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Transcript of Alteryx, Inc.d18rn0p25nwr6d.cloudfront.net/CIK-0001689923/9bd67b63-565f-40f8-b… · Table of...
Table of Contents
UNITED STATESSECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
or☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-38034
Alteryx, Inc.(Exact name of registrant as specified in its charter)
Delaware 90-0673106
(State or other jurisdiction ofincorporation or organization)
(I.R.S. EmployerIdentification No.)
3345 Michelson Drive, Suite 400, Irvine, California 92612(Address of principal executive offices) (Zip Code)
(888) 836-4274(Registrant’s telephone number, including area code)
Not Applicable(Former name, former address and former fiscal year, if changed since last report)
Indicatebycheckmarkwhethertheregistrant(1)hasfiledallreportsrequiredtobefiledbySection13or15(d)oftheSecuritiesExchangeActof1934duringthepreceding12months(orforsuchshorterperiodthattheregistrantwasrequiredtofilesuchreports),and(2)hasbeensubjecttosuchfilingrequirementsforthepast90days.Yes☒No☐
IndicatebycheckmarkwhethertheregistranthassubmittedelectronicallyandpostedonitscorporateWebsite,ifany,everyInteractiveDataFilerequiredtobesubmittedandpostedpursuanttoRule405ofRegulationS-T(§232.405ofthischapter)duringthepreceding12months(orforsuchshorterperiodthattheregistrantwasrequiredtosubmitandpostsuchfiles).Yes☒No☐
Indicatebycheckmarkwhethertheregistrantisalargeacceleratedfiler,anacceleratedfiler,anon-acceleratedfiler,smallerreportingcompany,oranemerginggrowthcompany.Seethedefinitionsof“largeacceleratedfiler,”“acceleratedfiler,”“smallerreportingcompany,”and“emerginggrowthcompany”inRule12b-2oftheExchangeAct.Largeacceleratedfiler ☐ Acceleratedfiler ☐
Non-acceleratedfiler ☒(Donotcheckifasmallerreportingcompany) Smallerreportingcompany ☐
Emerginggrowthcompany ☒
Ifanemerginggrowthcompany,indicatebycheckmarkiftheregistranthaselectednottousetheextendedtransitionperiodforcomplyingwithanyneworrevisedfinancialaccountingstandardsprovidedpursuanttoSection13(a)oftheExchangeAct.☐
Indicatebycheckmarkwhethertheregistrantisashellcompany(asdefinedinRule12b-2oftheExchangeAct).Yes☐No☒
Indicatethenumberofsharesoutstandingofeachoftheissuer’sclassesofcommonstock,asofthelatestpracticabledate.
OnNovember3,2017,therewere23,921,917sharesoftheregistrant’sClassAcommonstockoutstandingand35,244,315sharesoftheregistrant’sClassBcommonstockoutstanding.
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Alteryx,Inc.QuarterlyReportonForm10-Q
FortheQuarterlyPeriodEndedSeptember30,2017TABLEOFCONTENTS
Page NumberPartI: FinancialInformation 4
Item1.CondensedConsolidatedFinancialStatements(unaudited) 4
A.CondensedConsolidatedStatementsofOperationsandComprehensiveLossforthethreeandninemonthsended
September30,2017and2016 4
B.CondensedConsolidatedBalanceSheetsasofSeptember30,2017andDecember31,2016 5
C.CondensedConsolidatedStatementsofRedeemableConvertiblePreferredStockandStockholders’Equity(Deficit)forthe
ninemonthsendedSeptember30,2017 6
D.CondensedConsolidatedStatementsofCashFlowsfortheninemonthsendedSeptember30,2017and2016 7
E.NotestoCondensedConsolidatedFinancialStatements 9
Item2.Management’sDiscussionandAnalysisofFinancialConditionandResultsofOperations 23
Item3.QuantitativeandQualitativeDisclosuresAboutMarketRisk 33
Item4.ControlsandProcedures 33
PartII: OtherInformation 34
Item1.LegalProceedings 34
Item1A.RiskFactors 34
Item2.UnregisteredSalesofEquitySecuritiesandUseofProceeds 62
Item6.Exhibits 63
Signatures 64
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
ThisQuarterlyReportonForm10-Qincludes“forward-lookingstatements”withinthemeaningofthefederalsecuritieslaws.AllstatementscontainedinthisQuarterlyReportonForm10-Qotherthanstatementsofhistoricalfact,includingstatementsregardingourfutureresultsofoperationsandfinancialposition,ourbusinessstrategyandplans,andourobjectivesforfutureoperations,areforward-lookingstatements.Insomecases,forward-lookingstatementscanbeidentifiedbytheuseofterminologysuchas“believe,”“may,”“will,”“intend,”“expect,”“plan,”“anticipate,”“estimate,”“potential,”or“continue,”orothercomparableterminology.Forward-lookingstatementscontainedinthisQuarterlyReportonForm10-Qinclude,butarenotlimitedto,statementsaboutourexpectationsregarding:
• trendsinrevenue,costofrevenue,andgrossmargin;
• ourinvestmentsincloudinfrastructureandthecostofthird-partydatacenterhostingfees;
• trendsinoperatingexpenses,includingresearchanddevelopmentexpense,salesandmarketingexpense,andgeneralandadministrativeexpense,andexpectationsregardingtheseexpensesasapercentageofrevenue;
• maintainingafullvaluationallowancefordomesticnetdeferredtaxassets;
• cashandcashequivalentsandshort-terminvestmentsandanypositivecashflowsfromoperationsbeingsufficienttosupportourworkingcapitalandcapitalexpenditurerequirementsforatleastthenext12months;and
• otherstatementsregardingourfutureoperations,financialcondition,andprospectsandbusinessstrategies.
Althoughwebelievethattheexpectationsreflectedintheforward-lookingstatementscontainedhereinarereasonable,theseexpectationsoranyoftheforward-lookingstatementscouldprovetobeincorrect,andactualresultscoulddiffermateriallyfromthoseprojectedorassumedintheforward-lookingstatements.Ourfuturefinancialconditionandresultsofoperations,aswellasanyforward-lookingstatements,aresubjecttorisksanduncertainties,including,butnotlimitedto,thefactorssetforthinthisQuarterlyReportonForm10-QunderPartII,Item1A.RiskFactors.Moreover,weoperateinaverycompetitiveandrapidlychangingenvironment.Newrisksemergefromtimetotime.Itisnotpossibleforustopredictallrisks,norcanweassesstheimpactofallfactorsonourbusinessortheextenttowhichanyfactor,orcombinationoffactors,maycauseactualresultstodiffermateriallyfromthosecontainedinanyforward-lookingstatementswemaymake.Inlightoftheserisks,uncertainties,andassumptions,theforward-lookingstatementsmadeinthisQuarterlyReportonForm10-Qmaynotoccurandactualresultscoulddiffermateriallyandadverselyfromthoseanticipatedorimpliedintheforward-lookingstatements.
Allforward-lookingstatementsandreasonswhyresultsmaydifferincludedinthisQuarterlyReportonForm10-QaremadeasofthedateofthefilingofthisQuarterlyReportonForm10-Q,andweassumenoobligationtoupdateanysuchforward-lookingstatementsorreasonswhyactualresultsmaydiffer.ThefollowingdiscussionshouldbereadinconjunctionwithourcondensedconsolidatedfinancialstatementsandnotestheretoappearinginPartI,Item1ofthisQuarterlyReportonForm10-Q.
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PART I: FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (unaudited).
Alteryx, Inc.Condensed Consolidated Statements of Operations and Comprehensive Loss
(inthousands,exceptpersharedata)(unaudited)
Three Months Ended September 30,
Nine Months Ended September 30,
2017 2016 2017 2016 Revenue $34,155 $ 22,462 $ 93,019 $ 60,828Costofrevenue 5,425 4,062 15,545 11,727
Grossprofit 28,730 18,400 77,474 49,101Operatingexpenses:
Researchanddevelopment 7,774 4,496 20,943 12,419Salesandmarketing 15,514 13,456 48,731 42,530Generalandadministrative 8,005 4,298 24,115 11,623
Totaloperatingexpenses 31,293 22,250 93,789 66,572
Lossfromoperations (2,563) (3,850) (16,315) (17,471)Otherexpense,net (711) (284) (277) (562)
Lossbeforeprovisionfor(benefitof)incometaxes (3,274) (4,134) (16,592) (18,033)Provisionsfor(benefitof)incometaxes 25 58 (632) 148
Netloss $ (3,299) $ (4,192) $(15,960) $(18,181)
Less:AccretionofSeriesAredeemableconvertiblepreferredstock — (1,733) (1,983) (4,466)
Netlossattributabletocommonstockholders $ (3,299) $ (5,925) $(17,943) $(22,647)
Netlosspershareattributabletocommonstockholders,basicanddiluted $ (0.06) $ (0.18) $ (0.35) $ (0.70)
Weighted-averagesharesusedtocomputenetlosspershareattributabletocommonstockholders,basicanddiluted 58,942 32,538 50,864 32,390
Othercomprehensiveincome(loss),netoftax: Netunrealizedholdinggain(loss)oninvestments,netoftax (15) (9) (101) 75Foreigncurrencytranslationadjustments,netoftax (40) — (148) —
Othercomprehensiveincome(loss),netoftax (55) (9) (249) 75
Totalcomprehensiveloss $ (3,354) $ (4,201) $(16,209) $(18,106)
Theaccompanyingnotesareanintegralpartofthesecondensedconsolidatedfinancialstatements
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Alteryx, Inc.Condensed Consolidated Balance Sheets
(inthousands,exceptparvalue)(unaudited)
September 30,2017
December 31,2016
Assets Currentassets:
Cashandcashequivalents $ 95,776 $ 31,306Short-terminvestments 60,812 21,394Accountsreceivable,net 30,820 35,367Deferredcommissions 6,700 7,358Prepaidexpensesandothercurrentassets 6,211 5,013
Totalcurrentassets 200,319 100,438Propertyandequipment,net 6,913 6,212Long-terminvestments 25,989 —Goodwill 8,741 —Intangibleassets,net 8,456 —Otherassets 3,928 4,765
Totalassets $ 254,346 $ 111,415
Liabilities, Redeemable Convertible Preferred Stock, and Stockholders’ Equity (Deficit) Currentliabilities:
Accountspayable $ 4,014 $ 1,780Accruedpayrollandpayrollrelatedliabilities 6,108 7,760Accruedexpensesandothercurrentliabilities 8,063 4,987Deferredrevenue 78,656 71,050
Totalcurrentliabilities 96,841 85,577Deferredrevenue 3,522 3,084Otherliabilities 2,531 1,182
Totalliabilities 102,894 89,843
Commitmentsandcontingencies(Note8) Redeemableconvertiblepreferredstock,$0.0001parvalue:nosharesand14,899sharesauthorizedasofSeptember30,2017andDecember31,2016,respectively;nosharesand14,647sharesissuedandoutstandingasofSeptember30,2017andDecember31,2016,respectively;aggregateliquidationpreferenceof$0and$87,448asofSeptember30,2017andDecember31,2016,respectively — 99,182
Stockholders’equity(deficit): Preferredstock,$0.0001parvalue:10,000andnosharesauthorizedasofSeptember30,2017andDecember31,2016,respectively;nosharesissuedandoutstandingasofSeptember30,2017andDecember31,2016 — —
Commonstock,$0.0001parvalue:1,000,000and56,025sharesauthorizedasofSeptember30,2017andDecember31,2016,respectively;59,142and32,674sharesissuedandoutstandingasofSeptember30,2017andDecember31,2016,respectively 5 3
Additionalpaid-incapital 253,712 8,443Accumulateddeficit (102,007) (86,047)Accumulatedothercomprehensiveloss (258) (9)
Totalstockholders’equity(deficit) 151,452 (77,610)
Totalliabilities,redeemableconvertiblepreferredstock,andstockholders’equity(deficit) $ 254,346 $ 111,415
Theaccompanyingnotesareanintegralpartofthesecondensedconsolidatedfinancialstatements
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Alteryx, Inc.Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)
(inthousands)(unaudited)
Accumulated Redeemable Convertible Additional Other Preferred Stock Common Stock Paid-in Accumulated Comprehensive Shares Amount Shares Amount Capital Deficit Loss Total BalancesatDecember31,2016 14,647 $ 99,182 32,674 $ 3 $ 8,443 $ (86,047) $ (9) $ (77,610)
Issuanceofcommonstock,netofissuancecostsof$3,344 — — 10,350 1 131,412 — — 131,413
AccretionofSeriesAredeemableconvertiblepreferredstockissuancecostsandredemptionfeature — 1,983 — — (1,983) — — (1,983)
Conversionofredeemableconvertiblepreferredstocktocommonstock (14,647) (101,165) 14,647 1 101,164 — — 101,165
Equityissuedinbusinesscombination — — 265 — 5,285 5,285Sharesissuedpursuanttostockawards — — 1,194 — 2,562 — — 2,562Stock-basedcompensation — — — — 6,454 — — 6,454Equitysettledcontingentconsideration — — 12 — 375 — — 375Cumulativetranslationadjustment — — — — — — (148) (148)Unrealizedlossoninvestments — — — — — — (101) (101)Netloss — — — — — (15,960) — (15,960)
BalancesatSeptember30,2017 — $ — 59,142 $ 5 $ 253,712 $ (102,007) $ (258) $151,452
Theaccompanyingnotesareanintegralpartofthesecondensedconsolidatedfinancialstatements
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Alteryx, Inc.Condensed Consolidated Statements of Cash Flows
(inthousands)(unaudited)
Nine Months Ended September 30,
2017 2016 Cash flows from operating activities:
Netloss $ (15,960) $(18,181)Adjustmentstoreconcilenetlosstonetcashprovidedby(usedin)operatingactivities:
Depreciationandamortization 2,670 1,182Stock-basedcompensation 6,454 2,334Provisionfordoubtfulaccountsandsalesreserve,netofrecoveries 770 (36)Deferredincometaxes (1,138) —Impairmentoflong-livedassets 1,050 —Changeinfairvalueofcontingentconsideration 190 —Lossondisposalofassets 32 56Changesinoperatingassetsandliabilities,netofeffectofbusinessacquisitions:
Accountsreceivable 3,892 (3,342)Deferredcommissions 827 249Prepaidexpensesandothercurrentassetsandotherassets (2,229) (1,209)Accountspayable 1,720 2,646Accruedpayrollandpayrollrelatedliabilities (1,667) (2,357)Accruedexpensesandothercurrentliabilities 1,470 (241)Deferredrevenue 8,071 8,430Otherliabilities 288 1,343
Netcashprovidedby(usedin)operatingactivities 6,440 (9,126)
Cash flows from investing activities: Purchasesofpropertyandequipment (2,303) (3,454)Cashpaidinbusinessacquisitions,netofcashacquired (9,097) —Purchasesofinvestments (87,551) (5,706)Maturitiesofinvestments 21,768 11,382
Netcashprovidedby(usedin)investingactivities (77,183) 2,222
Cash flows from financing activities: Proceedsfrominitialpublicoffering,netofunderwritingcommissionsanddiscounts 134,757 —Paymentofinitialpublicofferingcosts (1,867) (68)PaymentofSeriesCconvertiblepreferredstockissuancecosts — (350)Repurchaseofcommonstock,netofcostspaid — (256)Principalpaymentsoncapitalleaseobligations (247) (165)Proceedsfromexerciseofstockoptions 2,562 270
Netcashprovidedby(usedin)financingactivities 135,205 (569)
Effectofexchangeratechangesoncash 8 —Netincrease(decrease)incashandcashequivalents 64,470 (7,473)Cashandcashequivalents—beginningofperiod 31,306 24,779
Cashandcashequivalents—endofperiod $ 95,776 $ 17,306
Theaccompanyingnotesareanintegralpartofthesecondensedconsolidatedfinancialstatements
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Alteryx, Inc.Condensed Consolidated Statements of Cash Flows (continued)
(inthousands)(unaudited)
Nine Months Ended
September 30, 2017 2016 Supplemental disclosure of noncash investing and financing activities:
Propertyandequipmentrecordedinaccountspayable $ 26 $ 108
Considerationforbusinessacquisitioninitiallyincludedinaccruedexpensesandothercurrentliabilitiesandotherliabilities $ 1,660 $ —
Considerationforbusinessacquisitionfromissuanceofcommonstock $ 5,285 $ —
Contingentconsiderationsettledthroughissuanceofcommonstock $ 375 $ —
AccretionofSeriesAredeemableconvertiblepreferredstock $ 1,983 $4,466
Deferredinitialpublicofferingcostsrecordedinaccountspayableandaccruedexpenses $ 529 $ 329
Propertyandequipmentfundedbycapitalleaseborrowing $ — $ 987
ConversionofSeriesAredeemableconvertiblepreferredstocktocommonshares $101,165 $ —
Theaccompanyingnotesareanintegralpartofthesecondensedconsolidatedfinancialstatements
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Alteryx, Inc.Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Business
Our Company
Alteryx,Inc.anditssubsidiaries,orwe,our,orus,arealeadingproviderofself-servicedataanalyticssoftware.Oursoftwareplatformenablesorganizationstodramaticallyimprovebusinessoutcomesandtheproductivityoftheirbusinessanalysts.Oursubscription-basedplatformallowsorganizationstoeasilyprepare,blend,andanalyzedatafromamultitudeofsourcesandmorequicklybenefitfromdata-drivendecisions.Theease-of-use,speed,andsophisticationthatourplatformprovidesisenhancedthroughintuitiveandhighlyrepeatablevisualworkflows.Weaimtomakeourplatformasubiquitousintheworkplaceasspreadsheetsaretoday.
Initial Public Offering and Follow-on Public Offering
InMarch2017,wecompletedaninitialpublicoffering,orIPO,ofourClassAcommonstock.InconnectionwiththeIPO,wesold10.4millionsharesofClassAcommonstock,whichincludedtheexerciseinfulloftheunderwriters’optiontopurchaseanadditional1.4millionsharesinApril2017,at$14.00pershareforaggregatenetproceedsof$131.4millionafterunderwritingdiscountsandcommissionsandofferingexpenses.PriortotheclosingoftheIPO,allsharesofcommonstockthenoutstandingwerereclassifiedasClassBcommonstockandallsharesofourthenoutstandingconvertiblepreferredstockheldpriortotheIPOwereconvertedintoClassBcommonstock.SeeNote6forfurtherdiscussionofourClassAandClassBcommonstock.
InSeptember2017,wecompletedafollow-onpublicofferinginwhichatotalof8.0millionsharesofourClassAcommonstock(issueduponautomaticconversionofsharesofourClassBcommonstock)weresoldbycertainsellingstockholdersatapriceof$21.25pershare.WedidnotreceiveanyproceedsfromthesaleofsharesofourClassAcommonstockbythesellingstockholdersandweincurredofferingcostsof$0.7millioninthethreeandninemonthsendedSeptember30,2017inconnectionwiththisoffering.Thesecostsareincludedingeneralandadministrativeexpenseinourcondensedconsolidatedstatementofoperationsandcomprehensiveloss.
AsofSeptember30,2017,wehad21.1millionand38.0millionsharesofClassAcommonstockandClassBcommonstockissuedandoutstanding,respectively.
Basis of Presentation
OurinterimcondensedconsolidatedfinancialstatementsarepresentedinaccordancewithaccountingstandardsgenerallyacceptedintheUnitedStatesofAmerica,orU.S.GAAP,forinterimfinancialinformation.CertaininformationanddisclosuresnormallyincludedinconsolidatedfinancialstatementspresentedinaccordancewithU.S.GAAPhavebeencondensedoromitted.Accordingly,thesecondensedconsolidatedfinancialstatementsshouldbereadinconjunctionwiththeauditedconsolidatedfinancialstatementsandtherelatednotesfortheyearendedDecember31,2016includedinourfinalprospectusrelatedtoourIPOdatedMarch23,2017,ortheProspectus,filedwiththeSecuritiesandExchangeCommission,orSEC,pursuanttoRule424(b)undertheSecuritiesActof1933,asamended,ortheSecuritiesAct.Theunauditedinterimcondensedconsolidatedfinancialstatementshavebeenpreparedonabasisconsistentwiththatusedtopreparetheauditedannualconsolidatedfinancialstatementsandreflectalladjustmentswhichare,intheopinionofourmanagement,ofanormalrecurringnatureandnecessaryforafairstatementofthecondensedconsolidatedfinancialstatements.
TheoperatingresultsforthethreeandninemonthsendedSeptember30,2017arenotnecessarilyindicativeoftheresultsexpectedforthefullyearendingDecember31,2017.
2. Significant Accounting Policies
TherehavebeennochangestoouraccountingpoliciesdisclosedinourauditedconsolidatedfinancialstatementsandtherelatednotesfortheyearendedDecember31,2016includedinourProspectus.AsaresultofbusinesscombinationsmadeduringtheninemonthsendedSeptember30,2017(seeNote3),wehaveincludedouraccountingpoliciesrelatingtobusinesscombinations,intangibleassets,andgoodwillbelow.
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Correction of an Error
InthecourseofpreparingourconsolidatedfinancialstatementsasofandfortheyearendedDecember31,2016,weidentifiedanerrorrelatedtotheimpropercalculationofroyaltyexpenseduringtheyearendedDecember31,2016associatedwithlicensedthird-partysyndicateddata.WehavedeterminedthattheerrorwasnotmaterialtoourinterimunauditedconsolidatedfinancialstatementsasofSeptember30,2016,andforthethreeandninemonthsthenended.Thecorrectionofthiserrorresultedinarevisionwhichincreasedcostofrevenue,lossfromoperations,netloss,andcomprehensivelossby$0.3millionand$1.1millionforthethreeandninemonthsendedSeptember30,2016,respectively,anddecreasedprepaidexpensesandothercurrentassetsandtotalassets,andincreasedaccumulateddeficitby$1.1millionasofSeptember30,2016.
FortheninemonthsendedSeptember30,2016,therevisionincreasedcostofrevenuefrom$10.6millionto$11.7million,lossfromoperationsfrom$16.4millionto$17.5million,lossbeforeprovisionforincometaxesfrom$16.9millionto$18.0million,netlossfrom$17.1millionto$18.2million,andcomprehensivelossfrom$17.0millionto$18.1million.Netlosspershareattributabletocommonstockholders,basicanddiluted,increasedby$0.04from$0.66to$0.70fortheninemonthsendedSeptember30,2016.
Use of Estimates
ThepreparationofcondensedconsolidatedfinancialstatementsinconformitywithU.S.GAAPrequiresmanagementtomakeestimatesandassumptionsthataffectthereportedamountsofassetsandliabilities,disclosureofcontingentliabilitiesatthedateofthecondensedconsolidatedfinancialstatements,andthereportedamountsofrevenueandexpensesduringthereportingperiod.Actualresultscoulddifferfromtheseestimatesandassumptions.
Onanongoingbasis,ourmanagementevaluatesestimatesandassumptionsbasedonhistoricaldataandexperience,aswellasvariousotherfactorsthatourmanagementbelievestobereasonableunderthecircumstances,theresultsofwhichformthebasisformakingjudgmentsaboutthecarryingvalueofassetsandliabilities.
Business Combinations
Theresultsofbusinessesacquiredinabusinesscombinationareincludedinourcondensedconsolidatedfinancialstatementsfromthedateoftheacquisition.Weallocatedthepurchaseprice,includingthefairvalueofanynon-cashandcontingentconsideration,totheidentifiableassetsandliabilitiesoftherelevantacquiredbusinessattheiracquisitiondatefairvalues.Anyexcessconsiderationoverthefairvalueofassetsacquiredandliabilitiesassumedisrecognizedasgoodwill.
Contingentconsiderationpayableincashorafixeddollaramountsettleableinavariablenumberofsharesisclassifiedasaliabilityandrecordedatfairvalue,withchangesinfairvaluerecordedingeneralandadministrativeexpenseseachperiod.Transactioncostsassociatedwithbusinesscombinationsareexpensedasincurred,andareincludedingeneralandadministrativeexpenseinthecondensedconsolidatedstatementsofoperationsandcomprehensiveloss.
Weperformvaluationsofassetsacquired,liabilitiesassumed,andcontingentconsiderationandallocatethepurchasepricetoitsrespectiveassetsandliabilities.Determiningthefairvalueofassetsacquired,liabilitiesassumed,andcontingentconsiderationrequiresustousesignificantjudgmentandestimatesincludingtheselectionofvaluationmethodologies,estimatesoffuturerevenue,costsandcashflows,discountrates,theprobabilityoftheachievementofspecifiedmilestones,andselectionofcomparablecompanies.Weengagetheassistanceofvaluationspecialistsinconcludingonfairvaluemeasurementsinconnectionwithdeterminingfairvaluesofassetsacquired,liabilitiesassumed,andcontingentconsiderationinabusinesscombination.
Intangible Assets
Intangibleassetsconsistofacquireddevelopedtechnology.Wedeterminetheappropriateusefullifeofourintangibleassetsbyperformingananalysisofexpectedcashflowsoftheacquiredassets.Intangibleassetsareamortizedovertheirestimatedusefullivesofthreetosevenyears,usingthestraight-linemethod,whichapproximatesthepatterninwhichtheeconomicbenefitsareconsumed.
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Goodwill
Goodwillrepresentstheexcessofthepurchasepriceoverthefairvalueofnetassetsacquiredinabusinesscombination.WetestgoodwillforimpairmentinaccordancewiththeprovisionsofAccountingStandardsCodification,orASC,350,Intangibles–GoodwillandOther.Goodwillistestedforimpairmentatleastannuallyatthereportingunitlevelorwhenevereventsorchangesincircumstancesindicatethatgoodwillmightbeimpaired.Eventsorchangesincircumstanceswhichcouldtriggeranimpairmentreviewincludeasignificantadversechangeinlegalfactorsorinthebusinessclimate,unanticipatedcompetition,lossofkeypersonnel,significantchangesintheuseoftheacquiredassetsorourstrategy,significantnegativeindustryoreconomictrends,orsignificantunderperformancerelativetoexpectedhistoricalorprojectedfutureresultsofoperations.
ASC350providesthatanentityhastheoptiontofirstassessqualitativefactorstodeterminewhethertheexistenceofeventsorcircumstancesleadstoadeterminationthatitismorelikelythannotthatthefairvalueofareportingunitislessthanitscarryingamount.If,afterassessingthetotalityofeventsorcircumstances,anentitydeterminesitisnotmorelikelythannotthatthefairvalueofareportingunitislessthanitscarryingamount,thenadditionalimpairmenttestingisnotrequired.However,ifanentityconcludesotherwise,thenitisrequiredtoperformthefirstofatwo-stepimpairmenttest.
Thefirststepinvolvescomparingtheestimatedfairvalueofareportingunitwithitsbookvalue,includinggoodwill.Iftheestimatedfairvalueexceedsbookvalue,goodwillisconsiderednottobeimpairedandnoadditionalstepsarenecessary.If,however,thefairvalueofthereportingunitislessthanbookvalue,thenthecarryingamountofthegoodwilliscomparedwithitsimpliedfairvalue.Theestimateofimpliedfairvalueofgoodwillmayrequirevaluationsofcertaininternallygeneratedandunrecognizedintangibleassets.Ifthecarryingamountofgoodwillexceedstheimpliedfairvalueofthatgoodwill,animpairmentlossisrecognizedinanamountequaltotheexcess.
Wehaveonereportingunitandwetestforgoodwillimpairmentannuallyduringthefourthquarterofeachcalendaryear.
Variable Interest Entities
InaccordancewithASC810,Consolidation,theapplicableaccountingguidancefortheconsolidationofvariableinterestentities,orVIEs,weanalyzeourintereststodetermineifsuchinterestsarevariableinterests.Ifvariableinterestsareidentified,thentherelatedentityisassessedtodetermineifitisaVIE.VIEsaregenerallyentitiesthathaveeitheratotalequityinvestmentthatisinsufficienttopermittheentitytofinanceitsactivitieswithoutadditionalsubordinatedfinancialsupport,orwhoseequityinvestorslackthecharacteristicsofacontrollingfinancialinterest(i.e.,abilitytomakesignificantdecisionsthroughvotingrightsandarighttoreceivetheexpectedresidualreturnsoftheentityoranobligationtoabsorbtheexpectedlossesoftheentity).IfwedeterminethattheentityisaVIE,wethenassessifwemustconsolidatetheVIE.Wedeemourselvestobetheprimarybeneficiaryifwehaveboth(i)thepowertodirecttheactivitiesoftheVIEthatmostsignificantlyimpacttheentity’seconomicperformance,and(ii)anobligationtoabsorblossesoftheentitythatcouldpotentiallybesignificanttotheVIE,orarighttoreceivebenefitsfromtheentitythatcouldbesignificanttotheVIE.
AsofSeptember30,2017andDecember31,2016,wedeterminedthattwoofourdistributorswereVIEsundertheguidanceofASC810,Consolidation,dueto(i)ourparticipationinthedesignofthedistributor’slegalentity,(ii)ourhavingavariableinterestinthedistributor,and(iii)ourhavingtherighttoresidualreturns.WedeterminedthatwewerenottheprimarybeneficiaryoftheseVIEsbecausewedidnothave(a)thepowertodirecttheactivitiesthatmostsignificantlyimpacttheVIE’seconomicperformance,and(b)theobligationtoabsorblossesoftheVIEortherighttoreceivebenefitsfromtheVIEthatcouldpotentiallybesignificant.Therefore,wedidnotconsolidateanyassetsorliabilitiesofthesedistributorsinourconsolidatedbalancesheetsorrecordtheresultsofthesedistributorsinourconsolidatedstatementsofoperationsandcomprehensiveloss.Transactionswiththedistributorswereaccountedforinthesamemannerasourotherdistributorsandresellers.AsofSeptember30,2017andDecember31,2016,wehadnoexposuretolossesfromthecontractualrelationshipswiththeseVIEsorcommitmentstofundtheseVIEs.
Recent Accounting Pronouncements
InJanuary2017,theFinancialAccountingStandardsBoard,orFASB,issuedAccountingStandardsUpdate,orASU,2017-04,SimplifyingtheTestforGoodwillImpairment,whichsimplifiesthesubsequentmeasurementofgoodwillbyremovingtherequirementtoperformahypotheticalpurchasepriceallocationtocomputetheimpliedfairvalueofgoodwilltomeasureimpairment.Instead,anygoodwillimpairmentwillequaltheamountbywhichareportingunit’scarryingvalue
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exceedsitsfairvalue,nottoexceedthecarryingamountofgoodwill.Further,theguidanceeliminatestherequirementsforanyreportingunitwithazeroornegativecarryingamounttoperformaqualitativeassessmentand,ifitfailsthatqualitativetest,toperformStep2ofthegoodwillimpairmenttest.ThisguidanceiseffectiveforannualoranyinterimgoodwillimpairmenttestinannualreportingperiodsbeginningafterDecember15,2021.Earlyadoptionispermitted.Whilewecontinuetoassessthepotentialimpactoftheadoptionofthisguidance,wedonotexpecttheadoptionofthisguidancetohaveamaterialimpactonourconsolidatedfinancialstatements.
InJanuary2017,theFASBissuedASU2017-01,ClarifyingtheDefinitionofaBusiness,whichnarrowstheapplicationofwhenanintegratedsetofassetsandactivitiesisconsideredabusinessandprovidesaframeworktoassistentitiesinevaluatingwhetherbothaninputandasubstantiveprocessarepresenttobeconsideredabusiness.Itisexpectedthatthenewguidancewillreducethenumberoftransactionsthatwouldneedtobefurtherevaluatedandaccountedforasabusiness.ThisguidanceiseffectiveforannualreportingperiodsbeginningafterDecember15,2018andinterimperiodswithinannualperiodsbeginningafterDecember15,2019.Earlyadoptionispermitted.Weareevaluatingthepotentialimpactofadoptingthisguidanceonourconsolidatedfinancialstatements.
