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Item 7. Management’s Discussion and Analysis

2023-02-23 compared with 2022-02-22 · 52 added, 43 removed, 167 unchanged (36% of the section changed)

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You should read the following discussion in conjunction with our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K.

In addition to historical information, this discussion contains forward-looking statements that involve risks and uncertainties that could cause our actual results to differ materially from our expectations, as discussed in "Forward-Looking Statements" in Part I of this Annual Report on Form 10-K.

You should carefully review and consider the information regarding our financial condition and results of operations set forth under Part I-Item 7 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on February 22, 2022, for an understanding of our results of operations and liquidity discussions and analysis comparing fiscal year 2021 to fiscal year 2020, which information is hereby incorporated by reference. In addition to historical information, this discussion contains forward-looking statements that involve risks and uncertainties that could cause our actual results to differ materially from our expectations, as discussed in "Forward-Looking Statements" in Part I of this Annual Report on Form 10-K.

Factors that could cause such differences include, but are not limited to, those described in the section titled "Risk Factors" and elsewhere in this Annual Report on Form 10-K.

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Vulnerability Management (VM),  

Vulnerability Management, Detection and Response (VMDR), Threat Protection (TP), Continuous Monitoring (CM), Patch Management (PM), Multi-Vector Endpoint Detection and Response (EDR), Certificate Assessment (CRA), SaaS Detection and Response (SaaSDR), Secure Enterprise Mobility (SEM), Custom Assessment and Remediation (CAR), Context Extended Detection and Response (XDR), Network Detection and Response (NDR);

Policy Compliance (PC), Security Configuration Assessment (SCA), PCI Compliance (PCI), File Integrity Monitoring (FIM), Security Assessment Questionnaire (SAQ), Out of-Band Configuration Assessment (OCA);

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Asset Management:

Global Asset View (GAV), Cybersecurity Asset Management (CSAM), Certificate Inventory (CRI);

Global AssetView (GAV), Cybersecurity Asset Management (CSAM), Certificate Inventory (CRI);

Cloud/Container Security:

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We generate a significant portion of sales through our channel partners, including managed security service providers, value-added resellers and consulting firms in the United States and internationally.

Impacts of COVID-19

In March 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic.

As a result of COVID-19, we have modified certain aspects of our business, including restricting employee travel, requiring employees to work from home, and canceling certain events and meetings, among other modifications.

We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our employees, customers, partners, suppliers and stockholders.

While we have not incurred significant disruptions from the COVID-19 pandemic, we are unable to accurately predict the full impact that the pandemic will have due to numerous uncertainties, including the availability and acceptance of COVID-19 vaccines as well as the effectiveness of the vaccines to new variants of the disease, future actions that may be taken by governmental authorities and the impact of the pandemic on the businesses of our customers and partners.

We will continue to evaluate the nature and extent of the impact to our business, financial position, results of operations and cash flows.

Impacts of Current Macroeconomic Environment

The uncertainty surrounding macroeconomic factors in the U.S.

and globally characterized by COVID-19, the supply chain environment, inflationary pressure, rising interest rates, labor shortages, significant volatility of global markets and geopolitical conflicts have had and could in the future have a material adverse effect on our long-term business and could lead to further economic disruption and expose us to greater risk as our current and potential customers may reduce or eliminate their overall spending on IT security. We will continue to evaluate the nature and extent of the impact to our business, financial position, results of operations and cash flows.

Key Components of Results of Operations

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Cost of Revenues

Cost of revenues consists primarily of personnel expenses, comprised of salaries, benefits, performance-based compensation and stock-based compensation, for employees who operate our data centers and provide support services to our customers.

Other expenses include depreciation of data center equipment, physical scanner appliances and computer hardware provided to certain customers as part of their subscriptions, expenses related to the use of third-party data centers and cloud infrastructures, amortization of software and license fees, amortization of intangibles related to acquisitions, maintenance support, fees paid to contractors who supplement or support our operations center personnel and overhead allocations.

We expect to continue to make capital investments to expand and support our data center and cloud infrastructure operations, which will increase the cost of revenues in absolute dollars.

Cost of revenues consists primarily of personnel expenses, comprised of salaries, benefits, performance-based compensation and stock-based compensation, for employees who operate our shared cloud platforms and provide support services to our customers.

Other expenses include depreciation of shared cloud platform equipment, physical scanner appliances and computer hardware provided to certain customers as part of their subscriptions, expenses related to the use of third-party shared cloud platforms and cloud infrastructures, amortization of software and license fees, amortization of intangibles related to acquisitions, maintenance support, fees paid to contractors who supplement or support our operations center personnel and overhead allocations.

We expect to continue to make capital investments to expand and support our shared cloud platform and cloud infrastructure operations, which will increase the cost of revenues in absolute dollars.

