MOBILEIRON, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year endedDecember 31, 2019 filed with theSEC . In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those contained in or implied by any forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in "Special Note Regarding Forward-Looking Statements" and "Risk Factors." The forward-looking statements included in this Quarterly Report on Form 10-Q are made only as
of the date hereof. Overview Mobile and cloud computing are the catalysts for modern work and the digital workplace. Mobile empowers employees to make better decisions and take faster actions because the information and tools they need to do their jobs are always available from anywhere. Cloud is transforming IT, Security and DevOps and has accelerated how the developer ecosystem builds and rolls out innovative services enabling unparalleled user experience. However, this comes with new risks. The traditional, locked-down, perimeter-based approach to security no longer applies to mobile endpoints and cloud services that operate outside the corporate network. Data no longer resides behind the firewall on locked-down PCs and servers, and so it cannot be secured by legacy firewall-based solutions. Instead, data is spread across a wide variety of modern endpoints including Android, iOS, macOS, Chrome OS and Windows 10, as well as cloud services such as Box, Concur, Microsoft Office 365,Netsuite , Salesforce, Workday and custom cloud applications that are hosted on cloud infrastructure providers like AWS or on-premise.
This shift to mobile and cloud technologies introduces three main challenges that CIOs and CISOs need to address to realize their secure digital workplace:
1. Drive business innovation by allowing employees to securely use mobile, cloud,
services and on-premises apps from any device, anywhere;
2. Enforce corporate security without impacting the user experience;
3. Redefine enterprise security strategies to address a perimeter-less
environment.
To solve these challenges, many organizations are in the early stages of investigating a zero trust security framework for their enterprise. Zero trust assumes that bad actors are already in the network and secure access is determined by a "never trust, always verify" approach.
MobileIron is an established player in the zero trust market, and a leader in mobile-centric, zero trust solutions that go beyond traditional approaches to security by utilizing a more comprehensive set of attributes to grant secure access.MobileIron products and services validate the device, establish user context, check application authorization, verify the network, and detect and mitigate threats before granting secure access to a device or user. We believe traditional identity-based and gateway approaches to zero trust fall short because they provide only limited visibility into devices, applications, and threats. We are redefining how customers build a secure foundation in a perimeter-less world. Our security platform is built on the foundation of unified endpoint management (UEM) with additional zero trust capabilities including zero sign-on (ZSO), multifactor authentication (MFA), and mobile threat defense (MTD). Together these products and services create a more seamless mobile experience by automating access control decisions across users, endpoints, operating systems, clouds, networks, threats, and vulnerabilities so that only trusted resources can access corporate data. Our customers can deployMobileIron solutions as either cloud services or on-premise software. They have historically been able to choose to purchase our on-premise software priced as a subscription or perpetual license. However, we announced the discontinuation of sales of on-premise software priced as a perpetual license effective 33
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beginning the third quarter of 2020. We target midsize and large enterprises around the world across a broad range of industries including financial services, government, healthcare, legal, manufacturing, professional services, retail, technology, and telecommunications. We sell a significant portion of our products through our channel partners, including resellers, service providers and system integrators. Our sales force develops sales opportunities and works closely with our channel partners to sell our solutions. We have a high touch sales force focused on large organizations, inside sales teams focused on mid-sized enterprises and sales teams that work with service providers that focus on smaller businesses. We prioritize our internal sales and marketing efforts on large organizations because we believe that they represent the largest potential opportunity. Our total revenue in the three and nine months endedSeptember 30, 2020 was$50.0 million and$158.6 million , compared to$52.2 million and$151.1 million in the three and nine months endedSeptember 30, 2019 , representing a decrease of 4% and an increase of 5%, respectively. Revenue from cloud services, licenses and software support and services represented 42%, 13% and 45% of total