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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 

FORM 10-Q
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020

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 001-36067
 

FireEye, Inc.
(Exact name of registrant as specified in its charter)
 
 
Delaware
 
20-1548921
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
601 McCarthy Blvd.
Milpitas, CA 95035
(408) 321-6300
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
 

 Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock, $0.0001 par value per share
FEYE
The NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   No      

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes     No  
The number of shares of the registrant's common stock outstanding as of April 28, 2020 was 222,844,478.


Table of Contents
TABLE OF CONTENTS


 
 
 
 
Page 
 
 
 
 
 
 
 
1
 
 
 
1
 
 
 
2
 
 
 
3
 
 
 
4
 
 
 
5
 
 
 
6
 
 
26
 
 
40
 
 
41
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
42
 
 
42
 
 
71
 
 
71
Item 4.
 
 
71
Item 5.
 
 
71
Item 6.
 
 
71
 
 
 
 
 
 
 
 
72



PART I — FINANCIAL INFORMATION
Item1.    Financial Statements
FIREEYE, INC.
Condensed Consolidated Balance Sheets
(In thousands, except per share data)
(Unaudited)
 
March 31, 2020
 
December 31, 2019
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
283,866

 
$
334,603

Short-term investments
696,104

 
704,955

Accounts receivable, net of allowance for doubtful accounts of $2,791 and $2,263 at March 31, 2020 and December 31, 2019, respectively
140,191

 
171,459

Inventories
7,158

 
5,892

Prepaid expenses and other current assets
98,324

 
96,827

Total current assets
1,225,643

 
1,313,736

Property and equipment, net
90,613

 
93,812

Operating lease right-of-use assets, net
58,045

 
58,758

Goodwill
1,213,454

 
1,205,292

Intangible assets, net
128,110

 
134,420

Deposits and other long-term assets
80,521

 
84,468

TOTAL ASSETS
$
2,796,386

 
$
2,890,486

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY

 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable
$
26,288

 
$
26,271

Operating lease liabilities, current
19,017

 
18,437

Accrued and other current liabilities
23,794

 
24,496

Accrued compensation
57,941

 
59,513

Convertible senior notes, current, net
118,805

 
117,288

Deferred revenue, current
572,533

 
603,944

Total current liabilities
818,378


849,949

Convertible senior notes, non-current, net
904,120

 
893,273

Deferred revenue, non-current
347,323

 
370,623

Operating lease liabilities, non-current
68,277

 
70,481

Other long-term liabilities
4,680

 
4,494

Total liabilities
2,142,778


2,188,820

Commitments and contingencies (NOTE 10)

 

Stockholders' equity:
 
 
 
Common stock, par value of $0.0001 per share; 1,000,000 shares authorized, 222,766 shares and 219,422 shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively
22

 
22

Additional paid-in capital
3,488,456

 
3,457,359

Treasury stock, at cost; 3,333 shares as of March 31, 2020 and December 31, 2019
(150,000
)
 
(150,000
)
Accumulated other comprehensive income (loss)
(1,669
)
 
1,180

Accumulated deficit
(2,683,201
)
 
(2,606,895
)
Total stockholders’ equity
653,608


701,666

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
2,796,386


$
2,890,486


See accompanying notes to condensed consolidated financial statements.

1

FIREEYE, INC.
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)

 
Three Months Ended March 31,
 
2020
 
2019
Revenue:
 
 
 
Product, subscription and support
$
174,083

 
$
169,903

Professional services
50,639

 
40,641

Total revenue
224,722


210,544

Cost of revenue:
 
 
 
Product, subscription and support
53,136

 
48,468

Professional services
28,450

 
23,100

Total cost of revenue
81,586


71,568

Total gross profit
143,136


138,976

Operating expenses:
 
 
 
Research and development
67,503

 
67,395

Sales and marketing
100,200

 
103,896

General and administrative
27,429

 
27,376

Restructuring charges
10,974

 
3,799

Total operating expenses
206,106


202,466

Operating loss
(62,970
)

(63,490
)
Interest income
4,424

 
5,848

Interest expense
(15,846
)
 
(15,263
)
Other expense, net
(989
)
 
(288
)
Loss before income taxes
(75,381
)

(73,193
)
Provision for income taxes
925

 
2,182

Net loss
$
(76,306
)
 
$
(75,375
)
Net loss per share, basic and diluted
$
(0.35
)
 
$
(0.38
)
Weighted average shares used in computing net loss per share, basic and diluted
217,789

 
197,819


See accompanying notes to condensed consolidated financial statements.

2

FIREEYE, INC.
Condensed Consolidated Statements of Comprehensive Loss
(In thousands)
(Unaudited)

 
Three Months Ended March 31,
 
2020
 
2019
Net loss
$
(76,306
)
 
$
(75,375
)
Change in net unrealized gain (loss) on available-for-sale investments, net of tax
(2,849
)
 
2,097

Comprehensive loss
$
(79,155
)

$
(73,278
)

See accompanying notes to condensed consolidated financial statements.

3

FIREEYE, INC.
Condensed Consolidated Statements of Stockholders' Equity
(Unaudited, in thousands)

 
Three Months Ended March 31,
 
2020
 
2019
Total stockholders' equity, beginning balances
$
701,666

 
$
650,394

 
 
 
 
Common stock and additional paid-in-capital:

 
 
Balance, beginning of period
3,457,381

 
3,152,179

Issuance of common stock for equity awards, net of tax withholdings
1,348

 
843

Shares withheld for taxes
(7,399
)
 

Stock-based compensation
37,148

 
41,482

Balance, end of period
3,488,478

 
3,194,504

 
 
 
 
Treasury Stock:
 
 
 
Balance, beginning of period
(150,000
)
 
(150,000
)
Balance, end of period
(150,000
)
 
(150,000
)
 
 
 
 
Accumulated Other Comprehensive Income (Loss):
 
 
 
Balance, beginning of period
1,180

 
(2,299
)
Unrealized gain (loss) investments, net of tax
(2,849
)
 
2,097

Balance, end of period
(1,669
)
 
(202
)
 
 
 
 
Accumulated Deficit:
 
 
 
Balance, beginning of period
(2,606,895
)
 
(2,349,486
)
Net loss
(76,306
)
 
(75,375
)
Balance, end of period
(2,683,201
)
 
(2,424,861
)
 
 
 
 
Total stockholders' equity, ending balances
$
653,608

 
$
619,441


See accompanying notes to condensed consolidated financial statements

4

FIREEYE, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

 
Three Months Ended March 31,
 
2020
 
2019
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net loss
$
(76,306
)
 
$
(75,375
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
24,241

 
23,833

Stock-based compensation
36,178

 
40,323

Non-cash interest expense related to convertible senior notes
12,365

 
11,778

Deferred income taxes
143

 
475

Other
6,267

 
1,101

Changes in operating assets and liabilities, net of business acquisitions:
 
 
 
Accounts receivable
30,256

 
46,479

Inventories
(935
)
 
(395
)
Prepaid expenses and other assets
2,827

 
6,975

Accounts payable
1,717

 
6,802

Accrued liabilities
(1,319
)
 
758

Accrued compensation
(1,572
)
 
(7,611
)
Deferred revenue
(54,711
)
 
(28,639
)
Other long-term liabilities
(3,607
)
 
(2,051
)
Net cash provided by (used in) operating activities
(24,456
)

24,453

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of property and equipment and demonstration units
(11,680
)
 
(13,503
)
Purchases of short-term investments
(103,131
)
 
(156,533
)
Proceeds from maturities of short-term investments
108,462

 
141,004

Purchase of investment in privately held company
(1,000
)
 

Business acquisitions, net of cash acquired
(12,948
)
 

Lease deposits
67

 
(36
)
Net cash used in investing activities
(20,230
)

(29,068
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Payment related to shares withheld for taxes
(7,399
)
 

Proceeds from exercise of equity awards
1,348

 
843

Net cash provided by (used in) financing activities
(6,051
)

843

Net change in cash and cash equivalents
(50,737
)
 
(3,772
)
Cash and cash equivalents, beginning of period
334,603

 
409,829

Cash and cash equivalents, end of period
$
283,866


$
406,057

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
Cash paid for income taxes
$
727

 
$
1,399

SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Purchases of property and equipment and demonstration units in accounts payable and accrued liabilities
$
3,215

 
$
9,161


See accompanying notes to condensed consolidated financial statements.

