Saturday, December 16, 2017America's Leading Online Business Magazine

ForeScout Technologies Reports Third Quarter 2017 Financial Results

  • Robust customer demand drives revenue growth of 32% year over year
  • Effective sales execution and expense management drives improvement in GAAP and non-GAAP operating loss
  • Strong collections drives positive free cash flow

SAN JOSE, Calif., Dec. 07, 2017 (GLOBE NEWSWIRE) — ForeScout Technologies, Inc. (NASDAQ:FSCT), a leading Internet of Things (IoT) security company, today announced results for the third quarter of fiscal year 2017, ended September 30, 2017.

“We are pleased with our strong third quarter results, highlighted by revenue growth of 32% year-over-year.  This validates the robust demand for ForeScout’s differentiated solutions and the growing mindshare and wallet share for visibility and control of networked-connected devices,” said Michael DeCesare, CEO and President, ForeScout Technologies. “During the third quarter, we added nearly 100 new customers, including several Global 2000 companies, expanded partnerships, and delivered innovation that strengthens both our near and long-term market opportunity.”

Third Quarter 2017 Financial Highlights

  • Revenue: Total revenue was $64.4 million, an increase of 32% over the third quarter of 2016.

    • Product revenue was $39.2 million, an increase of 27% over the third quarter of 2016
    • Maintenance and Professional Services revenue was $25.2 million, an increase of 40% over the third quarter of 2016

  • Gross Profit: GAAP gross profit was $48.5 million, or 75.3% of total revenue, compared to $35.2 million in the third quarter of 2016, or 72.3% of total revenue.  Non-GAAP gross profit was $48.8 million, or 75.8% of total revenue, compared to $35.6 million in the third quarter of 2016, or 72.9% of total revenue.
  • Operating Loss: GAAP operating loss was $6.6 million, or 10.3% of total revenue, compared to $17.0 million in the third quarter of 2016, or 34.9% of total revenue.  Non-GAAP operating loss was $2.7 million or 4.2% of total revenue, compared to $13.2 million in the third quarter of 2016, or 27.1% of total revenue.
  • Net Loss Per Share: GAAP net loss per share was $1.17, compared to $3.18 in the third quarter of 2016. Non-GAAP net loss per share was $0.53, compared to $2.48 in the third quarter of 2016.
  • Cash Flow: Net cash provided by operating activities was $2.3 million, compared to net cash used in operating activities of $20.4 million in the third quarter of 2016.  Free cash flow was $1.7 million, or 3% of total revenue compared to ($26.3) million in the third quarter of 2016, or (54)% of total revenue.

A reconciliation of GAAP to non-GAAP financial measures is provided in the financial statement tables included in this press release.  An explanation of these measures is also included under the heading “Non-GAAP Financial Measures.”

“Our 32% increase in year-over-year revenue, and the composition of this revenue, illustrates that we are both retaining and expanding within our existing customers as well as adding important new ones to help provide a stronger foundation for future growth,” said Criss Harms, Chief Financial Officer of ForeScout. “While growing our top-line, we also improved bottom-line leverage, demonstrating our continued focus on expense management and profitability.  GAAP and Non-GAAP operating loss improved year over year, and strong and efficient collections resulted in positive free cash flow, translating to flat free cash flow for the year to date.”

Third Quarter Business Highlights

During the third quarter 2017, ForeScout:

  • Announced pricing of its initial public offering, raising gross proceeds of $133.6 million.

  • Expanded orchestration value proposition with the delivery of a new extended module for ServiceNow to help customers gain visibility of assets for better asset management, improved compliance and accelerated response to security incidents. Together, ForeScout and ServiceNow allow for visibility of devices, monitoring for indications of security incidents and rapid response to contain a potential breach.
  • Announced a new partnership and joint solution with CyberArk to provide automated visibility and control of previously unknown privileged accounts on network-connected devices in real time. The joint solution enforces security controls, provides an up-to-date centralized repository of privileged accounts and automates security threat response.
  • Was named to the Forbes 2017 Cloud 100 list, recognizing the company’s leadership in the cloud technology revolution.

Fourth Quarter and Full Year 2017 Outlook

ForeScout provides guidance based on current market conditions and expectations.

For the fourth quarter of 2017, ForeScout expects:

  • Revenue of $61 million – $63 million, representing year-over-year growth of 25 percent at the midpoint.

  • Non-GAAP operating loss of ($11) – ($9) million.
  • Non-GAAP net loss per share of ($0.39) – ($0.32) using approximately 28.7 million basic and diluted shares outstanding.