revenue, respectively, in the three months endedSeptember 30, 2020 , and 34%, 23% and 43% of total revenue, respectively, in the three months endedSeptember 30, 2019 . Revenue from cloud services, licenses and software support and services represented 37%, 21% and 42% of total revenue, respectively, in the nine months endedSeptember 30, 2020 , and 32%, 24% and 44% of total revenue, respectively, in the nine months endedSeptember 30, 2019 . Revenue from recurring sources, which includes revenue from the license component of on-premise term subscriptions, cloud services, and software support on perpetual and on-premise term licenses, was 95% and 86% of total revenue in the three and nine months endedSeptember 30, 2020 , respectively, compared to 86% and 85% of total revenue in the three and nine months endedSeptember 30, 2019 , respectively. Cloud services and on-premise subscription revenue have increased as a percentage of our total revenue over the long-term. After the second quarter of 2020, we discontinued the perpetual license pricing model and, consequently, we expect to generate nearly all of our revenue from recurring sources in the future, as we did in the three months endedSeptember 30, 2020 , with cloud services accounting for an increasing proportion of that recurring revenue. Our cloud services revenue in the three months endedSeptember 30, 2020 and 2019 was$20.9 million and$17.6 million , respectively, representing an increase of 19%. Our cloud services revenue in the nine months endedSeptember 30, 2020 and 2019 was$59.1 million and$49.2 million , respectively, representing an increase of 20%. This growth reflects our customers' preference to purchase cloud services and contributions from MobileIron Threat Detection and Access. When we sell our cloud solutions on a subscription basis, we typically offer 12 months or longer terms and bill in advance. Our license revenue in the three months endedSeptember 30, 2020 and 2019 was$6.5 million and$12.2 million , respectively, representing a decrease of 47%. Our license revenue in the nine months endedSeptember 30, 2020 and 2019 was$32.6 million and$35.8 million , respectively, representing a decrease of 9%. The decrease in license revenue in the three and nine months endedSeptember 30, 2020 was primarily due to the discontinuation of sales of perpetual licenses. Over time, demand for our perpetual licenses decreased and we announced in the first quarter of 2020 that we would be discontinuing that pricing model at the end of our second quarter of 2020. As a result of that announcement, the three months endedJune 30, 2020 benefitted from perpetual license sales that would have otherwise closed in future quarters. In the third quarter of 2020, however, perpetual license revenue was minimal. In future quarters, license revenue will be generated primarily from sales of on-premise subscriptions which do not generate as much up-front license revenue as perpetual licenses. Our software support and services revenue in the three months endedSeptember 30, 2020 and 2019 was$22.6 million and$22.4 million , respectively. Our software support and services revenue in the nine months endedSeptember 30, 2020 and 2019 was$67.0 million and$66.2 million , respectively, representing an increase of 1%. Software support and services revenue includes support of perpetual license customers, the support component of on-premise subscriptions, and professional services. The growth rate of software support and services revenue has primarily been dependent on growth in our installed base of customers that purchase perpetual licenses or on-premises subscriptions, renewals of on-premises subscriptions and software support on perpetual licenses, and purchases of professional services 34
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as part of our solutions. The discontinuation of sales of perpetual licenses eliminates the sale of new perpetual licenses with accompanying support as a software support and services growth factor in the future. Our Annual Recurring Revenue (or "Total ARR") atSeptember 30, 2020 was$191.5 million compared to$174.3 million atSeptember 30, 2019 , representing a growth rate of 10%. Total ARR is defined as the annualized value of all recurring revenue contracts active at the end of a reporting period. See "Key Metrics and Non-GAAP Financial Information" for more information about ARR. We believe that our market opportunity is large, and sales to customers outside ofthe United States will remain a significant opportunity for future growth. In the nine months endedSeptember 30, 2020 , 57% of our total revenue was generated from customers located outside ofthe United States and for both the full years of 2019 and 2018, 58% of our total revenue was generated from customers located outside ofthe United States . The international revenue was primarily generated from customers located inEurope . International market trends that may affect sales of our products and services include heightened concerns and legal requirements relating to data security and privacy, the importance of execution on our international