5

FIREEYE, INC.
Notes to Condensed Consolidated Financial Statements


1. Description of Business and Summary of Significant Accounting Policies
Description of Business
FireEye, Inc., with principal executive offices located in Milpitas, California, was incorporated as NetForts, Inc. on February 18, 2004, under the laws of the State of Delaware, and changed its name to FireEye, Inc. on September 7, 2005.
FireEye, Inc. and its wholly owned subsidiaries (collectively, the “Company”, “we”, “us” or “our”) provide comprehensive intelligence-based cybersecurity solutions that allow organizations to prepare for, prevent, investigate, respond to and remediate cyber attacks, including attacks that target on-premise, cloud and critical infrastructure environments. Our portfolio of cyber security products and services helps customers minimize the risk of costly cyber security breaches by:
validating the effectiveness of existing cybersecurity controls before an attack occurs,
detecting and preventing advanced, targeted and other evasive attacks missed by other security controls,
enabling more efficient management of security operations, including alert management, investigations and response when a breach occurs, and
providing assessment, training and other strategic security consulting services that help organizations improve their resilience to attack.
Our portfolio of cybersecurity solutions includes threat detection and prevention products that include appliance-based, virtual and cloud solutions for web security, email security and endpoint security. These products are complemented by our cloud-based threat intelligence, security analytics and security automation and orchestration technologies, as well as our managed security services, cybersecurity consulting and incident response offerings. In combination, our solutions and services enable a proactive approach to cybersecurity that extends across the threat management lifecycle to minimize the risk of costly cybersecurity breaches.
We have organized our cybersecurity solutions in a hub and spokes model designed to integrate machine-generated threat data from our detection and prevention products with our analytics, response and orchestration technologies delivered through our Helix cybersecurity operations platform. Helix is designed to enable more efficient security operations by correlating security and event data across an organization’s environment to determine which threats present the greatest risk, automate repetitive security processes, and provide tools and workflows to investigate and respond to attacks. The Helix cloud-based interface presents a unified view of an organization’s attack surface, including on-premise and cloud environments, and provides the contextual threat intelligence and threat management tools to enable a rapid response.
The majority of our products, subscriptions and services are sold to end-customers through distributors, resellers, and strategic partners, with a lesser percentage of sales directly to our end-customers.
On January 17, 2020, we acquired Cloudvisory LLC ("Cloudvisory"), a provider of cloud visibility and control solutions. Total consideration for the acquisition was $13.2 million in cash. We also assumed $0.3 million in net tangible liabilities.
In May 2019, we acquired Verodin, Inc. ("Verodin"), a security instrumentation platform company. As consideration for the acquisition, we paid $143.7 million in cash, issued 8,404,609 shares of our common stock with an estimated fair value of $119.7 million and recognized $1.5 million of the fair value of assumed stock options attributable to pre-combination services.
Basis of Presentation and Consolidation
The accompanying unaudited condensed consolidated financial statements include the accounts of FireEye, Inc. and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), and following the requirements of the Securities and Exchange Commission (“SEC”), for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. GAAP can be condensed or omitted. These unaudited condensed consolidated financial statements have been prepared on the same basis as our annual consolidated financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, that are necessary for a fair statement of our financial information. The results of operations for the three months ended March 31, 2020 are not necessarily indicative of the results to be expected for the year ending December 31, 2020 or for any other interim period or for any other future year. The balance sheet as of December 31, 2019 has been derived from audited consolidated financial statements at that date but does not include all information required by U.S. GAAP for annual consolidated financial statements.

6


The accompanying unaudited condensed consolidated financial statements and related financial information should be read in conjunction with the audited consolidated financial statements and the related notes thereto for the year ended December 31, 2019 included in our Annual Report on Form 10-K for the year ended December 31, 2019.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Such management estimates include, but are not limited to, determining the nature and timing of satisfaction of performance obligations, useful life of our security appliances that are dependent on intelligence and assessing the material rights associated with it, determining the standalone selling price of performance obligations, subscriptions and services, commissions expense including the period of benefit of customer acquisition cost, bonus expense, future taxable income, contract manufacturer liabilities, litigation and settlement costs and other loss contingencies, fair value of our equity awards, achievement of targets for performance stock units, fair value of the liability and equity components of the Convertible Senior Notes (as defined in Note 9) and the purchase price allocation of acquired businesses. We base our estimates on historical experience and on assumptions that we believe are reasonable. Changes in facts or circumstances may cause us to change our assumptions and estimates in future periods, and it is possible that actual results could differ from current or revised future estimates.
Summary of Significant Accounting Policies
There have been no significant changes to our significant accounting policies as of and for the three months ended March 31, 2020, as compared to the significant accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2019.
Recently Adopted Accounting Pronouncements
Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This standard requires capitalization of the implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. Further, the standard also requires the Company to expense the capitalized implementation costs of a hosting arrangement over the term of the hosting arrangement. We adopted the standard effective January 1, 2020. The standard did not have a significant impact on our condensed consolidated financial statements.
Simplifying the Test for Goodwill Impairment
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This standard eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge (i.e. Step 2 of the current guidance), instead measuring the impairment charge as the excess of the reporting unit's carrying amount over its fair value (i.e. Step 1 of the current guidance). The guidance is effective for the Company beginning in the first quarter of 2020, and should be applied prospectively. Early adoption is permitted for impairment testing dates after January 1, 2017. We adopted the standard effective January 1, 2020. The standard did not have a significant impact on our condensed consolidated financial statements.
Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This standard changes the impairment model for most financial assets and certain other instruments by introducing a current expected credit loss ("CECL") model. The CECL model is a more forward-looking approach based on expected losses rather than incurred losses, requiring entities to estimate and record losses expected over the remaining contractual life of an asset. The guidance is effective for the Company beginning in the first quarter of 2020. Early adoption beginning January 1, 2019 is permitted. We adopted the standard effective January 1, 2020. The standard did not have a significant impact on our condensed consolidated financial statements.
Simplifying Accounting for Income Taxes
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This standard simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in Topic 740 related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill and allocating consolidated income taxes to separate financial statements of entities not subject to income tax. ASU 2019-12 is effective for annual and interim periods in fiscal years beginning after December 15, 2020. Early adoption is permitted, and we adopted ASU 2019-12 as of January 1, 2020. The adoption did not have a significant impact on our consolidated financial statements.
Recent Legislation

7


On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was enacted and signed into U.S. law to provide economic relief to individuals and businesses facing economic hardship as a result of the COVID-19 pandemic. Changes in tax laws or rates are accounted for in the period of enactment. The income tax provisions of the CARES Act do not have a significant impact on our current taxes, deferred taxes, or uncertain tax positions.
2. Fair Value Measurements
The accounting guidance for fair value measurements provides a framework for measuring fair value on either a recurring or nonrecurring basis, whereby the inputs used in our valuation techniques are assigned a hierarchical level. The following are the three levels of inputs to measure fair value:
Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2: Inputs that reflect quoted prices for identical assets or liabilities in less active markets; quoted prices for similar assets or liabilities in active markets; benchmark yields, reported trades, broker/dealer quotes, inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3: Unobservable inputs that reflect our own assumptions incorporated in valuation techniques used to measure fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.
We consider an active market to be one in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis, and consider an inactive market to be one in which there are infrequent or few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market makers. Where appropriate, our own or the counterparty’s non-performance risk is considered in measuring the fair values of assets.
The following table presents our assets and liabilities measured at fair value on a recurring basis using the above input categories (in thousands):
 
As of March 31, 2020
 
As of December 31, 2019
Description
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
33,732

 
$

 
$

 
$
33,732

 
$
24,246

 
$

 
$

 
$
24,246

Total cash equivalents
33,732

 

 

 
33,732

 
24,246

 

 

 
24,246

Short-term investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Certificates of deposit

 
5,417

 

 
5,417

 

 
5,145

 

 
5,145

Corporate notes and bonds

 
472,624

 

 
472,624

 

 
472,908

 

 
472,908

U.S. Treasuries

 
41,155

 

 
41,155

 

 
48,069

 

 
48,069

U.S. Government agencies

 
176,908

 

 
176,908

 

 
178,833

 

 
178,833

Total short-term investments

 
696,104

 

 
696,104

 

 
704,955

 

 
704,955

Total assets measured at fair value
$
33,732

 
$
696,104

 
$

 
$
729,836

 
$
24,246

 
$
704,955

 
$

 
$
729,201


Additionally, we have a restructuring liability related to certain real estate facilities that was calculated based on the present value of future non-lease payments, discounted at a rate commensurate with our current cost of financing as well as external ratings. This non-recurring fair value measurement is considered to be a Level 3 measurement due to the use of significant unobservable inputs. See Note 6 Restructuring Charges for a reconciliation of this liability.
We measure certain assets, including goodwill, intangible assets and our equity-method investment in a privately held company at fair value on a nonrecurring basis when there are identifiable events or changes in circumstances that may have a significant adverse impact on the fair value of these assets. In light of the COVID-19 pandemic, we performed an analysis of impairment indicators of these assets and noted no adverse impact to their fair values as of March 31, 2020.
The estimated fair value of the Convertible Senior Notes as of March 31, 2020 and December 31, 2019 was determined to be $1.1 billion. The fair value was determined based on the closing trading prices per $100 principal amount of the respective Convertible Senior Notes as of the last day of trading for the period. We consider the fair value of the Convertible Senior Notes to be a Level 2 measurement as they are not actively traded.


8


3. Investments
Our investments consisted of the following (in thousands):
 
As of March 31, 2020
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
Certificates of deposit
$
5,368

 
$
49

 
$

 
$
5,417

Corporate notes and bonds
474,461

 
1,299

 
(3,136
)
 
472,624

U.S. Treasuries
41,055

 
106

 
(6
)
 
41,155

U.S. Government agencies
176,380

 
534

 
(6
)
 
176,908

Total
$
697,264


$
1,988


$
(3,148
)

$
696,104


 
As of December 31, 2019
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
Certificates of deposit
$
5,118

 
$
27

 
$

 
$
5,145

Corporate notes and bonds
471,172

 
1,950

 
(214
)
 
472,908

U.S. Treasuries
48,086

 
2

 
(19
)
 
48,069

U.S. Government agencies
178,891

 
52

 
(110
)
 
178,833

Total
$
703,267

 
$
2,031

 
$
(343
)

$
704,955


The following tables present the gross unrealized losses and related fair values of our investments that have been in a continuous unrealized loss position (in thousands):
 
As of March 31, 2020
 
Less Than 12 Months
 
Greater Than 12 Months
 
Total
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
Certificates of deposit
$

 
$

 
$

 
$

 
$

 
$

Corporate notes and bonds
258,386

 
(2,936
)
 
23,814

 
(200
)
 
282,200

 
(3,136
)
U.S. Treasuries

 

 
34,000

 
(6
)
 
34,000

 
(6
)
U.S. Government agencies

 

 
35,803

 
(6
)
 
35,803

 
(6
)
Total
$
258,386


$
(2,936
)

$
93,617


$
(212
)

$
352,003


$
(3,148
)

 
As of December 31, 2019
 
Less Than 12 Months
 
Greater Than 12 Months
 
Total
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
Certificates of deposit
$
244

 
$

 
$

 
$

 
$
244

 
$

Corporate notes and bonds
$
117,271

 
$
(205
)
 
$
24,514

 
$
(9
)
 
$
141,785

 
$
(214
)
U.S. Treasuries
5,041

 
(2
)
 
33,996

 
(17
)
 
39,037

 
(19
)
U.S. Government agencies
91,221

 
(103
)
 
25,997

 
(7
)
 
117,218

 
(110
)
Total
$
213,777


$
(310
)

