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MOBILEIRON : Management’s Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q) | #corporatesecurity | #businesssecurity | #


The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and related notes included elsewhere in this Quarterly Report on Form
10-Q and our Annual Report on Form 10-K for the year ended December 31, 2018
filed with the SEC. In addition to historical financial information, the
following discussion contains forward-looking statements that reflect our plans,
estimates and beliefs. Our actual results could differ materially from those
contained in or implied by any forward-looking statements. Factors that could
cause or contribute to these differences include those discussed below and
elsewhere in this Quarterly Report on Form 10-Q, particularly in “Special Note
Regarding Forward-Looking Statements” and “Risk Factors.” The forward-looking
statements included in this Quarterly Report on Form 10-Q are made only as of
the date hereof.



Overview


Mobile and cloud computing are the catalysts for modern work and the digital
workplace. Mobile empowers employees to make better decisions and take faster
actions because the information and tools they need to do their jobs are always
available from anywhere. Cloud is transforming IT, Security and DevOps and has
accelerated how the developer ecosystem builds and rolls out innovative services
enabling unparalleled user experience.

However, this comes with new risks. The traditional, locked-down,
perimeter-based approach to security no longer applies to mobile endpoints and
cloud services that operate outside the corporate network. Data no longer
resides behind the firewall on locked-down PCs and servers, and so it cannot be
secured by legacy firewall-based solutions. Instead, data is spread across a
wide variety of modern endpoints including Android, iOS, macOS, Chrome OS and
Windows 10, as well as cloud services such as Box, Concur, Microsoft Office 365,
Netsuite, Salesforce, Workday and custom cloud applications that are hosted on
cloud infrastructure providers like AWS or on-premise.

This shift to mobile and cloud technologies introduces three main challenges
that CIOs and CISOs need to address to realize their secure digital workplace:

1. Drive business innovation by allowing employees to securely use mobile, cloud,

services and on-premises apps from any device, anywhere;

2. Enforce corporate security without impacting the user experience;

3. Redefine enterprise security strategies to address a perimeter-less

     environment.



To solve these challenges, many organizations are in the early stages of
investigating a zero trust security framework for their enterprise. Zero trust
assumes that bad actors are already in the network and secure access is
determined by a “never trust, always verify” approach.

MobileIron is an established player in the zero trust market, and a leader in
mobile-centric, zero trust solutions that go beyond traditional approaches to
security by utilizing a more comprehensive set of attributes to grant secure
access. MobileIron products and services validate the device, establish user
context, check application authorization, verify the network, and detect and
mitigate threats before granting secure access to a device or user. We believe
traditional identity-based and gateway approaches to zero trust fall short
because they provide only limited visibility into devices, applications, and
threats.

We are redefining how customers build a secure foundation in a perimeter-less
world. Our security platform is built on the foundation of unified endpoint
management (UEM) with additional zero trust capabilities including zero sign-on
(ZSO), multifactor authentication (MFA), and mobile threat defense (MTD).
Together these products and services create a more seamless mobile experience by
automating access control decisions across users, endpoints, operating systems,
clouds, networks, threats, and vulnerabilities so that only trusted resources
can access corporate data.

Our customers can deploy MobileIron solutions as either cloud services or
on-premise software. They have historically been able to choose to purchase our
on-premise software priced as a subscription or perpetual license. However, we
plan to discontinue the sale of on-premise software priced as a perpetual
license beginning the third quarter


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of 2020. We target midsize and large enterprises around the world across a broad
range of industries including financial services, government, healthcare, legal,
manufacturing, professional services, retail, technology, and
telecommunications.