channel partner strategy, the importance of recruiting and retaining sufficient international personnel, the effect of exchange rates, and political and financial market instability. InApril 2020 , we acquired all of the issued and outstanding capital stock of incapptic, a privately-held German software company, for$5.9 million . Our unified endpoint management platform integrates with the incapptic software to help customers develop, deploy and secure in-house business applications, a natural extension of our product portfolio. Since 2016, we have focused on driving more efficiency in our business. However, we have continued to incur net losses. We incurred net losses of$37.4 million ,$48.8 million and$43.1 million in the nine months endedSeptember 30, 2020 , and the full years 2019 and 2018, respectively. As a result of this, we do not expect to be profitable for the foreseeable future under our current operating plan. Future profitability is primarily dependent on revenue growth, which may be challenging for a number of reasons including continued mix shift towards cloud subscription licensing, increasing and entrenched competition, product features, changes in our pricing model, the amount of revenue we generate from sales of partner solutions that bear royalties, our ability to continue to develop and evolve our products, any failure to capitalize on market opportunities, and the ability of our sales organization to retain its key employees and leadership team. Future profitability is also dependent on our ability to drive efficiencies into the business and to manage our expenses, which continue to be impacted by stock-based compensation charges from RSU and PSU grants and stock-settled bonuses. We will also need to increase operating efficiency, which may be challenging given our operational complexity. In the first quarter of 2020,the United States and other countries began shelter-in-place mandates and began to close many businesses as a result of the COVID-19 virus. TheWorld Health Organization characterized COVID-19 as a pandemic and the President ofthe United States declared the COVID-19 outbreak a national emergency. Since then, the COVID-19 pandemic has rapidly spread across the globe and has already resulted in significant volatility, uncertainty and economic disruption. The future impact of the pandemic and any resulting economic impact are largely unknown and rapidly evolving. While we are closely monitoring the situation, it is difficult at this time to predict the impact that COVID-19 will continue to have on our business, financial position and operating results in future periods due to numerous uncertainties. As a result of COVID-19, we have seen a reduction in expense due to travel and marketing event restrictions and the limited use of our office facilities. We expect spending in these areas to mostly continue to run below historical norms until national and local authorities have issued updated guidance and regulations, and our employees, customers and partners have confidence that the pandemic has been contained. Our future financial position is likely to be negatively impacted by the loss of current customers or prospects, delays in existing customer renewals or new customer purchases, limitation in our ability to expand or upsell within our existing customer base, pricing pressure, or by our customers' inability to pay amounts owed to us. While we cannot predict the amount of the future financial impact from COVID-19, shelter-in-place mandates across the world have disrupted certain of our ARR growth drivers as the priorities of the IT leaders of our customers and prospective customers have shifted. As a result of those and other priority changes, as well as the economic toll that COVID-19 has had and we expect will continue to have on our customers, we have seen and expect to continue to see a negative impact on our ARR and revenue, which may increase net losses, until the pandemic 35 Table of Contents is contained and likely for an unknown period of time thereafter. Because of our IT infrastructure and the nature of our business, our employees have generally been able to work remotely and productively despite the shelter-in-place requirements, but future productivity and the effects of COVID-19 on our operations is unknown at this time. OnSeptember 26, 2020 , we entered into an Agreement and Plan of Merger (the "Merger Agreement") withIvanti, Inc. , aDelaware corporation ("Parent"), andOahu Merger Sub, Inc. , aDelaware corporation and a wholly-owned subsidiary of Parent. The consummation of the merger pursuant to the Merger Agreement is subject to certain closing conditions, including approval by our stockholders. See Note 1 in Notes to the Consolidated Financial Statements for additional information about the Merger Agreement. Critical Accounting Policies Our consolidated financial statements and accompanying notes are prepared in accordance withU.S. GAAP. Preparing consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by management's application of accounting policies. Actual results could differ from those estimates.
