10-Q 1 mule10-q9302017.htm 10-Q Document
 


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 September 30, 2017
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 001-38031
MuleSoft, Inc.
(Exact name of Registrant as specified in its Charter) 

Delaware
 
20-5158650
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
77 Geary Street, Suite 400
San Francisco, California 94108
(Address of principal executive offices including zip code)

Registrant’s telephone number, including area code: (415) 229-2009 
 
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    YES  ☒    NO  ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): 
Large accelerated filer
Accelerated filer
Non-accelerated filer
☒  (Do not check if a small reporting company)
Small reporting company
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☒
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ☐    NO  ☒
As of October 31, 2017, the number of outstanding shares of the Registrant’s Class A Common Stock was 74,905,453 and the number of outstanding shares of the Registrant’s Class B Common Stock was 55,056,463.


 

Table of Contents
 
 
 
Page
PART I—FINANCIAL INFORMATION
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.



2

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws, 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,” “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 ability to attract and retain customers, including larger organizations;
our ability to deepen our relationships with existing customers;
our expectations regarding our customer growth rate;
our business plan and beliefs and objectives for future operations;
trends associated with our industry and potential market, including the adoption of application networks;
benefits associated with use of our platform and services;
our ability to develop or acquire new products and services, improve our platform and services and increase the value of our platform and services;
our ability to compete successfully against current and future competitors;
the network effects associated with our business;
our ability to further develop strategic relationships;
our ability to achieve positive returns on investments;
our plans to further invest in and grow our business, and our ability to effectively manage our growth and associated investments;
our ability to timely and effectively scale and adapt our existing technology;
our ability to increase our revenue, our revenue growth rate and our gross margin;
our future financial performance, including trends in revenue, cost of revenue, operating expenses, other income and expenses, income taxes, billings, customers and dollar-based net retention rate;
the sufficiency of our cash and cash equivalents and cash generated from operations to meet our working capital and capital expenditure requirements;
our ability to attract, train, and retain qualified employees and key personnel;
our ability to maintain and benefit from our corporate culture;
our ability to successfully identify, acquire and integrate companies and assets;
our ability to successfully enter new markets and manage our international expansion; and
our ability to maintain, protect and enhance our intellectual property and not infringe upon others’ intellectual property.

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, results of operations and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section titled “Risk Factors” and elsewhere in 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 and 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.


3

 

PART I—FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MULESOFT, INC.
Condensed Consolidated Balance Sheets
(In thousands)
(Unaudited)
 
 
September 30,
2017
 
December 31,
2016
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
56,156

 
$
35,101

Investments
125,392

 
63,361

Trade receivables, net of allowance for doubtful accounts of $707 and $446 as of September 30, 2017 and December 31, 2016
84,077

 
72,324

Prepaid expenses and other current assets
18,557

 
18,854

Total current assets
284,182

 
189,640

Investments, noncurrent
152,316

 
4,151

Property and equipment, net of accumulated depreciation of $6,204 and $3,925 as of September 30, 2017 and December 31, 2016
6,468

 
5,231

Restricted cash
786

 
671

Goodwill
764

 
787

Intangible assets, net
1,002

 
1,797

Other assets
2,268

 
661

TOTAL ASSETS
$
447,786

 
$
202,938

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable
$
1,314

 
$
1,879

Accrued expenses
12,760

 
7,797

Accrued compensation and related expenses
20,409

 
16,369

Deferred revenue
162,707

 
130,045

Total current liabilities
197,190

 
156,090

Deferred revenue, noncurrent
8,316

 
5,569

Other liabilities
2,334

 
1,176

TOTAL LIABILITIES
207,840

 
162,835

Commitments and contingencies (Note 4)

 

STOCKHOLDERS’ EQUITY:
 
 
 
Convertible preferred stock

 
255,946

Common stock

 
1

Class A common stock
1

 

Class B common stock
2

 

Additional paid-in capital
533,049

 
22,241

Accumulated deficit
(291,129
)
 
(236,230
)
Accumulated other comprehensive loss
(1,977
)
 
(1,855
)
TOTAL STOCKHOLDERS’ EQUITY
239,946

 
40,103

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
447,786

 
$
202,938

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

4

 

MULESOFT, INC.
Condensed Consolidated Statements of Operations
(In thousands, except share and per share data)
(Unaudited)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Revenue:
 
 
 
 
 
 
 
Subscription and support
$
61,704

 
$
40,937

 
$
167,375

 
$
107,837

Professional services and other
15,900

 
8,432

 
40,367

 
24,557

Total revenue
77,604

 
49,369

 
207,742

 
132,394

Cost of revenue:
 
 
 
 

 

Subscription and support
5,242

 
3,589

 
13,939

 
9,540

Professional services and other
16,858

 
8,756

 
41,748

 
24,389

Total cost of revenue
22,100

 
12,345

 
55,687

 
33,929

Gross profit
55,504

 
37,024

 
152,055

 
98,465

Operating expenses:
 
 
 
 
 
 

Research and development
18,048

 
8,701

 
45,977

 
22,893

Sales and marketing
50,707

 
33,920

 
127,650

 
87,440

General and administrative
12,144

 
9,555

 
32,755

 
23,681

Total operating expenses
80,899

 
52,176

 
206,382

 
134,014

Loss from operations
(25,395
)
 
(15,152
)
 
(54,327
)
 
(35,549
)
Interest income
968

 
110

 
1,483

 
314

Other income (expense), net
(354
)
 
(242
)
 
(621
)
 
(348
)
Net loss before provision for income taxes
(24,781
)
 
(15,284
)
 
(53,465
)
 
(35,583
)
Provision for income taxes
335

 
377

 
1,427

 
925

Net loss
$
(25,116
)
 
$
(15,661
)
 
$
(54,892
)
 
$
(36,508
)
Net loss attributable to common stockholders
$
(25,116
)
 
$
(25,097
)
 
$
(54,892
)
 
$
(45,944
)
Net loss per share attributable to common stockholders, basic and diluted
$
(0.19
)
 
$
(1.15
)
 
$
(0.56
)
 
$
(2.26
)
Weighted-average shares used in computing net loss per share, basic and diluted
129,044,913

 
21,733,456

 
98,762,781

 
20,368,438

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


5

 

MULESOFT, INC.
Condensed Consolidated Statements of Comprehensive Loss
(In thousands)
(Unaudited)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Net loss
$
(25,116
)
 
$
(15,661
)
 
$
(54,892
)
 
$
(36,508
)
Other comprehensive income (loss):
 
 
 
 

 

Foreign currency translation adjustments, net
(19
)
 
(47
)
 
289

 
(563
)
Unrealized gains (losses) on investments
(114
)
 
(26
)
 
(411
)
 
272

Other comprehensive income (loss)
(133
)
 
(73
)
 
(122
)
 
(291
)
Comprehensive loss
$
(25,249
)
 
$
(15,734
)
 
$
(55,014
)
 
$
(36,799
)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


6

 

MULESOFT, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 
Nine Months Ended
September 30,
 
2017
 
2016
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net loss
$
(54,892
)
 
$
(36,508
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

 

Stock-based compensation
18,632

 
4,348

Other non-cash compensation related to 2016 Tender Offer

 
9,948

Depreciation and amortization
2,827

 
1,203

Amortization of investment premiums
482

 
434

Provision for doubtful accounts
261

 
281

Tax benefits from employee stock plans(1)

 
226

Loss on disposal of property and equipment
60

 
6

Other

 
13

Changes in assets and liabilities:

 

Trade receivables
(12,052
)
 
492

Prepaid expenses and other current assets
(1,617
)
 
2,276

Other assets
(1,606
)
 
(252
)
Accounts payable
(493
)
 
1,156

Accrued expenses
5,154

 
1,542

Accrued compensation and related expenses
(440
)
 
(1,763
)
Other liabilities
1,158

 
496

Deferred revenue
35,603

 
22,356

Net cash provided by (used in) operating activities
(6,923
)
 
6,254

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of investments
(261,420
)
 
(21,955
)
Sales of investments
2,425

 
24,536

Maturities of investments
47,907

 
18,550

Purchases of property and equipment
(3,548
)
 
(2,191
)
Business combinations, net of cash acquired
(106
)
 

Net cash provided by (used in) investing activities
(214,742
)
 
18,940

CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Net proceeds from issuance of common stock in initial public offering
236,360

 

Proceeds from employee stock purchase plan
4,479

 

Repurchase of common shares

 
(2,607
)
Proceeds from issuance of common stock upon exercise of options and warrants
3,433

 
2,906

Payment of costs related to initial public offering
(1,823
)
 

Net cash provided by financing activities
242,449

 
299

Impact of foreign exchange on cash and cash equivalents
386

 
(505
)
Net increase in cash
21,170

 
24,988

Cash, cash equivalents, and restricted cash, Beginning of period
35,772

 
22,383

Cash, cash equivalents, and restricted cash, End of period
$
56,942

 
$
47,371

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
Cash paid for income taxes
$
967

 
$
441

SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING INFORMATION:
 
 
 
Costs related to initial public offering, accrued but unpaid
$
89

 
$

Deemed dividends on preferred stock
$

 
$
9,436

Liability for purchase of property and equipment
$
4

 
$
807

(1) As a result of our adoption of Accounting Standards Update ("ASU") 2016-09, our treatment of excess tax benefits from employee stock plans has changed. See Note 2 contained in the "Notes to Condensed Consolidated Financial Statements" for more details.

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

7

 

MULESOFT, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
1. Organization and Description of Business
MuleSoft, Inc. (“we” or “our”) was incorporated in the state of Delaware on April 12, 2006. We provide a single, unified platform that allows customers to connect their applications, data and devices and to enable a self-serve infrastructure through discoverable building blocks that can be used and reused to rapidly compose applications. Our customers use these building blocks to connect their SaaS applications, on-premises applications, cloud deployments, mobile devices and data into an “application network.” With an application network built with Anypoint Platform, organizations can transform into composable enterprises. We are the sole owner of the MuleSoft source code and all MuleSoft trademarks.
We have subsidiaries in Argentina, Australia, Canada, Germany, Hong Kong, the Netherlands, New Zealand, Singapore and the United Kingdom.
Initial Public Offering
On March 16, 2017, our Registration Statement on Form S-1 (File No. 333-216130) relating to the initial public offering (“IPO”) of our Class A common stock was declared effective by the Securities and Exchange Commission (“SEC”). Pursuant to such Registration Statement, we sold 14,950,000 shares of our Class A common stock at an initial public offering price of $17.00 per share for net proceeds of $232.7 million, net of underwriting discounts and commissions and offering costs. Immediately prior to the closing of the initial public offering, all 86,030,961 shares of our then-outstanding convertible preferred stock were automatically converted and reclassified into Class B common stock, and all 27,685,793 shares of our then-outstanding common stock were automatically reclassified into Class B common stock.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and applicable rules and regulations of the SEC regarding interim financial reporting, and include our accounts and those of our wholly owned subsidiaries. All intercompany balances and transactions have been eliminated upon consolidation. As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP have been condensed or omitted, and accordingly the consolidated balance sheet as of December 31, 2016 has been derived from the audited consolidated financial statements at that date but does not include all of the information required by GAAP for complete financial statements. These unaudited interim condensed consolidated financial statements have been prepared on the same basis as our annual consolidated financial statements and, in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for a fair statement of our consolidated financial information. The results of operations for the three and nine months ended September 30, 2017 are not necessarily indicative of the results to be expected for the year ending December 31, 2017 or for any other future interim period or year.
The accompanying condensed consolidated financial statements and related financial information should be read in conjunction with the audited consolidated financial statements and the related notes thereto as of and for the year ended December 31, 2016, included in our prospectus filed pursuant to Rule 424(b) under the Securities Act of 1933, as amended ("Securities Act"), with the SEC on March 17, 2017.