In March 2020, the World Health Organization characterized COVID-19 as a
pandemic and the President of the United States declared the COVID-19 outbreak a
national emergency. Since then, the COVID-19 pandemic has rapidly spread across
the globe and has already resulted in significant volatility, uncertainty and
economic disruption. While the COVID-19 pandemic has not had a material adverse
financial impact on our operations to date, the future impacts of the pandemic
and any resulting economic impact are largely unknown and rapidly evolving. It
is difficult at this time to predict the impact that COVID-19 will have on our
business, financial position and operating results in future periods due to
numerous uncertainties. We are closely monitoring the impact of the pandemic on
all aspects of our business.

Our total revenue in the three months ended March 31, 2020 was $49.7 million,
compared to $48.1 million in the three months ended March 31, 2019, representing
an increase of 3%.

Revenue from cloud services, licenses and software support and services
represented 38%, 18% and 44% of total revenue, respectively, in the three months
ended March 31, 2020, and 32%, 24% and 44% of total revenue, respectively, in
the three months ended March 31, 2019. This represents a continuing mix shift in
our business. Revenue from recurring sources, which includes revenue from the
license component of on-premise term subscriptions, cloud services, and software
support on perpetual and on-premise term licenses, was 86% of total revenue in
the three months ended March 31, 2020, compared to 83% of total revenue in the
three months ended March 31, 2019.

Our cloud services revenue in the three months ended March 31, 2020 and 2019 was
$18.6 million and $15.3 million, respectively, representing an increase of
22%. This growth reflects contributions from MobileIron Threat Detection and
Access and our customers’ preference to purchase cloud services. When we sell
our cloud solutions on a subscription basis, we typically offer 12 months or
longer terms and bill in advance.

Our license revenue in the three months ended March 31, 2020 and 2019 was $9.0
million
and $11.4 million, respectively, representing a decrease of 21%. The
decline in license revenue was due to a decrease in revenue from perpetual
licenses and license fees recognized from on-premise subscriptions. We have
generally seen a decrease in demand for our perpetual licenses and a mix shift
in favor of subscriptions, particularly cloud, rather than perpetual licenses.

In the first quarter of 2020, we announced the discontinuation of perpetual
license sales for our on-premise solution beginning the third quarter of 2020
and, consequently, we anticipate that license revenue may decrease more
dramatically for a period of time as license revenue will be generated primarily
from sales of on-premise subscriptions which do not generate as much up-front
license revenue as perpetual licenses.

Our software support and services revenue in the three months ended March 31,
2020
and 2019 was $22.1 million and $21.5 million, respectively, representing an
increase of 3%. Software support and services revenue includes support of
perpetual license customers, the support component of on-premise subscriptions,
and professional services. The growth rate of software support and services
revenue is primarily dependent on growth in our installed base of customers that
purchase perpetual licenses or on-premise subscriptions, renewals of on-premise
subscriptions and software support on perpetual licenses, and purchases of
professional services as part of our solutions.

Our Annual Recurring Revenue (or “Total ARR”) at March 31, 2020 was $180.8
million
compared to $167.2 million at March 31, 2019, representing a growth rate
of 8%. See “Key Metrics and Non-GAAP Financial Information” for more information
about ARR.

We sell a significant portion of our products through our channel partners,
including resellers, service providers and system integrators. Our sales force
develops sales opportunities and works closely with our channel partners to sell
our solutions. We have a high touch sales force focused on large organizations,
inside sales teams focused on mid-sized enterprises and sales teams that work
with service providers that focus on smaller businesses. We prioritize our
internal sales and marketing efforts on large organizations because we believe
that they represent the largest potential opportunity.



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We believe that our market opportunity is large, and sales to customers outside
of the United States will remain a significant opportunity for future growth. In
the three months ended March 31, 2020 and the full years of 2019 and 2018,
57%, 58% and 58%, respectively, of our total revenue was generated from
customers located outside of the United States, primarily those located in
Europe. International market trends that may affect sales of our products and
services include heightened concerns and legal requirements relating to data
security and privacy, the importance of execution on our international channel
partner strategy, the importance of recruiting and retaining sufficient
international personnel, the effect of exchange rates, and political and
financial market instability.