InNovember2016,theFASBissuedASU2016-18,RestrictedCash,whichrequiresthatrestrictedcashbeincludedwithcashandcashequivalentswhenreconcilingthebeginningandendingtotalamountsshownonthestatementofcashflows.ThisguidanceiseffectiveforfiscalyearsbeginningafterDecember15,2018,andinterimperiodswithinfiscalyearsbeginningafterDecember15,2019,andshouldbeappliedusingaretrospectivetransitionmethodtoeachperiodpresented.Earlyadoptionispermitted,includingadoptioninaninterimperiod.Ifanentityearlyadoptstheamendmentsinaninterimperiod,anyadjustmentsshouldbereflectedasofthebeginningofthefiscalyearthatincludesthatinterimperiod.Wehavenotyetdeterminedthetimingofadoption.Wecurrentlypresentchangesinrestrictedcashwithininvestingactivitiesandsotheadoptionofthisguidancewillresultinchangesinnetcashflowsfrominvestingactivitiesandtocertainbeginningandendingcashandcashequivalenttotalsshownonourconsolidatedstatementofcashflows.
InOctober2016,theFASBissuedASU2016-16,Intra-EntityTransfersofAssetsOtherThanInventory.ThisguidanceremovestheprohibitioninASC740,IncomeTaxes,againsttheimmediaterecognitionofthecurrentanddeferredincometaxeffectsofintra-entitytransfersofassetsotherthaninventory.ThisguidanceisintendedtoreducethecomplexityofU.S.GAAPanddiversityinpracticerelatedtothetaxconsequencesofcertaintypesofintra-entityassettransfers,particularlythoseinvolvingintellectualproperty.ThisguidanceiseffectiveforannualreportingperiodsbeginningafterDecember15,2018,andinterimperiodswithinfiscalyearsbeginningafterDecember15,2019.Earlyadoptionispermitted.Wearecurrentlyevaluatingthepotentialimpactofthisguidanceonourconsolidatedfinancialstatements.
InAugust2016,theFASBissuedASU2016-15,ClassificationofCertainCashReceiptsandCashPayments,whichaddresseseightspecificcashflowissueswiththeobjectiveofreducingtheexistingdiversityinpractice,includingpresentationofcashflowsrelatingtocontingentconsiderationpayments,proceedsfromthesettlementofinsuranceclaims,anddebtprepaymentordebtextinguishmentcosts,amongothermatters.ThisguidanceiseffectiveforfiscalyearsbeginningafterDecember15,2018,andinterimperiodswithinfiscalyearsbeginningafterDecember15,2019.Earlyadoptionispermitted,includingadoptioninaninterimperiod.Ifadoptedinaninterimperiod,anyadjustmentsshouldbereflectedasofthebeginningofthefiscalyearthatincludesthatinterimperiod.Adoptionofthisguidanceisrequiredtobeappliedusingaretrospectivetransitionmethodtoeachperiodpresented,unlessimpracticabletodoso.Wearecurrentlyevaluatingthepotentialimpactofthisguidanceonourconsolidatedstatementofcashflows.
InMarch2016,theFASBissuedASU2016-09,Compensation—StockCompensation(Topic718):ImprovementstoEmployeeShare-BasedPaymentAccounting,whichsimplifiesseveralaspectsoftheaccountingforshare-basedpaymenttransactionsandrelatedtaximpacts,theclassificationofexcesstaxbenefitsonthestatementofcashflows,statutorytaxwithholdingrequirements,andotherstock-basedcompensationclassificationmatters.ThisguidanceiseffectiveforannualreportingperiodsbeginningafterDecember15,2017,andinterimperiodswithinannualperiodsbeginningafterDecember31,2018.Earlyadoptionispermittedinanyinterimorannualperiod.Alltheamendmentsinthenewguidancemustbeadoptedinthesameperiod.Weareevaluatingthepotentialimpactofthisguidanceonourconsolidatedfinancialstatements.
InFebruary2016,theFASBissuedASU2016-02,Leases,creatingTopic842,whichrequireslesseestorecordtheassetsandliabilitiesarisingfromallleasesinthestatementoffinancialposition.UnderASU2016-02,lesseeswillrecognizealiabilityforleasepaymentsandaright-of-useasset.Whenmeasuringassetsandliabilities,alesseeshouldincludeamountsrelatedtooptionterms,suchastheoptionofextendingorterminatingtheleaseorpurchasingtheunderlyingasset,thatarereasonablycertaintobeexercised.Forleaseswithatermof12monthsorless,lesseesarepermittedtomakeanaccountingpolicyelectiontonotrecognizeleaseassetsandliabilities.Thisguidanceretainsthedistinctionbetweenfinance
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leasesandoperatingleasesandtheclassificationcriteriaremainssimilar.Forfinancingleases,alesseewillrecognizetheinterestonaleaseliabilityseparatefromamortizationoftheright-of-useasset.Inaddition,repaymentsofprincipalwillbepresentedwithinfinancingactivities,andinterestpaymentswillbepresentedwithinoperatingactivitiesinthestatementofcashflows.Foroperatingleases,alesseewillrecognizeasingleleasecostonastraight-linebasisandclassifyallcashpaymentswithinoperatingactivitiesinthestatementofcashflows.ThisguidancewillbeeffectiveforfiscalyearsbeginningafterDecember15,2019,andinterimperiodswithinfiscalyearsbeginningafterDecember15,2020,andisrequiredtobeappliedusingamodifiedretrospectiveapproach.Earlyadoptionispermitted.Weareevaluatingthepotentialimpactofthisguidanceonourconsolidatedfinancialstatements.
InMay2014,theFASBissuedASU2014-09,RevenuefromContractswithCustomers.Thisguidancereplacesmostexistingrevenuerecognitionguidance.Itprovidesprinciplesforrecognizingrevenueforthetransferofpromisedgoodsorservicestocustomerswiththeconsiderationtowhichtheentityexpectstobeentitledinexchangeforthosegoodsorservices.InAugust2015,theFASBissuedASU2015-14,whichdeferredtheeffectivedateofASU2014-09byoneyear.During2016,theFASBcontinuedtoissueadditionalamendmentstothisnewrevenueguidance.ThisnewrevenueguidancewillbeeffectiveforannualreportingperiodsbeginningafterDecember15,2018,andinterimreportingperiodswithinannualreportingperiodsbeginningafterDecember15,2019.EarlyadoptionispermittedforannualperiodsbeginningafterDecember15,2016.Weareevaluatingthepotentialimpactofthisguidanceonourconsolidatedfinancialstatements.
3. Business Combinations
InJanuary2017,weacquired100%oftheoutstandingequityofSemanta,s.r.o.,orSemanta,asoftwaredevelopmentfirmbasedinPrague,CzechRepublicthatdeliversacloud-baseddatagovernanceandmetadatamanagementplatform.InMay2017,weacquired100%oftheoutstandingequityofYhat,Inc.,orYhat,adatasciencesoftwarecompanybasedinBrooklyn,NewYorkthatprovidesdatascientistsandanalystswithself-servicedatasciencetoolsfordeveloping,managing,anddeployinganalyticalmodels.Theseacquisitionsweremadetoenhanceourplatformwithadditionaldatagovernancecapabilitiesandtheabilitytodeployandmanageadvancedanalyticmodels.
Thefollowingtablepresentsdetailsofthepurchaseconsiderationrelatedtoeachacquisition.CompanyAcquired
Month Acquired
Cash Consideration
Paid
Equity Consideration
Paid Cash Holdback
Contingent Consideration
Maximum
Contingent Consideration
Fair Value Semanta January2017 $ 3,944 $ — $ 500 $ 2,300 $ 1,160Yhat May2017 5,535 5,285 — — —
$ 9,479 $ 5,285 $ 500 $ 2,300 $ 1,160
TheacquisitionofSemantaincludedcashconsiderationheldbackforcustomaryindemnificationmattersforaperiodof24-monthsfollowingtheacquisitiondate.AportionofthecashconsiderationintheYhatacquisitioniscurrentlyheldinescrowpursuanttothetermsoftheacquisitionagreementandisreflectedingoodwill.
Thecondensedconsolidatedfinancialstatementsincludetheresultsofoperationsoftheacquiredcompaniescommencingasoftheirrespectiveacquisitiondates.RevenueandoperatingresultsoftheacquiredcompaniesfortheninemonthsendedSeptember30,2017werenotmaterialtothecondensedconsolidatedfinancialstatements.DuringtheninemonthsendedSeptember30,2017,werecognized$0.9millionofacquisitionrelatedcostsingeneralandadministrativeexpenseinthecondensedconsolidatedstatementofoperationsandcomprehensiveloss.
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Thefollowingtablesummarizestheestimatedfairvaluesoftheassetsacquiredandliabilitiesassumedasofthedatesofeachacquisition(inthousands):
Assetsacquiredandliabilitiesassumed: Cashandcashequivalents $ 382Accountsreceivable 247Prepaidexpensesandotherassets 68Propertyandequipment 54Intangibleassets 9,220Goodwill 8,724Accountspayable (479)Accruedexpenses,deferredrevenueandothercurrentliabilities (205)Deferredtaxliability,includedinotherliabilities (1,587)
Totalpurchaseconsideration $16,424
Goodwillrepresentstheexcessofthepurchaseconsiderationoverthefairvalueoftheunderlyingintangibleassetsandnetliabilitiesassumed.Webelievetheamountofgoodwillresultingfromtheacquisitionsisprimarilyattributabletoexpectedsynergiesfromanassembledworkforce,increaseddevelopmentcapabilities,increasedofferingstocustomers,andenhancedopportunitiesforgrowthandinnovation.Thegoodwillresultingfromtheacquisitionsisnottaxdeductible.
Wedeterminedthefairvalueofthecompletedtechnologyacquiredintheacquisitionsusingthemultipleperiodexcessearningsandthereplacementcostmodels.ThesemodelsutilizecertainunobservableinputsclassifiedasLevel3measurementsasdefinedbyASC820,FairValueMeasurementsandDisclosures.Keyinputsutilizedinthemodelsincludediscountratesrangingfrom35%to45%,amarketparticipanttaxrateof40%,anestimatedleveloffuturecashflowsbasedoncurrentproductandmarketdata,andestimatedcoststorecreatethetechnology.Basedonthevaluationmodels,wedeterminedthefairvalueofthecompletedtechnologytobe$9.2millionwithaweighted-averageamortizationperiodof5.7years.
AportionoftheconsiderationfortheSemantaacquisitionissubjecttoearn-outprovisions.Additionalcontingentearn-outconsiderationofupto$2.3millioninsharesofourClassAcommonstockmaybepaidouttotheformershareholdersofSemantaovertwoyearsupontheachievementofspecifiedmilestones.ThenumberofsharesthatwillbeissuedwillbedeterminedbasedonthetotaldollarvalueofconsiderationearnedupontheachievementofaparticularmilestonedividedbyanaveragetradingvalueofourClassAcommonstockcalculatedatthetimeoftheissuance.Weutilizedaprobabilityweightedscenariobasedmodeltodeterminethefairvalueofthecontingentconsideration.Basedonthisvaluationmodelwedeterminedthefairvalueofthecontingentconsiderationtobe$1.2millionasoftheacquisitiondate.
ProformainformationasiftheacquisitionsoccurredonJanuary1,2016hasnotbeenpresentedastheproformaimpactisnotmaterialtoourcondensedconsolidatedfinancialstatements.
4. Fair Value Measurements
Weutilizevaluationtechniquesthatmaximizetheuseofobservableinputsandminimizetheuseofunobservableinputstotheextentpossible.Wedeterminefairvaluebasedonassumptionsthatmarketparticipantswoulduseinpricinganassetorliabilityintheprincipalormostadvantageousmarket.Whenconsideringmarketparticipantassumptionsinfairvaluemeasurements,thefollowingfairvaluehierarchydistinguishesbetweenobservableandunobservableinputs,whicharecategorizedinoneofthefollowinglevels:
Level1 Unadjustedquotedpricesinactivemarketsforidenticalassetsorliabilitiesatthemeasurementdate.
Level2
InputsotherthanLevel1thatareobservable,eitherdirectlyorindirectly,suchasquotedpricesforsimilarassetsorliabilities;quotedpricesinmarketsthatarenotactivenearthemeasurementdate;orotherinputsthatareobservableorcanbecorroboratedbyobservablemarketdataforsubstantiallythefulltermoftheassetsorliabilities.
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Level3 Unobservableinputsthataresupportedbylittleornomarketactivityandthataresignificanttothefairvalueoftheassetsorliabilities.
Thefairvalueofourmoneymarketfundswasdeterminedbasedon“Level1”inputs.
Thefairvalueofcertificatesofdeposit,U.S.Treasuryandagencybonds,andcorporatebondsweredeterminedbasedon“Level2”inputs.Thevaluationtechniquesusedtomeasurethefairvalueofcertificatesofdepositincludedobservablemarket-basedinputsforsimilarassets,whichprimarilyincludeyieldcurvesandtime-to-maturityfactors.ThevaluationtechniquesusedtomeasurethefairvalueofU.S.Treasuryandagencybondsandcorporatebondsincludedstandardobservableinputs,includingreportedtrades,quotedmarketprices,matrixpricing,benchmarkyields,broker/dealerquotes,issuerspreads,two-sidedmarketsorbenchmarksecuritiesanddataprovidedbythirdpartiesasmanyofthebondsarenotactivelytraded.
Therewerenomarketablesecuritiesmeasuredonarecurringbasisinthe“Level3”category.
WehavenotelectedthefairvalueoptionasprescribedbyASC825,TheFairValueOptionforFinancialAssetsandFinancialLiabilities,forourfinancialassetsandliabilitiesthatarenototherwiserequiredtobecarriedatfairvalue.UnderASC820,materialfinancialassetsandliabilitiesnotcarriedatfairvalue,suchasouraccountsreceivableandpayables,arereportedattheircarryingvalues.
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InstrumentsMeasuredatFairValueonaRecurringBasis.Thefollowingtablespresentourcashandcashequivalentsandinvestments’costs,grossunrealizedgains(losses),andfairvaluebymajorsecuritytyperecordedascashandcashequivalentsorshort-termorlong-terminvestmentsasofSeptember30,2017andDecember31,2016(inthousands): As of September 30, 2017 Gross Cash and Unrealized Cash Short-term Long-term Cost Gains (Losses) Fair Value Equivalents Investments InvestmentsCash $ 89,377 $ — $ 89,377 $ 89,377 $ — $ —
Level1: Moneymarketfunds 6,399 — 6,399 6,399 — —
Subtotal 6,399 — 6,399 6,399 — —
Level2: Certificatesofdeposit 2,584 — 2,584 — 2,584 —U.S.Treasuryandagencybonds 52,537 (78) 52,459 — 27,569 24,890Corporatebonds 31,790 (32) 31,758 — 30,659 1,099
Subtotal 86,911 (110) 86,801 — 60,812 25,989
Level3 — — — — — —
Total $182,687 $ (110) $ 182,577 $ 95,776 $ 60,812 $ 25,989
As of December 31, 2016 Gross Cash and Unrealized Cash Short-term Long-term Cost Gains (Losses) Fair Value Equivalents Investments InvestmentsCash $ 10,499 $ — $ 10,499 $ 10,499 $ — $ —
Level1: Moneymarketfunds 20,807 — 20,807 20,807 — —
Subtotal 20,807 — 20,807 20,807 — —
Level2: — Certificatesofdeposit 10,552 — 10,552 — 10,552 —Corporatebonds 10,770 72 10,842 — 10,842 —
Subtotal 21,322 72 21,394 — 21,394 —
Level3 — — — — — —
Total $ 52,628 $ 72 $ 52,700 $ 31,306 $ 21,394 $ —
TherewerenotransfersbetweenLevel1,Level2,orLevel3securitiesduringtheninemonthsendedSeptember30,2017.AsofSeptember30,2017,therewere28securitieswithafairvalueof$77.9millioninanunrealizedlosspositionforlessthan12months.Thegrossunrealizedlossesof$0.1millionasofSeptember30,2017wereduetochangesinmarketrates,andwehavedeterminedthelossesaretemporaryinnature.
Allthelong-terminvestmentshadmaturitiesofbetweenoneandtwoyearsindurationasofSeptember30,2017.Cashandcashequivalents,restrictedcash,andinvestmentsasofSeptember30,2017andDecember31,2016helddomesticallywereapproximately$166.9millionand$52.9million,respectively.
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ContingentConsideration.Contingentconsiderationinconnectionwithacquisitionsismeasuredatfairvalueeachreportingperiodbasedonsignificantunobservableinputs,classifiedasLevel3measurement.SeeNote3foradditionalinformationonthevaluationofthecontingentconsiderationasoftheacquisitiondate.Thecontingentearn-outconsiderationhasbeenrecordedinotherliabilitiesinouraccompanyingcondensedconsolidatedbalancesheetwithanychangesinfairvalueeachreportingperiodrecordedingeneralandadministrativeexpensesinourcondensedconsolidatedstatementsofoperationsandcomprehensiveloss.Changesinfairvaluedependonseveralfactorsincludingestimatesofthetimingandabilitytoachievethemilestones.
Thefollowingtablepresentsareconciliationofthebeginningandendingbalancesofacquisition-relatedaccruedcontingentconsiderationusingsignificantunobservableinputs(Level3)forthethreeandninemonthsendedSeptember30,2017(inthousands):
Three Months Ended
September 30, Nine Months Ended
September 30, 2017 2016 2017 2016 Beginningbalance $ 1,318 $ — $ — $ —
Obligationsassumed — — 1,160 —Changeinfairvalue 32 — 190 —Settlement (375) — (375) —
Endingbalance $ 975 $ — $ 975 $ —
UpontheachievementofcertainmilestonesinconnectionwithouracquisitionofSemanta,wereleased12,492sharesofClassAcommonstocktotheformershareholdersofSemantaintheninemonthsendedSeptember30,2017.Inaddition,4,824shareswereearned,butheldbackforcustomaryindemnificationmattersinaccordancewiththeacquisitionagreement,andthevalueofthesharesispresentedwithinadditionalpaid-incapitalinthecondensedconsolidatedbalancesheetasofSeptember30,2017.Subjecttoanyindemnificationclaimsthatmayariseduringtheindemnificationperiod,theseshareswillbeissuedtotheformershareholdersuponthecompletionoftheindemnificationperiod.
InstrumentsNotRecordedatFairValueonaRecurringBasis.Thecarryingamountsofourfinancialinstruments,includingcash,accountsreceivable,prepaidexpensesandothercurrentassets,accountspayable,andaccruedliabilitiesapproximatetheircurrentfairvaluebecauseoftheirnatureandrelativelyshortmaturitydatesordurations.
AssetsandLiabilitiesRecordedatFairValueonaNon-RecurringBasis.Thefairvalueofourcostmethodinvestmentismeasuredwhenitisdeemedtobeother-than-temporarilyimpaired,assetsacquiredandliabilitiesassumedinabusinessacquisition,andgoodwillandotherlonglivedassetswhentheyareheldforsaleordeterminedtobeimpaired.SeeNote3andNote5forfairvaluemeasurementsofcertainassetsandliabilitiesrecordedatfairvalueonanon-recurringbasis.
5. Cost Method Investment
InNovember2014,weenteredintoadefinitiveagreementwithaprivatelyheldcompany,inwhichweagreedtoinvestapproximately$1.1millioninexchangeforsharesofconvertiblepreferredstockequaltoapproximately15%ownershipoftheprivatelyheldcompany.Weaccountforourinvestmentinthiscompanyusingthecostmethodofaccountingandtheinvestmentbalanceisincludedinothernon-currentassetsinourcondensedconsolidatedbalancesheets.Weevaluatetheinvestmentateachreportingdatetodetermineifanyindicatorsofother-than-temporaryimpairmentexist.Ifsuchindicatorsareidentified,wewillestimatethefairvalueoftheinvestmentanddetermineifanydeclineinthefairvalueoftheinvestmentbelowitscarryingvalueisother-than-temporary.Theestimatedfairvalueisdeterminedusingunobservableinputsincludingforecastedcashflowinformationfromtheinvestee’smanagement.TheseinputsareclassifiedasLevel3.DuringthethreemonthsendedSeptember30,2017,wedeterminedthatindicatorsofother-than-temporaryimpairmentexisted.Basedonourevaluation,weestimatedthefairvalueoftheinvestmentandrecordedanimpairmentforthefullvalueoftheinvestmentof$1.1million.TheimpairmentisincludedinotherexpensesinourcondensedconsolidatedstatementsofoperationsforthethreeandninemonthsendedSeptember30,2017.
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6. Stockholders’ Equity
Reverse Stock Split
InFebruary2017,weeffecteda2-to-1reversestocksplitofouroutstandingcommonandpreferredstockandacorrespondingreductioninthenumberofauthorizedsharesofpreferredstock.Allshareandpershareamountsforallperiodspresentedinthesecondensedconsolidatedfinancialstatementsandnotes,havebeenadjustedretrospectivelytoreflectthisreversestocksplit.
Dual Class Common Stock Structure
InFebruary2017,weimplementedadualclasscommonstockstructureinwhicheachthenexistingshareofcommonstockconvertedintoashareofClassBcommonstockandwealsoauthorizedanewclassofcommonstock,theClassAcommonstock.TheClassAcommonstockisentitledtoonevotepershareandtheClassBcommonstockisentitledtotenvotespershare.TheClassAcommonstockandClassBcommonstockhavethesamedividendandliquidationrights,andtheClassBcommonstockconvertstoClassAcommonstockatanytimeattheoptionoftheholder,orautomaticallyuponthedatethatistheearliestof(i)thedatespecifiedbyavoteoftheholdersofatleast662/3%oftheoutstandingsharesofClassBcommonstock,(ii)March29,2027,and(iii)thedatethatthetotalnumberofsharesofClassBcommonstockoutstandingceasetorepresentatleast10%oftheaggregatenumberofsharesofClassAcommonstockandClassBcommonstockthenoutstanding.Inaddition,eachshareofClassBcommonstockwillconvertautomaticallyintooneshareofClassAcommonstockuponanytransfer,exceptforcertainpermittedtransfersdescribedinourrestatedcertificateofincorporation,ortheRestatedCertificate.UponthecreationofthedualclasscommonstockstructurealloutstandingoptionstopurchasecommonstockbecameoptionstopurchaseanequivalentnumberofsharesofClassBcommonstock,andallrestrictedstockunits,orRSUs,becameRSUsforanequivalentnumberofsharesofClassBcommonstock.
UpontheeffectivenessoftheRestatedCertificateinMarch2017,thenumberofsharesofcapitalstockthatisauthorizedtobeissuedconsistedof500,000,000sharesofClassAcommonstock,$0.0001parvaluepershare,500,000,000sharesofClassBcommonstock,$0.0001parvaluepershare,and10,000,000sharesofundesignatedpreferredstock,$0.0001parvaluepershare.
7. Equity Awards
Amended and Restated 2013 Stock Plan
WegrantedoptionsandRSUsunderourAmendedandRestated2013StockPlan,or2013Plan,untilMarch22,2017,whentheplanwasterminatedinconnectionwithourIPO.Accordingly,nosharesareavailableforfutureissuanceunderthe2013PlanfollowingtheIPO.The2013Plancontinuestogovernoutstandingequityawardsgrantedthereunder.
2017 Equity Incentive Plan
InFebruary2017,ourboardofdirectorsadoptedandourstockholdersapprovedthe2017EquityIncentivePlan,or2017Plan.The2017PlanbecameeffectiveonMarch22,2017andisthesuccessorplantothe2013Plan.Underthe2017Plan,weinitiallyreserved(i)5.1millionsharesofClassAcommonstockforfutureissuanceand(ii)0.8millionsharesofClassAcommonstockequaltothenumberofClassBsharesreservedbutnotissuedunderthe2013Planasoftheeffectivedateofthe2017Plan.ThenumberofsharesofClassAcommonstockreservedforissuanceunderour2017PlanwillincreaseautomaticallyonthefirstdayofJanuaryofeachof2018through2027bythelesserof(a)5%ofthetotaloutstandingsharesofourClassAandClassBcommonstockasoftheimmediatelyprecedingDecember31and(b)thenumberofsharesdeterminedbyourboardofdirectors.Thesharereservemayalsoincreasetotheextentthatoutstandingawardsunderour2013Planexpireorterminate.AsofSeptember30,2017,anaggregateof5.4millionsharesofClassAcommonstockwerereservedforissuanceunderthe2017Plan.
2017 Employee Stock Purchase Plan
InFebruary2017,ourboardofdirectorsadoptedandourstockholdersapprovedthe2017EmployeeStockPurchasePlan,or2017ESPP.The2017ESPPbecameeffectiveonMarch23,2017.Underthe2017ESPP,wereserved1.1millionsharesofClassAcommonstockforfutureissuance.ThenumberofsharesofClassAcommonstockreservedforissuanceunderour2017ESPPwillincreaseautomaticallyonthefirstdayofJanuaryofeachof2018through2027bythelesserof(a)1%ofthetotaloutstandingsharesofourClassAandClassBcommonstockasoftheimmediatelyprecedingDecember31and(b)thenumberofsharesdeterminedbyourboardofdirectors.Theaggregatenumberofsharesissuedoverthetermofthe2017ESPPmaynotexceed11,000,000sharesofClassAcommonstock.
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Stock Options
StockoptionactivityduringtheninemonthsendedSeptember30,2017consistedofthefollowing(inthousands,exceptweighted-averageinformation):
Options
Outstanding
Weighted-Average Exercise
Price OptionsoutstandingatDecember31,2016 6,318 $ 5.65
Granted 938 16.72Exercised (1,099) 1.36Cancelled/forfeited (538) 8.30
OptionsoutstandingatSeptember30,2017 5,619 $ 8.08
AsofSeptember30,2017,therewas$11.9millionofunrecognizedcompensationcostrelatedtounvestedstockoptions,whichisexpectedtoberecognizedoveraweighted-averageperiodof2.9years.
Restricted Stock Units
RSUactivityduringtheninemonthsendedSeptember30,2017consistedofthefollowing(inthousands,exceptweighted-averageinformation):
Awards
Outstanding
Weighted- Average
Grant DateFair Value
RSUsoutstandingatDecember31,2016 373 $ 12.30Granted 178 18.10Cancelled/forfeited (96) 12.67
RSUsoutstandingatSeptember30,2017 455 $ 14.50
RSUsoutstandingasofDecember31,2016,orpre-2017RSUs,vestuponthesatisfactionofbothaserviceconditionandaliquiditycondition.Theserviceconditionfortheseawardswillbesatisfiedoverfouryears.TheliquidityconditionwassatisfiedonSeptember25,2017,whichwas180daysfollowingtheclosingoftheIPO.BeginningontheclosingoftheIPOinMarch2017,werecognizedacumulativestock-basedcompensationexpensefortheportionofthepre-2017RSUsthathadmettheservicecondition.IntheninemonthsendedSeptember30,2017,stock-basedcompensationexpenserelatedtoourpre-2017RSUswas$1.4million.
AsofSeptember30,2017,totalunrecognizedcompensationexpense,adjustedforestimatedforfeitures,relatedtounvestedRSUswasapproximately$3.7million,whichisexpectedtoberecognizedoveraweighted-averageperiodof2.0years.
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Weclassifiedstock-basedcompensationexpenseintheaccompanyingconsolidatedstatementsofoperationsandcomprehensivelossasfollows(inthousands):
Three Months Ended
September 30, Nine Months Ended
September 30, 2017 2016 2017 2016 Costofrevenue $ 123 $ 24 $ 368 $ 72Researchanddevelopment 458 99 1,157 243Salesandmarketing 459 308 1,642 942Generalandadministrative 1,239 475 3,342 1,077
Total $ 2,279 $ 906 $6,509 $2,334
8. Commitments and Contingencies
Leases
Wehavevariousnon-cancelableoperatingleasesforouroffices.Theseleasesexpireatvarioustimesthrough2024.Certainleaseagreementscontainrenewaloptions,rentabatement,andescalationclauses.
Indemnification
Intheordinarycourseofbusiness,weenterintoagreementsinwhichwemayagreetoindemnifyotherpartieswithrespecttocertainmatters,includinglossesresultingfromclaimsofintellectualpropertyinfringement,damagestopropertyorpersons,businesslosses,orotherliabilities.Inaddition,wehaveenteredintoindemnificationagreementswithourdirectors,executiveofficers,andcertainotheremployeesthatwillrequireustoindemnifythemagainstliabilitiesthatmayarisebyreasonoftheirstatusorserviceasdirectors,officers,oremployees.Thetermoftheseindemnificationagreementswithourdirectors,executiveofficers,andotheremployees,aregenerallyperpetualafterexecutionoftheagreement.Themaximumpotentialamountoffuturepaymentswecouldberequiredtomakeundertheseindemnificationprovisionsisunlimited;however,wemaintaininsurancethatreducesourexposureandenablesustorecoveraportionofanyfutureamountspaid.AsofSeptember30,2017andDecember31,2016,wehavenotaccruedaliabilityfortheseindemnificationprovisionsbecausethelikelihoodofincurringapaymentobligation,ifany,inconnectionwiththesearrangementsisnotprobableorreasonablyestimable.
Litigation
Fromtimetotime,wemaybeinvolvedinlawsuits,claims,investigations,andproceedings,consistingofintellectualproperty,commercial,employment,andothermatters,whichariseintheordinarycourseofbusiness.
Wearenotcurrentlyapartytoanymateriallegalproceedingsorclaims,norareweawareofanypendingorthreatenedlitigationorclaimsthatcouldhaveamaterialadverseeffectonourbusiness,operatingresults,cashflows,orfinancialconditionshouldsuchlitigationorclaimberesolvedunfavorably.
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9. Income Taxes
Thefollowingtablepresentsdetailsoftheprovisionfor(benefitof)incometaxesandoureffectivetaxrates(inthousandsexceptpercentages):
Three Months Ended
September 30, Nine Months Ended
September 30, 2017 2016 2017 2016 Provisionfor(benefitof)incometaxes $ 25 $ 58 $ (632) $ 148Effectivetaxrate 0.8% 1.4% (3.8%) 0.8%
WeaccountforincometaxesaccordingtoASC740,IncomeTaxes,which,amongotherthings,requiresthatweestimateourannualeffectiveincometaxrateforthefullyearandapplyittopre-taxincome(loss)toeachinterimperiod,takingintoaccountyear-to-dateamountsandprojectedresultsforthefullyear.Theprovisionfor(benefitof)incometaxesconsistsoffederal,foreign,state,andlocalincometaxes.OureffectivetaxratediffersfromthestatutoryU.S.incometaxrateduetotheeffectofstateandlocalincometaxes,generallylowertaxratesinforeignjurisdictionscomparedtotheUnitedStates,certainnondeductibleexpenses,andthechangesinvaluationallowancesagainstourdeferredtaxassets.Oureffectivetaxratecouldchangesignificantlyfromquartertoquarterbecauseofrecurringandnonrecurringfactors.
Weevaluatewhethertorecordavaluationallowanceagainstourdeferredtaxassetsbyconsideringallavailablepositiveandnegativeevidence,usinga“morelikelythannot”realizationstandard,includingourcumulativelosses,andtheamountandtimingoffuturetaxableincome.Basedonourreview,wewillcontinuetomaintainafullvaluationallowanceagainstourU.S.deferredtaxassets.
Theincometaxbenefitof$0.6millionfortheninemonthsendedSeptember30,2017primarilyrelatestoadiscretetaxbenefitof$1.0millionrelatedtoadecreaseinourvaluationallowanceagainstourdeferredtaxassetsrelatedtotheYhatacquisition,offsetinpartbyU.S.andCzechtaxexpensefromthesaleoftheintellectualpropertyrelatedtoourproductsfromtheU.S.parentcompanytowhollyownedsubsidiariesoutsidetheUnitedStatesandfromtheCzechsubsidiarytotheU.S.parentcompanyandotherwhollyownedsubsidiariesoutsidetheUnitedStates.
Neitherwenoranyofoursubsidiariesarecurrentlyunderexaminationfromtaxauthoritiesinthejurisdictionsinwhichwedobusiness.
10. Basic and Diluted Net Loss Per Share
Inperiodsinwhichwehavenetincome,weapplythetwo-classmethodforcalculatingnetlosspershare.Underthetwo-classmethod,netincomeisattributedtocommonstockholdersandparticipatingsecuritiesbasedontheirparticipationrights.Participatingsecuritiesincludeconvertiblepreferredstock.Inperiodsinwhichwehavenetlossesafteraccretionofconvertiblepreferredstock,wedonotattributelossestoparticipatingsecuritiesastheyarenotcontractuallyobligatedtoshareourlosses.