$
84,507


$
(33
)

$
298,284


$
(343
)

Unrealized losses related to these investments are due to interest rate fluctuations as opposed to credit quality. In addition, we do not intend to sell, and it is not more likely than not that we would be required to sell, these investments before recovery of their cost basis.
The following table summarizes the contractual maturities of our investments as of March 31, 2020 (in thousands):
 
Amortized Cost
 
Fair Value
Due within one year
$
262,934

 
$
263,045

Due within one to three years
434,330

 
433,059

Total
$
697,264

 
$
696,104



9


All available-for-sale securities have been classified as current, based on management's ability to use the funds in current operations.
As of March 31, 2020, we held an 11.0% ownership interest in a privately held company, which is accounted for under the equity method based on our ability to exercise significant influence over operating and financial policies of the privately held company. This investment is classified within deposits and other long-term assets on our condensed consolidated balance sheets. The carrying value of this investment was $0.6 million as of March 31, 2020 and zero as of December 31, 2019.
4. Property and Equipment
Property and equipment, net consisted of the following (in thousands):
 
As of March 31, 2020
 
As of December 31, 2019
Computer equipment and software
$
206,359

 
$
203,242

Leasehold improvements
63,220

 
64,180

Furniture and fixtures
15,498

 
15,496

Machinery and equipment
465

 
465

Total property and equipment
285,542

 
283,383

Less: accumulated depreciation
(194,929
)
 
(189,571
)
Total property and equipment, net
$
90,613

 
$
93,812


Depreciation and amortization expense related to property, equipment and demonstration units during the three months ended March 31, 2020 and 2019 was $9.0 million and $9.2 million, respectively.
During the three months ended March 31, 2020 and 2019, we capitalized $5.8 million and $5.5 million, respectively, of software development costs primarily related to our platform and cloud subscription offerings. Amortization expense related to capitalized software development costs during the three months ended March 31, 2020 and 2019 were $4.6 million and $3.5 million, respectively. Refer to Note 6 Restructuring Charges regarding fixed assets write-offs.
5. Business Combinations
Acquisition of Cloudvisory
On January 17, 2020, we acquired Cloudvisory, a provider of cloud visibility and control solutions. As consideration for the acquisition, we paid $13.2 million in cash. In addition, we also assumed $0.3 million in net tangible liabilities.
The acquisition of Cloudvisory was accounted for in accordance with the acquisition method of accounting for business combinations with FireEye as the accounting acquirer. Under the acquisition method of accounting, the total purchase consideration is allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values. The total purchase price of $13.2 million was allocated using the information available to us. As a result, we may continue to adjust the preliminary purchase price allocation after obtaining more information regarding asset valuations, liabilities assumed, and revisions of preliminary estimates. The results of operations of Cloudvisory have been included in our consolidated statements of operations from the acquisition date, though revenue and net income from Cloudvisory were not material for the three months ended March 31, 2020. Transaction costs were immaterial and expensed as incurred. Pro forma financial information has not been presented for this acquisition as the impact to our consolidated financial statements was not material. Allocation of the preliminary purchase price is as follows (in thousands):
 
Amount
Net tangible liabilities assumed
$
(288
)
Intangible assets
5,650

Goodwill
$
7,846

Total preliminary purchase price allocation
$
13,208


The preliminary purchase price exceeded the fair value of the net tangible liabilities and identifiable intangible assets acquired, resulting in the recognition of goodwill. Goodwill is primarily attributable to expected synergies in our subscription offerings and cross-selling opportunities. None of the goodwill is expected to be deductible for U.S. federal income tax purposes.
Intangible assets consist primarily of developed technology and trade name. Intangible assets attributable to developed technology include a combination of patented and unpatented technology, trade secrets, computer software and research processes that represent the foundation for the existing and planned new products to facilitate the generation of new content. Trade name is attributable to marketing goods and services under the Cloudvisory brand.

10


The estimated useful life and fair values of the identifiable intangible assets are as follows (in thousands):
 
Preliminary Estimated Useful Life (in years)
 
Amount
Developed technology
3
 
$
5,500

Trade name
1
 
150

Total identifiable intangible assets
 
 
$
5,650


The value of developed technology was estimated using the excess earnings method, an income approach (Level 3), which converts projected revenues and costs into cash flows. To reflect the fact that certain other assets contribute to the cash flows generated, the returns for these contributory assets were removed to arrive at estimated cash flows solely attributable to the acquired technology, which were discounted at a rate of 35% to determine the fair value.
The value of the trade name was estimated using the relief-from-royalty method, an income approach (Level 3), which estimates the cost savings that accrue to the owner of the intangibles asset that would otherwise be payable as royalties or license fees on revenues earned through the use of the asset. A royalty rate was applied to the projected revenues associated with the intangible asset to determine the amount of savings, which was at a rate of 35% to determine the fair value.
Discount rates for each respective intangible asset were determined by accounting for the risk associated with each asset, including required technology development necessary to support respective projections, the uncertainty of market success and the risk inherent with projected financial results. The estimated useful lives were determined by evaluating the expected economic and useful lives of the assets and of similar intangible assets from previous business combinations and adjusting accordingly for circumstances that may be unique to Cloudvisory.
Acquisition of Verodin
On May 28, 2019, we acquired all outstanding shares of privately held Verodin, a security instrumentation platform company. We have incorporated the Verodin technology into our platform and analytics capabilities. In connection with this acquisition, we paid cash consideration of $143.7 million and issued 8,404,609 shares of our common stock with an estimated fair value of $119.7 million. We also assumed unvested stock options, which are now exercisable for our common stock, of which $1.5 million of the fair value has been accounted for as consideration for assumed awards pertaining to pre-combination service prior to acquisition. Based on the above, total purchase consideration for Verodin was $264.9 million.
The acquisition of Verodin was accounted for in accordance with the acquisition method of accounting for business combinations with FireEye as the accounting acquirer. We expensed the related acquisition costs of $0.6 million in general and administrative expenses. Under the acquisition method of accounting, the total purchase consideration is allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values. The total purchase price of $264.9 million was allocated using information currently available to us. As a result, we may continue to adjust the preliminary purchase price allocation after obtaining more information regarding asset valuations, liabilities assumed, and revisions of preliminary estimates. Pro forma financial information has not been presented for this acquisition as the impact to our consolidated financial statements was not material. Allocation of the preliminary purchase price is as follows (in thousands):
 
Amount
Net tangible assets assumed
$
15,036

Intangible assets
45,200

Deferred tax liability
(1,158
)
Goodwill
$
205,804

Total preliminary purchase price allocation
$
264,882


The preliminary purchase price exceeded the fair value of the net tangible assets and identifiable intangible assets acquired, resulting in the recognition of goodwill. Goodwill is primarily attributable to expected synergies in our subscription offerings and cross-selling opportunities. None of the goodwill is expected to be deductible for U.S. federal income tax purposes.

11


Intangible assets consist primarily of developed technology, customer relationships, trade name and contract backlog. Intangible assets attributable to developed technology include a combination of patented and unpatented technology, trade secrets, computer software and research processes that represent the foundation for the existing and planned new products to facilitate the generation of new content. Customer relationship intangibles relate to Verodin's ability to sell current and future content, as well as products built around this content, to its existing customers. Trade name is attributable to marketing goods and services under the Verodin brand. Contract backlog pertains to unbilled and unrecognized contracts yet to be fulfilled.
The estimated useful life and fair values of the identifiable intangible assets are as follows (dollars in thousands):
 
Preliminary Estimated Useful Life (in years)
 
Amount
Developed technology
5
 
$
38,300

Customer relationships
5
 
4,600

Trade name
5
 
1,600

Contract backlog
2
 
700

Total identifiable intangible assets
 
 
$
45,200


The value of developed technology was estimated using the excess earnings method, an income approach (Level 3), which converts projected revenues and costs into cash flows. To reflect the fact that certain other assets contribute to the cash flows generated, the returns for these contributory assets were removed to arrive at estimated cash flows solely attributable to the acquired technology, which were discounted at a rate of 12% to determine the fair value.
The value of customer relationships was estimated using the cost savings method, an income level approach (Level 3), which estimates the value of an asset based upon costs avoided through ownership of the asset. Estimated costs on projected revenues, excluding acquired contract backlog, were made using historical data pertaining to sales to new and existing customers. The cash flow impact of projected cost savings, primarily avoidance of legal costs pertaining to new customers and lower commission rates applicable to existing customers than new customers, were discounted at a rate of 11% to determine the fair value.
The value of the trade name was estimated using the relief-from-royalty method, an income approach (Level 3), which estimates the cost savings that accrue to the owner of the intangibles asset that would otherwise be payable as royalties or license fees on revenues earned through the use of the asset. A royalty rate was applied to the projected revenues associated with the intangible asset to determine the amount of savings, which was at a rate of 12% to determine the fair value.
The value of the contract backlog was estimated by discounting estimated cash flows from existing orders, an income level approach (Level 3). Using expected timing of backlog revenue realization by quarter, the cash flow estimates resulting therefrom were reduced by estimated fulfillment costs associated with completing the backlog obligations, and the net cash flows were then discounted at a rate of 8% to determine fair value.
Discount rates for each respective intangible asset were determined by accounting for the risk associated with each asset, including required technology development and customer acquisition required to support respective projections, the uncertainty of market success and the risk inherent with projected financial results. The estimated useful lives were determined by evaluating the expected economic and useful lives of the assets and of similar intangible assets from previous business combinations and adjusting accordingly after taking into account circumstances that may be unique to Verodin.
Goodwill and Purchased Intangible Assets
Goodwill increased by $8.2 million for the three months ended March 31, 2020. The increase was comprised of approximately $7.8 million due to the acquisition of Cloudvisory in January 2020 and $0.3 million due to a tax adjustment for the acquisition of Verodin in May 2019.