For the full year 2017, ForeScout expects:

  • Revenue of $216 million – $218 million, representing year-over-year growth of 30 percent at the midpoint.

  • Non-GAAP operating loss of ($51) – ($49) million.
  • Non-GAAP net loss per share of ($4.56) – ($4.39) using approximately 11.8 million basic and diluted shares outstanding.

Guidance for non-GAAP operating loss and non-GAAP net loss per share excludes stock-based compensation expense, changes in fair value of warrant liabilities, $12.8 million related to the value of the additional shares of common stock issued to preferred stockholders in connection with our initial public offering, and gains on warrant exercises.  We have not reconciled non-GAAP operating loss guidance to GAAP operating loss, nor have we reconciled non-GAAP net loss per share to GAAP net loss per share, as a result of the uncertainty regarding, and the potential variability of, these items. Accordingly, a reconciliation of the non-GAAP financial measure guidance to the corresponding GAAP measure is not available without unreasonable effort.

Conference Call Information

ForeScout will host a conference call for analysts and investors to discuss its third quarter 2017 financial results today at 1:30 p.m. Pacific time.  Open to the public, interested parties may access the conference call by dialing either (855) 659-9329 or (615) 247-5915 using the passcode 1797958.

A live webcast will be accessible on ForeScout’s investor relations website at investors.forescout.com.  A telephonic replay of the conference call will be available through Thursday, December 14, 2017.  To access the replay, interested parties should dial either (855) 859-2056 or (404) 537-3406 using the passcode 1797958.

About ForeScout

ForeScout Technologies, Inc. helps make the invisible visible.  Our company provides Global 2000 enterprises and government agencies with agentless visibility and control of traditional and IoT devices the instant they connect to the network. Our technology integrates with disparate security tools to help organizations accelerate incident response, break down silos, automate workflows and optimize existing investments. Learn more at www.forescout.com.

©2017. ForeScout Technologies, Inc. is a Delaware corporation. ForeScout, the ForeScout logo, ActiveResponse, ControlFabric, CounterACT, CounterACT Edge and SecureConnector are trademarks or registered trademarks of ForeScout.

FSCT – F

Forward Looking Statements

This press release contains forward-looking statements that involve risks and uncertainties, including statements regarding our financial outlook for the fourth quarter of 2017 and updated fiscal year 2017, our markets and demand for our products as well as our growth prospects.  These forward-looking statements involve risks and uncertainties.  If any of these risks or uncertainties materialize, or if any of our assumptions prove incorrect, our actual results could differ materially from the results expressed or implied by these forward-looking statements.  These risks and uncertainties include risks associated with: the evolution of the cyberthreat landscape facing enterprises in the United States and other countries; developments and trends in the domestic and international markets for network security products; our expectations concerning the productivity of our expanding sales force as our sales representatives become more seasoned; our plans to attract new customers, retain existing customers and increase our annual revenue; future acquisitions of, or investments in, complementary companies, services or technologies; fluctuations in our quarterly results of operations and other operating measures; increasing competition; our ability to recruit and retain our employees; general economic, market and business conditions; and the risks described in the other filings we make with the Securities and Exchange Commission from time to time, including the risks described under the heading “Risk Factors” in our Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, which was filed with the Securities and Exchange Commission on December 7, 2017, and which should be read in conjunction with our financial results and forward-looking statements, and is available on the SEC filings section of the Investor Relations page of our website at https://investors.forescout.com/.  All forward-looking statements in this press release are based on information available to us as of the date hereof, and we do not assume any obligation to update the forward-looking statements provided to reflect events that occur or circumstances that exist after the date on which they were made.

Non-GAAP Financial Measures

ForeScout has provided in this press release financial information that has not been prepared in accordance with generally accepted accounting principles in the United States (GAAP).  ForeScout uses these non-GAAP financial measures internally in analyzing its financial results and believes that use of these non-GAAP financial measures is useful to investors as an additional tool to evaluate ongoing operating results and trends and in comparing ForeScout’s financial results with other companies in its industry, many of which present similar non-GAAP financial measures.

Non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable GAAP financial measures and should be read only in conjunction with ForeScout’s consolidated financial statements prepared in accordance with GAAP.  A reconciliation of ForeScout’s historical non-GAAP financial measures to the most directly comparable GAAP measures has been provided in the financial statement tables included in this press release, and investors are encouraged to review the reconciliation.