Underthetwo-classmethod,basicnetlosspershareattributabletocommonstockholdersiscomputedbydividingthenetlossattributabletocommonstockholdersbytheweighted-averagenumberofsharesofcommonstockoutstandingduringtheperiod.Netlossattributabletocommonstockholdersiscalculatedasnetlossincludingcurrentperiodconvertiblepreferredstockaccretion.
Dilutednetlosspershareattributabletocommonstockholdersadjustsbasicnetlosspershareforthepotentiallydilutiveimpactofstockoptionsandconvertiblepreferredstock.Aswehavereportedlossesattributabletocommonstockholdersforallperiodspresented,allpotentiallydilutivesecuritiesareantidilutiveandaccordingly,basicnetlosspershareequalsdilutednetlosspershare.BasicanddilutednetlosspershareattributabletocommonstockholdersforClassAandClassBcommonstockwerethesamebecausetheywereentitledtothesameliquidationanddividendrights.
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Thefollowingweighted-averageequivalentsharesofcommonstockwereexcludedfromthedilutednetlosspersharecalculationbecausetheirinclusionwouldhavebeenanti-dilutive(inthousands):
Three Months Ended
September 30, Nine Months Ended
September 30, 2017 2016 2017 2016 Optionstopurchasecommonstock 5,890 5,590 6,029 5,363Unvestedrestrictedstockunits 418 — 411 —Conversionofconvertiblepreferredstock — 14,647 4,399 14,647Contingentlyissuableshares 12 — 4 —
Totalsharesexcludedfromnetlosspershare 6,320 20,237 10,843 20,010
11. Segment and Geographic Information
Operatingsegmentsaredefinedascomponentsofanenterpriseforwhichseparatefinancialinformationisevaluatedregularlybythechiefoperatingdecisionmaker,orCODM,whoisourchiefexecutiveofficer,indecidinghowtoallocateresourcesandassessourfinancialandoperationalperformance.OurCODMevaluatesourfinancialinformationandresourcesandassessestheperformanceoftheseresourcesonaconsolidatedandaggregatedbasis.Asaresult,wehavedeterminedthatourbusinessoperatesinasingleoperatingsegment.
OuroperationsoutsidetheUnitedStatesincludesalesofficesinCanada,CzechRepublic,Germany,Singapore,andtheUnitedKingdom,andaresearchanddevelopmentcenterinUkraine.Revenuebylocationisdeterminedbythebillingaddressofthecustomer.Thefollowingsetsforthourrevenuebygeographicregion(inthousands):
Three Months Ended
September 30, Nine Months Ended
September 30, 2017 2016 2017 2016 UnitedStates $ 26,290 $ 18,158 $72,582 $49,632International 7,865 4,304 20,437 11,196
Total $ 34,155 $ 22,462 $93,019 $60,828
NocountriesoutsidetheUnitedStatescomprisedmorethan10%ofrevenueforanyoftheperiodspresented.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
YoushouldreadthefollowingdiscussionandanalysisofourfinancialconditionandresultsofoperationstogetherwiththecondensedconsolidatedfinancialstatementsandrelatednotesthatareincludedelsewhereinthisQuarterlyReportonForm10-QandourfinalprospectusrelatedtotheCompany’sinitialpublicoffering,orIPO,datedMarch23,2017,ortheProspectus,filedwiththeSecuritiesandExchangeCommission,ortheSEC,pursuanttoRule424(b)undertheSecuritiesActof1933,asamended,ortheSecuritiesAct.Thisdiscussioncontainsforward-lookingstatementsbaseduponcurrentexpectationsthatinvolverisksanduncertainties.Ouractualresultsmaydiffermateriallyfromthoseanticipatedintheseforward-lookingstatementsasaresultofvariousfactors,includingthosesetforthunder“RiskFactors,”setforthinPartII,Item1AofthisQuarterlyReportonForm10-Q.See“SpecialNoteRegardingForward-LookingStatements”above.
Overview
Wearealeadingproviderofself-servicedataanalyticssoftware.Oursoftwareplatformenablesorganizationstodramaticallyimprovebusinessoutcomesandtheproductivityoftheirbusinessanalysts.Oursubscription-basedplatformallowsorganizationstoeasilyprepare,blend,andanalyzedatafromamultitudeofsourcesandmorequicklybenefitfromdata-drivendecisions.Theease-of-use,speed,andsophisticationthatourplatformprovidesisenhancedthroughintuitiveandhighlyrepeatablevisualworkflows.Weaimtomakeourplatformasubiquitousintheworkplaceasspreadsheetsaretoday.
OurplatformincludesAlteryxDesigner,ourdatapreparation,blending,andanalyticsproductdeployableinthecloudandonpremise,andAlteryxServer,oursecureandscalableproductforsharingandrunninganalyticapplicationsinaweb-basedenvironment.Inaddition,AlteryxAnalyticsGallery,ourcloud-basedcollaborationoffering,isakeyfeatureofourplatformallowinguserstoshareworkflowsinacentralizedrepository.Ourplatformhasbeenadoptedbyorganizationsacrossawidevarietyofindustriesandsizes.AsofSeptember30,2017,wehad3,054customersinmorethan60countries,includingover400oftheGlobal2000companies.
Wederivesubstantiallyallourrevenuefromsubscriptionsforuseofourplatform.Oursoftwarecanbelicensedforuseonadesktoporserver,oritcanbedeliveredthroughahostedmodel.Subscriptionperiodsforourplatformgenerallyrangefromonetothreeyearsandthesubscriptionfeesaretypicallybilledannuallyinadvance.Werecognizerevenuefromsubscriptionfeesratablyoverthetermofthecontract.Revenuefromsubscriptionsrepresentedover95%ofrevenueforeachofthethreeandninemonthsendedSeptember30,2017and2016.Wealsogeneraterevenuefromprofessionalservices,includingtrainingandconsultingservices.
Weemploya“landandexpand”businessmodel.Ourgo-to-marketapproachoftenbeginswithafreetrialandisfollowedbyaninitialpurchaseofourplatform.Asorganizationsrealizethebenefitsderivedfromourplatform,usefrequentlyspreadsacrossdepartments,divisions,andgeographiesthroughword-of-mouth,collaboration,andstandardizationofbusinessprocesses.Overtime,manyofourcustomersfindthattheuseofourplatformismorestrategicinnatureandourplatformbecomesafundamentalelementoftheirregularanalyticalprocesses.
Wesellourplatformprimarilythroughdirectsalesandmarketingchannelsutilizingawiderangeofonlineandofflinesalesandmarketingactivities.Inaddition,wehavecultivatedstrongrelationshipswithchannelpartnerstohelpusextendthereachofoursalesandmarketingefforts,especiallyinternationally.Ourchannelpartnersincludetechnologyalliances,systemintegrators,managementconsultingfirms,andvalue-addedresellers.Thesechannelpartnersalsoprovidesolution-basedselling,services,andtraininginternationally.
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Key Business Metrics
Wereviewthefollowingkeybusinessmetricstoevaluateourbusiness,measureourperformance,identifytrendsaffectingourbusiness,formulatebusinessplans,andmakestrategicdecisions:
Number of Customers .Webelievethatourabilitytoexpandourcustomerbaseisakeyindicatorofourmarketpenetration,thegrowthofourbusiness,andourfuturepotentialbusinessopportunities.Wedefineacustomerattheendofanyparticularperiodasanentitywithasubscriptionagreementthatrunsthroughthecurrentorfutureperiodasofthemeasurementdate.Organizationswithfreetrialshavenotenteredintoasubscriptionagreementandarenotconsideredcustomers.Asingleorganizationwithseparatesubsidiaries,segments,ordivisionsthatuseourplatformmayrepresentmultiplecustomers,aswetreateachentitythatisinvoicedseparatelyasasinglecustomer.Incaseswherecustomerssubscribetoourplatformthroughourchannelpartners,eachendcustomeriscountedseparately.
Thefollowingtablesummarizesthenumberofourcustomersateachquarterendfortheperiodsindicated: As of
Mar. 31,
2016 Jun. 30,
2016 Sep. 30,
2016 Dec. 31,
2016 Mar. 31,
2017 Jun. 30,
2017 Sep. 30,
2017 Customers 1,578 1,834 2,047 2,328 2,565 2,823 3,054
Dollar-Based Net Revenue Retention Rate .Webelievethatourdollar-basednetrevenueretentionrateisakeymeasuretoprovideinsightintothelong-termvalueofourcustomersandourabilitytoretainandexpandrevenuefromourcustomerbaseovertime.Ourdollar-basednetrevenueretentionrateisatrailingfour-quarteraverageofthesubscriptionrevenuefromacohortofcustomersinaquarterascomparedtothesamequarterintheprioryear.Dollar-basednetrevenueretentionrateequalto100%wouldindicatethatwereceivedthesameamountofrevenuefromourcohortofcustomersinthecurrentquarteraswedidinthesamequarteroftheprioryear.Dollar-basednetrevenueretentionratelessthan100%wouldindicatethatwereceivedlessrevenuefromourcohortofcustomersinthecurrentquarterthanwedidinthesamequarteroftheprioryear.
Tocalculateourdollar-basednetrevenueretentionrate,wefirstidentifyacohortofcustomers,ortheBaseCustomers,inaparticularquarter,ortheBaseQuarter.AcustomerwillnotbeconsideredaBaseCustomerunlesssuchcustomerhasanactivesubscriptionfortheentiretyoftheBaseQuarter.WethendividetherevenueinthesamequarterofthesubsequentyearattributabletotheBaseCustomers,ortheComparisonQuarter,includingBaseCustomersfromwhichwenolongerderiverevenueintheComparisonQuarter,bytherevenueattributabletothoseBaseCustomersintheBaseQuarter.Ourdollar-basednetrevenueretentionrateinaparticularquarteristhenobtainedbyaveragingtheresultfromthatparticularquarterbythecorrespondingresultfromeachofthepriorthreequarters.Thedollar-basednetrevenueretentionrateexcludesrevenuefromprofessionalservicesfromthatcohort.
Thefollowingtablesummarizesourdollar-basednetrevenueretentionrateforeachquarterfortheperiodsindicated: Three Months Ended
Mar. 31,
2016 Jun. 30,
2016 Sep. 30,
2016 Dec. 31,
2016 Mar. 31,
2017 Jun. 30,
2017 Sep. 30,
2017 Dollar-basednetrevenueretentionrate 126% 127% 129% 135% 133% 134% 133%
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Components of Our Results of Operations
Revenue
Wederiveourrevenueprimarilyfromthesaleofsoftwaresubscriptions.Revenuefromsubscriptionsreflectstherevenuerecognizedfromsalesoflicensestoourplatformtonewcustomersandadditionallicensestoexistingcustomers.Subscriptionfeesarebasedprimarilyonthenumberofusersofourplatform.Werecognizesubscriptionrevenueratablyoverthetermofthecontract,commencingwiththedateonwhichtheplatformisfirstmadeavailabletothecustomer,andwhenallotherrevenuerecognitioncriteriaaremet.Oursubscriptionagreementsgenerallyhavetermsrangingfromonetothreeyearsandarebilledannuallyinadvance.Subscriptionsaregenerallynon-cancelableduringthesubscriptiontermandsubscriptionfeesarenon-refundable.Oursubscriptionagreementsprovideforunspecifiedfutureupdates,upgrades,andenhancements,andtechnicalproductsupport.Wealsogeneraterevenuefromlicensingthird-partysyndicateddatapackagedwithsubscriptions,whichwerecognizeratablyoverthesubscriptionperiod.Wealsoderiverevenuefromprofessionalservicesfeesearnedforconsultingengagementsrelatedtotrainingcustomersandchannelpartners,andconsultingservices.Revenuefromprofessionalservicesrelatingtotrainingresultsfromcontractstoprovideeducationalservicestocustomersandchannelpartnersregardingtheuseofourtechnologiesandisrecognizedastheservicesareprovided.Consultingrevenueisrecognizedonatimeandmaterialsbasisasservicesareprovided.Revenuefromprofessionalservicesrepresentedlessthan5%ofrevenueforeachofthethreeandninemonthsendedSeptember30,2017and2016.Overthelongterm,weexpectourrevenuefromprofessionalservicestodecreaseasapercentageofourrevenue.Inaddition,duetoour“landandexpand”businessmodel,asubstantialmajorityofourrevenueinanygivenperiodisattributabletoourexistingcustomerscomparedtonewcustomers.
Cost of Revenue
Costofrevenueconsistsprimarilyofemployee-relatedcosts,includingsalariesandbonuses,stock-basedcompensationexpense,andemployeebenefitcostsassociatedwithourcustomersupportandprofessionalservicesorganizations.Italsoincludesexpensesrelatedtohostingandoperatingourcloudinfrastructureinathird-partydatacenter,licensesofthird-partysyndicateddata,amortizationofintangibleassets,andrelatedoverheadexpenses.Themajorityofourcostofrevenuedoesnotfluctuatedirectlywithincreasesinrevenue.
Weallocatesharedoverheadcostssuchasinformationtechnologyinfrastructure,rent,andoccupancychargesineachexpensecategorybasedonheadcountinthatcategory.Assuch,generaloverheadexpensesarereflectedincostofrevenue.
Weintendtocontinuetoinvestadditionalresourcesinourcloudinfrastructure.Weexpectthatthecostofthird-partydatacenterhostingfeeswillincreaseovertimeaswecontinuetoexpandourcloud-basedoffering.
Gross Profit and Gross Margin
Grossprofitisrevenuelesscostofrevenue.Grossmarginisgrossprofitexpressedasapercentageofrevenue.Ourgrossmarginhasfluctuatedandmayfluctuatefromperiodtoperiodbasedonanumberoffactors,includingthemixofproductsandserviceswesell,thechannelthroughwhichwesellourproductsandservices,and,toalesserdegree,theutilizationofcustomersupportandprofessionalservicesresources,aswellasthird-partyhostingandsyndicateddatafeesinanygivenperiod.Weexpectourgrossmargintoincreasemodestlyoverthelongterm,althoughourgrossmarginmayfluctuatefromperiodtoperioddependingontheinterplayofthefactorsdiscussedabove.
Operating Expenses
Ouroperatingexpensesareclassifiedasresearchanddevelopment,salesandmarketing,andgeneralandadministrative.Foreachofthesecategories,thelargestcomponentisemployee-relatedcosts,whichincludesalariesandbonuses,stock-basedcompensationexpense,andemployeebenefitcosts.Weallocatesharedoverheadcostssuchasinformationtechnologyinfrastructure,rent,andoccupancychargesineachexpensecategorybasedonheadcountinthatcategory.
Researchanddevelopment.Researchanddevelopmentexpenseconsistsprimarilyofemployee-relatedcosts,includingsalariesandbonuses,stock-basedcompensationexpense,andemployeebenefitcosts,forourresearchanddevelopmentemployees,depreciationofequipmentusedinresearchanddevelopment,third-partycontractors,andrelatedallocatedoverheadcosts.Weexpectresearchanddevelopmentexpensestocontinuetoincreaseinabsolutedollarsforthe
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foreseeablefutureaswecontinuetoincreasethefunctionalityandotherwiseenhanceourplatformanddevelopnewproductsandservices.However,weexpectresearchanddevelopmentexpensetodecreaseasapercentageofrevenueoverthelongterm,althoughresearchanddevelopmentexpensemayfluctuateasapercentageofrevenuefromperiodtoperiodduetotheseasonalityofrevenueandthetimingandextentoftheseexpenses.
Salesandmarketing.Salesandmarketingexpenseconsistsprimarilyofemployee-relatedcosts,includingsalariesandbonuses,salescommissions,stock-basedcompensationexpense,andemployeebenefitcosts,foroursalesandmarketingemployees,marketingprograms,andrelatedallocatedoverheadcosts.Oursalesandmarketingemployeesincludequota-carryingheadcount,salesoperations,andadministration,marketing,andmanagement.Marketingprogramsconsistofadvertising,promotionaleventssuchasourU.S.andEuropeanInspireuserconferences,corporatecommunications,brandbuilding,andproductmarketingactivitiessuchasonlineleadgeneration.
Weplantocontinuetoinvestinsalesandmarketingbyexpandingourglobalpromotionalactivities,buildingbrandawareness,attractingnewcustomers,andsponsoringadditionalmarketingevents.Thetimingoftheseevents,suchasourannualsaleskickoffinthefirstquarterandourannualU.S.andEuropeanInspireuserconferencesinthesecondandthirdquarters,respectively,willaffectoursalesandmarketingexpenseinaparticularquarter.WeexpectsalesandmarketingexpensetocontinuetoincreaseinabsolutedollarsfortheforeseeablefutureaswecontinuetoexpandoursalesforcebothintheUnitedStatesandinternationally,andtocontinuetobeourlargestoperatingexpensecategory.However,weexpectsalesandmarketingexpensetodecreaseasapercentageofrevenueoverthelongterm,althoughsalesandmarketingexpensemayfluctuateasapercentageofrevenuefromperiodtoperiodduetotheseasonalityofrevenueandthetimingandextentoftheseexpenses.
Generalandadministrative.Generalandadministrativeexpenseconsistsprimarilyofemployee-relatedcosts,includingsalariesandbonuses,stock-basedcompensationexpense,andemployeebenefitcosts,forourexecutiveofficersandfinance,legal,humanresources,andadministrativepersonnel,professionalfeesforexternallegal,accounting,andotherconsultingservices,includingthoseincurredinconnectionwithourbusinesscombinationsandfollow-onpublicoffering,changesinthefairvalueofcontingentconsideration,andrelatedallocatedoverheadcosts.Weexpectgeneralandadministrativeexpensetocontinuetoincreaseinabsolutedollarsfortheforeseeablefutureaswecontinuetogrowandincurthecostsassociatedwithbeingapubliclytradedcompany,includingincreasedlegal,audit,andconsultingfees.However,weexpectgeneralandadministrativeexpensetodecreaseasapercentageofrevenueoverthelongtermasweimproveourprocesses,systems,andcontrolstoenableourinternalsupportfunctionstoscalewiththegrowthofourbusiness,althoughgeneralandadministrativeexpensemayfluctuateasapercentageofrevenuefromperiodtoperiodduetotheseasonalityofrevenueandthetimingandextentoftheseexpenses.
Other Expense, Net
Otherexpense,net,consistsprimarilyofforeignexchangegainsandlossesfromforeigncurrencytransactionsdenominatedincurrencyotherthanthefunctionalcurrency,interestincomefromouravailable-for-saleinvestments,andimpairmentofacostmethodinvestment.
Provision for (Benefit of) Income Taxes
Provisionfor(benefitof)incometaxesconsistsprimarilyofincometaxesincertainforeignjurisdictionsinwhichweconductbusiness,anddiscretetaxbenefitsrelatedtoourbusinessacquisitions.Aswehaveexpandedourinternationaloperations,wehaveincurredincreasedforeigntaxexpense,andweexpectthistrendtocontinue.Wehaveafullvaluationallowancefordomesticnetdeferredtaxassets,includingnetoperatinglosscarryforwards,andtaxcreditsrelatedprimarilytoresearchanddevelopment.Duetoourhistoryofdomesticlosses,weexpecttomaintainthisfullvaluationallowancefortheforeseeablefuture.
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Results of Operations
Thefollowingtablesetsforthourresultsofoperationsfortheperiodsindicated.Theperiod-to-periodcomparisonoffinancialresultsisnotnecessarilyindicativeoffinancialresultstobeachievedinfutureperiods.
Three Months Ended
September 30, Nine Months Ended
September 30, 2017 2016 2017 2016 (in thousands) Revenue $34,155 $22,462 $ 93,019 $ 60,828Costofrevenue(1) 5,425 4,062 15,545 11,727
Grossprofit 28,730 18,400 77,474 49,101
Operatingexpenses: Researchanddevelopment(1) 7,774 4,496 20,943 12,419Salesandmarketing(1) 15,514 13,456 48,731 42,530Generalandadministrative(1) 8,005 4,298 24,115 11,623
Totaloperatingexpenses 31,293 22,250 93,789 66,572
Lossfromoperations (2,563) (3,850) (16,315) (17,471)Otherexpense,net (711) (284) (277) (562)
Lossbeforeprovisionfor(benefitof)incometaxes (3,274) (4,134) (16,592) (18,033)Provisionfor(benefitof)incometaxes 25 58 (632) 148
Netloss $ (3,299) $ (4,192) $ (15,960) $ (18,181)
(1) Amountsincludestock-basedcompensationexpenseasfollows:
Three Months Ended
September 30, Nine Months Ended
September 30, 2017 2016 2017 2016 (in thousands) Costofrevenue $ 123 $ 24 $ 368 $ 72Researchanddevelopment 458 99 1,157 243Salesandmarketing 459 308 1,642 942Generalandadministrative 1,239 475 3,342 1,077
Total $ 2,279 $ 906 $ 6,509 $ 2,334
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Thefollowingtablesetsforthselectedhistoricalfinancialdatafortheperiodsindicated,expressedasapercentageofrevenue:
Three Months Ended
September 30, Nine Months Ended
September 30, 2017 2016 2017 2016 Revenue 100.0% 100.0% 100.0% 100.0%Costofrevenue 15.9 18.1 16.7 19.3Grossprofit 84.1 81.9 83.3 80.7Operatingexpenses:
Researchanddevelopment 22.8 20.0 22.5 20.4Salesandmarketing 45.4 59.9 52.4 69.9Generalandadministrative 23.4 19.1 25.9 19.1
Totaloperatingexpenses 91.6 99.1 100.8 109.4Lossfromoperations (7.5) (17.1) (17.5) (28.7)Otherexpense,net (2.1) (1.3) (0.3) (0.9)Lossbeforeprovisionfor(benefitof)incometaxes (9.6) (18.4) (17.8) (29.6)Provisionfor(benefitof)incometaxes 0.1 0.3 (0.7) 0.2Netloss (9.7) (18.7) (17.2) (29.9)
Comparison of the Three and Nine Months Ended September 30, 2017 and 2016
Revenue
Three Months Ended September 30, Change
Nine Months Ended September 30, Change
2017 2016 Amount % 2017 2016 Amount % (in thousands, except percentages) Revenue $34,155 $22,462 $11,693 52.1% $93,019 $60,828 $32,191 52.9%
Theincreaseinourrevenuewasprimarilyfromadditionalsalestoexistingcustomersand,toalesserextent,theincreaseinourtotalnumberofcustomers.ForeachofthethreeandninemonthsendedSeptember30,2017and2016,revenueattributedtoexistingcustomerswasgreaterthan90%ofourrevenue.
Cost of Revenue and Gross Margin
Three Months Ended September 30, Change
Nine Months Ended September 30, Change
2017 2016 Amount % 2017 2016 Amount % (in thousands, except percentages) Costofrevenue $ 5,425 $ 4,062 $ 1,363 33.6% $15,545 $11,727 $ 3,818 32.6%%ofrevenue 15.9% 18.1% 16.7% 19.3% Grossmargin 84.1% 81.9% 83.3% 80.7%
Theincreaseincostofrevenuewasprimarilyduetoroyaltiesassociatedwiththird-partysyndicateddatacosts.
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Theincreaseingrossmarginwastheresultofanincreaseintheproportionofrevenuefromsubscriptionsrelativetorevenuefromprofessionalservices,aswellasanincreaseintheuseofourcommunitysiteforself-servicesupport,whichreliesonengagementwithotherend-usersandourpartners,resultinginlowersupportcostsasapercentageofrevenue.
Research and Development
Three Months Ended September 30, Change
Nine Months Ended September 30, Change
2017 2016 Amount % 2017 2016 Amount % (in thousands, except percentages) Researchanddevelopment $ 7,774 $ 4,496 $ 3,278 72.9% $20,943 $12,419 $ 8,524 68.6%%ofrevenue 22.8% 20.0% 22.5% 20.4%
TheincreaseinresearchanddevelopmentexpenseforthethreemonthsendedSeptember30,2017ascomparedtothethreemonthsendedSeptember30,2016wasprimarilyduetoanincreaseinemployee-relatedcostsexcludingstock-basedcompensationof$2.3millionduetohigherheadcount,anincreaseinstock-basedcompensationof$0.4millionduetohigherheadcountandstockawardsissuedinconnectionwiththeacquisitionofYhat,Inc.,orYhat,andanincreaseof$0.4millioninallocatedoverheadexpenses.AsofSeptember30,2017,wehad157researchanddevelopmentpersonnelascomparedto98asofSeptember30,2016.
TheincreaseinresearchanddevelopmentexpensefortheninemonthsendedSeptember30,2017ascomparedtotheninemonthsendedSeptember30,2016wasprimarilyduetoanincreaseinemployee-relatedcostsexcludingstock-basedcompensationof$6.1millionduetohigherheadcount,anincreaseinstock-basedcompensationof$0.9millionduetohigherheadcountandstockawardsissuedinconnectionwiththeYhatacquisitionandanincreaseof$1.0millioninallocatedoverheadexpenses.
Sales and Marketing
Three Months Ended September 30, Change
Nine Months Ended September 30, Change
2017 2016 Amount % 2017 2016 Amount % (in thousands, except percentages) Salesandmarketing $15,514 $13,456 $ 2,058 15.3% $48,731 $42,530 $ 6,201 14.6%%ofrevenue 45.4% 59.9% 52.4% 69.9%
TheincreaseinsalesandmarketingexpenseforthethreemonthsendedSeptember30,2017ascomparedtothethreemonthsendedSeptember30,2016wasprimarilyduetoanincreaseinemployee-relatedcostsof$2.2millionduetohigherheadcountandanincreaseof$0.1millioninallocatedoverheadexpenses,offsetinpartbyadecreasein,andanoptimizationof,marketingprogramrelatedexpensesof$0.4million.AsofSeptember30,2017,wehad224salesandmarketingpersonnelascomparedto191asofSeptember30,2016.
TheincreaseinsalesandmarketingexpensefortheninemonthsendedSeptember30,2017ascomparedtotheninemonthsendedSeptember30,2016wasprimarilyduetoanincreaseinemployee-relatedcostsof$5.2millionduetohigherheadcountandanincreaseof$1.1millioninallocatedoverheadexpenses.
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General and Administrative
Three Months Ended September 30, Change
Nine Months Ended September 30, Change
2017 2016 Amount % 2017 2016 Amount % (in thousands, except percentages) Generalandadministrative $ 8,005 $ 4,298 $ 3,707 86.2% $24,115 $11,623 $12,492 107.5%%ofrevenue 23.4% 19.1% 25.9% 19.1%
TheincreaseingeneralandadministrativeexpenseforthethreemonthsendedSeptember30,2017ascomparedtothethreemonthsendedSeptember30,2016wasprimarilyduetoanincreaseinemployee-relatedcostsexcludingstock-basedcompensationof$0.8millionduetohigherheadcountaswecontinuedtoexpandourinfrastructuretosupportourgrowth,anincreaseinstock-basedcompensationof$0.8millionduetohigherheadcountandtherecognitionofexpensesrelatedtorestrictedstockunitstriggeredbyourIPO,anincreaseof$1.1millioninconsulting,accounting,legalandprofessionalfeesrelatedtobecomingapubliccompanyandcostsrelatedtoourfollow-onpublicoffering,andanincreaseof$0.7millionofallocatedoverheadexpenses.AsofSeptember30,2017,wehad76generalandadministrativepersonnelascomparedto63asofSeptember30,2016.
TheincreaseingeneralandadministrativeexpensefortheninemonthsendedSeptember30,2017ascomparedtotheninemonthsendedSeptember30,2016wasprimarilyduetoanincreaseinemployee-relatedcostsexcludingstock-basedcompensationof$3.5millionduetohigherheadcountaswecontinuedtoexpandourinfrastructuretosupportourgrowth,anincreaseinstock-basedcompensationof$2.3millionduetohigherheadcountandtherecognitionofexpensesrelatedtorestrictedstockunitstriggeredbyourIPO,anincreaseof$3.2millioninconsulting,accounting,legalandprofessionalfeesrelatedtobecomingapubliccompany,ourrecentacquisitionsandourfollow-onpublicoffering,andanincreaseof$2.6millionofallocatedoverheadexpenses.
Other Expense, Net
Three Months Ended September 30, Change
Nine Months Ended September 30, Change
2017 2016 Amount % 2017 2016 Amount % (in thousands, except percentages) Otherexpense,net $ (711) $ (284) $ (427) 150.4% $ (277) $ (562) $ 285 (50.7%)
Otherexpense,netconsistsprimarilyofgainsandlossesonforeigncurrencytransactions,interestincomefromouravailable-for-saleinvestments,andimpairmentofacostmethodinvestment.ThefluctuationinotherexpenseforthethreeandninemonthsendedSeptember30,2017ascomparedtothethreeandninemonthsendedSeptember30,2016wasprimarilyduetoa$1.1millionimpairmentofacostmethodinvestmentinthethreemonthsendedSeptember30,2017,increasesininterestincomeduetoanincreaseinbalancesofavailableforsalesecurities,andfluctuationsinforeigncurrencyagainsttheU.S.Dollar.
Provision for (Benefit of) Income Taxes
Three Months Ended September 30, Change
Nine Months Ended September 30, Change
2017 2016 Amount % 2017 2016 Amount % (in thousands, except percentages) Provisionfor(benefitof)incometaxes $ 25 $ 58 $ (33) * $ (632) $ 148 $ (780) ** Notmeaningful
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ThechangeintheprovisionforincometaxesfortheninemonthsendedSeptember30,2017ascomparedtotheninemonthsendedSeptember30,2016wasprimarilyduetoadiscretetaxbenefitof$1.0millionrelatedtoadecreaseinourvaluationallowanceagainstourdeferredtaxassetsrelatedtotheYhatacquisition.
Liquidity and Capital Resources
AsofSeptember30,2017,wehad$182.6millionofcashandcashequivalentsandshort-termandlong-terminvestmentsinmarketablesecurities.InMarch2017,wecompletedourIPO,resultinginnetproceedsof$131.4million,whichincluded$17.6millionfromtheexerciseinfulloftheunderwriters’optiontopurchaseadditionalsharesinApril2017,afterunderwritingdiscountsandcommissionsandofferingexpenses.
Ourprincipalusesofcasharefundingouroperationsandotherworkingcapitalrequirements.
Webelievethatourexistingcashandcashequivalentsandshort-termandlong-terminvestmentsandanypositivecashflowsfromoperationswillbesufficienttosupportourworkingcapitalandcapitalexpenditurerequirementsforatleastthenext12months.Totheextentexistingcashandcashequivalentsandshort-terminvestmentsandcashfromoperationsarenotsufficienttofundfutureactivities,wemayneedtoraiseadditionalfunds.Wemayseektoraiseadditionalfundsthroughequity,equity-linked,ordebtfinancings.Ifweraiseadditionalfundsthroughtheincurrenceofindebtedness,suchindebtednessmayhaverightsthatareseniortoholdersofourequitysecuritiesandcouldcontaincovenantsthatrestrictoperations.Anyadditionalequityorconvertibledebtfinancingmaybedilutivetostockholders.Ifweareunabletoraiseadditionalcapitalwhendesired,ourbusiness,operatingresults,andfinancialconditioncouldbeadverselyaffected.
Cash Flows
Thefollowingtablesetsforthcashflowsfortheperiodsindicated:
Nine Months Ended
September 30, 2017 2016 (in thousands) Netcashprovidedby(usedin)operatingactivities $ 6,440 $(9,126)Netcashprovidedby(usedin)investingactivities (77,183) 2,222Netcashprovidedby(usedin)financingactivities 135,205 (569)
Operating Activities
FortheninemonthsendedSeptember30,2017,netcashprovidedbyoperatingactivitieswas$6.4million.Netcashprovidedbyoperatingactivitiesprimarilyreflectedachangeinoperatingassetsandliabilitiesof$12.4millionandnetnon-cashactivityof$10.0million,offsetinpartbyanetlossof$16.0million.Thechangesinoperatingassetsandliabilitiesprimarilyrelatedtoadecreaseinaccountsreceivableof$3.9millionfromcollectionsofannualbillingsinvoicedduringthethreemonthsendedDecember31,2016,andanincreaseindeferredrevenueof$8.1millionduetoincreasedbillings.Netnon-cashactivityprimarilyconsistedofstock-basedcompensationof$6.5millionanddepreciationandamortizationof$2.7million.
