Quarterly Report



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

FORM 10-Q
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2015

or
o
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 Number)
 
1440 McCarthy Blvd.
Milpitas, CA 95035
(408) 321-6300
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
 

 
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   x No   ¨     

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes   x     No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
x
Accelerated filer
¨
Non-accelerated filer
¨ (Do not check if a smaller reporting company)
Smaller reporting company
¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   ¨    No   x

The number of shares of the registrant's common stock outstanding as of July 29, 2015 was 159,417,820 .


Table of Contents
TABLE OF CONTENTS


 
 
 
 
Page  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 4.
 
 
Item 5.
 
 
Item 6.
 
 
 
 
 
 
 
 
 
 



PART I — FINANCIAL INFORMATION
Item1.    Financial Statements
FIREEYE, INC.
Condensed Consolidated Balance Sheets
(In thousands, except per share data)
(Unaudited)
 
June 30,
2015
 
December 31,
2014
 
 
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
726,480

 
$
146,363

Short-term investments
463,137

 
255,845

Accounts receivable, net of allowance for doubtful accounts of $1,830 and $586 at June 30, 2015 and December 31, 2014, respectively
105,183

 
193,182

Inventories
10,485

 
7,952

Deferred tax assets, current portion
25,081

 
25,126

Prepaid expenses and other current assets
32,706

 
28,669

Total current assets
1,363,072

 
657,137

Property and equipment, net
74,438

 
82,298

Goodwill
750,288

 
750,288

Intangible assets, net
238,092

 
261,625

Deposits and other long-term assets
6,824

 
7,533

TOTAL ASSETS
$
2,432,714

 
$
1,758,881

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable
$
25,344

 
$
34,057

Accrued and other current liabilities
27,286

 
24,596

Accrued compensation
63,693

 
64,551

Deferred revenue, current portion
232,522

 
203,877

Total current liabilities
348,845

 
327,081

Convertible senior notes, net
688,961

 

Deferred revenue, non-current portion
177,369

 
148,666

Deferred tax liabilities, non-current portion
24,893

 
24,903

Other long-term liabilities
9,959

 
7,403

Total liabilities
1,250,027

 
508,053

Commitments and contingencies (NOTE 9)

 

Stockholders' equity:
 
 
 
Common stock, par value of $0.0001 per share; 1,000,000 shares authorized, 159,341 shares and 152,860 shares issued and outstanding as of June 30, 2015 and December 31, 2014, respectively
16

 
15

Additional paid-in capital
2,267,972

 
1,918,546

Treasury stock, at cost; 3,333 shares and no shares as of June 30, 2015 and December 31,
2014, respectively
(150,000
)
 

Accumulated other comprehensive loss
(472
)
 
(441
)
Accumulated deficit
(934,829
)
 
(667,292
)
Total stockholders’ equity
1,182,687

 
1,250,828

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
2,432,714

 
$
1,758,881

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 June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Revenue:
 
 
 
 
 
 
 
Product
$
49,696

 
$
37,683

 
$
89,933

 
$
61,935

Subscription and services
97,511

 
56,806

 
182,644

 
106,534

Total revenue
147,207

 
94,489

 
272,577

 
168,469

Cost of revenue:
 
 
 
 
 
 
 
Product
17,101

 
13,749

 
32,301

 
24,075

Subscription and services
39,006

 
27,831

 
75,857

 
52,798

Total cost of revenue
56,107

 
41,580

 
108,158

 
76,873

Total gross profit
91,100

 
52,909

 
164,419

 
91,596

Operating expenses:
 
 
 
 
 
 
 
Research and development
68,798

 
53,408

 
134,403

 
95,378

Sales and marketing
116,008

 
94,591

 
223,603

 
171,445

General and administrative
34,687

 
31,931

 
67,294

 
59,031

Total operating expenses
219,493

 
179,930

 
425,300

 
325,854

Operating loss
(128,393
)
 
(127,021
)
 
(260,881
)
 
(234,258
)
Interest income
391

 
183

 
660

 
228

Interest expense
(3,838
)
 
(4
)
 
(3,838
)
 
(11
)
Other expense, net
(806
)
 
(329
)
 
(1,574
)
 
(383
)
Loss before income taxes
(132,646
)
 
(127,171
)
 
(265,633
)
 
(234,424
)
Provision for (benefit from) income taxes
927

 
(10,348
)
 
1,904

 
(16,390
)
Net loss attributable to common stockholders
$
(133,573
)
 
$
(116,823
)
 
$
(267,537
)
 
$
(218,034
)
Net loss per share attributable to common stockholders, basic and diluted
$
(0.87
)
 
$
(0.82
)
 
$
(1.75
)
 
$
(1.58
)
Weighted average shares used in computing net loss per share attributable to common stockholders, basic and diluted
154,121

 
141,895

 
152,890

 
137,939

See accompanying notes to condensed consolidated financial statements.

2

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

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Net loss
$
(133,573
)
 
$
(116,823
)
 
$
(267,537
)
 
$
(218,034
)
Change in net unrealized loss on available-for-sale investments, net of tax
(434
)
 
28

 
(31
)
 
(110
)
Comprehensive loss
$
(134,007
)

$
(116,795
)

$
(267,568
)

$
(218,144
)
See accompanying notes to condensed consolidated financial statements.

3

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

 
Six Months Ended June 30,
 
2015
 
2014
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net loss
$
(267,537
)
 
$
(218,034
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
54,169

 
42,726

Stock-based compensation
106,286

 
63,447

Non-cash interest expense related to convertible senior notes
2,832

 

Deferred income taxes
81

 
(18,960
)
Other
2,085

 
183

Changes in operating assets and liabilities, net of acquisition of business:
 
 
 
Accounts receivable
86,840

 
(11,660
)
Inventories
(3,309
)
 
729

Prepaid expenses and other assets
(2,354
)
 
(3,084
)
Accounts payable
(6,053
)
 
(7,103
)
Accrued liabilities
3,891

 
8,747

Accrued compensation
(992
)
 
10,834

Deferred revenue
57,348

 
44,193

Other long-term liabilities
2,557

 
3,460

Net cash provided by (used in) operating activities
35,844

 
(84,522
)
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of property and equipment and demonstration units
(24,538
)
 
(31,469
)
Purchases of short-term investments
(301,213
)
 
(302,531
)
Proceeds from maturities of short-term investments
92,138

 
8,000

Acquisition of business, net of cash acquired

 
(55,058
)
Lease deposits
(786
)
 
(403
)
Net cash used in investing activities
(234,399
)
 
(381,461
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Net proceeds from issuance of stock

 
445,280

Net proceeds from issuance of convertible senior notes
897,000

 

Prepaid forward stock purchase
(150,000
)
 

Proceeds from exercise of equity awards
31,672

 
18,405

Net cash provided by financing activities
778,672

 
463,685

Net change in cash and cash equivalents
580,117

 
(2,298
)
Cash and cash equivalents, beginning of period
146,363

 
173,918

Cash and cash equivalents, end of period
$
726,480

 
$
171,620

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
Cash paid for income taxes
$
786

 
$
1,172

SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Unpaid follow-on public offering costs
$

 
$
984

Unpaid convertible senior notes issuance costs
$
470

 
$

Vesting of early exercised stock options
$
1,201

 
$
3,059

Purchases of property and equipment and demonstration units in accounts payable and accrued liabilities
$
3,585

 
$
11,971

See accompanying notes to condensed consolidated financial statements.

