QUALYS, INC. 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This Quarterly Report on Form 10-Q, including this Management’s Discussion and Analysis of Financial Condition and Results of Operations, should be read in conjunction with (1) our unaudited condensed consolidated financial statements and the related notes included elsewhere in this report, and (2) the audited consolidated financial statements and the related notes and section titled "Management’s Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the Securities and Exchange Commission, or SEC, on February 21, 2020. In addition to historical information, this Quarterly Report on Form 10-Q contains “forward-looking” statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, it is possible to identify forward-looking statements because they contain words such as “anticipates,” “believes,” “contemplates,” “continue,” “could,” “estimates,” “expects,” “future,” “intends,” “likely,” “may,” “plans,” “potential,” “predicts,” “projects,” “seek,” “should,” “target,” or “will,” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about: • our financial performance, including our revenues, costs, expenditures, growth rates, operating expenses and ability to generate positive cash flow to fund our operations and sustain profitability; • anticipated technology trends, such as the use of cloud solutions; • our ability to adapt to changing market conditions; • the impact of the ongoing COVID-19 pandemic and related public health measures on our business; • economic and financial conditions, including volatility in foreign exchange rates; • our ability to diversify our sources of revenues, including selling additional solutions to our existing customers and our ability to pursue new customers; • the effects of increased competition in our market; • our ability to innovate and enhance our cloud solutions and platform and introduce new solutions; • our ability to effectively manage our growth; • our anticipated investments in sales and marketing, our infrastructure, new solutions, and research and development, and acquisitions; • maintaining and expanding our relationships with channel partners; • our ability to maintain, protect and enhance our brand and intellectual property; • costs associated with defending intellectual property infringement and other claims; • our ability to attract and retain qualified employees and key personnel, including sales and marketing personnel; • our ability to successfully enter new markets and manage our international expansion; • our expectations, assumptions and conclusions related to our provision for income taxes, our deferred tax assets and our effective tax rate; and • other factors discussed in this Quarterly Report on Form 10-Q in the sections titled “ Risk Factors” and “ Management ' s Discussion and Analysis of Financial Condition and Results of Operations. ” We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. The results, events and circumstances reflected in these forward-looking statements are subject to risks, uncertainties, assumptions, and other factors including those described in Part II, Item 1A (Risk Factors) of this Quarterly Report and those discussed in other documents we file with the SEC. 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 used herein. We cannot provide assurance 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. Overview We are a pioneer and leading provider of a cloud-based platform delivering IT, security and compliance solutions that enable organizations to identify security risks to their IT infrastructures, help protect their IT systems and a pplications from ever-evolving cyber-attacks and achieve compliance with internal policies and external 27 Table of Contents regulations. Our cloud solutions address the growing security and compliance complexities and risks that are amplified by the dissolving boundaries between internal and external IT infrastructures and web environments, the rapid adoption of cloud computing, containers and serverless IT models, and the proliferation of geographically dispersed IT assets. Our integrated suite of IT, security and compliance solutions delivered on our Qualys Cloud Platform enables our customers to identify and manage their IT assets, collect and analyze large amounts of IT security data, discover and prioritize vulnerabilities, recommend remediation actions and verify the implementati on of such actions. Organizations use our integrated suite of solutions delivered on our Qualys Cloud Platform to cost-effectively obtain a unified view of their IT asset inventory as well as security and compliance posture across globally distributed IT infrastructures as our solution offers a single platform for information technology, information security, application security, endpoint, developer security and cloud teams. We were founded and incorporated in December 1999 with a vision of transforming the way organizations secure and protect their IT infrastructure and applications and initially launched our first cloud solution, Vulnerability Management (VM), in 2000. As VM gained acceptance, we introduced additional solutions to help customers manage increasing IT, security and compliance requirements. Today, the suite of solutions that we offer on our cloud platform and refer to as the Qualys Cloud Apps helps our customers protect a range of assets across on-premises, endpoints, cloud, containers, and mobile environments. These Cloud Apps address and include: • IT Security: Vulnerability Management (VM), Vulnerability Management, Detection, and