FortheninemonthsendedSeptember30,2016,netcashusedbyoperatingactivitieswas$9.1million.Netcashusedbyoperatingactivitiesprimarilyreflectedanetlossof$18.2million.Thenetlosswasoffsetinpartbyachangeinoperatingassetsandliabilitiesof$5.5millionandnetnon-cashoperatingactivitiesof$3.5million.ThechangeinoperatingassetsandliabilitiesprimarilyrelatedtoanincreaseinbillingsduringthethreemonthsendedSeptember30,2016resultinginanincreaseindeferredrevenueof$8.4millionoffsetinpartbyanincreaseinaccountsreceivableof$3.3million.Netnon-cashactivitiesprimarilyconsistedofstock-basedcompensationof$2.3millionanddepreciationandamortizationof$1.2million.
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Investing Activities
NetcashusedininvestingactivitiesfortheninemonthsendedSeptember30,2017was$77.2million,consistingprimarilyof$65.8millionofnetpurchasesofinvestments,$9.1millionofnetcashpaidinconnectionwithourbusinessacquisitions,and$2.3millionofpurchasesofpropertyandequipment.
NetcashprovidedbyinvestingactivitiesfortheninemonthsendedSeptember30,2016was$2.2million,consistingprimarilyof$5.7millionofnetmaturitiesofinvestments,offsetinpartby$3.5millionofpurchasesofpropertyandequipmentassociatedwithadditionalheadcountandofficelocations.
Financing Activities
NetcashprovidedbyfinancingactivitiesfortheninemonthsendedSeptember30,2017was$135.2million,consistingprimarilyofproceedsfromourIPOof$134.8millionand$2.6millionofproceedsfromstockoptionexercisesandpurchasesunderouremployeestockpurchaseplan,partiallyoffsetby$1.9millioninpaymentsofIPOcostsand$0.2millionofprincipalpaymentsonourcapitallease.
NetcashusedinfinancingactivitiesfortheninemonthsendedSeptember30,2016was$0.6million,consistingprimarilyofpaymentofissuancecostsrelatedtoourSeriesCconvertiblepreferredstockissuanceof$0.4millionand$0.3millionofrepurchasesofcommonstock.
Contractual Obligations and Commitments
TherewerenomaterialchangesinourcontractualobligationsandcommitmentsduringtheninemonthsendedSeptember30,2017fromthecontractualobligationsandcommitmentsdisclosedintheProspectus,exceptforthecontingentconsiderationacquiredaspartofourbusinesscombinationsasdiscussedinNote3ofthenotestoourcondensedconsolidatedfinancialstatementsincludedinPartI,Item1ofthisQuarterlyReportonForm10-Q.SeeNote8ofthenotestoourcondensedconsolidatedfinancialstatementsincludedinPartI,Item1ofthisQuarterlyReportonForm10-Qforadditionalinformationregardingcontractualobligationsandcommitments.
Off-Balance Sheet Arrangements
AsofSeptember30,2017,wedidnothaveanyrelationshipswithunconsolidatedentitiesorfinancialpartnerships,suchasstructuredfinanceorspecialpurposeentities,whichwouldhavebeenestablishedforthepurposeoffacilitatingoff-balancesheetarrangements.
Critical Accounting Policies and Estimates
OurcondensedconsolidatedfinancialstatementsandtherelatednoteshavebeenpreparedinaccordancewithU.S.GAAP.Thepreparationofourcondensedconsolidatedfinancialstatementsrequiresustomakeestimatesandassumptionsthataffectthereportedamountsofassets,liabilities,revenue,costsandoperatingexpenses,provisionforincometaxes,andrelateddisclosures.Generally,webaseourestimatesonhistoricalexperienceandonvariousotherassumptionsinaccordancewithU.S.GAAPthatwebelievetobereasonableunderthecircumstances.Actualresultsmaydifferfromtheseestimates.Totheextentthattherearematerialdifferencesbetweentheseestimatesandouractualresults,ourfuturefinancialstatementswillbeaffected.
TherehavebeennochangestoourcriticalaccountingpoliciesdisclosedinourProspectusrelatedtoourIPOdatedMarch23,2017filedwiththeSecuritiesandExchangeCommissionpursuanttoRule424(b)undertheSecuritiesActof1933,asamended.
Recent Accounting Pronouncements
SeeNote2ofthenotestoourcondensedconsolidatedfinancialstatementsinPartI,Item1ofthisQuarterlyReportonForm10-Qforadescriptionofrecentaccountingpronouncements.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Foreign Currency Exchange Risk
Duetoourinternationaloperations,wehaveforeigncurrencyrisksrelatedtorevenueandoperatingexpensesdenominatedincurrenciesotherthantheU.S.dollar,primarilytheBritishPoundandEuro.Oursalescontractsareprimarilydenominatedinthelocalcurrencyofthecustomermakingthepurchase.Inaddition,aportionofouroperatingexpensesareincurredoutsidetheUnitedStatesandaredenominatedinforeigncurrencieswhereouroperationsarelocated.DecreasesintherelativevalueoftheU.S.dollartoothercurrenciesmaynegativelyaffectrevenueandotheroperatingresultsasexpressedinU.S.dollars.Wedonotbelievethatanimmediate10%increaseordecreaseintherelativevalueoftheU.S.dollartoothercurrencieswouldhaveamaterialeffectonouroperatingresults.
Wehaveexperiencedandwillcontinuetoexperiencefluctuationsinnetlossasaresultoftransactiongainsorlossesrelatedtoremeasuringcertaincurrentassetandcurrentliabilitybalancesthataredenominatedincurrenciesotherthanthefunctionalcurrencyoftheentitiesinwhichtheyarerecorded.Todate,wehavenotenteredintoderivativesorhedgingtransactions,asourexposuretoforeigncurrencyexchangerateshashistoricallybeenpartiallyhedgedasourU.S.dollardenominatedinflowshavecoveredourU.S.dollardenominatedexpensesandourforeigncurrencydenominatedinflowshavecoveredourforeigncurrencydenominatedexpenses.However,wemayenterintoderivativeorhedgingtransactionsinthefutureifourexposuretoforeigncurrencyshouldbecomemoresignificant.
Interest Rate Risk
Wehadcashandcashequivalentsandshort-termandlong-terminvestmentsof$182.6millionasofSeptember30,2017.Theprimaryobjectiveofourinvestmentactivitiesisthepreservationofcapital,andwedonotenterintoinvestmentsfortradingorspeculativepurposes.Ahypothetical10%increaseininterestratesduringtheninemonthsendedSeptember30,2017wouldnothavehadamaterialimpactonourcondensedconsolidatedfinancialstatements.Wedonothavematerialexposuretomarketriskwithrespecttoshort-termandlong-terminvestments,asanyinvestmentsweenterintoareprimarilyhighlyliquidinvestments.
Inflation Risk
Wedonotbelievethatinflationhashadamaterialeffectonourbusiness,financialcondition,oroperatingresults.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Ourmanagement,withtheparticipationofourChiefExecutiveOfficerandChiefFinancialOfficer,evaluatedtheeffectivenessofourdisclosurecontrolsandproceduresasdefinedinRules13a-15(e)and15d-15(e)undertheSecuritiesExchangeActof1934,asamended,ortheExchangeAct,asofSeptember30,2017.OurdisclosurecontrolsandproceduresaredesignedtoensurethatinformationwearerequiredtodiscloseinthereportswefileorsubmitundertheExchangeActisaccumulatedandcommunicatedtoourmanagement,includingourChiefExecutiveOfficerandChiefFinancialOfficer,asappropriatetoallowtimelydecisionsregardingrequireddisclosures,andisrecorded,processed,summarized,andreportedwithinthetimeperiodsspecifiedintheSEC’srulesandforms.
BecauseofthematerialweaknessinourinternalcontroloverfinancialreportingpreviouslydisclosedinourProspectus,ourChiefExecutiveOfficerandChiefFinancialOfficerconcludedthat,asofSeptember30,2017,ourdisclosurecontrolsandprocedureswerenoteffective.Inlightofthisfact,ourmanagement,includingourChiefExecutiveOfficerandChiefFinancialOfficer,hasperformedadditionalanalyses,reconciliations,andotherpost-closingproceduresandhasconcludedthat,notwithstandingthematerialweaknessinourinternalcontroloverfinancialreporting,thecondensedconsolidatedfinancialstatementsfortheperiodscoveredbyandincludedinthisQuarterlyReportonForm10-Qfairlypresent,inallmaterialrespects,ourfinancialposition,resultsofoperationsandcashflowsfortheperiodspresentedinconformitywithU.S.GAAP.
Previously Reported Material Weakness
Asdisclosedinthesectiontitled“RiskFactors”inPartII,Item1AofthisQuarterlyReportonForm10-Q,wepreviouslyidentifiedamaterialweaknessinourinternalcontroloverfinancialreportingrelatedtotheevaluationoftheaccountingimpactofcertaincontractualtermsincertainarrangementswithlicenseddataproviders,whichresultedinthemisstatementintherecordingofprepaidandotherassetsandroyaltycoststhatwererecordedincostofrevenueinthefirstthreefiscalquartersof2016.Thismaterialweaknessresultedinanimmaterialrevisionofthosequarterlybalancesheetandresultsofoperationsdata.
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Wecommencedmeasurestoremediatetheidentifiedmaterialweakness.Thoseremediationmeasuresareongoingandincludetheimplementationofadditionalcontrolactivitiesrelatedtotheidentificationandevaluationofthetermsofroyaltycontractsthatrequireconsiderationwhenassessingtheaccountingforthearrangement.
Whilewebelievethattheseeffortswillimproveourinternalcontroloverfinancialreporting,theimplementationofourremediationisongoingandwillrequirevalidationandtestingofthedesignandoperatingeffectivenessofinternalcontrolsoverasustainedperiodoffinancialreportingcycles.
Webelievewearemakingprogresstowardachievingtheeffectivenessofourinternalcontrolsanddisclosurecontrols.Theactionsthatwearetakingaresubjecttoongoingseniormanagementreview,aswellasauditcommitteeoversight.Wewillnotbeabletoconcludewhetherthestepswearetakingwillfullyremediatethematerialweaknessinourinternalcontroloverfinancialreportinguntilwehavecompletedourremediationeffortsandsubsequentevaluationoftheireffectiveness.Wemayalsoconcludethatadditionalmeasuresmayberequiredtoremediatethematerialweaknessinourinternalcontroloverfinancialreporting,whichmaynecessitateadditionalimplementationandevaluationtime.Wewillcontinuetoassesstheeffectivenessofourinternalcontroloverfinancialreportingandtakestepstoremediatetheknownmaterialweaknessexpeditiously.
Changes in Internal Control over Financial Reporting
Wearetakingactionstoremediatethematerialweaknessrelatingtoourinternalcontroloverfinancialreporting,asdescribedabove.Exceptasotherwisedescribedherein,therewasnochangeinourinternalcontroloverfinancialreportingthatoccurredduringtheperiodcoveredbythisQuarterlyReportonForm10-Qthathasmateriallyaffected,orisreasonablylikelytomateriallyaffect,ourinternalcontroloverfinancialreporting.
Limitations on the Effectiveness of Disclosure Controls and Procedures
Ourmanagement,includingourChiefExecutiveOfficerandChiefFinancialOfficer,doesnotexpectthatourdisclosurecontrolsandproceduresorinternalcontroloverfinancialreportingwillpreventallerrorsandallfraud.Acontrolsystem,nomatterhowwelldesignedandimplemented,canprovideonlyreasonable,notabsolute,assurancethatthecontrolsystem’sobjectiveswillbemet.Further,thedesignofacontrolsystemmustreflectthefactthatthereareresourceconstraintsandthebenefitsofcontrolsmustbeconsideredrelativetotheircosts.Becauseoftheinherentlimitationsinallcontrolsystems,noevaluationofcontrolscanprovideabsoluteassurancethatallcontrolissueswithinacompanyaredetected.Theinherentlimitationsincludetherealitiesthatjudgmentsindecision-makingcanbefaultyandthatbreakdownscanoccurbecauseofsimpleerrorsormistakes.Controlscanalsobecircumventedbytheindividualactsofsomepersons,bycollusionoftwoormorepeople,orbymanagementoverrideofthecontrols.Becauseoftheinherentlimitationsinacost-effectivecontrolsystem,misstatementsduetoerrororfraudmayoccurandmaynotbedetected.Also,projectionsofanyevaluationofeffectivenesstofutureperiodsaresubjecttotheriskthatcontrolsmaybecomeinadequatebecauseofchangesinconditionsorthatthedegreeofcompliancewiththepoliciesorproceduresmaydeteriorate.
PART II: OTHER INFORMATION
Item 1. Legal Proceedings.
Fromtimetotime,weareinvolvedinlegalproceedingsarisingintheordinarycourseofourbusiness.Wearenotapartytoanylegalproceedingsthat,ifdeterminedadverselytous,wouldindividuallyortakentogetherhaveamaterialadverseeffectonourbusiness,operatingresults,financialcondition,orcashflows.Regardlessoftheoutcome,litigationcanhaveanadverseimpactonusbecauseofdefenseandsettlementcosts,diversionofmanagementresources,andotherfactors.
Item 1A. Risk Factors.
AninvestmentinourClassAcommonstockinvolvesahighdegreeofrisk.YoushouldcarefullyconsidertherisksdescribedbelowandtheotherinformationinthisQuarterlyReportonForm10-Qandinourotherpublicfilingsbeforemakinganinvestmentdecision.Ourbusiness,prospects,financialcondition,oroperatingresultscouldbeharmedbyanyoftheserisks,aswellasotherrisksnotcurrentlyknowntousorthatwecurrentlyconsiderimmaterial.Ifanyofsuchrisksanduncertaintiesactuallyoccurs,ourbusiness,prospects,financialcondition,oroperatingresultscoulddiffermateriallyfromtheplans,projections,andotherforward-lookingstatementsincludedinthesectiontitled“Management’sDiscussionandAnalysisofFinancialConditionandResultsofOperations”andelsewhereinthisreportandinourotherpublicfilings.ThetradingpriceofourClassAcommonstockcoulddeclineduetoanyoftheserisks,and,asaresult,youmayloseallorpartofyourinvestment.
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Risks Related to Our Business and Industry
We have a limited operating history under our current business model, which makes it difficult to evaluate our business and prospects and increases the risksassociated with your investment.
Althoughwehavebeenoperatingourbusinesssince1997,wechangedourbusinessmodelsignificantlyandfirstlaunchedoursoftwareplatformin2010.Further,since2013,wehavelicensedourplatformtocustomersunderasubscription-basedmodel.Asaresult,ourbusinessmodelhasnotbeenfullyproven,andwehaveonlyalimitedoperatinghistorywithournewbusinessmodeltoevaluateourbusinessandfutureprospects,whichsubjectsustoanumberofuncertainties,includingourabilitytoplanforandmodelfuturegrowth.Ourhistoricalrevenuegrowthshouldnotbeconsideredindicativeofourfutureperformance.Wehaveencounteredandwillcontinuetoencounterrisksanddifficultiesfrequentlyexperiencedbygrowingcompaniesinrapidlychangingindustries,includingachievingmarketacceptanceofourplatform,attractingandretainingcustomers,growingpartnershipsanddistributionofourplatform,increasingcompetition,andincreasingexpensesaswecontinuetogrowourbusiness.Wecannotassureyouthatwewillbesuccessfulinaddressingtheseandotherchallengeswemayfaceinthefutureandifwedonotmanagetheseriskssuccessfully,ourbusinessmaybeadverselyaffected.Inaddition,wemaynotachievesufficientrevenuetoachieveormaintainpositivecashflowfromoperationsorprofitabilityinanygivenperiod.
We have a history of losses, anticipate increasing our operating expenses in the future, and may not achieve or sustain profitability.
Wehaveincurrednetlossesineachfiscalyearsinceourinception,includingnetlossesof$20.3million,$21.5million,and$24.3millionintheyearsendedDecember31,2014,2015,and2016,respectively.Wealsoincurredanetlossof$3.3millionand$16.0millioninthethreeandninemonthsendedSeptember30,2017,respectively.AsofSeptember30,2017,wehadanaccumulateddeficitof$102.0million.Weexpectouroperatingexpensestoincreasesubstantiallyintheforeseeablefutureasweimplementinitiativesdesignedtogrowourbusiness,includingincreasingouroverallcustomerbaseandexpandingsaleswithinourcurrentcustomerbase,continuingtopenetrateinternationalmarkets,investinginresearchanddevelopmenttoimprovethecapabilitiesofourplatform,growingourdistributionchannelsandchannelpartnerecosystem,deepeningourusercommunity,hiringadditionalemployees,expandingouroperationsandinfrastructure,bothdomesticallyandinternationally,andinconnectionwithlegal,accounting,andotheradministrativeexpensesrelatedtooperatingasapubliccompany.Theseeffortsmayprovemoreexpensivethanwecurrentlyanticipate,andwemaynotsucceedinincreasingourrevenuesufficiently,oratall,tooffsetthesehigherexpensesandtoachieveandsustainprofitability.Growthofourrevenuemaysloworrevenuemaydeclineforanumberofpossiblereasons,includingadecreaseinourabilitytoattractandretaincustomers,afailuretoincreaseournumberofchannelpartners,increasingcompetition,decreasinggrowthofouroverallmarket,andaninabilitytotimelyandcost-effectivelyintroducenewproductsandservicesthatarefavorablyreceivedbycustomersandpartners.Ifweareunabletomeettheserisksandchallengesasweencounterthem,ourbusinessandoperatingresultsmaybeadverselyaffected,andevenifweareabletoachieveprofitability,wemaynotbeabletosustainorincreasesuchprofitability.
Our operating results may fluctuate from quarter to quarter, which makes our future results difficult to predict.
Ourquarterlyoperatingresultshavefluctuatedinthepastandmayfluctuateinthefuture.Additionally,wehavealimitedoperatinghistorywiththecurrentscaleofourbusiness,whichmakesitdifficulttoforecastourfutureresults.Asaresult,youshouldnotrelyuponourpastquarterlyoperatingresultsasindicatorsoffutureperformance.Youshouldtakeintoaccounttherisksanduncertaintiesfrequentlyencounteredbycompaniesinrapidlyevolvingmarkets.Ouroperatingresultsinanygivenquartercanbeinfluencedbynumerousfactors,manyofwhichareunpredictableorareoutsideofourcontrol,including:
• ourabilitytogeneratesignificantrevenuefromnewproductsandservices;
• ourabilitytomaintainandgrowourcustomerbase;
• ourabilitytoexpandournumberofpartnersanddistributionofourplatform;
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• thedevelopmentandintroductionofnewproductsandservicesbyusorourcompetitors;
• increasesinandtimingofoperatingexpensesthatwemayincurtogrowandexpandouroperationsandtoremaincompetitive;
• seasonalpurchasingpatternsofourcustomers;
• thetimingofourInspirecustomerconferences;
• costsrelatedtotheacquisitionofbusinesses,talent,technologies,orintellectualproperty,includingpotentiallysignificantamortizationcostsandpossiblewrite-downs;
• failuresorbreachesofsecurityorprivacy,andthecostsassociatedwithremediatinganysuchfailuresorbreaches;
• adverselitigation,judgments,settlements,orotherlitigation-relatedcosts;
• changesinthelegislativeorregulatoryenvironment,suchaswithrespecttoprivacy;
• fluctuationsincurrencyexchangeratesandchangesintheproportionofourrevenueandexpensesdenominatedinforeigncurrencies;and
• generaleconomicconditionsineitherdomesticorinternationalmarkets.
We have been growing rapidly and expect to continue to invest in our growth for the foreseeable future. If we are unable to manage our growth effectively, ourrevenue and profits could be adversely affected.
Wehaveexperiencedrapidgrowthinarelativelyshortperiodoftime.Ourrevenuegrewfrom$38.0millionintheyearendedDecember31,2014to$53.8millionintheyearendedDecember31,2015to$85.8millionintheyearendedDecember31,2016andfrom$60.8millionintheninemonthsendedSeptember30,2016to$93.0millionintheninemonthsendedSeptember30,2017.Ournumberoffull-timeemployeeshasincreasedsignificantlyoverthelastfewyears,from413employeesasofSeptember30,2016to515employeesasofSeptember30,2017.Duringthisperiod,wealsoestablishedoperationsinanumberofcountriesoutsidetheUnitedStates.
Weplantocontinuetoexpandouroperationsandheadcountsignificantly,andweanticipatethatfurthersignificantexpansionwillberequired.Inaddition,wesellourplatformtocustomersinmorethan60countriesandhaveemployeesintheUnitedStates,Canada,theCzechRepublic,Germany,Singapore,andtheUnitedKingdom.Weplantocontinuetoexpandouroperationsintoothercountriesinthefuture,whichwillplaceadditionaldemandsonourresourcesandoperations.Ourfutureoperatingresultsdependtoalargeextentonourabilitytomanagethisexpansionandgrowthsuccessfully.Sustainingourgrowthwillplacesignificantdemandsonourmanagementaswellasonouradministrative,operational,andfinancialresources.Tomanageourgrowth,wemustcontinuetoimproveouroperational,financial,andmanagementinformationsystemsandexpand,motivate,andmanageourworkforce.Ifweareunabletomanageourgrowthsuccessfullywithoutcompromisingourqualityofserviceorourprofitmargins,orifnewsystemsthatweimplementtoassistinmanagingourgrowthdonotproducetheexpectedbenefits,ourrevenueandprofitscouldbeharmed.Risksthatwefaceinundertakingfutureexpansioninclude:
• effectivelyrecruiting,integrating,training,andmotivatingalargenumberofnewemployees,includingourdirectsalesforce,whileretainingexistingemployees,maintainingthebeneficialaspectsofourcorporateculture,andeffectivelyexecutingourbusinessplan;
• satisfyingexistingcustomersandattractingnewcustomers;
• successfullyimprovingandexpandingthecapabilitiesofourplatformandintroducingnewproductsandservices;
• expandingourchannelpartnerecosystem;
• controllingexpensesandinvestmentsinanticipationofexpandedoperations;
• implementingandenhancingouradministrative,operational,andfinancialinfrastructure,systems,andprocesses;
• addressingnewmarkets;and
• expandingoperationsintheUnitedStatesandinternationalregions.
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Afailuretomanageourgrowtheffectivelycouldharmourbusiness,operatingresults,financialcondition,andabilitytomarketandsellourplatform.
Further,duetoourrecentrapidgrowth,wehavelimitedexperienceoperatingatourcurrentscaleandpotentiallyatalargerscale,andasaresult,itmaybedifficultforustofullyevaluatefutureprospectsandrisks.Ourrecentandhistoricalgrowthshouldnotbeconsideredindicativeofourfutureperformance.Wehaveencounteredinthepast,andwillencounterinthefuture,risksanduncertaintiesfrequentlyexperiencedbygrowingcompaniesinrapidlychangingindustries.Ifourassumptionsregardingtheserisksanduncertainties,whichweusetoplanandoperateourbusiness,areincorrectorchange,orifwedonotaddresstheseriskssuccessfully,ourfinancialconditionandoperatingresultscoulddiffermateriallyfromourexpectations,ourgrowthratesmayslowandourbusinesswouldbyadverselyimpacted.
If the market for analytics products and services fails to grow as we expect, or if businesses fail to adopt our platform, our business, operating results, andfinancial condition could be adversely affected.
Since2013,nearlyallourrevenuehascomefromsalesofoursubscription-basedsoftwareplatform.Weexpectthesesalestoaccountforalargeportionofourrevenuefortheforeseeablefuture.Althoughdemandforanalyticsproductsandserviceshasgrowninrecentyears,themarketforanalyticsproductsandservicescontinuestoevolveandthesecularshifttowardsself-serviceanalyticsmaynotbeassignificantasweexpect.Wecannotbesurethatthismarketwillcontinuetogrowor,evenifitdoesgrow,thatbusinesseswilladoptourplatform.Ourfuturesuccesswilldependinlargepartonourabilitytofurtherpenetratetheexistingmarketforbusinessanalyticssoftware,aswellasthecontinuedgrowthandexpansionofwhatwebelievetobeanemergingmarketforanalyticsproductsandservicesthatarefaster,easiertoadopt,easiertouse,andmorefocusedonself-servicecapabilities.Ourabilitytofurtherpenetratethebusinessanalyticsmarketdependsonanumberoffactors,includingthecost,performance,andperceivedvalueassociatedwithourplatform,aswellascustomers’willingnesstoadoptadifferentapproachtodataanalysis.Wehavespent,andintendtokeepspending,considerableresourcestoeducatepotentialcustomersaboutanalyticsproductsandservicesingeneralandourplatforminparticular.However,wecannotbesurethattheseexpenditureswillhelpourplatformachieveanyadditionalmarketacceptance.Furthermore,potentialcustomersmayhavemadesignificantinvestmentsinlegacyanalyticssoftwaresystemsandmaybeunwillingtoinvestinnewproductsandservices.Inaddition,resistancefromconsumerandprivacygroupstoincreasedcommercialcollectionanduseofdataonspendingpatternsandotherpersonalbehaviorandgovernmentalrestrictionsonthecollectionanduseofpersonaldatamayimpairthefurthergrowthofthismarketbyreducingthevalueofdatatoorganizations,asmayotherdevelopments.Ifthemarketfailstogroworgrowsmoreslowlythanwecurrentlyexpectorbusinessesfailtoadoptourplatform,ourbusiness,operatingresults,andfinancialconditioncouldbeadverselyaffected.
We derive substantially all of our revenue from our software platform, and our future growth is dependent on its success.
Since2013,nearlyallofourrevenuehascomefromsalesofoursubscription-basedsoftwareplatform.Weexpectthesesalestoaccountforsubstantiallyallofourrevenuefortheforeseeablefuture.Assuch,thecontinuedgrowthinmarketdemandforourplatformiscriticaltoourcontinuedsuccess.Werecentlyannouncedtwonewproductsforoursoftwareplatform,AlteryxConnectandAlteryxPromote,butcannotbecertainthateitherproductwillgeneratesignificantrevenue,ifany.Inaddition,theseproductsaredesignedtobeusedwithourAlteryxServerproductandwillnotbesoldindependently.Accordingly,ourbusinessandfinancialresultswillcontinuetobesubstantiallydependentonoursinglesoftwareplatform.
If we are unable to attract new customers and expand sales to existing customers, both domestically and internationally, our revenue growth could be slowerthan we expect and our business may be harmed.
Ourfuturerevenuegrowthdependsinpartuponincreasingourcustomerbase.Ourabilitytoachievesignificantgrowthinrevenueinthefuturewilldepend,inlargepart,upontheeffectivenessofourmarketingefforts,bothdomesticallyandinternationally,andourabilitytoattractnewcustomers.Thismaybeparticularlychallengingwhereanorganizationhasalreadyinvestedsubstantialpersonnelandfinancialresourcestointegratetraditionaldataanalyticstoolsintoitsbusiness,assuchorganizationmaybereluctantorunwillingtoinvestinnewproductsandservices.Ifwefailtoattractnewcustomersandmaintainandexpandthosecustomerrelationships,ourrevenuewillgrowmoreslowlythanexpectedandourbusinesswillbeharmed.
Ourfuturerevenuegrowthalsodependsuponexpandingsalesandrenewalsofsubscriptionstoourplatformwithexistingcustomers.Ifourcustomersdonotpurchaseadditionallicensesorcapabilities,ourrevenuemaygrowmoreslowlythanexpected,maynotgrowatallormaydecline.Additionally,increasingincrementalsalestoourcurrentcustomerbaserequiresincreasinglysophisticatedandcostlysaleseffortsthataretargetedatseniormanagement.Forexample,duringthe
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yearsendedDecember31,2015and2016,salesandmarketingexpensesrepresented80%and67%ofourrevenue,respectively.Weplantocontinueexpandingoursalesefforts,bothdomesticallyandinternationally,butwemaybeunabletohirequalifiedsalespersonnel,maybeunabletosuccessfullytrainthosesalespersonnelthatweareabletohire,andsalespersonnelmaynotbecomefullyproductiveonthetimelinesthatwehaveprojectedoratall.Additionally,althoughwededicatesignificantresourcestosalesandmarketingprograms,includingInternetandotheronlineadvertising,thesesalesandmarketingprogramsmaynothavethedesiredeffectandmaynotexpandsales.Wecannotassureyouthatoureffortswouldresultinincreasedsalestoexistingcustomers,andadditionalrevenue.Ifoureffortstoupselltoourcustomersarenotsuccessful,ourbusinessandoperatingresultswouldbeadverselyaffected.
Ourcustomersgenerallyenterintolicenseagreementswithonetothreeyearsubscriptiontermsandhavenoobligationorcontractualrighttorenewtheirsubscriptionsaftertheexpirationoftheirinitialsubscriptionperiod.Moreover,ourcustomersthatdorenewtheirsubscriptionsmayrenewforlowersubscriptionamountsorforshortersubscriptionperiods.Customerrenewalratesmaydeclineorfluctuateasaresultofanumberoffactors,includingthebreadthofearlydeployment,reductionsinourcustomers’spendinglevels,ourpricingorpricingstructure,thepricingorcapabilitiesofproductsorservicesofferedbyourcompetitors,ourcustomers’satisfactionordissatisfactionwithourplatform,ortheeffectsofeconomicconditions.Ifourcustomersdonotrenewtheiragreementswithus,orrenewontermslessfavorabletous,ourrevenuemaydecline.
If we are unable to develop and release product and service enhancements and new products and services to respond to rapid technological change in a timelyand cost-effective manner, our business, operating results, and financial condition could be adversely affected.
Themarketforourplatformischaracterizedbyrapidtechnologicalchange,frequentnewproductandserviceintroductionsandenhancements,changingcustomerdemands,andevolvingindustrystandards.Theintroductionofproductsandservicesembodyingnewtechnologiescanquicklymakeexistingproductsandservicesobsoleteandunmarketable.Analyticsproductsandservicesareinherentlycomplex,anditcantakealongtimeandrequiresignificantresearchanddevelopmentexpenditurestodevelopandtestneworenhancedproductsandservices.Thesuccessofanyenhancementsorimprovementstoourplatformoranynewproductsandservicesdependsonseveralfactors,includingtimelycompletion,competitivepricing,adequatequalitytesting,integrationwithexistingtechnologiesandourplatform,andoverallmarketacceptance.Wecannotbesurethatwewillsucceedindeveloping,marketing,anddeliveringonatimelyandcost-effectivebasisenhancementsorimprovementstoourplatformoranynewproductsandservicesthatrespondtotechnologicalchangeornewcustomerrequirements,norcanwebesurethatanyenhancementsorimprovementstoourplatformoranynewproductsandserviceswillachievemarketacceptance.Anynewproductsthatwedevelopmaynotbeintroducedinatimelyorcost-effectivemanner,maycontainerrorsordefects,ormaynotachievethebroadmarketacceptancenecessarytogeneratesufficientrevenue.Moreover,evenifweintroducenewproductsandservices,wemayexperienceadeclineinrevenueofourexistingproductsandservicesthatisnotoffsetbyrevenuefromthenewproductsorservices.Forexample,customersmaydelaymakingpurchasesofnewproductsandservicestopermitthemtomakeamorethoroughevaluationoftheseproductsandservicesoruntilindustryandmarketplacereviewsbecomewidelyavailable.Somecustomersmayhesitatemigratingtoanewproductorserviceduetoconcernsregardingthecomplexityofmigrationandproductorserviceinfancyissuesonperformance.Inaddition,wemayloseexistingcustomerswhochooseacompetitor’sproductsandservicesratherthanmigratetoournewproductsandservices.Thiscouldresultinatemporaryorpermanentrevenueshortfallandadverselyaffectourbusiness.