4

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”) is a leader in stopping advanced cyber attacks that use advanced malware, zero-day exploits, and APT (“Advanced Persistent Threat”) tactics. Our solutions supplement traditional and next-generation firewalls, Intrusion Prevention Systems ("IPS”), anti-virus, and gateways, which cannot stop advanced threats, leaving security holes in networks. We offer a solution that detects and blocks attacks across Web, email, endpoint, file and mobile threat vectors, as well as latent malware resident on file shares. Our solutions address all stages of an attack lifecycle with a signature-less engine utilizing stateful attack analysis to detect zero-day threats.
On December 30, 2013, we acquired privately held Mandiant Corporation (“Mandiant”), a leading provider of advanced endpoint security products and security incident response management solutions. The operations of Mandiant's business were integrated with our own and Mandiant's financial results were included in our consolidated financial statements as of the acquisition date.
In March 2014, we completed our follow-on public offering in which we issued and sold 5,582,215 shares of common stock at a price of $82.00 per share. We received aggregate proceeds of $446.5 million from the sale of shares of common stock, net of underwriters’ discounts and commissions of $11.2 million , but before deducting offering expenses of approximately $2.2 million . Another 8,417,785 shares were sold by certain selling stockholders, which included 796,846 shares sold pursuant to the exercise of vested outstanding options by our employees. We did not receive any of the proceeds from the sales of shares by the selling stockholders.
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 "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 of 1933, as amended (the "Securities Act"). We recognized total net proceeds after the initial purchasers' discount and issuance costs of $896.5 million . In connection with the issuance of the Convertible Senior Notes, we also entered into privately negotiated prepaid forward stock purchase transactions (each a “Prepaid Forward”) with one of the initial purchasers of the Convertible Senior Notes, pursuant to which we purchased approximately $150.0 million worth of our common stock (equivalent to approximately 3.3 million shares) for settlement on or around June 1, 2020 and June 1, 2022, respectively, subject to any early settlement in whole or part of each Prepaid Forward.
We sell the majority of our products, subscriptions and services to end-customers through distributors, resellers, and strategic partners, with a lesser percentage of sales directly to end-customers.
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 and six months ended June 30, 2015 are not necessarily indicative of the results to be expected for the year ending December 31, 2015 or for any other interim period or for any other future year. The balance sheet as of December 31, 2014 has been derived from audited consolidated financial statements at that date but does not include all of the information required by U.S. GAAP for annual consolidated financial statements.
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, 2014 included in our Annual Report on Form 10-K, which was filed with the SEC on March 2, 2015 .
Use of Estimates
The preparation of condensed 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

5


estimates include, but are not limited to, the best estimate of selling price for our products and services, commissions expense, future taxable income, contract manufacturer liabilities, litigation and settlement costs and other loss contingencies, fair value of our stock options and the purchase price allocation of acquired businesses. We base our estimates on historical experience and also 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 and six months ended June 30, 2015 , as compared to the significant accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2014 , except for the inclusion of a new policy related to our Convertible Senior Notes.
Convertible Senior Notes
We allocated the principal amount of the Convertible Senior Notes between its liability and equity components. The carrying amount of the liability component was determined by measuring the fair value of a similar debt instrument of similar credit quality and maturity that did not have the convert feature. The carrying amount of the equity component, representing the embedded conversion option, was determined by deducting the fair value of the liability component from the principal amount of the Convertible Senior Notes as a whole. The equity component was recorded to additional paid-in capital and is not remeasured as long as it continues to meet the conditions for equity classification. The excess of the principal amount of the Convertible Senior Notes over the carrying amount of the liability component was recorded as a debt discount, and is being amortized to interest expense using the effective interest method through the first date holders have the right to require us to repurchase all or any portion of their Convertible Senior Notes; the first put date (see Note 8). We allocate the total amount of transaction costs incurred to the liability and equity components using the same proportions as the proceeds from the Convertible Senior Notes. Transaction costs attributable to the liability component were recorded as a direct deduction from the liability component of the Convertible Senior Notes, and are being amortized to interest expense using the effective interest method through the first put date. Transaction costs attributable to the equity component were netted with the equity component of the Convertible Senior Notes in additional paid-in capital.
Recent Accounting Pronouncements
In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30) - Simplifying the Presentation of Debt Issuance Costs. This standard requires companies to present debt issuance costs on the balance sheet as a direct deduction from the related liability, consistent with the presentation of debt discounts, rather than as an asset. Amortization of such costs will continue to be reported as interest expense. The guidance is effective for us beginning in the first quarter of 2016, and requires retrospective application to all prior periods presented in the financial statements. Early adoption is permitted.
We have elected to early adopt this standard in the current fiscal quarter, concurrent with the issuance of our Convertible Senior Notes. As such, the issuance costs determined attributable to the liability component of our Convertible Senior Notes have been recorded as a direct deduction from the carrying amount of the notes liability (See Note 8). The adoption of this standard has no impact on any prior period financial statements presented, as we did not previously incur any debt issuance costs.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). This standard provides a single model for revenue arising from contracts with customers and supersedes current revenue recognition guidance. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of 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 July 2015, the FASB decided to defer the effective date by one year, and as a result, the guidance is effective for us beginning in the first quarter of 2018. Early adoption as of the original effective date would be permitted. The guidance permits companies to either apply the requirements retrospectively to all prior periods presented, or apply the requirements in the year of adoption, through a cumulative adjustment. We are currently evaluating the impact the adoption will have on our consolidated financial statements and related disclosures.
In August 2014, the FASB issued ASU 2014-15, Disclosures of Uncertainties About an Entity’s Ability to Continue as a Going Concern. This standard provides guidance on how and when reporting entities must disclose going-concern uncertainties in their financial statements. The guidance is effective for us beginning in the first quarter of 2017. Early adoption is permitted. The adoption of this standard is not expected to have an impact on our consolidated financial statements.
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

6


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 measured at fair value on a recurring basis using the above input categories (in thousands):
 