Response (VMDR); Threat Protection (TP), Continuous Monitoring (CM), Patch Management (PM), Indication of Compromise (IOC); • Compliance Monitoring: Policy Compliance (PC), PCI Compliance (PCI), File Integrity Monitoring (FIM), Security Configuration Assessment (SCA), Security Assessment Questionnaire (SAQ), Out of-Band Configuration Assessment (OCA); • Web Application Security: Web Application Scanning (WAS), Web Application Firewall (WAF); • Global IT Asset Management: Asset Inventory (AI), CMDB Sync (SYN), Certificate Inventory (CRI); and, • Cloud/Container Security: Cloud Inventory (CI), Cloud Security Assessment (CSA), Container Security (CS). Our VM solutions (including VM, VMDR, CM, TP, Cloud Agent for VM , CS, allocated scanner revenue and Qualys Private Cloud Platform) have provided a substantial majority of our revenues to date, representing 72% and 73% of our revenues for the six months ended June 30, 2020 and 2019, respectively. We provide our solutions through a software-as-a-service model, primarily with renewable annual subscriptions. These subscriptions require customers to pay a fee in order to access each of our cloud solutions. We generally invoice our customers for the entire subscription amount at the start of the subscription term, and the invoiced amounts are treated as deferred revenues and are recognized ratably over the term of each subscription. We continue to experience significant revenue growth from our existing customers as they renew and purchase additional subscriptions . We market and sell our solutions to enterprises, government entities and small and medium-sized businesses across a broad range of industries, including education, financial services, government, healthcare, insurance, manufacturing, media, retail, technology and utilities. In each of the six months ended June 30, 2020 and 2019, approximately 64% of our revenues were derived from customers in the United States based on our customers' billing addresses. We sell our solutions to enterprises and government entities primarily through our field sales force and to small and medium-sized businesses through our inside sales force. We generate a significant portion of sales through our channel partners, including managed 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 28 Table of Contents 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 outbreak, we are unable to accurately predict the full impact that COVID-19 will have due to numerous uncertainties, including the duration of the outbreak, actions that may be taken by governmental authorities and the impact to the business 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. Key Components of Results of Operations Revenues We derive revenues from the sale of subscriptions to our IT, security and compliance solutions, which are delivered on our cloud platform. Subscriptions to our solutions allow customers to access our cloud-based IT, security and compliance solutions through a unified, web-based interface. Customers generally enter into one-year renewable subscriptions. The subscription fee entitles the customer to an unlimited number of scans for a specified number of devices or web applications and, if requested by a customer as part of their subscription, a specified number of physical or virtual scanner appliances. Our physical and virtual scanner appliances are requested by certain customers as part of their subscriptions in order to scan IT infrastructures within their firewalls and do not function without, and are not sold separately from, subscriptions for our solutions. In some limited cases, we also provide certain computer equipment used to extend our Qualys Cloud Platform into our customers' private cloud environment. Customers are required to return physical scanner appliances and computer equipment if they do not renew their subscript ions. We typically invoice our customers for the entire subscription amount at the start of the subscription term. Invoiced amounts are reflected on our condensed consolidated balance sheets as accounts receivable or as cash when collected, and as deferred revenues until earned and recognized ratably over the subscription period. Accordingly, deferred revenues represent the amount billed to customers that has not yet been earned or recognized as revenues, pursuant to subscriptions entered into in current and prior periods. Cost of Revenues Cost of revenues consists primarily of personnel expenses, comprised of salaries, benefits, amortization of capitalized internal-use software, 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 and 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, amortization of third-party technology licensing 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 operations, which will increase the cost of revenues in absolute dollars. Operating Expenses Research and Development Research and development expenses consist primarily of personnel expenses, comprised of salaries, benefits, performance-based compensation and stock-based compensation, for our research and development teams. Other expenses include third-party contractor fees, software and license fees, amortization of intangibles related to acquisitions and overhead allocations. We capitalize certain research and development costs related to new products' internal-use software development efforts. Capitalized costs include salaries, benefits, and stock-based compensation charges for employees that are directly involved in developing new products for our cloud security platform during the application development stage. Capitalized costs related to internally developed software under development are treated as construction in progress until the program, feature or functionality is ready for its intended use, at which time amortization commences. We expect to continue to devote substantial 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. 