Since 2016, we have focused on driving more efficiency in our business. However,
we have continued to incur net losses. We incurred net losses of $12.7 million,
$48.8 million and $43.1 million in the three months ended March 31, 2020, and
the full years 2019 and 2018, respectively. As a result of this, we do not
expect to be profitable for the foreseeable future under our current operating
plan. Future profitability is primarily dependent on revenue growth, which may
be challenging for a number of reasons including likely continued mix shift
towards cloud subscription licensing, increasing and entrenched competition,
product features, changes in our pricing model, the amount of revenue we
generate from sales of partner solutions that bear royalties, our ability to
continue to develop and evolve our products, any failure to capitalize on market
opportunities, and the ability of our sales organization to retain its key
employees and leadership team. Future profitability is also dependent on our
ability to drive efficiencies into the business and to manage our expenses,
which continue to be impacted by stock-based compensation charges from RSU and
PSU grants and stock-settled bonuses. We will also need to increase operating
efficiency, which may be challenging given our operational complexity.

While we did not see a material adverse financial impact from COVID-19 in our
first quarter of 2020, our future financial position may be impacted by the loss
of current customers or prospects, delays in existing customer renewals or new
customer purchases, limitation in our ability to expand or upsell within our
existing customer base, pricing pressure, or by our customers’ inability to pay
amounts owed to us. While it is too early to determine the amount of the future
financial impact from COVID-19, shelter-in-place mandates across the world have
disrupted certain of our ARR growth drivers as the priorities of IT leaders have
shifted. As a result of those and other priority changes, as well as the
economic toll that COVID-19 will have on our customers, we expect a negative
impact on our ARR and revenue, and likely on our net loss as well, until the
pandemic is contained and likely for an unknown period of time thereafter.
Because of our IT infrastructure and the nature of our business, our employees
mostly have been able to work remotely and productively despite the
shelter-in-place requirements, but future productivity and the effects of
COVID-19 on our operations is unknown.

Critical Accounting Policies

The preparation of financial statements in conformity with U.S. GAAP requires
management to make judgments, estimates and assumptions in the preparation of
our consolidated financial statements and accompanying notes. Actual results
could differ from those estimates.

Recent Accounting Pronouncements

For discussion on recent accounting pronouncements, see “Summary of Significant
Accounting Policies” under Note 1 “Description of Business and Significant
Accounting Policies” included in Item 1, “Financial Statements” of Part I of
this Quarterly Report on Form 10-Q.



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Application of Critical Accounting Policies

Our consolidated financial statements and accompanying notes are prepared in
accordance with U.S. GAAP. Preparing consolidated financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenue, and expenses. These estimates and assumptions are
affected by management’s application of accounting policies.

Revenue Recognition

We derive revenue from software-related arrangements consisting of perpetual
software licenses, post-contract customer support for such licenses, or PCS or
software support, including when and if available updates, and professional
services such as consulting and training services. We also offer our software as
term-based licenses and cloud-based arrangements.

Our contracts with customers often include promises to transfer multiple
products and services to a customer. Determining whether products and services
are considered distinct performance obligations that should be accounted for
separately versus together may require significant judgment.

Judgment is also required to determine the stand-alone selling price (“SSP”) for
each distinct performance obligation. We use a single amount to estimate SSP for
items that are not sold separately, including on-premises licenses sold with
software support. We use a range of amounts to estimate SSP when we sell our
products and services separately and need to determine whether there is a
discount that needs to be allocated based on the relative SSP of the various
products and services.

We typically have more than one SSP for individual products and services due to
the stratification of those products and services by customers and
circumstances. In these instances, we may use information such as the size of
the customer in determining the SSP.

Our products are sometimes sold with a right of refund which we have to consider
when estimating the amount of revenue to recognize.

