UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number: 001-37496

RAPID7, INC.

(Exact Name of Registrant as Specified in its Charter)

Delaware	35-2423994
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

120 Causeway Street
Boston,	MA	02114
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (617) 247-1717

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value per share	RPD	The Nasdaq Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer	☒	Accelerated Filer	☐
Non-accelerated Filer	☐	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 July 31, 2019, there were 48,842,220 shares of the registrant’s common stock, $0.01 par value per share, outstanding.

Table of Contents

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	1
	Consolidated Balance Sheets	1
	Consolidated Statements of Operations	2
	Consolidated Statements of Comprehensive Loss	3
	Consolidated Statements of Changes in Stockholders' Equity	4
	Consolidated Statements of Cash Flows	5
	Notes to Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40
Item 4.	Controls and Procedures	40
PART II.	OTHER INFORMATION	42
Item 1.	Legal Proceedings	42
Item 1A.	Risk Factors	42
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	64
Item 3.	Defaults Upon Senior Securities	65
Item 4.	Mine Safety Disclosures	65
Item 5.	Other Information	65
Item 6.	Exhibits	66

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

RAPID7, INC.

Consolidated Balance Sheets (Unaudited)

(in thousands, except share and per share data)

	June 30, 2019			December 31, 2018
Assets
Current assets:
Cash and cash equivalents	$	126,569		$	99,565
Short-term investments	119,138			159,210
Accounts receivable, net of allowance for doubtful accounts of $1,622 and $1,624 at June 30, 2019 and December 31, 2018, respectively	69,289			74,935
Deferred contract acquisition and fulfillment costs, current portion	13,851			12,321
Prepaid expenses and other current assets	15,416			9,746
Total current assets	344,263			355,777
Long-term investments	18,680			44,892
Property and equipment, net	51,860			17,523
Operating lease right-of-use assets	59,417			—
Deferred contract acquisition and fulfillment costs, non-current portion	29,275			27,634
Goodwill	97,866			88,420
Intangible assets, net	29,726			23,955
Other assets	5,192			1,168
Total assets	$	636,279		$	559,369
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	12,975		$	7,048
Accrued expenses	33,069			37,376
Operating lease liabilities, current portion	6,057			—
Deferred revenue, current portion	199,048			189,855
Other current liabilities	126			707
Total current liabilities	251,275			234,986
Convertible senior notes, net	179,791			174,688
Operating lease liabilities, non-current portion	71,722			—
Deferred revenue, non-current portion	44,944			58,716
Other long-term liabilities	1,023			3,660
Total liabilities	548,755			472,050
Stockholders’ equity:
Preferred stock, $0.01 par value per share; 10,000,000 shares authorized at June 30, 2019 and December 31, 2018; 0 shares issued at June 30, 2019 and December 31, 2018	—			—
Common stock, $0.01 par value per share; 100,000,000 shares authorized at June 30, 2019 and December 31, 2018; 49,284,448 and 48,087,257 shares issued at June 30, 2019 and December 31, 2018, respectively; 48,797,640 and 47,600,449 shares outstanding at June 30, 2019 and December 31, 2018, respectively	488			476
Treasury stock, at cost, 486,808 shares at June 30, 2019 and December 31, 2018	(4,764		)	(4,764		)
Additional paid-in-capital	581,127			556,223
Accumulated other comprehensive income (loss)	351			(31		)
Accumulated deficit	(489,678		)	(464,585		)
Total stockholders’ equity	87,524			87,319
Total liabilities and stockholders’ equity	$	636,279		$	559,369

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

1

RAPID7, INC.