As of June 30, 2015
 
As of December 31, 2014
Description
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Cash equivalents:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
300,064

 
$

 
$

 
$
300,064

 
$
13,069

 
$

 
$

 
$
13,069

Commercial paper

 
59,991

 

 
59,991

 

 

 

 

U.S. Government agencies

 
196,090

 

 
196,090

 

 
12,950

 

 
12,950

Total cash equivalents
300,064


256,081




556,145


13,069


12,950




26,019

Short-term investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Certificates of deposit

 
11,482

 

 
11,482

 

 
4,994

 

 
4,994

Commercial paper

 
4,998

 

 
4,998

 

 

 

 

Corporate notes and bonds

 
286,828

 

 
286,828

 

 
142,984

 

 
142,984

U.S. Government agencies

 
159,829

 

 
159,829

 

 
107,867

 

 
107,867

Total short-term investments

 
463,137

 

 
463,137

 

 
255,845

 

 
255,845

Total assets measured at fair value
$
300,064

 
$
719,218

 
$

 
$
1,019,282

 
$
13,069

 
$
268,795

 
$

 
$
281,864

The estimated fair value of the Convertible Senior Notes as of June 30, 2015 was determined to be $979.0 million , based on quoted market prices. We consider the fair value of the Convertible Senior Notes to be a Level 2 measurement as they are not actively traded.

7


3. Short-Term Investments
Our investments consisted of the following available-for-sale securities (in thousands):
 
As of June 30, 2015
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
 
Cash and cash equivalents
 
Short-term investment
Certificates of deposit
$
11,480

 
$
5

 
$
(3
)
 
$
11,482

 
$

 
$
11,482

Commercial paper
64,995

 

 
(6
)
 
64,989

 
59,991

 
4,998

Corporate notes and bonds
287,234

 
4

 
(410
)
 
286,828

 

 
286,828

U.S. Government agencies
355,981

 
40

 
(102
)
 
355,919

 
196,090

 
159,829

Total
$
719,690

 
$
49

 
$
(521
)
 
$
719,218

 
$
256,081

 
$
463,137

 
As of December 31, 2014
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
 
Cash and cash equivalents
 
Short-term investment
Certificates of deposit
$
5,000

 
$

 
$
(6
)
 
$
4,994

 
$

 
$
4,994

Corporate notes and bonds
143,215

 
4

 
(235
)
 
142,984

 

 
142,984

U.S. Government agencies
121,021

 
1

 
(205
)
 
120,817

 
12,950

 
107,867

Total
$
269,236

 
$
5

 
$
(446
)
 
$
268,795

 
$
12,950

 
$
255,845

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 June 30, 2015
 
Less Than 12 Months
 
Greater Than 12 Months
 
Total
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
Certificates of deposit
$
5,717

 
$
(3
)
 
$

 
$

 
$
5,717

 
$
(3
)
Commercial paper
64,989

 
(6
)
 

 

 
64,989

 
(6
)
Corporate notes and bonds
208,767

 
(382
)
 
48,026

 
(28
)
 
256,793

 
(410
)
U.S. Government agencies
213,784

 
(101
)
 
4,998

 
(1
)
 
218,782

 
(102
)
Total
$
493,257

 
$
(492
)
 
$
53,024

 
$
(29
)
 
$
546,281

 
$
(521
)
 
As of December 31, 2014
 
Less Than 12 Months
 
Greater Than 12 Months
 
Total
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
Certificates of deposit
$
3,793

 
$
(6
)
 
$

 
$

 
$
3,793

 
$
(6
)
Corporate notes and bonds
130,920

 
(235
)
 

 

 
130,920

 
(235
)
U.S. Government agencies
109,868

 
(205
)
 

 

 
109,868

 
(205
)
Total
$
244,581


$
(446
)

$


$


$
244,581


$
(446
)
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. As a result, there is no other-than-temporary impairment for these investments as of June 30, 2015 .
The following table summarizes the contractual maturities of our investments at June 30, 2015 (in thousands):
 
Amortized Cost
 
Fair Value
Due within one year
$
459,524

 
$
459,426

Due within one to two years
260,166

 
259,792

Total
$
719,690

 
$
719,218


8


All available-for-sale securities have been classified as current, based on management's intent and ability to use the funds in current operations.
4. Property and Equipment
Property and equipment, net consisted of the following (in thousands):
 
As of June 30, 2015
 
As of December 31, 2014
Computer equipment and software
$
98,745

 
$
85,171

Leasehold improvements
37,611

 
34,522

Furniture and fixtures
12,759

 
12,022

Machinery and equipment
447

 
447

Total property and equipment
149,562

 
132,162

Less: accumulated depreciation
(75,124
)
 
(49,864
)
Total property and equipment, net
$
74,438

 
$
82,298

Depreciation and amortization expense related to property and equipment and demonstration units during the three months ended June 30, 2015 and 2014 was $15.3 million and $10.2 million , respectively. Depreciation and amortization expense related to property and equipment and demonstration units during the six months ended June 30, 2015 and 2014 was $29.5 million and $19.9 million , respectively.
During the three months ended June 30, 2015 , we recognized $1.1 million in accelerated depreciation expense associated with changes in the estimated useful life of certain assets to be replaced in the first quarter of 2016.
5. Business Combinations
On May 9, 2014, we acquired all outstanding shares of privately held nPulse Technologies, Inc. (“nPulse”), a performance leader in network forensics based in Charlottesville, Virginia. The acquisition of nPulse strengthens our position as a leader in advanced threat detection and incident response management solutions.
The total purchase consideration of  $56.6 million  consisted of  $55.2 million  in cash, $0.1 million of equity awards assumed, and 54,319  shares of our common stock, with a fair value of $1.3 million which will vest upon the achievement of milestones. The number of shares was fixed at the completion of the acquisition, and is the maximum number of shares that can vest over a period of approximately three and half years from the acquisition date.
The acquisition of nPulse 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 $0.5 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 purchase price allocation was finalized during the three months ended June 30, 2015. Total allocation of the purchase price allocation is as follows (in thousands):
 
Amount
Net tangible liabilities assumed
$
(1,833
)
Intangible assets
24,700

Deferred tax asset
442

Deferred tax liability
(8,368
)
Goodwill
41,671

Total purchase price allocation
$
56,612

None of the goodwill is deductible for U.S. federal income tax purposes.