Revenue Recognition
We derive revenue from software-related arrangements consisting of perpetual
software licenses, post-contract customer support for such licenses, or PCS or
software support, including when and if available updates, and professional
services such as consulting and training services. We also offer our software as
term-based licenses and cloud-based arrangements.
Our contracts with customers often include promises to transfer multiple
products and services to a customer. Determining whether products and services
are considered distinct performance obligations that should be accounted for
separately versus together may require significant judgment.
Judgment is also required to determine the stand-alone selling price ("SSP") for
each distinct performance obligation. We use a single amount to estimate SSP for
items that are not sold separately, including on-premises licenses sold with
software support. We use a range of amounts to estimate SSP when we sell our
products and services separately and need to determine whether there is a
discount that needs to be allocated based on the relative SSP of the various
products and services.
We typically have more than one SSP for individual products and services due to
the stratification of those products and services by customers and
circumstances. In these instances, we may use information such as the size of
the customer in determining the SSP.
Our products are sometimes sold with a right of refund which we have to consider when estimating the amount of revenue to recognize.
Commissions
Current accounting principles require us to defer commission costs and amortize
them in a manner consistent with how we recognize revenue. Key judgments that
impact our commission expense include estimating our customer life and the
determination of the impairment of commission assets we deem to be
unrecoverable.
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We record the excess of the acquisition purchase price over the fair value of the tangible and identifiable intangible assets acquired as goodwill. We perform an impairment test of our goodwill in the third quarter of our fiscal year, or more frequently if indicators of potential impairment arise. We have a single reporting unit and consequently evaluate goodwill for impairment based on an evaluation of the fair value of the Company as a whole. We observed no impairment indicators in 2020. In our impairment test completed in the third quarter of 2020, we observed that the fair value of the Company as a whole is substantially in excess of its carrying value, including goodwill. We record purchased intangible assets at their respective estimated fair values at the date of acquisition. Purchased intangible assets are being amortized using the straight-line method over their estimated useful lives, which range from three to five years. We evaluate the remaining useful lives of intangible assets on a periodic basis to determine whether events or circumstances warrant a revision to the remaining estimated amortization period.
Stock-Based Compensation
Stock-based compensation costs related to restricted stock and stock options granted to employees are measured at the date of grant based on the estimated fair value of the award, net of estimated forfeitures. We estimate the grant date fair value, and the resulting stock-based compensation expense, using the Black-Scholes option-pricing model. For stock awards, we recognize compensation costs on a straight-line basis over the requisite service period of the award, which is generally the vesting term of four years. We estimate the fair value of the rights to acquire stock under our ESPP using the Black-Scholes option pricing formula. Our ESPP typically provides for consecutive 24 month offering periods, consisting of four tranches. We recognize compensation expense on an accelerated-graded basis over the employee's requisite service period. We account for the fair value of restricted stock units, or RSUs, and, beginning 2020, performance stock units, or PSUs, using the closing market price of our common stock on the date of grant. RSUs granted to existing employees typically vest ratably on a quarterly basis over four years. RSUs granted to new employees typically vest one-fourth after one year and ratably on a quarterly basis over the following three years. Based on achievement relative to certain company metrics, one-fourth of PSUs vest in the first quarter of the year after grant and the remaining PSUs vest ratably on a quarterly basis over the following three years. We recognize compensation expense for RSUs on a straight-line basis over the employee's requisite service period. We recognize compensation expense for PSUs on an accelerated-graded basis over the employee's