Consolidated Statements of Operations (Unaudited)

(in thousands, except share and per share data)

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Revenue:
Products	$	63,207		$	39,043		$	119,495		$	74,322
Maintenance and support	9,372			10,610			18,929			21,363
Professional services	6,380			8,788			13,720			17,271
Total revenue	78,959			58,441			152,144			112,956
Cost of revenue:
Products	14,556			9,650			27,041			18,086
Maintenance and support	2,081			2,007			3,965			3,856
Professional services	5,544			5,736			11,148			12,045
Total cost of revenue	22,181			17,393			42,154			33,987
Total gross profit	56,778			41,048			109,990			78,969
Operating expenses:
Research and development	19,626			16,082			37,491			32,804
Sales and marketing	38,172			31,157			73,310			60,209
General and administrative	11,160			8,149			21,113			16,881
Total operating expenses	68,958			55,388			131,914			109,894
Loss from operations	(12,180		)	(14,340		)	(21,924		)	(30,925		)
Other income (expense), net:
Interest income	1,582			464			3,313			707
Interest expense	(3,312		)	—			(6,541		)	(2		)
Other income (expense), net	(29		)	(326		)	(235		)	(248		)
Loss before income taxes	(13,939		)	(14,202		)	(25,387		)	(30,468		)
Provision for (benefit from) income taxes	(519		)	131			(294		)	226
Net loss	$	(13,420	)	$	(14,333	)	$	(25,093	)	$	(30,694	)
Net loss per share, basic and diluted	$	(0.28	)	$	(0.31	)	$	(0.52	)	$	(0.67	)
Weighted-average common shares outstanding, basic and diluted	48,451,562			46,279,947			48,141,474			45,746,513

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

2

RAPID7, INC.

Consolidated Statements of Comprehensive Loss (Unaudited)

(in thousands)

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Net loss	$	(13,420	)	$	(14,333	)	$	(25,093	)	$	(30,694	)
Other comprehensive income (loss):
Change in fair value of investments	189			20			382			15
Total change in unrealized gain on investments	189			20			382			15
Comprehensive loss	$	(13,231	)	$	(14,313	)	$	(24,711	)	$	(30,679	)

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

3

RAPID7, INC.

Consolidated Statements of Changes in Stockholders' Equity (Unaudited)

(in thousands)

	Common stock					Treasury stock				Additional paid-in-capital			Accumulated other comprehensive gain (loss)		Accumulated deficit			Total stockholders’ equity
	Shares		Amount			Shares	Amount
Balance, March 31, 2019	48,158		$	482		487	$	(4,764	)	$	569,229		$	162	$	(476,258	)	$	88,851
Stock-based compensation expense	—		—			—	—			10,430			—		—			10,430
Vesting of restricted stock units	351		3			—	—			(3		)	—		—			—
Shares withheld for employee taxes	(36	)	(1		)	—	—			(1,858		)	—		—			(1,859		)
Issuance of common stock upon exercise of stock options	325		4			—	—			3,329			—		—			3,333
Net unrealized gain on investments	—		—			—	—			—			189		—			189
Net loss	—		—			—	—			—			—		(13,420		)	(13,420		)
Balance, June 30, 2019	48,798		$	488		487	$	(4,764	)	$	581,127		$	351	$	(489,678	)	$	87,524

	Common stock				Treasury stock				Additional paid-in-capital			Accumulated other comprehensive gain (loss)			Accumulated deficit			Total stockholders’ equity
	Shares		Amount		Shares	Amount
Balance, March 31, 2018	46,199		$	462	487	$	(4,764	)	$	503,669		$	(44	)	$	(425,401	)	$	73,922
Stock-based compensation expense	—		—		—	—			7,350			—			—			7,350
Vesting of restricted stock units	269		2		—	—			(2		)	—			—			—
Shares withheld for employee taxes	(22	)	—		—	—			(543		)	—			—			(543		)
Issuance of common stock upon exercise of stock options	293		3		—	—			3,124			—			—			3,127
Net unrealized gain on investments	—		—		—	—			—			20			—			20
Net loss	—		—		—	—			—			—			(14,333		)	(14,333		)
Balance, June 30, 2018	46,739		$	467	487	$	(4,764	)	$	513,598		$	(24	)	$	(439,734	)	$	69,543