9


Intangible assets consist primarily of developed technology, customer relationships and in-process research and development. Developed technology intangible includes 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 and services. Customer relationships intangible relates to nPulse’s ability to sell existing, in-process and future products and services to its existing and potential customers. The in-process research and development intangible represents the estimated fair value of acquired research projects which had not reached technological feasibility at acquisition date, but have since been developed into products and services. The estimated useful life and fair values of the identifiable intangible assets are as follows (in thousands):
 
Estimated Useful Life (in years)
 
Amount
Developed technology
6
 
$
10,100

Customer relationships
8
 
8,000

In-process research and development
N/A
 
6,600

Total
 
 
$
24,700

The results of operations of nPulse have been included in our condensed consolidated statements of operations from the acquisition date. Pro forma results of operations have not been presented because the acquisition was not material to our results of operations.
Goodwill and Purchased Intangible Assets
There were no changes in the carrying amount of goodwill for the six months ended June 30, 2015 .
Purchased intangible assets consisted of the following as of the dates below (in thousands):
 
As of June 30, 2015
 
As of December 31, 2014
Developed technology
$
78,193

 
$
78,193

Content
128,600

 
128,600

Customer relationships
75,300

 
75,300

Contract backlog
13,800

 
13,800

Trade names
12,400

 
12,400

Total intangible assets
308,293

 
308,293

Less: accumulated amortization
(70,201
)
 
(46,668
)
Total net intangible assets
$
238,092

 
$
261,625

Amortization expense of intangible assets for the three months ended June 30, 2015 and 2014 was $11.8 million and $11.2 million , respectively. Amortization expense of intangible assets for the six months ended June 30, 2015 and 2014 was $23.5 million and $22.0 million , respectively.
The expected annual amortization expense of intangible assets as of June 30, 2015 is presented below (in thousands):
Years Ending December 31,
Amount
2015 (remaining six months)
$
23,532

2016
46,448

2017
40,503

2018
29,346

2019
27,574

2020 and thereafter
70,689

Total
$
238,092


10


6. Restructuring Charges
We initiated a series of business restructuring plans beginning in August 2014 to reduce our cost structure and improve efficiency, resulting in workforce reductions and the consolidation of certain real estate facilities. These activities were substantially complete as of December 31, 2014.
The following table sets forth a summary of restructuring activities during the six months ended June 30, 2015 (in thousands):
 
Severance and related costs
 
Facilities costs
 
Total costs
Balance, December 31, 2014
$

 
$
765

 
$
765

Provision for restructuring charges

 

 

Cash payments

 
(457
)
 
(457
)
Balance, June 30, 2015
$

 
$
308

 
$
308

The remaining restructuring balance of $0.3 million at June 30, 2015 relates to non-cancelable lease costs, which we expect to pay over the terms of the related obligations through the third quarter of 2017, less sublease income.
7. Deferred Revenue
Deferred revenue consisted of the following as of the dates below (in thousands):
 
As of June 30, 2015
 
As of December 31, 2014
Product, current
$
9,176

 
$
10,718

Subscription and services, current
223,346

 
193,159

Total deferred revenue, current
232,522

 
203,877

Product, non-current
3,599

 
4,891

Subscription and services, non-current
173,770

 
143,775

Total deferred revenue, non-current
177,369

 
148,666

Total deferred revenue
$
409,891

 
$
352,543

 
8. Convertible Senior Notes
Convertible Senior Notes
In June 2015, we issued $460.0 million principal amount of Series A Notes and $460.0 million principal amount of Series B Notes, including the full exercise of the initial purchasers' over-allotment option, 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 Convertible Senior 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 Convertible Senior Notes mature on June 1, 2035, unless earlier repurchased, redeemed or converted.
The Convertible Senior 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 Convertible Senior Notes. They rank equally in right of payment with all of our existing and future liabilities that are not expressly subordinated to the Convertible Senior 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 Convertible Senior 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 Convertible Senior Notes is 16.4572 shares of our common stock per $1,000 principal amount of Convertible Senior 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 Convertible Senior Notes may be adjusted upon the occurrence of certain specified events, but not for accrued and unpaid interest.
Holders may convert the Convertible Senior 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 ending 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

11


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 Convertible Senior 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 Convertible Senior 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 Convertible Senior Notes.
Regardless of the foregoing conditions, holders may convert their Convertible Senior 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 Convertible Senior Notes. Upon conversion, the Convertible Senior 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 Convertible Senior Notes to repurchase all or any portion of their Convertible Senior 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. Holders may also require us to repurchase the Convertible Senior Notes if we undergo a "fundamental change," as defined in each indenture governing the Convertible Senior 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 Convertible Senior 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 Convertible Senior Notes. Transaction costs of $0.4 million and $0.1 million were attributable to the liability component and equity component of the Convertible Senior Notes, respectively.
As of June 30, 2015 , the liability and equity components of the Convertible Senior Notes consisted of the following (in thousands):
 
 
Series A Notes
 
Series B Notes
 
Total
Liability component:
 
 
 
 
 
 
Principal
 
$
460,000

 
$
460,000

 
$
920,000

Less: Convertible senior notes discounts and issuance costs, net of amortization
 
(102,774
)
 
(128,265
)
 
(231,039
)
Net carrying amount
 
$
357,226

 
$
331,735

 
$
688,961

 
 
 
 
 
 
 
Equity component, net of issuance costs
 
$
92,567

 
$
117,834

 
$
210,401

The unamortized discounts and issuance costs as of June 30, 2015 will be amortized over a weighted-average remaining period of approximately 6 years.
For the three and six months ended June 30, 2015 , interest expense related to the Convertible Senior Notes consisted of the following (in thousands):
 
 
Series A Notes
 
Series B Notes
 
Total
Coupon interest
 
$
383

 
$
623

 
$
1,006

Amortization of convertible senior notes discounts and issuance costs
 
1,528

 
1,304

 
2,832

Total interest expense recognized
 
$
1,911

 
$
1,927

 
$
3,838

 
 
 
 
 
 
 
Effective interest rate on the liability component
 
6.4
%
 
7.0
%
 
6.7
%

12


Prepaid Forward Stock Purchase
In connection with the issuance of the Convertible Senior Notes, we also entered into privately negotiated Prepaid Forwards with one of the initial purchasers of the Convertible Senior Notes (the "Forward Counterparty"), pursuant to which we purchased approximately $150.0 million worth of our common stock (equivalent to approximately 3.3 million shares) for settlement 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 Convertible Senior Notes will be able to hedge their investment in the Convertible Senior 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.
9. Commitments and Contingencies
Leases
We lease our facilities under various non-cancelable operating leases, which expire on various dates through the year ending December 31, 2024. Rent expense is recognized using the straight-line method over the term of the lease. Rent expense, net of sublease income, was $3.6 million and $2.7 million for the three months ended June 30, 2015 and 2014 , respectively. Rent expense, net of sublease income, was $6.8 million and $5.3 million for the six months ended June 30, 2015 and 2014 , respectively.
The aggregate future non-cancelable minimum rental payments on our operating leases, as of June 30, 2015 , are as follows (in thousands):
Years Ending December 31,  
Amount  
2015 (remaining six months)
$
10,846