requisite service period and the expense may be adjusted each quarter based on our forecast of the Company's performance relative to the metrics that determine the number of PSUs that will vest. In 2019 and prior years, stock-based compensation expense associated with our annual stock-settled bonus program was recognized on a straight-line basis over the required service period and the expense is evaluated each quarter based on our forecast of the Company's performance relative to the metrics that determine the bonus pool. The Merger Agreement imposes certain pre-closing restrictions on our activities, one of which precludes settlement of our 2020 Bonus Plans in unrestricted common stock. Consequently, we have classified the 2020 Bonus Plan expense as bonus expense rather than stock-based compensation expense in the three and nine months endedSeptember 30, 2020 . The expense methodology otherwise remains the same as in 2019 and prior years. InSeptember 2020 , following the completion of negotiations among the parties regarding the material terms of the Merger Agreement (including the price of$7.05 per share), the Compensation Committee of our board of directors split the 2020 Bonus Plans into Nine-Month Plans, coveringJanuary 1, 2020 toSeptember 30, 2020 , and Three-Month Plans, coveringOctober 1, 2020 toDecember 31, 2020 . In the case of the Three-Month Plans and the Nine-Month Plans, the level of achievement will be determined by the Company based on the application of the metrics and terms previously adopted by the Company, but with a minimum payout of 100% of target under each plan. Income Taxes
We account for income taxes in accordance with ASC Topic 740, Income Taxes,
under which deferred tax liabilities and assets are recognized for the expected
future tax consequences of temporary differences between financial statement
carrying amounts and the tax basis of assets and liabilities and net operating
loss and tax credit carryforwards. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
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We currently have a full valuation allowance against ourU.S. net deferred tax assets, which was$117.7 million as ofDecember 31, 2019 . We continue to monitor the relative weight of positive and negative evidence of future profitability in relevant jurisdictions. The allowance will be released if evidence indicates that it becomes more likely than not that the tax asset may be utilized.
Recent Accounting Pronouncements
For discussion of recent accounting pronouncements, see "Summary of Significant Accounting Policies" under Note 1 "Description of Business and Significant Accounting Policies" included in Item 1, "Financial Statements" of Part I of this Quarterly Report on Form 10-Q.
Key Metrics and Non-GAAP Financial Information
To supplement our financial results presented on aU.S. GAAP basis, we provide investors with certain non-GAAP financial measures, including non-GAAP gross profit, non-GAAP gross margin, non-GAAP operating income (loss), non-GAAP operating margin, non-GAAP net income (loss), non-GAAP net income (loss) per share and free cash flow. These non-GAAP financial measures exclude stock-based compensation, restructuring expense, and intangible asset amortization.
Stock-based compensation expenses
In our non-GAAP financial measures, we have excluded the effect of stock-based compensation expenses. Stock-based compensation expenses will recur in future periods in varying amounts. 2020 Bonus Plan expense
In our non-GAAP financial measures, we have excluded the effect of expense associated with our 2020 Bonus Plans. The Merger Agreement imposes certain pre-closing restrictions on our activities, one of which precludes settlement of our 2020 Bonus Plans in unrestricted common stock. Consequently, we have classified expense from the 2020 Bonus Plans as bonus expense rather than stock-based compensation expense in the three and nine months endedSeptember 30, 2020 . We believe that excluding this expense from our non-GAAP financial measures makes the 2020 periods presented more comparable since the 2019 periods presented classify expense from our Bonus Plans as stock-based compensation
expense. Restructuring expense
In our non-GAAP financial measures, we have excluded the effect of expenses associated with severance and other expenses related to reductions in our workforce and the exit of an office building. Restructuring expense may recur in the future; however, the timing and amounts are difficult to predict.
Intangible asset amortization
In our non-GAAP financial measures, we have excluded the effect of intangible asset amortization. Amortization of intangible assets can be significantly affected by the timing and size of acquisitions of companies or technology.