Operating Expenses

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Other expenses include third-party contractor fees, software and license fees, amortization of intangibles related to acquisitions and overhead allocations.

We expect to continue to devote resources to research and development in an effort to continuously improve our existing solutions as well as develop new solutions and capabilities and expect that research and development expenses will increase in absolute dollars.

Sales and Marketing

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The timing of our hiring of sales personnel, or the participation in new marketing events or programs, and the rate at which these generate incremental revenues, may affect our future operating results.

We expect to continue to significantly invest in additional sales personnel worldwide and also in more marketing programs to support new solutions on our platform, which will increase sales and marketing expenses in absolute dollars.

We expect to continue to invest in additional sales personnel worldwide and also in more marketing programs to support new solutions on our platform, which will increase sales and marketing expenses in absolute dollars.

General and Administrative

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(in thousands, except percentages)

Revenues increased by $48.2 million in 2021 compared to 2020, due to an increase in IT Security, Compliance, Web Application Security, Asset Management and Cloud and Container Security subscriptions.

The revenue growth was primarily from an increase in renewal and expansion business in 2021 compared to 2020.

Of the total increase of $48.2 million, $20.3 million was from customers in the United States and the remaining $27.9 million was from customers in foreign countries.

Revenues increased by $78.6 million in 2022 compared to 2021, driven by increased demand for our subscription services by our end customers. Of the total increase of $78.6 million in revenue from 2021 to 2022, 80% was from revenues from customers existing at or prior to December 31, 2021, and the remaining 20% was from new customers added in 2022.

Of the total increase of $78.6 million, 51% was from customers in the United States and the remaining 49% was from customers in foreign countries.

In 2022, 58% of total revenue was direct and 42% of total revenue was through partners.

Of the total increase of $48.2 million, $30.4 million was direct and $17.8 million was from partners.

Of the total increase of $78.6 million, 53% was direct and the remaining 47% was from partners.

With our strong market position driving further demand for our solutions, we expect revenue growth from new and existing customers to continue.

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Cost of revenues increased by $13.3 million in 2022 compared to 2021, 

due to an increase in personnel costs of $6.3 million driven by additional employees hired to support the growth of our business, an increase in data center and cloud costs of $2.0 million to meet growing demand and an increase in depreciation and amortization expense of $1.5 million as more computer equipment was placed in service.

due to an increase in personnel costs of $9.5 million driven by additional employees hired to support the growth of our business, an increase in shared cloud platform and cloud costs of $2.0 million to meet growing demand and an increase in software license cost of $1.8 million.

Research and Development Expenses

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increased  by 

$8.7 million in 2021 compared to 2020 , due to an increase in personnel costs of $5.5 million primarily driven by additional employees hired to support the growth of our business, an increase in software costs of $1.0 million, an increase in professional services fees of $0.9 million, an increase in data center and cloud costs of $0.8 million for our ongoing research and development efforts and an increase in depreciation and amortization expense of $0.7 million as more computer equipment was placed in service.

$19.9 million in 2022 compared to 2021 , due to an increase in personnel costs of $18.3 million primarily driven by additional employees hired to support the growth of our business, an increase in software license cost of $1.0 million and an increase in travel and entertainment expense of $0.6 million due to easing of COVID-19 related travel restrictions.

Sales and Marketing Expenses

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increased  by 

$8.5  million in 2021 compared to 2020 , due to an increase in commissions of $3.4 million driven by higher revenues, an increase in personnel costs of $2.8 million driven by additional employees hired to support the growth of our business, an increase in travel and trade show related costs of $1.1 million associated with the easing of COVID-19 related travel restrictions and an increase in license and subscription costs of $0.8 million.

$20.7  million in 2022 compared to 2021 , due to an increase in personnel costs of $9.9 million driven by additional employees hired to support the growth of our business, an increase in trade show and other advertising related costs of $5.7 million, an increase of consulting expense of $2.3 million, an increase of travel and entertainment expense of $1.8 million 

associated with the easing of COVID-19 related travel restrictions and an increase in software license cost of $1.0 million. 

General and Administrative Expenses

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General and administrative  expenses 

increased  by 

$29.7 million in 2021 compared to 2020 , due to an increase in stock-based compensation expense of $28.7 million primarily driven by accelerated vesting relating to the resignation of our former chief executive officer and an increase in personnel costs of $1.6 million driven by additional employees hired to support the growth of our business.

decreased  by 

$18.3 million in 2022 compared to 2021 , due to a decrease in stock-based compensation expense of $27.3 million related to accelerated vesting of our former chief executive officer's grants upon termination due to disability in 2021, offset by an increase in personnel costs of $3.8 million driven by additional employees hired to support the growth of our business, an increase in software license cost of $1.0 million, an increase in consulting expense of $1.9 million, an increase in legal accrual of $1.5 million and an increase of travel and entertainment expense of $0.8 million associated with the easing of COVID-19 related travel restrictions.  