	Common stock					Treasury stock				Additional paid-in-capital			Accumulated other comprehensive gain (loss)			Accumulated deficit			Total stockholders’ equity
	Shares		Amount			Shares	Amount
Balance, December 31, 2018	47,600		$	476		487	$	(4,764	)	$	556,223		$	(31	)	$	(464,585	)	$	87,319
Stock-based compensation expense	—		—			—	—			19,064			—			—			19,064
Issuance of common stock under Employee Stock Purchase Plan	111		1			—	—			2,633			—			—			2,634
Vesting of restricted stock units	595		6			—	—			(6		)	—			—			—
Shares withheld for employee taxes	(58	)	(1		)	—	—			(2,838		)	—			—			(2,839		)
Issuance of common stock upon exercise of stock options	550		6			—	—			6,051			—			—			6,057
Net unrealized gain on investments	—		—			—	—			—			382			—			382
Net loss	—		—			—	—			—			—			(25,093		)	(25,093		)
Balance, June 30, 2019	48,798		$	488		487	$	(4,764	)	$	581,127		$	351		$	(489,678	)	$	87,524

	Common stock					Treasury stock				Additional paid-in-capital			Accumulated other comprehensive gain (loss)			Accumulated deficit			Total stockholders’ equity
	Shares		Amount			Shares	Amount
Balance, December 31, 2017	44,054		$	441		487	$	(4,764	)	$	463,428		$	(39	)	$	(434,913	)	$	24,153
Stock-based compensation expense	—		—			—	—			13,575			—			—			13,575
Cumulative effect adjustment for the adoption of ASC 606	—		—			—	—			—			—			25,873			25,873
Issuance of common stock related to follow-on public offering	1,500		15			—	—			30,892			—			—			30,907
Issuance of common stock under Employee Stock Purchase Plan	124		1			—	—			1,631			—			—			1,632
Vesting of restricted stock units	425		4			—	—			(4		)	—			—			—
Forfeiture of restricted stock awards	(3	)	—			—	—			—			—			—			—
Shares withheld for employee taxes	(42	)	(1		)	—	—			(1,004		)	—			—			(1,005		)
Issuance of common stock upon exercise of stock options	681		7			—	—			5,080			—			—			5,087
Net unrealized gain on investments	—		—			—	—			—			15			—			15
Net loss	—		—			—	—			—			—			(30,694		)	(30,694		)
Balance, June 30, 2018	46,739		$	467		487	$	(4,764	)	$	513,598		$	(24	)	$	(439,734	)	$	69,543

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

4

RAPID7, INC.

Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

 

	Six Months Ended June 30,
	2019			2018
Cash flows from operating activities:
Net loss	$	(25,093	)	$	(30,694	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	7,371			5,077
Amortization of debt discount and issuance costs	5,104			—
Stock-based compensation expense	19,064			13,575
Provision for doubtful accounts	1,353			456
Deferred income taxes	(761		)	—
Foreign currency re-measurement loss	191			471
Other non-cash (income) expense	(1,290		)	(71		)
Changes in operating assets and liabilities:
Accounts receivable	4,549			24,586
Deferred contract acquisition and fulfillment costs	(3,172		)	(4,531		)
Prepaid expenses and other assets	(9,334		)	(3,602		)
Accounts payable	2,184			2,391
Accrued expenses	(7,312		)	(7,806		)
Deferred revenue	(5,066		)	(1,001		)
Other liabilities	1,129			(669		)
Net cash used in operating activities	(11,083		)	(1,818		)
Cash flows from investing activities:
Business acquisition, net of cash acquired	(14,621		)	—
Purchases of property and equipment	(17,712		)	(5,650		)
Capitalization of internal-use software costs	(3,152		)	(1,413		)
Purchases of investments	(72,432		)	(10,655		)
Sales/maturities of investments	140,302			33,128
Net cash provided by investing activities	32,385			15,410
Cash flows from financing activities:
Proceeds from follow-on public offering, net of offering costs of $608	—			30,907
Taxes paid related to net share settlement of equity awards	(2,839		)	(1,005		)
Proceeds from employee stock purchase plan	2,634			1,632
Proceeds from stock option exercises	6,058			4,657
Net cash provided by financing activities	5,853			36,191
Effect of exchange rate changes on cash, cash equivalents and restricted cash	(151		)	(314		)
Net increase in cash, cash equivalents and restricted cash	27,004			49,469
Cash, cash equivalents and restricted cash, beginning of period	99,565			51,762
Cash, cash equivalents and restricted cash, end of period	$	126,569		$	101,231
Supplemental cash flow information:
Cash paid for interest on convertible senior notes	$	1,342		$	—
Cash paid for income taxes, net of refunds	$	319		$	315
Non-cash investing activities:
Leasehold improvements acquired through tenant improvement allowance	$	14,016		$	—
Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents	$	126,569		$	100,731
Restricted cash in other assets	—			500
Total cash, cash equivalents and restricted cash	$	126,569		$	101,231