 
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Management periodically evaluates such estimates and assumptions for continued reasonableness. In particular, we make estimates with respect to the fair value allocation of multiple elements in revenue recognition, the uncollectible accounts receivable, valuation of long-lived assets, stock-based compensation expense and income taxes. Appropriate adjustments, if any, to the estimates used are made prospectively based upon such periodic evaluation. Actual results could differ from those estimates.

8

 

Restricted Cash
Restricted cash at September 30, 2017 and December 31, 2016 includes $786,000 and $308,000, respectively, which is used as collateral for letters of credit and bank guarantees issued in relation to certain leases and $0 and $364,000, respectively, of collateral used to secure credit cards which may not be used or transferred until the restriction is released by the issuing bank.
Cash as Reported in Consolidated Statements of Cash Flows
Cash as reported on the consolidated statements of cash flows includes the aggregate amounts of cash and cash equivalents and the restricted cash as shown on the consolidated balance sheets.
Cash as reported on the consolidated statements of cash flows consists of the following (in thousands):
 
 
As of
September 30,
 
2017
 
2016
Cash and cash equivalents
$
56,156

 
$
46,504

Restricted cash
786

 
867

Cash balance in consolidated statements of cash flows
$
56,942

 
$
47,371

Fair Value of Financial Instruments
Assets and liabilities recorded at fair value in the financial statements are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels which are directly related to the amount of subjectivity associated with the inputs to the valuation of these assets or liabilities are as follows:
 
Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2: Observable inputs, other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3: Unobservable inputs reflecting our own assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.
For certain financial instruments, including cash and cash equivalents, accounts receivable and payable, as well as certain accrued liabilities, the recorded amount approximates estimated fair value due to their relatively short maturity period.
 
Investments consist of investments in marketable equity securities that are classified as available-for-sale and recognized at fair value using Level 1 and Level 2 inputs.
Concentration of Credit and Other Risks
Financial instruments that potentially subject us to concentration of credit risk consist principally of trade receivables. Our trade receivables mainly result from subscription to our software products and professional services provided to our customers that are located primarily in the United States, Western Europe, and Australia. We review the need for allowances for potential losses from these trade receivables. At September 30, 2017 and December 31, 2016, the allowance for doubtful accounts was $707,000 and $446,000, respectively. One customer accounted for 11% of trade receivables as of September 30, 2017. No single customer accounted for 10% or more of trade receivables as of December 31, 2016. No single customer accounted for 10% or more of total revenue for the three and nine months ended September 30, 2017 and 2016.
We are dependent upon third parties, such as Amazon Web Services, in order to meet the uptime and performance requirements of our customers.
Revenue Recognition
We recognize revenue from the following sources: (1) subscription and support revenue, which is comprised of subscription fees from customers accessing our cloud-hosted software and from term-based licenses of our software and support

9

 

services; (2) professional services and other revenue, which consists primarily of fees associated with consulting and training services related to the implementation and configuration of our platform; and (3) royalty revenue from customers incorporating our software in their products.
On sales through our channel partners, we recognize revenue on a “sell in” basis as our contractual relationships with our channel partners do not depend on the sale of our products and services to their customers and payment from the channel partner is not contingent on receiving payment from the end customer. The contractual relationships with our channel partners do not allow returns, rebates, or price concessions.
We recognize revenue net of sales taxes and other applicable taxes when all of the following criteria are met: there is persuasive evidence of an arrangement, delivery has occurred or service has been performed, the fee is fixed or determinable, and collectability is probable.
Subscription Revenue from Cloud-Hosted Software
Subscription revenue from cloud-hosted software is recognized ratably over the subscription period.
Subscription and Support Revenue from Software Licenses
Software licenses for our enterprise software are sold with support services and are generally offered with one-year base subscription periods. The base license subscription generally entitles the end user to the technology itself and post-contract customer support consisting of a specified level of customer support bug fixes, functionality enhancements to the technology, and upgrades to new versions of the technologies, each on a when-and-if available basis, during the term of the subscription. Revenue is recorded ratably over the subscription term as we have not established vendor-specific objective evidence (“VSOE”) for such offerings.
Professional Services and Other Revenue
Professional services and other revenue is comprised of revenue earned for consulting and training services related to the implementation and configuration of our platform and royalty revenue. Professional services revenue is generally recognized as the services are rendered for time and material contracts, or on a proportional performance basis for fixed price contracts. The majority of our professional services contracts are on a time and materials basis and have standalone value. For professional services that are part of a multiple-element software arrangement, where VSOE of fair value does not exist for all undelivered elements, the professional services revenue is recognized over the term of the subscription.
 
We classify reimbursements received from customers for out-of-pocket expenses as a component of revenue.

We recognize income from our tradeshows as a component of revenue.
Royalty revenue is comprised of royalty fees received from customers who have our products incorporated in their own products. Revenue is recognized when the sale to the end customer is reported to us.
Multiple-Element Arrangements
For multiple-element arrangements containing cloud hosted subscription and non-software services, we: (1) determine whether each element constitutes a separate unit of accounting; (2) determine the fair value of each element using the selling price hierarchy of VSOE of selling price, third party evidence ("TPE") of selling price or best estimated selling price ("BESP"), as applicable; and (3) allocate the total non-contingent fee to each separate unit of accounting based on the relative selling price method. An element constitutes a separate unit of accounting when the delivered item has standalone value and delivery of the undelivered element is probable and within our control. As we have been unable to establish VSOE or TPE for the elements of our arrangements, we determine BESP by considering overall pricing objectives and market conditions. Significant pricing practices taken into consideration include our discounting practices, the size and volume of our transactions, our price lists, our go-to-market strategy, historical standalone sales, and contract prices. As our go-to-market strategies evolve, the pricing practices may be modified in the future, which could result in changes in relative selling prices, including BESP, and therefore, the allocation of the selling price to an element. The consideration allocated to subscription and support is recognized as revenue over the contract period commencing when the subscription service is made available to the customer. The consideration allocated to professional services is recognized as revenue using the proportional performance method or as services are delivered for time and material contracts.

10

 

The total arrangement fee for a multiple element arrangement is allocated based on the relative BESP of each element. However, since the professional services are generally completed prior to completion of delivery of subscription and support services, the revenue recognized for professional services in a given reporting period does not include fees subject to delivery of subscription and support services. This results in the recognition of revenue for professional services that is generally no greater than the contractual fees for those professional services.
For multiple-element arrangements that include only software licenses and software related post-contract support, training, and/or consulting, we allocate and defer revenue for each undelivered element of these arrangements based on VSOE. As we have not yet established VSOE of fair value for our software licenses and support, we recognize revenue for these arrangements on a ratable basis over the term of the subscription product with which it is bundled.
We have certain multiple element transactions that include both non-software and software elements. For these types of transactions, we allocate the total price to each separate unit of accounting based on the relative selling price method described above. For non-software elements, the revenue is recognized when revenue recognition criteria are met for each element. For subscription elements, we recognize revenue over the subscription term when revenue recognition criteria have been met.
Net Loss Per Share Attributable to Common Stockholders
Our basic net loss per share is calculated by dividing the net loss by the weighted-average number of shares of common stock outstanding for the period, without consideration of potentially dilutive securities. Diluted net loss per share is the same as basic net loss per share since the effect of potentially dilutive securities is anti-dilutive. The rights of the holders of Class A and Class B common stock are identical, except with respect to voting and conversion. Each share of Class A common stock is entitled to one vote per share and each share of Class B common stock is entitled to 10 votes per share. Shares of Class B common stock may be converted into Class A common stock at any time at the option of the stockholder on a one-for-one basis, and are automatically converted into Class A common stock upon sale or transfer, subject to certain limited exceptions. Shares of Class A common stock are not convertible.
 
Significant Accounting Policies
There have been no changes to our significant accounting policies described in the prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act on March 17, 2017.
Recently Adopted Accounting Standards
In November 2016, the Financial Accounting Standards Board (FASB) issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. ASU 2016-18 requires that the statement of cash flows explains the change during the period in the total cash, cash equivalents, and restricted cash. The standard is effective for fiscal years beginning after December 15, 2017, and interim periods within those years. We have early adopted ASU 2016-18 and, accordingly, amounts generally described as restricted cash are included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the accompanying consolidated statements of cash flows. We have adopted ASU 2016-18 retrospectively and have revised the prior period cash flow from investing activities, beginning cash balance, and ending cash balance to reflect the change in presentation of restricted cash. Other than the change in presentation in the accompanying consolidated statements of cash flows, the adoption of this pronouncement had no effect on our financial position, results of operations, or liquidity.
In March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share - Based Payment Accounting, which simplifies the accounting and reporting of share-based payment transactions, including adjustments to how excess tax benefits and a company’s payments for tax withholdings should be classified. The new standard is effective for annual periods beginning after December 15, 2016. Other than the change in presentation in the accompanying consolidated statements of cash flows, the adoption of this pronouncement had no material effect on our financial position, results of operations, or liquidity.

11

 

3. Investments
Marketable Securities
The following tables summarize our available-for-sale investments at September 30, 2017 and December 31, 2016.
 
 
September 30, 2017
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
(In thousands)
Corporate bonds
$
121,119

 
$

 
$
(240
)
 
$
120,879

US Treasury securities
103,900

 

 
(149
)
 
103,751

Commercial paper
3,481

 

 
(1
)
 
3,480

Agency securities
43,941

 

 
(53
)
 
43,888

Foreign bonds
5,736

 

 
(26
)
 
5,710

Total marketable securities
$
278,177

 
$

 
$
(469
)
 
$
277,708

 
 
December 31, 2016
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
(In thousands)
Corporate bonds
$
24,027

 
$

 
$
(33
)
 
$
23,994

US Treasury securities
40,548

 

 
(20
)
 
40,528

Foreign bonds
2,995

 

 
(5
)
 
2,990

Total marketable securities
$
67,570

 
$

 
$
(58
)
 
$
67,512


The duration of the investments classified as marketable securities is as follows (in thousands):
 
 
September 30,
2017
 
December 31,
2016
Short-term (due in one year or less)
$
125,392

 
$
63,361

Long-term (due after one year)
152,316

 
4,151

Total marketable securities
$
277,708

 
$
67,512

As of September 30, 2017, the following marketable securities were in an unrealized loss position (in thousands):
 
Less than 12 months
 
12 months or greater
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Corporate bonds
$
120,879

 
$
(240
)
 
$

 
$

 
$
120,879

 
$
(240
)
US Treasury securities
102,501

 
(149
)
 
1,250

 

 
103,751

 
(149
)
Commercial paper
3,480

 
(1
)
 

 

 
3,480

 
(1
)
Agency securities
43,888

 
(53
)
 

 

 
43,888

 
(53
)
Foreign bonds
5,710

 
(26
)
 

 

 
5,710

 
(26
)
Total marketable securities
$
276,458

 
$
(469
)
 
$
1,250

 
$

 
$
277,708

 
$
(469
)

12

 

As of December 31, 2016, the following marketable securities were in an unrealized loss position (in thousands):
 
Less than 12 months
 
12 months or greater
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Corporate bonds
$
22,342

 
$
(31
)
 
$
1,652

 
$
(2
)
 
$
23,994

 
$
(33
)
U.S. Treasury securities
38,029

 
(20
)
 
2,499

 

 
40,528

 
(20
)
Foreign bonds
2,990

 
(5
)
 

 

 
2,990

 
(5
)
Total marketable securities
$
63,361

 
$
(56
)
 
$
4,151

 
$
(2
)
 
$
67,512

 
$
(58
)
We do not believe any of the unrealized losses represent an other-than-temporary impairment based on our evaluation of available evidence as of September 30, 2017 and December 31, 2016. We expect to receive the full principal and interest on all of these marketable securities.
 