2016
10,646

2017
7,916

2018
5,759

2019
5,522

2020 and thereafter
10,511

Total
$
51,200

Total future non-cancelable minimum rental payments have not been reduced by future minimum sublease rentals totaling  $1.0 million .
We are party to letters of credit totaling $1.9 million as of June 30, 2015 and December 31, 2014 , issued primarily in support of operating leases at 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 June 30, 2015 and December 31, 2014 , we had non-cancelable open orders of $21.8 million and $23.2 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 June 30, 2015 we have not accrued any significant costs for such non-cancelable commitments.
Purchase Obligations
As of June 30, 2015 , we had approximately $26.0 million of non-cancelable firm purchase commitments primarily for purchases of software and services. Amounts which we have received delivery of the goods or services under purchase orders outstanding at June 30, 2015 , are reflected in the Condensed Consolidated Balance Sheet as accounts payable or accrued liabilities, and are excluded from the  $26.0 million .
Litigation
We accrue for contingencies when we believe that a loss is probable and that we can reasonably estimate the amount of any such loss. We have made an assessment of the probability of incurring any such losses and whether or not those losses are estimable.

13


On June 20, 2014, a purported stockholder class action lawsuit was filed in the Superior Court of California, County of Santa Clara, against the Company, current and former members of our Board of Directors, our Chief Financial Officer, and the underwriters of our March 2014 follow-on public offering.  On July 17, 2014, a substantially similar lawsuit was filed in the same court against the same defendants. The actions were consolidated and, on March 4, 2015, an amended complaint was filed, alleging violations of the federal securities laws on behalf of a purported class consisting of purchasers of the Company's common stock pursuant or traceable to the registration statement and prospectus for the follow-on public offering, and seeking unspecified compensatory damages and other relief.  On April 20, 2015, defendants filed demurrers seeking that the amended complaint be dismissed. On July 10, 2015, the court heard oral argument on the demurrers and has yet to issue a final ruling. The Company intends to defend the litigation vigorously.  Based on information currently available, the Company has determined that the amount of any possible loss or range of possible loss is not reasonably estimable.
On November 24, 2014, a purported stockholder class action lawsuit was filed in the United States District Court for the Northern District of California against the Company and certain of its officers. On June 29, 2015, plaintiffs filed a consolidated complaint alleging violations of the federal securities laws on behalf of a putative class of all persons who purchased or otherwise acquired the Company’s securities between January 2, 2014, and November 4, 2014. Plaintiffs seek, among other things, compensatory damages and attorneys’ fees and costs on behalf of the putative class. The Company intends to defend the litigation vigorously. Based on information currently available, the Company has determined that the amount of any possible loss or range of possible loss is not reasonably estimable.
On January 28, 2015, certain of the Company’s officers and directors were named as defendants in a putative derivative action filed in the Superior Court of California, County of Santa Clara. On April 21, 2015, a substantially similar lawsuit was filed in the same court against the same defendants. The Company is named as a nominal defendant in both actions. The actions were consolidated and a consolidated complaint was filed on June 15, 2015, purporting to allege claims for breach of fiduciary duty and unjust enrichment. Defendants have filed demurrers to the consolidated complaint, which are scheduled for hearing on December 4, 2015. Based on information currently available, the Company has determined that the amount of any possible loss or range of possible loss is not reasonably estimable.
On April 28, 2015, a lawsuit was filed in the Delaware Court of Chancery by a purported stockholder against the Company, seeking production of certain books and records pursuant to Delaware law. The Company filed a motion to dismiss, which is set to be heard on August 11, 2015. The Company intends to defend the litigation vigorously. Based on information currently available, the Company has determined that the amount of any possible loss or range of possible loss is not reasonably estimable.
We are also subject to legal proceedings, claims and litigation, including intellectual property litigation, arising in the ordinary course of business. Such matters are subject to many uncertainties and outcomes, and are not predictable with assurance.
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 June 30, 2015 , there have been no claims under any indemnification provisions.
10. Common Shares Reserved for Issuance
We have 100,000,000 shares of convertible preferred stock authorized, none of which were issued and outstanding as of June 30, 2015  or December 31, 2014 .
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 June 30, 2015 and December 31, 2014 . 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 the Board of Directors, subject to the prior rights of holders of all classes of convertible preferred stock outstanding.

14


As of June 30, 2015 and December 31, 2014 , we had reserved shares of common stock for issuance as follows (in thousands):
 
As of June 30, 2015
 
As of December 31, 2014
Reserved under stock award plans
41,458

 
38,879

Convertible Senior Notes
15,141

 

ESPP
3,792

 
2,683

Total
60,391

 
41,562

11. 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. Awards granted under the 2013 Plan vest over the periods determined by the Board of Directors or compensation committee of the 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 for so long as such stock remains unvested. Approximately 15.0 million shares of our common stock were reserved for future grants as of June 30, 2015 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 3,792,578 shares of common stock were available for future issuance as of June 30, 2015 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 vested and expected to vest 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
 
Weighted-
Average
Grant Date
Fair Value
(per share)
 
Weighted-
Average
Contractual
Life (years)
 
Aggregate
Intrinsic
Value
Balance — December 31, 2014
18,578

 
$
9.13

 
 
 
7.40
 
$
445,636

Granted

 

 
$

 
 
 
 
Exercised
(4,684
)
 
4.88

 
 
 
 
 
177,528

Cancelled
(809
)
 
13.95

 
 
 
 
 
 
Balance — June 30, 2015
13,085

 
$
10.35

 
 
 
7.32
 
$
518,607

Options vested and expected to vest — June 30, 2015
12,847

 
$
10.26

 
 
 
7.31
 
$
510,092

Options exercisable — June 30, 2015
6,350

 
$
8.20

 
 
 
6.87
 
$
263,582


15


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 period and a summary of information related to unvested restricted common stock, RSAs and RSUs and those expected to vest 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, 2014
8,341

 
 
 
1.70
 
$
263,416

Granted
7,690

 
$
41.74

 
 
 
 
Vested
(1,691
)
 
 
 
 
 
 
Cancelled
(937
)
 
 
 
 
 
 
Unvested balance — June 30, 2015
13,403

 
 
 
1.74
 
655,563

Expected to vest — June 30, 2015
12,584

 
 