12


Purchased intangible assets consisted of the following (in thousands):
 
As of March 31, 2020
 
As of December 31, 2019
Developed technology
$
153,803

 
$
148,303

Content
158,700

 
158,700

Customer relationships
115,690

 
115,690

Contract backlog
13,200

 
13,200

Trade names
17,310

 
17,160

Non-competition agreements
1,400

 
1,400

Total intangible assets
460,103

 
454,453

Less: accumulated amortization
(331,993
)
 
(320,033
)
Total net intangible assets
$
128,110

 
$
134,420


Amortization expense of intangible assets during the three months ended March 31, 2020 and 2019 was $12.0 million and $12.1 million, respectively.
The expected future annual amortization expense of intangible assets as of March 31, 2020 is presented below (in thousands):
Years Ending December 31,
Amount
2020 (remaining nine months)
$
33,093

2021
40,220

2022
28,942

2023
22,082

2024
3,692

2025
81

Total
$
128,110


6. Restructuring Charges
In January 2020, we implemented a restructuring plan designed primarily to align our resources with the strategic growth initiatives of the business. This restructuring plan resulted in a reduction of less than 2% of our total workforce as of March 31, 2020 as well as the impairment of certain long lived assets.
The total provision for restructuring charges during the three months ended March 31, 2020 of $11.0 million includes $5.6 million of cash charges which consists of $2.0 million in provision for restructuring charges and $3.6 million in other adjustments, which was offset by a $0.2 million reduction in severance benefits from the third quarter of 2019 that were not utilized. In addition, there are non-cash charges of $5.4 million related to fixed asset and right-of-use asset write-offs.
The following table sets forth the restructuring balance as of March 31, 2020 related to previous restructuring activities and a summary of restructuring activities during the three months ended March 31, 2020 (in thousands):
 
Severance and related costs
 
Facilities costs
 
Total costs
Balance, December 31, 2019
$
164

 
$
470

 
$
634

Provision for restructuring charges
1,997

 

 
1,997

Cash payments
(1,709
)
 
(34
)
 
(1,743
)
Other adjustments
3,498

 
(125
)
 
3,373

Balance, March 31, 2020
$
3,950

 
$
311

 
$
4,261


The remainder of the restructuring balance of $4.3 million at March 31, 2020 is primarily composed of $3.5 million consulting payments, $0.5 million of severance payments which we have paid, or expect to pay during the second quarter of 2020, and $0.3 million of non-cancelable non-lease costs which we expect to pay over the terms of the related obligations through the third quarter of 2021.
7. Leases
We have operating leases primarily for corporate offices. Our leases have remaining lease terms of one to ten years, some of which include options to extend the leases for up to five years, and some of which include options to terminate the leases within one year.

13


The components of lease expenses were as follows (in thousands):
 
Three Months Ended March 31, 2020
 
Three Months Ended March 31, 2019
Operating lease costs
$
4,418

 
$
4,762

Short-term lease costs
527

 
937

Sublease income
(274
)
 
(272
)
Total net lease costs
$
4,671

 
$
5,427


Supplemental balance sheet information related to leases is as follows (in thousands, except lease term and discount rate):
 
As of March 31, 2020
Operating leases:
 
Operating lease right-of-use assets, net
$
58,045

 
 
Operating lease liabilities, current
$
19,017

Operating lease liabilities, non-current
68,277

Total operating lease liabilities
$
87,294

 
 
Weighted average remaining lease term (in years)
6.8

Weighted average discount rate
6.8
%

Supplemental cash flow and other information related to leases is as follows (in thousands):
 
Three Months Ended March 31, 2020
 
Three Months Ended March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
 
 
Operating cash flows from operating leases
$
4,730

 
$
2,585

 
 
 
 
Lease liabilities arising from obtaining right-of-use assets:
 
 
 
Operating leases
$
478

 
$
2,575


Undiscounted cash flows of operating lease liabilities are as follows (in thousands):
Years Ending December 31, 
Amount 
2020 (remaining nine months)
$
14,779

2021
18,511

2022
15,381

2023
13,376

2024
11,954

2025
11,346

2026 and thereafter
26,446

Total lease payments
111,793

Less: imputed interest
(24,499
)
Total lease obligations
87,294

Less: current lease obligations
(19,017
)
Long-term lease obligations
$
68,277


As of March 31, 2020, we did not have any additional operating lease commitments for an office lease that has not yet commenced.

14


8. Deferred Revenue
Deferred revenue consisted of the following (in thousands):
 
As of March 31, 2020
 
As of December 31, 2019
Product, subscription and support, current
$
485,268

 
$
508,580

Professional services, current
87,265

 
95,364

Total deferred revenue, current
572,533

 
603,944

Product, subscription and support, non-current
346,505

 
369,589

Professional services, non-current
818

 
1,034

Total deferred revenue, non-current
347,323

 
370,623

Total deferred revenue
$
919,856

 
$
974,567


Changes in the balance of deferred revenue for the periods presented are as follows (in thousands):
 
Three Months Ended March 31,
 
2020
 
2019
Deferred revenue, beginning of period
$
974,567

 
$
934,828

Billings for the period
170,011

 
181,906

Revenue recognized
(224,722
)
 
(210,544
)
Deferred revenue, end of period
$
919,856

 
$
906,190


Remaining Performance Obligations
Transaction price allocated to remaining performance obligations represents contracted revenue that has not yet been recognized, which includes deferred revenue and non-cancelable contracts that will be invoiced and recognized as revenue in future periods ("backlog"). While deferred revenue is recorded on our balance sheet as a liability, backlog is not recorded in revenue, deferred revenue or elsewhere in our consolidated financial statements until we establish a contractual right to invoice, at which point it is recorded as revenue or deferred revenue as appropriate. As of March 31, 2020, the aggregate amount of the transaction price allocated to remaining performance obligations was $919.9 million in deferred revenue and $15.5 million in backlog.
We expect that the amount of backlog relative to the total value of our contracts will change from year to year due to several factors, including the amount invoiced early in the contract term, the timing and duration of customer agreements, varying invoicing cycles of agreements and changes in customer financial circumstances. Accordingly, we believe that fluctuations in backlog are not always a reliable indicator of future revenues and we do not utilize backlog internally as a key management metric.
We expect to recognize these remaining performance obligations as follows (in percentages):
 
Total
 
Less than 1 year
 
1-2 years
 
2-3 years
 
More than 3 years
Deferred revenue
100%
 
62%
 
24%
 
11%
 
3%
Backlog
100%
 
55%
 
34%
 
11%
 
—%



15


9. Convertible Senior Notes
Convertible Senior Notes due 2024
On May 24, 2018, we issued $525.0 million aggregate principal amount of 0.875% Convertible Senior Notes due 2024 (the "2024 Notes") in a private placement to qualified institutional purchasers pursuant to an exemption from registration provided by Section 4(a)(2) and Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"). In addition, on June 5, 2018, we issued an additional $75.0 million aggregate principal amount of the 2024 Notes pursuant to the full exercise of the initial purchasers' option to purchase additional 2024 Notes, in a private placement exempt from the registration requirements of the Securities Act. The net proceeds from the offerings, after deducting the initial purchasers' discount of approximately $15.0 million and the issuance costs of approximately $0.6 million, were $584.4 million. We used (i) approximately $330.4 million of the net proceeds to repurchase approximately $340.2 million in aggregate principal amount outstanding of the Series A Notes (as defined below) in negotiated transactions with institutional investors and (ii) approximately $65.2 million of the net proceeds from the offering of the 2024 Notes to enter into capped call transactions (the "Capped Calls").
The 2024 Notes are unsecured obligations and rank senior in right of payment to any of our indebtedness that is expressly subordinated in right of payment to the 2024 Notes. They rank equally in right of payment with all of our existing and future liabilities that are not expressly subordinated to the 2024 Notes including the Series A Notes and the Series B Notes (as defined below); and effectively rank junior in right of payment to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness. The 2024 Notes are structurally junior to all indebtedness and other liabilities (including trade payables) of our subsidiaries.
The 2024 Notes do not contain any financial covenants and do not restrict us from paying dividends or issuing or repurchasing other securities.
The 2024 Notes bear interest at 0.875% per year, payable semiannually in arrears on June 1 and December 1 of each year, beginning December 1, 2018. The 2024 Notes mature on June 1, 2024, unless earlier repurchased, redeemed or converted.
The initial conversion rate of the 2024 Notes is 43.1667 shares of our common stock per $1,000 of principal amount of the 2024 Notes, which is equivalent to an initial conversion price of approximately $23.17 per share of common stock. The conversion rate of the 2024 Notes may be adjusted pursuant to the terms of the indenture governing the 2024 Notes upon the occurrence of certain specified events, but not for accrued and unpaid interest.
Holders may convert the 2024 Notes at their option in multiples of $1,000 principal amount prior to the business day preceding March 1, 2024, only under the following circumstances:
during any calendar quarter commencing after the calendar quarter ended on September 30, 2018 (and only during such calendar quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price of the 2024 Notes on each applicable trading day;
during the five business day period after any five consecutive trading day period (the "measurement period") in which the trading price per $1,000 principal amount of the 2024 Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate for the notes on each such trading day;
if we call any or all of the 2024 Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the relevant redemption date; or
upon the occurrence of specified corporate events, as specified in each indenture governing the 2024 Notes.
Regardless of the foregoing conditions, holders may convert their 2024 Notes at their option in multiples of $1,000 principal amount during the period from, and including, March 1, 2024 to the close of business on the second scheduled trading day immediately preceding the maturity date. Upon conversion, the 2024 Notes can be settled in cash, shares of our common stock or any combination of cash and shares of common stock at our option.
Holders may also require us to repurchase the 2024 Notes if we undergo a "fundamental change," as defined in each indenture governing the 2024 Notes, at a repurchase price equal to 100% of the principal amount, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
Additionally, we may redeem for cash all or any portion of the 2024 Notes on or after June 5, 2021, if the last reported sale price of our common stock has been at least 130% of the conversion price of the 2024 Notes then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) immediately preceding the date on which we provide notice of redemption at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus any accrued and unpaid interest to, but excluding, the redemption date.
As of March 31, 2020, none of the conditions permitting holders to convert their 2024 Notes had been satisfied and no shares of our common stock had been issued in connection with any conversions of the 2024 Notes. Based on the closing price of our common