Total other income, net

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Total other income, net  

decreased  by 

$3.7 million in 2021 compared to 2020 , due to a decrease in interest income of $3.1 million driven by lower yield and an increase in foreign exchange loss of $0.6 million.

increased  by 

$1.4 million in 2022 compared to 2021 , due to an increase in interest income of $2.9 million driven by continued interest rate increase in 2022, offset by an increase in foreign exchange loss of $1.5 million.

Income tax provision

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Income tax provision

Income tax provision increased by $8.0 million in 2021 compared to 2020, due to a reduction in excess tax benefits from stock-based compensation and an increase in income after permanent tax adjustments related to the former CEO’s accelerated stock-based compensation.

Key Non-GAAP Metric

In addition to measures of financial performance presented in our consolidated financial statements, we monitor the non-GAAP key metric set forth below to help us evaluate growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts and assess operational efficiencies.

Income tax provision increased by $7.3 million in 2022 compared to 2021, primarily due to an increase in pre-tax income and the effects of a tax law change related to mandatory capitalization of research and development expenses starting January 1, 2022, offset by an increase in excess tax benefits arising from stock-based compensation.

Key Operating and Non-GAAP Financial Performance Metrics

In addition to measures of financial performance presented in our consolidated financial statements, we monitor the key metrics set forth below to help us evaluate growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts and assess operational efficiencies.

Net Dollar Expansion Rate

We evaluate our ability to retain and grow existing customers by assessing our net dollar expansion rate on a last twelve months, or LTM, basis.

This metric is used to appropriately manage resources and customer retention and expansion.

We calculate the net dollar expansion rate on a foreign exchange neutral basis by dividing a numerator by a denominator, each defined as follows:

To calculate our net dollar expansion rate as of the end of a reporting period, we first determine the annual recurring revenue, or ARR, from all active subscriptions as of the last day of the same reporting period in the prior year.

This represents recurring payments that we expect to receive in the next 12-month period from the cohort of customers that existed on the last day of the same reporting period in the prior year.

We measure the ARR for that same cohort of customers representing all active subscriptions as of the end of the reporting period, using the same foreign exchange rate from the prior year.

Our net dollar expansion rates were 109% and 108% for the years ended December 31, 2022 and 2021, respectively.

Adjusted EBITDA

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(in thousands)

Net income as a percentage of revenues

Depreciation and amortization of property and equipment

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Adjusted EBITDA

Percentage of revenues

Adjusted EBITDA as a percentage of revenues

Liquidity and Capital Resources

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Cash provided by operating activities

Cash used in investing activities

Cash provided by (used in) investing activities

Cash used in financing activities

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In 2022 , 

we generated $169.6 million of cash from our net income, as adjusted for non-cash items mainly related to stock-based compensation expense, depreciation and amortization expense and deferred taxes, as compared to $169.4 million in 2020.

In addition, we also generated $31.0 million of cash from working capital change in 2021, of which $37.4 million was related to net increase in deferred revenue and accounts receivable as a result of our continued growth in billing and collection, partially offset by higher prepaid income taxes of $6.9 million.

In 2020, we generated $10.7 million of cash from working capital change, which was also mainly related to deferred revenue and accounts receivable due to continued growth in billing and collection.

we generated $177.2 million of cash from our net income, as adjusted for non-cash items mainly related to stock-based compensation expense, depreciation and amortization expense and deferred taxes, as compared to $169.6 million in 2021.

In addition, we also generated $21.7 million of cash from working capital change in 2022, of which $11.8 million was related to net increase in deferred revenue and accounts receivable as a result of our continued growth in billing and collection, and $9.9 million was due to lower prepaid expenses and an increase in payables and accrued liabilities in line with our business.

In 2021, we generated $31.0 million of cash from working capital change, of which $37.4 million was related to net increase in deferred revenue and accounts receivable as a result of our continued growth in billing and collection, partially offset by higher prepaid income taxes of $6.9 million. 

 Net cash taxes paid, excluding prepaid income taxes, during 2022 were approximately $20.0 million higher compared to 2021, primarily due to the new tax law requiring mandatory capitalization and amortization of research and development expenses effective January 1, 2022. Previously, these expenses could be deducted in the year incurred.

The near term increase in cash tax will be offset by a decrease in cash taxes in future years when the capitalized expenses are amortized for tax purposes.  

Investing Activities

In 2021, we used $4.5 million of cash in marketable securities investment, $24.4 million of cash in capital expenditures mainly related to computer equipment to support our growth and development and $1.1 million of cash to acquire certain technology assets, as compared to $49.8 million of cash used in marketable securities investment, $29.6 million of cash used in capital expenditures and $1.5 million of cash used for acquisition of technology assets in 2020.