 
1.74
 
$
615,495

We issued into escrow 241,362 restricted stock awards, with an estimated fair value of  $6.4 million , for certain employees from the nPulse acquisition. These awards will be released from escrow to such employees if specified performance milestones are met within approximately three and a half years from May 2014, the acquisition date. These awards are also contingent upon the related employees’ continuous employment with us, and we have determined that it is probable that such performance milestones will be met. As such, compensation expense is being recorded over the requisite service period of three and half years.
Stock-Based Compensation
We record stock-based compensation based on the fair value of stock options on grant date using the Black-Scholes option-pricing model. We determine the fair value of 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. 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 provider’s 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 period beginning May 15, 2015:
 
Three and Six months ended June 30, 2015
 
Three and Six months ended June 30, 2014
Fair value of common stock
$35.16
 
$23.02
Risk-free interest rate
0.09% - 0.23%
 
0.05% - 0.09%
Expected term (in years)
0.5 - 1.0
 
0.5 - 1.0
Volatility
39%
 
45%
Dividend yield
—%
 
—%
Stock-based compensation expense related to stock options, ESPP and restricted stock units and awards is included in the condensed consolidated statements of operations as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Cost of product revenue
$
386

 
$
236

 
$
654

 
$
381

Cost of subscription and services revenue
7,163

 
3,605

 
13,541

 
7,025

Research and development
16,525

 
7,803

 
32,560

 
12,406

Sales and marketing
19,358

 
15,923

 
35,812

 
24,611

General and administrative
12,979

 
10,686

 
23,719

 
19,024

Total
$
56,411

 
$
38,253

 
$
106,286

 
$
63,447


16


As of June 30, 2015 , total compensation cost related to stock-based awards not yet recognized was $466.8 million , net of es timated forfeitures, which is expected to be amortized on a straight-line basis over the weighted-average remaining vesting period of approximately 3 years .
12. 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 for the three months ended June 30, 2015 . We recognized a benefit from income taxes of $10.3 million for the three months ended June 30, 2014 . The tax provision for the three months ended June 30, 2015 is primarily due to foreign taxes and state minimum taxes. The tax benefit for the three months ended June 30, 2014 is primarily due to a decrease in the U.S. deferred tax liabilities previously established in purchase accounting due to amortization of the related intangibles and an increase in U.S. deferred tax assets primarily related to current year operating losses and stock based compensation, partially offset by foreign taxes and state minimum taxes.
We recognized a provision for income taxes of $1.9 million for the six months ended June 30, 2015 . We recognized a benefit from income taxes of $16.4 million for the six months ended June 30, 2014 . The tax provision for the six months ended June 30, 2015 is primarily due to foreign taxes and state minimum taxes. The tax benefit for the six months ended June 30, 2014 is primarily due to a decrease in the U.S. deferred tax liabilities previously established in purchase accounting due to amortization of the related intangibles and an increase in U.S. deferred tax assets primarily related to current year operating losses and stock based compensation, partially offset by foreign taxes and state minimum taxes.
13. 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 warrants. 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 and six months ended June 30, 2015 and 2014 , 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 June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Numerator:
 
 
 
 
 
 
 
Net loss
$
(133,573
)
 
$
(116,823
)
 
$
(267,537
)
 
$
(218,034
)
Denominator:
 
 
 
 
 
 
 
Weighted average number of shares outstanding—basic and diluted
154,121

 
141,895

 
152,890

 
137,939

Net loss per share—basic and diluted
$
(0.87
)

$
(0.82
)

$
(1.75
)

$
(1.58
)
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 June 30,
 
2015
 
2014
Options to purchase common stock
13,085

 
23,317

Unvested early exercised common shares
1,547

 
3,308

Unvested restricted stock awards and units
13,403

 
6,960

Convertible senior notes
15,141

 

ESPP shares
97

 
137


17


14. 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. In addition, until January 2015, we maintained a tax qualified plan for employees of the Mandiant subsidiary that was assumed in the Mandiant acquisition. In January 2015, the Mandiant 401(k) plan was merged into the 401(k) Plan. All participants’ interests in their deferrals are 100% vested when contributed under both 401(k) plans. We are responsible for administrative costs of the 401(k) Plan and have made no matching contributions into our 401(k) Plan since inception. The Mandiant 401(k) plan had provided for a match of 100% of the first 4% of an eligible employee’s compensation contributed. Matching contributions under the Mandiant 401(k) plan were 100% vested when made. Under both 401(k) plans, pre-tax contributions are allocated to each participant’s individual account and are then invested in selected investment alternatives according to the participants’ directions. Each 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 each 401(k) plan and earnings on those contributions are not taxable to the employees until distributed from the 401(k) plan, and all contributions are deductible by us when made. We contributed $0.7 million and $1.4 million to the Mandiant 401(k) plan for the three and six months ended June 30, 2014 , respectively.
15. Segment and Major Customers Information
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. 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 June 30,
 
Six Months Ended June 30,
 
2015

2014
 
2015
 
2014
Revenue:
 
 
 
 
 
 
 
United States
$
106,131

 
$
69,636

 
$
195,320

 
$
125,364

EMEA
18,971

 
14,678

 
35,763

 
23,923

APAC
15,610

 
6,621

 
29,330

 
12,948

Other
6,495

 
3,554

 
12,164

 
6,234

Total revenue
$
147,207

 
$
94,489

 
$
272,577

 
$
168,469

Long lived assets by geographic region based on physical location is as follows (in thousands):
 
As of June 30, 2015
 
As of December 31, 2014
Property and Equipment, net:
 
 
 
United States
$
56,805

 
$
66,807

International
17,633

 
15,491

Total property and equipment, net
$
74,438

 
$
82,298

For the three and six months ended June 30, 2015 , one distributor represented 15% and 14% , respectively, and one reseller represented 13% and 12% , respectively, of the Company's total revenue. For the three and six months ended June 30, 2014 , one customer represented 12% and 11% , respectively, of the Company's total revenue. As of June 30, 2015 , one distributor represented 10% of the Company's net accounts receivable balance. As of December 31, 2014 , one distributor represented 15% of the Company's net accounts receivable balance.