29 Table of Contents Sales and Marketing Sales and marketing expenses consist primarily of personnel expenses, comprised of salaries, benefits, sales commissions, performance-based compensation and stock-based compensation for our worldwide sales and marketing teams. Other expenses include marketing and promotional events, lead-generation marketing programs, public relations, travel, software licenses and overhead allocations. Sales commissions related to new business and upsells are capitalized as an asset. We amortize the capitalized commission cost as a selling expense on a straight-line basis over a period of five years. We expense sales commissions related to contract renewals. Our new sales personnel are typically not immediately productive, and the resulting increase in sales and marketing expenses we incur when we add new personnel may not result in increased revenues if these new sales personnel fail to become productive. 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. General and Administrative General and administrative expenses consist primarily of personnel expenses, comprised of salaries, benefits, performance-based compensation and stock-based compensation for our executive, finance and accounting, IT, legal and human resources teams, as well as professional services, fees, software licenses and overhead allocations. We expect that general and administrative expenses will increase in absolute dollars, as we continue to add personnel and incur professional services to support our growth and compliance with legal requirements. Other Income (Expense), Net Our other income (expense), net consists primarily of interest and investment income from our short-term and long-term marketable securities; foreign exchange gains and losses, the majority of which result from fluctuations between the U.S. Dollar and the Euro, British Pound and Indian Rupee; and gains and losses from disposal of property and equipment. Provision for Income Taxes We are subject to federal, state and foreign income taxes for jurisdictions in which we operate, and we use estimates in determining our provision for these income taxes and deferred tax assets. Earnings from our non-U.S. activities are subject to income taxes in the local countries at rates which were generally similar to the U.S. statutory tax rate. Our provision for income taxes for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items, if any, that arise during the period. Each quarter, we update our estimate of the annual effective tax rate, and if the estimated annual effective tax rate changes, we make a cumulative adjustment in such period. Our effective tax rate differs from the U.S. statutory rate of 21% primarily due to non-deductible stock-based compensation expense, state taxes, and the benefit of U.S. federal income tax credits and foreign-derived intangible income deduction. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the tax impact of timing differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using statutory tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period when the statutory rate change is enacted into law. We assess the likelihood that deferred tax assets will be realized, and we recognize a valuation allowance if it is more likely than not that some portion of the deferred tax assets will not be recognized. This assessment requires judgment as to the likelihood and amounts of future taxable income. 30 Table of Contents Results of Operations The following table sets forth selected condensed consolidated statements of operations data for each of the periods presented as a percentage of revenues. Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 Revenues 100 % 100 % 100 % 100 % Cost of revenues 21 22 21 23 Gross profit 79 78 79 77 Operating expenses: Research and development 20 22 21 22 Sales and marketing 18 22 19 22 General and administrative 12 13 13 13 Total operating expenses 50 57 53 57 Income from operations 29 21 26 20 Other income, net 2 3 2 3 Income before income taxes 31 24 28 23 Provision for income taxes 1 3 2 3 Net income 30 % 21 % 26 % 20 % Comparison of Three and Six Months Ended June 30, 2020 and 2019 Revenues Three Months Ended June 30, Change Six Months Ended June 30, Change 2020 2019 $ % 2020 2019 $ % (in thousands, except percentages) Revenues $ 88,830 $ 78,929 $ 9,901 12.5 % $ 175,093 $ 154,272 $ 20,821 13.5 % Revenues increased $9.9 million for the three months ended June 30, 2020 compared to the three months ended June 30, 2019, due to an increase in the purchase of subscriptions from existing customers and new customer subscriptions entered into after June 30, 2019 . Of the total increase of $9.9 million, $6.3 million was from customers in the United States and the remaining $3.6 million was from customers in foreign countries. Revenues increased $20.8 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019, due to an increase in the purchase of subscriptions from existing customers and new customer subscriptions entered into after June 30, 2019. Of the total increase of $20.8 million, $12.6 million was from customers in the United States and the remaining $8.2 million was from customers in foreign countries. We expect revenue growth from existing and