In 2022, we generated $169.0 million of cash in marketable securities investment, used $15.4 million of cash in capital expenditures mainly related to computer equipment to support our growth and development and $8.6 million of cash to acquire certain technology assets, as compared to $4.5 million of cash used in marketable securities investment, $24.4 million of cash used in capital expenditures and $1.1 million of cash used for acquisition of technology assets in 2021.

Financing Activities

In 2021, we used $130.0 million of cash for share repurchase and $27.8 million of cash in payment of employee withholding taxes upon vesting of restricted stock units and received $50.0 million of proceeds from employee exercise of stock options, as compared to $126.7 million of cash used for share repurchase, $20.2 million of cash used in payment of employee withholding taxes upon vesting of restricted stock units and $34.5 million of cash received from employee exercise of stock options in 2020.

Net cash used in financing activities are expected to be higher in 2022 due to expected higher volume of share repurchase and lower cash receipt from stock option exercise, mainly due to the resignation of our former CEO.

In 2022, we used $317.3 million of cash for share repurchase and $17.6 million of cash in payment of employee withholding taxes upon vesting of restricted stock units and received $24.5 million of proceeds from employee exercise of stock options, as compared to $130.0 million of cash used for share repurchase, $27.8 million of cash used in payment of employee withholding taxes upon vesting of restricted stock units and $50.0 million of cash received from employee exercise of stock options in 2021.

Net cash used in financing activities are expected to be lower in 2023 due to expected lower volume of share repurchase.

We believe our existing cash and cash equivalents, marketable securities and our expected cash flow generated from operations will be sufficient to fund our operations for the next twelve months and beyond.

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Our material cash requirements mainly include the following contractual and other obligations:

Our operating lease obligations to make payments under our non-cancelable lease agreements for our facilities and data centers.

Our operating lease obligations to make payments under our non-cancelable lease agreements for our facilities and shared cloud platforms.

We had fixed operating lease payment obligations of $46.4 million as of December 31, 2022, with $14.9 million expected to be paid within the next 12 months.

Cash outflow for capital expenditures in 2022 is expected to be in a range of $25.0 million to $30.0 million.

Our future capital requirements will depend on many factors, including our rate of revenue growth, the expansion of our sales and marketing activities, the timing, type and extent of our spending on research and development efforts, international expansion and investment in data centers and cloud infrastructures.

Cash outflow for capital expenditures in 2023 is expected to be in a range of $18.0 million to $25.0 million.

We may also seek to invest in or acquire complementary businesses or technologies.

Other non-cancelable purchase obligations related to cloud infrastructures and other service providers totaled $77.1 million, of which $25.6 million is expected to be paid with in the next 12 months.

We expect to continue to use cash to repurchase shares in 2022 under our share repurchase program authorized by our board of directors on February 5, 2018.

We expect to continue to use cash to repurchase shares in 2023 under our share repurchase program authorized by our board of directors on February 5, 2018.

As of December 31, 2022, our board of directors had authorized an aggregate amount of $900.0 million for repurchases under our share repurchase program, of which approximately $154.5 million remained available.

Shares will be repurchased from time to time on the open market in accordance with Rule 10b-18 of the Exchange Act of 1934, including pursuant to a pre-set trading plan adopted in accordance with Rule 10b5-1 under the Exchange Act.

On February 9, 2023 ,  we announced that its Board of Directors authorized the repurchase of an additional $100.0 million under our share repurchase program, increasing the total amount of authorized repurchase to $1.0 billion.

Critical Accounting Estimates

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Significant assumptions, judgments and estimates are involved in determining our provision for (benefit from) income taxes, our deferred tax assets and liabilities, and any valuation allowance to be recorded against our deferred tax assets.

Our judgments, assumptions and estimates relating to the current provision for income taxes include the geographic mix and amount of income (loss), our interpretation of current tax laws, and possible outcomes of current and future audits conducted by foreign and domestic tax authorities.

Our judgments, assumptions and estimates relating to the current provision for income taxes include the geographic mix and amount of income (loss), expectations of future income, our interpretation of current tax laws, our business, and possible outcomes of current and future audits conducted by foreign and domestic tax authorities.

Our judgments also include anticipating the tax positions we will record in the financial statements before preparing and filing the tax returns.

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We reevaluate our income tax positions on a quarterly basis to consider factors such as changes in facts or circumstances, changes in tax laws, effectively settled issues under audit, the potential for interest and penalties, and new audit activity.

Such a change in recognition or measurement would result in recognition of a tax benefit or an additional charge to the tax provision.

Such a change in recognition or measurement would result in recognition of a tax benefit or an additional charge to the tax provision that could be material in the future.

Stock-Based Compensation

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The assumptions used in calculating the fair value of employee stock options and estimating the probability of achievement of performance metrics represent management’s best estimates, which require significant judgment and involve inherent uncertainties.

While not material to the current year, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future.

If factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis