10-Q 1 sail-10q_20180331.htm 10-Q sail-10q_20180331.htm

 

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 March 31, 2018

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 001-38297

 

SailPoint Technologies Holdings, Inc.

(Exact name of Registrant as specified in its Charter)

 

 

Delaware

47-1628077

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

 

 

11305 Four Points Drive, Building 2, Suite 100,

Austin, TX 78726

78726

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (512) 346-2000

 

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 Website, 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, a smaller reporting company, or emerging growth company. See the definition 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

 

 (Do not check if a smaller reporting company)

  

Smaller 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 June 30, 2017, the last business day of the registrant’s most recently completed second fiscal quarter, the registrant’s equity was not listed on a domestic exchange or over-the-counter market.  The registrant’s common stock began trading on the New York Stock Exchange on November 17, 2017.

The registrant had 87,219,160 shares of common stock outstanding as of May 4, 2018.

 

 

 

 


SailPoint Technologies Holdings, Inc.
Table of Contents

 

 

PART I.  FINANCIAL INFORMATION

Page

 

 

Item 1.

Financial Statements (unaudited)

1

 

Condensed Consolidated Balance Sheets as of March 31, 2018 (Unaudited) and December 31, 2017

1

 

Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 2018 and 2017

2

 

Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2018 and 2017

3

 

Notes to Unaudited Condensed Consolidated Financial Statements

4

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

12

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

24

Item 4.

Controls and Procedures

24

 

 

 

PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

25

Item 1A.

Risk Factors

25

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

25

Item 5.

Other Information

26

Item 6.

Exhibits, Financial Statement Schedules

26

 

Signatures

28

 

 

 

i


 

PART I

ITEM 1. Financial Statements

Sailpoint technologies Holding, Inc. and subsidiaries

Condensed Consolidated Balance sheets

 

 

 

As of

 

 

 

March 31, 2018

 

 

December 31, 2017

 

 

 

(In thousands, except share and per share  data)

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

130,859

 

 

$

116,049

 

Restricted cash

 

 

126

 

 

 

78

 

Accounts receivable

 

 

55,997

 

 

 

72,907

 

Prepayments and other current assets

 

 

9,094

 

 

 

10,013

 

Total current assets

 

 

196,076

 

 

 

199,047

 

Property and equipment, net

 

 

3,126

 

 

 

3,018

 

Deferred tax asset - non-current

 

 

264

 

 

 

264

 

Other non-current assets

 

 

3,106

 

 

 

3,542

 

Goodwill

 

 

219,377

 

 

 

219,377

 

Intangible assets, net

 

 

78,979

 

 

 

81,185

 

Total assets

 

$

500,928

 

 

$

506,433

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,872

 

 

$

2,231

 

Accrued expenses and other liabilities

 

 

12,012

 

 

 

22,636

 

Income taxes payable

 

 

1,918

 

 

 

1,688

 

Deferred revenue

 

 

75,883

 

 

 

73,671

 

Total current liabilities

 

 

91,685

 

 

 

100,226

 

Long-term debt

 

 

68,321

 

 

 

68,329

 

Other long-term liabilities

 

 

65

 

 

 

27

 

Deferred revenue non-current

 

 

13,175

 

 

 

9,454

 

Total liabilities

 

 

173,246

 

 

 

178,036

 

Commitments and contingencies (Note 4)

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

 

Common stock, $0.0001 par value, authorized 300,000,000 shares issued and

   outstanding 85,953,041 shares at March 31, 2018 and 84,948,126 shares at

   December 31, 2017

 

 

9

 

 

 

8

 

Preferred stock, $0.0001 par value, authorized 10,000,000 shares, no shares

   issued and outstanding at March 31, 2018 and December 31, 2017

 

 

 

 

 

 

Additional paid in capital

 

 

358,858

 

 

 

353,609

 

Accumulated deficit

 

 

(31,185

)

 

 

(25,220

)

Total stockholders' equity

 

 

327,682

 

 

 

328,397

 

Total liabilities and stockholders’ equity

 

$

500,928

 

 

$

506,433

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

1


 

Sailpoint technologies Holding, Inc. and subsidiaries

Condensed Consolidated STATEMENTS OF OPERATIONS

 

 

 

Three Months Ended

 

 

 

March 31, 2018

 

 

March 31, 2017

 

 

 

(In thousands, except share and per share  data)

 

 

 

(Unaudited)

 

Revenue

 

 

 

 

 

 

 

 

Licenses

 

$

16,987

 

 

$

12,236

 

Subscription

 

 

23,005

 

 

 

14,952

 

Services and other

 

 

9,722

 

 

 

8,278

 

Total revenue

 

 

49,714

 

 

 

35,466

 

Cost of revenue

 

 

 

 

 

 

 

 

Licenses

 

 

1,138

 

 

 

1,087

 

Subscription

 

 

4,658

 

 

 

3,575

 

Services and other

 

 

6,974

 

 

 

5,473

 

Total cost of revenue

 

 

12,770

 

 

 

10,135

 

Gross profit

 

 

36,944

 

 

 

25,331

 

Operating expenses

 

 

 

 

 

 

 

 

Research and development

 

 

9,762

 

 

 

6,927

 

General and administrative

 

 

7,657

 

 

 

3,032

 

Sales and marketing

 

 

23,815

 

 

 

15,173

 

Total operating expenses

 

 

41,234

 

 

 

25,132

 

(Loss) income from operations

 

 

(4,290

)

 

 

199

 

Other expense, net:

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(1,178

)

 

 

(2,657

)

Other, net

 

 

(147

)

 

 

(64

)

Total other expense, net

 

 

(1,325

)

 

 

(2,721

)

Loss before income taxes

 

 

(5,615

)

 

 

(2,522

)

Income tax (expense) benefit

 

 

(352

)

 

 

239

 

Net loss

 

$

(5,967

)

 

$

(2,283

)

Net loss available to common shareholders

 

$

(5,967

)

 

$

(8,453

)

Net loss per share

 

 

 

 

 

 

 

 

Basic

 

$

(0.07

)

 

$

(0.18

)

Diluted

 

$

(0.07

)

 

$

(0.18

)

Weighted average shares outstanding

 

 

 

 

 

 

 

 

Basic

 

 

85,719,240

 

 

 

47,208,477

 

Diluted

 

 

85,719,240

 

 

 

47,208,477

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

2


 

Sailpoint technologies Holding, Inc. and subsidiaries

Condensed Consolidated STATEMENTS OF CASH FLOWS

 

 

 

Three Months Ended

 

 

 

March 31, 2018

 

 

March 31, 2017

 

 

 

(In thousands)

 

 

 

(Unaudited)

 

Operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(5,967

)

 

$

(2,283

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization expense

 

 

2,628

 

 

 

2,476

 

Amortization of loan origination fees

 

 

108

 

 

 

152

 

Gain on disposal of fixed assets

 

 

(4

)

 

 

(8

)

Stock-based compensation expense

 

 

5,139

 

 

 

158

 

Deferred taxes

 

 

 

 

 

(68

)

Changes in operating assets and liabilities, net of acquisition:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

16,910

 

 

 

6,500

 

Prepayments and other current assets

 

 

919

 

 

 

1,058

 

Other non-current assets

 

 

436

 

 

 

(1,355

)

Accounts payable

 

 

(358

)

 

 

711

 

Accrued expenses and other liabilities

 

 

(10,651

)

 

 

(2,283

)

Income taxes payable (receivable)

 

 

230

 

 

 

(313

)

Deferred revenue

 

 

5,932

 

 

 

2,113

 

Net cash provided by operating activities

 

 

15,322

 

 

 

6,858

 

Investing activities

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(530

)

 

 

(382

)

Proceeds from sale of property and equipment

 

 

4

 

 

 

109

 

Net cash used in investing activities

 

 

(526

)

 

 

(273

)

Financing activities

 

 

 

 

 

 

 

 

Repurchase of equity shares

 

 

 

 

 

(267

)

Exercise of stock options

 

 

62

 

 

 

29

 

Net cash provided by (used in) financing activities

 

 

62

 

 

 

(238

)

Increase in cash

 

 

14,858

 

 

 

6,347

 

Cash, cash equivalents and restricted cash, beginning of period

 

 

116,127

 

 

 

18,272

 

Cash, cash equivalents and restricted cash, end of period

 

$

130,985

 

 

$

24,619

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

884

 

 

$

2,513

 

Cash paid for income taxes

 

$

94

 

 

$

73

 

Conversion of prepaid incentive units to common stock (Note 7)

 

$

65

 

 

$

10

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

3


 

Sailpoint technologies Holding, Inc. and subsidiaries

NOTES TO UNAUDITED Condensed Consolidated FINANCIAL STATEMENTS

1. Organization and Description of Business

SailPoint Technologies Holdings, Inc. (“we,” “our,” “the Company” or “SailPoint”) was incorporated in the state of Delaware on August 8, 2014, in preparation for the purchase of SailPoint Technologies, Inc. The purchase (the “Acquisition”) occurred on September 8, 2014. SailPoint Technologies, Inc. was formed July 14, 2004 as a Delaware corporation. The Company designs, develops, and markets identity governance software that helps organizations govern user access to critical systems and data. The Company currently markets its products and services throughout North America, Europe and the Asia Pacific regions.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated interim financial statements have been prepared in accordance with Article 10 of Regulation S-X, “Interim Financial Statements” and the rules and regulations for Form 10-Q of the Securities and Exchange Commission (the “SEC”). Pursuant to those rules and regulations, the Company has condensed or omitted certain information and footnote disclosure it normally includes in its annual consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the balance sheet, statements of operations and the statements of cash flows for the interim periods but are not necessarily indicative of the results of operations to be anticipated for the full year ending December 31, 2018 or any future period. Our unaudited consolidated financial statements have been prepared in a manner consistent with the accounting principles described in our Company’s Annual Report on Form 10-K for the year ended December 31, 2017, which was filed with the SEC on March 19, 2018 (the “Annual Report”). These financial statements and accompanying notes should be read in conjunction with the consolidated financial statements and notes thereto in the Company’s Annual Report. All intercompany accounts and transactions have been eliminated in consolidation.

 

Cash, Cash Equivalents and Restricted Cash

We consider all highly liquid investments with an original maturity of three months or less from date of purchase to be cash equivalents. The Company is required to maintain a small amount of restricted cash to guarantee rent payments in a foreign subsidiary.

 

 

 

As of

 

 

 

March 31, 2018

 

 

December 31, 2017

 

 

 

(In thousands)

 

Cash and cash equivalents per balance sheet

 

$

130,859

 

 

$

116,049

 

Restricted cash per balance sheet

 

 

126

 

 

 

78

 

Cash, cash equivalents and restricted cash per cash flow

 

$

130,985

 

 

$

116,127

 

 

Segment Information and Concentration of Credit and Other Risks

Segment Information

The Company operates as one operating segment. The Company’s chief operating decision maker is its chief executive officer, who reviews financial information presented on a consolidated basis for purposes of making operating decisions, assessing financial performance and allocating resources.

4


 

ASC 280, “Segment Reporting,” establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company manages its business on the basis of one reportable segment, and derives revenues from licensing of software, sale of professional services, maintenance and technical support. The following tables sets forth the Company’s consolidated total revenue by geography:

 

 

 

Three Months Ended

 

 

 

March 31, 2018

 

 

March 31, 2017

 

 

 

(In thousands)

 

United States

 

$

32,698

 

 

$

25,915

 

EMEA (1)

 

 

11,671

 

 

 

5,814

 

Rest of the World (1)

 

 

5,345

 

 

 

3,737

 

Total revenue

 

$

49,714

 

 

$

35,466

 

 

(1)

No single country represented more than 10% of our consolidated revenue.

 

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents and accounts receivable. The Company maintains its cash in bank deposit accounts that, at times, may exceed federally insured limits. There is no concentration of credit risk for customers as no individual entity represented more than 10% of the balance in accounts receivable as of March 31, 2018 and December 31, 2017 or 10% of revenue for three months ended March 31, 2018 and 2017. The Company does not experience concentration of credit risk in foreign countries as no foreign country represents more than 10% of the Company’s condensed consolidated revenues or net assets.

 

Significant Accounting Policies

There have been no significant changes to the Company’s significant accounting policies, which are discussed in Note 2 of “Notes to Consolidated Financial Statements” in the Annual Report.

Recently Issued Accounting Standards Not Yet Adopted

Under the Jumpstart Our Business Startups Act (the “JOBS Act”), emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to take advantage of the longer phase-in periods for the adoption of new or revised financial accounting standards under the JOBS Act until we are no longer an emerging growth company.

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No2014-09, Revenue from Contracts with Customers (Topic 606). This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance, and creates guidance for when revenue should be recognized from the exchange of goods or services. ASU No. 2016-08 was issued in March 2016 to clarify the principal versus agent guidance in this new revenue recognition standard. ASU 2016-10 was issued in April 2016 to clarify the guidance on accounting for licenses of intellectual property and identifying performance obligations in the new revenue recognition standard. ASU 2016-12 was issued in May 2016 to clarify the guidance on transition, collectability, noncash consideration and the presentation of sales and other similar taxes in the new revenue recognition standard. ASU 2016-20 was issued in December 2016 to make technical corrections and improvements on narrow aspects of this guidance. ASU No. 2015-14 was issued in August 2015 to defer the effective date of ASU 2014-09 for one year. The new standard permits adoption either by using (i) a full retrospective approach for all periods presented in the period of adoption or (ii) a modified retrospective approach with the cumulative effect of initially applying the new standard recognized at the date of initial application and providing certain additional disclosures. For public companies, the new standard is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. For all other entities, this standard is effective for annual reporting periods beginning after December 15, 2018. Early adoption is permitted. The Company does not plan to early adopt, and therefore plans to adopt for the annual reporting period beginning after December 15, 2018.