Commissions

Current accounting principles require us to defer commission costs and amortize
them in a manner consistent with how we recognize revenue. Key judgments that
impact our commission expense include estimating our customer life and the
determination of the impairment of commission assets we deem to be
unrecoverable.




Goodwill

We record the excess of the acquisition purchase price over the fair value of
the tangible and identifiable intangible assets acquired as goodwill. We perform
an impairment test of our goodwill in the third quarter of our fiscal year, or
more frequently if indicators of potential impairment arise. We have a single
reporting unit and consequently evaluate goodwill for impairment based on an
evaluation of the fair value of the Company as a whole. We evaluated our
goodwill for impairment in 2019 and 2018 and observed no impairment indicators.
As part of this, we observed that the fair value of the Company as a whole is
substantially in excess of its carrying value, including goodwill.

Stock-Based Compensation

Stock-based compensation costs related to restricted stock and stock options
granted to employees are measured at the date of grant based on the estimated
fair value of the award, net of estimated forfeitures. We estimate the grant
date fair value, and the resulting stock-based compensation expense, using the
Black-Scholes option-pricing model. For stock awards, we recognize compensation
costs on a straight-line basis over the requisite service period of the award,
which is generally the vesting term of four years.

We estimate the fair value of the rights to acquire stock under our ESPP using
the Black-Scholes option pricing formula. Our ESPP typically provides for
consecutive 24 month offering periods, consisting of four tranches. We


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recognize compensation expense on an accelerated-graded basis over the
employee’s requisite service period. We account for the fair value of restricted
stock units, or RSUs, and, beginning 2020, performance stock units, or PSUs,
using the closing market price of our common stock on the date of grant. RSUs
granted to existing employees typically vest ratably on a quarterly basis over
four years. RSUs granted to new employees typically vest one-fourth after one
year and ratably on a quarterly basis over the following three years. Based on
achievement relative to certain company metrics, one-fourth of PSUs vest in the
first quarter of the year after grant and the remaining PSUs vest ratably on a
quarterly basis over the following three years. We recognize compensation
expense for RSUs on a straight-line basis over the employee’s requisite service
period. We recognize compensation expense for PSUs on an accelerated-graded
basis over the employee’s requisite service period and the expense may be
adjusted each quarter based on our forecast of the Company’s performance
relative to the metrics that determine the number of PSUs that will vest.

Stock-based compensation expense associated with our stock-settled bonus program
is recognized on a straight-line basis over the required service period and the
expense is evaluated each quarter based on our forecast of the Company’s
performance relative to the metrics that determine the bonus pool.



Income Taxes


We account for income taxes in accordance with ASC Topic 740, Income Taxes,
under which deferred tax liabilities and assets are recognized for the expected
future tax consequences of temporary differences between financial statement
carrying amounts and the tax basis of assets and liabilities and net operating
loss and tax credit carryforwards. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.

We currently have a full valuation allowance against our U.S. net deferred tax
assets, which was $117.7 million as of December 31, 2019. We continue to monitor
the relative weight of positive and negative evidence of future profitability in
relevant jurisdictions. The allowance will be released if evidence indicates
that it becomes more likely than not that the tax asset may be utilized.

Key Metrics and Non-GAAP Financial Information

To supplement our financial results presented on a U.S. GAAP basis, we provide
investors with certain non-GAAP financial measures, including non-GAAP gross
profit, non-GAAP gross margin, non-GAAP operating loss, non-GAAP operating
margin, non-GAAP net loss, non-GAAP net loss per share and free cash flow. These
non-GAAP financial measures exclude stock-based compensation and restructuring
expense.

Stock-based compensation expenses

In our non-GAAP financial measures, we have excluded the effect of stock-based
compensation expenses. Stock-based compensation expenses will recur in future
periods in varying amounts.



Restructuring expense


In our non-GAAP financial measures, we have excluded the effect of expenses
associated with severance and other expenses related to reductions in our
workforce. Restructuring expense may recur in the future; however, the timing
and amounts are difficult to predict.