Further,theemergenceofnewindustrystandardsrelatedtoanalyticsproductsandservicesmayadverselyaffectthedemandforourplatform.ThiscouldhappenifnewInternetstandardsandtechnologiesornewstandardsinthefieldofoperatingsystemsupportemergedthatwereincompatiblewithcustomerdeploymentsofourplatform.Forexample,ifweareunabletoadaptourplatformonatimelybasistonewdatabasestandards,theabilityofourplatformtoaccesscustomerdatabasesandtoanalyzedatawithinsuchdatabasescouldbeimpaired.Inaddition,becausepartofourplatformiscloud-based,weneedtocontinuallyenhanceandimproveourplatformtokeeppacewithchangesinInternet-relatedhardware,software,communications,anddatabasetechnologiesandstandards.
Anyfailureofourplatformtooperateeffectivelywithfutureinfrastructureplatformsandtechnologiescouldreducethedemandforourplatform.Ifweareunabletorespondtothesechangesinatimelyandcost-effectivemanner,ourplatformmaybecomelessmarketable,lesscompetitive,orobsolete,andouroperatingresultsmaybeadverselyaffected.
Moreover,software-as-a-service,orSaaS,businessmodelshavebecomeincreasinglydemandedbycustomersandadoptedbyothersoftwareproviders,includingourcompetitors.Whilepartofourplatformiscloud-based,mostofourplatformiscurrentlydeployedonpremiseandtherefore,ifcustomersdemandthatourplatformbeprovidedthroughaSaaS
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businessmodel,wewouldberequiredtomakeadditionalinvestmentstoourinfrastructureinordertobeabletomorefullyprovideourplatformthroughaSaaSmodelsothatourplatformremainscompetitive.Suchinvestmentsmayinvolveexpandingourdatacenters,servers,andnetworksandincreasingourtechnicaloperationsandengineeringteams.
The competitive position of our software platform depends in part on its ability to operate with third-party products and services, and if we are not successful inmaintaining and expanding the compatibility of our platform with such third-party products and services, our business, financial position, and operatingresults could be adversely impacted.
Thecompetitivepositionofoursoftwareplatformdependsinpartonitsabilitytooperatewithproductsandservicesofthirdparties,softwareservicesandinfrastructure.Assuch,wemustcontinuouslymodifyandenhanceourplatformtoadapttochangesinhardware,software,networking,browser,anddatabasetechnologies.Inthefuture,oneormoretechnologycompaniesmaychoosenottosupporttheoperationoftheirhardware,software,orinfrastructure,orourplatformmaynotsupportthecapabilitiesneededtooperatewithsuchhardware,software,orinfrastructure.Inaddition,totheextentthatathirdpartyweretodevelopsoftwareorservicesthatcompetewithours,thatprovidermaychoosenottosupportourplatform.Weintendtofacilitatethecompatibilityofoursoftwareplatformwithvariousthird-partyhardware,software,andinfrastructurebymaintainingandexpandingourbusinessandtechnicalrelationships.Ifwearenotsuccessfulinachievingthisgoal,ourbusiness,financialcondition,andoperatingresultscouldbeadverselyimpacted.
We face intense and increasing competition, and we may not be able to compete effectively, which could reduce demand for our platform and adversely affectour business, revenue growth, and market share.
Themarketforself-servicedataanalyticssolutionsisnewandrapidlyevolving.Inmanycases,ourprimarycompetitionismanual,spreadsheetdrivenprocessesormoretraditionalcustombuiltapproachesinwhichpotentialcustomershavemadesignificantinvestments.Inaddition,wecompetewithlargesoftwarecompanies,includingprovidersoftraditionalbusinessintelligencetoolsthatofferoneormorecapabilitiesthatarecompetitivewithourplatform,suchasInternationalBusinessMachinesCorporation,MicrosoftCorporation,OracleCorporation,SAPSE,andSASInstituteInc.Moreover,businessanalyticssoftwarecompaniesoffercapabilitiesthatarecompetitivewithasubsetofthesolutionsweprovide,suchasMicroStrategyIncorporatedandTIBCOSoftwareInc.
Inaddition,otherlargesoftwarecompanies,suchassalesforce.com,inc.andAmazon.com,Inc.,anddatavisualizationcompanies,suchasTableauSoftware,IncandQlikTechnology,Inc,alreadyprovideproductsandservicesinadjacentmarketsandmaydecidetoenterintoourmarket.Wealsocompetewithopensourceinitiativesandcustomdevelopmentefforts.Wecouldalsofacecompetitionfromnewmarketentrants,someofwhommightbecurrenttechnologypartnersofours.Weexpectcompetitiontoincreaseasotherestablishedandemergingcompaniesenterthebusinessanalyticssoftwaremarket,ascustomerrequirementsevolveandasnewproductsandservicesandtechnologiesareintroduced.
Manyofourcurrentandpotentialcompetitors,particularlythelargesoftwarecompaniesnamedabove,havelongeroperatinghistories,significantlygreaterfinancial,technical,marketing,distribution,professionalservices,orotherresourcesandgreaternamerecognitionthanwedo.Inaddition,manyofourcurrentandpotentialcompetitorshavestrongrelationshipswithcurrentandpotentialcustomersandextensiveknowledgeofthebusinessanalyticsindustry.Asaresult,ourcurrentandpotentialcompetitorsmaybeabletorespondmorequicklyandeffectivelythanwecantoneworchangingopportunities,technologies,standards,orcustomerrequirementsordevotegreaterresourcesthanwecantothedevelopment,promotion,andsaleoftheirproductsandservices.Moreover,manyofthesecompaniesarebundlingtheiranalyticsproductsandservicesintolargerdealsorsubscriptionrenewals,oftenatsignificantdiscountsaspartofalargersale.Inaddition,somecurrentandpotentialcompetitorsmayofferproductsorservicesthataddressoneoralimitednumberoffunctionsatlowerpricesorwithgreaterdepththanourplatform.Ourcurrentandpotentialcompetitorsmaydevelopandmarketnewtechnologieswithcomparablefunctionalitytoourplatform.Wemayexperiencefewercustomerorders,reducedgrossmargins,longersalescycles,andlossofmarketshare.Thiscouldleadustodecreaseprices,implementalternativepricingstructures,orintroduceproductsandservicesavailableforfreeoranominalpriceinordertoremaincompetitive.Wemaynotbeabletocompetesuccessfullyagainstcurrentandfuturecompetitors,andourbusiness,operatingresults,andfinancialconditionwillbeharmedifwefailtomeetthesecompetitivepressures.
Ourabilitytocompetesuccessfullyinourmarketdependsonanumberoffactors,bothwithinandoutsideofourcontrol.Someofthesefactorsinclude:easeofuse;platformfeatures,quality,functionality,reliability,performance,andeffectiveness;abilitytoautomateanalyticaltasksorprocesses;abilitytointegratewithothertechnologyinfrastructures;visionforthemarketandproductinnovation;softwareanalyticsexpertise;totalcostofownership;adherencetoindustrystandardsandcertifications;strengthofsalesandmarketingefforts;brandawarenessandreputation;andcustomerexperience,includingsupport.Anyfailurebyustocompetesuccessfullyinanyoneoftheseorotherareasmayreducethedemandforourplatform,aswellasadverselyaffectourbusiness,operatingresults,andfinancialcondition.
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Moreover,currentandfuturecompetitorsmayalsomakestrategicacquisitionsorestablishcooperativerelationshipsamongthemselvesorwithothers,includingourcurrentorfuturetechnologypartners.Bydoingso,thesecompetitorsmayincreasetheirabilitytomeettheneedsofourcustomersorpotentialcustomers.Inaddition,ourcurrentorprospectiveindirectsaleschannelpartnersmayestablishcooperativerelationshipswithourcurrentorfuturecompetitors.Theserelationshipsmaylimitourabilitytosellorcertifyourplatformthroughspecificdistributors,technologyproviders,databasecompanies,anddistributionchannelsandallowourcompetitorstorapidlygainsignificantmarketshare.Thesedevelopmentscouldlimitourabilitytoobtainrevenuefromexistingandnewcustomers.Ifweareunabletocompetesuccessfullyagainstcurrentandfuturecompetitors,ourbusiness,operatingresults,andfinancialconditionwouldbeharmed.
If we fail to develop, maintain, and enhance our brand and reputation cost-effectively, our business and financial condition may be adversely affected.
Webelievethatdeveloping,maintaining,andenhancingawarenessandintegrityofourbrandandreputationinacost-effectivemannerareimportanttoachievingwidespreadacceptanceofourplatformandareimportantelementsinattractingnewcustomersandmaintainingexistingcustomers.Webelievethattheimportanceofourbrandandreputationwillincreaseascompetitioninourmarketfurtherintensifies.Successfulpromotionofourbrandwilldependontheeffectivenessofourmarketingefforts,ourabilitytoprovideareliableandusefulplatformatcompetitiveprices,theperceivedvalueofourplatform,andourabilitytoprovidequalitycustomersupport.Brandpromotionactivitiesmaynotyieldincreasedrevenue,andeveniftheydo,theincreasedrevenuemaynotoffsettheexpensesweincurinbuildingandmaintainingourbrandandreputation.Wealsorelyonourcustomerbaseandcommunityofend-usersinavarietyofways,includingtogiveusfeedbackonourplatformandtoprovideuser-basedsupporttoourothercustomers.Ifwefailtopromoteandmaintainourbrandsuccessfullyortomaintainloyaltyamongourcustomers,orifweincursubstantialexpensesinanunsuccessfulattempttopromoteandmaintainourbrand,wemayfailtoattractnewcustomersandpartnersorretainourexistingcustomersandpartnersandourbusinessandfinancialconditionmaybeadverselyaffected.Anynegativepublicityrelatingtoouremployees,partners,orothersassociatedwiththeseparties,mayalsotarnishourownreputationsimplybyassociationandmayreducethevalueofourbrand.Damagetoourbrandandreputationmayresultinreduceddemandforourplatformandincreasedriskoflosingmarketsharetoourcompetitors.Anyeffortstorestorethevalueofourbrandandrebuildourreputationmaybecostlyandmaynotbesuccessful.
Our revenue growth and ability to achieve and sustain profitability depends on being able to expand our direct sales force and increase the productivity of oursales force successfully.
Todate,mostofourrevenuehasbeenattributabletotheeffortsofourdirectsalesforceintheUnitedStates.Inordertoincreaseourrevenueandachieveandsustainprofitability,wemustincreasethesizeofourdirectsalesforce,bothintheUnitedStatesandinternationally,togenerateadditionalrevenuefromnewandexistingcustomers.Weintendtosubstantiallyfurtherincreaseournumberofdirectsalesprofessionals.
Webelievethatthereissignificantcompetitionforsalespersonnelwiththeskillsandtechnicalknowledgethatwerequire.Ourabilitytoachievesignificantrevenuegrowthwilldepend,inlargepart,onoursuccessinrecruiting,training,andretainingsufficientnumbersofdirectsalespersonneltosupportourgrowth.Newhiresrequiresignificanttrainingandtypicallytakesixmonthsormoretoachievefullproductivity.Ourrecenthiresandplannedhiresmaynotbecomeproductiveasquicklyasweexpectandifournewsalesemployeesdonotbecomefullyproductiveonthetimelinesthatwehaveprojectedoratall,ourrevenuewillnotincreaseatanticipatedlevelsandourabilitytoachievelongtermprojectionsmaybenegativelyimpacted.Wemayalsobeunabletohireorretainsufficientnumbersofqualifiedindividualsinthemarketswherewedobusinessorplantodobusiness.Furthermore,hiringsalespersonnelinnewcountriesrequiresadditionalsetupandupfrontcoststhatwemaynotrecoverifthesalespersonnelfailtoachievefullproductivity.Inaddition,aswecontinuetogrowrapidly,alargepercentageofoursalesforcewillbenewtoourcompanyandourplatform,whichmayadverselyaffectoursalesifwecannottrainoursalesforcequicklyoreffectively.Attritionratesmayincrease,andwemayfaceintegrationchallengesaswecontinuetoseektoaggressivelyexpandoursalesforce.Ifweareunabletohireandtrainsufficientnumbersofeffectivesalespersonnel,orthesalespersonnelarenotsuccessfulinobtainingnewcustomersorincreasingsalestoourexistingcustomerbase,ourbusinesswillbeadverselyaffected.
Weperiodicallychangeandmakeadjustmentstooursalesorganizationinresponsetomarketopportunities,competitivethreats,managementchanges,productintroductionsorenhancements,acquisitions,salesperformance,increasesinsalesheadcount,costlevelsandotherinternalandexternalconsiderations.Anyfuturesalesorganizationchangesmayresultinatemporaryreductionofproductivity,whichcouldnegativelyaffectourrateofgrowth.Inaddition,anysignificantchangetothewaywestructureourcompensationofoursalesorganizationmaybedisruptiveandmayaffectourrevenuegrowth.
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We use channel partners and if we are unable to establish and maintain successful relationships with them, our business, operating results, and financialcondition could be adversely affected.
Inadditiontoourdirectsalesforce,weusechannelpartnerssuchastechnologyalliances,systemintegrators,managementconsultingfirms,andvalue-addedresellerstosellandsupportourplatform.Channelpartnersarebecominganincreasinglyimportantaspectofourbusiness,particularlywithregardtoenterprise,governmental,andinternationalsales.Ourfuturegrowthinrevenueandabilitytoachieveandsustainprofitabilitydependsinpartonourabilitytoidentify,establish,andretainsuccessfulchannelpartnerrelationshipsintheUnitedStatesandinternationally,whichwilltakesignificanttimeandresourcesandinvolvesignificantrisk.Ifweareunabletomaintainourrelationshipswiththesechannelpartners,orotherwisedevelopandexpandourindirectdistributionchannel,ourbusiness,operatingresults,financialcondition,orcashflowscouldbeadverselyaffected.
Wecannotbecertainthatwewillbeabletoidentifysuitableindirectsaleschannelpartners.Totheextentwedoidentifysuchpartners,wewillneedtonegotiatethetermsofacommercialagreementwiththemunderwhichthepartnerwoulddistributeourplatform.Wecannotbecertainthatwewillbeabletonegotiatecommercially-attractivetermswithanychannelpartner,ifatall.Inaddition,allchannelpartnersmustbetrainedtodistributeourplatform.Inordertodevelopandexpandourdistributionchannel,wemustdevelopandimproveourprocessesforchannelpartnerintroductionandtraining.Ifwedonotsucceedinidentifyingsuitableindirectsaleschannelpartners,ourbusiness,operatingresults,andfinancialconditionmaybeadverselyaffected.
Wealsocannotbecertainthatwewillbeabletomaintainsuccessfulrelationshipswithanychannelpartnersand,totheextentthatourchannelpartnersareunsuccessfulinsellingourplatform,ourabilitytosellourplatformandourbusiness,operatingresults,andfinancialconditioncouldbeadverselyaffected.Ourchannelpartnersmayoffercustomerstheproductsandservicesofseveraldifferentcompanies,includingproductsandservicesthatcompetewithourplatform.Becauseourchannelpartnersgenerallydonothaveanexclusiverelationshipwithus,wecannotbecertainthattheywillprioritizeorprovideadequateresourcestosellingourplatform.Moreover,divergenceinstrategybyanyofthesechannelpartnersmaymateriallyadverselyaffectourabilitytodevelop,market,sell,orsupportourplatform.Wecannotassureyouthatourchannelpartnerswillcontinuetocooperatewithus.Inaddition,actionstakenoromittedtobetakenbysuchpartiesmayadverselyaffectus.Inaddition,werelyonourchannelpartnerstooperateinaccordancewiththetermsoftheircontractualagreementswithus.Forexample,ouragreementswithourchannelpartnerslimitthetermsandconditionspursuanttowhichtheyareauthorizedtoresellordistributeourplatformandoffertechnicalsupportandrelatedservices.Wealsotypicallyrequireourchannelpartnerstorepresenttousthedatesanddetailsoflicensessoldthroughtoourcustomers.Ifourchannelpartnersdonotcomplywiththeircontractualobligationstous,ourbusiness,operatingresults,andfinancialconditionmaybeadverselyaffected.
Inaddition,alloursalestogovernmententitieshavebeenmadeindirectlythroughourchannelpartners.Governmententitiesmayhavestatutory,contractual,orotherlegalrightstoterminatecontractswithourchannelpartnersforconvenienceorduetoadefault,and,inthefuture,iftheportionofgovernmentcontractsthataresubjecttorenegotiationorterminationattheelectionofthegovernmententityarematerial,anysuchterminationorrenegotiationmayadverselyimpactourfutureoperatingresults.Intheeventofsuchtermination,itmaybedifficultforustoarrangeforanotherchannelpartnertosellourplatformtothesegovernmententitiesinatimelymanner,andwecouldlosesalesopportunitiesduringthetransition.Governmententitiesroutinelyinvestigateandauditgovernmentcontractors’administrativeprocesses,andanyunfavorableauditcouldresultinthegovernmententityrefusingtorenewitssubscriptiontoourplatform,areductionofrevenue,orfinesorcivilorcriminalliabilityiftheaudituncoversimproperorillegalactivities.
We depend on technology and data licensed to us by third parties that may be difficult to replace or cause errors or failures that may impair or delayimplementation of our products and services or force us to pay higher license fees.
Welicensethird-partytechnologiesanddatathatweincorporateinto,usetooperate,andprovidewithourplatform.Wecannotassureyouthatthelicensesforsuchthird-partytechnologiesordatawillnotbeterminatedorthatwewillbeabletolicensethird-partysoftwareordataforfutureproductsandservices.Inaddition,wemaybeunabletorenegotiateacceptablethird-partyreplacementlicensetermsintheeventoftermination,orwemaybesubjecttoinfringementliabilityifthird-partysoftwareordatathatwelicenseisfoundtoinfringeintellectualpropertyorprivacyrightsofothers.Inaddition,thedatathatwelicensefromthirdpartiesforpotentialuseinourplatformmaycontainerrorsordefects,whichcouldnegativelyimpacttheanalyticsthatourcustomersperformonorwithsuchdata.Thismayhaveanegativeimpactonhowourplatformisperceivedbyourcurrentandpotentialcustomersandcouldmateriallydamageourreputationandbrand.
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Changesinorthelossofthird-partylicensescouldleadtoourplatformbecominginoperableortheperformanceofourplatformbeingmateriallyreducedresultinginourpotentiallyneedingtoincuradditionalresearchanddevelopmentcoststoensurecontinuedperformanceofourplatformoramaterialincreaseinthecostsoflicensing,andwemayexperiencedecreaseddemandforourplatform.
Our long-term success depends, in part, on our ability to expand the sales of our software platform to customers located outside of the United States and ourcurrent, and any further, expansion of our international operations exposes us to risks that could have a material adverse effect on our business, operatingresults, and financial condition.
Wearegeneratingagrowingportionofourrevenuefrominternationalsales,andconductourbusinessactivitiesinvariousforeigncountries,includingsomeemergingmarketswherewehavelimitedexperience,wherethechallengesofconductingourbusinesscanbesignificantlydifferentfromthosewehavefacedinmoredevelopedmarketsandwherebusinesspracticesmaycreateinternalcontrolrisks.Forexample,werecentlyacquiredSemanta,whichhasoperationsintheCzechRepublicandUkraine.Therearecertainrisksinherentinconductinginternationalbusiness,including:
• fluctuationsinforeigncurrencyexchangerates;
• new,orchangesin,regulatoryrequirements;
• tariffs,exportandimportrestrictions,restrictionsonforeigninvestments,sanctions,andothertradebarriersorprotectionmeasures;
• costsoflocalizingproductsandservices;
• lackofacceptanceoflocalizedproductsandservices;
• difficultiesinandcostsofstaffing,managing,andoperatingourinternationaloperations;
• taxissues,includingrestrictionsonrepatriatingearningsandwithrespecttoourcorporateoperatingstructureandintercompanyarrangements;
• weakerintellectualpropertyprotection;
• economicweaknessorcurrencyrelatedcrises;
• theburdenofcomplyingwithawidevarietyoflaws,includingthoserelatingtolabormatters,consumeranddataprotection,privacy,networksecurity,encryption,andtaxes;
• generallylongerpaymentcyclesandgreaterdifficultyincollectingaccountsreceivable;
• ourabilitytoadapttosalespracticesandcustomerrequirementsindifferentcultures;
• corporateespionage;and
• politicalinstabilityandsecurityrisksinthecountrieswherewearedoingbusiness.
Forexample,inJune2016,theUnitedKingdomheldareferendumandvotedinfavorofleavingtheEuropeanUnionandinMarch2017theUnitedKingdomprovidednotificationofitsintenttoleavetheEuropeanUnion.Thishascreatedpoliticalandeconomicuncertainty,particularlyintheUnitedKingdomandtheEuropeanUnion,andcouldcausedisruptionsto,andcreateuncertaintysurrounding,ourbusinessintheUnitedKingdomandEuropeanUnion,includingaffectingourrelationshipswithourexistingandprospectivecustomers,partners,andemployees,andcouldhaveamaterialimpactontheregulatoryregimeapplicabletoouroperationsintheUnitedKingdom.
Wehaveundertaken,andmightundertakeadditional,corporateoperatingrestructuringsthatinvolveourgroupofforeigncountrysubsidiariesthroughwhichwedobusinessabroad.Weconsidervariousfactorsinevaluatingtheserestructurings,includingthealignmentofourcorporatelegalentitystructurewithourorganizationalstructureanditsobjectives,theoperationalandtaxefficiencyofourgroupstructure,andthelong-termcashflowsandcashneedsofourbusiness.Ifineffectual,suchrestructuringscouldincreaseourincometaxliabilities,andinturn,increaseourglobaleffectivetaxrate.
VarioustaxreformbillsandotherproposalsarecurrentlyunderconsiderationintheUnitedStatesandabroad.
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TheU.S.proposalsinclude,amongotheritems,changingtheU.S.corporateincometaxrate,reducingoreliminatingcertaincorporatetaxincentives,andchangingtheexistingregimefortaxingoverseasearnings(includingtheintroductionofaminimumtaxonadjusted,unrepatriatedforeignearnings).
TheOrganizationforEconomicCo-operationandDevelopment,orOECD,issuedfinalactionitemsorproposalsrelatedtoitsinitiativetocombatbaseerosionandprofitshifting,orBEPS.TheOECDurgeditsmemberstoadoptsomeoralloftheproposalstocounteracttheeffectsoftheuseoftaxhavensandpreferentialtaxregimesglobally.OneBEPSproposalredefinesa“permanentestablishment,”andchangeshowprofitswouldbeattributedtothepermanentestablishment.Anotherproposalcallsforinsuringtransferpricingoutcomesarecommensuratewithvaluecreation,adoptingtheviewthecurrentrulesfacilitatethetransferofrisks,capital,andincomeawayfromcountrieswhereeconomicactivitytakesplace.WeexpectmanycountriestoincorporatetheBEPSproposalsintotheirlaws.Severalcountrieshavechangedorproposedchangesthatincorporatesomeoralloftheproposals.
Someoftheseproposals,ifenactedintolawintheUnitedStatesandintheforeigncountrieswherewedobusiness,couldincreasetheburdenandcostsofourtaxcompliance.Moreover,suchchangescouldincreasetheamountoftaxesweincurinthosejurisdictions,andinturn,increaseourglobaleffectivetaxrate.Itisunclearwhether,andtowhatextent,theUnitedStatesandothercountrieswillenactintolawtheaboveorsimilarproposals.
Inaddition,compliancewithforeignandU.S.lawsandregulationsthatareapplicabletoourinternationaloperationsiscomplexandmayincreaseourcostofdoingbusinessininternationaljurisdictions,andourinternationaloperationscouldexposeustofinesandpenaltiesifwefailtocomplywiththeseregulations.Theselawsandregulationsincludeimportandexportrequirementsandanti-briberylaws,suchastheUnitedStatesForeignCorruptPracticesActof1977,asamended,ortheFCPA,theUnitedKingdomBriberyAct2010,ortheBriberyAct,andlocallawsprohibitingcorruptpaymentstogovernmentalofficials.Althoughwehaveimplementedpoliciesandproceduresdesignedtohelpensurecompliancewiththeselaws,wecannotassureyouthatouremployees,partners,andotherpersonswithwhomwedobusinesswillnottakeactionsinviolationofourpoliciesortheselaws.Anyviolationsoftheselawscouldsubjectustocivilorcriminalpenalties,includingsubstantialfinesorprohibitionsonourabilitytoofferourplatforminoneormorecountries,andcouldalsomateriallydamageourreputationandourbrand.Thesefactorsmayhaveanadverseeffectonourfuturesalesand,consequently,onourbusiness,operatingresults,andfinancialcondition.
Because we recognize revenue from our subscriptions over the subscription term, downturns or upturns in new sales and renewals may not be immediatelyreflected in our operating results and may be difficult to discern.
Wegenerallyrecognizerevenuefromcustomersratablyoverthetermsoftheirsubscriptions.Asignificantportionoftherevenuewereportineachquarterisderivedfromtherecognitionofdeferredrevenuerelatingtosubscriptionsenteredintoduringpreviousquarters.Consequently,adeclineinneworrenewedsubscriptionsinanysinglequartermayhaveasmallimpactonourrevenueforthatquarter.However,suchadeclinewillnegativelyaffectourrevenueinfuturequarters.Accordingly,theeffectofsignificantdownturnsinsalesandmarketacceptanceofourplatform,andpotentialchangesinourrateofrenewals,maynotbefullyreflectedinouroperatingresultsuntilfutureperiods.Wemayalsobeunabletoreduceouroperatingexpensesintheeventofasignificantdeteriorationinsales.Inaddition,asignificantmajorityofourcostsareexpensedasincurred,whileasignificantportionofourrevenueisrecognizedoverthelifeoftheagreementwithourcustomer.Asaresult,increasedgrowthinthenumberofourcustomerscouldcontinuetoresultinourrecognitionofmorecoststhanrevenueintheearlierperiodsofthetermsofouragreements.Ourrevenuefromsubscriptionsalsomakesitmoredifficultforustorapidlyincreaseourrevenuethroughadditionalsalesinanyperiod,asrevenuefromcertainnewcustomersisrecognizedovertheapplicableterm.
As we continue to pursue sales to large enterprises, our sales cycle, forecasting processes, and deployment processes may become more unpredictable andrequire greater time and expense.
Salestolargeenterprisesinvolverisksthatmaynotbepresentorthatarepresenttoalesserextentwithsalestosmallerorganizationsandaccordingly,oursalescyclemaylengthenaswecontinuetopursuesalestolargeenterprises.Asweseektoincreaseoursalestolargeenterprisecustomers,wefacelongersalescycles,morecomplexcustomerrequirements,substantialupfrontsalescosts,andlesspredictabilityincompletingsomeofoursalesthanwedowithsmallercustomers.Withlargerorganizations,thedecisiontosubscribetoourplatformfrequentlyrequirestheapprovalsofmultiplemanagementpersonnelandmoretechnicalpersonnelthanwouldbetypicalofasmallerorganizationand,accordingly,salestolargerorganizationsmayrequireustoinvestmoretimeeducatingthesepotentialcustomers.Inaddition,largeenterprisesoftenrequireextensiveconfiguration,integrationservices,andpricingnegotiations,whichincreaseourupfrontinvestmentin
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thesaleseffortwithnoguaranteethatthesecustomerswilldeployourplatformwidelyenoughacrosstheirorganizationtojustifyoursubstantialupfrontinvestment.Purchasesbylargeenterprisesarealsofrequentlysubjecttobudgetconstraintsandunplannedadministrative,processing,andotherdelays,whichmeanswemaynotbeabletocometoagreementonthetermsofthesaletolargeenterprises.Inaddition,ourabilitytosuccessfullysellourplatformtolargeenterprisesisdependentonusattractingandretainingsalespersonnelwithexperienceinsellingtolargeorganizations.Ifweareunabletoincreasesalesofourplatformtolargeenterprisecustomerswhilemitigatingtherisksassociatedwithservingsuchcustomers,ourbusiness,financialposition,andoperatingresultsmaybeadverselyimpacted.Furthermore,ifwefailtorealizeanexpectedsalefromalargecustomerinaparticularquarteroratall,ourbusiness,operatingresults,andfinancialconditioncouldbeadverselyaffectedforaparticularperiodorinfutureperiods.
Our business is affected by seasonality.
Ourbusinessisaffectedbyseasonality.Duetothebudgetingcyclesofourcurrentandpotentialcustomers,historically,weenterintomoreagreementswithnewcustomersandmorerenewedagreementswithexistingcustomersinthefourthquarterofeachcalendaryearthaninanyotherquarter.Accordingly,ourcashflowfromoperationshashistoricallybeenhigherinthefirstquarterofeachcalendaryearthaninotherquarters.Thisseasonalityisreflectedtoamuchlesserextent,andsometimesisnotimmediatelyapparent,inourrevenueresults,duetothefactthat,inaccordancewithU.S.GAAP,werecognizerevenuefromthesaleofourplatformoverthetermofthecustomeragreement.Inaddition,wehaveexperiencedincreasedsalesandmarketingexpensesassociatedwithourannualsaleskickoffinthefirstquarterandourannualU.S.andEuropeanInspireuserconferencesinthesecondandthirdquarters,respectively.Ourrapidgrowthinrecentyearsmayobscuretheextenttowhichseasonalitytrendshaveaffectedourbusinessandmaycontinuetoaffectourbusiness.Accordingly,yearlyorquarterlycomparisonsofouroperatingresultsmaynotbeusefulandouroperatingresultsinanyparticularperiodwillnotnecessarilybeindicativeoftheresultstobeexpectedforanyfutureperiod.Seasonalityinourbusinesscanalsobeimpactedbyintroductionsofneworenhancedproductsandservices,includingthecostsassociatedwithsuchintroductions.
Any failure to offer high-quality technical support may harm our relationships with our customers and have a negative impact on our business and financialcondition.
Onceourplatformisdeployed,ourcustomersdependonourcustomersupportteamtoresolvetechnicalandoperationalissuesrelatingtoourplatform.Ourabilitytoprovideeffectivecustomersupportislargelydependentonourabilitytoattract,train,andretainqualifiedpersonnelwithexperienceinsupportingcustomersonplatformssuchasours.Thenumberofourcustomershasgrownsignificantlyandthathasandwillputadditionalpressureonourcustomersupportteam.Wemaybeunabletorespondquicklyenoughtoaccommodateshort-termincreasesincustomerdemandfortechnicalsupport.Wealsomaybeunabletomodifythefuture,scope,anddeliveryofourtechnicalsupporttocompetewithchangesinthetechnicalsupportprovidedbyourcompetitors.Increasedcustomerdemandforsupport,withoutcorrespondingrevenue,couldincreasecostsandnegativelyaffectouroperatingresults.Inaddition,aswecontinuetogrowouroperationsandexpandinternationally,weneedtobeabletoprovideefficientcustomersupportthatmeetsourcustomers’needsgloballyatscaleandourcustomersupportteamwillfaceadditionalchallenges,includingthoseassociatedwithdeliveringsupport,training,anddocumentationinlanguagesotherthanEnglish.Ifweareunabletoprovideefficientcustomersupportgloballyatscale,ourabilitytogrowouroperationsmaybeharmedandwemayneedtohireadditionalsupportpersonnel,whichcouldnegativelyimpactouroperatingresults.Inaddition,wehaverecentlybegun,andintendtocontinue,toprovideself-servicesupportresourcestoourcustomers.Someoftheseresources,suchasourcommunitypage,relyonengagementandcollaborationbyandwithothercustomers.Ifweareunabletodevelopself-servicesupportresourcesthatareeasytouseandthatourcustomersutilizetoresolvetheirtechnicalissuesorifourcustomerschoosenottocollaborateorengagewithothercustomersontechnicalsupportissues,customersmaycontinuetodirectsupportrequeststoourcustomersupportteaminsteadofrelyingonourself-servicesupportresourcesandourcustomers’experiencewithourplatformmaybenegativelyimpacted.Anyfailuretomaintainhigh-qualitysupport,oramarketperceptionthatwedonotmaintainhigh-qualitysupport,couldharmourreputation,ourabilitytosellourplatformtoexistingandprospectivecustomers,andourbusiness,operatingresults,andfinancialcondition.