The Company currently plans to adopt using the full retrospective approach; however, a final decision regarding the adoption method has not been made at this time. The Company’s final determination will depend on a number of factors such as the significance of the impact of the new standard on the Company’s financial results, system readiness, including that of software procured from third-party providers, and the Company’s ability to accumulate and analyze the information necessary to assess the impact on prior period financial statements, as necessary.

5


 

The Company is in the initial stages of its evaluation of the impact of the new standard on its accounting policies, and processes. The Company has assigned internal resources in addition to the engagement of third party service providers to assist in the evaluation. While the Company continues to assess all potential impacts under the new standard will have on our condensed consolidated financial statements and related disclosures there may be the potential for significant impacts to the timing of recognition of professional services revenue, and contract acquisition costs, with respect to the amounts that will be capitalized as well as the period of amortization.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This standard requires lessees to recognize a lease liability and a lease asset for all leases, including operating leases, with a term greater than 12 months on its balance sheet. The standard also expands the required quantitative and qualitative disclosures surrounding leases. This standard is effective for annual periods beginning after December 15, 2019 including interim periods within that reporting period. Early adoption is permitted. The Company does not plan to early adopt, and therefore plans to adopt for the annual period beginning after December 15, 2019. This standard will be applied using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Management is currently evaluating the effect of these provisions on the Company’s consolidated financial statements.

In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. This standard requires companies to account for the income tax effects of intercompany transfers of assets other than inventory when the transfer occurs. This guidance is effective for annual periods beginning after December 15, 2018, including interim periods within that reporting period. Early adoption is permitted. The Company does not plan to early adopt and therefore plans to adopt for the annual period beginning after December 15, 2018. Management is currently evaluating the effect of these provisions on the Company’s consolidated financial statements.

In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718). This standard clarifies which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718. An entity is required to account for the effects of a modification unless all of the following conditions are met: (i) the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or value using an alternative measurement method) of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification; (ii) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and (iii) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The new standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted in the first period of the year this guidance is adopted. The Company does not plan to early adopt, and therefore plans to adopt for the annual period beginning after December 15, 2017. Management is currently evaluating the effect of these provisions on the Company’s consolidated financial statements.

In July 2017, the FASB issued ASU No. 2017-11, Earnings Per Share (Topic 260). This standard addresses the complexity of accounting for certain financial instruments with down round features. This guidance is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years beginning after December 15, 2020. Early adoption is permitted. The Company does not plan to early adopt, and therefore plans to adopt for the annual period beginning after December 15, 2020. Management is currently evaluating the effect of these provisions on the Company’s consolidated financial statements.

 

 

3. Goodwill and Intangible Assets

Goodwill

Goodwill represents the excess of the purchase price over the identifiable tangible and intangible assets acquired plus liabilities assumed arising from business combinations.  The carrying amount of goodwill was $219.4 million for the periods ended March 31, 2018 and 2017 as there has been no acquisition activity in these periods. Goodwill and other intangible balances are tested for impairment on an annual basis during the fourth quarter, or sooner if an indicator of impairment occurs. No triggering events have occurred during the three-month period ended March 31, 2018 and 2017 that would indicate a potential impairment of goodwill and other intangible assets.

6


 

Intangible Assets

 

Total cost and amortization of intangible assets comprised of the following:

 

 

 

 

 

As of

 

 

 

Weighted Average

Useful Life

 

March 31, 2018

 

 

December 31,

2017

 

Intangible assets, net

 

(In years)

 

(In thousands)

 

Customer lists

 

15

 

$

42,500

 

 

$

42,500

 

Developed technology

 

9.6

 

 

42,000

 

 

 

42,000

 

Trade names and trademarks

 

17

 

 

24,500

 

 

 

24,500

 

Order backlog

 

1.5

 

 

1,100

 

 

 

1,100

 

Non-competition agreements and related items

 

4.4

 

 

810

 

 

 

810

 

Total intangible assets

 

 

 

 

110,910

 

 

 

110,910

 

Less: Accumulated amortization

 

 

 

 

(31,931

)

 

 

(29,725

)

Total intangible assets, net

 

 

 

$

78,979

 

 

$

81,185

 

 

Amortization expense of intangible assets was $2.2 million for the three months ended March 31, 2018 and March 31, 2017. Amortization expense is included in the condensed consolidated statements of operations for the three months ended March 31, 2018 and 2017, respectively, as follows:

 

 

 

Three months ended

 

 

 

March 31, 2018

 

 

March 31, 2017

 

 

 

(In thousands)

 

Cost of revenue  – license

 

$

1,008

 

 

$

1,008

 

Cost of revenue  – subscription

 

 

96

 

 

 

96

 

Research and development

 

 

34

 

 

 

 

Sales and marketing

 

 

1,068

 

 

 

1,117

 

Total amortization of acquired intangibles

 

$

2,206

 

 

$

2,221

 

 

Periodically, the Company evaluates intangible assets for possible impairment. There were no impairments for intangible assets during the three months ended March 31, 2018 and 2017.

 

4. Commitments and Contingencies

Operating Leases

The Company leases its facilities under non-cancelable operating lease agreements. The majority of these agreements include a renewal option, and/or require the Company to pay taxes, insurance, and maintenance costs, which are not included in the table below. Certain of these facility leases contain predetermined fixed escalations of the minimum rentals, and the Company recognizes expense for these leases on a straight-line basis. The difference between the recognized rental expense and amounts payable under the lease is recorded as deferred rent, which is included in accrued expenses and other liabilities on the accompanying condensed consolidated balance sheets.

 

Rent expense under all operating leases was approximately $0.9 million and $0.5 million for the three months ended March 31, 2018 and 2017, respectively.

Indemnification Arrangements

In the ordinary course of business, the Company enters into contractual arrangements under which it agrees to provide indemnification of varying scope and terms to customers, business partners and other parties with respect to certain matters, including, losses arising out of the breach of such agreements, intellectual property infringement claims made by third parties, and other liabilities with respect to our products and services and business. In these circumstances, payment may be conditional on the other party making a claim pursuant to the procedures specified in a particular contract.