18


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 consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K filed with the SEC on March 2, 2015 . 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:
beliefs and objectives for future operations, financial condition and prospects, including trends in revenue and other financial metrics;
our business plan and our ability to effectively manage our growth and associated investments;
our ability to timely and effectively scale and adapt our existing technology;
our ability to pursue opportunities in new and existing markets;
our ability to innovate new products and bring them to market in a timely manner;
our ability to expand internationally;
our ability to further penetrate our existing customer base;
our expectations concerning renewal rates for subscriptions and services by existing customers;
cost of revenue, including changes in costs associated with production, manufacturing and customer support;
operating expenses, including changes in research and development, sales and marketing, and general and administrative expenses;
our expectations concerning relationships with third parties, including channel partners and logistics providers;
our expectations concerning investments in our product development organization and in the development of our sales and marketing teams;
economic and industry trends or trend analysis;
the effects of seasonal trends on our results of operations;
the attraction and retention of qualified employees and key personnel;
future acquisitions of or investments in complementary companies, products, subscriptions or technologies; and
the sufficiency of our existing cash and investments to meet our cash needs for at least the next 12 months
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.
Overview
We provide comprehensive cybersecurity solutions for detecting, preventing and resolving advanced cyber-attacks that evade legacy signature-based security products. To address the shortcomings of legacy security solutions, we developed a new threat prevention platform based on our purpose-built, virtual machine-based detection engine, MVX. Our comprehensive platform combines our MVX virtualized execution engine and our cloud-based threat intelligence network to identify previously unknown threats and protect organizations at all stages of the attack lifecycle and across all primary threat vectors, including Web, email, file, endpoint and mobile. We have developed products to address each of these vectors: Network Threat Prevention Platform (NX Series), Email Threat Prevention Platform (EX Series), File Content Security (FX Series), Endpoint Threat Prevention Platform (HX Series) and Mobile Threat Prevention (MX Series). Each of these products requires a mandatory subscription agreement that provides access to our Dynamic Threat Intelligence Cloud (DTI) which distributes updated intelligence throughout the network to provide real-time detection of advanced attacks. We also offer optional subscription services that provide additional support and functionality. In addition to these product and subscription offerings, we offer professional services, including incident response services. Our approach to cybersecurity represents a paradigm shift in how IT security has been conducted since the earliest days of the information technology

19


industry, and we believe it is imperative for organizations to invest in this new approach to protect their critical assets from the global pandemic of cybercrime, cyber-espionage and cyber-warfare.
Second Quarter Fiscal 2015 Highlights
Revenue: Second quarter revenue was $147.2 million, an increase of 56 percent from the second quarter of 2014. Total revenue included product revenue of $49.7 million, product subscription revenue of $48.5 million, support and maintenance revenue of $21.4 million and professional services revenue of $27.6 million.
Deferred revenue: Deferred revenue totaled $409.9 million at the end of the second quarter, an increase of $177.9 million, or 77 percent, from the end of the second quarter of 2014. Current deferred revenue was $232.5 million, an increase of $95.7 million from the end of the second quarter of 2014, and included $9.2 million in deferred product revenue and $223.3 million in deferred subscription, support and services revenue. Non-current deferred revenue was $177.4 million, an increase of $82.2 million from the end of the second quarter of 2014. Non-current deferred revenue included $3.6 million of deferred product revenue and $173.8 million of deferred subscription, support and services revenue.
Net loss: Second quarter net loss was $133.6 million, or $0.87 per share, based on approximately 154 million weighted average shares outstanding. This compares to a net loss of $116.8 million, or $0.82 per share, based on approximately 142 million weighted average shares outstanding, in the second quarter of 2014.
Cash flow from operations: Second quarter cash flow from operations increased more than $100 million year-over-year to $39.1 million, compared to negative $61.9 million in the second quarter of 2014. Purchases of property and equipment and demonstration units decreased to $11.9 million in the second quarter of 2015, compared to $17.3 million in the second quarter of 2014.
Our Business Model
We generate revenue from sales of our products, subscriptions and services. Our product revenue consists primarily of revenue from the sale of our threat prevention platform of vector-specific appliances and cloud-based security solutions, consisting of Network Threat Prevention, Email Threat Prevention, Endpoint Threat Prevention, File Content Security and Mobile Threat Prevention. We also offer security management products including our Central Management System and our Threat Analytics Platform, and security forensics products including our Forensic Analysis System, Network Forensics Platform and Investigation Analysis System. We offer this portfolio as a complete solution to protect customers from the next generation of cyber-attacks at all stages of the attack lifecycle and across all primary threat vectors, including web, email, file, endpoint and mobile. Because the typical customer has more web entry points to protect than email and file entry points, customers that purchase our threat prevention portfolio generally purchase more Network Threat Prevention appliances than any other appliance. As a result, Network Threat Prevention accounts for the largest portion of our threat prevention product revenue. In addition, because most malicious attacks occur through the web threat vector, smaller customers and customers who do not have the budget to purchase the full threat prevention portfolio often only purchase Network Threat Prevention. Prior to June 2014, revenue associated with Email Threat Prevention was recognized ratably over the longer of the contractual term or the estimated period the customer was expected to benefit from the product. Beginning in June 2014, we started shipping all Email Threat Prevention appliances with software that allows customers to benefit from the product without the associated subscription services. As a result, revenue from sales of Email Threat Prevention appliances is now being recognized at the time of shipment, consistent with our other product offerings. We have also experienced steady growth in sales of our Endpoint Threat Prevention and Mobile Threat Prevention appliances which we began offering early in 2014. We introduced our File Content Security appliance in the second quarter of 2012. To date, revenue from our File Content Security appliances represents an insignificant percentage of our product revenue.
We require customers to purchase a subscription to our DTI cloud and support and maintenance services when they purchase any part of our product portfolio. Our customers generally purchase these subscriptions and services for a one or three year term, and revenue from such subscriptions is recognized ratably over the subscription period. Sales of these subscriptions and services have increased our deferred revenue. As of June 30, 2015 and December 31, 2014 , our total deferred revenue was $409.9 million and $352.5 million , respectively. Amortization of this growing deferred revenue has increased our subscription and services revenue as a percentage of total revenue. For the three months ended June 30, 2015 and 2014 , subscription and services revenue as a percentage of total revenue was 66% and 60% , respectively. For the six months ended June 30, 2015 and 2014 , subscription and services revenue as a percentage of total revenue was 67% and 63% , respectively. While most of the growth in our subscription and services revenue during such periods relates to the amortization of the initial subscription and services agreements, renewals of such agreements have also contributed to this growth. Our renewal rate for subscriptions expiring in the 12 months ended June 30, 2015 was in excess of 90% , and we expect to maintain high renewal rates in the future due to the significant value we believe these subscriptions and services add to the efficacy of our product portfolio.
We also offer FireEye-as-a-Service, which includes our Network Platform and Endpoint Security Platform solutions, managed by our security experts through our security operations centers around the world. Revenue from this service is recognized ratably over the period the service is provided. In addition to our product and subscription services, we offer professional services, including incident

20


response and related consulting services for our customers who have experienced a cyber-security breach or require assistance assessing the vulnerability of their networks. We also offer training services to educate customers in the implementation and use and functionality of our products, and other professional services to assist as technical resources. Revenue from these services is recognized as delivered.
Key Business Metrics
We monitor the 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, billings, net cash flow provided by (used in) operating activities, and free cash flow are discussed immediately below the following table.
 