Fair Value Measurement
The following table presents information about our assets and liabilities that are measured at fair value and indicates the fair value hierarchy of the valuation (in thousands):
 
 
As of September 30, 2017
 
Aggregate
Fair Value
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
Money market
$
5,639

 
$
5,639

 
$

 
$

Corporate bonds
120,879

 

 
120,879

 

U.S. Treasury securities
103,751

 

 
103,751

 

Commercial paper
3,480

 

 
3,480

 

Agency securities
43,888

 

 
43,888

 

Foreign bonds
5,710

 

 
5,710

 

 
$
283,347

 
$
5,639

 
$
277,708

 
$

Reported as:
 
 
 
 
 
 
 
Cash equivalents(1)
$
5,639

 
 
 
 
 
 
Investments, current
125,392

 
 
 
 
 
 
Investments, noncurrent
152,316

 
 
 
 
 
 
Total
$
283,347

 
 
 
 
 
 
 
As of December 31, 2016
 
Aggregate
Fair Value
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
Money market
$
3,133

 
$
3,133

 
$

 
$

Corporate bonds
23,994

 

 
23,994

 

U.S. Treasury securities
40,528

 

 
40,528

 

Foreign bonds
2,990

 

 
2,990

 

 
$
70,645

 
$
3,133

 
$
67,512

 
$

Reported as:
 
 
 
 
 
 
 
Cash equivalents(1)
$
3,133

 
 
 
 
 
 
Investments, current
63,361

 
 
 
 
 
 
Investments, noncurrent
4,151

 
 
 
 
 
 
Total
$
70,645

 
 
 
 
 
 
 
(1)
Included in “cash and cash equivalents” in the accompanying condensed consolidated balance sheet as of September 30, 2017 and December 31, 2016, in addition to $50.6 million and $32.0 million of cash, respectively.

13

 

4. Commitments and Contingencies
Operating Leases
As of September 30, 2017, we leased office space in the United States, Australia, Argentina, the United Kingdom, Hong Kong, the Netherlands, Sweden and Singapore under noncancelable operating leases with various expiration dates through 2027. During the third quarter of 2017, we entered into a short-term lease agreement for incremental space in San Francisco.
Our future minimum lease payments are as follows as of September 30, 2017 (in thousands):
 
Amount
2017 (remaining three months)
$
1,899

2018
8,749

2019
7,449

2020
6,829

2021
5,024

Thereafter
4,694

Total future minimum lease payments
$
34,644

Litigation
From time to time, we may be involved in claims that arise in the normal course of business. While it is not feasible to predict or determine the ultimate outcome of these matters, we are not currently subject to any proceeding that we believe is required to be accrued for or disclosed in our consolidated financial statements or consolidated results of operations.
5. Stockholders’ Equity
In March 2017, our board of directors and stockholders approved the Amended and Restated Certificate of Incorporation to increase our authorized capital stock from 234,296,190 shares, consisting of 144,000,000 shares of common stock, par value $0.000025 per share and 90,296,190 shares of convertible preferred stock, par value $0.000025 per share, to authorized capital stock of 1,300,000,000 shares, consisting of the following: 1,000,000,000 shares of Class A common stock, par value $0.000025 per share, 200,000,000 shares of Class B common stock, par value $0.000025 per share, and 100,000,000 shares of undesignated preferred stock, par value $0.000025 per share.
Convertible Preferred Stock
There were no outstanding shares of convertible preferred stock as of September 30, 2017 as the shares had been converted and reclassified into 86,030,961 shares of Class B common stock as part of the IPO in March 2017.
Common Stock
As of September 30, 2017, there were 70,114,218 shares of Class A common stock and 59,232,875 shares of Class B common stock outstanding. The rights of the holders of Class A common stock and Class B common stock are identical, except with respect to voting and conversion. Each share of Class A common stock is entitled to one vote per share and each share of Class B common stock is entitled to ten votes per share. Each share of Class B common stock can be converted into a share of Class A common stock at any time at the option of the holder. All of our Class B common stock will convert to Class A shares upon the date, or happening of an event, specified by affirmative vote of the holders of at least 66-2/3% of then outstanding Class B common stock. All outstanding shares of Class B common stock will automatically convert into Class A common stock on the earlier of (i) the five-year anniversary of the completion of the IPO or (ii) when the outstanding shares of Class B common stock represent less than 15% of the total outstanding capital stock. Once transferred and converted into a share of our Class A common stock, the converted share of our Class B common stock will not be reissued. In addition, following the conversion of all outstanding shares of our Class B common stock into Class A common stock, no further shares of our Class B common stock will be issued.

14

 

6. Equity Incentive Plans
2017 Equity Incentive Plan
In March 2017, our Board of Directors adopted and our stockholders approved our 2017 Equity Incentive Plan ("2017 Plan"). The 2017 Plan became effective on March 15, 2017. The 2016 Equity Incentive Plan ("2016 Plan") was terminated in connection with the IPO and any shares available for issuance under the 2016 Plan were transferred to the 2017 Plan.
Our 2017 Plan provides for the grant of incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock, restricted stock units, performance units and performance shares to our employees, directors and consultants. The exercise price of options granted under the 2017 Plan must at least be equal to the fair value of our common stock on the date of grant, except that with respect to any participant with incentive stock options who owns more than 10% of the voting power of all classes of our outstanding stock, the exercise price will be no less than 110% of the fair value on the grant date. The term of a stock option may not exceed 10 years except that with respect to any participant with incentive stock options who owns more than 10% of the voting power of all classes of our outstanding stock, the term must not exceed five years. As of September 30, 2017, a total of 16,561,143 shares of our Class A common stock are reserved for issuance, not yet issued under the 2017 Plan. The number of shares of our Class A common stock available for issuance under our 2017 Plan will include an annual increase on the first day of each year beginning on January 1, 2018, equal to the least of (a) 15,840,000 shares of our Class A common stock; (b) 5% of the outstanding shares of our Class A common stock and Class B common stock as of the last day of the immediately preceding year; or (c) any other amount determined by our Board of Directors.
Restricted Stock Units (“RSUs”)
During the nine months ended September 30, 2017, we awarded RSUs to certain employees, with a weighted-average grant date fair value of $21.62 per share. RSUs are generally subject to forfeiture if employment terminates prior to the vesting date. We expense the cost of the RSUs, which is determined to be the fair market value of the shares of common stock underlying the RSUs on the date of grant, ratably over the period during which the vesting restrictions lapse.
2017 Employee Stock Purchase Plan
In March 2017, our Board of Directors adopted and our stockholders approved our 2017 Employee Stock Purchase Plan ("ESPP"). The ESPP became effective on March 17, 2017, the first trading day after the date our registration statement was declared effective by the SEC. The ESPP provides for 24-month offering periods. The offering periods are scheduled to start on the first trading day on or after May 10 and November 10 of each year, except for the first offering period, which commenced on April 1, 2017 and will end on the first trading day on or after May 10, 2019. Each offering period is comprised of four purchase periods of approximately six months in length.
The ESPP permits participants to purchase shares of our Class A common stock through payroll deductions of up to 15% of their eligible compensation. A participant may purchase a maximum of 5,000 shares of our Class A common stock during a purchase period. Amounts deducted and accumulated by the participant are used to purchase shares of our Class A common stock at the end of each six-month purchase period. The purchase price of the shares will be 85% of the lower of the fair market value of our Class A common stock as of the enrollment date or on the exercise date. If the fair value of our Class A common stock on the last trading day prior to the exercise date is less than the fair value on the last trading day prior to the first day of each offering period, participants will be withdrawn from the current offering period following their purchase of shares of our Class A common stock on the purchase date and will be automatically re-enrolled in a new offering period. Participants may end their participation at any time during an offering period and will be paid their accrued contributions that have not yet been used to purchase shares of our Class A common stock. Participation ends automatically upon termination of employment with us.
A total of 2,540,000 shares of our Class A common stock are available for sale under the ESPP. The number of shares of our Class A common stock available for sale under the ESPP also includes an annual increase on the first day of each fiscal year beginning in fiscal 2018, equal to the least of (a) 5,070,000 shares of our Class A common stock; (b) 2% of the outstanding shares of our Class A common stock and Class B common stock as of the last day of the immediately preceding year; or (c) such other amount as our Board of Directors may determine.
Participation in the ESPP began on April 1, 2017. As of September 30, 2017, no shares of Class A common stock were purchased under the ESPP and 1,232,977 shares are expected to be purchased by the end of the initial offering period on May 10, 2019.  As of September 30, 2017, total unrecognized compensation cost related to the ESPP was $7.3 million, which will be amortized over a weighted-average period of 1.1 years.

15

 

Stock-Based Compensation
Stock-based compensation expense and other compensation expense related to our 2016 Tender Offer (as defined below) was as follows (in thousands):
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Cost of subscription and support revenue
$
288

 
$
77

 
$
625

 
$
165

Cost of professional services and other revenue
1,110

 
276

 
2,270

 
487

Research and development
2,121

 
1,668

 
4,566

 
2,206

Sales and marketing
3,827

 
6,681

 
8,480

 
7,775

General and administrative
1,123

 
3,136

 
2,691

 
3,663

Total stock-based and other compensation expense
$
8,469

 
$
11,838

 
$
18,632

 
$
14,296


In July 2016, we announced a tender offer ("2016 Tender Offer") to our employees, executives, members of the Board of Directors and preferred stockholders whereby eligible participants were able to sell a portion of their shares of our common stock to third party investors. The total number of tendered shares was 4,346,203 for a total purchase price of $61.6 million. The premium that was paid by the third parties over the fair value of the shares of common stock purchased in the 2016 Tender Offer, totaling $9.9 million, was recorded as other compensation expense. The excess of the sale price of the converted preferred stock sold in the 2016 Tender Offer over the fair value of our common stock was $9.4 million and was recorded as a deemed dividend within additional paid-in capital.
7. Income Taxes
Our provision for income taxes has not been historically significant to our business as we have incurred operating losses to date. Our provision for income taxes consists primarily of income taxes and withholding taxes in foreign jurisdictions in which we conduct business.
For the nine months ended September 30, 2017 and 2016, we reported a tax expense of $1.4 million and $0.9 million on pretax loss of $53.5 million and $35.6 million, respectively. The effective tax rates for September 30, 2017 and 2016 were (2.7)% and (2.6)%, respectively. The effective tax rates differ from the statutory rate primarily as a result of providing no benefit on pretax losses incurred in the United States, as we have determined that the benefit of the losses is not more likely than not to be realized. The tax expense recorded relates to foreign tax expense incurred by its foreign subsidiaries as well as foreign withholding tax.
 