The Company includes service level commitments to our cloud customers warranting certain levels of uptime reliability and performance and permitting those customers to receive credits in the event that we fail to meet those levels. To date, the Company has not incurred any material costs as a result of these commitments and we expect the time between any potential claims and issuance of

7


 

the credits to be short. As a result, we have not accrued any liabilities related to these commitments in our consolidated financial statements.

Litigation Claims and Assessments

The Company is subject to claims and suits that may arise from time to time in the ordinary course of business. In addition, some legal actions, claims and governmental inquiries may be instituted or asserted in the future against us and our subsidiaries. Although the outcome of our legal proceedings cannot be predicted with certainty and no assurances can be provided, based upon current information, we do not believe the liabilities, if any, which may ultimately result from the outcome of such matters, individually or in the aggregate, will have a material adverse impact on our financial statements.

5. Line of Credit and Long-Term Debt

The outstanding balance of the term loan at March 31, 2018 and December 31, 2017 was $70 million. There was no outstanding balance of the revolving line of credit at March 31, 2018 and December 31, 2017. The Company was in compliance with all applicable covenants as of March 31, 2018 and December 31, 2017.

In 2017, the Company amended its existing credit facility in connection with the consummation of its initial public offering. Such amendment required that the Company use a portion of its net proceeds to repay $90.0 million of borrowings outstanding under its term loan facility to reduce the aggregate outstanding principal amount thereof to $70.0 million. This repayment was subject to a prepayment premium of 1.50% approximately $1.4 million, which is recorded as interest expense. As a result of this paydown, the Company incurred a $1.7 million loss on the modification and partial extinguishment of debt which was also recorded as interest expense in the consolidated statements of operations for the years ended December 31, 2017. In October 2017, in connection with its new corporate headquarters lease, the Company executed a standby letter of credit in the amount of $6.0 million.  The term loan and the credit facility both bear interest based on the adjusted LIBOR rate, as defined in the credit agreement, with a 1% floor plus an applicable margin of 4.5%.

The Company has incurred total debt issuance costs of $4.5 million in connection with these loan and security agreements of which $1.4 million relates to the modified agreement as of December 31, 2017. These costs are being amortized to interest expense over the life of the debt on a straight-line basis, which approximates the interest method. Amortization of debt issuance costs for existing loan and security agreement as of March 31, 2018 and March 31, 2017, was approximately $0.1 million and $0.2 million, respectively, and was recorded in interest expense in the accompanying condensed consolidated statements of operations.  As of March 31, 2018, future principal payment for long-term debt, is $68.3 million, net of $1.7 million of unamortized debt issuance costs included in long-term debt. The maturity date on the term loan is August 16, 2021, with principal payment due in full on maturity date, and interest payments due quarterly. The rate prevalent at March 31, 2018 was 5.5% consisting of the 1% floor, plus an applicable margin of 4.5% for the term loan and the credit facility.

 

6. Related Party Transactions

During the three months ended March 31, 2018 and 2017, the Company engaged in ordinary sales transactions of $147,000, and $0 and purchase transactions of $101,000 and $382,000, respectively, with entities affiliated with its controlling entity. At March 31, 2018 and December 31, 2017, the accompanying condensed consolidated balance sheets included accounts payable balances of $400 and $3,400, as well as accounts receivable balances $91,000 and $516,000, respectively, associated with these transactions.

In September 2014, the Company entered into an advisory services agreement (the “Consulting Agreement”) with its controlling entity. The Consulting Agreement requires quarterly payments from September 8, 2014 through December 31, 2018 for business consulting services provided by the controlling entity to the Company. Consulting fees from the Consulting Agreement totaled $313,000 in the three months ended March 31, 2017 and were included in general and administrative expenses in the accompanying condensed consolidated statements of operations. Upon completion of the initial public offering, the Consulting Agreement ceased, and the Company was no longer required to make future payments.

 

7. Stock Option Plans and Stock-Based Compensation

2015 Stock Option Plans

In 2015, the Company adopted (i) the Amended and Restated 2015 Stock Option and Grant Plan and (ii) the 2015 Stock Incentive Plan (together the “2015 Stock Option Plans”) under which it may grant incentive stock options (“ISOs”), nonqualified stock options (“NSOs”), and restricted stock to purchase shares of common stock. The 2015 Stock Option Plans reserve 5,000,000

8


 

shares of common stock for issuance as ISOs, 500,000 shares of restricted stock and 250,000 shares for issuance under the 2015 Stock Incentive Plan. Under the 2015 Stock Option Plans ISOs may not be granted at less than fair market value on the date of the grant and generally vest over a four-year period based on continued service. Certain options are subject to vesting based on certain future performance targets. Options generally expire ten years after the grant date.

At March 31, 2018, 468,956 shares were available for issuance under the Amended and Restated 2015 Stock Option and Grant Plan. At March 31, 2018, 333,999 shares were available for issuance under the 2015 Stock Incentive Plan. The Company currently uses authorized and unissued shares to satisfy share award exercises.

2017 Long Term Incentive Plan

In November 2017, the Company’s board of directors adopted the 2017 Long Term Incentive Plan (the “2017 Plan”). As of December 31, 2017, the Company had reserved 8,856,876 shares of common stock available for issuance under the 2017 Plan to employees, directors, officers and consultants of the Company and its subsidiaries. The number of shares of common stock available for issuance under the 2017 Plan will be increased on each January 1 hereafter by 4,428,438 shares of common stock. Options granted under the 2017 Plan generally vest over four years. Common stock subject to an award that expires or is canceled, forfeited, exchanged, settled in cash or otherwise terminated without delivery of shares, and shares withheld or surrendered to pay the exercise price of, or to satisfy the withholding obligations with respect to an award, will become available for future grants under the 2017 Plan.  At March 31, 2018, 6,482,775 shares were available for issuance under the 2017 Plan.  The Company currently uses authorized and unissued shares to satisfy share award exercises.

In November 2017, the Company’s board of directors adopted the Employee Stock Purchase Plan (the "ESPP"). The ESPP became effective on in November of 2017, after the date our registration statement was declared effective by the SEC.  As of March 31, 2018, the participation in the ESPP is not effective and no shares were purchased.