Non-GAAP gross profit, non-GAAP gross margin, non-GAAP operating income (loss), non-GAAP operating margin, non-GAAP net income (loss), and non-GAAP net income (loss) per share We believe that the exclusion of stock-based compensation expense, restructuring expense, and intangible asset amortization from various gross profit, gross margin, operating loss, operating margin, net loss, and net loss per share provides useful measures for management and investors. Because stock-based compensation, restructuring expense, and intangible asset amortization have been and can continue to be inconsistent in amount from period to period, we believe the inclusion of these items makes it difficult to compare periods and understand the growth and performance of our business, on its own and in comparison to other companies. The Merger Agreement contains a pre-closing
restriction
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from settling our Bonus Plans in unrestricted common stock which caused us to change the classification of expense from our 2020 Bonus Plans from stock-based compensation expense to bonus expense. Because bonus plans were historically settled in unrestricted common stock, we classified the associated expense as stock-based compensation expense in the comparable periods of 2019. In addition, we evaluate our business performance and compensate management based in part on these non-GAAP measures. There are limitations in using non-GAAP financial measures because the non-GAAP financial measures are not prepared in accordance with GAAP, may be different from non-GAAP financial measures used by our competitors and exclude expenses that may have a material impact on our reported financial results. Further, stock-based compensation expense has been and will continue to be for the foreseeable future a significant recurring expense in our business and an important part of the compensation provided to our employees. Free Cash Flow Our non-GAAP financial measures also include free cash flow, which we define as cash provided by (used in) operating activities less the amount of property and equipment purchased. Management believes that information regarding free cash flow provides investors with an important perspective on the cash available to invest in our business and fund ongoing operations. However, our calculation of free cash flow may not be comparable to similar measures used by other companies. We believe these non-GAAP financial measures are helpful in understanding our past financial performance and our future results. Our non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable GAAP measures and should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP. Our management regularly uses our supplemental non-GAAP financial measures internally to understand, manage and evaluate our business, and make operating decisions. These non-GAAP measures are among the primary factors management uses in planning for and forecasting future periods. Compensation of our executives is based in part on the performance of our business relative to certain of
these non-GAAP measures.
Non-GAAP financial measures for the three and nine months ended
Three Months Ended Nine Months Ended
September 30 , September 30 ,(in thousands, except percentages and per share data) 2020 2019 2020 2019 Non-GAAP gross profit$ 39,573 $ 42,794 $ 127,782 $ 123,838 Non-GAAP gross margin 79.1 % 82.0 % 80.6 % 81.9 % Non-GAAP operating income (loss)$ (3,857) $ 173 $ (2,261) $ (10,327) Non-GAAP operating margin (7.7) % 0.3 % (1.4) % (6.8) % Non-GAAP net loss$ (4,202) $ (191) $ (3,589) $ (10,675) Non-GAAP loss per share$ (0.04) $ (0.00) $ (0.03) $ (0.10) Free cash flow$ 3,069 $ (6,197) $ 3,788 $ (3,649) 39 Table of Contents
Reconciliation of Non-GAAP Financial Measures
The following table reconciles the most directly comparable GAAP financial measure to each of the non-GAAP financial measures discussed above.
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
(in thousands, except percentages and
per share data)
Non-GAAP gross profit reconciliation:
Gross profit $ 37,878 $ 41,742 $ 123,225 $ 119,679
Add: Stock-based compensation expense (57) 1,052 2,739 3,859
Add: Expense from 2020 Bonus Plans 1,657 - 1,657 -