8. Net Loss Per Share Attributable to Common Stockholders
The following table sets forth the calculation of basic and diluted net loss per share during the periods presented (in thousands, except share and per share data):
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Numerator:
 
 
 
 
 
 
 
Net loss
$
(25,116
)
 
$
(15,661
)
 
$
(54,892
)
 
$
(36,508
)
Deemed dividend to preferred stockholders from 2016 Tender Offer
$

 
$
(9,436
)
 
$

 
$
(9,436
)
Net loss attributable to common stockholders
$
(25,116
)
 
$
(25,097
)
 
$
(54,892
)
 
$
(45,944
)
Denominator:
 
 
 
 
 
 
 
Weighted-average shares used in computing net loss, basic and diluted
129,044,913

 
21,733,456

 
98,762,781

 
20,368,438

Net loss per share attributable to common stockholders, basic and diluted
$
(0.19
)
 
$
(1.15
)
 
$
(0.56
)
 
$
(2.26
)

16

 

The following outstanding shares of common stock equivalents were excluded from the computation of the diluted net loss per share for the periods presented because their effect would have been anti-dilutive:
 
 
As of
September 30,
 
2017
 
2016
Convertible preferred stock on an as-if converted basis

 
88,146,615

Stock options to purchase common stock
20,604,148

 
21,160,539

RSUs issued and outstanding
2,322,740

 

Common stock expected to be purchased under 2017 ESPP
1,232,977

 

Convertible preferred stock warrants

 
19,640

Total
24,159,865

 
109,326,794



17

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements based upon current expectations 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 discussed in the section titled “Risk Factors” and in other parts of this Quarterly Report on Form 10-Q.

Overview
We are enabling a fundamental shift in organizations’ technology operating models by equipping them to create composable, agile infrastructures. Our customers use our Anypoint Platform to connect their applications, data, and devices into an application network where IT assets are pluggable instead of glued together with custom integration code. The application network enables a self-serve infrastructure through discoverable building blocks that can be used and reused to rapidly compose applications. As a result, the IT organization delivers projects faster and lines of business are able to innovate and respond more rapidly. With an application network built with Anypoint Platform, organizations can transform into composable enterprises.
We generate revenue primarily from sales of software subscriptions to our platform. Our subscription pricing is based primarily on the amount of computing capacity on which our customers run our software. We offer the same capacity-based pricing model regardless of whether customers choose to deploy our platform on-premises or in the cloud. Our subscriptions are term-based, and we recognize revenue from subscriptions ratably over the subscription term. The substantial majority of our subscription and support revenue is derived from subscriptions that are one year in duration and invoiced upfront, although a growing number of our customers are entering into multi-year subscriptions that are invoiced annually. When we enter into a multi-year subscription, we typically invoice the customer on an annual basis.
We also generate revenue from professional services, which consist primarily of fees associated with consulting and training services. Revenue derived from professional services is generally recognized ratably as the services are rendered. We will continue to invest in our professional services organization because we believe it plays an important role in accelerating our customers’ realization of the benefits of the platform, which helps to drive customer retention and expansion. A significant percentage of our customers purchase our professional services when they enter into new or expanded subscriptions.
We currently have over 1,000 customers located in approximately 60 countries across every major industry. We sell to organizations worldwide primarily through our direct sales efforts. Although our platform can be adopted by organizations of nearly any size, we focus our sales efforts on the largest global organizations. Our sales efforts are targeted towards CIOs, chief IT architects, and line of business leaders, who are driving digital transformation. We also partner with system integrators (SIs) that enhance our sales leverage by sourcing new prospects and providing systems integration services on implementations of our platform.
Historically, customers have expanded their spend with us over time as they realize the benefits of speed and innovation that come with our platform. Our customers expand the use of our platform in two ways. First, they deploy additional capacity as the usage of applications built on our platform increases. Second, as they address additional use cases with their application network, their usage of our platform further increases. The expanded use of our platform by our customers is evidenced by our high dollar-based net retention rate.
We have grown rapidly in recent periods. Our revenue for the three months ended September 30, 2017 and 2016 was $77.6 million and $49.4 million, respectively, representing a growth rate of 57%. We incurred net losses of $25.1 million and $15.7 million in the three months ended September 30, 2017 and 2016, respectively. We have made substantial investments in developing our platform, expanding our sales, services, and marketing capabilities, and providing general and administrative resources to support our growth. Specifically, we have increased our headcount from 841 employees as of December 31, 2016 to 1,147 employees as of September 30, 2017. We intend to continue to invest heavily to grow our business to take advantage of our expansive market opportunity rather than optimizing for profitability or cash flow in the near future.

Key Metrics
We monitor the following key metrics to help us evaluate our business, identify trends affecting our business, formulate business plans, and make strategic decisions. We believe the following metrics are useful in evaluating our business.

18

 

Customers. We believe that the number of customers is a key metric because our ability to attract new customers and grow our customer base helps drive our success and is an important contributor to the growth in our revenue. We have successfully demonstrated a history of growing both our customer base and spend per customer through increased use of our platform. As our sales force continues to focus on selling Anypoint Platform to large organizations, we expect the rate of increase in customer growth to decline, but we expect our sales model will drive higher average subscription and support revenue per customer.
We define the number of customers at the end of any particular period as the number of parties or organizations that have entered into a subscription contract with us for which the term has not ended, or with which we are negotiating a renewal contract. Each party with which we have entered into a subscription contract is considered a unique customer, and in some cases, there may be more than one customer within a single organization. Although customers can elect not to renew their subscriptions by providing prior written notice to us, our subscription contracts typically have automatic renewal provisions that become effective on the expiration of a subscription contract. To the extent that we are negotiating a renewal with a customer after the expiration of the subscription contract, we continue to count such organization as a customer for a period of four months if we are actively in discussion with such organization for a new subscription contract or a contract renewal, or until such organization notifies us that it is not renewing its subscription contract, if earlier.
The following table sets forth the number of customers:
 
 
As of
September 30,
 
2017
 
2016
Customers
1,217

 
994

Average Subscription and Support Revenue per Customer. We believe that average subscription and support revenue per customer is a key metric because it is a reflection of our customers’ growing commitment to our platform and our sales force’s productivity.
We define average subscription and support revenue per customer as subscription and support revenue for a trailing 12-month period divided by the number of customers as of the end of the period.
The following table sets forth the average subscription and support revenue per customer:
 
 
Three Months Ended
September 30,
 
2017
 
2016
 
(Dollars in thousands)
Average subscription and support revenue per customer
$
175

 
$
136

Dollar-Based Net Retention Rate. We believe that dollar-based net retention rate is a key metric to measure the long-term value of our customer relationships and is driven by our ability to retain and expand the subscription and support revenue generated from our existing customers. Our dollar-based net retention rate compares our subscription and support revenue from the same set of customers across comparable periods.
We calculate our dollar-based net retention rate for all periods on a trailing four-quarter basis. To calculate our dollar-based net retention rate, we first calculate the subscription and support revenue in one quarter from a cohort of customers that were customers at the beginning of the same quarter in the prior fiscal year, or Cohort Customers. We repeat this calculation for each quarter in the trailing four-quarter period. The numerator for dollar-based net retention rate is the sum of subscription and support revenue from Cohort Customers for the four most recent quarters, or Numerator Period, and the denominator is the sum of subscription and support revenue from Cohort Customers for the four quarters preceding the Numerator Period.
Dollar-based net retention rate is the quotient obtained by dividing the numerator by the denominator. Our dollar-based net retention rate may fluctuate as a result of a number of factors, including our customers’ satisfaction or dissatisfaction with our platform, the increase in the dollar value of subscription and support contracts from new customers, and the other risk factors included in this Quarterly Report on Form 10-Q.

19

 

The following table sets forth the dollar-based net retention rates:
 
 
Three Months Ended
September 30,
 
2017
 
2016
Dollar-based net retention rate
116
%
 
120
%

Components of Results of Operations
Revenue. We generate revenue from the following sources: (i) subscription and support revenue, which is comprised of subscription fees from customers accessing our cloud-hosted software and from term-based licenses of our software and support services; and (ii) professional services and other revenue, which consists primarily of fees associated with consulting and training services related to the implementation and configuration of our platform.
We recognize subscription and support revenue from our cloud-hosted software ratably over the term of the arrangement. Term-based licenses are sold with support services and are recognized ratably over the life of the license or support period. Our subscriptions are typically one year in duration, although a growing number of our customers are entering into multi-year subscriptions. We generally invoice our customers in annual installments at the beginning of each year in the subscription period. Amounts that have been invoiced are initially recorded as deferred revenue and are recognized ratably over the subscription period.
Professional services and other revenue is generally recognized as the services are rendered for time-and-material contracts or on a proportional performance basis for fixed-price contracts. Revenue from professional services sold exclusively with term-based licenses is recognized over the term of the subscription. We will continue to invest in our professional services because we believe that it plays an important role in enabling our customers to achieve success on our platform and accelerate their realization of its benefits, which helps to drive retention of, and expansion with, our customers.
Cost of Revenue. Cost of revenue for subscription and support consists primarily of cloud-hosting costs and personnel-related costs of our customer support organization, including salaries, bonuses, benefits, stock-based compensation, commissions, and contractor costs to supplement our staff levels, third-party software royalties, and allocated overhead.
Cost of revenue for professional services and other revenue consists primarily of personnel-related costs of our consulting and training departments, including salaries, bonuses, benefits, stock-based compensation, commissions, and contractor costs to supplement our staff levels, and allocated overhead.
Gross Profit and Gross Margin. Gross profit, or total revenue less total cost of revenue, and gross margin, or gross profit as a percentage of total revenue, has been and will continue to be affected by various factors, including the mix among our subscription and support and professional services and other revenue, the costs associated with third-party hosting services for our cloud-based subscriptions, and the extent to which we expand our customer support and professional services organizations. Our gross margin on subscription and support revenue is significantly higher than our gross margin on professional services and other revenue. We expect our gross margin will fluctuate from period to period depending on the interplay of these various factors.
Operating Expenses. Our operating expenses consist of research and development, sales and marketing, and general and administrative expenses. The most significant component of each of our operating expense categories is personnel-related costs, including salaries, bonuses, benefits, stock-based compensation, and with respect to sales and marketing, sales commissions and incentives.
Research and Development Expenses. Research and development expenses consist primarily of personnel-related costs for the design and development of our platform and technologies, contractor costs to supplement our staff levels, third-party web services, consulting services, costs associated with our company-wide meeting, and allocated overhead. We expense research and development expenses as they are incurred. Historically, a significant percentage of our research and development has been conducted by our personnel in Argentina, which has provided a substantial cost-advantage in research and development expenses. We expect our research and development expenses to increase in absolute dollars and may fluctuate as a percentage of our total revenue from period to period, as we expand our research and development team to develop new products and product enhancements.
Sales and Marketing Expenses. Our sales and marketing expenses consist primarily of personnel-related costs for our sales and marketing employees, marketing programs including tradeshows, costs associated with our company-wide meeting, and

20

 

allocated overhead. We expect that our sales and marketing expenses will increase in absolute dollars and may fluctuate as a percentage of our total revenue from period to period, as we hire additional sales and marketing personnel, increase our marketing activities, grow our domestic and international operations and build brand awareness.
General and Administrative Expenses. Our general and administrative expenses consist primarily of personnel-related costs for executive, finance, legal, human resources, recruiting, and administrative personnel, as well as professional fees for external legal, accounting, recruiting and other consulting services, costs associated with our company-wide meeting, and allocated overhead. We expect to incur additional general and administrative expenses as a result of operating as a public company, including expenses related to compliance with the rules and regulations of the SEC and listing standards of the New York Stock Exchange, additional insurance expenses, investor relations activities and other administrative and professional services. We also expect to increase the size of our general and administrative function to support the growth of our business. As a result, we expect that our general and administrative expenses will increase in absolute dollars and may fluctuate as a percentage of our total revenue from period to period.
Interest Income. Interest income consists primarily of income earned on our cash equivalents and investments in marketable securities.
Other Income (Expense), Net. Other income (expense), net consists primarily of foreign currency transaction gains and losses related to the impact of transactions denominated in a foreign currency other than the functional currencies of our legal entities. As we have expanded our international operations, our exposure to fluctuations in foreign currencies has increased, and we expect this to continue.
Income Tax Expense. Provision for income taxes consists primarily of income taxes in certain foreign jurisdictions in which we conduct business. As we have expanded our international operations, we have incurred increased foreign tax expense, and we expect this to continue. We have a full valuation allowance for net deferred tax assets, including net operating loss carryforwards, and tax credits related primarily to research and development for our operations in the United States. We expect to maintain this full valuation allowance for the foreseeable future. We also have deferred tax assets or liabilities in certain of our foreign subsidiaries including in the United Kingdom, Argentina and Australia.