Non-GAAP gross profit, non-GAAP gross margin, non-GAAP operating loss, non-GAAP
operating margin, non-GAAP net loss, and non-GAAP net loss per share

We believe that the exclusion of stock-based compensation expense and
restructuring expense from various gross profit, gross margin, operating loss,
operating margin, net loss, and net loss per share provides useful measures for
management and investors. Because stock-based compensation and restructuring
expense have been and can continue to be inconsistent in amount from period to
period, we believe the inclusion of these items makes it difficult to compare
periods and understand the growth and performance of our business, on its own
and in comparison to other companies. In addition, we evaluate our business
performance and compensate management based in part on these non-GAAP measures.
There are limitations in using non-GAAP financial measures because the non-GAAP
financial measures are


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not prepared in accordance with GAAP, may be different from non-GAAP financial
measures used by our competitors and exclude expenses that may have a material
impact on our reported financial results. Further, stock-based compensation
expense has been and will continue to be for the foreseeable future a
significant recurring expense in our business and an important part of the
compensation provided to our employees.

Free Cash Flow

Our non-GAAP financial measures also include free cash flow, which we define as
cash provided by (used in) operating activities less the amount of property and
equipment purchased. Management believes that information regarding free cash
flow provides investors with an important perspective on the cash available to
invest in our business and fund ongoing operations. However, our calculation of
free cash flow may not be comparable to similar measures used by other
companies.

We believe these non-GAAP financial measures are helpful in understanding our
past financial performance and our future results. Our non-GAAP financial
measures are not meant to be considered in isolation or as a substitute for
comparable GAAP measures and should be read only in conjunction with our
consolidated financial statements prepared in accordance with GAAP. Our
management regularly uses our supplemental non-GAAP financial measures
internally to understand, manage and evaluate our business, and make operating
decisions. These non-GAAP measures are among the primary factors management uses
in planning for and forecasting future periods. Compensation of our executives
is based in part on the performance of our business relative to certain of these
non-GAAP measures.




Non-GAAP financial measures for the three months ended March 31, 2020 and 2019
were as follows (unaudited):




                                                             Three Months Ended
                                                                 March 31,
  (in thousands, except percentages and per share data)      2020         2019
  Non-GAAP gross profit                                    $  39,724$  39,336
  Non-GAAP gross margin                                         79.9 %       81.8 %
  Non-GAAP operating loss                                  $ (3,960)$ (6,150)
  Non-GAAP operating margin                                    (8.0) %     (12.8) %
  Non-GAAP net loss                                        $ (4,509)$ (6,195)
  Non-GAAP loss per share                                  $  (0.04)$  (0.06)
  Free cash flow                                           $   7,074$   7,639




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Reconciliation of Non-GAAP Financial Measures

The following table reconciles the most directly comparable GAAP financial
measure to each of the non-GAAP financial measures discussed above.




                                                           Three Months Ended
                                                               March 31,
                                                          2020           2019

(in thousands, except percentages and per share

data)

Non-GAAP gross profit reconciliation:

 Gross profit                                          $    38,826$    37,719
 Add: Stock-based compensation expense                         898          1,541
 Add: Restructuring expense                                      -             76
 Non-GAAP gross profit                                 $    39,724$    39,336

Non-GAAP gross margin reconciliation:

GAAP gross margin: GAAP gross profit over GAAP

 total revenue                                                78.1 %         78.4 %
 GAAP to non-GAAP gross margin adjustments                     1.8 %          3.4 %
 Non-GAAP gross margin                                        79.9 %         81.8 %

Non-GAAP operating loss reconciliation:

 GAAP operating loss                                   $  (12,112)$  (17,055)
 Add: Stock-based compensation expense                       7,573         10,290
 Add: Restructuring expense                                    579            615
 Non-GAAP operating loss reconciliation:               $   (3,960)$   (6,150)

