extended enterprise, from campus to data center to hybrid cloud to OT devices, while our SilentDefense product provides for visibility and control capabilities deeper within the OT portion of the network. Our products for orchestration capabilities are comprised of our portfolio of our eyeExtend family of products.

We offer our solution across two product types: (i) software products and (ii) hardware products. Our software products include eyeSight, eyeSegment, eyeControl, eyeExtend, SilentDefense, and SilentDefense Command Center (“Software Products”). Our hardware products include hardware that is sold separately for use with our Software Products and appliances that are embedded with our software (“Hardware Products”).

We also offer our solution across license types and increments. Our Software Products are sold with a perpetual license or a subscription license. Customers can purchase in license increments of 100 devices, with hardware sold separately based on customer deployment requirements. Customers can manage their own deployments of our products in varying options capable of scaling and managing deployments of up to 2,000,000 devices under a single console. Customers can purchase our SilentDefense products in license increments that are on a per sensor basis.

Proposed Merger

On February 6, 2020, we entered into an Agreement and Plan of Merger (the “Original Merger Agreement”) with Ferrari Group Holdings, L.P., a Delaware limited partnership (“Parent”), and Ferrari Merger Sub, Inc., a Delaware corporation and an indirect wholly owned subsidiary of Parent (“Merger Sub”). Parent and Merger Sub are affiliates of Advent International Corporation (“Advent”).

On July 15, 2020, Forescout, Parent and Merger Sub entered into an Amended and Restated Agreement and Plan of Merger (the “Amended and Restated Merger Agreement”) in order to amend and restate the Original Merger Agreement. The Amended and Restated Merger Agreement provides that, subject to the terms of the Amended and Restated Merger Agreement, Merger Sub will commence a tender offer (the “Offer”) to purchase each issued and outstanding share of our common stock for $29.00 per share, net to the seller in cash, without interest and subject to any withholding taxes (the “Offer Price”). The closing of the Offer is subject to certain limited customary conditions, including the tender by Company shareholders of at least one share more than 50% of the Company’s issued and outstanding shares. If the Offer is successful, then following consummation of the Offer, Merger Sub will be merged with and into Forescout, with Forescout surviving as a wholly owned subsidiary of Parent (the “Merger”). The Amended and Restated Merger Agreement contemplates that the Merger will be effected pursuant to Section 251(h) of the Delaware General Corporation Law, which would not require a vote of our stockholders in order to consummate the Merger. At

the effective time of the Merger, each issued and outstanding share of our common stock (except for certain shares specified in the Amended and Restated Merger Agreement), whether or not tendered in accordance with the Offer, will be canceled and converted into the right to receive the Offer Price.

Impact of COVID-19 on our Results of Operations

In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic, which continues to spread throughout the U.S. and the world and has resulted in authorities implementing numerous measures to contain the virus, including travel restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns.

The broader impact of COVID-19 on our results of operations and overall financial performance remains uncertain because the extent and duration of the impact from COVID-19 continue to evolve. Our operations have been impacted by office closures globally and restrictions on employee travel and in-person meetings; however, we have generally been able to deliver our products and services remotely. To support the health and well-being of our employees, customers, partners and communities, a vast majority of our employees continue to work remotely as of June 30, 2020. Despite the extent of the COVID-19 pandemic, we exited the second quarter of 2020 with a stronger growth in revenue and improved profitability as compared to the first quarter of 2020, driven by our continuous effort in closing strategic deals with both new and existing customers as well as continuous adjustments to our overall expense plan and workforce to further align with our strategy. We will continue to evaluate the nature and extent of the impact of COVID-19 on our business. See section titled “Risk Factors” for further discussion of the possible impact of COVID-19 on our business.

Second Quarter 2020 Financial Highlights

Since our inception through June 30, 2020, we have sold to more than 3,800 end-customers in nearly 100 countries, including 27% of the Global 2000. For the three months ended June 30, 2020 and 2019, we sold to 8% and 8% of the Global 2000, respectively. Our end-customers represent a broad range of industries, including government, financial, technology, healthcare, energy, manufacturing, services, retail, education, and entertainment.

The following table summarizes our key financial highlights for the periods presented in dollars and as a percentage of our total revenue.