new customers to continue. The growth in revenues reflects the continued demand for our solutions. Cost of Revenues Three Months Ended June 30, Change Six Months Ended June 30, Change 2020 2019 $ % 2020 2019 $ % (in thousands, except percentages) Cost of revenues $ 18,891 $ 17,537 $ 1,354 7.7 % $ 37,386 $ 35,246 $ 2,140 6.1 % 31 Table of Contents Cost of revenues increased $1.4 million for the three months ended June 30, 2020 compared to the three months ended June 30, 2019. The increase was primarily due to an increase in licenses and software services of $0.5 million, an increase in data center costs of $0.3 million to meet growing demand, an increase in personnel expenses of $0.3 million due to our continued business growth and a $0.3 million increase in allocation of overhead costs to the cost of revenue department related to increased leasing expenses for our new office in India. Cost of revenues increased $2.1 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019. The increase was primarily due to an increase in licenses and software services of $0.9 million, an increase in data center costs of $0.8 million and an increase in equipment repair and maintenance expense of $0.6 million. Research and Development Expenses Three Months Ended June 30, Change Six Months Ended June 30, Change 2020 2019 $ % 2020 2019 $ % (in thousands, except percentages) Research and development $ 18,058 $ 17,695 $ 363 2.1 % $ 36,041 $ 33,532 $ 2,509 7.5 % Research and development expenses increased $0.4 million for the three months ended June 30, 2020 compared to the three months ended June 30, 2019, primarily due to a $0.7 million increase in allocation of overhead costs to the research and development department mainly caused by an increase in leasing expenses for our new office in India, an increase in stock-based compensation expense of $0.6 million driven by additional employees hired to support the growth of our business and an increase in depreciation and amortization expenses of $0.2 million as a result of increased purchase of computer equipment. These increases were partially offset by a decrease in acquisition-related expense of $1.1 million. Research and development expenses increased $2.5 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019, primarily due to an increase in stock-based compensation expense of $1.7 million driven by the headcount increase to support the growth of our business, an increase in allocation of overhead costs to the research and development department of $1.5 million mainly caused by an increase in leasing expenses for our new office in India and an increase in depreciation and amortization expenses as a result of increased purchase of computer equipment of $0.4 million. These increases were partially offset by a decrease in acquisition-related expense of $1.2 million. Sales and Marketing Expenses Three Months Ended June 30, Change Six Months Ended June 30, Change 2020 2019 $ % 2020 2019 $ % (in thousands, except percentages) Sales and marketing $ 15,783 $ 17,165 $ (1,382) (8.1) % $ 34,013 $ 34,480 $ (467) (1.4) % Sales and marketing expenses decreased $1.4 million for the three months ended June 30, 2020 compared to the three months ended June 30, 2019, primarily due to a decrease in trade show costs of $1.3 million driven by rescheduling or cancellation of events or changing to online events and a decrease in travel related expenses of $1.0 million due to the COVID-19 pandemic, partially offset by an increase in commission expense of $0.6 million and an increase in stock-based compensation expense of $0.5 million due to additional employees hired to support the growth of our business. Sales and marketing expenses decreased $0.5 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019, primarily due to a decrease in trade show costs of $1.0 million driven by rescheduling or cancellation of events or changing to online events, a decrease in travel related expenses of $0.8 million and a decrease in customer acquisition costs of $0.2 million. These decreases were partially offset by an increase in stock-based compensation expense of $0.9 million and an increase in personnel costs of $0.5 million, driven by additional employees hired to support the growth of our business. 32 Table of Contents General and Administrative Expenses Three Months Ended June 30, Change Six Months Ended June 30, Change 2020 2019 $ % 2020 2019 $ % (in thousands, except percentages) General and administrative $ 10,590 $ 10,424 $ 166 1.6 % $ 21,714 $ 20,855 $ 859 4.1 % General and administrative expenses increased $0.2 million for the three months ended June 30, 2020 compared to the three months ended June 30, 2019, primarily due to an increase in legal fees of $0.3 million and $0.3 million increase in personnel costs due to additional employees hired to support the growth of our business, partially offset by a decrease in miscellaneous expense of $0.3 million. General and administrative expenses increased by $0.9 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019, primarily due to an increase in legal fees of $0.7 million and an increase in personnel costs of $0.5 million driven by an increase in headcount, partially offset by a decrease in miscellaneous expense of $0.3 million. Total Other Income, Net Three Months Ended June 30, Change Six Months Ended June 30, Change 2020 2019 $ % 2020 2019 $ % (in thousands, except percentages) Total other income, net $ 1,586 $ 2,401 $ (815) (33.9) % $ 3,372 $ 4,187 $ (815) (19.5) % T otal other income, net decreased by $0.8 million for each of the three and six