Non-GAAP Gross Profit. ForeScout defines non-GAAP gross profit as gross profit plus stock-based compensation expense. ForeScout considers non-GAAP gross profit to be a useful metric for management and investors as a more accurate comparison to our peer companies and a more accurate comparison of our financial results to previous periods due to the impact of differences in valuation assumptions and varying award types associated with stock-based compensation expense.

Non-GAAP Operating Loss. ForeScout defines non-GAAP operating loss as operating loss excluding stock-based compensation expense.

Non-GAAP Net Loss Per Share. ForeScout defines non-GAAP net loss as net loss excluding stock-based compensation expense and expense associated with changes in warrants issued in connection with preferred shares.  In the fourth quarter and full year 2017, ForeScout will also exclude the value of the dividend of common stock to certain of our stockholders in connection with our IPO. ForeScout defines non-GAAP net loss per share as non-GAAP net loss divided by the weighted average shares outstanding.

Free cash flow. ForeScout defines free cash flow as net cash provided by (used in) operating activities less purchases of property and equipment.  ForeScout defines free cash flow margin as free cash flow as a percentage of total revenue.  ForeScout considers free cash flow and free cash flow margin to be profitability and liquidity measures that provide useful information to management and investors about the amount of cash generated by the business that, after the purchases of property and equipment, can be used for strategic opportunities, including investing in our business, making strategic acquisitions, and strengthening the balance sheet. 

 
FORESCOUT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands)
 
  September 30,
 2017
  December 31,
 2016
Assets      
Current assets:      
Cash and cash equivalents $ 72,344     $ 79,665  
Accounts receivable 49,080     44,694  
Inventory 132     890  
Prepaid expenses and other current assets 8,431     8,592  
Total current assets 129,987     133,841  
Property and equipment, net 23,264     24,536  
Severance pay deposits 1,987     1,704  
Restricted cash 4,137     4,011  
Other assets 4,951     3,334  
Total assets $ 164,326     $ 167,426  
Liabilities, redeemable convertible preferred stock and stockholders’ deficit      
Current liabilities:      
Accounts payable $ 1,889     $ 5,210  
Accrued compensation 21,106     17,286  
Accrued expenses 11,002     12,903  
Customer deposits 6,506     718  
Deferred revenue 91,216     68,844  
Notes payable 7,224     7,163  
Total current liabilities 138,943     112,124  
Warrant liabilities 5,216     4,874  
Deferred revenue – non-current 56,712     40,070  
Notes payable – non-current 17,398     22,824  
Accrued severance pay liability 2,524     2,033  
Other liabilities 9,340     10,244  
Total liabilities 230,133     192,169  
Commitments and Contingencies      
Redeemable convertible preferred stock 283,854     283,854  
       
Stockholders’ deficit:      
Common stock 6     6  
Additional paid-in capital 98,555     84,792  
Accumulated deficit (448,222 )   (393,395 )
Total stockholders’ deficit (349,661 )   (308,597 )
Total liabilities, redeemable convertible preferred stock and stockholders’ deficit $ 164,326     $ 167,426  
               

 
FORESCOUT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except share and per share amounts)
 
  Three Months Ended
September 30,
  Nine Months Ended
September 30,
  2017   2016   2017   2016
               
Revenue:              
Product $ 39,192     $ 30,799     $ 83,889     $ 68,861  
Maintenance and professional services 25,164     17,941     71,026     48,550  
Total revenue 64,356     48,740     154,915     117,411  
Cost of revenue:              
Product 7,201     6,563     17,117     13,754  
Maintenance and professional services 8,688     6,945     25,662     19,304  
Total cost of revenue 15,889     13,508     42,779     33,058  
Total gross profit 48,467     35,232     112,136     84,353  
Operating expenses:              
Research and development 10,985     8,509     32,634     22,352  
Sales and marketing 34,957     35,759     104,515     94,316  
General and administrative 9,148     7,967     27,265     23,081  
Total operating expenses 55,090     52,235     164,414     139,749  
Loss from operations (6,623 )   (17,003 )   (52,278 )   (55,396 )
Interest expense (290 )   (702 )   (953 )   (2,072 )
Other income (expense), net 160     (226 )   (66 )   (354 )
Change in fair value of warrant liabilities     (224 )   (342 )   379  
Loss before income taxes (6,753 )   (18,155 )   (53,639 )   (57,443 )
Income tax provision 412     157     1,221     517  
Net loss and comprehensive loss $ (7,165 )   $ (18,312 )   $ (54,860 )   $ (57,960 )
Net loss per share attributable to common stockholders, basic and diluted $ (1.17 )   $ (3.18 )   $ (9.09 )   $ (10.46 )
Weighted-average shares used to compute net loss per share attributable to common stockholders, basic and diluted 6,139,876     5,749,930     6,032,427     5,539,012  
                       

 
FORESCOUT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
 
  Nine Months Ended
September 30,
  2017   2016
Cash flows from operating activities      
Net loss $ (54,860 )   $ (57,960 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities      
Stock-based compensation 12,060     12,862  
Depreciation 4,264     2,279  
Loss on disposal of property and equipment 187     19  
Amortization of discount on debt 259     554  
Change in fair value of warrant liabilities 342     (379 )
Changes in operating assets and liabilities      
Accounts receivable (4,386 )   (2,562 )
Inventory 835     125  
Prepaid expenses and other current assets 177     (4,516 )
Other assets (131 )   (1,723 )
Accounts payable (3,319 )   (1,630 )
Accrued compensation 3,820     4,725  
Accrued expenses (567 )   1,855  
Customer deposits 5,788     (709 )
Deferred revenue 39,014     10,085  
Severance pay, net 208     151  
Other liabilities (128 )   6,429  
Net cash provided by (used in) operating activities 3,563     (30,395 )
Cash flows from investing activities      
Purchases of property and equipment (3,386 )   (19,959 )
Purchases of short-term investments     (23,983 )
Proceeds from maturities of short-term investments     12,000  
Proceeds from sales of short-term investments     11,979  
Change in restricted cash (126 )   (199 )
Net cash used in investing activities (3,512 )   (20,162 )
Cash flows from financing activities      
Repayments of notes payable (5,624 )    
Net proceeds from issuance of redeemable convertible preferred stock     2,399  
Proceeds from exercise of stock options 960     907  
Payments of deferred offering costs (2,708 )    
Net cash (used in) provided by financing activities (7,372 )   3,306  
Net change in cash and cash equivalents for period (7,321 )   (47,251 )
Cash and cash equivalents at beginning of period 79,665     126,846  
Cash and cash equivalents at end of period $ 72,344     $ 79,595  
               

 
FORESCOUT TECHNOLOGIES, INC.
RECONCILIATION OF GAAP TO NON-GAAP MEASURES
(Unaudited, in thousands, except per share amounts)
 
  Three Months Ended
September 30,
  Nine Months Ended
September 30,
  2017   2016   2017   2016
               
GAAP gross profit $ 48,467     $ 35,232     $ 112,136     $ 84,353  
Add:              
  Stock-based compensation expense 305     323     990     825  
Non-GAAP gross profit $ 48,772     $ 35,555     $ 113,126     $ 85,178  
               
GAAP operating expense: $ 55,090     $ 52,235     $ 164,414     $ 139,749  
Less:              
  Stock-based compensation expense 3,604     3,495     11,070     12,037  
Non-GAAP operating expense $ 51,486     $ 48,740     $ 153,344     $ 127,712  
               
GAAP operating loss $ (6,623 )   $ (17,003 )   $ (52,278 )   $ (55,396 )
Add:              
  Stock-based compensation expense 3,909     3,818     12,060     12,862  
Non-GAAP operating loss $ (2,714 )   $ (13,185 )   $ (40,218 )   $ (42,534 )
               
GAAP net loss per share $ (1.17 )   $ (3.18 )   $ (9.09 )   $ (10.46 )
Add:              
Effect on net loss per share from stock-based compensation expense 0.64     0.66     2.00     2.32  
Effect on net loss per share from change in fair value of warrant liabilities     0.04     0.05     (0.07 )
Non-GAAP net loss per share $ (0.53 )   $ (2.48 )   $ (7.04 )   $ (8.21 )
               
Net cash provided by (used in) operating activities $ 2,313     $ (20,411 )   $ 3,563     $ (30,395 )
Less:              
  Net purchases of property and equipment (592 )   (5,855 )   (3,386 )   (19,959 )
Free cash flow (non-GAAP) $ 1,721     $ (26,266 )   $ 177     $ (50,354 )
Free cash flow margin 3 %   (54 )%   %   (43 )%
                       

 

Investor Relations Contact: Media Relations Contact:
Michelle Spolver Katie Beck
408-721-5884 650-314-8705
michelle.spolver@forescout.com katie.beck@forescout.com