21

 

Results of Operations
The following table sets forth our results of operations for the periods indicated:
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
Revenue:
 
 
 
 
 
 
 
Subscription and support
$
61,704

 
$
40,937

 
$
167,375

 
$
107,837

Professional services and other
15,900

 
8,432

 
40,367

 
24,557

Total revenue
77,604

 
49,369

 
207,742

 
132,394

Cost of revenue:
 
 
 
 
 
 
 
Subscription and support
5,242

 
3,589

 
13,939

 
9,540

Professional services and other
16,858

 
8,756

 
41,748

 
24,389

Total cost of revenue
22,100

 
12,345

 
55,687

 
33,929

Gross profit
55,504

 
37,024

 
152,055

 
98,465

Operating expenses:
 
 
 
 
 
 
 
Research and development
18,048

 
8,701

 
45,977

 
22,893

Sales and marketing
50,707

 
33,920

 
127,650

 
87,440

General and administrative
12,144

 
9,555

 
32,755

 
23,681

Total operating expenses
80,899

 
52,176

 
206,382

 
134,014

Loss from operations
(25,395
)
 
(15,152
)
 
(54,327
)
 
(35,549
)
Interest income
968

 
110

 
1,483

 
314

Other income (expense), net
(354
)
 
(242
)
 
(621
)
 
(348
)
Net loss before provision for income taxes
(24,781
)
 
(15,284
)
 
(53,465
)
 
(35,583
)
Provision for income taxes
335

 
377

 
1,427

 
925

Net loss
$
(25,116
)
 
$
(15,661
)
 
$
(54,892
)
 
$
(36,508
)


22

 

The following table sets forth the consolidated statements of operations data for each of the periods presented as a percentage of total revenue:
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Revenue:
 
 
 
 
 
 
 
Subscription and support
80
 %
 
83
 %
 
81
 %
 
81
 %
Professional services and other
20
 %
 
17
 %
 
19
 %
 
19
 %
Total revenue
100
 %
 
100
 %
 
100
 %
 
100
 %
Cost of revenue:
 
 
 
 
 
 
 
Subscription and support
7
 %
 
7
 %
 
7
 %
 
7
 %
Professional services and other
22
 %
 
18
 %
 
20
 %
 
18
 %
Total cost of revenue
28
 %
 
25
 %
 
27
 %
 
26
 %
Gross profit
72
 %
 
75
 %
 
73
 %
 
74
 %
Operating expenses:
 
 
 
 
 
 
 
Research and development
23
 %
 
18
 %
 
22
 %
 
17
 %
Sales and marketing
65
 %
 
69
 %
 
61
 %
 
66
 %
General and administrative
16
 %
 
19
 %
 
16
 %
 
18
 %
Total operating expenses
104
 %
 
106
 %
 
99
 %
 
101
 %
Loss from operations
(33
)%
 
(31
)%
 
(26
)%
 
(27
)%
Interest income
1
 %
 
 %
 
1
 %
 
 %
Other income (expense), net
 %
 
 %
 
 %
 
 %
Net loss before provision for income taxes
(32
)%
 
(31
)%
 
(26
)%
 
(27
)%
Provision for income taxes
 %
 
1
 %
 
1
 %
 
1
 %
Net loss
(32
)%
 
(32
)%
 
(26
)%
 
(28
)%


Comparison of the Three Months Ended September 30, 2017 and 2016
Revenue
 
 
Three Months Ended
September 30,
 
Change
 
2017
 
2016
 
Amount
 
%
 
(in thousands, except percentages)
Subscription and support
$
61,704

 
$
40,937

 
$
20,767

 
51
%
Professional services and other
15,900

 
8,432

 
7,468

 
89
%
Total revenue
$
77,604

 
$
49,369

 
$
28,235

 
57
%
Subscription and support revenue increased by $20.8 million, or 51%, to $61.7 million during the three months ended September 30, 2017, from $40.9 million during the three months ended September 30, 2016. The increase was attributable to both sales of subscriptions to new customers and expanded use of our platform by existing customers. Our total number of customers increased from 994 as of September 30, 2016 to 1,217 as of September 30, 2017.
Professional services and other revenue increased by $7.5 million, or 89%, to $15.9 million during the three months ended September 30, 2017, from $8.4 million during the three months ended September 30, 2016. The increase was primarily attributable to the increase in consulting services to support our larger customer base.

23

 

Cost of Revenue and Gross Margin
 
 
Three Months Ended
September 30,
 
Change
 
2017
 
2016
 
Amount
 
%
 
(in thousands, except percentages)
Subscription and support
$
5,242

 
$
3,589

 
$
1,653

 
46
%
Professional services and other
16,858

 
8,756

 
8,102

 
93
%
Total cost of revenue
$
22,100

 
$
12,345

 
$
9,755

 
79
%
Subscription and support gross margin
92
 %
 
91
 %
 
 
 
 
Professional services and other gross margin
(6
)%
 
(4
)%
 
 
 
 
Gross margin
72
 %
 
75
 %
 
 
 
 
Cost of revenue for subscription and support increased by $1.7 million, or 46%, to $5.2 million during the three months ended September 30, 2017, from $3.6 million during the three months ended September 30, 2016. The increase was due to an increase of $0.8 million in personnel-related expenses, which includes an increase of $0.2 million of related stock-based compensation expense. In addition, there was also an increase of $0.6 million in third-party cloud-hosting costs, and an increase of $0.2 million related to software subscriptions, partially offset by a decrease of $0.2 million in contractor costs.
Cost of revenue for professional services and other increased by $8.1 million, or 93%, to $16.9 million during the three months ended September 30, 2017, from $8.8 million during the three months ended September 30, 2016. The increase was due to an increase in personnel-related costs of $3.7 million, which includes an increase of $0.9 million of related stock-based compensation expense, partially offset by a decrease of other compensation expense of $0.1 million related to the 2016 Tender Offer, which did not recur in the 2017 period. In addition, there was also an increase of $3.3 million in contractor costs, an increase of $0.6 million in travel and related expenses and an increase of $0.2 million related to software subscriptions and other expenses.
Operating Expenses
 
 
Three Months Ended
September 30,
 
Change
 
2017
 
2016
 
Amount
 
%
 
(In thousands, except percentages)
Research and development
$
18,048

 
$
8,701

 
$
9,347

 
107
%
Sales and marketing
50,707

 
33,920

 
16,787

 
49
%
General and administrative
12,144

 
9,555

 
2,589

 
27
%
Total operating expenses
$
80,899

 
$
52,176

 
$
28,723

 
55
%
Research and Development
Research and development expenses increased by $9.3 million, or 107%, to $18.0 million during the three months ended September 30, 2017, from $8.7 million during the three months ended September 30, 2016. The increase was primarily attributable to an increase in personnel-related costs of $4.9 million, which includes an increase of $1.6 million of related stock-based compensation expense, partially offset by a decrease in other compensation expense of $1.2 million related to the 2016 Tender Offer. In addition, there was also an increase of $2.2 million in contractor costs, an increase of $0.9 million in third-party cloud-hosting costs for internal use, an increase of $0.6 million in facility and other expenses, an increase of $0.4 million for software subscription costs, and an increase of $0.2 million in depreciation due to an increase in fixed assets.

Sales and Marketing
Sales and marketing expenses increased by $16.8 million, or 49%, to $50.7 million during the three months ended September 30, 2017, from $33.9 million during the three months ended September 30, 2016. The increase was primarily attributable to an increase in personnel-related costs of $11.6 million, which includes an increase of $3.1 million of related stock-based compensation expense, partially offset by a decrease in other compensation expense of $5.9 million related to the 2016 Tender Offer. In addition, there was also an increase of $1.6 million in marketing costs related to advertising, domestic and international

24

 

tradeshow expenses, an increase of $1.3 million in travel and related expenses, an increase of $0.9 million in facility and other expenses, an increase of $0.5 million in software subscription costs and an increase of $0.2 million of contractor costs.
General and Administrative
General and administrative expenses increased by $2.6 million, or 27%, to $12.1 million during the three months ended September 30, 2017, from $9.6 million during the three months ended September 30, 2016. The increase was attributable to an increase of $0.7 million in contractor costs to supplement our staffing, an increase of $0.6 million in software subscription costs for our operations, an increase of $0.5 million in facility and other expenses and an increase of $0.2 million in recruiting costs.
Interest Income
 
 
Three Months Ended
September 30,
 
Change
 
2017
 
2016
 
Amount
 
%
 
(In thousands, except percentages)
Interest income
$
968

 
$
110

 
$
858

 
NM (1)
(1) NM: Not meaningful
Interest income increased by $0.9 million to $1.0 million in the three months ended September 30, 2017, from $0.1 million in the three months ended September 30, 2016. The increase was primarily related to the increase in interest rates beginning in December 31, 2016, resulting in increased interest income earned from our investments in U.S. Treasuries. In addition, we had more cash, cash equivalents, and investments as a result of the IPO which led to increased interest income in the three months ended September 30, 2017 compared to the three months ended September 30, 2016.
Other Income (Expense), Net
 
 
Three Months Ended
September 30,
 
Change
 
2017
 
2016
 
Amount
 
%
 
(In thousands, except percentages)
Other income (expense), net
$
(354
)
 
$
(242
)
 
$
(112
)
 
46
%
Other expense increased by $0.1 million, or 46%, to an expense of $0.4 million in the three months ended September 30, 2017, from an expense of $0.2 million in the three months ended September 30, 2016. The change was primarily related to foreign currency fluctuations.
Provision for Income Taxes
 
 
Three Months Ended
September 30,
 
Change
 
2017
 
2016
 
Amount
 
%
 
(In thousands, except percentages)
Provision for income taxes
$
335

 
$
377

 
$
(42
)
 
(11
)%

Provision for income taxes for each period was primarily attributable to foreign taxes incurred by certain non-U.S. subsidiaries and foreign withholding taxes.