months ended June 30, 2020 compared to the same periods ended June 30, 2019, primarily due to a decrease in interest income and accretion of discount from our marketable securities portfolio. Provision for Income Taxes Three Months Ended June 30, Change Six Months Ended June 30, Change 2020 2019 $ % 2020 2019 $ % (in thousands, except percentages) Provision for income taxes $ 775 $ 2,277 $ (1,502) (66.0) % $ 4,298 $ 4,848 $ (550) (11) % Effective tax rate 2.9 % 12.3 % 8.7 % 14.1 % We recorded an income tax provision of $0.8 million and $2.3 million for the three months ended June 30, 2020 and 2019, respectively, and $4.3 million and $4.8 million for the six months ended June 30, 2020 and 2019, respectively. The decreases in income tax provision for the three and six months ended June 30, 2020 compared to the same periods ended June 30, 2019 were primarily due to higher excess tax benefits from stock-based compensation in the current period. Key Non-GAAP Metric In addition to measures of financial performance presented in our condensed 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. Adjusted EBITDA We monitor Adjusted EBITDA, a non-GAAP financial measure, to analyze our financial results and believe that it is useful to investors, as a supplement to U.S. GAAP measures, in evaluating our ongoing operational performance and enhancing an overall understanding of our past financial performance. We believe that Adjusted EBITDA helps illustrate underlying trends in our business that could otherwise be masked by the effect of the income or expenses that we exclude in Adjusted EBITDA. Furthermore, we use this measure to establish budgets and operational goals for managing our business and evaluating our performance. We also believe that Adjusted 33 Table of Contents EBITDA provides an additional tool for investors to use in comparing our recurring core business operating results over multiple periods with other companies in our industry. Adjusted EBITDA should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with U.S. GAAP. We calculate Adjusted EBITDA as net income before (1) other (income) expense, net, which includes interest income, interest expense and other income and expense, (2) provision for (benefit from) income taxes, (3) depreciation of property and equipment, (4) amortization of intangible assets, (5) stock-based compensation, (6) non-recurring expenses and (7) cash acquisition-related expense that do not reflect ongoing costs of operating the business. Adjusted EBITDA has limitations as an analytical tool and should not be considered in isolation from or as a substitute for the measures presented in accordance with U.S. GAAP. Some of these limitations are: • Adjusted EBITDA does not reflect certain cash and non-cash charges that are recurring; • Adjusted EBITDA does not reflect income tax payments that reduce cash available to us; • Adjusted EBITDA excludes depreciation and amortization of property and equipment and, although these are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future; and • Other companies, including companies in our industry, may calculate Adjusted EBITDA differently or not at all, which reduces its usefulness as a comparative measure. Because of these limitations, Adjusted EBITDA should be considered alongside other financial performance measures, including revenues, net income, cash flows from operating activities and our financial results presented in accordance with U.S. GAAP. Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 (in thousands, except percentages) Adjusted EBITDA $ 42,838 $ 33,376 $ 81,033 $ 64,001 Percentage of revenues 48 % 42 % 46 % 41 % The following unaudited table presents the reconciliation of net income to Adjusted EBITDA for the three and six months ended June 30, 2020 and 2019: Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 (in thousands) Net income $ 26,319 $ 16,232 $ 45,013 $ 29,498 Depreciation and amortization of property and equipment 6,366 6,354 12,593 12,769 Amortization of intangible assets 1,520 1,520 3,040 3,040 Provision for income taxes 775 2,277 4,298 4,848 Stock-based compensation 9,444 8,335 19,441 16,780 Other income, net (1,586) (2,401) (3,372) (4,187) Acquisition-related expenses (1) (2) (3) — 1,059 20 1,253 Adjusted EBITDA $ 42,838 $ 33,376 $ 81,033 $ 64,001 (1) For six months ended June 30, 2020, includes $0.02 million of compensation related to acquisitions in 2019 and 2018. (2) For three months ended June 30, 2019, includes $0.1 million, $0.9 million and $0.04 million of compensation related to acquisitions in 2019, 2018 and 2017, respectively. (3) For six months ended June 30, 2019, includes $0.5 million, $2.1 million and $0.1 million of compensation related to acquisitions in 2019, 2018 and 2017, respectively, offset by $1.4 million of reversals of previous obligations. Liquidity and Capital Resources At June 30, 2020 , our principal source of liquidity was cash, cash equivalents, and marketable securities of $445.3 million, including $29.3 million held outside of the United States. We do not anticipate that we will need 34 Table of Contents funds generated from foreign operations to fund our domestic operations. However, if we repatriate these funds, we could be subject to foreign withholding taxes. We generated positive cash flows from operations during each of the six months ended June 30, 2020 and 2019. We believe our existing cash, cash equivalents, marketable securities, and cash from operations will be sufficient to fund our operations for at least the next twelve months. 