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MOBL > SEC Filings for MOBL > Form 10-Q on 7-Aug-2014All Recent SEC Filings

Show all filings for MOBILEIRON, INC.

Form 10-Q for MOBILEIRON, INC.


7-Aug-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion of our financial condition and results of operations in conjunction with the consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the 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

We invented a purpose-built mobile IT platform for enterprises to secure and manage mobile applications, content and devices while providing their employees with device choice, privacy and a native user experience. Customers use our platform as the technology foundation in their journey to become "Mobile First" organizations, embracing mobility as a primary computing platform for their employees. Our platform is extensible and fosters a growing ecosystem of application developers and technology partners who augment the functionality and add value to our platform, creating positive network effects for our customers, our ecosystem and our company.

Our platform is composed of three integrated and distributed software components: a mobile IT policy server ("Core") that allows IT to define security and management policies across popular mobile operating systems, software on the device ("Client") to enforce those policies at the mobile end-point, and an intelligent gateway ("Sentry") that secures data as it moves between the device and back-end enterprise systems. Each component is distributed to accommodate corporate IT environments and integrated into a single solution for a simplified management experience. Customers, independent application vendors and technology vendors leverage our extensible interfaces to add value to our platform, and in turn, mobilize and secure their applications and content.

We were founded in 2007 and spent our first two years focused on the development of our mobile IT platform. In 2009, we released our mobile IT platform to customers globally. We have continued to introduce new products and functionality to address the management and security of mobile applications and content and have extended our solution to a cloud offering to enable deployment flexibility for our customers. In 2012 and 2013, we released Docs@Work and Web@Work, content, application and web modules that allow our customers to easily and securely access documents and run third-party and enterprise applications, and launched our AppConnect ecosystem. In the first half of 2014, we launched Help@Work, focused on IT support, Tunnel, our per-app VPN solution for iOS 7, MobileIron Insight, which enables IT to support devices from mobile devices, and MobileIron Spaces, that allows IT departments to establish data and task boundaries to protect user privacy and provide flexible delegation of IT responsibility.

Our business model is based on winning new customers, expanding sales within existing customers, upselling new products and renewing subscriptions and software support agreements. We win customers using a sales force that works closely with our channel partners, including resellers, service providers and system integrators.

We offer our customers the flexibility to use our software as a cloud service or to deploy it on-premise. They can also choose from various pricing options including subscription and perpetual licensing and pricing based on the number of users or devices. We target customers of all sizes across a broad range of industries including financial services, government, healthcare, legal, manufacturing, professional services, retail, technology and telecommunications.

We sell our products almost entirely 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 Global 2000 organizations, inside sales teams focused on mid-sized enterprises and sales teams that work in conjunction with service providers that focus on smaller businesses. We prioritize our internal sales and marketing efforts on potential customers that are members of the Global 2000 because we believe that they represent the largest potential opportunity.

We derive revenue from sales of our software solutions to customers, which are sold either (i) on a perpetual license basis with annual software support when deployed on-premise or (ii) on a subscription basis, which can be either deployed on premise or used as a cloud service. When we sell our solutions on a subscription basis, we generally offer a one-year term and bill customers in advance. A portion of our revenues through service providers is based on active subscriptions billed on a monthly basis. We include this revenue in subscription revenue and refer to this revenue as monthly recurring charge, or MRC.

Our gross billings, as defined below, were $34.9 million and $65.2 million in the three and six months ended June 30, 2014, representing growth rates of 73% and 52% from the corresponding periods of 2013.

Our total revenue was $31.5 million and $59.7 million in the three and six months ended June 30, 2014, respectively, representing growth rates of 25% and 17% from the corresponding periods of 2013. Because we had not established VSOE of the fair value of software support and services prior to January 1, 2013, we recognized perpetual license revenue ratably over the term of the


related software support agreement. Upon establishing VSOE on January 1, 2013, we began to recognize perpetual license revenue upon delivery assuming all other revenue recognition criteria were met. As a result, our total revenue includes amounts related to licenses delivered in previous years. Excluding $1.4 million and $3.0 million, respectively, of revenue recognized in the three and six months ended June 30, 2014 from perpetual licenses delivered prior to 2013, our total revenue was $30.1 million and $56.7 million, respectively, representing growth rates of 56% and 51% over the corresponding periods of 2013.

We believe that our market opportunity is large and global and sales to customers outside of the United States will remain a significant opportunity for future growth. In the three and six months ended June 30, 2014, 43% 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 and privacy, the importance of execution on our international channel partners strategy, and the importance of recruiting and retaining sufficient international personnel. International revenue for the three and six months ended June 30, 2014 was $13.8 million and $25.7 million compared to $11.6 million and $23.8 million for the corresponding periods in 2013. Domestic revenue for the three and six months ended June 30, 2014 was $17.6 million and $34.0 million, respectively, compared to $13.5 million and $27.2 million for the corresponding periods in 2013.