25

 

Comparison of the Nine Months Ended September 30, 2017 and 2016
Revenue
 
 
Nine Months Ended
September 30,
 
Change
 
2017
 
2016
 
Amount
 
%
 
(in thousands, except percentages)
Subscription and support
$
167,375

 
$
107,837

 
$
59,538

 
55
%
Professional services and other
40,367

 
24,557

 
15,810

 
64
%
Total revenue
$
207,742

 
$
132,394

 
$
75,348

 
57
%
Subscription and support revenue increased by $59.5 million, or 55%, to $167.4 million during the nine months ended September 30, 2017, from $107.8 million during the nine months ended September 30, 2016. The increase was attributable to both sales of subscriptions to new customers and expanded use of our platform by existing customers. Our total number of customers increased from 994 as of September 30, 2016 to 1,217 as of September 30, 2017.
Professional services and other revenue increased by $15.8 million, or 64%, to $40.4 million during the nine months ended September 30, 2017, from $24.6 million during the nine months ended September 30, 2016. The increase was primarily attributable to the increase in consulting services to support our customers.
Cost of Revenue and Gross Margin
 
 
Nine Months Ended
September 30,
 
Change
 
2017
 
2016
 
Amount
 
%
 
(in thousands, except percentages)
Subscription and support
$
13,939

 
$
9,540

 
$
4,399

 
46
%
Professional services and other
41,748

 
24,389

 
17,359

 
71
%
Total cost of revenue
$
55,687

 
$
33,929

 
$
21,758

 
64
%
Subscription and support gross margin
92
 %
 
91
%
 
 
 
 
Professional services and other gross margin
(3
)%
 
1
%
 
 
 
 
Gross margin
73
 %
 
74
%
 
 
 
 
Cost of revenue for subscription and support increased by $4.4 million, or 46%, to $13.9 million during the nine months ended September 30, 2017, from $9.5 million during the nine months ended September 30, 2016. The increase was due to an increase of $2.2 million in personnel-related expenses, which includes an increase of $0.5 million of related stock-based compensation expense. In addition, there was also an increase of $1.6 million in third-party cloud-hosting costs, an increase of $0.6 million related to software subscriptions and an increase of $0.4 million in depreciation of fixed assets and the amortization of intangibles, specifically developed technology, partially offset by a decrease of $0.7 million in contractor costs.
Cost of revenue for professional services and other increased by $17.4 million, or 71%, to $41.7 million during the nine months ended September 30, 2017, from $24.4 million during the nine months ended September 30, 2016. The increase was due to an increase in personnel-related costs of $8.5 million, which includes an increase of $1.9 million of related stock-based compensation expense. In addition, there was also an increase of $6.1 million in contractor costs, an increase of $1.2 million in travel and related expenses, an increase of $0.7 million of facility and other expenses and an increase of $0.3 million related to software subscriptions.

26

 

Operating Expenses
 
 
Nine Months Ended
September 30,
 
Change
 
2017
 
2016
 
Amount
 
%
 
(In thousands, except percentages)
Research and development
$
45,977

 
$
22,893

 
$
23,084

 
101
%
Sales and marketing
127,650

 
87,440

 
40,210

 
46
%
General and administrative
32,755

 
23,681

 
9,074

 
38
%
Total operating expenses
$
206,382

 
$
134,014

 
$
72,368

 
54
%
Research and Development
Research and development expenses increased by $23.1 million, or 101%, to $46.0 million during the nine months ended September 30, 2017, from $22.9 million during the nine months ended September 30, 2016. The increase was primarily attributable to an increase in personnel-related costs of $12.5 million, which includes an increase of $3.5 million of related stock-based compensation expense. In addition, there was also an increase of $4.9 million in contractor costs, an increase of $2.4 million in third-party cloud-hosting costs for internal use, an increase of $1.4 million in facility and other expenses, an increase of $0.7 for software subscription costs, an increase of $0.5 in depreciation of fixed assets and the amortization of intangibles, specifically developed technology, and an increase of $0.3 million in costs incurred for the company-wide meeting held during the first half of 2017.

Sales and Marketing
Sales and marketing expenses increased by $40.2 million, or 46%, to $127.7 million during the nine months ended September 30, 2017, from $87.4 million during the nine months ended September 30, 2016. The increase was primarily attributable to an increase in personnel-related costs of $27.0 million, which includes an increase of $6.6 million of related stock-based compensation expense. In addition, there was also an increase of $4.1 million in marketing costs related to advertising, domestic and international tradeshow expenses, an increase of $2.4 million in travel and related expenses, an increase of $1.9 million in facility and other expenses, an increase of $1.7 million in software subscription costs, an increase of $1.4 million in costs incurred for the company-wide meeting held during the first half of 2017 and other internal meetings, an increase of $0.8 million in contractor costs and an increase of $0.4 million in depreciation due to increase in fixed assets and intangibles.
General and Administrative
General and administrative expenses increased by $9.1 million, or 38%, to $32.8 million during the nine months ended September 30, 2017, from $23.7 million during the nine months ended September 30, 2016. The increase was primarily attributable to an increase in personnel-related costs of $4.3 million, which includes an increase of $1.8 million of related stock-based compensation expense. In addition, there was also an increase of $1.9 million in contractor costs to supplement our staffing, an increase of $1.4 million in facility and other expenses, an increase of $0.8 million in software subscription costs for our operations and an increase of $0.2 million in costs incurred for the company-wide meeting held during the first half of 2017.
Interest Income
 
 
Nine Months Ended
September 30,
 
Change
 
2017
 
2016
 
Amount
 
%
 
(In thousands, except percentages)
Interest income
$
1,483

 
$
314

 
$
1,169

 
NM
Interest income increased by $1.2 million to $1.5 million in the nine months ended September 30, 2017, from $0.3 million in the nine months ended September 30, 2016. The increase was primarily related to the increase in interest rates beginning in December 31, 2016, resulting in increased interest income earned from our investments in U.S. Treasuries. Additionally, we had more cash, cash equivalents, and investments as a result of the IPO which led to increased interest income for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016.

27

 

Other Income (Expense), Net
 
 
Nine Months Ended
September 30,
 
Change
 
2017
 
2016
 
Amount
 
%
 
(In thousands, except percentages)
Other income (expense), net
$
(621
)
 
$
(348
)
 
$
(273
)
 
78
%
Other expense increased by $0.3 million, or 78%, to an expense of $0.6 million in the nine months ended September 30, 2017, from an expense of $0.3 million in the nine months ended September 30, 2016. The change was primarily related to foreign currency fluctuations.
Provision for Income Taxes
 
 
Nine Months Ended
September 30,
 
Change
 
2017
 
2016
 
Amount
 
%
 
(In thousands, except percentages)
Provision for income taxes
$
1,427

 
$
925

 
$
502

 
54
%

Provision for income taxes for each period was primarily attributable to foreign taxes incurred by certain non-U.S. subsidiaries and foreign withholding taxes.

Liquidity and Capital Resources
To date, our principal sources of liquidity have been the net proceeds we received through the sale of our common stock in our initial public offering, private sales of equity securities, as well as payments received from customers using our platform and services. As of September 30, 2017, we had cash, cash equivalents, and investments totaling $333.9 million, which we intend to use for working capital, operating expenses, and capital expenditures. We may also use a portion of this to acquire complementary businesses, products, services, or technologies. Our cash equivalents are comprised primarily of bank deposits and money market funds, and our investments are comprised of marketable securities such as commercial paper, corporate bonds, foreign bonds and U.S. Treasury securities. We believe that our existing cash, cash equivalents, and investments will be sufficient to satisfy our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. We plan to continue to finance our operations from customers paying for our platform and services. However, our liquidity assumptions may prove to be incorrect, and we could utilize our available financial resources sooner than we currently expect. Our future capital requirements and the adequacy of available funds will depend on many factors, including those set forth in the section of this Quarterly Report on Form 10-Q titled “Risk Factors.” We cannot assure you that we will be able to raise additional capital on acceptable terms or at all. In addition, if we fail to meet our operating plan during the next 12 months, our liquidity and ability to operate our business could be adversely affected.
Cash Flows
The following table summarizes our cash flows for the periods indicated (in thousands):
 
 
Nine Months Ended
September 30,
 
2017
 
2016
Cash provided by (used in) operating activities
$
(6,923
)
 
$
6,254

Cash provided by (used in) investing activities
(214,742
)
 
18,940

Cash provided by financing activities
242,449

 
299

Effect of exchange rate changes on cash
386

 
(505
)
Net increase in cash and cash equivalents
$
21,170

 
$
24,988


28

 

Cash Flows from Operating Activities
During the nine months ended September 30, 2017, cash used in operating activities was $6.9 million, which consisted of a net loss of $54.9 million, adjusted by non-cash charges of $22.3 million and a net change of $25.7 million in our net operating assets and liabilities. The non-cash charges are primarily comprised of stock-based compensation of $18.6 million, depreciation and amortization of $2.8 million and amortization of investment premiums of $0.5 million. The change in our net operating assets and liabilities was primarily due to an increase in deferred revenue of $35.6 million due to the timing of billings in advance of revenue recognition primarily for subscription and support, an increase in accrued expenses of $5.2 million due to an increase in operating expenses, an increase in other liabilities of $1.2 million; partially offset by an increase in accounts receivable of $12.1 million, an increase in prepaid and other current assets of $1.6 million, an increase of $1.6 million in other assets and a decrease in accrued compensation of $0.4 million due to lower commissions payable as compared to year end.
During the nine months ended September 30, 2016, cash provided by operating activities was $6.3 million, consisting of a net loss of $36.5 million, adjusted by non-cash charges of $16.5 million and a change of $26.3 million in our net operating assets and liabilities. The non-cash charges were primarily comprised of non-cash compensation expense related to the 2016 Tender Offer of $9.9 million, stock-based compensation of $4.3 million, depreciation and amortization of $1.2 million, amortization of investment premiums of $0.4 million and $0.2 million related to tax benefits from employee stock plans. The change in our net operating assets and liabilities was primarily due to an increase in deferred revenue of $22.4 million due to the timing of billings in advance of revenue recognition primarily for subscription and support, a decrease in prepaid expenses and other current assets of $2.3 million due to amortization of third-party cloud hosting, an increase in accrued expenses of $1.5 million due to an increase in operating expenses and an increase in accounts payable of $1.2 million due to the timing of invoices from vendors and related payments, partially offset by a decrease in accrued compensation and related expenses of $1.8 million due to higher commissions payable as compared to year end.
Cash Flows from Investing Activities
During the nine months ended September 30, 2017, cash used in investing activities was $214.7 million, which consisted of payments for investment purchases of $261.4 million, payments for purchases of property and equipment of $3.5 million, consisting primarily of leasehold improvements and, to a lesser extent, the purchase of computers for personnel and $0.1 million paid in connection with business combinations, net, partially offset by sales and maturities of investments of $50.3 million.
During the nine months ended September 30, 2016, cash provided by investing activities was $18.9 million, consisting of sales and maturities of investments of $43.1 million, partially offset by purchases of investments of $22.0 million, and purchases of property and equipment of $2.2 million.
Cash Flows from Financing Activities
During the nine months ended September 30, 2017, cash provided by financing activities was $242.4 million, which consisted of proceeds from the issuance of common stock in connection with our initial public offering of $236.4 million, proceeds from our ESPP of $4.5 million and proceeds from the issuance of common stock upon exercise of stock options of $3.4 million, partially offset by $1.8 million payments of costs related to the initial public offering.
During the nine months ended September 30, 2016, cash provided by financing activities was $0.3 million consisting of proceeds of $2.9 million from the issuance of common stock upon the exercise of stock options and warrants, partially offset by $2.6 million for the repurchase of common stock
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements and do not have any holdings in variable interest entities.