Failure to protect our intellectual property could adversely affect our business.
Wecurrentlyrelyonacombinationofcopyrights,trademarks,tradesecrets,confidentialityprocedures,contractualcommitments,andotherlegalrightstoprotectourintellectualproperty.WealsohavefourpendingpatentapplicationsintheUnitedStates.Despiteourefforts,thestepswetaketoprotectourintellectualpropertymaybeinadequate.Unauthorizedthirdpartiesmaytrytocopyorreverseengineerportionsofourplatformorotherwiseobtainanduseourintellectualproperty.Inaddition,wemaynotbeabletoobtainsufficientintellectualpropertyprotectionforimportantfeaturesofourplatform,inwhichcaseourcompetitorsmaydiscoverwaystoprovidesimilarfeatureswithoutinfringingormisappropriatingourintellectualpropertyrights.
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Anypatentsthatwemayownandrelyoninthefuturemaybechallengedorcircumventedbyothersorinvalidatedthroughadministrativeprocessorlitigation.Ourcurrentandfuturepatentapplicationsmaynotbeissuedwiththescopeoftheclaimsweseek,ifatall.Inaddition,anypatentsissuedinthefuturemaynotprovideuswithcompetitiveadvantages,maynotbeenforceableinactionsagainstallegedinfringersormaybesuccessfullychallengedbythirdparties.
Moreover,recentamendmentstoU.S.patentlaw,developingjurisprudenceregardingU.S.patentlaw,andpossiblefuturechangestoU.S.orforeignpatentlawsandregulationsmayaffectourabilitytoprotectourintellectualpropertyanddefendagainstclaimsofpatentinfringement.Inaddition,thelawsofsomecountriesdonotprovidethesamelevelofprotectionofourintellectualpropertyasdothelawsoftheUnitedStates.Asweexpandourinternationalactivities,ourexposuretounauthorizedcopyinganduseofourplatformandproprietaryinformationwilllikelyincrease.Despiteourprecautions,itmaybepossibleforunauthorizedthirdpartiestoinfringeuponormisappropriateourintellectualproperty,tocopyourplatform,anduseinformationthatweregardasproprietarytocreateproductsandservicesthatcompetewithours.Effectiveintellectualpropertyprotectionmaynotbeavailabletousineverycountryinwhichourplatformisavailable.Forexample,someforeigncountrieshavecompulsorylicensinglawsunderwhichapatentownermustgrantlicensestothirdparties.Inaddition,manycountrieslimittheenforceabilityofpatentsagainstcertainthirdparties,includinggovernmentagenciesorgovernmentcontractors.Inthesecountries,patentsmayprovidelimitedornobenefit.Wemayneedtoexpendadditionalresourcestodefendourintellectualpropertyrightsdomesticallyorinternationally,whichcouldimpairourbusinessoradverselyaffectourdomesticorinternationalexpansion.Ifwecannotprotectourintellectualpropertyagainstunauthorizedcopyingoruse,wemaynotremaincompetitiveandourbusiness,operatingresults,andfinancialconditionmaybeadverselyaffected.
Weenterintoconfidentialityandinventionassignmentagreementswithouremployeesandconsultantsandenterintoconfidentialityagreementswithotherparties.Wecannotassureyouthattheseagreementswillbeeffectiveincontrollingaccessto,useof,anddistributionofourproprietaryinformationorineffectivelysecuringexclusiveownershipofintellectualpropertydevelopedbyouremployeesandconsultants.Further,theseagreementsmaynotpreventourcompetitorsfromindependentlydevelopingtechnologiesthataresubstantiallyequivalentorsuperiortoourplatform.
Inordertoprotectourintellectualpropertyrights,wemayberequiredtospendsignificantresourcestoacquire,maintain,monitor,andprotectourintellectualpropertyrights.Wecannotassureyouthatourmonitoringeffortswilldetecteveryinfringementofourintellectualpropertyrightsbyathirdparty.Litigationmaybenecessaryinthefuturetoenforceourintellectualpropertyrightsandtoprotectourtradesecrets.Litigationbroughttoprotectandenforceourintellectualpropertyrightscouldbecostly,time-consuming,anddistractingtomanagement,andcouldresultintheimpairmentorlossofportionsofourintellectualproperty.Further,oureffortstoenforceourintellectualpropertyrightsmaybemetwithdefenses,counterclaims,andcountersuitsattackingthevalidityandenforceabilityofourintellectualpropertyrights.Ourinabilitytoprotectourproprietarytechnologyagainstunauthorizedcopyingoruse,aswellasanycostlylitigationordiversionofourmanagement’sattentionandresources,coulddelayfurthersalesortheimplementationofourplatform,impairthefunctionalityofourplatform,delayintroductionsofnewproductsandservices,resultinoursubstitutinginferiorormorecostlytechnologiesintoourplatform,ordamageourbrandandreputation.
Additionally,theUnitedStatesPatentandTrademarkOfficeandvariousforeigngovernmentalpatentagenciesrequirecompliancewithanumberofprocedural,documentary,feepayment,andothersimilarprovisionsduringthepatentapplicationprocessandtomaintainissuedpatents.Therearesituationsinwhichnoncompliancecanresultinabandonmentorlapseofthepatentorpatentapplication,resultinginpartialorcompletelossofpatentrightsintherelevantjurisdiction.Ifthisoccurs,itcouldhaveamaterialadverseeffectonourbusinessoperationsandfinancialcondition.
Our platform may infringe the intellectual property rights of third parties and this may create liability for us or otherwise harm our business.
Thirdpartiesmayclaimthatourcurrentorfutureproductsandservicesinfringetheirintellectualpropertyrights,andsuchclaimsmayresultinlegalclaimsagainstourcustomersandus.Theseclaimsmaydamageourbrandandreputation,harmourcustomerrelationships,andcreateliabilityforus.Weexpectthenumberofsuchclaimswillincreaseasthenumberofproductsandservicesandthelevelofcompetitioninourmarketgrows,thefunctionalityofourplatformoverlapswiththatofotherproductsandservices,andthevolumeofissuedsoftwarepatentsandpatentapplicationscontinuestoincrease.Wegenerallyagreeinourcustomercontractstoindemnifycustomersforexpensesorliabilitiestheyincurasaresultofthirdpartyintellectualpropertyinfringementclaimsassociatedwithourplatform.Totheextentthatanyclaimarisesasaresultofthird-partytechnologywehavelicensedforuseinourplatform,wemaybeunabletorecoverfromtheappropriatethirdpartyanyexpensesorotherliabilitiesthatweincur.
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Companiesinthesoftwareandtechnologyindustries,includingsomeofourcurrentandpotentialcompetitors,ownlargenumbersofpatents,copyrights,trademarks,andtradesecretsandfrequentlyenterintolitigationbasedonallegationsofinfringementorotherviolationsofintellectualpropertyrights.Inaddition,manyofthesecompanieshavethecapabilitytodedicatesubstantiallygreaterresourcestoenforcetheirintellectualpropertyrightsandtodefendclaimsthatmaybebroughtagainstthem.Furthermore,patentholdingcompanies,non-practicingentities,andotheradversepatentownersthatarenotdeterredbyourexistingintellectualpropertyprotectionsmayseektoassertpatentclaimsagainstus.Fromtimetotime,thirdparties,includingcertainoftheseleadingcompanies,havecontactedusinvitingustolicensetheirpatentsandmay,inthefuture,assertpatent,copyright,trademark,orotherintellectualpropertyrightsagainstus,ourchannelpartners,ourtechnologypartners,orourcustomers.Wehavereceived,andmayinthefuturereceive,noticesthatclaimwehavemisappropriated,misused,orinfringedotherparties’intellectualpropertyrights,and,totheextentwegaingreatermarketvisibility,wefaceahigherriskofbeingthesubjectofintellectualpropertyinfringementclaims,whichisnotuncommonwithrespecttotheenterprisesoftwaremarket.
Theremaybethird-partyintellectualpropertyrights,includingissuedorpendingpatents,thatcoversignificantaspectsofourtechnologiesorbusinessmethods.Inaddition,ifweacquireorlicensetechnologiesfromthirdparties,wemaybeexposedtoincreasedriskofbeingthesubjectofintellectualpropertyinfringementdueto,amongotherthings,ourlowerlevelofvisibilityintothedevelopmentprocesswithrespecttosuchtechnologyandthecaretakentosafeguardagainstinfringementrisks.Anyintellectualpropertyclaims,withorwithoutmerit,couldbeverytime-consuming,couldbeexpensivetosettleorlitigate,andcoulddivertourmanagement’sattentionandotherresources.Theseclaimscouldalsosubjectustosignificantliabilityfordamages,potentiallyincludingtrebledamagesifwearefoundtohavewillfullyinfringedpatentsorcopyrights,andmayrequireustoindemnifyourcustomersforliabilitiestheyincurasaresultofsuchclaims.Theseclaimscouldalsoresultinourhavingtostopusingtechnologyfoundtobeinviolationofathirdparty’srights.Wemightberequiredtoseekalicensefortheintellectualproperty,whichmaynotbeavailableonreasonabletermsoratall.Evenifalicensewereavailable,wecouldberequiredtopaysignificantroyalties,whichwouldincreaseouroperatingexpenses.Alternatively,wecouldberequiredtodevelopalternativenon-infringingtechnology,whichcouldrequiresignificanttime,effort,andexpense,andmayaffecttheperformanceorfeaturesofourplatform.Ifwecannotlicenseordevelopalternativenon-infringingsubstitutesforanyinfringingtechnologyusedinanyaspectofourbusiness,wewouldbeforcedtolimitorstopsalesofourplatformandmaybeunabletocompeteeffectively.Anyoftheseresultswouldadverselyaffectourbusinessoperationsandfinancialcondition.
Our platform contains third-party open source software components, and failure to comply with the terms of the underlying open source software licensescould restrict our ability to sell our platform.
Ourplatformincorporatesopensourcesoftwarecode.Anopensourcelicenseallowstheuse,modification,anddistributionofsoftwareinsourcecodeform.Certainkindsofopensourcelicensesfurtherrequirethatanypersonwhocreatesaproductorservicethatcontains,linksto,orisderivedfromsoftwarethatwassubjecttoanopensourcelicensemustalsomaketheirownproductorservicesubjecttothesameopensourcelicense.Usingsoftwarethatissubjecttothiskindofopensourcelicensecanleadtoarequirementthatourplatformbeprovidedfreeofchargeorbemadeavailableordistributedinsourcecodeform.Althoughwedonotbelieveourplatformincludesanyopensourcesoftwareinamannerthatwouldresultintheimpositionofanysuchrequirement,theinterpretationofopensourcelicensesislegallycomplexand,despiteourefforts,itispossiblethatourplatformcouldbefoundtocontainthistypeofopensourcesoftware.
Moreover,wecannotassureyouthatourprocessesforcontrollingouruseofopensourcesoftwareinourplatformwillbeeffective.Ifwehavenotcompliedwiththetermsofanapplicableopensourcesoftwarelicense,wecouldberequiredtoseeklicensesfromthirdpartiestocontinueofferingourplatformontermsthatarenoteconomicallyfeasible,tore-engineerourplatformtoremoveorreplacetheopensourcesoftware,todiscontinuethesaleofourplatformifre-engineeringcouldnotbeaccomplishedonatimelybasis,topaymonetarydamages,ortomakegenerallyavailablethesourcecodeforourproprietarytechnology,anyofwhichcouldadverselyaffectourbusiness,operatingresults,andfinancialcondition.
Inadditiontorisksrelatedtolicenserequirements,useofopensourcesoftwarecaninvolvegreaterrisksthanthoseassociatedwithuseofthird-partycommercialsoftware,asopensourcelicensorsgenerallydonotprovidewarrantiesorassuranceoftitle,performance,non-infringement,orcontrolsonoriginofthesoftware.Thereistypicallynosupportavailableforopensourcesoftware,andwecannotassureyouthattheauthorsofsuchopensourcesoftwarewillnotabandonfurtherdevelopmentandmaintenance.Manyoftherisksassociatedwiththeuseofopensourcesoftware,suchasthelackof
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warrantiesorassurancesoftitleorperformance,cannotbeeliminated,andcould,ifnotproperlyaddressed,negativelyaffectourbusiness.Wehaveestablishedprocessestohelpalleviatetheserisks,includingareviewprocessforscreeningrequestsfromourdevelopmentorganizationsfortheuseofopensourcesoftware,butwecannotbesurethatallopensourcesoftwareisidentifiedorsubmittedforapprovalpriortouseinourplatform.
Respondingtoanyinfringementclaim,regardlessofitsvalidity,ordiscoveringopensourcesoftwarecodeinourplatformcouldharmourbusiness,operatingresults,andfinancialcondition,by,amongotherthings:
• resultingintime-consumingandcostlylitigation;
• divertingmanagement’stimeandattentionfromdevelopingourbusiness;
• requiringustopaymonetarydamagesorenterintoroyaltyandlicensingagreementsthatwewouldnotnormallyfindacceptable;
• causingdelaysinthedeploymentofourplatform;
• requiringustostopsellingsomeaspectsofourplatform;
• requiringustoredesigncertaincomponentsofourplatformusingalternativenon-infringingornon-opensourcetechnologyorpractices,whichcouldrequiresignificanteffortandexpense;
• requiringustodiscloseoursoftwaresourcecode,thedetailedprogramcommandsforoursoftware;and
• requiringustosatisfyindemnificationobligationstoourcustomers.
Future litigation could have a material adverse impact on our operating results and financial condition.
Fromtimetotime,wehavebeensubjecttolitigation.Theoutcomeofanylitigation,regardlessofitsmerits,isinherentlyuncertain.Regardlessofthemeritsofanyclaimsthatmaybebroughtagainstus,pendingorfuturelitigationcouldresultinadiversionofmanagement’sattentionandresourcesandwemayberequiredtoincursignificantexpensesdefendingagainsttheseclaims.Ifweareunabletoprevailinlitigation,wecouldincursubstantialliabilities.Wherewecanmakeareasonableestimateoftheliabilityrelatingtopendinglitigationanddeterminethatitisprobable,werecordarelatedliability.Asadditionalinformationbecomesavailable,weassessthepotentialliabilityandreviseestimatesasappropriate.However,becauseofuncertaintiesrelatingtolitigation,theamountofourestimatescouldbewrong.Anyadversedeterminationrelatedtolitigationcouldrequireustochangeourtechnologyorourbusinesspractices,paymonetarydamages,orenterintoroyaltyorlicensingarrangements,whichcouldadverselyaffectouroperatingresultsandcashflows,harmourreputation,orotherwisenegativelyimpactourbusiness.
The nature of our platform makes it particularly vulnerable to undetected errors or bugs, which could cause problems with how our platform performs andwhich could, in turn, reduce demand for our platform, reduce our revenue, and lead to product liability claims against us.
Becauseourplatformiscomplex,itmaycontainerrorsordefects,especiallywhennewupdatesorenhancementsarereleased.Oursoftwareisofteninstalledandusedinlarge-scalecomputingenvironmentswithdifferentoperatingsystems,systemmanagementsoftware,andequipmentandnetworkingconfigurations,whichmaycauseerrorsorfailuresofoursoftwareorotheraspectsofthecomputingenvironmentintowhichitisdeployed.Inaddition,deploymentofoursoftwareintothesecomputingenvironmentsmayexposepreviouslyundetectederrors,compatibilityissues,failures,orbugsinoursoftware.Althoughwetestourplatformextensively,wehaveinthepastdiscoveredsoftwareerrorsinourplatformafterintroducingnewupdatesorenhancements.Despitetestingbyusandbyourcurrentandpotentialcustomers,errorsmaybefoundinnewupdatesorenhancementsafterdeploymentbyourcustomers.Realorperceivederrors,failures,vulnerabilities,orbugsinourplatformcouldresultinnegativepublicity,lossofcustomerdata,lossofordelayinmarketacceptanceofourplatform,lossofcompetitiveposition,orclaimsbycustomersforlossessustainedbythem,allofwhichcouldnegativelyimpactourbusinessandoperatingresultsandmateriallydamageourreputationandbrand.Wemayalsohavetoexpendresourcesandcapitaltocorrectthesedefects.Alleviatinganyoftheseproblemscouldrequiresignificantexpendituresofourcapitalandotherresourcesandcouldcauseinterruptions,delays,orcessationinthesaleofourplatform,whichcouldcauseustoloseexistingorpotentialcustomersandcouldadverselyaffectouroperatingresultsandgrowthprospects.
Ouragreementswithcustomerstypicallycontainprovisionsdesignedtolimitourexposuretoproductliability,warranty,andotherclaims.However,theseprovisionsdonoteliminateourexposuretotheseclaims.Inaddition,itispossiblethattheseprovisionsmaynotbeeffectiveunderthelawsofcertaindomesticorinternationaljurisdictionsandwemaybeexposedtoproductliabilitywarranty,andotherclaims.Asuccessfulproductliability,warranty,orothersimilarclaimagainstuscouldhaveanadverseeffectonourbusiness,operatingresults,andfinancialcondition.
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Business disruptions or performance problems associated with our technology and infrastructure, including interruptions, delays, or failures in service fromour third-party data center hosting facility and other third-party services, could adversely affect our operating results or result in a material weakness in ourinternal controls that could adversely affect the market price of our Class A common stock.
Continuedadoptionofourplatformdependsinpartontheabilityofourexistingandpotentialcustomerstoaccessourplatformwithinareasonableamountoftime.Wehaveexperienced,andmayinthefutureexperience,disruptions,dataloss,outages,andotherperformanceproblemswithourinfrastructureandwebsiteduetoavarietyoffactors,includinginfrastructurechanges,introductionsofnewfunctionality,humanorsoftwareerrors,capacityconstraints,denialofserviceattacks,orothersecurity-relatedincidents.Ifourplatformisunavailableorifourusersandcustomersareunabletoaccessourplatformwithinareasonableamountoftime,oratall,wemayexperienceadeclineinrenewals,damagetoourbrand,orotherharmtoourbusiness.Totheextentthatwedonoteffectivelyaddresscapacityconstraints,upgradeoursystemsasneeded,andcontinuallydevelopourtechnologyandnetworkarchitecturetoaccommodateactualandanticipatedchangesintechnology,ourbusiness,operatingresults,andfinancialconditioncouldbeadverselyaffected.
AsignificantportionofourcriticalbusinessoperationsareconcentratedintheUnitedStates.Inaddition,weserveourcustomersandmanagecertaincriticalinternalprocessesusingathird-partydatacenterhostingfacilitylocatedinColoradoandotherthird-partyservices,includingcloudservices.Weareahighlyautomatedbusiness,andadisruptionorfailureofoursystems,orthethird-partyhostingfacilityorotherthird-partyservicesthatweuse,couldcausedelaysincompletingsalesandprovidingservices.Forexample,fromtimetotime,ourdatacenterhostingfacilityhasexperiencedoutages.Suchdisruptionsorfailurescouldalsoincludeamajorearthquake,blizzard,fire,cyber-attack,actofterrorism,orothercatastrophicevent,oradecisionbyoneofourthird-partyserviceproviderstoclosefacilitiesthatweusewithoutadequatenoticeorotherunanticipatedproblemswiththethird-partyservicesthatweuse,includingafailuretomeetservicestandards.
Interruptionsorperformanceproblemswitheitherourtechnologyandinfrastructureorourdatacenterhostingfacilitycould,amongotherthings:
• resultinthedestructionordisruptionofanyofourcriticalbusinessoperations,controls,orproceduresorinformationtechnologysystems;
• severelyaffectourabilitytoconductnormalbusinessoperations;
• resultinamaterialweaknessinourinternalcontroloverfinancialreporting;
• causeourcustomerstoterminatetheirsubscriptions;
• resultinourissuingcreditsorpayingpenaltiesorfines;
• harmourbrandandreputation;
• adverselyaffectourrenewalratesorourabilitytoattractnewcustomers;or
• causeourplatformtobeperceivedasnotbeingsecure.
Anyoftheabovecouldadverselyaffectourbusinessoperationsandfinancialcondition.
We have experienced, and may in the future experience, security breaches and if unauthorized parties obtain access to our customers’ data, our data, or ourplatform, networks, or other systems, our platform may be perceived as not being secure, our reputation may be harmed, demand for our platform may bereduced, our operations may be disrupted, we may incur significant legal liabilities, and our business could be materially adversely affected.
Aspartofourbusiness,weprocess,store,andtransmitourcustomers’informationanddataaswellasourown,includinginourplatform,networks,andothersystems,andwerelyonthirdpartiesthatarenotdirectlyunderourcontroltodosoaswell.We,andourthird-partypartners,havesecuritymeasuresanddisasterresponseplansinplacetohelpprotectourcustomers’data,ourdata,andourplatform,networks,andothersystemsagainstunauthorizedaccess.However,wecannotassureyouthatthesesecuritymeasuresanddisasterresponseplanswillbeeffectiveagainstallsecuritythreatsandnaturaldisasters.Ourorourthird-partypartners’securitymeasureshaveinthepastbeen,andmayinthefuturebe,breachedasaresultofthird-partyaction,includingintentionalmisconductbycomputerhackers,fraudulentinducementofemployeesorcustomerstodisclose
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sensitiveinformationsuchasusernamesorpasswords,andemployeeerrorormalfeasance.Suchabreachcouldresultinsomeoneobtainingunauthorizedaccesstoourcustomers’data,ourdata,orourplatform,networks,orothersystems.Becausetherearemanydifferentsecuritybreachtechniquesandsuchtechniquescontinuetoevolve,weandourthird-partypartnersmaybeunabletoanticipateattemptedsecuritybreachesandimplementadequatepreventativemeasures.Thirdpartiesmayalsoconductattacksdesignedtotemporarilydenycustomersaccesstoourservices.Anysecuritybreachorsuccessfuldenialofserviceattackcouldresultinalossofcustomerconfidenceinthesecurityofourplatformanddamagetoourbrand,reducingthedemandforourplatformandourrevenue,disruptournormalbusinessoperations,requireustospendmaterialresourcestocorrectthebreach,exposeustolegalliabilitiesincludinglitigationandindemnityobligations,andmateriallyadverselyaffectouroperatingresults.Theseriskswillincreaseaswecontinuetogrowthescaleandfunctionalityofourplatformandprocess,store,andtransmitincreasinglylargeamountsofourcustomers’informationanddata,whichmayincludeproprietaryorconfidentialdataorpersonaloridentifyinginformation.
We may be adversely affected by natural disasters and other catastrophic events, and by man-made problems such as terrorism, that could disrupt our businessoperations and our business continuity and disaster recovery plans may not adequately protect us from a serious disaster.
Naturaldisastersorothercatastrophiceventsmayalsocausedamageordisruptiontoouroperations,internationalcommerce,andtheglobaleconomy,andcouldhaveanadverseeffectonourbusiness,operatingresults,andfinancialcondition.Ourbusinessoperationsaresubjecttointerruptionbynaturaldisasters,fire,powershortages,pandemics,andothereventsbeyondourcontrol.Inaddition,actsofterrorismandothergeo-politicalunrestcouldcausedisruptionsinourbusinessorthebusinessesofourpartnersortheeconomyasawhole.Intheeventofanaturaldisaster,includingamajorearthquake,blizzard,orhurricane,oracatastrophiceventsuchasafire,powerloss,ortelecommunicationsfailure,wemaybeunabletocontinueouroperationsandmayenduresysteminterruptions,reputationalharm,delaysindevelopmentofourplatform,lengthyinterruptionsinservice,breachesofdatasecurity,andlossofcriticaldata,allofwhichcouldhaveanadverseeffectonourfutureoperatingresults.Forexample,ourcorporateofficesarelocatedinCalifornia,astatethatfrequentlyexperiencesearthquakes.Additionally,alltheaforementionedrisksmaybefurtherincreasedifwedonotimplementadisasterrecoveryplanorourpartners’disasterrecoveryplansprovetobeinadequate.
Failure to comply with governmental laws and regulations could harm our business.
Ourbusinessissubjecttoregulationbyvariousfederal,state,localandforeigngovernments.Incertainjurisdictions,theseregulatoryrequirementsmaybemorestringentthanthoseintheUnitedStates.Noncompliancewithapplicableregulationsorrequirementscouldsubjectustoinvestigations,sanctions,mandatoryproductrecalls,enforcementactions,disgorgementofprofits,fines,damages,civilandcriminalpenalties,injunctionsorothercollateralconsequences.Ifanygovernmentalsanctionsareimposed,orifwedonotprevailinanypossiblecivilorcriminallitigation,ourbusiness,operatingresults,andfinancialconditioncouldbemateriallyadverselyaffected.Inaddition,respondingtoanyactionwilllikelyresultinasignificantdiversionofmanagement’sattentionandresourcesandanincreaseinprofessionalfees.Enforcementactionsandsanctionscouldharmourbusiness,reputation,operatingresultsandfinancialcondition.
Changes in laws or regulations relating to privacy or the protection or transfer of personal data, or any actual or perceived failure by us to comply with suchlaws and regulations or our privacy policies, could adversely affect our business.
Componentsofourbusiness,includingourplatform,involveprocessing,storing,andtransmittingconfidentialdata,whichissubjecttoourprivacypoliciesandcertainfederal,state,andforeignlawsandregulationsrelatingtoprivacyanddataprotection.Theamountofcustomerandemployeedatathatwestorethroughourplatform,networks,andothersystems,includingpersonaldata,isincreasing.Inrecentyears,thecollectionanduseofpersonaldatabycompanieshavecomeunderincreasedregulatoryandpublicscrutiny.
Forexample,intheUnitedStates,protectedhealthinformationissubjecttotheHealthInsurancePortabilityandAccountabilityAct,orHIPAA.HIPAAhasbeensupplementedbytheHealthInformationTechnologyforEconomicandClinicalHealthActwiththeresultofincreasedcivilandcriminalpenaltiesfornoncompliance.UnderHIPAA,entitiesperformingcertainfunctionsandcreating,receiving,maintaining,ortransmittingprotectedhealthinformationprovidedbycoveredentitiesandotherbusinessassociatesaredirectlysubjecttoHIPAA.Ifwehaveaccesstoprotectedhealthinformationthroughourplatform,wemaybeobligatedtocomplywithcertainprivacyrulesanddatasecurityrequirementsunderHIPAA.Anysystemsfailureorsecuritybreachthatresultsinthereleaseof,orunauthorizedaccessto,personaldata,oranyfailureorperceivedfailurebyustocomplywithourprivacypoliciesoranyapplicablelawsorregulationsrelatingtoprivacyordataprotection,couldresultinproceedingsagainstusbygovernmentalentitiesorothers.Suchproceedingscouldresultintheimpositionofsanctions,fines,penalties,liabilities,orgovernmentalordersrequiringthatwechangeourdatapractices,anyofwhichcouldhaveamaterialadverseeffectonourbusiness,operatingresults,andfinancialcondition.
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Variouslocal,state,federal,andinternationallaws,directives,andregulationsapplytothecollection,use,retention,protection,disclosure,transfer,andprocessingofpersonaldata.Thesedataprotectionandprivacylawsandregulationscontinuetoevolve.Variousfederal,state,andforeignlegislativeorregulatorybodiesmayenactneworadditionallawsorregulationsconcerningprivacyanddataprotectionthatcouldadverselyimpactourbusiness.Complyingwiththesevaryingrequirementscouldcauseustoincursubstantialcostsorrequireustochangeourbusinesspractices,eitherofwhichcouldadverselyaffectourbusinessandoperatingresults.Forexample,inOctober2015,theEuropeanCourtofJusticeissuedarulinginvalidatingtheU.S.-EUSafeHarborFramework,whichfacilitatedpersonaldatatransferstotheUnitedStatesincompliancewithapplicableE.U.dataprotectionlaws.InJuly2016,theEuropeanUnionandtheUnitedStatespoliticalauthoritiesadoptedtheEU-U.S.PrivacyShield,orPrivacyShield,whichmayprovideanewmechanismforcompaniestotransferE.U.personaldatatotheUnitedStates.WewillneedtoassessthespecificrequirementsofthePrivacyShieldtodeterminewhetherwecancomplywiththenewframework.IfweareunabletocomplywiththePrivacyShieldwewillneedtoimplementalternativesolutionstoensurethatdatatransfersfromtheEuropeanUniontotheUnitedStatesprovideadequateprotectionstocomplywiththeE.U.DataProtectionDirective.Inanyevent,thereremainssignificantregulatoryuncertaintysurroundingthefutureofdatatransfersfromtheEuropeanUniontotheUnitedStates,andchanginglaws,directives,andregulationsmayhaveanadverseeffectupontheconductofourbusiness.Additionally,theEuropeanCommissionadoptedageneraldataprotectionregulation,tobecomeeffectiveinMay2018,thatwillsupersedecurrentE.U.dataprotectionlegislation,imposemorestringentE.U.dataprotectionrequirements,andprovideforgreaterpenaltiesfornoncompliance.Changingdefinitionsofpersonaldataandinformationmayalsolimitorinhibitourabilitytooperateorexpandourbusiness,includinglimitingstrategicpartnershipsthatmayinvolvethesharingofdata.Also,somejurisdictionsrequirethatcertaintypesofdataberetainedonserverswithinthesejurisdictions.Ourfailuretocomplywithapplicablelaws,directives,andregulationsmayresultinenforcementactionagainstus,includingfinesandimprisonment,anddamagetoourreputation,anyofwhichmayhaveanadverseeffectonourbusinessandoperatingresults.
Failure to comply with anti-corruption and anti-money laundering laws, including the FCPA and similar laws associated with our activities outside of theUnited States, could subject us to penalties and other adverse consequences.
WearesubjecttotheFCPA,theU.S.domesticbriberystatutecontainedin18U.S.C.§201,theU.S.TravelAct,theUSAPATRIOTAct,theBriberyAct,andpossiblyotheranti-briberyandanti-moneylaunderinglawsincountriesinwhichweconductactivities.WefacesignificantrisksifwefailtocomplywiththeFCPAandotheranti-corruptionlawsthatprohibitcompaniesandtheiremployeesandthird-partyintermediariesfromauthorizing,offering,orproviding,directlyorindirectly,improperpaymentsorbenefitstoforeigngovernmentofficials,politicalparties,andprivate-sectorrecipientsforthepurposeofobtainingorretainingbusiness,directingbusinesstoanyperson,orsecuringanyadvantage.Inmanyforeigncountries,particularlyincountrieswithdevelopingeconomies,itmaybealocalcustomthatbusinessesengageinpracticesthatareprohibitedbytheFCPAorotherapplicablelawsandregulations.Inaddition,weusevariousthirdpartiestosellourplatformandconductourbusinessabroad.Weorourthird-partyintermediariesmayhavedirectorindirectinteractionswithofficialsandemployeesofgovernmentagenciesorstate-ownedoraffiliatedentitiesandwecanbeheldliableforthecorruptorotherillegalactivitiesofthesethird-partyintermediaries,ouremployees,representatives,contractors,partners,andagents,evenifwedonotexplicitlyauthorizesuchactivities.Wehaveimplementedananti-corruptioncomplianceprogrambutcannotassureyouthatallouremployeesandagents,aswellasthosecompaniestowhichweoutsourcecertainofourbusinessoperations,willnottakeactionsinviolationofourpoliciesandapplicablelaw,forwhichwemaybeultimatelyheldresponsible.
AnyviolationoftheFCPA,otherapplicableanti-corruptionlaws,andanti-moneylaunderinglawscouldresultinwhistleblowercomplaints,adversemediacoverage,investigations,lossofexportprivileges,severecriminalorcivilsanctionsand,inthecaseoftheFCPA,suspensionordebarmentfromU.S.governmentcontracts,whichcouldhaveanadverseeffectonourreputation,business,operatingresults,andprospects.Inaddition,respondingtoanyenforcementactionmayresultinasignificantdiversionofmanagement’sattentionandresourcesandsignificantdefensecostsandotherprofessionalfees.
We are required to comply with governmental export control laws and regulations. Our failure to comply with these laws and regulations could have an adverseeffect on our business and operating results.