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

5

RAPID7, INC.

Notes to Consolidated Financial Statements (Unaudited)

Note 1. Description of Business, Basis of Presentation and Consolidation and Significant Accounting Policies

Description of Business

Rapid7, Inc. and subsidiaries (we, us or our) is advancing security with visibility, analytics, and automation delivered through our Insight cloud. Our solutions simplify the complex, allowing security teams to work more effectively with IT and development to reduce vulnerabilities, monitor for malicious behavior, investigate and shut down attacks, and automate routine tasks.

Basis of Presentation and Consolidation

The accompanying unaudited consolidated financial statements have been prepared by us in accordance with accounting principles generally accepted in the United States of America (GAAP), as well as pursuant to the rules and regulations of the Securities and Exchange Commission (SEC), regarding interim financial reporting. Accordingly, certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC on February 28, 2019.

The consolidated financial statements include our results of operations and those of our wholly-owned subsidiaries and reflect all adjustments (consisting solely of normal, recurring adjustments) which are, in the opinion of management, necessary for a fair statement of results for the interim periods presented. All intercompany transactions and balances have been eliminated in consolidation. The results of operations for the three and six months ended June 30, 2019 are not necessarily indicative of the results to be expected for any future period or the entire fiscal year.

Significant Accounting Policies

Our significant accounting policies are described in Note 2, Summary of Significant Accounting Policies, to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018. There have been no material changes to the significant accounting policies during the three and six-month periods ended June 30, 2019 other than those noted below.

Leases

Effective January 1, 2019, we adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2016-02, Leases (Topic 842), as amended Accounting Standard Codification (ASC) 842. In accordance with ASC 842, at the inception of an arrangement, we determine whether the arrangement is or contains a lease based on the unique facts and circumstances present and the classification of the lease. Most leases with a term greater than one year are recognized on the balance sheet as right-of-use (ROU) assets, lease liabilities and, if applicable, long-term lease liabilities. We have elected not to recognize on the balance sheet leases with terms of one year or less. For contracts with lease and non-lease components, we have elected not to allocate the contract consideration and to account for the lease and non-lease components as a single lease component.

Lease liabilities and their corresponding ROU assets are recorded based on the present value of lease payments over the expected lease term. The implicit rate within our operating leases are generally not determinable and therefore we use the incremental borrowing rate at the lease commencement date to determine the present value of lease payments. The determination of our incremental borrowing rate requires judgment. We determine our incremental borrowing rate for each lease using our estimated borrowing rate, adjusted for various factors including level of collateralization, term and currency to align with the terms of the lease. The operating lease ROU asset also includes any lease prepayments, offset by lease incentives. Certain of our leases include options to extend or terminate the lease. An option to extend the lease is considered in connection with determining the ROU asset and lease liability when it is reasonably certain we will exercise that option. An option to terminate is considered unless it is reasonably certain we will not exercise the option.

For periods prior to the adoption of ASC 842, we recorded rent expense on a straight-line basis over the term of the related lease. The difference between the straight-line rent expense and the payments made in accordance with the operating lease agreements were recognized as a deferred rent liability on the accompanying consolidated balance sheets.