Options Activity

The fair value for the Company’s stock options granted during the year ended March 31, 2018 and 2017 was estimated at the date of grant using a Black Scholes option-pricing model using the following weighted average assumptions:

 

 

 

March 31, 2018

 

 

March 31, 2017

 

Expected dividend rate

 

0%

 

 

0%

 

Expected volatility

 

41.0%

 

 

49.0%

 

Risk-free interest rate

 

2.63% - 2.73%

 

 

2.02% - 2.11%

 

Expected term (in years)

 

6.25 - 6.25

 

 

5.5 - 6.25

 

 

The following table summarizes option activity under the Plans and related information:

 

 

 

Number

of Options

 

 

Weighted

Average

Exercise

Price

(per share)

 

 

Weighted

Average

Remaining

Contractual

Term

(years)

 

 

Aggregate

Intrinsic

Value

 

Balances at December 31, 2017

 

3,500,075

 

 

$

5.43

 

 

 

8.8

 

 

 

31,784,488

 

Granted

 

34,875

 

 

$

19.02

 

 

 

 

 

 

 

 

 

Exercised

 

 

(26,334

)

 

$

2.36

 

 

 

 

 

 

 

 

 

Forfeited

 

(53,579

)

 

$

2.77

 

 

 

 

 

 

 

 

 

Balances at March 31, 2018

 

3,455,037

 

 

$

5.64

 

 

 

8.6

 

 

 

52,025,934

 

Options vested and expected to vest at March 31, 2018

 

3,455,037

 

 

$

5.64

 

 

 

8.6

 

 

 

52,025,934

 

Options vested and exercisable at March 31, 2018

 

 

1,043,709

 

 

$

2.32

 

 

 

7.6

 

 

 

19,172,966

 

 

The Company expects all outstanding stock options at March 31, 2018 to fully vest. The weighted average grant date fair value per share for the period ended March 31, 2018 and 2017 was $8.42 and $1.56, respectively. Compensation expense relating to stock options was approximately $1.7 million and $158,000 for the three months ended March 31, 2018 and 2017, respectively. The total fair value of shares vested during the three months ended March 31, 2018 and 2017 was approximately $0.4 million and $98,000, respectively.  

9


 

The total unrecognized compensation expense related to non-vested stock options granted is $9.2 million and is expected to be recognized over a weighted average period of 2.71 years as of March 31, 2018.

Incentive Unit Plan

In 2014 and 2015, the Company granted shares of the Company’s common stock (the “incentive units”) to certain members of management pursuant to restricted stock agreements (the “RSAs”).

The incentive units were granted with an exercise price equal to the fair market value on the date of grant, are subject to vesting, and if exercised in advance of vesting were subject to the Company’s right to repurchase. Upon vesting, the incentive units automatically convert to common stock. 50% of incentive units granted to executives vest based on performance meeting or exceeding EBITDA targets, as defined in the RSAs. Incentive units granted to non-executives and the remaining 50% of incentive units granted to executives vest 25% on the first anniversary date of the grant, and ratably over the remaining three years. The graded-vesting attribution method is used by the Company to determine the monthly stock-based compensation expense over the applicable vesting periods. In 2017, the Board of Directors waived the EBITDA criteria associated with the annual tranche of performance vesting stock options resulting in a modification.

 

The Company did not grant any incentive units during the first quarter of 2018. As of March 31, 2018, the aggregate intrinsic value for 1,257,000 non-vested incentive units was $26.0 million, and the total unrecognized compensation related to non-vested incentive units granted was approximately $6.9 million and is expected to be recognized over a weighted-average remaining period of 0.8 years. During the first quarter of 2018, approximately 979,000 units vested. Compensation expense relating to incentive units was approximately $2.1 million and $10,000 for the three months ended March 31, 2018 and 2017, respectively.

Restricted Stock Units

The Company granted 382,427 restricted stock units during the three months ended March 31, 2018. As of March 31, 2018, 1,270,966 units of restricted stock is expected to vest over a weighted average remaining contractual period of 2.1 years with an aggregate intrinsic value of approximately $26.3 million. The total unrecognized compensation related to restricted stock units was $15.4 million as of March 31, 2018 and is expected to be recognized over a weighted average period of 3.57 years. Compensation expense relating to restricted stock units was approximately $1.2 million and $0 for the three months ended March 31, 2018 and 2017, respectively.

 

Stock-based compensation expense, which includes stock options, restricted stock units and incentive units, was recognized as follows:

 

 

 

Three Months Ended

 

 

 

March 31, 2018

 

 

March 31, 2017

 

 

 

(In thousands)

 

Cost of revenue –  subscription

 

$

121

 

 

$

9

 

Cost of revenue –  services and other

 

 

375

 

 

 

18

 

Research and development

 

 

641

 

 

 

30

 

General and administrative

 

 

2,340

 

 

 

30

 

Sales and marketing

 

 

1,662

 

 

 

71

 

Total stock-based compensation

 

$

5,139

 

 

$

158

 

 

8. Income Taxes

Impacts of the U.S. 2017 Tax Cuts and Jobs Act

The U.S. 2017 Tax Cuts and Jobs Act (the “Act”), which was signed into law on December 22, 2017 and effective January 1, 2018, reduces the U.S. federal corporate tax rate from 35% to 21%. There was no net impact to the Company’s provision for income taxes or net deferred taxes due to the Company’s valuation allowance. The decrease in future tax assets via the reduced rate was offset by the decrease in our valuation allowance.

The Act subjects a U.S. shareholder to tax on global intangible low-taxed income (“GILTI”) earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5, Accounting for GILTI, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only. Given the complexity of the GILTI

10


 

provisions, we are still evaluating the effects of the GILTI provisions and have not yet determined our accounting policy. As of March 31, 2018, the Company is not subject to the GILTI provisions due to Section 956 inclusions.

The provision for income taxes for 2018 and 2017 is generated from activity in certain foreign jurisdictions by our consolidated subsidiaries.

The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. During the three months ended March 31, 2018 and 2017 the Company did not record any material interest or penalties.

The Company files tax returns in the U.S. federal jurisdiction, in several state jurisdictions, and in several foreign jurisdictions. The Company is no longer subject to U.S. federal income tax examinations for years before 2013 and is no longer subject to state, local and foreign income tax examinations by tax authorities for years before 2012. The Company is not currently under income tax audit in any jurisdiction.

9. Net loss per share attributable to common shareholders

Basic and diluted net loss per share is computed by dividing net loss attributable to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is calculated using our weighted-average outstanding common shares including the dilutive effect of stock awards. In periods when the Company recognizes a net loss, the Company excludes the impact of outstanding stock awards from the diluted loss per share calculation as their inclusion would have an antidilutive effect.

The following table sets forth the calculation of basic and diluted net loss per share during the periods presented:

 

 

 

Three months ended

 

 

 

March 31, 2018

 

 

March 31, 2017

 

 

 

(In thousands, except share data)

 

Numerator:

 

 

 

 

 

 

 

 

Net loss

 

$

(5,967

)

 

$

(2,283

)

Deemed dividends to preferred stockholders

 

 

 

 

 

(6,170

)

Net loss attributable to common shareholders

 

$

(5,967

)

 

$

(8,453

)

 

 

 

 

 

 

 

 

 

Denominator

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

Basic and diluted

 

 

85,719,240

 

 

 

47,208,477

 

Net loss attributable to common shareholders

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.07

)

 

$

(0.18

)

 

The following weighted average outstanding shares of common stock equivalents were excluded from the computation of the diluted net loss per share attributable to common shareholders for the periods presented because their effect would have been anti-dilutive.  For the period prior to our initial public offering, convertible preferred stock is not included in this computation as it was contingently convertible based upon a future event.

 

 

 

Three months ended

 

 

 

March 31, 2018

 

 

March 31, 2017

 

Convertible preferred stock on an as-if converted basis

 

 

 

 

 

 

 

 

Stock options to purchase common stock

 

 

3,468,458

 

 

 

2,057,211

 

RSUs issued and outstanding

 

 

1,097,668

 

 

 

 

Non-vested incentive units

 

 

1,480,304

 

 

 

3,689,429

 

Total

 

 

6,046,430

 

 

 

5,746,640

 

 

11


 

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 in conjunction with our Unaudited Condensed Consolidated Financial Statements and notes thereto in Part I, Item 1 of this Quarterly Report on Form 10-Q (this “Quarterly Report”) and the Annual Report, including the Consolidated Financial Statements and related notes included therein.  

SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS

This Quarterly Report 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. All statements of historical fact included in this Quarterly Report regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. 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. These forward-looking statements are based on management’s current beliefs, based on currently available information, as to the outcome and timing of future events. The forward-looking statements are contained principally in this Quarterly Report in “Management’s Discussion and Analysis of Financial Condition and Result of Operations” and “Risk Factors”.

 

You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained this Quarterly Report 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. Important factors, some of which are beyond our control, that could cause actual results to differ materially from our historical results or those expressed or implied by these forward-looking statements include the following: our ability to attract and retain customers and our ability to deepen our relationships with existing customers; our expectations regarding our customer growth rate; our ability to maintain successful relationships with our channel partners and further develop strategic relationships; our ability to develop or acquire new solutions, improve our platform and solutions and increase the value of and benefits associated with our platform and solutions; our ability to compete successfully against current and future competitors; our plans to further invest in and grow our business, and our ability to effectively manage our growth and associated investments; our ability to adapt and respond to rapidly changing technology, evolving industry standards, changing regulations and changing customer needs; our ability to maintain and enhance our brand or reputation as an industry leader and innovator; our ability to hire, retain, train and motivate our senior management team and key employees; our ability to successfully enter new markets and manage our international expansion; adverse economic conditions in the United States, Europe or the global economy; significant changes in the contracting or fiscal policies of the public sector; actual or perceived failures by us to comply with privacy policy or legal or regulatory requirements; our ability to maintain third-party licensed software in or with our solutions; and our ability to raise additional capital or generate cash flows necessary to expand our operations and invest in new technologies. These and other important risk factors are described more fully in our reports and other documents filed with the SEC, including under “Risk Factors” in Part I, Item 1A in the Annual Report and “Risk Factors” in Part II, Item 1A 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. 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 relate only to events as of the date hereof. We undertake no obligation to update any forward-looking statements made in this Quarterly Report to reflect events or circumstances after the date of this Quarterly Report 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.

 


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Overview

SailPoint is the leading provider of enterprise identity governance solutions. Our open identity platform provides organizations with critical visibility into who currently has access to which resources, who should have access to those resources, and how that access is being used.

We offer both on-premises software and cloud-based solutions, which empower our customers to efficiently and securely govern the digital identities of employees, contractors, business partners and other users, and manage their constantly changing access rights to enterprise applications and data across hybrid IT environments, whether comprised of on-premises, cloud or mobile applications. We help customers enable their businesses with more agile and innovative IT, enhance their security posture and better meet compliance and regulatory requirements. We believe that our open identity platform is a critical, foundational layer of a modern cyber security strategy that complements and builds upon traditional perimeter- and endpoint-centric security solutions, which on their own are increasingly insufficient to secure organizations, and their applications and data. Our customers include many of the world’s largest and most complex organizations, including commercial enterprises, educational institutions and governments.

We were founded by identity industry veterans to develop a new category of identity management solutions and address emerging identity governance challenges. Since our inception, we have focused on driving innovation in the identity market, with our key milestones including:

 

in 2007, we pioneered identity governance through our release of IdentityIQ, our on-premises identity governance solution;

 

in 2010, we revolutionized provisioning by integrating it with IdentityIQ into a single solution;

 

in 2013, we introduced our cloud-based identity governance solution, IdentityNow;

 

in 2015, we extended identity governance by adding our identity governance for data stored in files solution, SecurityIQ, which manages user access to unstructured data, a rapidly growing area of risk; and

 

in 2017, we further extended identity governance with the introduction, on a limited release basis, of our advanced identity analytics solution, IdentityAI, which is designed to use machine learning technologies to enable rapid detection of security threats before they turn into security breaches.

Our success is principally dependent on our ability to deliver compelling solutions to attract new customers and retain existing customers. Delivering these solutions is challenging because our customers have large, complex IT environments, often rely on both legacy and innovative technologies, and deploy different business models, including on premise and cloud solutions. Rising security threats and evolving regulations and compliance standards for cyber security, data protection, privacy and internal IT controls create new opportunities for our industry and require us to adapt our solutions to be successful. Our ability to continue to maintain our historical growth rates is also challenging because our growth strategy depends in part on our ability to expand our global presence and invest in new vertical markets, while competing against much larger companies with more recognizable brands and financial resources. Although we seek to grow rapidly, we also focus on delivering positive net cash from operations while continuing to invest in our platform and to deliver innovative solutions to our customers. Additionally, our gross margins vary depending on the type of solution we sell, and a shift in the mix of our solutions could affect our performance relative to historical results.

Our Business Model

We deliver an integrated set of solutions that supports all aspects of identity governance, including provisioning, access request, compliance controls, password management and identity governance for data stored in files. Our solutions are built on an open identity platform, which offers connectivity to a variety of security and operational IT applications, extending the reach of our identity governance processes and enabling effective identity governance controls across customer environments.

Our set of solutions currently consists of (i) IdentityIQ, our on-premises identity governance solution, (ii) IdentityNow, our cloud-based, multi-tenant governance suite, which is delivered as a subscription service, and (iii) SecurityIQ, our on-premises identity governance for files solution that secures access to data stored in file servers, collaboration portals, mailboxes and cloud storage systems, and (iv) IdentityAI, our cloud-based advanced identity analytics solution. See the section titled “Business—Products” in Part I, Item 1 of the Annual Report for more information regarding our solutions.