Ourplatformissubjecttogovernmental,includingUnitedStatesandEuropeanUnion,exportcontrollawsandregulations.U.S.exportcontrollawsandregulationsandeconomicsanctionsprohibittheshipmentofcertainproductsandservicestoU.S.embargoedorsanctionedcountries,governments,andpersons,andcomplyingwithexportcontrolandsanctionsregulationsforaparticularsalemaybetime-consumingandmayresultinthedelayorlossofsalesopportunities.
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Whilewetakeprecautionstopreventourplatformfrombeingexportedinviolationoftheselaws,ifweweretofailtocomplywithU.S.exportlaws,U.S.Customsregulationsandimportregulations,U.S.economicsanctions,andothercountries’importandexportlaws,wecouldbesubjecttosubstantialcivilandcriminalpenalties,includingfinesforthecompanyandincarcerationforresponsibleemployeesandmanagers,andthepossiblelossofexportorimportprivileges.
Weincorporateencryptiontechnologyintocertainofourproducts.EncryptionproductsmaybeexportedoutsideoftheUnitedStatesonlywiththerequiredexportauthorizationincludingbylicense,alicenseexceptionorotherappropriategovernmentauthorization.Inaddition,variouscountriesregulatetheimportofcertainencryptiontechnology,includingimportpermittingandlicensingrequirements,andhaveenactedlawsthatcouldlimitourabilitytodistributeourproductsorcouldlimitourcustomers’abilitytoimplementourproductsinthosecountries.Althoughwetakeprecautionstopreventourproductsfrombeingprovidedinviolationofsuchlaws,wecannotassureyouthatinadvertentviolationsofsuchlawshavenotoccurredorwillnotoccurinconnectionwiththedistributionofourproductsdespitetheprecautionswetake.Governmentalregulationofencryptiontechnologyandregulationofimportsorexports,orourfailuretoobtainrequiredimportorexportapprovalforourproducts,couldharmourinternationalsalesandadverselyaffectouroperatingresults.
Further,ifourchannelorotherpartnersfailtoobtainappropriateimport,export,orre-exportlicensesorpermits,wemayalsobeharmed,becomethesubjectofgovernmentinvestigationsorpenalties,andincurreputationalharm.Changesinourplatformorchangesinexportandimportregulationsmaycreatedelaysintheintroductionofourplatformininternationalmarkets,preventourcustomerswithinternationaloperationsfromdeployingourplatformgloballyor,insomecases,preventtheexportorimportofourplatformtocertaincountries,governments,orpersonsaltogether.Anychangeinexportorimportlawsorregulations,economicsanctions,orrelatedlegislation,shiftintheenforcementorscopeofexistinglawsandregulations,orchangeinthecountries,governments,persons,ortechnologiestargetedbysuchlawsandregulations,couldresultindecreaseduseofourplatformby,orinourdecreasedabilitytoexportorsellourplatformto,existingorpotentialcustomerswithinternationaloperations.Anydecreaseduseofourplatformorlimitationonourabilitytoexportorsellourplatformwouldlikelyharmourbusiness,financialcondition,andoperatingresults.
If we are unable to recruit or retain skilled personnel, or if we lose the services of any of our senior management or other key personnel, our business,operating results, and financial condition could be adversely affected.
Ourfuturesuccessdependsonourcontinuingabilitytoattract,train,assimilate,andretainhighlyskilledpersonnel.Wefaceintensecompetitionforqualifiedindividualsfromnumeroussoftwareandothertechnologycompanies.Wemaynotbeabletoretainourcurrentkeyemployeesorattract,train,assimilate,orretainotherhighlyskilledpersonnelinthefuture.Wemayincursignificantcoststoattractandretainhighlyskilledpersonnel,andwemaylosenewemployeestoourcompetitorsorothertechnologycompaniesbeforewerealizethebenefitofourinvestmentinrecruitingandtrainingthem.Aswemoveintonewgeographies,wewillneedtoattractandrecruitskilledpersonnelinthoseareas.Ifweareunabletoattractandretainsuitablyqualifiedindividualswhoarecapableofmeetingourgrowingtechnical,operational,andmanagerialrequirements,onatimelybasisoratall,ourbusinessmaybeadverselyaffected.Volatilityorlackofperformanceinourstockpricemayalsoaffectourabilitytoattractandretainourkeyemployees.
Further,severalmembersofourmanagementteamhaveonlybeenwithourcompanyforashortperiodoftime.FourofoursixexecutiveofficersjoinedourcompanyafterApril2016,andourmanagementteamhaslimitedexperienceworkingtogether.Ifourmanagementteamcannotworktogethereffectivelyoranymemberofourmanagementteamleavesourcompany,ourbusiness,operatingresults,andfinancialconditioncouldbeadverselyaffected.
Ourfuturesuccessalsodependsinlargepartonthecontinuedserviceofseniormanagementandotherkeypersonnel.Inparticular,wearehighlydependentontheservicesofDeanA.Stoecker,theChairmanofourboardofdirectors,ChiefExecutiveOfficerandaco-founder,andEdwardP.HardingJr.,ourChiefTechnologyOfficerandaco-founder,bothofwhomarecriticaltothedevelopmentofourtechnology,platform,futurevision,andstrategicdirection.Werelyonourleadershipteamintheareasofoperations,security,marketing,sales,support,andgeneralandadministrativefunctions,andonindividualcontributorsonourresearchanddevelopmentteam.Ourseniormanagementandotherkeypersonnelareallemployedonanat-willbasis,whichmeansthattheycouldterminatetheiremploymentwithusatanytime,foranyreasonandwithoutnotice.Ifwelosetheservicesofseniormanagementorotherkeypersonnel,orifweareunabletoattract,train,assimilate,andretainthehighlyskilledpersonnelweneed,ourbusiness,operatingresults,andfinancialconditioncouldbeadverselyaffected.
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If currency exchange rates fluctuate substantially in the future, the results of our operations, which are reported in U.S. dollars, could be adversely affected.
Aswecontinuetoexpandourinternationaloperations,webecomemoreexposedtotheeffectsoffluctuationsincurrencyexchangerates.AlthoughweexpectanincreasingnumberofsalescontractstobedenominatedincurrenciesotherthantheU.S.dollarinthefuture,themajorityofoursalescontractshavehistoricallybeendenominatedinU.S.dollars,andtherefore,mostofourrevenuehasnotbeensubjecttoforeigncurrencyrisk.However,astrengtheningoftheU.S.dollarcouldincreasetherealcostofourplatformtoourcustomersoutsideoftheUnitedStates,whichcouldadverselyaffectourbusiness,operatingresults,financialcondition,andcashflows.Inaddition,weincurexpensesforemployeecompensationandotheroperatingexpensesatournon-U.S.locationsinthelocalcurrency.FluctuationsintheexchangeratesbetweentheU.S.dollarandothercurrenciescouldresultinthedollarequivalentofsuchexpensesbeinghigher.Thiscouldhaveanegativeimpactonouroperatingresults.Althoughwemayinthefuturedecidetoundertakeforeignexchangehedgingtransactionstocoveraportionofourforeigncurrencyexchangeexposure,wecurrentlydonothedgeourexposuretoforeigncurrencyexchangerisks.
We may have exposure to additional tax liabilities.
WearesubjecttocomplextaxlawsandregulationsintheUnitedStatesandavarietyofforeignjurisdictions.Allofthesejurisdictionshaveinthepastandmayinthefuturemakechangestotheircorporateincometaxratesandotherincometaxlawswhichcouldincreaseourfutureincometaxprovision.
Ourfutureincometaxobligationscouldbeaffectedbyearningsthatarelowerthananticipatedinjurisdictionswherewehavelowerstatutoryratesandbyearningsthatarehigherthananticipatedinjurisdictionswherewehavehigherstatutoryrates,bychangesinthevaluationofourdeferredtaxassetsandliabilities,changesintheamountofunrecognizedtaxbenefits,orbychangesintaxlaws,regulations,accountingprinciples,orinterpretationsthereof.
OurdeterminationofourtaxliabilityissubjecttoreviewbyapplicableU.S.andforeigntaxauthorities.Anyadverseoutcomeofsuchareviewcouldharmouroperatingresultsandfinancialcondition.Thedeterminationofourworldwideprovisionforincometaxesandothertaxliabilitiesrequiressignificantjudgmentand,intheordinarycourseofbusiness,therearemanytransactionsandcalculationswheretheultimatetaxdeterminationiscomplexanduncertain.Moreover,asamultinationalbusiness,wehavesubsidiariesthatengageinmanyintercompanytransactionsinavarietyoftaxjurisdictionswheretheultimatetaxdeterminationiscomplexanduncertain.Ourexistingcorporatestructureandintercompanyarrangementshavebeenimplementedinamannerwebelieveisincompliancewithcurrentprevailingtaxlaws.However,thetaxingauthoritiesofthejurisdictionsinwhichweoperatemaychallengeourmethodologiesforvaluingdevelopedtechnologyorintercompanyarrangements,whichcouldimpactourworldwideeffectivetaxrateandharmourfinancialpositionandoperatingresults.
Wearealsosubjecttonon-incometaxes,suchaspayroll,sales,use,value-added,networth,property,andgoodsandservicestaxesintheUnitedStatesandvariousforeignjurisdictions.Weareperiodicallyreviewedandauditedbytaxauthoritieswithrespecttoincomeandnon-incometaxes.Taxauthoritiesmaydisagreewithcertainpositionswehavetakenandwemayhaveexposuretoadditionalincomeandnon-incometaxliabilitieswhichcouldhaveanadverseeffectonouroperatingresultsandfinancialcondition.Inaddition,ourfutureeffectivetaxratescouldbefavorablyorunfavorablyaffectedbychangesintaxrates,changesinthevaluationofourdeferredtaxassetsorliabilities,theeffectivenessofourtaxplanningstrategies,orchangesintaxlawsortheirinterpretation.Suchchangescouldhaveanadverseimpactonourfinancialcondition.
Asaresultoftheseandotherfactors,theultimateamountoftaxobligationsowedmaydifferfromtheamountsrecordedinourfinancialstatementsandanysuchdifferencemayharmouroperatingresultsinfutureperiodsinwhichwechangeourestimatesofourtaxobligationsorinwhichtheultimatetaxoutcomeisdetermined.
Our ability to use our net operating losses to offset future taxable income may be subject to certain limitations which could subject our business to higher taxliability.
Wemaybelimitedintheportionofnetoperatingloss,orNOL,carryforwardsthatwecanuseinthefuturetooffsettaxableincomeforU.S.federalandstateincometaxpurposes.AsofSeptember30,2017,wehadU.S.federalNOLcarryforwardsof$55.0million,whichifnotutilizedwillbegintoexpirein2035,andstateNOLsof$34.4million,whichifnotutilizedwillbegintoexpirein2024.
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Inaddition,underSection382oftheInternalRevenueCodeof1986,asamended,ortheCode,acorporationthatundergoesan“ownershipchange”issubjecttolimitationsonitsabilitytoutilizeitsNOLstooffsetfuturetaxableincome.Futurechangesinourstockownership,includingasaresultoffutureofferingsofourcapitalstock,aswellasotherchangesthatmaybeoutsideofourcontrol,couldresultinadditionalownershipchangesunderSection382oftheCode.ASection382“ownershipchange”generallyoccursifoneormorestockholdersorgroupsofstockholderswhoownatleast5%ofourstockincreasetheirownershipbymorethan50percentagepointsovertheirlowestownershippercentagewithinarollingthree-yearperiod.OurNOLsmayalsobeimpairedundersimilarprovisionsofstatelaw.WepreviouslyexperiencedanownershipchangethatresultedinlimitationsoftheannualutilizationofourNOLcarryforwards,butdidnotresultinpermanentdisallowanceofanyofourNOLcarryforwards.ItispossiblethatanyfutureownershipchangecouldhaveamaterialeffectontheuseofourNOLsorothertaxattributes.WehaverecordedafullvaluationallowancerelatedtoourNOLsandothernetdeferredtaxassetsduetotheuncertaintyoftheultimaterealizationofthefuturebenefitsofthoseassets.OurNOLsmayexpireunutilizedorunderutilized,whichcouldpreventusfromoffsettingfuturetaxableincome.
Economic uncertainty or downturns, particularly as it impacts particular industries, could adversely affect our business and operating results.
Inrecentyears,theUnitedStatesandothersignificantmarketshaveexperiencedcyclicaldownturnsandworldwideeconomicconditionsremainuncertain.Economicuncertaintyandassociatedmacroeconomicconditionsmakeitextremelydifficultforourcustomersandustoaccuratelyforecastandplanfuturebusinessactivities,andcouldcauseourcustomerstoslowspendingonourplatform,whichcoulddelayandlengthensalescycles.Furthermore,duringuncertaineconomictimesourcustomersmayfaceissuesgainingtimelyaccesstosufficientcredit,whichcouldresultinanimpairmentoftheirabilitytomaketimelypaymentstous.Ifthatweretooccur,wemayberequiredtoincreaseourallowancefordoubtfulaccountsandourresultswouldbenegativelyimpacted.
Furthermore,wehavecustomersinavarietyofdifferentindustries.Asignificantdownturnintheeconomicactivityattributabletoanyparticularindustry,including,butnotlimitedto,theretailandfinancialindustries,maycauseorganizationstoreactbyreducingtheircapitalandoperatingexpendituresingeneralorbyspecificallyreducingtheirspendingoninformationtechnology.Inaddition,ourcustomersmaydelayorcancelinformationtechnologyprojectsorseektolowertheircostsbyrenegotiatingvendorcontracts.Totheextentpurchasesofourplatformareperceivedbycustomersandpotentialcustomerstobediscretionary,ourrevenuemaybedisproportionatelyaffectedbydelaysorreductionsingeneralinformationtechnologyspending.Also,customersmaychoosetodevelopin-housesoftwareasanalternativetousingourplatform.Moreover,competitorsmayrespondtochallengingmarketconditionsbyloweringpricesandattemptingtolureawayourcustomers.
Wecannotpredictthetiming,strength,ordurationofanyeconomicslowdownoranysubsequentrecoverygenerally,oranyindustryinparticular.Iftheconditionsinthegeneraleconomyandthemarketsinwhichweoperateworsenfrompresentlevels,ourbusiness,financialcondition,andoperatingresultscouldbemateriallyadverselyaffected.
We may require additional capital to fund our business and support our growth, and any inability to generate or obtain such capital may adversely affect ouroperating results and financial condition.
Inordertosupportourgrowthandrespondtobusinesschallenges,suchasdevelopingnewfeaturesorenhancementstoourplatformtostaycompetitive,acquiringnewtechnologies,andimprovingourinfrastructure,wehavemadesignificantfinancialinvestmentsinourbusinessandweintendtocontinuetomakesuchinvestments.Asaresult,wemayneedtoengageinequityordebtfinancingstoprovidethefundsrequiredfortheseinvestmentsandotherbusinessendeavors.Ifweraiseadditionalfundsthroughequityorconvertibledebtissuances,ourexistingstockholdersmaysuffersignificantdilutionandthesesecuritiescouldhaverights,preferences,andprivilegesthataresuperiortothatofholdersofourcommonstock.Ifweobtainadditionalfundsthroughdebtfinancing,wemaynotbeabletoobtainsuchfinancingontermsfavorabletous.Suchtermsmayinvolverestrictivecovenantsmakingitdifficulttoengageincapitalraisingactivitiesandpursuebusinessopportunities,includingpotentialacquisitions.Ifweareunabletoobtainadequatefinancingorfinancingontermssatisfactorytouswhenwerequireit,ourabilitytocontinuetosupportourbusinessgrowthandtorespondtobusinesschallengescouldbesignificantlyimpairedandourbusinessmaybeadverselyaffected,requiringustodelay,reduce,oreliminatesomeorallofouroperations.
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The requirements of being a public company may strain our resources, divert management’s attention, and affect our ability to attract and retain additionalexecutive management and qualified board members.
WearesubjecttothereportingrequirementsoftheExchangeAct,theSarbanes-OxleyActof2002,orSarbanes-OxleyAct,theDodd-FrankWallStreetReformandConsumerProtectionActof2010,thelistingrequirementsoftheNewYorkStockExchange,andotherapplicablesecuritiesrulesandregulations.Compliancewiththeserulesandregulationshaveincreasedourlegalandfinancialcompliancecosts,makesomeactivitiesmoredifficult,time-consuming,orcostlyandincreasedemandonoursystemsandresources,particularlyafterwearenolongeranemerginggrowthcompany.TheExchangeActrequires,amongotherthings,thatwefileannual,quarterly,andcurrentreportswithrespecttoourbusinessandoperatingresults.TheSarbanes-OxleyActrequires,amongotherthings,thatwemaintaineffectivedisclosurecontrolsandproceduresandinternalcontroloverfinancialreporting.Inordertomaintainand,ifrequired,improveourdisclosurecontrolsandproceduresandinternalcontroloverfinancialreportingtomeetthisstandard,significantresourcesandmanagementoversightmayberequired.Asaresult,management’sattentionmaybedivertedfromotherbusinessconcerns,whichcouldadverselyaffectourbusinessandoperatingresults.Althoughwehavealreadyhiredadditionalemployeestocomplywiththeserequirements,wemayneedtohiremoreemployeesinthefutureorengageoutsideconsultants,whichwillincreaseourcostsandexpenses.
Inaddition,changinglaws,regulations,andstandardsrelatingtocorporategovernanceandpublicdisclosurearecreatinguncertaintyforpubliccompanies,increasinglegalandfinancialcompliancecosts,andmakingsomeactivitiesmoretimeconsuming.Theselaws,regulations,andstandardsaresubjecttovaryinginterpretations,inmanycasesduetotheirlackofspecificity,and,asaresult,theirapplicationinpracticemayevolveovertimeasnewguidanceisprovidedbyregulatoryandgoverningbodies.Thiscouldresultincontinuinguncertaintyregardingcompliancemattersandhighercostsnecessitatedbyongoingrevisionstodisclosureandgovernancepractices.Weintendtoinvestresourcestocomplywithevolvinglaws,regulations,andstandards,andthisinvestmentmayresultinincreasedgeneralandadministrativeexpensesandadiversionofmanagement’stimeandattentionfromrevenue-generatingactivitiestocomplianceactivities.Ifoureffortstocomplywithnewlaws,regulations,andstandardsdifferfromtheactivitiesintendedbyregulatoryorgoverningbodiesduetoambiguitiesrelatedtotheirapplicationandpractice,regulatoryauthoritiesmayinitiatelegalproceedingsagainstusandourbusinessmaybeadverselyaffected.
Thenewrulesandregulationsapplicabletopubliccompaniesmakeitmoreexpensiveforustoobtainandmaintaindirectorandofficerliabilityinsurance,andwemayberequiredtoacceptreducedcoverageorincursubstantiallyhighercoststoobtaincoverage.Thesefactorscouldalsomakeitmoredifficultforustoattractandretainqualifiedmembersofourboardofdirectors,particularlytoserveonourauditcommitteeandcompensationcommittee,andqualifiedexecutiveofficers.
Asaresultofdisclosureofinformationinfilingsrequiredofapubliccompany,ourbusinessandfinancialconditionhasbecomemorevisible,whichwebelievemayresultinthreatenedoractuallitigation,includingbycompetitorsandotherthirdparties.Ifsuchclaimsaresuccessful,ourbusinessandoperatingresultscouldbeadverselyaffected,andeveniftheclaimsdonotresultinlitigationorareresolvedinourfavor,theseclaims,andthetimeandresourcesnecessarytoresolvethem,coulddiverttheresourcesofourmanagementandadverselyaffectourbusinessandoperatingresults.
We are obligated to develop and maintain proper and effective internal control over financial reporting. We have identified a material weakness in our internalcontrol over financial reporting and if our remediation of this material weakness is not effective, or if we fail to maintain an effective system of internal controlover financial reporting in the future, we may not be able to accurately or timely report our financial condition or operating results, which may adversely affectinvestor confidence in our company and, as a result, the value of our Class A common stock.
Asapubliccompany,wearerequired,pursuanttoSection404oftheSarbanes-OxleyAct,tofurnishareportbymanagementon,amongotherthings,theeffectivenessofourinternalcontroloverfinancialreportingcommencingwithoursecondannualreportonForm10-K.Effectiveinternalcontroloverfinancialreportingisnecessaryforustoprovidereliablefinancialreportsand,togetherwithadequatedisclosurecontrolsandprocedures,aredesignedtopreventfraud.Anyfailuretoimplementrequiredneworimprovedcontrols,ordifficultiesencounteredintheirimplementation,couldcauseustofailtomeetourreportingobligations.Ineffectiveinternalcontrolscouldalsocauseinvestorstoloseconfidenceinourreportedfinancialinformation,whichcouldhaveanegativeeffectonthetradingpriceofourClassAcommonstock.
Thisassessmentwillneedtoincludedisclosureofanymaterialweaknessesidentifiedbyourmanagementinourinternalcontroloverfinancialreporting,aswellasastatementthatourindependentregisteredpublicaccountingfirmhasissuedanopiniononourinternalcontroloverfinancialreporting,providedthatourindependentregisteredpublicaccounting
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firmwillnotberequiredtoattesttotheeffectivenessofourinternalcontroloverfinancialreportinguntilourfirstannualreportrequiredtobefiledwiththeSECfollowingthelaterofthedatewearedeemedtobean“acceleratedfiler”ora“largeacceleratedfiler,”eachasdefinedintheExchangeAct,orthedatewearenolongeranemerginggrowthcompany,asdefinedintheJumpstartOurBusinessStartupsActof2012,ortheJOBSAct.Wecouldbeanemerginggrowthcompanyforuptofiveyears.Anindependentassessmentoftheeffectivenessofourinternalcontrolscoulddetectproblemsthatourmanagement’sassessmentmightnot.Undetectedmaterialweaknessesinourinternalcontrolscouldleadtofinancialstatementrestatementsandrequireustoincurtheexpenseofremediation.Wearerequiredtodisclosechangesmadeinourinternalcontrolsandproceduresonaquarterlybasis.Tocomplywiththerequirementsofbeingapubliccompany,wemayneedtoundertakevariousactions,suchasimplementingnewinternalcontrolsandproceduresandhiringaccountingorinternalauditstaff.
InthecourseofpreparingourfinancialstatementsasofandfortheyearendedDecember31,2016,weidentifiedamaterialweaknessinourinternalcontroloverfinancialreporting.Amaterialweaknessisadeficiency,orcombinationofdeficiencies,ininternalcontroloverfinancialreporting,suchthatthereisareasonablepossibilitythatamaterialmisstatementoftheannualorinterimconsolidatedfinancialstatementswillnotbepreventedordetectedonatimelybasis.Thematerialweaknessidentifiedrelatedtotheevaluationoftheaccountingimpactofcertaincontractualtermsrelatedtoourarrangementswithlicenseddataproviders,whichresultedinthemisstatementintherecordingofprepaidandotherassetsandroyaltycoststhatarerecordedincostofrevenueinthefirstthreefiscalquartersof2016.Thismaterialweaknessresultedinanimmaterialrevisionofthosequarterlyresultsofoperationsdata.Thismaterialweaknesscouldresultinadditionalmisstatementstotheaccountsanddisclosuresthatwouldresultinamaterialmisstatementofourconsolidatedfinancialstatementsthatwouldnotbepreventedordetected.Becauseofthismaterialweaknessinourinternalcontroloverfinancialreporting,ourChiefExecutiveOfficerandChiefFinancialOfficerconcludedthat,asofSeptember30,2017,ourdisclosurecontrolsandprocedureswerenoteffective.
Inresponsetothismaterialweakness,wehavebeguntakingactionstoremediateourmaterialweaknessbyenhancingourexistingcontrolactivitiesrelatedtothereviewofroyaltycontracts,includingtheimplementationofadditionalcontrolactivitiesrelatedtotheidentificationandevaluationofthetermsofroyaltycontractsthatrequireconsiderationinassessingtheaccountingforthearrangement.Theseremediationmeasuresareongoing.Whilewebelievethattheseeffortswillimproveourinternalcontroloverfinancialreporting,theimplementationofourremediationisongoingandwillrequirevalidationandtestingofthedesignandoperatingeffectivenessofinternalcontrolsoverasustainedperiodoffinancialreportingcycles.Furthermore,whilewebelievewearemakingprogresstowardachievingtheeffectivenessofourinternalcontrolsanddisclosurecontrols,wecannotassureyouthatthesemeasureswillsignificantlyimproveorremediatethematerialweaknessdescribed.Wealsocannotassureyouthatwehaveidentifiedallourexistingmaterialweaknesses,orthatwewillnotinthefuturehaveadditionalmaterialweaknesses.
WeareintheearlystagesofthecostlyandchallengingprocessofcompilingthesystemandprocessingdocumentationnecessarytoperformtheevaluationneededtocomplywithSection404.Wemaynotbeabletocompleteourevaluation,testing,andanyrequiredremediationinatimelyfashion.Duringtheevaluationandtestingprocess,ifweidentifyadditionalmaterialweaknessesinourinternalcontroloverfinancialreporting,wewillbeunabletoassertthatourinternalcontroloverfinancialreportingiseffective.
Ifweareunabletoassertthatourinternalcontroloverfinancialreportingiseffective,orifourindependentregisteredpublicaccountingfirmisunabletoexpressanopinionontheeffectivenessofourinternalcontrol,includingasaresultofthematerialweaknessdescribedabove,wecouldloseinvestorconfidenceintheaccuracyandcompletenessofourfinancialreports,whichwouldcausethepriceofourClassAcommonstocktodecline,andwemaybesubjecttoinvestigationorsanctionsbytheSEC.Inaddition,ifweareunabletocontinuetomeettheserequirements,wemaynotbeabletoremainlistedontheNewYorkStockExchange.
Our management team has limited experience managing a public company.
Mostmembersofourmanagementteamhavelimitedexperiencemanagingapubliclytradedcompany,interactingwithpubliccompanyinvestors,andcomplyingwiththeincreasinglycomplexlawspertainingtopubliccompanies.Ourmanagementteammaynotsuccessfullyorefficientlymanageourtransitiontobeingapubliccompanysubjecttosignificantregulatoryoversightandreportingobligationsunderthefederalsecuritieslawsandthecontinuousscrutinyofsecuritiesanalystsandinvestors.Thesenewobligationsandconstituentswillrequiresignificantattentionfromourseniormanagementandcoulddiverttheirattentionawayfromtheday-to-daymanagementofourbusiness,whichcouldadverselyaffectourbusiness,financialcondition,andoperatingresults.
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If we cannot maintain our corporate culture as we grow, we could lose the innovation, teamwork, passion, and focus on execution that we believe contribute toour success, and our business may be harmed.
Webelievethatourcorporateculturehasbeenvitaltooursuccess,includinginattracting,developing,andretainingpersonnel,aswellasourcustomers.Aswecontinuetogrowandfaceindustrychallenges,itmaybecomemorechallengingtomaintainthatculture.Inaddition,weplantoexpandourinternationaloperationsintoothercountriesinthefuture,whichmayimpactourcultureasweseektofind,hire,andintegrateadditionalemployeeswhilemaintainingourcorporateculture.Ifweareunabletomaintainourcorporateculture,wecouldlosetheinnovation,passion,anddedicationofourteamandasaresult,ourbusinessandabilitytofocusonourcorporateobjectivesmaybeharmed.
Future acquisitions of, or investments in, other companies, products, or technologies could require significant management attention, disrupt our business,dilute stockholder value, and adversely affect our operating results.
Ourbusinessstrategyhasincluded,andmayinthefutureinclude,acquiringothercomplementaryproducts,technologies,orbusinesses.Forexample,werecentlyacquiredSemantatoenhanceourdatagovernancecapabilitiesandYhattoenhanceourcapabilitiesformanaginganddeployingadvancedanalyticmodels.Wealsomayenterintorelationshipswithotherbusinessesinordertoexpandourplatform,whichcouldinvolvepreferredorexclusivelicenses,additionalchannelsofdistribution,ordiscountpricingorinvestmentsinothercompanies.Negotiatingthesetransactionscanbetime-consuming,difficult,andexpensive,andourabilitytoclosethesetransactionsmaybesubjecttothird-partyapprovals,suchasgovernmentregulatoryapprovals,whicharebeyondourcontrol.Consequently,wecanmakenoassurancethatthesetransactionsonceundertakenandannounced,willclose.
Thesekindsofacquisitionsorinvestmentsmayresultinunforeseenoperatingdifficultiesandexpenditures.Ifweacquirebusinessesortechnologies,wemaynotbeabletointegratetheacquiredpersonnel,operations,andtechnologiessuccessfully,oreffectivelymanagethecombinedbusinessfollowingtheacquisition.Wealsomaynotachievetheanticipatedbenefitsfromtheacquiredbusinessduetoanumberoffactors,including:
• inabilitytointegrateorbenefitfromacquiredtechnologiesorservicesinaprofitablemanner;
• unanticipatedcostsorliabilitiesassociatedwiththeacquisition;
• incurrenceofacquisition-relatedcosts;
• difficultyintegratingtheaccountingsystems,operations,andpersonneloftheacquiredbusiness;
• difficultiesandadditionalexpensesassociatedwithsupportinglegacyproductsandhostinginfrastructureoftheacquiredbusiness;
• difficultyconvertingthecustomersoftheacquiredbusinessontoourplatformandcontractterms;
• diversionofmanagement’sattentionfromotherbusinessconcerns;
• adverseeffectstoourexistingbusinessrelationshipswithbusinesspartnersandcustomersasaresultoftheacquisition;
• thepotentiallossofkeyemployees;
• useofresourcesthatareneededinotherpartsofourbusiness;and
• useofsubstantialportionsofouravailablecashtoconsummatetheacquisition.
Moreover,wecannotassureyouthattheanticipatedbenefitsofanyacquisitionorinvestmentwouldberealizedorthatwewouldnotbeexposedtounknownliabilities.
Inconnectionwiththesetypesoftransactions,wemayissueadditionalequitysecuritiesthatwoulddiluteourstockholders,usecashthatwemayneedinthefuturetooperateourbusiness,incurdebtontermsunfavorabletousorthatweareunabletorepay,incurlargechargesorsubstantialliabilities,encounterdifficultiesintegratingdiversebusinesscultures,andbecomesubjecttoadversetaxconsequences,substantialdepreciation,ordeferredcompensationcharges.Thesechallengesrelatedtoacquisitionsorinvestmentscouldadverselyaffectourbusiness,operatingresults,financialcondition,andprospects.
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Changes in financial accounting standards or practices may cause adverse, unexpected financial reporting fluctuations and affect our reported operatingresults.
U.S.GAAPissubjecttointerpretationbytheFASB,theSEC,andvariousbodiesformedtopromulgateandinterpretappropriateaccountingprinciples.Achangeinaccountingstandardsorpracticescanhaveasignificanteffectonourreportedresultsandmayevenaffectourreportingoftransactionscompletedbeforethechangeiseffective.Newaccountingpronouncementsandvaryinginterpretationsofaccountingpronouncementshaveoccurredandmayoccurinthefuture.Changestoexistingrulesorthequestioningofcurrentpracticesmayadverselyaffectourreportedfinancialresultsorthewayweconductourbusiness.Accountingforrevenuefromsalesofsubscriptionstosoftwareisparticularlycomplex,isoftenthesubjectofintensescrutinybytheSEC,andwillevolveasFASBcontinuestoconsiderapplicableaccountingstandardsinthisarea.
Forexample,theFASBandtheInternationalAccountingStandardsBoardareworkingtoconvergecertainaccountingprinciplesandfacilitatemorecomparablefinancialreportingbetweencompaniesthatarerequiredtofollowU.S.GAAPandthosethatarerequiredtofollowInternationalFinancialReportingStandards,orIFRS.Inconnectionwiththeseinitiatives,theFASBissuednewaccountingstandardsforrevenuerecognitionthatreplacemostexistingrevenuerecognitionguidance.Althoughwearecurrentlyintheprocessofevaluatingtheimpactofthesenewstandardsonourconsolidatedfinancialstatements,itcouldchangethewayweaccountforcertainofoursalestransactions,orthecoststoobtainorfulfillacontractwithacustomer.Adoptionofthestandardcouldhaveasignificantimpactonourfinancialstatementsandmayretroactivelyaffecttheaccountingtreatmentoftransactionscompletedbeforeadoptiondependingonthemethodofadoptionweselect.TheimpactoftheconvergenceofU.S.GAAPandIFRS,ifany,onourfinancialstatementsisuncertainandmaynotbeknownuntiladditionalrulesareproposedandadopted,whichmayormaynotoccur.