Recent Accounting Pronouncements

Accounting Pronouncements Recently Adopted

In February 2016, the FASB issued ASU 2016-02, Leases, which requires companies to recognize on the balance sheet the assets and liabilities for the rights and obligations created by the leased asset. The standard is effective for fiscal years, and interim periods

6

within those fiscal years, beginning after December 15, 2018. We adopted this standard effective January 1, 2019 using the modified retrospective approach for all leases entered into before the effective date. We also elected to implement the new standard at the adoption date with a cumulative-effect adjustment, if any, recognized to the opening balance of accumulative deficit in the period of adoption.

For comparability purposes, we will continue to comply with the previous disclosure requirements in accordance with the existing lease guidance for all periods presented in the year of adoption. We elected the package of practical expedients as permitted under the transition guidance, which allowed us: (1) to carry forward the historical lease classification; (2) not to reassess whether expired or existing contracts are or contain leases; and, (3) not to reassess the treatment of initial direct costs for existing leases. In addition, we elected an accounting policy to not recognize leases with an initial term of one year or less on the balance sheet.

Upon the adoption of this standard on January 1, 2019, we recognized a total lease liability of $21.3 million, representing the present value of the minimum rental payments remaining as of the adoption date and a right-of-use asset in the amount of $15.4 million. We did not have any finance leases (formerly referred to as capital leases prior to the adoption of ASC 842), therefore there was no change in accounting treatment required.

Accounting Pronouncements Not Yet Effective

In August 2018, the FASB issued Accounting Standards Update (ASU) 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract, which aligns the requirements for capitalizing implementation costs in cloud computing arrangements with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The new standard will be effective for us in the first quarter of 2020, with early adoption permitted. Entities can choose to adopt the new guidance prospectively or retrospectively. We are currently in the process of evaluating the effects of this pronouncement on our consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates, modifies and adds disclosure requirements for fair value measurements. The new standard will be effective for us in the first quarter of 2020, with early adoption permitted. We do not expect this ASU to have a material impact on our consolidated financial statements.

Note 2. Revenue from Contracts with Customers

We generate products revenue from the sale of (1) cloud-based subscriptions for our InsightIDR, InsightVM, InsightAppSec and InsightConnect products, (2) managed services offerings, which utilize our products and (3) term or perpetual software licenses for our Nexpose, Metasploit, and AppSpider products, and associated content subscriptions for our Nexpose and Metasploit products. We also generate appliance revenue that is included in our products revenue and is associated with hardware sold with our Nexpose product to certain customers. We generate maintenance and support revenue associated with customers’ purchases of our software licenses for Nexpose, Metasploit and AppSpider. We generate professional service revenue from the sale of our deployment and training services related to our solutions, incident response services and security advisory services. Our deployment services educate and assist our customers on the best use and best practices to deploy our solutions.

In accordance with FASB ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (ASC 606), revenue is recognized when a customer obtains control of promised products or services. The amount of revenue recognized reflects the consideration that we expect to be entitled to receive in exchange for these products or services. To achieve the core principle of this standard, we apply the following five steps:

1) Identify the contract with a customer

We consider the terms and conditions of the contracts and our customary business practices in identifying our contracts under ASC 606. We determine we have a contract with a customer when the contract is approved, we can identify each party’s rights regarding the services to be transferred, we can identify the payment terms for the services, and we have determined the customer has the ability and intent to pay and the contract has commercial substance. We apply judgment in determining the customer’s ability and intent to pay, which is based on a variety of factors, including the customer’s historical payment experience or, in the case of a new customer, credit and financial information pertaining to the customer.

2) Identify the performance obligations in the contract

Performance obligations promised in a contract are identified based on the products and services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the product or service either on its own or together with other resources that are readily available from third parties or from us, and are distinct in the context of the contract, whereby the transfer of the products or services is separately identifiable from other promises in the contract.