Add: Amortization of intangible assets 95 - 161 - Add: Restructuring expense - - - 300 Non-GAAP gross profit$ 39,573 $ 42,794 $ 127,782 $ 123,838 Non-GAAP gross margin reconciliation: GAAP gross margin: GAAP gross profit over GAAP total revenue 75.8 % 80.0 % 77.7 % 79.2 % GAAP to non-GAAP gross margin adjustments 3.3 % 2.0 % 2.9 % 2.7 % Non-GAAP gross margin 79.1 % 82.0 % 80.6 % 81.9 % Non-GAAP operating income (loss) reconciliation: GAAP operating loss$ (15,927) $ (7,839) $ (36,113) $ (40,544) Add: Stock-based compensation expense 2,644 8,012 23,723 27,159 Add: Expense from 2020 Bonus Plans 9,248 - 9,248 - Add: Amortization of intangible assets 178 - 302 - Add: Restructuring expense - - 579 3,058 Non-GAAP operating income (loss) reconciliation:$ (3,857) $ 173 $ (2,261) $ (10,327) Non-GAAP operating margin reconciliation: GAAP operating margin: GAAP operating loss over GAAP total revenue (31.9) % (15.0) % (22.8) % (26.8) % GAAP to non-GAAP operating margin adjustments 24.2 % 15.3 % 21.4 % 20.0 % Non-GAAP operating margin (7.7) % 0.3 % (1.4) % (6.8) % Non-GAAP net loss reconciliation: GAAP net loss$ (16,272) $ (8,203) $ (37,441) $ (40,892) Add: Stock-based compensation expense 2,644 8,012 23,723 27,159 Add: Expense from 2020 Bonus Plans 9,248 - 9,248 - Add: Amortization of intangible assets 178 - 302 - Add: Restructuring expense - - 579 3,058 Non-GAAP net loss reconciliation:$ (4,202) $ (191) $ (3,589) $ (10,675) Non-GAAP net loss per share reconciliation: GAAP net loss$ (0.14) $ (0.07) $ (0.32) $ (0.37)
Add: Stock-based compensation expense 0.02 0.07 0.20 0.24 Add: Expense from 2020 Bonus Plans 0.08 - 0.08 - Add: Amortization of intangible assets - -
- - Add: Restructuring expense - - 0.01 0.03 Non-GAAP net loss per share$ (0.04) $ (0.00) $ (0.03) $ (0.10) Free cash flow: Net cash provided by operating activities$ 3,181 $ (5,746) $ 4,584 $ (2,416) Purchase of property and equipment (112) (451) (796) (1,233) Free cash flow$ 3,069 $ (6,197) $ 3,788 $ (3,649) Annual Recurring Revenue We utilize the operating metric, total annual recurring revenue ("Total ARR"), which is defined as the annualized value of all recurring revenue contracts active at the end of a reporting period. Total ARR includes the annualized value of subscriptions ("Subscription ARR") and the annualized value of software support contracts related to perpetual licenses ("Perpetual license support ARR") active at the end of a reporting period and does not include revenue reported as perpetual license or professional services in our consolidated statement of operations. We are monitoring these metrics because they align with how our customers are increasingly purchasing our solutions and how we are managing our business. These ARR measures should be viewed independently of revenue, unearned revenue, and customer arrangements with termination rights as ARR is an operating metric and is not intended to be combined with or replace those items. ARR is not an indicator of future revenue and can be impacted by contract start and end dates and renewal rates. 40 Table of Contents
ARR metrics as of
September 30 ,
(in thousands, except percentages) 2020 2019 Total ARR
$ 191,529 $ 174,296 Year-over-year percentage increase 10 % 14 % Subscription ARR$ 126,113 $ 108,559 Year-over-year percentage increase 16 % 23 %
Perpetual license support ARR
- % 1 %
Results of Operations
Revenue
Cloud Services
Cloud services include sales of cloud-based solutions that allow customers to use hosted software over a contract period without taking possession of our software and are typically provided on a subscription or usage basis. We recognize revenue from cloud-based subscriptions ratably over the term of the subscriptions or, if usage based, as the usage is billed. License License revenue consists primarily of revenue from on-premises perpetual licenses and the license portion of on-premise subscriptions. From time to time, we enter into multiple element arrangements with customers in which a customer purchases our software with an appliance. Appliance revenue is also included in license revenue and constituted less than 1% of total revenue for the three and nine months endedSeptember 30, 2020 and 2019.