For our IdentityIQ and SecurityIQ solutions, our customers typically purchase a perpetual software license, which includes one year of maintenance. Our maintenance provides software maintenance as well as access to our technical support services during the maintenance term. After the initial maintenance period, customers with perpetual licenses may renew their maintenance agreement for an additional fee. For our cloud-based solutions, IdentityNow and IdentityAI, for a subscription fee, we offer customers access to this

13


 

solution and infrastructure support for the duration of their subscription agreement. Our standard subscription agreement for our IdentityNow solution has a duration of three years.

Pricing for each of our solutions is dependent on the number of digital identities of employees, contractors, business partners and other users that the customer is entitled to govern with the solution. We also package and price our IdentityIQ and IdentityNow solutions into modules. Each module has unique functionalities, and our IdentityIQ and IdentityNow customers are able to purchase one or more modules, depending on their needs. We package and price SecurityIQ, our identity governance for files solution, by target storage systems. Thus, our revenue from any customer is generally determined by the number of identities that the customer is entitled to govern as well as the number of modules (for our IdentityIQ and IdentityNow solutions) or target storage systems (for our SecurityIQ solution) purchased by the customer.

Our go-to-market strategy consists of both direct sales and indirect sales through our partnership network of systems integrators, value-added resellers and adjacent technology vendors. We work closely with systems integrators, many of whom have dedicated SailPoint practices (including Accenture, Deloitte, KPMG and PwC), with some dating back more than seven years, and resellers (including value-added resellers such as Optiv) to identify potential sales opportunities and help us increase our reach, and we frequently cooperate with systems integrators to make joint sales proposals to address our mutual customers’ requirements. We also collaborate with leading access management vendors by adding our identity governance capabilities to their access management services (e.g., Microsoft, Okta and VMware). We do not have any material payment obligations to systems integrators, resellers or our technology partners; nor do they have any material payment obligations to us, except that resellers typically purchase solutions directly from us and resell to customers. See the section titled “Business—Partnerships and Strategic Relationships” in Part I, Item 1 of the Annual Report for more information regarding our partnership network.

In addition to our solutions, we offer professional services to our customers and partners to configure and optimize the use of our solutions as well as training services related to the configuration and operation of our platform. Most of our professional services activity is in support of our partners, who perform a significant majority of all initial and follow-on implementation work for our customers. Most of our consulting services are priced on a time and materials basis; our training services are provided through multiple pricing models, including on a per-person basis (for courses provided at our headquarters and on-site at our customers’ offices) and a flat-rate basis (for our e-learning course).

We devote significant resources to acquire new customers, in both existing and new markets, in order to grow our customer base. In addition, we focus on three distinct opportunities to increase sales to existing customers: (i) expand the number of digital identities; (ii) up-sell additional modules or target storage systems, as applicable, within a single solution; and (iii) cross-sell additional solutions.

Key Factors Affecting Our Performance

Our historical financial performance has been, and we expect our financial performance in the future to be, driven by our ability to:

 

Add New Customers Within Existing Markets. Based on data from S&P Global Market Intelligence, we believe that we have penetrated less than 2% of the approximately 65,000 companies in the countries where we have customers today and that as a result, there is significant opportunity to expand our footprint in our existing markets through new, greenfield installations and displacement of our competitors’ legacy solutions. To do so, we plan to grow our sales organization, increase and leverage our indirect channel partners and enhance our marketing efforts.

 

Generate Additional Sales to Existing Customers. We believe that our existing customer base provides us with a significant opportunity to drive incremental sales. In most cases, our customers initially purchase a subset of the modules or solutions we offer based on their immediate need. We focus on generating more revenue from the modules that our customers have already purchased from us as our customers grow the number of identities our solutions manage and govern and as our customers deploy our solutions across other business units or geographies within their organizations. Over time, we also identify up-selling and cross-selling opportunities and seek to sell additional modules and solutions to our existing customers.

 

Retain Customers. We believe that our ability to retain our customers is an important component of our growth strategy and reflects the long-term value of our customer relationships. For example, when we add a new customer, we generate new license revenue. If the customer renews, we generate incremental maintenance revenue. As we add new IdentityIQ customers, our high renewal rates result in incremental maintenance revenue. Our key strategies to maintain our high renewal rates include focusing on the quality and reliability of our solutions, customer service and support to ensure our customers receive value from our solutions, providing consistent software upgrades and having dedicated customer success teams.

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Expand into New Markets. We expect to continue to invest significantly in sales, marketing and customer service, as well as our indirect channel partner network, to expand into new geographies and vertical markets. We believe that our market opportunity is large and growing and that the global cyber security market represents a significant growth opportunity for us.

Key Business Metrics

In addition to our GAAP financial information, we monitor the following key metrics to help us measure and evaluate the effectiveness of our operations:

 

 

 

Three Months Ended

 

 

 

March 31, 2018

 

 

March 31, 2017

 

Number of customers

 

 

984

 

 

 

725

 

Subscription revenue as a percentage of total revenue

 

 

46

%

 

 

42

%

Adjusted EBITDA (in thousands)

 

$

3,342

 

 

 

3,152

 

 

 

Number of Customers. We believe that the size of our customer base is an indicator of our market penetration and that our net customer additions are an indicator of the growth of our business and our future revenue opportunity. We define a customer as a distinct entity, division or business unit of an organization that receives support or has the right to use our cloud-based solutions as of the specified measurement date.

 

Subscription Revenue as a Percentage of Total Revenue. Subscription revenue is a portion of our total revenue and is derived from (i) IdentityNow, our cloud-based solution where customers enter into SaaS subscription agreements with us, and (ii) IdentityIQ and SecurityIQ maintenance and support agreements, but not licenses. As we generally sell our solutions on a per-identity basis, our subscription revenue for any customer is primarily determined by the number of identities that the customer is entitled to govern as part of a SaaS subscription, and the ongoing price paid per-identity under a maintenance and support agreement or SaaS subscription. Thus, we consider our subscription revenue to be the recurring portion of our revenue base and believe that its continued growth as a percentage of total revenue will lead to a more predictable revenue model and increase our visibility to future period total revenues. Because we recognize our subscription revenue ratably over the duration of those agreements, a portion of the revenue we recognize each period is derived from agreements we entered into in prior periods. In contrast, we typically recognize license revenue upon entering into the applicable license, the timing of which is less predictable and may cause significant fluctuations in our quarterly financial results.