Over the past year, we have significantly increased our expenditures to support the development and expansion of our business, which has resulted in continuing losses. We plan to continue to invest for future growth, including additional investment in sales and marketing and research and development, and as a result, we do not expect to be profitable for the foreseeable future. Under our current operating plan, future profitability is dependent upon continued revenue growth. We have incurred net losses of $31.1 million and $9.3 million in the six months ended June 30, 2014 and 2013, respectively.

Critical Accounting Policies

The preparation of financial statements in conformity with generally accepted accounting principles 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. We believe there have been no significant changes in our critical accounting policies from those described in our Prospectus filed with the SEC on June 12, 2014.

Recent Accounting Pronouncements

In May 2014, the FASB, jointly with the International Accounting Standards Board, issued a comprehensive new standard on revenue recognition from contracts with customers. The standard's core principle is that a reporting entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying this new guidance to contracts within its scope, an entity will: (1) identify the contract(s) with a customer, (2) identify the performance obligation in the contract,
(3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. Additionally, this new guidance would require significantly expanded disclosures about revenue recognition. Provisions of this new standard are effective for annual reporting periods (including interim reporting periods within those annual periods) beginning after December 15, 2016. Early application is not permitted. Entities have the option of using either a full retrospective or a modified retrospective approach to adopt this new guidance. We are currently evaluating the potential effect on our consolidated financial statements from adoption of this standard.

Key Metrics and Non-GAAP Financial Information

To supplement our financial results presented on a GAAP basis, we provide investors with certain non-GAAP financial measures, including gross billings, recurring billings, non-GAAP revenue, non-GAAP gross profit, non-GAAP gross margin, non-GAAP operating loss, non-GAAP operating margin, non-GAAP net loss, and non-GAAP EPS. These non-GAAP financial measures exclude stock-based compensation, the amortization of intangible assets, and perpetual license revenue recognized from licenses delivered prior to 2013. These non-GAAP financial measures reflect adjustments based on the following items:

Perpetual license revenue recognized from licenses delivered prior to 2013

We have excluded the effect of perpetual license revenue recognized from licenses delivered prior to 2013 from revenue, gross profit, gross margin, operating loss, operating margin, net loss, and earnings per share. Because we had not established vendor specific


objective evidence, or VSOE, of fair value of software support and services prior to January 1, 2013, we recognized perpetual license revenue ratably over the term of the related software support agreement. Upon establishing VSOE on January 1, 2013, we began to recognize perpetual license revenue upon delivery assuming all other revenue recognition criteria are met. As a result, our perpetual license revenue includes amounts related to licenses delivered prior to 2013. Revenue from these perpetual licenses delivered prior to 2013 has declined over each quarter since the quarter ended March 31, 2013 and will continue to decline sequentially until it is fully amortized.

Stock-based compensation expenses

We have excluded the effect of stock-based compensation expenses from our gross profit, gross margin, operating loss, operating margin, net loss, and earnings per share. Stock-based compensation expenses will recur in future periods.

Amortization of intangible assets

We have excluded the effect of amortization of intangible assets from our gross profit, gross margin, operating loss, operating margin, net loss, and earnings per share. Amortization of intangible assets is significantly affected by the timing and size of our acquisitions. Amortization of intangible assets will recur in future periods.

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

We believe that the exclusion of perpetual license revenue recognized from licenses delivered prior to 2013, stock-based compensation expense, and amortization of intangible assets, as relevant, from revenue, gross profit, gross margin, operating loss, operating margin, net loss, and earnings per share provides useful measures for management and investors because revenue recognized from licenses delivered prior to 2013 has and will continue to significantly decline over time until it is fully amortized and stock-based compensation and the amortization of intangible assets 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. In addition, we evaluate our business performance and compensate management based on these non-GAAP measures. There are limitations in using non-GAAP financial measures because the non-GAAP financial measures are not prepared in accordance with GAAP, may be different from non-GAAP financial measures used by our competitors and exclude expenses that may have a material impact upon 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. Similarly, amortization of intangible assets has been and will continue to be a recurring expense and has and will continue to contribute to our revenue earned.

Gross and recurring billings and free cash flow

Our non-GAAP financial measures also include: gross billings, which we define as total revenue plus the change in deferred revenue in a period; recurring billings, which we define as total revenue less perpetual license, hardware, and professional services revenue plus the change in deferred revenue for subscription and software support arrangements in a period, adjusted for nonrecurring perpetual license billings; and free cash flow, which we define as cash used in operating activities less the amount of purchase of property and equipment. We consider gross billings to be a useful metric for management and investors because gross billings drive deferred revenue, which is an important indicator of the health and visibility of our business. Similarly, we consider recurring billings to be a useful metric because recurring billings drive software support and subscription deferred revenue, which is an important indicator of the portion of our business that we would expect to recur each year. There are a number of limitations related to the use of gross and recurring billings versus revenue calculated in accordance with GAAP. First, gross and recurring billings include amounts that have not yet been recognized as revenue. Second, our calculation of gross and recurring billings may be different from other companies that report similar financial measures. We compensate for these limitations by providing specific information regarding GAAP revenue and evaluating gross and recurring billings together with revenue calculated in accordance with GAAP. 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 based on certain of these non-GAAP measures.