16


stock of $10.58 per share on March 31, 2020, the conversion value of the 2024 Notes was less than the principal amount of the 2024 Notes outstanding on a per 2024 Note basis.
In accordance with accounting for debt with conversions and other options, we bifurcated the principal amount of the 2024 Notes into liability and equity components. The initial liability component of the 2024 Notes was valued at $458.3 million based on the contractual cash flows discounted at an appropriate comparable market non-convertible debt borrowing rate at the date of issuance of 5.5% with the equity component representing the residual amount of the proceeds of $141.7 million, which was recorded as a debt discount. Issuance costs were allocated pro rata based on the relative initial carrying amounts of the liability and equity components. As a result, transaction costs of $0.5 million and $0.1 million and initial purchasers' discount of $11.5 million and $3.5 million were attributable to the liability component and equity component of the 2024 Notes, respectively. The debt discount and the issuance costs allocated to the liability component are amortized as additional interest expense over the term of the 2024 Notes using the effective interest method as noted in the table below.
The liability and equity components of the 2024 Notes consisted of the following (in thousands):
 
As of March 31, 2020
 
As of December 31, 2019
 
2024 Notes
 
2024 Notes
Liability component:
 
 
 
Principal
$
600,000

 
$
600,000

Less: 2024 Notes discounts and issuance costs, net of amortization
(111,108
)
 
(117,078
)
Net carrying amount
$
488,892

 
$
482,922

 
 
 
 
Equity component, net of issuance costs
$
138,064

 
$
138,064


The unamortized issuance costs as of March 31, 2020 will be amortized over a weighted-average remaining period of approximately 4.2 years.
Interest expense related to the 2024 Notes consisted of the following (dollars in thousands):
 
Three Months Ended March 31,
 
2020
 
2019
 
2024 Notes
 
2024 Notes
Coupon interest
$
1,313

 
$
1,313

Amortization of 2024 Notes discounts and issuance costs
5,970

 
5,684

Total interest expense recognized
$
7,283

 
$
6,997

 
 
 
 
Effective interest rate on the liability component
6.0
%
 
6.1
%

In connection with the 2024 Notes offering, we entered into the Capped Calls with certain counterparties affiliated with the initial purchasers of the 2024 Notes. The Capped Calls are expected to reduce potential dilution of earnings per share upon conversion of the 2024 Notes, and have an initial strike price of $23.17 per share, which corresponds to the initial conversion price of the 2024 Notes and which have a cap price of $34.32 per share. The Capped Calls do not meet the criteria for separate accounting as a derivative as they are indexed to our own stock and are accounted for as freestanding financial instruments. The premiums paid for the purchase of the Capped Calls in the amount of $65.2 million have been recorded as a reduction of the Company's additional paid-in capital in stockholder's equity in the accompanying Condensed Consolidated Financial Statements and fair values of the Capped Calls are not re-measured at each reporting period.
Convertible Senior Notes due 2035
In June 2015, we issued $460.0 million principal amount of 1.000% Convertible Senior Notes due 2035 (the "Series A Notes") and $460.0 million principal amount of 1.625% Convertible Senior Notes due 2035 (the “Series B Notes” and together with the Series A Notes, the "2035 Notes", and the 2035 Notes, together with the 2024 Notes, the "Convertible Senior Notes") in a private placement to qualified institutional purchasers pursuant to an exemption from registration provided by Section 4(a)(2) and Rule 144A under the Securities Act. The net proceeds after the initial purchasers' discount of $23.0 million and issuance costs of $0.5 million from the 2035 Notes were $896.5 million. The Series A Notes and Series B Notes bear interest at 1.000% per year and 1.625% per year, respectively, payable semiannually in arrears on June 1 and December 1 of each year, beginning December 1, 2015. The 2035 Notes mature on June 1, 2035, unless earlier repurchased, redeemed or converted.

17


The 2035 Notes are unsecured obligations and rank senior in right of payment to any of our indebtedness that is expressly subordinated in right of payment to the 2035 Notes. They rank equally in right of payment with all of our existing and future liabilities that are not expressly subordinated to the 2035 Notes and effectively rank junior in right of payment to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness. They are structurally junior to all indebtedness and other liabilities (including trade payables) of our subsidiaries.
The 2035 Notes do not contain any financial covenants and do not restrict us from paying dividends or issuing or repurchasing our other securities.
The initial conversion rate on each series of 2035 Notes is 16.4572 shares of our common stock per $1,000 principal amount of 2035 Notes, which is equivalent to an initial conversion price of approximately $60.76 per share of common stock. The conversion rate of each series of 2035 Notes may be adjusted upon the occurrence of certain specified events, but not for accrued and unpaid interest.
Holders may convert the 2035 Notes at their option in multiples of $1,000 principal amount prior to March 1, 2035, excluding the period from March 1, 2020 to June 1, 2020 in the case of the Series A Notes and March 1, 2022 to June 1, 2022 in the case of the Series B Notes, only under the following circumstances:
during any calendar quarter commencing after the calendar quarter ended on September 30, 2015 (and only during such calendar quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price for the 2035 Notes of the relevant series on each applicable trading day;
during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of Series A Notes or Series B Notes, as applicable, for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate for the notes of the relevant series on each such trading day;
if we call any or all of the 2035 Notes of a series for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the relevant redemption date; or
upon the occurrence of specified corporate events, as specified in each indenture governing the 2035 Notes.
Regardless of the foregoing conditions, holders may convert their 2035 Notes at their option in multiples of $1,000 principal amount at any time during the period from March 1, 2020 to June 1, 2020 in the case of the Series A Notes and during the period from March 1, 2022 to June 1, 2022 in the case of the Series B Notes, or after March 1, 2035 until maturity for either series of 2035 Notes. Upon conversion, the 2035 Notes can be settled in cash, shares of our common stock or any combination thereof at our option.
We may be required by holders of the 2035 Notes to repurchase all or any portion of their 2035 Notes at 100% of the principal amount plus accrued and unpaid interest, on each of June 1, 2020, June 1, 2025 and June 1, 2030, in the case of the Series A Notes, and each of June 1, 2022, June 1, 2025 and June 1, 2030 in the case of the Series B Notes. With respect to the upcoming June 1, 2020 repurchase date for the Series A Notes, in light of the recent trading price of our common stock, we expect that holders of the Series A Notes will likely require us to repurchase their Series A Notes that we expect to settle in cash on such June 1, 2020 repurchase date. Holders may also require us to repurchase the 2035 Notes if we undergo a "fundamental change," as defined in each indenture governing the 2035 Notes, at a purchase price equal to 100% of the principal amount, plus accrued and unpaid interest.
Additionally, we may redeem for cash all or any portion of the Series B Notes on or after June 1, 2020 until June 1, 2022 if the last reported sale price of our common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending not more than three trading days immediately preceding the date we provide notice of redemption. We also may redeem for cash all or any portion of the Series A Notes on or after June 1, 2020 until maturity and all or any portion of the Series B Notes on or after June 1, 2022 until maturity, regardless of the foregoing sale price condition.
In accordance with accounting for debt with conversions and other options, we allocated the principal amount of the 2035 Notes into liability and equity components. We also allocated the total amount of initial purchasers' discount and transaction costs incurred to the liability and equity components using the same proportions as the proceeds from the 2035 Notes. Transaction costs of $0.4 million and $0.1 million and initial purchasers' discount of $17.6 million and $5.4 million were attributable to the liability component and equity component of the 2035 Notes, respectively.
Repurchase of a portion of the Series A Notes
In May 2018, we used approximately $330.4 million of the net proceeds from the offering of the 2024 Notes to repurchase $340.2 million aggregate principal amount of the Series A Notes. The repurchase was accounted for as a partial extinguishment of the Series A Notes. The consideration of approximately $330.4 million used to repurchase the Series A Notes was allocated between the liability and equity components of the amount extinguished by determining the fair value of the liability component immediately prior to the

18


debt extinguishment and allocating that portion of the repurchase price to the liability component in the amount of $317.4 million. The residual of the repurchase price of $13.0 million was allocated to the equity component of the Series A Notes as a reduction of additional paid-in capital. The fair value of the debt extinguished was calculated using a discount rate of 4.5%, representing an estimate of the Company's borrowing rate at the date of repurchase with a remaining expected life of two years. As part of the repurchase, we wrote-off a portion of the unamortized debt issuance cost apportioned to the principal amount of Series A Notes repurchased. We also recorded a loss on partial extinguishment of the Series A Notes of $10.8 million in Other Expense, net, representing the difference between the consideration attributed to the liability component and the sum of the net carrying amount of the liability component and unamortized costs. As of March 31, 2020, $119.8 million aggregate principal amount of the Series A Notes remained outstanding.
The liability and equity components of the remaining portion of 2035 Notes consisted of the following (in thousands):
 
As of March 31, 2020
 
As of December 31, 2019
 
Series A Notes
 
Series B Notes
 
Series A Notes
 
Series B Notes
Liability component:
 
 
 
 
 
 
 
Principal
$
119,828

 
$
460,000

 
$
119,828

 
$
460,000

Less: 2035 Notes discount and issuance costs, net of amortization
(1,023
)
 
(44,772
)
 
(2,540
)
 
(49,650
)
Net carrying amount
$
118,805


$
415,228

 
$
117,288

 
$
410,350

 
 
 
 
 
 
 
 
Equity component, net of issuance costs
$
79,555

 
$
117,834

 
$
79,555

 
$
117,834


The unamortized discounts and issuance costs as of March 31, 2020 will be amortized over a weighted-average remaining period of approximately 2.1 years.
Interest expense for the three months ended March 31, 2020 related to the 2035 Notes consisted of the following (dollars in thousands):
 
Three Months Ended March 31, 2020
 
 
Series A Notes
 
Series B Notes
 
Coupon interest
$
300

 
$
1,869

 
Amortization of 2035 Notes discount and issuance costs
1,518

 
4,877

 
Total interest expense recognized
$
1,818


$
6,746

 
 