 

Adjusted EBITDA. We believe that adjusted EBITDA is a measure widely used by securities analysts and investors to evaluate the financial performance of our company and other companies. We believe that adjusted EBITDA is an important measure for evaluating our performance because it facilitates comparisons of our core operating results from period to period by removing the impact of our capital structure (net interest income or expense from our outstanding debt), asset base (depreciation and amortization), tax consequences, purchase accounting adjustments, acquisition and sponsor related costs and stock-based compensation. In addition, we base certain of our forward-looking estimates and budgets on adjusted EBITDA. See the section titled “Non-GAAP Financial Measures” for more information regarding adjusted EBITDA, including the limitations of using adjusted EBITDA as a financial measure, and for a reconciliation of adjusted EBITDA to net loss, the most directly comparable financial measure calculated in accordance with GAAP.

Non-GAAP Financial Measures

In addition to our financial information presented in accordance with GAAP, we use adjusted EBITDA, a non-GAAP financial measure, to clarify and enhance our understanding of past performance and future prospects. Generally, a non-GAAP financial measure is a numerical measure of a company’s operating performance, financial position or cash flow that includes or excludes amounts that are included or excluded from the most directly comparable measure calculated and presented in accordance with GAAP.

Our non-GAAP financial measure of adjusted EBITDA may not provide information that is directly comparable to that provided by other companies in our industry because they may calculate adjusted EBITDA differently. In addition, there are limitations in using non-GAAP financial measures, such as adjusted EBITDA, because they are not prepared in accordance with GAAP and exclude expenses that may have a material impact on our reported financial results. In particular, interest expense, which is excluded from adjusted EBITDA, has been and will continue to be a significant recurring expense in our business for the foreseeable future. The presentation of non-GAAP financial information is not meant to be considered in isolation or as a substitute for the directly comparable financial measures prepared in accordance with GAAP. We urge you to review the reconciliations of our adjusted EBITDA to net loss, the comparable GAAP financial measure, included below, and not to rely on any single financial measure to evaluate our business.

15


 

We calculate adjusted EBITDA as net income (loss) adjusted to exclude income taxes, interest expense, net, depreciation and amortization, purchase accounting adjustments, acquisition and sponsor related costs and stock-based compensation expense.

We believe that adjusted EBITDA is a measure widely used by securities analysts and investors to evaluate the financial performance of our company and other companies. We believe that adjusted EBITDA is an important measure for evaluating our performance because it facilitates comparisons of our core operating results from period to period by removing the impact of our capital structure (net interest income or expense from our outstanding debt), asset base (depreciation and amortization), tax consequences, purchase accounting adjustments, acquisition and sponsor related costs and stock-based compensation. In addition, we base certain of our forward-looking estimates and budgets on adjusted EBITDA.

The following table reflects the reconciliation of adjusted EBITDA to net loss calculated in accordance with GAAP:

 

 

 

March 31, 2018

 

 

March 31, 2017

 

 

 

(In thousands)

 

Net loss

 

$

(5,967

)

 

$

(2,283

)

Stock-based compensation

 

 

5,139

 

 

 

158

 

Amortization

 

 

2,206

 

 

 

2,221

 

Depreciation

 

 

421

 

 

 

255

 

Purchase price accounting adjustment (1)

 

 

13

 

 

 

55

 

Acquisition and sponsor related costs

 

 

 

 

 

328

 

Interest expense

 

 

1,178

 

 

 

2,657

 

Income tax expense (benefit)

 

 

352

 

 

 

(239

)

Adjusted EBITDA

 

$

3,342

 

 

$

3,152

 

 

(1)

Purchase accounting adjustment related to the fair value write down of deferred revenue from the Acquisition.

 

Components of Results of Operations

See the section titled “Components of Results of Operations” in Part II, Item 7 of the Annual Report, for information regarding the components of our results of operations.

16


 

Results of Operations

The following table sets forth our statement of operations for the periods presented:

 

 

 

Three Months Ended

 

 

 

March 31, 2018

 

 

March 31, 2017

 

 

 

(In thousands)

 

Revenue:

 

 

 

 

 

 

 

 

Licenses

 

$

16,987

 

 

$

12,236

 

Subscription

 

 

23,005

 

 

 

14,952

 

Services and other

 

 

9,722

 

 

 

8,278

 

Total revenue

 

 

49,714

 

 

 

35,466

 

Cost of revenue:

 

 

 

 

 

 

 

 

Licenses

 

 

1,138

 

 

 

1,087

 

Subscription (1)

 

 

4,658

 

 

 

3,575

 

Services and other (1)

 

 

6,974

 

 

 

5,473

 

Total cost of revenue

 

 

12,770

 

 

 

10,135

 

Gross profit

 

 

36,944

 

 

 

25,331

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development (1)

 

 

9,762

 

 

 

6,927

 

General and administrative (1)

 

 

7,657

 

 

 

3,032

 

Sales and marketing (1)

 

 

23,815

 

 

 

15,173

 

Total operating expenses

 

 

41,234

 

 

 

25,132

 

(Loss)  income from operations

 

 

(4,290

)

 

 

199

 

Other expense, net:

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(1,178

)

 

 

(2,657

)

Other, net

 

 

(147

)

 

 

(64

)

Total other expense, net

 

 

(1,325

)

 

 

(2,721

)

Loss before income taxes

 

 

(5,615

)

 

 

(2,522

)

Income tax (expense) benefit

 

 

(352

)

 

 

239

 

Net loss

 

$

(5,967

)

 

$

(2,283

)

 

(1)

Includes stock-based compensation expense as follows:

 

 

 

Three Months Ended

 

 

 

March 31, 2018

 

 

March 31, 2017

 

 

 

(In thousands)

 

Cost of revenue –  subscription

 

$

121

 

 

$

9

 

Cost of revenue –  services and other

 

 

375

 

 

 

18

 

Research and development

 

 

641

 

 

 

30

 

General and administrative

 

 

2,340

 

 

 

30

 

Sales and marketing

 

 

1,662

 

 

 

71

 

Total stock-based compensation

 

$

5,139

 

 

$

158

 

 

17


 

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

 

 

 

March 31, 2018

 

 

March 31, 2017

 

Revenue:

 

 

 

 

 

 

 

 

Licenses

 

 

34

%

 

 

35

%

Subscription

 

 

46

 

 

 

42

 

Services and other

 

 

20

 

 

 

23

 

Total revenue

 

 

100

 

 

 

100

 

Cost of revenue:

 

 

 

 

 

 

 

 

Licenses

 

 

2

 

 

 

3

 

Subscription

 

 

10

 

 

 

10

 

Services and other

 

 

14

 

 

 

15

 

Total cost of revenue

 

 

26

 

 

 

28

 

Gross profit

 

 

74

 

 

 

72

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

20

 

 

 

19

 

General and administrative

 

 

15

 

 

 

9

 

Sales and marketing

 

 

48

 

 

 

43

 

Total operating expenses

 

 

83

 

 

 

71

 

(Loss)  income from operations

 

 

(9

)

 

 

1

 

Other expense, net:

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(2

)

 

 

(8