Software support and services
Software support and services revenue consists of revenue from agreements to provide software upgrades and updates, as well as technical support, to customers with perpetual software licenses, on-premise subscriptions, and professional services. Revenue from software support for both perpetual and on-premise subscriptions is recognized ratably over the support or subscription term. Revenue from professional services is recognized as work is performed. Cost of Revenue Cloud Services Our cloud services cost of revenue consists of cloud service data center operations expense, the portion of our global Customer Success organization (See Software support and services below) associated with our cloud services business, and third-party royalties. Cloud service data center operations expenses primarily consist of personnel costs, stock-based compensation, third-party hosting facilities, telecommunication and information technology costs. We expect cloud services cost of revenue to increase if we continue to increase sales of MobileIron Threat Defense or other royalty-bearing cloud solutions and as we scale our data center operations team and infrastructure to support our growing cloud business. License Our cost of license revenue consists of the cost of third-party software royalties and appliances. 41 Table of Contents Software support and services Our software support and services cost of revenue consists of the portion of our global Customer Success organization expenses associated with our software support business and third-party royalties. Costs associated with our global Customer Success organization include our customer support, professional services, customer advocacy, and training teams. These costs consist of personnel costs, stock-based compensation, depreciation, facilities and information technology costs. Gross Margin
Gross margin, or gross profit as a percentage of total revenue, is affected by various factors, including mix between large and small customers, mix of products sold, including our MobileIron Threat Defense which bears a royalty, mix between perpetual, on-premises and cloud subscription licenses, timing of revenue recognition and the extent to which we expand our global Customer Success organization and data center operations, including costs associated with third-party hosting facilities and stock-based compensation expense associated with grants of equity awards. We expect our gross margins to decline somewhat over the short term based on the factors described above. Operating Expenses Personnel costs are the most significant component of operating expenses and consist of salaries, benefits, bonuses, stock-based compensation and, in sales and marketing expense, sales commissions. While operating expenses, exclusive of stock-based compensation expense, may fluctuate as a percentage of total revenue from period to period, we expect them to decrease over the long term as a percentage of total revenue. Stock-based compensation expense may fluctuate depending on the size and timing of RSU and PSU grants and achievement under stock-settled bonus plans.
Research and Development Expenses
Research and development costs are expensed as incurred. Research and development expense consists primarily of personnel costs. Research and development expense also includes costs associated with contractors and consultants, equipment and software to support our development and quality assurance teams, facilities and information technology. While our research and development expense, exclusive of stock-based compensation expense, may fluctuate as a percentage of total revenue from period to period, we expect it to decrease as a percentage of total revenue over the long term. Sales and Marketing Expenses Sales and marketing expense consists primarily of personnel costs, including sales commissions. Sales and marketing expense also includes costs associated with third-party events, lead generation campaigns, promotional and other marketing activities, as well as travel, equipment and software depreciation, consulting, information technology and facilities. While our sales and marketing expense, exclusive of stock-based compensation expense, may fluctuate as a percentage of total revenue from period to period, we expect it to decrease as a percentage of total revenue over the long term.
General and Administrative Expenses
General and administrative expense consists of personnel costs, travel,
information technology, facilities and professional services fees. General and
administrative personnel include our executive, finance, human resources and
legal organizations. Professional services fees consist primarily of legal,
accounting and consulting costs. While our general and administrative expense,
exclusive of stock-based compensation expense, may fluctuate as a percentage of
total revenue from period to period, we expect it to decrease as a percentage of
total revenue over the long term.
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Restructuring Expense
Restructuring expense consists of severance and other expenses related to
reductions in our workforce and the exit of an office building. Restructuring
expense may recur in the future; however, the timing and amounts are difficult
to predict.
Other Income (Expense)-Net
Other income (expense), net consists primarily of interest income earned on our cash and cash equivalents and fixed income securities and the effect of exchange rates on our foreign currency-denominated asset and liability balances and foreign currency transactions. All translation adjustments are recorded as foreign currency gains (losses) in the consolidated statements of operations. Income Tax Expense Income tax expense consists primarily of income taxes in foreign jurisdictions in which we conduct business. Due to our history of losses, we maintain a full valuation allowance for deferred tax assets including net operating loss carryforwards, research and development tax credits, capitalized research and development and other book versus tax differences.
Consolidated Results of Operations
The following tables summarize our results of operations for the periods presented and as a percentage of our total revenue for those periods. The period-to-period comparison of results is not necessarily indicative of results for future periods.
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