 
 
 
 
Effective interest rate on the liability component
6.2
%
 
6.6
%
 

Interest expense for the three months ended March 31, 2019 related to the 2035 Notes consisted of the following (dollars in thousands):
 
Three Months Ended March 31, 2019
 
 
Series A Notes
 
Series B Notes
 
Coupon interest
$
300

 
$
1,869

 
Amortization of 2035 Notes discount and issuance costs
1,442

 
4,652

 
Total interest expense recognized
$
1,742

 
$
6,521

 
 
 
 
 
 
Effective interest rate on the liability component
6.3
%
 
6.7
%
 

Prepaid Forward Stock Purchase
In connection with the issuance of the 2035 Notes, we also entered into privately negotiated prepaid forward transactions (the "Prepaid Forwards") with one of the initial purchasers of the 2035 Notes (the "Forward Counterparty"), pursuant to which we paid approximately $150.0 million. The amount of the prepaid is equivalent to approximately 3.3 million shares which are to be settled on or around June 1, 2020 and June 1, 2022, respectively, subject to any early settlement, in whole or in part, of each Prepaid Forward. The Prepaid Forwards are intended to facilitate privately negotiated derivative transactions by which investors in the 2035 Notes will

19


be able to hedge their investment in the 2035 Notes. In the event we pay any cash dividends on our common stock, the Forward Counterparty will pay an equivalent amount back to us.
The related shares were accounted for as a repurchase of common stock, and are presented as Treasury Stock in the unaudited condensed consolidated balance sheets. The 3.3 million shares of common stock purchased under the Prepaid Forwards are excluded from weighted-average shares outstanding for basic and diluted EPS purposes although they remain legally outstanding.
10. Commitments and Contingencies
Letters of Credit
We are party to letters of credit totaling $3.5 million and $3.6 million as of March 31, 2020 and December 31, 2019, respectively, issued primarily in support of operating leases for several of our facilities. These letters of credit are collateralized by a line with our bank. No amounts have been drawn against these letters of credit.
Contract Manufacturer Commitments
Our independent contract manufacturers procure components and assemble our products based on our forecasts. These forecasts are based on estimates of future demand for our products, which are in turn based on historical trends and an analysis from our sales and product marketing organizations, adjusted for overall market conditions. In order to reduce manufacturing lead times and plan for adequate supply, we may issue forecasts and orders for components and products that are non-cancelable. As of March 31, 2020 and December 31, 2019, we had non-cancelable open orders of $4.3 million and $5.0 million, respectively. We are required to record a liability for firm, non-cancelable and unconditional purchase commitments with contract manufacturers and suppliers for quantities in excess of our future demand forecasts. As of March 31, 2020, we have not incurred nor accrued any significant liabilities for such non-cancelable commitments.
Purchase Obligations
As of March 31, 2020, we had approximately $16.1 million of non-cancelable firm purchase commitments primarily for purchases of software and services. In situations where we have received delivery of the goods or services as of March 31, 2020 under purchase orders outstanding as of the same date, such amounts are reflected in the condensed consolidated balance sheet as accounts payable or accrued liabilities, and are excluded from the $16.1 million.
Litigation
From time to time, we are involved in claims and legal proceedings that arise in the ordinary course of business. Any claims or proceedings against us, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time, result in the diversion of significant operational resources, or require us to enter into agreements which may not be available on terms favorable to us or at all.
To the extent there is a reasonable possibility that a loss exceeding amounts already recognized may be incurred, and the amount of such additional loss would be material, we will either disclose the estimated additional loss or state that such an estimate cannot be made. We do not currently believe that it is reasonably possible that additional losses in connection with litigation arising in the ordinary course of business would be material.
Indemnification
Under the indemnification provisions of our standard sales related contracts, we agree to defend our customers against third-party claims asserting infringement of certain intellectual property rights, which may include patents, copyrights, trademarks, or trade secrets, and to pay judgments entered on such claims. Our exposure under these indemnification provisions is generally limited to the total amount paid by our customer under the agreement. However, certain agreements include indemnification provisions that could potentially expose us to losses in excess of the amount received under the agreement. In addition, we indemnify our officers, directors, and certain key employees for actions taken while they are or were serving in good faith in such capacities. Through March 31, 2020, there have been no claims under any indemnification provisions.
11. Common Shares Reserved for Issuance
Under our amended and restated certificate of incorporation, we are authorized to issue 100,000,000 shares of convertible preferred stock with a par value of $0.0001 per share, none of which were issued and outstanding as of March 31, 2020 or December 31, 2019.
Under our amended and restated certificate of incorporation, we are authorized to issue 1,000,000,000 shares of common stock with a par value of $0.0001 per share as of March 31, 2020 and December 31, 2019. Each share of common stock outstanding is entitled to one vote. The holders of common stock are also entitled to receive dividends whenever funds are legally available and when declared by our Board of Directors, subject to the prior rights of holders of all classes of convertible preferred stock outstanding.

20


We had reserved shares of common stock for issuance as follows (in thousands):
 
As of March 31, 2020
 
As of December 31, 2019
Reserved under stock award plans
45,595

 
37,982

Convertible senior notes
35,442

 
35,442

Employee Stock Purchase Plan (ESPP)
5,656

 
3,428

Total
86,693

 
76,852


12. Equity Award Plans
We have operated under our 2013 Equity Incentive Plan ("2013 Plan") since our initial public offering ("IPO") in September 2013. Our 2013 Plan provides for the issuance of restricted stock and the granting of options, stock appreciation rights, performance shares, performance units and restricted stock units to our employees, officers, directors and consultants. Our 2013 Plan provides for annual increases in the number of shares available for issuance on the first day of each fiscal year. Awards granted under the 2013 Plan vest over the periods determined by our Board of Directors or compensation committee of our Board of Directors, generally four years, and stock options granted under the 2013 Plan expire no more than ten years after the date of grant. In the case of an incentive stock option granted to an employee who at the time of grant owns stock representing more than 10% of the total combined voting power of all classes of stock, the exercise price shall be no less than 110% of the fair value per share on the date of grant, and the award shall expire five years from the date of grant. For options granted to any other employee, the per share exercise price shall be no less than 100% of the fair value per share on the date of grant. In the case of non-statutory stock options and options granted to consultants, the per share exercise price shall be no less than 100% of the fair value per share on the date of grant. Stock that is purchased prior to vesting is subject to our right of repurchase at any time following termination of the participant's service for so long as such stock remains unvested. Approximately 16.7 million shares and 12.2 million shares of our common stock were reserved for future grants as of March 31, 2020 and December 31, 2019, respectively, under the 2013 Plan.
Our 2013 Employee Stock Purchase Plan ("ESPP") allows eligible employees to acquire shares of our common stock at 85% of the lower of the fair market value of our common stock on the first trading day of each offering period or on the exercise date. Our ESPP provides for annual increases in the number of shares available for issuance on the first day of each fiscal year. An aggregate of approximately 5.7 million shares and 3.4 million shares of common stock were available for future issuance as of March 31, 2020 and December 31, 2019, respectively, under our ESPP.
From time to time, we also grant restricted common stock or restricted stock awards outside of our equity incentive plans to certain employees in connection with acquisitions.
Stock Option Activity
A summary of the activity for our stock option changes during the reporting period and a summary of information related to options outstanding and options exercisable are presented below (in thousands, except per share amounts and contractual life years):
 
Options Outstanding
 
Number of
Shares
 
Weighted-
Average
Exercise
Price
(per share)
 
Weighted-
Average
Contractual
Life (years)
 
Aggregate
Intrinsic
Value
Balance — December 31, 2019
4,391

 
$
9.07

 
5.2
 
$
45,931

Exercised
(372
)
 
3.63

 
 
 
4,053

Cancelled
(55
)
 
3.28

 
 
 
 
Balance — March 31, 2020
3,964

 
$
9.66

 
4.7
 
$
19,393

Options exercisable — March 31, 2020
2,836

 
$
12.15

 
3.2
 
$
11,282


The aggregate intrinsic value above represents the pre-tax difference between the exercise price of stock options and the quoted market price of our stock on that day for all in-the-money stock options.



21


Restricted Stock Award ("RSA") and Restricted Stock Unit ("RSU") Activity
A summary of the activity for our restricted common stock, RSAs and RSUs during the reporting periods and a summary of information related to unvested restricted common stock, RSAs and RSUs, including those expected to vest based on the achievement of a performance condition, are presented below (in thousands, except per share amounts and contractual life years):
 
Number of
Shares
 
Weighted-
Average
Grant Date
Fair Value
(per share)
 
Weighted-
Average
Contractual
Life (years)
 
Aggregate
Intrinsic
Value
Unvested balance — December 31, 2019
21,697

 
$
16.07

 
1.2
 
$
358,651

Granted
10,718

 
15.09

 
 
 
 
Vested
(3,427
)
 
14.92

 
 
 
 
Cancelled
(4,089
)
 
17.49

 
 
 
 
Unvested balance — March 31, 2020
24,899

 
$
15.11

 
1.4
 
$
263,430

Unvested awards for which the requisite service period has not been rendered and vesting is subject to the achievement of a performance condition — March 31, 2020
1,095

 
$
15.11

 
2.3
 
$
11,586


Stock-Based Compensation
We record stock-based compensation based on the fair value as determined on the date granted. We determine the fair value of stock options and shares of common stock to be issued under the ESPP using the Black-Scholes option-pricing model. The fair value of restricted stock units and restricted stock awards equals the market value of the underlying stock on the date of grant. We grant performance-based restricted stock units and restricted stock awards to certain employees which vest upon the achievement of certain performance conditions, subject to the employees’ continued service relationship with us. With respect to performance-based restricted stock units, we assess the probability of vesting at each reporting period and adjust our compensation cost based on this probability assessment. We recognize such compensation expense on a straight-line basis over the service providers' requisite service period.
The following table summarizes the assumptions used in the Black-Scholes option-pricing model to determine fair value of our common shares to be issued under the ESPP for the offering periods beginning in May 2019:
 
Three Months Ended March 31, 2020
 
Three Months Ended March 31, 2019
Fair value of common stock
$14.59 - $16.35
 
$16.69 - $20.01
Risk-free interest rate
1.60% - 2.35%
 
2.08% - 2.70%
Expected term (in years)
0.5 - 1.0
 
0.5 - 1.0
Volatility
29% - 39%
 
32% - 38%
Dividend yield
—%
 
—%

Stock-based compensation expense related to stock options, ESPP and restricted stock unit awards is included in the condensed consolidated statements of operations as follows (in thousands):
 
Three Months Ended March 31,
 
2020
 
2019
Cost of product, subscription and support revenue
$
3,742

 
$
3,947

Cost of professional services revenue
3,900

 
3,709

Research and development
11,545

 
12,424

Sales and marketing
11,486

 
12,540

General and administrative
5,505

 
7,703

Total
$
36,178


$
40,323


As of March 31, 2020, total compensation cost related to stock-based awards not yet recognized was $371.5 million, which is expected to be amortized on a straight-line basis over the weighted-average remaining vesting period of approximately 3.0 years.