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. We may also seek to invest in or acquire complementary businesses or technologies. While the COVID-19 pandemic has not had a material adverse financial impact on our operations to date, the future impact of the pandemic cannot be predicted with certainty and may increase our costs of capital and otherwise adversely affect our business, result of operations, financial condition and liquidity. Cash Flows The following summary of cash flows for the periods indicated has been derived from our condensed consolidated financial statements included elsewhere in this report: Six Months Ended June 30, 2020 2019 (in thousands) Cash provided by operating activities $ 81,649 $ 81,275 Cash used in investing activities $ (10,371) $ (7,547) Cash used in financing activities $ (44,928) $ (23,373) Operating Activities For the six months ended June 30, 2020, cash flows from operating activities of $81.6 million primarily resulted from our net income of approximately $45.0 million, as adjusted for non-cash items including stock-based compensation of $19.4 million and depreciation and amortization expense of $15.6 million. Net working capital changes were not material during the six months ended June 30, 2020. For the six months ended June 30, 2019, cash flows from operating activities of $81.3 million primarily resulted from our net income of approximately $29.5 million, as adjusted for non-cash items including stock-based compensation of $16.8 million and depreciation and amortization expense of $15.8 million, and cash flows from working capital of $16.9 million mainly attributable to the continued growth in our deferred revenues and the timing of customer payments. Investing Activities For the six months ended June 30, 2020 , cash used in investing activities of $10.4 million was mainly attributable to $11.6 million of cash used for capital expenditures, including computer equipment and leasehold improvements to support our growth and development, slightly offset by an increase of $1.2 million from sales and maturities of marketable securities, net of purchases. For the six months ended June 30, 2019, cash used in investing activities of $7.5 million was mainly attributable to $14.1 million of cash used for capital expenditures, including computer hardware and software for our data centers to support our growth and development and the purchase of physical scanner appliances and computer hardware provided to certain customers as part of their subscriptions, and $1.9 million cash paid in connection with our acquisition of the assets of Adya and acquisition-related holdback payment. These decreases were partially offset by $8.4 million cash obtained from sales and maturities of marketable securities, net of purchases. Financing Activities For the six months ended June 30, 2020 , cash used in financing activities of $44.9 million was attributable to share repurchases of $54.2 million and the payment of employee payroll taxes related to the net share settlement of equity awards of $11.1 million, which were partially offset by the proceeds from the exercise of stock options of $20.4 million. 35 Table of Contents For the six months ended June 30, 2019, cash used in financing activities of $23.4 million was attributable to share repurchases of $24.1 million, the payment of employee payroll taxes related to the net share settlement of equity awards of $7.4 million, and principal payments under finance lease obligations of $0.8 million. These decreases were partially offset by the proceeds from the exercise of stock options of $9.0 million. C ontractual Obligation and Commitments We presented our contractual obligations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019. Our contractual obligations consist of operating leases, purchase commitments, and other contractual obligations. During the six months ended June 30, 2020, we recorded lease liabilities of approximately $7.0 million related to leasing of new data center space. There have been no material changes to these obligations outside the ordinary course of business during the six months ended June 30, 2020 as compared to the contractual obligations disclosed in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K for the year ended December 31, 2019. Off-Balance Sheet Arrangements During the periods presented, we did not have, nor do we currently have, any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities. Recent Accounting Pronouncements See Note 1 to the unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for a discussion of recent accounting pronouncements. Critical Accounting Policies and Estimates Our condensed consolidated financial statements are prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions. We believe that of our significant accounting policies, which are described in the notes to our consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the SEC on February 21, 2020, the accounting policies related to revenue recognition, leases, derivative instruments, income taxes and stock-based compensation involve the greatest degree of judgment and complexity and have the greatest potential impact on our consolidated financial statements. A critical accounting policy is one that is material to the presentation of our consolidated financial statements and requires us to make difficult, subjective or complex judgments for uncertain matters that could have a material effect on our financial condition and results of operations. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of operations. 36 Table of Contents