Non-GAAP operating margin reconciliation:

GAAP operating margin: GAAP operating profit over

 GAAP total revenue                                         (24.4) %       (35.5) %
 GAAP to non-GAAP operating margin adjustments                16.4 %         22.7 %
 Non-GAAP operating margin                                   (8.0) %       (12.8) %

Non-GAAP net loss reconciliation:

 GAAP net loss                                         $  (12,661)$  (17,100)
 Add: Stock-based compensation expense                       7,573         10,290
 Add: Restructuring expense                                    579            615
 Non-GAAP net loss reconciliation:                     $   (4,509)$   (6,195)

Non-GAAP net loss per share reconciliation:

 GAAP net loss                                         $    (0.11)$    (0.16)
 Add: Stock-based compensation expense                        0.07           0.10
 Add: Restructuring expense                                      -              -
 Non-GAAP net loss per share                           $    (0.04)$    (0.06)

Free cash flow:

 Net cash provided by operating activities             $     7,167$     7,816
 Purchase of property and equipment                           (93)          (177)
 Free cash flow                                        $     7,074$     7,639




Annual Recurring Revenue


We utilize the operating metric, total annual recurring revenue (“Total ARR”),
which is defined as the annualized value of all recurring revenue contracts
active at the end of a reporting period. Total ARR includes the annualized value
of subscriptions (“Subscription ARR”) and the annualized value of software
support contracts related to perpetual licenses (“Perpetual license support
ARR”) active at the end of a reporting period and does not include revenue
reported as perpetual license or professional services in our consolidated
statement of operations. We are monitoring these metrics because they align with
how our customers are increasingly purchasing our solutions and how we are
managing our business. These ARR measures should be viewed independently of
revenue, unearned revenue, and customer arrangements with termination rights as
ARR is an operating metric and is not intended to be combined with or replace
those items. ARR is not an indicator of future revenue and can be impacted by
contract start and end dates and renewal rates.

ARR metrics as of March 31, 2020 and 2019 were as follows (unaudited):





                                            March 31,

(in thousands, except percentages) 2020 2019
Total ARR

                             $ 180,821$ 167,185
Year-over-year percentage increase            8 %         18 %
Subscription ARR                      $ 115,326$ 100,421
Year-over-year percentage increase           15 %         29 %

Perpetual license support ARR $ 65,495$ 66,764
Year-over-year percentage increase (2) % 3 %


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Results of Operations



Revenue



Cloud Services


Cloud services include sales of cloud-based solutions that allow customers to
use hosted software over a contract period without taking possession of our
software and are typically provided on a subscription or usage basis. We
recognize revenue from cloud-based subscriptions ratably over the term of the
subscriptions or, if usage based, as the usage is billed.



License


License revenue consists primarily of revenue from on-premises perpetual
licenses and the license portion of on-premise subscriptions. From time to time,
we enter into multiple element arrangements with customers in which a customer
purchases our software with an appliance. Appliance revenues are also included
in license revenue and constituted less than 1% of total revenue for the three
months ended March 31, 2020 and 2019.

Software support and services

Software support and services revenue consists of revenue from agreements to
provide software upgrades and updates, as well as technical support, to
customers with perpetual software licenses, on-premise subscriptions, and
professional services. Revenue from software support for both perpetual and
on-premise subscriptions is recognized ratably over the support or subscription
term. Revenue from professional services is recognized as work is performed.



Cost of Revenue



Cloud Services


Our cloud services cost of revenue consists of cloud service data center
operations expense, the portion of our global Customer Success organization (See
Software
support and services below) associated with our cloud services
business, and third-party royalties. Cloud service data center operations
expenses primarily consist of personnel costs, stock-based compensation,
third-party hosting facilities, telecommunication and information technology
costs. We expect cloud services cost of revenue to increase if we continue to
increase sales of MobileIron Threat Defense or other royalty-bearing cloud
solutions and as we scale our data center operations team and infrastructure to
support our growing cloud business.