22



13. Income Taxes
We account for income taxes under the asset and liability method. Under this method, deferred income tax assets and liabilities are determined based upon the difference between the financial statement carrying amounts and the tax basis of assets and liabilities and are measured using the enacted tax rate expected to apply to taxable income in the years in which the differences are expected to be reversed.
We recognized a provision for income taxes of $0.9 million and $2.2 million for the three months ended March 31, 2020 and 2019, respectively. The decrease in the provision for income taxes was due primarily to lower foreign taxes and a tax benefit from the Verodin acquisition in the three months ended March 31, 2020 as compared to the three months ended March 31, 2019.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was enacted and signed into U.S. law to provide economic relief to individuals and businesses facing economic hardship as a result of the COVID-19 pandemic. Changes in tax laws or rates are accounted for in the period of enactment. The income tax provisions of the CARES Act do not have a significant impact on our current taxes, deferred taxes, or uncertain tax positions.

14. Net Loss per Share
Basic net loss per share is calculated by dividing net loss by the weighted average number of common shares outstanding during the period, less shares subject to repurchase, and excludes any dilutive effects of employee share-based awards and options. Diluted net income per common share is computed giving effect to all potentially dilutive common shares, including common stock issuable upon exercise of stock options, conversion of the Convertible Senior Notes, and unvested restricted common stock and stock units. As we had net losses for the three months ended March 31, 2020 and 2019, all potential common shares were determined to be anti-dilutive.
The following table sets forth the computation of net loss per common share (in thousands, except per share amounts):
 
Three Months Ended March 31,
 
2020
 
2019
Numerator:
 
 
 
Net loss
$
(76,306
)
 
$
(75,375
)
Denominator:
 
 
 
Weighted average number of shares outstanding—basic and diluted
217,789

 
197,819

Net loss per share—basic and diluted
$
(0.35
)

$
(0.38
)

The following outstanding options and unvested shares were excluded (as common stock equivalents) from the computation of diluted net loss per common share for the periods presented as their effect would have been anti-dilutive (in thousands):
 
As of March 31,
 
2020
 
2019
Options to purchase common stock
3,964

 
3,183

Unvested restricted stock awards and units
24,899

 
25,601

Convertible senior notes
35,442

 
35,442

ESPP shares
966

 
601


15. Employee Benefit Plan
401(k) Plan
We have established a 401(k) tax-deferred savings plan (the “401(k) Plan”) which permits participants to make contributions by salary deduction pursuant to Section 401(k) of the Internal Revenue Code of 1986, as amended. All participants’ interests in their deferrals are 100% vested when contributed. We are responsible for administrative costs of the 401(k) Plan and have made no matching contributions into our 401(k) Plan since inception. Under the 401(k) Plan, pre-tax contributions are allocated to each participant’s individual account and are then invested in selected investment alternatives according to the participants’ directions. The 401(k) Plan is intended to qualify under Sections 401(a) and 501(a) of the Code. As a tax-qualified retirement plan, contributions to the 401(k) Plan and earnings on those contributions are not taxable to the employees until distributed, and all contributions are deductible by us when and if made.


23



16. Segment and Major Customers Information
Disaggregation of revenue by geography
We conduct business globally and are primarily managed on a geographic basis. Our Chief Executive Officer, who is our chief operating decision maker, reviews financial information presented on a consolidated basis accompanied by information about revenue by geographic region for purposes of allocating resources and evaluating financial performance. We define our regions into United States ("U.S."), Europe, the Middle East, and Africa ("EMEA"), Asia Pacific and Japan ("APAC"), and all remaining geographies (primarily Latin America and Canada) included in Others. There are no segment managers who are held accountable for operations, operating results, and plans for levels, components, or types of products or services below the consolidated unit level. Accordingly, we are considered to be in a single reportable segment and operating unit structure.
Revenue by geographic region based on the billing address is as follows (in thousands):
 
Three Months Ended March 31,
 
2020
 
2019
 
2020
 
2019
 
2020
 
2019
 
2020
 
2019
 
U.S.
 
EMEA
 
APAC
 
Other
Product and related subscription and support
$
59,988

 
$
69,578

 
$
20,606

 
$
21,952

 
$
20,723

 
$
21,810

 
$
4,370

 
$
5,108

Platform, cloud subscription and managed services
46,012

 
33,979

 
10,176

 
8,357

 
8,796

 
6,387

 
3,411

 
2,732

Professional services
34,573

 
27,741

 
7,280

 
5,625

 
4,054

 
3,374

 
4,733

 
3,901

Total revenue
$
140,573

 
$
131,298

 
$
38,062

 
$
35,934

 
$
33,573

 
$
31,571

 
$
12,514

 
$
11,741


We generate revenue from sales of our network, email and endpoint security solutions, network forensics appliances, cloud threat intelligence and analytics subscriptions, managed security, our Mandiant professional services, our Helix security operations platform, and our Mandiant security validation platform (formerly Verodin security instrumentation platform). We disaggregate our revenue into two main categories: (i) product, subscription, and support and (ii) professional services.
 Within the product, subscription and support category, we provide supplemental data to distinguish between solutions that are appliances dependent, and solutions and managed services that are not dependent on appliances. These solutions include security delivered entirely through the cloud or delivered through hybrid on premise/cloud platform. Security solutions that are dependent on appliances are included in the product and related subscription and support sub-category, and solutions and managed services without dependency on the appliances are included in the platform, cloud subscription and managed services sub-category.
To complement our product, subscription and support solutions, we offer professional services, including incident response and other security consulting services, to our customers who have experienced a cyber security breach or desire assistance assessing the resilience of their information systems infrastructure. The majority of our professional services are offered on a time and materials basis, through a fixed fee arrangement, or on a retainer basis. Revenue from professional services is recognized as services are delivered. Revenue from our Expertise-on-Demand micro-services and some pre-paid professional services is deferred, and revenue is recognized when services are delivered.
The following table depicts the disaggregation of revenue according to revenue type and is consistent with how we evaluate our financial performance (in thousands):
 
Three Months Ended March 31,
 
2020

2019
Product and related subscription and support
$
105,688

 
$
118,448

Platform, cloud subscription and managed services
68,395

 
51,455

Professional services
50,639

 
40,641

Total revenue
$
224,722

 
$
210,544



24


Long lived assets by geography
Long lived assets by geographic region based on physical location is as follows (in thousands):
 
As of March 31, 2020
 
As of December 31, 2019
Property and equipment, net:
 
 
 
United States
$
82,298

 
$
85,287

International
8,315

 
8,525

Total property and equipment, net
$
90,613

 
$
93,812


For the three months ended March 31, 2020 and 2019, one distributor represented 10% and 16%, respectively, of our total revenue. For each of the three months ended March 31, 2020 and 2019, one reseller represented 14% of our total revenue. Additionally, another distributor represented 11% of our total revenue for the three months ended March 31, 2020, but did not represent 10% or greater of our total revenue for the three months ended March 31, 2019.
As of March 31, 2020 and December 31, 2019, no customer represented 10% or more of our net accounts receivable balance.

25


17. Subsequent Events
On April 23, 2020, the Board of Directors of the Company approved a restructuring plan to streamline the Company’s operations to more closely align expenses to the Company’s projected revenue, position the Company for improved operating performance and allow the Company to increase investment in the growth areas of the business. The restructuring plan includes a reduction of approximately 6% of the Company’s workforce. The Company currently estimates that it will recognize pre-tax charges to its GAAP financial results of between $10 million and $15 million, consisting of severance and other one-time termination benefits, and other restructuring related costs. These charges are primarily cash-based and are expected to be recognized in the second quarter of 2020. The actions associated with the restructuring plan are expected to be completed by the end of the second quarter of 2020.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2019. The following discussion and analysis contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements include, but are not limited to, statements regarding:
the evolution of the threat landscape facing our customers and prospects;
our ability, and the effects of our efforts, to educate the market regarding the advantages of our security solutions;
our ability to continue to grow revenues, in particular annual recurring revenues from cloud and subscriptions;
our expected rate of decline in mature appliance revenues and associated subscription and support revenues;
our future financial and operating results;
our business plan and our ability to effectively manage our growth and associated investments;
our beliefs and objectives for future operations;
our ability to maintain our leadership position in advanced network security;
our ability to attract and retain customers and to expand our solutions footprint within each of these customers;
our expectations concerning customer retention rates as well as expectations for the value of subscriptions and services renewals;
our ability to maintain our competitive technological advantages against new entrants in our industry;
our ability to timely and effectively scale and adapt our existing technology;
our ability to innovate new products and bring them to market in a timely manner;
our ability to maintain, protect, and enhance our brand and intellectual property;
our ability to expand internationally;
the effects of increased competition in our market and our ability to compete effectively;
cost of revenue, including changes in costs associated with products, manufacturing and customer support;
trends in operating expenses, including changes in research and development, sales and marketing, and general and administrative expenses;
anticipated income tax rates;
potential attrition and other impacts associated with restructuring;
sufficiency of cash to meet cash needs for at least the next 12 months;
our ability to generate cash flows from operations and free cash flows;
our ability to capture new, and renew existing, contracts with the United States and international governments;
our expectations concerning relationships with third parties, including channel partners and logistics providers;
the release of new products;
economic and industry trends or trend analysis;
the impact of the recent COVID-19 pandemic and related public health measures on our business and the global economy;

26


our expectations concerning repurchases of the Series A Notes;
the attraction, training, integration and retention of qualified employees and key personnel;
future acquisitions of or investments in complementary companies, products, subscriptions or technologies;
our expectations, beliefs, plans, intentions and strategies related to our acquisition of Verodin, Inc. ("Verodin"); and
the effects of seasonal trends on our results of operations.
as well as other statements regarding our future operations, financial condition and prospects, and business strategies. Forward-looking statements generally can be identified by words such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “projects,” “will be,” “will continue,” “will likely result,” and similar expressions. These forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties, which could cause our actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Quarterly Report on Form 10-Q, and in particular, the risks discussed under the caption “Risk Factors” in Item 1A of Part II of this Quarterly Report on Form 10-Q and those discussed in other documents we file with the SEC. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
Investors and others should note that we announce material financial information to our investors using our investor relations Web site (http://investors.fireeye.com/), SEC filings, press releases, public conference calls and webcasts. We use these channels, as well as social media, to communicate with the public about our company, our services and other issues. It is possible that the information we post on social media could be deemed to be material information.