We monitor the following non-GAAP financial measures:

                                      Three Months Ended,              Six Months Ended,
                                           June 30,                         June 30,
(in thousands, except percentages
and per share data)                  2014             2013            2014            2013
Non-GAAP total revenue            $    30,039      $   19,209      $   56,694      $   37,557
Year-over-year percentage
increase                                   56 %             -              51 %             -
Gross billings                    $    34,941      $   20,248      $   65,239      $   42,831
Year-over-year percentage
increase                                   73 %             -              52 %             -
Recurring billings                $    18,509      $    8,871      $   34,267      $   17,701
Percentage of gross billings               53 %            44 %            53 %            41 %
Non-GAAP gross profit             $    24,628      $   15,462      $   46,216      $   30,245
Non-GAAP gross margin                    82.0 %          80.5 %          81.5 %          80.5 %
Non-GAAP operating loss           $   (13,391 )    $   (9,765 )    $  (26,174 )    $  (17,847 )
Non-GAAP operating margin               (44.6 %)        (50.8 %)        (46.2 %)        (47.5 %)
Non-GAAP net loss                 $   (13,597 )    $   (9,887 )    $  (26,595 )    $  (18,105 )
Non-GAAP loss per share           $     (0.52 )    $    (1.02 )    $    (1.43 )    $    (1.92 )
Free cash flow                    $   (10,678 )    $   (6,536 )    $  (21,511 )    $  (10,240 )


Reconciliation of Non-GAAP Financial Measures

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



                                   Three Months Ended                Six Months Ended
                                        June 30,                         June 30,
                                  2014            2013             2014            2013
(in thousands, except
percentages and per share
data)
Non-GAAP total revenue
reconciliation:
GAAP total revenue             $    31,467     $    25,155      $    59,680     $    50,976
Subtract: Perpetual license
revenue recognized from
licenses delivered prior to
2013                                (1,428 )        (5,946 )         (2,986 )       (13,419 )
Non-GAAP total revenue:        $    30,039     $    19,209      $    56,694     $    37,557
Gross billings reconciliation:               .
Total revenue                  $    31,467     $    25,155      $    59,680     $    50,976
Total deferred revenue, end of
period(1)                           46,310          37,355           46,310          37,355
Less: Total deferred revenue,
beginning of
  period                           (42,836 )       (42,262 )        (40,751 )       (45,500 )
Total change in deferred
revenue                              3,474          (4,907 )          5,559          (8,145 )
Gross billings                 $    34,941     $    20,248      $    65,239     $    42,831
Recurring billings
reconciliation:
Total revenue                  $    31,467     $    25,155      $    59,680     $    50,976
Less: Perpetual license
revenue                            (15,933 )       (17,243 )        (30,608 )       (36,437 )
Less: Professional services
revenue                               (638 )          (412 )         (1,217 )          (813 )
Subscription and software
support deferred
  revenue, end of period(1)         38,226          19,689           38,226          19,689
Less: Subscription and
software support
  deferred revenue, beginning
of period                          (33,947 )       (18,046 )        (30,468 )       (14,712 )
Total change in subscription
and software
  support deferred revenue           4,279           1,643            7,758           4,977
Less: Adjustments(2)                  (666 )          (272 )         (1,346 )        (1,002 )
Recurring billings             $    18,509     $     8,871      $    34,267     $    17,701
Non-GAAP gross profit
reconciliation:
Gross profit                   $    25,559     $    21,268      $    48,535     $    43,374
Add: Stock-based compensation
expense                                328              70              429             151
Add: Amortization of
intangible assets                      169              70              238             139
Subtract: Perpetual license
revenue recognized from
licenses delivered prior to
2013                                (1,428 )        (5,946 )         (2,986 )       (13,419 )
Non-GAAP gross profit          $    24,628     $    15,462      $    46,216     $    30,245
Non-GAAP gross margin
reconciliation:
GAAP gross margin: GAAP gross
profit over GAAP total revenue        81.2 %          84.5 %           81.3 %          85.1 %
GAAP to non-GAAP gross margin
adjustments                            0.8 %          (4.0 %)           0.2 %          (4.6 %)
Non-GAAP gross margin                 82.0 %          80.5 %           81.5 %          80.5 %
Non-GAAP operating loss
reconciliation:
GAAP operating loss            $   (16,905 )   $    (6,078 )    $   (30,652 )   $    (9,084 )
Add: Stock-based compensation
expense                              4,408           2,137            6,809           4,413
Add: Amortization of
intangible assets                      534             122              655             243
Subtract: Perpetual license
revenue recognized from
licenses delivered prior to
2013                                (1,428 )        (5,946 )         (2,986 )       (13,419 )
Non-GAAP operating loss        $   (13,391 )   $    (9,765 )    $   (26,174 )   $   (17,847 )