29

 

Contractual Obligations
The following table summarizes our non-cancellable contractual obligations as of September 30, 2017 (in thousands):
 
 
Payments Due by Period
 
Less Than
1 Year
 
1 to 3 Years
 
3 to 5 Years
 
More Than
5 Years
 
Total
Operating leases
$
8,549

 
$
14,655

 
$
8,043

 
$
3,397

 
$
34,644

Purchase Obligations (1)
9,000

 

 

 

 
9,000

Total
$
17,549

 
$
14,655

 
$
8,043

 
$
3,397

 
$
43,644

 
(1)
Purchase obligations represent total future minimum payments under our contract with our cloud infrastructure provider.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States, or U.S. GAAP. The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs, and expenses and related disclosures. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these judgments and estimates under different assumptions or conditions and any such differences may be material. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.
There have been no material changes to our critical accounting policies and significant judgments and estimates as compared to the critical accounting policies and significant judgments and estimates disclosed in the final prospectus for our IPO dated as of, and filed with the SEC on March 17, 2017, pursuant to Rule 424(b)(4) under the Securities Act.
JOBS Act Accounting Election
We are an emerging growth company, as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.
Recently Issued Accounting Standards, Not yet Adopted
In May 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09). This standard establishes a principle for recognizing revenue upon the transfer of promised goods or services to customers, in an amount that reflects the expected consideration received in exchange for those goods or services. The standard also provides guidance on the recognition of costs related to obtaining and fulfilling customer contracts. ASU 2014-09 is effective for us the first quarter of fiscal 2018.
We are finalizing our decision surrounding the adoption methodology and expect to apply the standard retrospectively to each prior period presented.
In regards to our software licenses, revenue is currently recorded ratably over the subscription term, as we have not established VSOE for such offerings. Under the new standard, the requirement to have VSOE for undelivered elements is eliminated. As a result, under the new standard we will most likely recognize a portion of our revenues related to our software products when delivered. In addition, some deferred revenue recorded in accordance with the current revenue standard could be eliminated upon adoption of the new revenue standard. 
While we currently expect revenue related to our professional services and cloud offerings to remain substantially unchanged, we are in the process of finalizing our evaluation regarding the impact of the new standard on these arrangements. However, some of our complex contracts have contract-specific terms and may require specific revenue recognition treatment. Therefore, in some instances, our revenue recognition treatment may vary.

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We have also considered the impact of the guidance in Accounting Standards Codification (ASC) 340-40, Other Assets and Deferred Costs; Contracts with Customers, under ASU 2014-09. Under ASC 340-40, we would be required to capitalize and amortize certain sales commission costs. Under our current accounting policy, we do not capitalize sales commission costs and recognize these costs when they are incurred. We expect that upon adoption we will be capitalizing certain commission expenses and recording the expense over the period in which we expect to benefit from the sales efforts. 
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (ASU 2016-02), which requires lessees to record most leases on their balance sheets but recognize the expenses on their income statements in a manner similar to current practice. ASU 2016-02 states that a lessee would recognize a lease liability for the obligation to make lease payments and a right-to-use asset for the right to use the underlying asset for the lease term. The new standard is effective for interim and annual periods beginning after December 15, 2018 and early adoption is permitted. We are currently evaluating the impact to our consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 identifies how certain cash receipts and cash payments are presented and classified in the Statement of Cash Flows. The standard is effective for fiscal years and interim periods beginning after December 15, 2017. The standard should be applied retrospectively and early adoption is permitted, including adoption in an interim period. We are currently in the process of evaluating the impact that the standard will have on our condensed consolidated financial statements and related disclosures.
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740) Intra-Entity Transfers of Assets other than Inventory which amends the guidance used in the recognition of current and deferred income taxes for an intra-entity transfer. The guidance requires an entity recognize the income tax consequences of an intra-entity transfer of an asset other than inventory at the time of transfer. The standard is effective for all public business entities for annual periods beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted as of the beginning of an annual period for which financial statements have not yet been issued. We are currently evaluating the impact to our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805) Clarifying the Definition of a Business, which amends the guidance used in evaluating whether a set of acquired assets and activities represents a business. The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities is not considered a business. Application of ASU 2017-01 is expected to result in more acquisitions to be accounted for as asset acquisitions as opposed to business combinations. As a result, acquisition fees and expenses will be capitalized to the cost basis of the property acquired, and the tangible and intangible components acquired will be recorded based on their relative fair values as of the acquisition date. The standard is effective for all public business entities for annual periods beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted for periods for which financial statements have not yet been issued. We are currently evaluating the impact to our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles (Topic 350) Simplifying the Test for Goodwill Impairment, which amends the guidance used in evaluating impairment of goodwill. The guidance eliminates Step 2 from the goodwill impairment test. An entity should now perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment change should be recognized for the amount that the carrying amount exceeds the fair value. Any reporting units with a zero or negative carrying amount no longer are required to perform qualitative assessments for goodwill impairment. Application of ASU 2017-04 is expected to reduce the cost and complexity of evaluating goodwill for impairment. The standard is effective for all public business entities for annual periods beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted for annual or interim goodwill impairment tests performed after January 1, 2017. We are currently evaluating the impact to our consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09, Stock Compensation (Topic 718) Scope of Modification Accounting, which amends the guidance used in modification accounting for share-based payment awards. The guidance specifies that any change to the terms or conditions of a share-based payment award should be treated as modification unless all three requirements are met. These requirements are that the fair value of the modified award, the vesting conditions of the modified award, and the classification of the modified award are all the same as the original award immediately before the modification. The standard is effective for all public business entities for annual periods beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted for annual or interim for which financial statements have not yet been issued. We are currently evaluating the impact to our consolidated financial statements.
    

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to financial market risks, primarily in interest rates and currency exchange rate fluctuations.
Interest Rate Risk
We had cash and cash equivalents of $56.2 million and $35.1 million as of September 30, 2017 and December 31, 2016, respectively. Our cash and cash equivalents are held in cash deposits and money market funds. Due to the short-term nature of these instruments, we do not believe that we have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. Declines in interest rates, however, would reduce our future interest income.
We had current investments in marketable securities of $125.4 million and $63.4 million as of September 30, 2017 and December 31, 2016, respectively. The primary objective of our investment activities is to preserve principal while maximizing yields without significantly increasing risk. This objective is accomplished by making investments consisting only of corporate bonds and U.S. Treasury securities. The effect of a hypothetical 10% increase or decrease in interest rates would not have had a material impact on our historical consolidated financial statements for any of the periods presented.
Foreign Currency Exchange Risk
As of September 30, 2017, and December 31, 2016, our cash and cash equivalents included $8.1 million and $6.4 million, respectively, held by our foreign subsidiaries, of which $2.1 million and $1.0 million, respectively, was denominated in Argentine pesos, $3.9 million and $2.7 million, respectively, was denominated in U.K. pounds sterling, and $0.9 million and $1.4 million, respectively, was denominated in Australian dollars.
Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates. Substantially all of our revenue is generated in U.S. dollars. Our expenses are generally denominated in the currencies of the jurisdictions in which we conduct our operations, which are primarily in the United States, Argentina, Europe and Asia. Our results of operations and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates and may be adversely affected in the future due to changes in foreign exchange rates. The effect of a hypothetical 10% change in foreign currency exchange rates applicable to our business would not have a material impact on our historical consolidated financial statements for any period presented.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures.
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, have evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in internal control over financial reporting.
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act during the quarter ended September 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Inherent limitation on the effectiveness of internal control.
The effectiveness of any system of internal control over financial reporting, including ours, is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, any system of internal control over financial reporting, including ours, no matter how well designed and operated, can only provide reasonable, not absolute assurances. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business, but cannot assure you that such improvements will be sufficient to provide us with effective internal control over financial reporting.
PART II. – OTHER INFORMATION
Item 1. Legal Proceedings
We are not party to any material legal proceedings at this time. From time to time, we may become involved in various legal proceedings that arise in the ordinary course of our business.
Item 1A. Risk Factors
Investing in our Class A common stock involves a high degree of risk. You should carefully consider the following risks, together with all of the other information contained in our condensed consolidated financial statements and related notes, before making a decision to invest in our Class A common stock. Any of the following risks could have an adverse effect on our business, results of operations, financial condition and prospects, and could cause the trading price of our Class A common stock to decline, which would cause you to lose all or part of your investment. Our business, results of operations, financial condition, or prospects could also be harmed by risks and uncertainties not currently known to us or that we currently do not believe are material.
Risks Related to Our Business and Industry
We have a history of losses, and as our costs increase, we may not be able to generate sufficient revenue to achieve and sustain profitability.
We have incurred net losses in each period since our inception, including net losses of $54.9 million and $49.6 million for the nine months ended September 30, 2017 and for the year ended December 31, 2016, respectively. As a result, we had an accumulated deficit of $291.1 million as of September 30, 2017. We expect our operating expenses to increase significantly as we increase our sales and marketing efforts, continue to invest heavily in research and development, and expand our operations and infrastructure, both domestically and internationally. In addition, we have incurred and expect to continue to incur significant additional legal, accounting, and other expenses related to being a public company. While our revenue has grown in recent years, if our revenue declines or fails to grow at a rate faster than these increases in our operating expenses, we will not be able to achieve and maintain profitability in future periods. As a result, we may continue to generate losses. We cannot assure you that we will achieve profitability in the future or that, if we do become profitable, we will be able to sustain profitability.
We have experienced rapid growth in recent periods. If we fail to continue to grow and to manage our growth effectively, we may be unable to execute our business plan, increase our revenue, improve our results of operations, maintain high levels of service, or adequately address competitive challenges.
We have recently experienced a period of rapid growth in our business, operations, and employee headcount. For the three months ended September 30, 2017 and 2016, our revenue was $77.6 million and $49.4 million, respectively, representing a 57% growth rate. For the nine months ended September 30, 2017 and 2016, our revenue was $207.7 million and $132.4 million, respectively, representing a 57% growth rate. We have also significantly increased the size of our customer base from 994 customers as of September 30, 2016 to over 1,200 customers as of September 30, 2017. We grew from 752 employees as of September 30, 2016 to 1,147 employees as of September 30, 2017. We expect to continue to expand our operations and employee headcount in the near term. Our success will depend in part on our ability to continue to grow and to manage this growth effectively.
Our recent growth has placed, and future growth will continue to place, a significant strain on our management, administrative, operational, and financial infrastructure. We will need to continue to improve our operational, financial, and management controls, and our reporting systems and procedures to manage the expected growth of our operations and personnel, which will require significant capital expenditures and allocation of valuable management and employee resources. If we fail to implement these infrastructure improvements effectively, our ability to ensure uninterrupted operation of key business systems