License


Our cost of license revenue consists of the cost of third-party software
royalties, and appliances.




Software support and services



Our software support and services cost of revenue consists of the portion of our
global Customer Success organization expenses associated with our software
support business and third-party royalties. Costs associated with our global
Customer Success organization include our customer support, professional
services, customer advocacy, and training teams. These costs consist of
personnel costs, stock-based compensation, depreciation, facilities and
information technology costs.



Gross Margin


Gross margin, or gross profit as a percentage of total revenue, has been and
will continue to be affected by various factors, including mix between large and
small customers, mix of products sold, including our MobileIron Threat Defense
which bears a royalty, mix between perpetual, on-premises and cloud subscription
licenses, timing of revenue


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recognition and the extent to which we expand our global Customer Success
organization and data center operations, including costs associated with
third-party hosting facilities and stock-based compensation expense associated
with grants of equity awards. We expect our gross margins to decline somewhat
over the short term based on the factors described above.



Operating Expenses


Personnel costs are the most significant component of operating expenses and
consist of salaries, benefits, bonuses, stock-based compensation and, in sales
and marketing expense, sales commissions. While operating expenses, exclusive of
stock-based compensation expense, may fluctuate as a percentage of total revenue
from period to period, we expect them to decrease over the long term as a
percentage of total revenue. Stock-based compensation expense may fluctuate
depending on the size and timing of RSU and PSU grants and achievement under
stock-settled bonus plans.

Research and Development Expenses

Research and development costs are expensed as incurred. Research and
development expense consists primarily of personnel costs. Research and
development expense also includes costs associated with contractors and
consultants, equipment and software to support our development and quality
assurance teams, facilities and information technology. While our research and
development expense, exclusive of stock-based compensation expense, may
fluctuate as a percentage of total revenue from period to period, we expect it
to decrease as a percentage of total revenue over the long term.



Sales and Marketing Expenses


Sales and marketing expense consists primarily of personnel costs, including
sales commissions. Sales and marketing expense also includes costs associated
with third-party events, lead generation campaigns, promotional and other
marketing activities, as well as travel, equipment and software depreciation,
consulting, information technology and facilities. While our sales and marketing
expense, exclusive of stock-based compensation expense, may fluctuate as a
percentage of total revenue from period to period, we expect it to decrease as a
percentage of total revenue over the long term.

General and Administrative Expenses

General and administrative expense consists of personnel costs, travel,
information technology, facilities and professional services fees. General and
administrative personnel include our executive, finance, human resources and
legal organizations. Professional services fees consist primarily of litigation,
other legal, accounting and consulting costs. While our general and
administrative expense, exclusive of stock-based compensation expense, may
fluctuate as a percentage of total revenue from period to period, we expect it
to decrease as a percentage of total revenue over the long term.



Restructuring Expense


Restructuring expense consists of severance and other expenses related to
reductions in our workforce. Restructuring expense may recur in the future;
however, the timing and amounts are difficult to predict.



Other Income (Expense)-Net


Other income (expense), net consists primarily of interest income earned on our
cash and cash equivalents and fixed income securities and the effect of exchange
rates on our foreign currency-denominated asset and liability balances and
foreign currency transactions. All translation adjustments are recorded as
foreign currency gains (losses) in the consolidated statements of operations.



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Income Tax Expense


Income tax expense consists primarily of income taxes in foreign jurisdictions
in which we conduct business. Due to our history of losses, we maintain a full
valuation allowance for deferred tax assets including net operating loss
carry-forwards, research and development tax credits, capitalized research and
development and other book versus tax differences.

Consolidated Results of Operations

The following tables summarize our results of operations for the periods
presented and as a percentage of our total revenue for those periods. The
period-to-period comparison of results is not necessarily indicative of results
for future periods.

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