7

3) Determine the transaction price

The transaction price is determined based on the consideration to which we expect to be entitled in exchange for transferring products or services to the customer. Variable consideration is included in the transaction price if, in our judgment, it is probable that no significant future reversal of cumulative revenue under the contract will occur.

In instances where the timing of revenue recognition differs from the timing of invoicing, we have determined our contracts generally do not include a significant financing component. The primary purpose of our invoicing terms is to provide customers with simplified and predictable ways of purchasing our products and services, not to receive financing from our customers or to provide customers with financing. Examples include invoicing at the beginning of a subscription term with revenue recognized ratably over the contract period.

4) Allocate the transaction price to performance obligations in the contract

If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price (SSP).

5) Recognize revenue when or as we satisfy a performance obligation

Revenue is recognized at the time the related performance obligation is satisfied by transferring the promised product or service to a customer. Revenue is recognized when control of the products or services are transferred to our customers, in an amount that reflects the consideration that we expect to receive in exchange for those products or services.

The following table summarizes revenue from contracts with customers for the three and six months ended June 30, 2019 and 2018:

	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
	(in thousands)
Subscription revenue	$	52,309	$	31,361	$	99,278	$	60,130
Term and perpetual software licenses	10,315		6,697		18,991		12,257
Maintenance and support	9,372		10,610		18,929		21,363
Professional services	6,380		8,788		13,720		17,271
Other	583		985		1,226		1,935
Total revenue	$	78,959	$	58,441	$	152,144	$	112,956

The following table summarizes the revenue by region based on the shipping address of customers who have contracted to use our products or services for the three and six months ended June 30, 2019 and 2018:

	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
	(in thousands)
United States	$	64,106	$	47,773	$	124,046	$	91,983
All other	14,853		10,668		28,098		20,973
Total revenue	$	78,959	$	58,441	$	152,144	$	112,956

Subscription Revenue

Subscription revenue consists of revenue from our cloud-based subscription, managed services offerings and content subscriptions associated with our software licenses.

• We generate cloud-based subscription revenue primarily from sales of subscriptions to access our cloud platform, together with related support services to our customers. These arrangements do not provide the customer with the right to take possession of our software operating on our cloud platform at any time. Instead, customers are granted continuous access to our cloud platform over the contractual period. Revenue is recognized over time on a ratable basis over the contract term beginning on the date that our service is made available to the customer. Our cloud-based subscription contracts generally have a term of one year, which is billed in advance and non-cancellable.

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• Managed services offerings consist of fees generated when we operate our software and provide our capabilities on behalf of our customers. Revenue is recognized on a ratable basis over the contract term beginning on the date that our service is made available to the customer. Our managed services offerings generally have a term of one year, which is billed in advance and non-cancellable.

• Revenue related to our content subscriptions associated with our software licenses is recognized ratably over the contractual period.

• Some of our customers have the option to purchase additional subscription and support services at a stated price. These options generally do not provide a material right as they are priced at our SSP.

Certain subscription contracts contain service level commitments, which entitle our customers to receive service credits and, in certain cases, refunds, if our services do not meet certain levels. These service credits and refunds represent variable consideration. We have historically not experienced any significant incidents affecting the defined levels of reliability and performance as required by our subscription contracts and accordingly, no estimated refunds have been considered in the allocation of the transaction price.

Term and Perpetual Software Licenses

For our perpetual software licenses where the utility to the customer is dependent on the continued delivery of content subscriptions, the content subscription renewal options result in a material right with respect to the perpetual software license. As a result, the revenue attributable to the perpetual software license is recognized ratably over the customer’s estimated economic life of five years, which represents a longer period of time in comparison to the initial contractual period of maintenance and support. The estimated economic life of five years represents the period which the customer is expected to benefit from the material right. We estimated this period of benefit by taking into consideration several factors, including the terms and conditions of our customer contracts and renewals and the expected useful life of our technology.

For our term software licenses where the utility to the customer is dependent on the continued delivery of content subscriptions, we recognize the license revenue over the contractual term of the arrangement as a material right does not exist.