Our financial statements are subject to change and if our estimates or judgments relating to our critical accounting policies prove to be incorrect, our operatingresults could be adversely affected.
ThepreparationoffinancialstatementsinconformitywithU.S.GAAPrequiresmanagementtomakeestimatesandassumptionsthataffecttheamountsreportedinourconsolidatedfinancialstatementsandrelatednotes.Webaseourestimatesonhistoricalexperienceandonvariousotherassumptionsthatwebelievetobereasonableunderthecircumstances,asprovidedinthesectiontitled“Management’sDiscussionandAnalysisofFinancialConditionandResultsofOperations”inthisQuarterlyReportonForm10-Q.Theresultsoftheseestimatesformthebasisformakingjudgmentsaboutthecarryingvaluesofassets,liabilities,andequity,andtheamountofrevenueandexpensesthatarenotreadilyapparentfromothersources.Criticalaccountingpoliciesandestimatesusedinpreparingourconsolidatedfinancialstatementsincludethoserelatedtorevenuerecognition,deferredcommissions,accountingforincometaxes,stock-basedcompensationexpense,andvaluationofourcommonstock.Ouroperatingresultsmaybeadverselyaffectedifourassumptionschangeorifactualcircumstancesdifferfromthoseinourassumptions,whichcouldcauseouroperatingresultstofallbelowtheexpectationsofsecuritiesanalystsandinvestors,resultinginadeclineinthepriceofourClassAcommonstock.
If our goodwill or intangible assets become impaired, we may be required to record a significant charge to earnings.
Wereviewourgoodwillandintangibleassetsforimpairmentwheneventsorchangesincircumstancesindicatethecarryingvaluemaynotberecoverable,suchasdeclinesinstockprice,marketcapitalization,orcashflowsandslowergrowthratesinourindustry.Goodwillisrequiredtobetestedforimpairmentatleastannually.Ifwearerequiredtorecordasignificantchargeinourfinancialstatementsduringtheperiodinwhichanyimpairmentofourgoodwillorintangibleassetsisdetermined,thatwouldnegativelyaffectouroperatingresults.
We are an emerging growth company and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make ourClass A common stock less attractive to investors.
Weareanemerginggrowthcompany,asdefinedintheJOBSAct,and,forsolongaswecontinuetobeanemerginggrowthcompany,wemaytakeadvantageofcertainexemptionsfromvariousreportingrequirementsthatareapplicabletootherpubliccompaniesthatarenotemerginggrowthcompaniesincluding,butnotlimitedto,notbeingrequiredtocomplywiththeauditorattestationrequirementsofSection404oftheSarbanes-OxleyAct,reduceddisclosureobligationsregardingexecutivecompensationinourperiodicreportsandproxystatements,andexemptionsfromtherequirementsofholdinganonbindingadvisoryvoteonexecutivecompensationandstockholderapprovalofanygoldenparachutepaymentsnotpreviouslyapproved.PursuanttoSection107oftheJOBSAct,asanemerginggrowthcompany,wehaveelectedtousetheextendedtransitionperiodforcomplyingwithneworrevisedaccountingstandardsuntilthosestandardswouldotherwiseapplytoprivatecompanies.Asaresult,ourconsolidatedfinancialstatementsmaynotbecomparabletothefinancial
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statementsofissuerswhoarerequiredtocomplywiththeeffectivedatesforneworrevisedaccountingstandardsthatareapplicabletopubliccompanies,whichmaymakeourClassAcommonstocklessattractivetoinvestors.Inaddition,ifweceasetobeanemerginggrowthcompany,wewillnolongerbeabletousetheextendedtransitionperiodforcomplyingwithneworrevisedaccountingstandards.
Wewillremainanemerginggrowthcompanyuntiltheearliestof(i)thelastdayofthefiscalyearfollowingthefifthanniversaryoftheeffectivenessoftheIPO,(ii)thelastdayofthefirstfiscalyearinwhichourannualgrossrevenueis$1.07billionormore,(iii)thedateonwhichwehave,duringthepreviousrollingthree-yearperiod,issuedmorethan$1.0billioninnon-convertibledebtsecurities,or(iv)thelastdayofthefiscalyearinwhichthemarketvalueofourcommonstockthatisheldbynon-affiliatesexceeds$700.0millionasofJune30.
WecannotpredictifinvestorswillfindourClassAcommonstocklessattractiveorourcompanylesscomparabletocertainotherpubliccompaniesbecausewewillrelyontheseexemptions.Forexample,ifwedonotadoptaneworrevisedaccountingstandard,ourfutureoperatingresultsmaynotbeascomparabletotheoperatingresultsofcertainothercompaniesinourindustrythatadoptedsuchstandards.IfsomeinvestorsfindourClassAcommonstocklessattractiveasaresult,theremaybealessactivetradingmarketforourClassAcommonstockandourstockpricemaybemorevolatile.
We are exposed to fluctuations in the market values of our investments.
Creditratingsandpricingofourinvestmentscanbenegativelyaffectedbyliquidity,creditdeterioration,financialresults,economicrisk,politicalrisk,sovereignrisk,changesininterestrates,orotherfactors.Asaresult,thevalueandliquidityofourcashandcashequivalentsandinvestmentsmayfluctuatesubstantially.Therefore,althoughwehavenotrealizedanysignificantlossesonourcashandcashequivalentsandinvestments,futurefluctuationsintheirvaluecouldresultinasignificantrealizedloss,whichcouldmateriallyadverselyaffectourfinancialconditionandoperatingresults.
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Risks Related to Ownership of Our Class A Common Stock
The market price of our Class A common stock has been, and will likely continue to be, volatile, and you could lose all or part of your investment.
ThemarketpriceofourClassAcommonstockhasbeen,andwilllikelycontinuetobe,volatile.SincesharesofourClassAcommonstockweresoldinourIPOinMarch2017atapriceof$14.00pershare,ourclosingstockpricehasrangedfrom$14.80to$23.59,throughSeptember30,2017.InadditiontofactorsdiscussedinthisQuarterlyReportonForm10-Q,themarketpriceofourClassAcommonstockmaycontinuetofluctuatesignificantlyinresponsetonumerousfactors,manyofwhicharebeyondourcontrol,including:
• overallperformanceoftheequitymarkets;
• actualoranticipatedfluctuationsinourrevenueandotheroperatingresults;
• changesinthefinancialprojectionswemayprovidetothepublicorourfailuretomeettheseprojections;
• failureofsecuritiesanalyststoinitiateormaintaincoverageofus,changesinfinancialestimatesbyanysecuritiesanalystswhofollowourcompany,orourfailuretomeettheseestimatesortheexpectationsofinvestors;
• recruitmentordepartureofkeypersonnel;
• theeconomyasawholeandmarketconditionsinourindustry;
• negativepublicityrelatedtotherealorperceivedqualityofourplatform,aswellasthefailuretotimelylaunchnewproductsandservicesthatgainmarketacceptance;
• rumorsandmarketspeculationinvolvingusorothercompaniesinourindustry;
• announcementsbyusorourcompetitorsofsignificanttechnicalinnovations,
• acquisitions,strategicpartnerships,jointventures,orcapitalcommitments;
• newlawsorregulationsornewinterpretationsofexistinglawsorregulationsapplicabletoourbusiness;
• lawsuitsthreatenedorfiledagainstus;
• developmentsordisputesconcerningourintellectualpropertyorourplatform,orthird-partyproprietaryrights;
• theinclusionofourClassAcommonstockonstockmarketindexes,includingtheimpactofnewrulesadoptedbycertainindexproviders,suchasS&PDowJonesIndicesandFTSERussell,thatlimitorprecludeinclusionofcompanieswithmulti-classcapitalstructures;
• changesinaccountingstandards,policies,guidelines,interpretations,orprinciples;
• othereventsorfactors,includingthoseresultingfromwar,incidentsofterrorism,orresponsestotheseevents;
• theexpirationofcontractuallock-upagreements;and
• salesofsharesofourClassAcommonstockbyusorourstockholders.
Inaddition,thestockmarketshaveexperiencedextremepriceandvolumefluctuationsthathaveaffectedandcontinuetoaffectthemarketpricesofequitysecuritiesofmanycompanies.Stockpricesofmanycompanies,andtechnologycompaniesinparticular,havefluctuatedinamannerunrelatedordisproportionatetotheoperatingperformanceofthosecompanies.Inthepast,stockholdershaveinstitutedsecuritiesclassactionlitigationfollowingperiodsofmarketvolatility.Ifweweretobecomeinvolvedinsecuritieslitigation,itcouldsubjectustosubstantialcosts,divertresourcesandtheattentionofmanagementfromourbusiness,andadverselyaffectourbusiness.
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Sales of substantial amounts of our Class A common stock in the public markets, or the perception that they might occur, including when the lock-up periodsend, could cause the market price of our Class A common stock to decline.
SalesofasubstantialnumberofsharesofourClassAcommonstockintothepublicmarket,particularlysalesbyourdirectors,executiveofficers,andprincipalstockholders,ortheperceptionthatthesesalesmightoccur,couldcausethemarketpriceofourClassAcommonstocktodecline.Wehadatotalof59,142,143sharesofourClassAandClassBcommonstockoutstandingasofSeptember30,2017.Oftheseshares,1,350,000sharesofClassAcommonstockand34,268,288sharesofClassBcommonstockaresubjecttothelock-uprestrictionsthatwereenteredintoinconnectionwithourfollow-onpublicoffering,ofwhich1,350,000sharesofClassAcommonstockand16,298,855sharesofClassBcommonstockwillbecomeavailableforsaleonNovember14,2017and17,969,433sharesofClassBcommonstockwillbecomeavailableforsaleonDecember6,2017.Theremainingsharesofourcommonstockarefreelytradable,withoutrestrictionsorfurtherregistrationundertheSecuritiesAct,exceptthatanysharesheldbyour“affiliates”asdefinedinRule144undertheSecuritiesActwouldonlybeabletobesoldincompliancewithRule144andanyapplicablelock-upagreementsdescribedbelow.
Whentheapplicablelock-upperiodsdescribedaboveexpire,weandoursecurityholderssubjecttoalock-upagreementwillbeabletoselloursharesinthepublicmarket.Inaddition,theunderwritersmay,intheirsolediscretion,releaseallorsomeportionofthesharessubjecttolock-upagreementspriortotheexpirationofthelock-upperiod.
Inaddition,certainholdersofourcommonstockare,subjecttocertainconditions,entitled,undercontractsprovidingforregistrationrights,torequireustofileregistrationstatementsforthepublicresaleoftheClassAcommonstockissuableuponconversionofsuchholders’sharesofClassBcommonstockortoincludesuchsharesinregistrationstatementsthatwemayfileforusorotherstockholders.
Salesofoursharesasrestrictionsendorpursuanttoregistrationrightsmaymakeitmoredifficultforustosellequitysecuritiesinthefutureatatimeandatapricethatwedeemappropriate.ThesesalesalsocouldcausethetradingpriceofourClassAcommonstocktofallandmakeitmoredifficultforyoutosellsharesofourClassAcommonstock.
Inaddition,wehavefiledaregistrationstatementtoregistersharesreservedforfutureissuanceunderourequitycompensationplans.Subjecttothesatisfactionofapplicableexerciseperiodsandexpirationofthemarketstandoffagreementsandlock-upagreementsreferredtoabove,thesharesissueduponexerciseofoutstandingstockoptionsorsettlementofoutstandingrestrictedstockunitswillbeavailableforimmediateresaleintheUnitedStatesintheopenmarket.
Wemayalsoissueoursharesofcommonstockorsecuritiesconvertibleintosharesofourcommonstockfromtimetotimeinconnectionwithafinancing,acquisition,investment,orotherwise.Forexample,weagreedtoissuesharesofourClassAcommonstockwithanaggregatevalueofupto$2.3millionupontheachievementofcertainmilestonesinconnectionwithouracquisitionofSemanta,ofwhich12,492sharesofClassAcommonstockwereissuedinAugust2017uponpartialsatisfactionofcertainmilestones.AnyfurthersuchissuancecouldresultinsubstantialdilutiontoourexistingstockholdersandcausethemarketpriceofourClassAcommonstocktodecline.
The dual class structure of our common stock has the effect of concentrating voting control with holders of our Class B common stock, including our directors,executive officers, and 5% stockholders and their affiliates, which limits or precludes your ability to influence corporate matters, including the election ofdirectors and the approval of any change of control transaction.
OurClassBcommonstockhastenvotespershareandourClassAcommonstockhasonevotepershare.AsofSeptember30,2017,ourdirectors,executiveofficers,andholdersofmorethan5%ofourcommonstock,andtheirrespectiveaffiliates,heldasubstantialmajorityofthevotingpowerofourcapitalstock.Becauseoftheten-to-onevotingratiobetweenourClassBcommonstockandClassAcommonstock,theholdersofourClassBcommonstockcollectivelycontrolamajorityofthecombinedvotingpowerofourcommonstockandthereforeareabletocontrolallmatterssubmittedtoourstockholdersforapprovaluntiltheearliestof(i)thedatespecifiedbyavoteoftheholdersofatleast662/3%oftheoutstandingsharesofClassBcommonstock,(ii)March29,2027,or(iii)thedatethesharesofClassBcommonstockceasetorepresentatleast10%oftheaggregatenumberofsharesofClassAcommonstockandClassBcommonstockthenoutstanding.Thisconcentratedcontrollimitsorprecludesyourabilitytoinfluencecorporatemattersfortheforeseeablefuture,includingtheelectionofdirectors,amendmentsofourorganizationaldocuments,andanymerger,consolidation,saleofallorsubstantiallyallofourassets,orothermajorcorporatetransactionrequiringstockholderapproval.Inaddition,thismaypreventordiscourageunsolicitedacquisitionproposalsoroffersforourcapitalstockthatyoumayfeelareinyourbestinterestasoneofourstockholders.
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FuturetransfersbyholdersofClassBcommonstockwillgenerallyresultinthosesharesconvertingtoClassAcommonstock,subjecttolimitedexceptions,suchascertainpermittedtransferseffectedforestateplanningpurposes.TheconversionofClassBcommonstocktoClassAcommonstockwillhavetheeffect,overtime,ofincreasingtherelativevotingpowerofthoseholdersofClassBcommonstockwhoretaintheirsharesinthelongterm.
If securities or industry analysts do not publish research, or publish inaccurate or unfavorable research, about our business, the price of our Class A commonstock and trading volume could decline.
ThetradingmarketforourClassAcommonstockdependsinpartontheresearchandreportsthatsecuritiesorindustryanalystspublishaboutusorourbusiness.Iffewsecuritiesanalystscommencecoverageofus,orifindustryanalystsceasecoverageofus,thetradingpriceforourcommonstockwouldbenegativelyaffected.IfoneormoreoftheanalystswhocoverusdowngradeourClassAcommonstockorpublishinaccurateorunfavorableresearchaboutourbusiness,thepriceofourClassAcommonstockwouldlikelydecline.Ifoneormoreoftheseanalystsceasecoverageofusorfailtopublishreportsonusregularly,demandforourClassAcommonstockcoulddecrease,whichmightcauseourClassAcommonstockpriceandtradingvolumetodecline.
We do not intend to pay dividends for the foreseeable future.
Wehaveneverdeclaredorpaidanycashdividendsonourcommonstockanddonotintendtopayanycashdividendsintheforeseeablefuture.Weanticipatethatfortheforeseeablefuturewewillretainallofourfutureearningsforuseinthedevelopmentofourbusinessandforgeneralcorporatepurposes.Anydeterminationtopaydividendsinthefuturewillbeatthediscretionofourboardofdirectors.Accordingly,investorsmustrelyonsalesoftheircommonstockafterpriceappreciation,whichmayneveroccur,astheonlywaytorealizeanyfuturegainsontheirinvestments.
Provisions in our charter documents and under Delaware law could make an acquisition of our company more difficult, limit attempts by our stockholders toreplace or remove our current management, limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, oremployees, and limit the market price of our Class A common stock.
Provisionsinourrestatedcertificateofincorporationandrestatedbylawsmayhavetheeffectofdelayingorpreventingachangeofcontrolorchangesinourmanagement.Ourrestatedcertificateofincorporationandrestatedbylawsincludeprovisionsthat:
• providethatourboardofdirectorswillbeclassifiedintothreeclassesofdirectorswithstaggeredthree-yearterms;
• permittheboardofdirectorstoestablishthenumberofdirectorsandfillanyvacanciesandnewly-createddirectorships;
• requiresuper-majorityvotingtoamendsomeprovisionsinourrestatedcertificateofincorporationandrestatedbylaws;
• authorizetheissuanceof“blankcheck”preferredstockthatourboardofdirectorscouldusetoimplementastockholderrightsplan;
• providethatonlythechairmanofourboardofdirectors,ourchiefexecutiveofficer,president,leadindependentdirector,oramajorityofourboardofdirectorswillbeauthorizedtocallaspecialmeetingofstockholders;
• provideforadualclasscommonstockstructureinwhichholdersofourClassBcommonstockhavetheabilitytocontroltheoutcomeofmatters
requiringstockholderapproval,eveniftheyownsignificantlylessthanamajorityoftheoutstandingsharesofourcommonstock,includingtheelectionofdirectorsandsignificantcorporatetransactions,suchasamergerorothersaleofourcompanyoritsassets;
• prohibitstockholderactionbywrittenconsent,whichrequiresallstockholderactionstobetakenatameetingofourstockholders;
• providethattheboardofdirectorsisexpresslyauthorizedtomake,alter,orrepealourbylaws;and
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• establishadvancenoticerequirementsfornominationsforelectiontoourboardofdirectorsorforproposingmattersthatcanbeacteduponbystockholdersatannualstockholdermeetings.
Inaddition,ourrestatedcertificateofincorporationprovidesthattheCourtofChanceryoftheStateofDelawarewillbetheexclusiveforumfor:anyderivativeactionorproceedingbroughtonourbehalf;anyactionassertingabreachoffiduciaryduty;anyactionassertingaclaimagainstusarisingpursuanttotheDelawareGeneralCorporationLaw,orDGCL,ourrestatedcertificateofincorporation,orourrestatedbylaws;oranyactionassertingaclaimagainstusthatisgovernedbytheinternalaffairsdoctrine.Thischoiceofforumprovisionmaylimitastockholder’sabilitytobringaclaiminajudicialforumthatitfindsfavorablefordisputeswithusoranyofourdirectors,officers,orotheremployees,whichmaydiscouragelawsuitswithrespecttosuchclaims.Alternatively,ifacourtweretofindthechoiceofforumprovisioncontainedinourrestatedcertificateofincorporationtobeinapplicableorunenforceableinanaction,wemayincuradditionalcostsassociatedwithresolvingsuchactioninotherjurisdictions,whichcouldharmourbusiness,operatingresults,andfinancialcondition.
Moreover,Section203oftheDGCLmaydiscourage,delay,orpreventachangeofcontrolofourcompany.Section203imposescertainrestrictionsonmergers,businesscombinations,andothertransactionsbetweenusandholdersof15%ormoreofourcommonstock.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(a) Unregistered Sales of Equity Securities
OnAugust21,2017,weissued12,492sharesofourClassAcommonstocktofiveindividualsuponpartialsatisfactionofacontingentconsiderationearn-outprovisionenteredintoaspartoftheSemantaacquisitioninJanuary2017.
ThesalesoftheabovesecuritiesweredeemedtobeexemptfromregistrationundertheSecuritiesActinrelianceuponSection4(a)(2)oftheSecuritiesAct(orRegulationDorRegulationSpromulgatedthereunder)astransactionsbyanissuernotinvolvinganypublicoffering.Therecipientsofthesecuritiesineachofthesetransactionsrepresentedtheirintentionstoacquirethesecuritiesforinvestmentonlyandnotwithaviewtoorforsaleinconnectionwithanydistributionthereof,andappropriatelegendswereplaceduponthestockcertificatesissuedinthesetransactions.
(b) Use of Proceeds
OnMarch23,2017,theSECdeclaredourregistrationstatementonFormS-1(FileNo.333-216237)forourIPOeffective,andtheofferingcommencedthefollowingday.Theofferingdidnotterminatebeforeallofthesecuritiesregisteredintheregistrationstatementweresold.Goldman,Sachs&Co.andJ.P.MorganSecuritiesLLCactedasjointbook-runningmanagersfortheoffering.PacificCrestSecurities,adivisionofKeyBancCapitalMarketsInc.,WilliamBlair&Company,L.L.C.,JMPSecuritiesLLC,RaymondJames&Associates,Inc.,andCowenandCompany,LLCactedasco-managers.
Weregisteredanaggregateof10,350,000sharesofourClassAcommonstock,including1,350,000sharespursuanttotheunderwriters’optiontopurchaseadditionalshares.OnMarch29,2017,weclosedourIPO,inwhichwesold9,000,000sharesofourClassAcommonstock.OnApril18,2017,weclosedthesaleoftheadditional1,350,000sharesofourClassAcommonstock.Thesharesweresoldatapublicofferingpriceof$14.00pershareforanaggregategrossofferingpriceofapproximately$144.9million.Wereceivednetproceedsof$134.8millionafterdeductingunderwritingdiscountsandcommissionsof$10.1millionbutbeforedeductingofferingcosts.Weincurredofferingexpensesofapproximately$3.4million,ofwhich$1.0millionwerepaidintheyearendedDecember31,2016,$1.9millionwerepaidintheninemonthsendedSeptember30,2017,andtheremaining$0.5millionwillbepaidafterSeptember30,2017.Thus,thenetofferingproceeds,afterdeductingunderwritingdiscountsandofferingexpenses,wereapproximately$131.4million.Nopaymentsweremadetoourdirectorsorofficersortheirassociates,holdersof10%ormoreofanyclassofourequitysecurities,ortoouraffiliatesinconnectionwiththeissuanceandsaleofthesecuritiesregistered.
TherehasbeennomaterialchangeintheplanneduseofproceedsfromourIPOasdescribedinourfinalprospectusfiledwiththeSEConMarch24,2017pursuanttoRule424(b)(4).
(c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
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Item 6. Exhibits.ExhibitNumber
Incorporated by Reference Filed
Herewith Exhibit Description FormFileNo. Exhibit
FilingDate
31.1
CertificationofDeanA.Stoecker,ChiefExecutiveOfficer,pursuanttoRule13a-14(a)/15d-14(a),asadoptedpursuanttoSection302oftheSarbanes-OxleyActof2002.
X
31.2
CertificationofKevinRubin,ChiefFinancialOfficer,pursuanttoRule13a-14(a)/15d-14(a),asadoptedpursuanttoSection302oftheSarbanes-OxleyActof2002.
X
32.1#
CertificationofDeanA.Stoecker,ChiefExecutiveOfficer,pursuantto18U.S.C.Section1350,asadoptedpursuanttoSection906oftheSarbanes-OxleyActof2002.
X
32.2#
CertificationofKevinRubin,ChiefFinancialOfficer,pursuantto18U.S.C.Section1350,asadoptedpursuanttoSection906oftheSarbanes-OxleyActof2002.
X
101.INS XBRLInstanceDocument. X
101.SCH XBRLTaxonomyExtensionSchemaDocument. X
101.CAL XBRLTaxonomyExtensionCalculationLinkbaseDocument. X
101.DEF XBRLTaxonomyExtensionDefinitionLinkbaseDocument. X
101.LAB XBRLTaxonomyExtensionLabelsLinkbaseDocument. X
101.PRE XBRLTaxonomyExtensionPresentationLinkbaseDocument. X# Thiscertificationisdeemednotfiledforpurposesofsection18oftheExchangeAct,orotherwisesubjecttotheliabilityofthatsection,norshallitbe
deemedincorporatedbyreferenceintoanyfilingundertheSecuritiesActortheExchangeAct.
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SIGNATURES
PursuanttotherequirementsoftheSecuritiesExchangeActof1934,asamended,theregistranthasdulycausedthisreporttobesignedonitsbehalfbytheundersignedthereuntodulyauthorized.
Alteryx,Inc.(Registrant)
By: /s/DeanA.Stoecker
DeanA.StoeckerChairmanoftheBoardofDirectorsandChiefExecutiveOfficer(PrincipalExecutiveOfficer)
By: /s/KevinRubin
KevinRubinChiefFinancialOfficer(PrincipalFinancialandAccountingOfficer)
Date:November9,2017
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Exhibit 31.1
CERTIFICATION PURSUANT TO RULE 13a-14(a) OR 15d-14(a) OFTHE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OFTHE SARBANES-OXLEY ACT OF 2002
I,DeanA.Stoecker,certifythat:
1. IhavereviewedthisQuarterlyReportonForm10-QofAlteryx,Inc.;
2. Basedonmyknowledge,thisreportdoesnotcontainanyuntruestatementofamaterialfactoromittostateamaterialfactnecessarytomakethestatementsmade,inlightofthecircumstancesunderwhichsuchstatementsweremade,notmisleadingwithrespecttotheperiodcoveredbythisreport;
3. Basedonmyknowledge,thefinancialstatements,andotherfinancialinformationincludedinthisreport,fairlypresentinallmaterialrespectsthefinancialcondition,resultsofoperationsandcashflowsoftheregistrantasof,andfor,theperiodspresentedinthisreport;
4. Theregistrant’sothercertifyingofficerandIareresponsibleforestablishingandmaintainingdisclosurecontrolsandprocedures(asdefinedinExchangeActRules13a-15(e)and15d-15(e))fortheregistrantandhave:
a. designedsuchdisclosurecontrolsandprocedures,orcausedsuchdisclosurecontrolsandprocedurestobedesignedunderoursupervision,toensure
thatmaterialinformationrelatingtotheregistrant,includingitsconsolidatedsubsidiaries,ismadeknowntousbyotherswithinthoseentities,particularlyduringtheperiodinwhichthisreportisbeingprepared;
b. evaluatedtheeffectivenessoftheregistrant’sdisclosurecontrolsandproceduresandpresentedinthisreportourconclusionsabouttheeffectivenessofthedisclosurecontrolsandprocedures,asoftheendoftheperiodcoveredbythisreportbasedonsuchevaluation;and
c. disclosedinthisreportanychangeintheregistrant’sinternalcontroloverfinancialreportingthatoccurredduringtheregistrant’smostrecentfiscal
quarter(theregistrant’sfourthfiscalquarterinthecaseofanannualreport)thathasmateriallyaffected,orisreasonablylikelytomateriallyaffect,theregistrant’sinternalcontroloverfinancialreporting.
5. Theregistrant’sothercertifyingofficerandIhavedisclosed,basedonourmostrecentevaluationofinternalcontroloverfinancialreporting,totheregistrant’sauditorsandtheauditcommitteeoftheregistrant’sboardofdirectors(orpersonsperformingtheequivalentfunctions):
a. allsignificantdeficienciesandmaterialweaknessesinthedesignoroperationofinternalcontroloverfinancialreporting,whicharereasonablylikelytoadverselyaffecttheregistrant’sabilitytorecord,process,summarizeandreportfinancialinformation;and
b. anyfraud,whetherornotmaterial,thatinvolvesmanagementorotheremployeeswhohaveasignificantroleintheregistrant’sinternalcontroloverfinancialreporting.
Date:November9,2017/s/DeanA.StoeckerDeanA.StoeckerChiefExecutiveOfficer(PrincipalExecutiveOfficer)
Exhibit 31.2
CERTIFICATION PURSUANT TO RULE 13a-14(a) OR 15d-14(a) OFTHE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OFTHE SARBANES-OXLEY ACT OF 2002
I,KevinRubin,certifythat:
1. IhavereviewedthisQuarterlyReportonForm10-QofAlteryx,Inc.;
2. Basedonmyknowledge,thisreportdoesnotcontainanyuntruestatementofamaterialfactoromittostateamaterialfactnecessarytomakethestatementsmade,inlightofthecircumstancesunderwhichsuchstatementsweremade,notmisleadingwithrespecttotheperiodcoveredbythisreport;
3. Basedonmyknowledge,thefinancialstatements,andotherfinancialinformationincludedinthisreport,fairlypresentinallmaterialrespectsthefinancialcondition,resultsofoperationsandcashflowsoftheregistrantasof,andfor,theperiodspresentedinthisreport;
4. Theregistrant’sothercertifyingofficerandIareresponsibleforestablishingandmaintainingdisclosurecontrolsandprocedures(asdefinedinExchangeActRules13a-15(e)and15d-15(e))fortheregistrantandhave:
a. designedsuchdisclosurecontrolsandprocedures,orcausedsuchdisclosurecontrolsandprocedurestobedesignedunderoursupervision,toensure
thatmaterialinformationrelatingtotheregistrant,includingitsconsolidatedsubsidiaries,ismadeknowntousbyotherswithinthoseentities,particularlyduringtheperiodinwhichthisreportisbeingprepared;
b. evaluatedtheeffectivenessoftheregistrant’sdisclosurecontrolsandproceduresandpresentedinthisreportourconclusionsabouttheeffectivenessofthedisclosurecontrolsandprocedures,asoftheendoftheperiodcoveredbythisreportbasedonsuchevaluation;and
c. disclosedinthisreportanychangeintheregistrant’sinternalcontroloverfinancialreportingthatoccurredduringtheregistrant’smostrecentfiscal
quarter(theregistrant’sfourthfiscalquarterinthecaseofanannualreport)thathasmateriallyaffected,orisreasonablylikelytomateriallyaffect,theregistrant’sinternalcontroloverfinancialreporting.
5. Theregistrant’sothercertifyingofficerandIhavedisclosed,basedonourmostrecentevaluationofinternalcontroloverfinancialreporting,totheregistrant’sauditorsandtheauditcommitteeoftheregistrant’sboardofdirectors(orpersonsperformingtheequivalentfunctions):
a. allsignificantdeficienciesandmaterialweaknessesinthedesignoroperationofinternalcontroloverfinancialreporting,whicharereasonablylikelytoadverselyaffecttheregistrant’sabilitytorecord,process,summarizeandreportfinancialinformation;and
b. anyfraud,whetherornotmaterial,thatinvolvesmanagementorotheremployeeswhohaveasignificantroleintheregistrant’sinternalcontroloverfinancialreporting.
Date:November9,2017/s/KevinRubinKevinRubinChiefFinancialOfficer(PrincipalFinancialandAccountingOfficer)
Exhibit 32.1
CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I,DeanA.Stoecker,ChiefExecutiveOfficerofAlteryx,Inc.(the“Company”),doherebycertify,pursuantto18U.S.C.Section1350,asadoptedpursuanttoSection906oftheSarbanes-OxleyActof2002,thattothebestofmyknowledge:
• theQuarterlyReportonForm10-QoftheCompanyforthefiscalquarterendedSeptember30,2017(the“Report”)fullycomplieswiththerequirementsofSection13(a)or15(d)oftheSecuritiesExchangeActof1934,asamended;and
• theinformationcontainedintheReportfairlypresents,inallmaterialrespects,thefinancialconditionandresultsofoperationsoftheCompany.
Date:November9,2017/s/DeanA.StoeckerDeanA.StoeckerChiefExecutiveOfficer(PrincipalExecutiveOfficer)
Exhibit 32.2
CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I,KevinRubin,ChiefFinancialOfficerofAlteryx,Inc.(the“Company”),doherebycertify,pursuantto18U.S.C.Section1350,asadoptedpursuanttoSection906oftheSarbanes-OxleyActof2002,thattothebestofmyknowledge:
• theQuarterlyReportonForm10-QoftheCompanyforthefiscalquarterendedSeptember30,2017(the“Report”)fullycomplieswiththerequirementsofSection13(a)or15(d)oftheSecuritiesExchangeActof1934,asamended;and
• theinformationcontainedintheReportfairlypresents,inallmaterialrespects,thefinancialconditionandresultsofoperationsoftheCompany.
Date:November9,2017/s/KevinRubinKevinRubinChiefFinancialOfficer(PrincipalFinancialandAccountingOfficer)