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and comply with the rules and regulations that are applicable to public reporting companies will be impaired. Further, if we do not effectively manage the growth of our business and operations, the quality of our platform and services could suffer, and we may not be able to adequately address competitive challenges. This could impair our ability to attract new customers, retain existing customers and expand their use of our platform, all of which would adversely affect our brand, overall business, results of operations and financial condition.
We currently derive substantially all of our revenue and cash flows from Anypoint Platform, and any failure of this platform to satisfy customer demands or to achieve increased market acceptance would adversely affect our business, results of operations, financial condition, and growth prospects.
We derive substantially all of our revenue and cash flows from subscriptions for, and services related to, Anypoint Platform. Demand for Anypoint Platform is affected by a number of factors beyond our control, including increased market acceptance of our platform by existing customers and potential new customers, the extension of our platform for new use cases, the timing of development and release of new products by our competitors and additional capabilities and functionality by us, technological change, and growth or contraction of the market in which we compete. In addition, we cannot assure you that our platform and future enhancements to our platform will be able to address future advances in technology or requirements of existing customers or potential new customers. For example, our platform may not be able to be used to build application networks that can scale with the massive proliferation of applications, data, and devices that reside on-premises and in the cloud. If we are unable to continue to meet customer demands or to achieve more widespread market acceptance of our platform, our business, results of operations, financial condition and growth prospects will be adversely affected.
We began selling Anypoint Platform in 2014. Due to our limited experience selling the platform, it may be difficult to forecast our future results of operations and subjects us to a number of uncertainties, including the pace and degree of customer adoption of our platform. We have encountered and will continue to encounter risks and uncertainties frequently experienced by growing companies operating in new or developing markets. If our assumptions regarding these uncertainties, which we use to plan our business, are incorrect or change in reaction to changes in our markets, or if we do not address these risks successfully, our results of operations and financial condition could differ materially from our expectations and our business could suffer.
The market for application networks and our platform is new and unproven.
We introduced Anypoint Platform in 2014 to address the developing need to connect applications, data and devices within and between the organization and its external ecosystems. While we believe that, over time, the concept of an application network will become fundamental to an organization’s core operations, the market for application networks is largely unproven and is subject to a number of risks and uncertainties, including:
 
organizations may determine that they only need point-to-point products to address their software integration needs;
organizations may decide that the investments needed to construct an application network are too significant or that such investments are better spent on other strategic initiatives within the organization; and
organizations may not understand the benefits that can be achieved with an application network.
Moreover, even if the market for application networks develops, we may not be able to differentiate the benefits of Anypoint Platform from other products that may be developed to address the demand for application networks. Our ability to successfully market and sell Anypoint Platform will depend on a number of factors, including:
 
our ability to support our customers as they build application networks that increase the speed at which they operate and innovate;
our ability to include technologies for the broadening diversity of use cases and respond to the rapid evolution of new technologies;
our ability to design and engineer our platform for ease-of-use across an organization; and
our ability to enable customers to successfully adopt and deploy our platform in their organizations.
The market for application networks and our platform is still new, and therefore, it is difficult to predict the size and growth rate of this market, whether and how rapidly customers will adopt our platform, whether we will be able to retain such customers and expand their usage of our platform, and the impact of competitive products and services. If the market for application networks and Anypoint Platform does not achieve significant growth or there is a reduction in demand for solutions in our market for any reason, it could result in reduced customer adoption of our platform, decreased customer retention, or weaker customer expansion with respect to the use of our platform, any of which would adversely affect our business, results of operations, and financial condition.

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Our business and results of operations depend substantially on our customers renewing their subscriptions with us and expanding their use of our platform. Any decline in our customer renewals or failure to convince our customers to broaden their use of our platform would harm our business, results of operations, and financial condition.
Subscriptions to our platform are term-based and are typically one year in duration. In order for us to maintain or improve our results of operations, it is important that our customers renew their subscriptions with us when the existing subscription term expires. While our customers are not entitled to maintain the applications developed using Anypoint Platform after the termination of a subscription, they have no obligation to renew their subscriptions upon expiration. Based on our relatively limited experience selling and marketing Anypoint Platform, we may not be able to accurately predict customer renewal rates. In addition, the growth of our business depends in part on our customers expanding their use of our platform. We utilize our dollar-based net retention rate to measure our ability to retain customers and expand their use of our platform. Although our dollar-based net retention rate has historically been strong, some of our customers have elected not to renew their subscriptions with us in the past for a variety of reasons, including as a result of changes in their strategic IT priorities. Our dollar-based net retention rate may also decline or fluctuate as a result of a number of other factors, including our customers’ satisfaction or dissatisfaction with our platform, the increase in the dollar value of subscription and support contracts from new customers, the effectiveness of our customer support services, our pricing, the prices of competing products or services, mergers and acquisitions affecting our customer base, global economic conditions, and the other risk factors included herein. As a result, we cannot assure you that customers will renew subscriptions or increase their usage of our platform. If our customers do not renew their subscriptions or renew on less favorable terms, or if we are unable to expand our customers’ use of our platform, our business, results of operations, and financial condition may be adversely affected.
If we were unable to attract new customers in a manner that is cost-effective and assures customer success, we would not be able to grow our business, which would adversely affect our results of operations, and financial condition.
In order to grow our business, we must continue to attract new customers in a cost-effective manner and enable such customers to realize the benefits associated with an application network. We may not be able to attract new customers to our platform for a variety of reasons, including as a result of their use of traditional approaches to technology integration,
such as manual project-by-project integrations and the use of legacy point-to-point software integration products, their internal timing, budget, or structural constraints that hinder their ability to build application networks, or the pricing of our platform compared to products and services offered by our competitors. After a customer makes a purchasing decision, we often must also help them successfully deploy our platform in their organization, a process that can last several months. Even if we do attract customers, the cost of new customer acquisition or ongoing customer support may prove so high as to prevent us from achieving or sustaining profitability. For example, for the nine months ended September 30, 2017 and 2016, total sales and marketing expense represented 61% and 66% of revenue, respectively. We intend to continue to hire additional sales personnel, increase our marketing activities to help educate the market about the benefits of application networks and our platform, grow our domestic and international operations, and build brand awareness. We also intend to continue to cultivate the MuleSoft developer community and our partner ecosystem of SIs, and independent software vendors (ISVs). If the costs of these sales and marketing efforts increase dramatically, if we do not experience a substantial increase in leverage from our partner ecosystem, or if our sales and marketing efforts do not result in substantial increases in revenue, our business, results of operations, and financial condition may be adversely affected. In addition, we expect to continue to invest in our professional services organization to accelerate our customers’ ability to adopt our platform and ultimately create and expand the size of their application network over time. We cannot assure you that any of these investments will lead to the cost-effective acquisition of additional customers.
We face a number of risks in our strategy to target larger organizations for sales of our platform, and if we do not manage these efforts effectively, our business and results of operations could be adversely affected.
We are increasingly focusing our sales and marketing efforts on larger organizations. As a result, we face a number of risks with respect to this strategy. For example, we expect to incur higher costs and longer sales cycles for larger organizations, and we may be less effective at predicting when we will complete these sales. In this market segment, the decision to invest in our platform may require a greater number of product evaluations and multiple approvals within a potential customer’s organization, which may require us to invest more time educating these potential customers. In addition, larger organizations may demand more features and professional services. As a result, these sales opportunities would likely lengthen our typical sales cycle and may require us to devote greater research and development, sales, support, and professional services resources to individual customers. This could strain our resources and result in increased costs. Moreover, larger customers may demand discounts in pricing, which could lower the amount of revenue we generate from any particular subscription. If an expected transaction is delayed until a subsequent period, or if we are unable to close one or more expected significant transactions with larger customers or potential new customers in a particular period, our results of operations for that period, and for any future periods in which revenue from such transaction would otherwise have been recognized, may be adversely affected. Our investments in marketing and selling to

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large organizations may not be successful, which could harm our results of operations and our overall ability to grow our customer base.
Interruptions or performance problems associated with our technology and infrastructure may adversely affect our business, results of operations, and financial condition.
Our continued growth depends in part on the ability of our existing customers and new customers to access our platform, particularly our cloud-based deployments, at any time and within an acceptable amount of time. We have experienced, and may in the future experience, service disruptions, outages and other performance problems due to a variety of factors, including infrastructure changes, human or software errors or capacity constraints. In some instances, we may not be able to identify the cause or causes of these performance problems within an acceptable period of time. It may become increasingly difficult to maintain and improve our performance as our platform becomes more complex. If our platform is unavailable or if our customers are unable to access features of our platform within a reasonable amount of time or at all, our business would be negatively affected. In addition, our infrastructure does not currently include the real-time mirroring of data. Therefore, in the event of any of the factors described above or other failures, customer data and other important information may be permanently lost.
We outsource our cloud infrastructure to Amazon Web Services, or AWS, which hosts our platform. Our customers need to be able to access our platform at any time, without interruption or degradation of performance. AWS runs its own platform that we access, and we are, therefore, vulnerable to service interruptions at AWS. We have experienced, and expect that in the future we may experience interruptions, delays and outages in service and availability from time to time due to a variety of factors, including infrastructure changes, human or software errors, website hosting disruptions and capacity constraints. Capacity constraints could be due to a number of potential causes including technical failures, natural disasters, fraud or security attacks. In addition, if our security, or that of AWS, is compromised, our platform is unavailable or our customers are unable to use our platform within a reasonable amount of time or at all, then our business, results of operations and financial condition could be adversely affected. In some instances, we may not be able to identify the cause or causes of these performance problems within a period of time acceptable to our customers. It may become increasingly difficult to maintain and improve our platform performance, especially during peak usage times, as the features of our platform become more complex and the usage of our platform increases. Any of the above circumstances or events may harm our reputation, cause customers to stop using our platform, impair our ability to increase revenue from existing customers, impair our ability to grow our customer base, subject us to financial penalties and liabilities under our service level agreements and otherwise harm our business, results of operations, and financial condition.
To the extent that we do not effectively anticipate capacity demands, upgrade our systems as needed, and continually develop our technology and network architecture to accommodate actual and anticipated changes in technology, our business and results of operations may be adversely affected. Moreover, our customer agreements include warranties and service level agreements that obligate us to provide future credits for customers of our cloud offerings in the event of a significant disruption in our platform. Any unscheduled downtime that exceeds such service level commitments could adversely affect our results of operations, financial condition, business, and reputation, which in turn could harm our ability to acquire new customers and expand relationships with existing customers.
Incorrect or improper implementation or use of our platform could result in customer dissatisfaction and negatively affect our business, results of operations, financial condition, and growth prospects.
Our platform is deployed in a wide variety of technology environments, both on-premises and in the cloud. Increasingly, our platform has been deployed in large scale, complex technology environments, and we believe our future success will depend on our ability to increase sales of our platform for use in such deployments. We must often assist our customers in achieving successful implementations of our platform, which we do through our professional services organization. The time required to implement our platform can range from three months for smaller deployments to six months or more for larger deployments. If our customers are unable to implement our platform successfully, or unable to do so in a timely manner, customer perceptions of our platform may be harmed, our reputation and brand may suffer, and customers may choose to cease usage of our platform or not to expand their use of our platform. Our customers and third-party partners may need training in the proper use of and the variety of benefits that can be derived from our platform to maximize its benefits. If our platform is not effectively implemented or used correctly or as intended, or if we fail to adequately train customers on how to efficiently and effectively use our platform, our customers may not be able to build application networks or otherwise achieve satisfactory outcomes. This could result in negative publicity and legal claims against us, which may cause us to generate fewer sales to new customers and reductions in renewals or expansions of the use of our platform with existing customers, any of which would harm our business and results of operations.

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If our security measures are breached or unauthorized access to private or proprietary data is otherwise obtained, our platform may be perceived as not being secure, customers may reduce the use of or stop using our platform, and we may incur significant liabilities.
Because our platform allows customers to store and transmit data, there exists an inherent risk that an unauthorized third party could conduct a security breach, resulting in the loss of this data, which could lead to litigation, indemnity obligations, and other liability. While we have taken steps to protect the confidential information to which we have access, we do not have the ability to monitor or review the content that our customers store or transmit through our platform. Therefore, if customers use our software for the transmission or storage of personally identifiable information and our security measures are breached as a result of third-party action, employee error, malfeasance or otherwise, our reputation could be damaged, our business may suffer, and we could incur significant liability. Because techniques used to obtain unauthorized access or sabotage systems change frequently and generally are not identified until they are launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. Any or all of these issues could negatively impact our ability to attract new customers and increase engagement by existing customers, cause existing customers to elect not to renew their subscriptions, or subject us to third-party lawsuits, regulatory fines or other action or liability, thereby adversely affecting our financial results.
If we fail to adapt and respond effectively to rapidly changing technology, evolving industry standards, changing regulations and changing customer needs, requirements or preferences, our products may become less competitive.
The market in which we compete is relatively new and subject to rapid technological change, evolving industry stan