For our term and perpetual software licenses, which are not dependent on the continued delivery of content subscriptions, the license is considered distinct from the maintenance and support, and we therefore recognize revenue attributable to the license at the time of delivery.

Maintenance and Support

Maintenance and support services are sold with our perpetual and term software licenses. As maintenance and support services are distinct from the perpetual and term software license, revenue attributable to maintenance and support services is recognized ratably over the contractual period.

Professional Services

All of our professional services are considered distinct performance obligations when sold stand alone or with other products. These contracts generally have terms of one year or less. For the majority of these contracts, revenue is recognized over time based upon the proportion of work performed to date.

Other

Other revenue primarily includes revenue from delivery of appliances and other miscellaneous revenue.

Contracts with Multiple Performance Obligations

The majority of our contracts with customers contain multiple performance obligations. For these contracts, we account for individual performance obligations separately if they are considered distinct. The transaction price is allocated to the separate performance obligations on a relative SSP basis. We determine SSP based on our overall pricing objectives, taking into consideration market conditions and other factors, including the geographic locations of our customers and selling method (i.e., partner or direct).

Contract Balances

Contract liabilities consist of deferred revenue and include payments received in advance of performance under the contract. Such amounts are recognized as revenue over the contractual period consistent with the above methodology. For the three months ended June 30, 2019 and 2018, we recognized revenue of $66.6 million and $48.5 million, respectively, and for the six months ended June 30, 2019 and 2018, we recognized $117.2 million and $84.3 million, respectively, that was included in the corresponding

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contract liability balance at the beginning of the periods presented. Deferred revenue that will be realized during the succeeding 12-month period is recorded as current, and the remaining deferred revenue is recorded as non-current.

We receive payments from customers based upon contractual billing schedules. Accounts receivable are recorded when the right to consideration becomes unconditional. Contract assets, or unbilled receivables, include amounts related to our contractual right to consideration for both completed and partially completed performance obligations that may not have been invoiced. As of June 30, 2019 and December 31, 2018, contract assets of $0.5 million and $0.8 million, respectively, are included in prepaid expenses and other current assets in our consolidated balance sheet.

Deferred Contract Acquisition and Fulfillment Costs

We capitalize commission expenses paid to internal sales personnel and partner referral fees that are incremental costs to obtaining customer contracts. These costs are recorded as deferred contract acquisition costs in the consolidated balance sheets. Costs to obtain a contract for a new customer, up-sell or cross-sell are amortized on a straight-line basis over an estimated period of benefit of five years as sales commissions on initial sales are not commensurate with sales commissions on contract renewals. We determined the estimated period of benefit by taking into consideration the contractual term and expected renewals of customer contracts, our technology and other factors, including the fact that commissions paid on renewals are not commensurate with commissions paid on initial sales transactions. We periodically review the carrying amount of deferred contract acquisition costs to determine whether events or changes in circumstances have occurred that could impact the period of benefit. Commissions paid relating to contract renewals are deferred and amortized on a straight-line basis over the related renewal period. Costs to obtain a contract for professional services arrangements are expensed as incurred in accordance with the practical expedient as the contractual period of our professional services arrangements are one year or less.

Amortization expense associated with deferred contract acquisition costs is recorded to sales and marketing expense in our consolidated statements of operations.

We capitalize costs incurred to fulfill our contracts that relate directly to the contract, are expected to generate resources that will be used to satisfy our performance obligations and are expected to be recovered through revenue generated under the contract. Contract fulfillment costs are amortized on a straight-line basis over the estimated period of benefit and recorded as cost of products in our consolidated statement of operations.

The following table summarizes the activity of the deferred contract acquisition and fulfillment costs for the six months ended June 30, 2019 and 2018:

	Six Months Ended June 30,
	2019			2018
	(in thousands)
Beginning balance	$	39,955		$	27,165
Capitalization of contract acquisition and fulfillment costs	10,067			8,921
Amortization of deferred contract acquisition and fulfillment costs	(6,896		)	(4,391		)
Ending balance	$	43,126		$	31,695

Transaction price allocated to the remaining performance obligations

The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied or partially unsatisfied as of June 30, 2019. The estimated revenues do not include unexercised contract renewals.