Overview
We provide a broad portfolio of cybersecurity solutions and services that allow organizations to prepare for, prevent, respond to, investigate and remediate cyber attacks. Our products include detection and prevention solutions for network, email, endpoint and cloud security, forensics appliances, a security validation platform, subscription-based threat intelligence and analytics solutions, and our Helix security platform. These products are complemented by our technology-enabled managed detection and response services and our Mandiant incident response and strategic cyber security consulting services.
In March 2020, the World Health Organization declared the novel coronavirus disease (COVID-19) a global pandemic. We operate in geographic locations that have been impacted by COVID-19. The pandemic has impacted, and could further impact, our operations and the operations of our customers as a result of quarantines, various local, state and federal government public health orders, facility and business closures, and travel and logistics restrictions. We anticipate governments and businesses will likely take additional actions or extend existing actions to respond to the risks of the COVID-19 pandemic. While we instituted a global work-from-home policy towards the end of the first quarter of 2020, we did not incur significant disruptions during the three months ended March 31, 2020. We are continuing to actively monitor the impacts and potential impacts of the COVID-19 pandemic in all aspects of our business. Although we are unable to predict the impact of the COVID-19 pandemic on our business, results of operations, liquidity or capital resources at this time, we expect we may be negatively affected if the pandemic and related public health measures result in substantial manufacturing or supply chain problems, disruptions in local and global economies, volatility in the global financial markets, overall reductions in demand, delays in payment, restrictions on the shipment of our products, or other ramifications from the COVID-19 pandemic. For a further discussion of the uncertainties and business risks associated with the COVID-19 pandemic, see the section entitled “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q.
On April 23, 2020, the Board of Directors of the Company approved a restructuring plan to streamline the Company’s operations to more closely align expenses to the Company’s projected revenue, position the Company for improved operating performance and allow the Company to increase investment in the growth areas of the business. The restructuring plan includes a reduction of approximately 6% of the Company’s workforce. The Company expects the restructuring will reduce total non-GAAP operating expenses by at least $25 million in 2020 compared to 2019, and currently estimates that it will recognize pre-tax charges to its GAAP financial results of between $10 million and $15 million, consisting of severance and other one-time termination benefits, and other restructuring related costs. These charges are primarily cash-based and are expected to be recognized in the second quarter of 2020. The actions associated with the restructuring plan are expected to be completed by the end of the second quarter of 2020.

Our Business Model
We generate revenue from sales of our network, email endpoint and cloud security solutions, our security validation platform, our threat intelligence, our managed detection and response services, our Helix security operations platform, and our Mandiant professional services. We disaggregate our revenue into two main categories: (i) product, subscription, and support and (ii) professional

27


services. For the three months ended March 31, 2020 and 2019, product, subscription and support revenue as a percentage of total revenue was 77% and 81%, respectively. Revenue from professional services was 23% and 19% for the three months ended March 31, 2020 and 2019, respectively.

Product, subscription and support
Within the product, subscription and support category, we provide supplemental data to distinguish between sales of our product solutions that are deployed on-premise (or in hybrid on-premise/private cloud configurations), and sales of our platform, cloud-based subscriptions and managed detection and response services. Security product solutions deployed on-premise (or in hybrid on-premise/private cloud configurations) are included in the Product and related subscription and support sub-category. Our security validation platform, Helix security platform, cloud-based security solutions, detection-on-demand, threat intelligence subscriptions and managed detection and response services are included in the platform, cloud subscription and managed services sub-category. For the three months ended March 31, 2020 and 2019, product and related subscription and support revenue as a percentage of total revenue was 47% and 56%, respectively. Revenue from platform, cloud subscription and managed services was 30% and 25% for the three months ended March 31, 2020 and 2019, respectively.
Sales of our network, email, and endpoint security solutions, platform, cloud subscriptions and managed detection and response services, initially increase our deferred revenue. Deferred revenue from our product, subscription and support sales totaled $831.8 million and $878.2 million, as of March 31, 2020 and December 31, 2019, respectively. The decrease in deferred revenue from our product, subscription and support sales was due primarily to a decrease in sales of our appliance hardware and attached DTI cloud and support subscriptions compared to December 31, 2019.
Product and related subscription and support
Revenue in the product and related subscription and support sub-category consists primarily of revenue from sales of our network, email and endpoint security solutions that are deployed on the customer's premise, either as an integrated security appliance or in distributed hybrid on-premise/private cloud configurations. Both deployment options are available on pre-configured appliance hardware or as virtual sensors and include our detection and MVX analysis technologies, our DTI cloud updates and support services.
Integrated and distributed solutions deployed on virtual sensors are offered as an “all inclusive” subscription that includes our detection and MVX analysis technologies, DTI cloud updates, and support services. There is no limit to the number of virtual sensors a customer can deploy, and capacity can be distributed throughout the customer’s IT environment as needed. Subscription revenue is recognized ratably over the contractual term, typically one to three years. Customers purchasing our network and email security subscriptions have the option of purchasing our appliance hardware at additional cost, but are not required to do so.
Integrated network and email security solutions can also be deployed on pre-configured appliance hardware purpose-built for FireEye security solutions with scalable capacity. Integrated security appliances are delivered with pre-installed detection and MVX analysis technologies and require subscriptions to our DTI cloud updates and support services, which are priced as a percentage of the appliance price per year. Subscription terms are typically one to three years and include a material right of renewal. Historically, the majority of our installed base of on-premise network and email security customers purchased our solutions under this pricing model.
Since our network, email and endpoint security solutions require regular DTI cloud and software updates to maintain detection efficacy, physical appliances and virtual sensors, together with the related DTI cloud and support subscriptions are considered a single performance obligation, whether deployed as an integrated appliance, virtual sensor or in a distributed hybrid on-premise/cloud configuration.
As a single performance obligation, revenue from sales of appliance hardware and related subscriptions is recognized ratably over the contractual term, typically one to three years. Such contracts typically contain a material right of renewal option that allows the customer to renew their DTI cloud and support subscriptions for an additional term at a discount to the original purchase price of the single performance obligation. For contacts that contain a material right of renewal option, the value of the performance obligation allocated to the renewal is recognized ratably over the period between the end of the initial contractual term and end of the estimated useful life of the related appliance and license. A small portion of our revenue in the product and related subscription and support revenue is derived from the sale of our network forensics appliances and our central management system appliances. These appliances are not dependent on regular security intelligence updates, and revenue from these appliances is therefore recognized when ownership is transferred to our customer, typically at shipment.
Platform, cloud subscriptions and managed services
Revenue in the platform, cloud subscription and managed services sub-category consists primarily of revenue from sales of our cloud-based network, email and endpoint security, our detection-on-demand service, our security validation platform, our threat analytics platform (either standalone or within the Helix security platform), our Helix security platform, our standalone threat intelligence subscriptions and our managed detection and response services. The majority of revenue from our platform, cloud subscription and managed services category is recognized ratably over the contractual term, generally one to three years. A small

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portion of our revenue in the platform, cloud subscription and managed services category is derived from term licenses of our security validation platform, and revenue from these sales is recognized when the license key is issued to the customer.
Professional Services
In addition to our product, subscription and support solutions, we offer professional services, including incident response and other strategic security consulting services, to our customers who have experienced a cyber security breach or desire assistance assessing and increasing the resilience of their IT environments to cyber attack. The majority our professional services are offered on a time and materials basis, through a fixed fee arrangement, or on a retainer basis. Revenue from professional services is recognized as services are delivered. Revenue from our Expertise-on-Demand subscription and some pre-paid professional services is deferred, and revenue is recognized when services are delivered. Deferred revenue from professional services as of March 31, 2020 and December 31, 2019 was $88.1 million and $96.4 million, respectively.

Key Business Metrics
We monitor our key business metrics set forth below to help us evaluate growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts, and assess operational efficiencies. We discuss revenue and gross margin below under “Components of Operating Results.” Deferred revenue, annualized recurring revenue, billings (a non-GAAP metric), net cash flow provided by (used in) operating activities, and free cash flow (a non-GAAP metric) are discussed immediately below the following table (in thousands, except percentages).
 
Three Months Ended or As of
 
March 31,
 
2020

2019
Product, subscription and support revenue
$
174,083

 
$
169,903

Professional services revenue
50,639

 
40,641

Total revenue
$
224,722


$
210,544

Year-over-year percentage increase
7
%
 
6
%
Gross margin percentage
64
%
 
66
%
Deferred revenue, (current and non-current)
$
919,856

 
$
906,190

Annualized recurring revenue
$
590,099

 
$
551,507

Billings (non-GAAP)
$
170,011

 
$
181,906