	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019

	(Dollars in thousands)
Total revenue	$	79,876		$	78,280		$	137,029		$	153,848
Total revenue year-over-year percentage growth	2		%	16		%	(11		)%	21		%
Gross margin	76		%	78		%	71		%	76		%
Loss from operations	$	(22,689	)	$	(30,627	)	$	(82,660	)	$	(64,692	)
Loss from operations as a percentage of total revenue	(28		)%	(39		)%	(60		)%	(42		)%
Net loss	$	(23,523	)	$	(30,760	)	$	(84,762	)	$	(65,012	)
Net cash used in operating activities							$	(44,771	)	$	(18,747	)

Continued Retention and Sales to Existing End-Customers

We believe the net-recurring revenue retention rate over the trailing 12 month period on our subscription revenue and on the annualized value of our subscription license revenue is an important metric to measure our ability to retain and increase sales to our existing end-customers. We calculate the net-recurring revenue retention rate using the following formula:

X = (A + B + C)/(B + D)

where:

X = net-recurring revenue retention rate

A = annualized value of term contracts renewed over the trailing 12 month period

B = trailing 12 month annualized value of term contracts not subject to renewal because the scheduled expiration date of the multi-year contract falls outside of the 12 month period under measurement

C = trailing 12 month annualized value of new term contracts from end-customers that have been end customers for more than one year

D = 12 months annualized value of term contracts scheduled to terminate or renew during the 12 month period under measurement

We believe this metric is an indication of the continuing value we provide to our end-customers because it shows the renewal rate of their support and maintenance contracts and Software Products subscription contracts. Our net-recurring revenue retention rate as of June 30, 2020 and December 31, 2019 were 110% and 122%, respectively. The 1,200 basis point decrease was primarily driven by the lack of new term contract from end-customers that have been end-customers for more than one year in the trailing 12 month period ending June 30, 2020 relative to the trailing 12 month period ending December 31, 2019. A net retention rate over 100% indicates that our products are expanding within our end-customer base, whereas a rate less than 100% indicates that our products are constricting within our end-customer base. Additionally, this calculation includes all changes to the annualized value of the recurring revenue from term contracts used in the calculation, which includes scheduled expiration periods, stub periods, changes in pricing, additional products purchased, lost end-customers, early renewals, and decreases in the number of devices licensed to be managed by our license under contract. This metric does not take into account perpetual license revenue or professional services revenue. The annualized value of our contracts is a legal and contractual determination made by assessing the contractual terms with our end-customers. The annualized value of our term contracts is not determined by reference to historical revenue, deferred revenue, or any other GAAP financial measure over any period.

Recurring Revenue Rate

We are focused on providing our customers with more licensing and delivery options from which to purchase our products.

Included in our license revenue is the value allocated to license within our Software Products subscription contracts, which 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 or upon commencement of a renewed term contract.

Included in our subscription revenue is the value allocated to support and maintenance within our Software Products subscription contracts and revenue derived from support and maintenance contracts. Subscription revenue is recognized ratably over the term of the contract.

We believe this metric is an important metric in understanding the impact of customer buying preferences for the varying Software Products options upon our reported revenue. We calculate the recurring revenue rate as a subscription revenue plus the portion of license revenue that is derived from the value allocated to license within our Software

Products subscription contracts (“term license”), collectively, as a percent of total revenue, as measured over the trailing 12 month period. We calculate the recurring revenue rate using the following formula:

X = (A + B)/C

where:

X = recurring revenue rate

A = subscription revenue over the trailing 12 month period

B = term license revenue over the trailing 12 month period

C = total revenue

Our recurring revenue rate as of June 30, 2020 and December 31, 2019 were 57% and 49%, respectively. The 800 basis point increase primarily reflects the increased adoption of new subscription contracts in the six months ended June 30, 2020. The numerator does not take into account perpetual license revenue or professional services revenue. The numerator does include the value allocated to license within our Software Products subscription contracts for all contract durations. Those contract durations that are greater than 12 months will raise the recurring revenue rate for the first 12 months of the contract duration and will lower the recurring revenue rate for the balance of the contract duration after the first 12 months relative to the annualized value of such Software Products subscription contracts. As disclosed in Note 2. Revenue, Deferred Revenue and Deferred Commissions of our Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, within the Disaggregation of Revenue, term license revenue was $19.2 million and $19.8 million for the three and six months ended June 30, 2020, respectively, and $11.2 million and $11.5 million for the three and six months ended June 30, 2019, respectively.

Results of Operations

The following tables summarize our results of operations for the periods presented in dollars and as a percentage of our total revenue. The period-to-period comparison of results is not necessarily indicative of results for future periods.



	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019

	(In thousands)
Condensed Consolidated Statements of Operations Data:
Revenue:
License	$	37,577	$	38,831	$	52,376	$	76,511
Subscription	37,612		34,822		75,138		68,621
Professional services	4,687