	Remainder of 2019		2020		2021 and thereafter
	(in thousands)
Subscription revenue	$	96,471	$	64,955	$	14,811
Term and perpetual software licenses	14,819		16,352		13,222
Maintenance and support	15,908		11,237		2,327

The amounts presented in the table above primarily consist of fixed fees, which are typically recognized ratably as the performance obligation is satisfied.

As of June 30, 2019, the estimated revenue expected to be recognized in the future related to professional services is $10.6 million. We will recognize this revenue as the professional services are completed, which is expected to occur within the next 12 months or less.

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Note 3. Business Combination

On April 1, 2019, we acquired NetFort Technologies Limited (NetFort), a provider of end-to-end network traffic visibility and analytics across cloud, virtual and physical platforms for a purchase price of $16.1 million. The $16.1 million purchase price was funded with cash. In the three and six months ended June 30, 2019, we recorded $0.3 million and $0.5 million, respectively, of acquisition related costs in general and administrative expense.

The following table summarizes the preliminary allocation of purchase price to the estimated fair value of the assets acquired and liabilities assumed at the acquisition date (in thousands):

Purchase price	$	16,130
Recognized amount of identifiable assets acquired and liabilities assumed:
Cash and cash equivalents	$	1,523
Other net working capital	325
Deferred revenue	(487		)
Deferred tax liability	(761		)
Intangible asset	6,084
Total identifiable net assets assumed	6,684
Goodwill	9,446
Total purchase price allocation	$	16,130

The fair value of identifiable intangible assets was based on valuations using the income approach. The estimated fair value and useful life of identifiable intangible assets are as follows:

	Amount		Weighted Average Amortization Life (years)
	(in thousands)
Developed technology	$	6,084	5

The excess of the purchase price over the tangible assets acquired, identifiable intangible asset acquired and assumed liabilities was recorded as goodwill. We believe that the amount of goodwill reflects the expected synergistic benefits of being able to leverage the integration of the technology acquired with our existing product offerings and to be able to successfully market and sell these new products and features to our customer base. The goodwill was allocated to our one reporting unit. The acquired goodwill and intangible asset will not be deductible for tax purposes. Accordingly, a $0.8 million deferred tax benefit was recorded resulting from a partial release of our valuation allowance to account for the creation of a deferred tax liability for the developed technology intangible asset acquired.

These preliminary amounts are subject to subsequent adjustment as we obtain additional information to finalize certain components of working capital.

Following the acquisition, certain retained employees and non-employee contractors of NetFort received an aggregate of 123,623 restricted stock units (RSUs), which will vest over a maximum of three years. The vesting of the RSUs are subject to the employee's continued service with us. Accordingly, compensation expense associated with the RSUs will be expensed as incurred in our post-acquisition financial statements.

Proforma results of operations have not been included, as the acquisition of NetFort was not material to our results of operations for any periods presented.

Note 4. Fair Value Measurements

We measure certain financial assets and liabilities at fair value. Fair value is determined based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, as determined by either the principal market or the most advantageous market. Inputs used in the valuation techniques to derive fair values are classified based on a three-level hierarchy, 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 with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all

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significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the asset or liability.

We consider an active market to be one in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis, and we consider an inactive market to be one in which there are infrequent or few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market makers.

The following table presents our financial assets measured and recorded at fair value on a recurring basis using the above input categories:

	As of June 30, 2019
	Level 1		Level 2		Level 3		Total
	(in thousands)
Description:
Assets:
Money market funds	$	108,526	$	—	$	—	$	108,526
U.S. government agencies	45,838		—		—		45,838
Commercial paper	—		17,292		—		17,292
Corporate bonds	—		45,606		—		45,606
Agency bonds	—		21,098		—		21,098
Asset-backed securities	—		7,984		—		7,984
Total assets	$	154,364	$	91,980	$	—	$	246,344