--------------------------------------------------------------------------------
Non-GAAP operating margin
reconciliation:
GAAP operating margin: GAAP
operating profit over GAAP
total revenue                        (53.7 %)         (24.2 %)         (51.4 %)         (17.8 %)
GAAP to non-GAAP operating
margin adjustments                     9.1 %          (26.6 %)           5.2 %          (29.7 %)
Non-GAAP operating margin            (44.6 %)         (50.8 %)         (46.2 %)         (47.5 %)
Non-GAAP net loss
reconciliation:
GAAP net loss                  $   (17,111 )    $    (6,200 )    $   (31,073 )    $    (9,342 )
Add: Stock-based compensation
expense                              4,408            2,137            6,809            4,413
Add: Amortization of
intangible assets                      534              122              655              243
Subtract: Perpetual license
revenue recognized from
licenses delivered prior to
2013                                (1,428 )         (5,946 )         (2,986 )        (13,419 )
Non-GAAP net loss              $   (13,597 )    $    (9,887 )    $   (26,595 )    $   (18,105 )
Non-GAAP EPS reconciliation:
GAAP earnings per share        $     (0.66 )    $     (0.64 )    $     (1.67 )    $     (0.99 )
Add: Stock-based compensation
expense                               0.17             0.22             0.37             0.47
Add: Amortization of
intangible assets                     0.02             0.01             0.04             0.03
Subtract: Perpetual license
revenue recognized from
licenses delivered prior to
2013                                 (0.05 )          (0.61 )          (0.16 )          (1.42 )
Non-GAAP EPS                   $     (0.52 )    $     (1.02 )    $     (1.42 )    $     (1.91 )
Free cash flow:
Net cash used in operating
activities                     $    (9,759 )    $    (6,069 )    $   (20,096 )    $    (9,277 )
Purchase of property and
equipment                             (919 )           (467 )         (1,415 )           (963 )
Free cash flow                 $   (10,678 )    $    (6,536 )    $   (21,511 )    $   (10,240 )

(1) Our deferred revenue consists of amounts that have been invoiced but that have not yet been recognized as revenue as of the period end, including subscription, software support and service revenue paid for in advance by the customer that is recognized ratably over the contractual service period. As of June 30, 2014 and June 30, 2013, $4.4 million and $15.0 million, respectively, of our total deferred revenue consisted of license revenue deferred from perpetual licenses sold prior to January 1, 2013 because we had not established VSOE until that date.

(2) Includes nonrecurring perpetual license billings that consists of the Deferred Portion arising from undelivered elements of perpetual license arrangements and billings classified under Bundled Arrangements. See "Note 1-Summary of Significant Accounting Policies-Revenue Recognition" for a description of Deferred Portion and Bundled Arrangements.

Results of Operations

Revenue

Perpetual license revenue

Perpetual license revenue primarily relates to revenue from on-premise perpetual licenses. Upon establishing VSOE of fair value for software support and services on January 1, 2013, we began to recognize perpetual license revenue upon delivery assuming all other revenue recognition criteria have been met. Prior to that date, we recognized perpetual license revenue ratably over the contractual term of the related software support agreement. Prior to January 1, 2013, we did not have VSOE of fair value for our software-related undelivered elements due to limited history of stand-alone sales transactions and inconsistency in pricing. We established VSOE of fair value when we had a substantial majority of stand-alone sales transactions of software support and services arrangements pricing within a narrow pricing band. In our VSOE analysis, we generally include stand-alone sales transactions entered into during a rolling 12 month period unless a shorter period is appropriate due to changes in our pricing structure. From time to time, we enter into multiple element arrangements with customers in which a customer purchases our software with an appliance are also included in perpetual license revenue and constitute less than 10% of total revenue for the three and six months ended June 30, 2014 and 2013.


Subscription revenue

Subscription revenue is generated primarily from subscriptions to our on-site term licenses, arrangements where perpetual and term license subscriptions are bundled together, and subscriptions to our cloud service. These revenues are recognized ratably over the subscription period or term. While most of our subscriptions have at least a one-year commitment, we also recognize in this category MRC, which is revenue from month-to-month subscription arrangements that are typically sold through service providers and billed on a monthly basis. Except for MRC, we typically bill subscriptions annually in advance.

Software support and services revenue

Software support and services revenue includes recurring revenue from agreements . . .

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