Three Months Ended or As of
 
Six Months Ended or As of
 
June 30,
 
June 30,
 
2015

2014
 
2015
 
2014
 
(Dollars in thousands)
Product revenue
$
49,696

 
$
37,683

 
$
89,933

 
$
61,935

Subscription and services revenue
97,511

 
56,806

 
182,644

 
106,534

Total revenue
$
147,207


$
94,489


$
272,577


$
168,469

Year-over-year percentage increase
56
%
 
184
%
 
62
%
 
173
%
Gross margin percentage
62
%
 
56
%
 
60
%
 
54
%
Deferred revenue, current
$
232,522

 
$
136,808

 
$
232,522

 
$
136,808

Deferred revenue, non-current
$
177,369

 
$
95,199

 
$
177,369

 
$
95,199

Billings (non-GAAP)
$
178,334

 
$
113,774

 
$
329,925

 
$
212,962

Net cash provided by (used in) operating activities
$
39,060

 
$
(61,934
)
 
$
35,844

 
$
(84,522
)
Free cash flow (non-GAAP)
$
27,191

 
$
(79,216
)
 
$
11,306

 
$
(115,991
)
Deferred revenue. Our deferred revenue consists of amounts that have been invoiced but have not yet been recognized as revenue as of the period end. The majority of our deferred revenue consists of the unamortized balance of revenue from subscriptions to our DTI cloud, FireEye-as-a-Service offerings and support and maintenance contracts. Because invoiced amounts for subscriptions and services can be for multiple years, we classify our deferred revenue as current or non-current depending on when we expect to recognize the related revenue. If the deferred revenue is expected to be recognized within 12 months, it is classified as current. Otherwise, the deferred revenue is classified as non-current. We monitor our deferred revenue balance because it represents a significant portion of revenue to be recognized in future periods.
Billings. Billings is a non-GAAP financial metric that we define as revenue recognized in accordance with generally accepted accounting principles, or GAAP, plus the change in deferred revenue from the beginning to the end of the period. We consider billings to be a useful metric for management and investors as a supplement to GAAP measures because billings drive deferred revenue, which is an important indicator of the health and visibility of trends in our business and represents a significant percentage of revenue. However, it is important to note that other companies, including companies in our industry, may not use billings, may calculate billings differently, may have different billing frequencies, or may use other financial measures to evaluate their performance, all of which could reduce the usefulness of billings as a comparative measure. A reconciliation of billings to revenue, the most directly comparable financial measure calculated and presented in accordance with GAAP, is provided below:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015

2014
 
2015
 
2014
 
(in thousands)
Revenue
$
147,207

 
$
94,489

 
$
272,577

 
$
168,469

Add: Deferred revenue, end of period
409,891

 
232,007

 
409,891

 
232,007

Less: Deferred revenue, beginning of period
378,764

 
212,722

 
352,543

 
187,514

Billings (non-GAAP)
$
178,334

 
$
113,774


$
329,925


$
212,962

Net cash provided by (used in) operating activities.  We monitor net cash provided by (used in) operating activities as a measure of our overall business performance. Our net cash provided by (used in) operating activities is driven in large part by sales of our products and from up-front payments for both subscriptions and support and maintenance services. Monitoring net cash provided by (used in) operating activities enables us to analyze our financial performance without the non-cash effects of certain items such as depreciation, amortization, and stock-based compensation costs, thereby allowing us to better understand and manage the cash needs of our business.

21


Free cash flow.  Free cash flow is a non-GAAP financial measure we define as net cash provided by (used in) operating activities, the most directly comparable GAAP financial measure, less purchases of property and equipment and demonstration units. We consider free cash flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated by our business that, after the purchases of property and equipment and demonstration units, can be used by us for strategic opportunities, including investing in our business, making strategic acquisitions and strengthening our balance sheet if and when generated. However, it is important to note that other companies, including companies in our industry, may not use free cash flow, may calculate free cash flow differently, or may use other financial measures to evaluate their performance, all of which could reduce the usefulness of free cash flow as a comparative measure. A reconciliation of free cash flow to cash flow provided by (used in) operating activities is provided below:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Cash flow provided by (used in) operating activities
$
39,060

 
$
(61,934
)
 
$
35,844

 
$
(84,522
)
Less: purchase of property and equipment and demonstration units
11,869

 
17,282

 
24,538

 
31,469

Free cash flow (non-GAAP)
$
27,191

 
$
(79,216
)

$
11,306


$
(115,991
)
Net cash used in investing activities
$
(216,158
)
 
$
(223,392
)
 
$
(234,399
)
 
$
(381,461
)
Net cash provided by financing activities
$
766,802

 
$
15,676

 
$
778,672

 
$
463,685

Factors Affecting our Performance
Market Adoption. We rely on market education to raise awareness of today’s next-generation cyber attacks, articulate the need for our virtual machine-based security solution and, in particular, the reasons to purchase our products. Our prospective customers often do not have a specific portion of their IT budgets allocated for products that address the next generation of advanced cyber attacks. We invest heavily in sales and marketing efforts to increase market awareness, educate prospective customers and drive adoption of our solution. This market education is critical to creating new IT budget dollars or allocating IT budget dollars across enterprises and governments for next-generation threat protection solutions, and in particular, our platform. Our investment in market education has also increased awareness of us and our solution in international markets. However, we believe that we will need to invest additional resources in targeted international markets to drive increased awareness and market adoption. The degree to which prospective customers recognize the mission critical need for next-generation threat protection solutions, and subsequently allocate budget dollars for our platform, will drive our ability to acquire new customers and increase renewals and follow-on sales opportunities, which, in turn, will affect our future financial performance.
Sales Productivity. Our sales organization consists of a direct sales team, made up of field and inside sales personnel, and indirect channel sales teams to support our channel partner sales. We utilize a direct-touch sales model whereby we work with our channel partners to secure prospects, convert prospects to customers, and pursue follow-on sales opportunities. To date, we have primarily targeted large enterprise and government customers, who typically have sales cycles from three to nine months, but can be more than a year. We have also recently expanded our inside sales teams to pursue customers in the small and medium enterprise, or SME, market.
Our growth strategy contemplates increased sales and marketing investments internationally. Newly hired sales and marketing resources will require several months to establish prospect relationships and drive overall sales productivity. In addition, sales teams in certain international markets will face local markets that have not had significant market education about the advanced security threats that our platform addresses. All of these factors will influence the timing and overall levels of sales productivity, impacting the rate at which we will be able to convert prospects to sales and drive revenue growth.
Renewal Rates. New or existing customers that purchase one of our appliances are required to purchase a one or three year subscription to our DTI cloud and support and maintenance services. New or existing customers that purchase one of our Forensic Analysis System or Central Management System appliances are required to purchase support and maintenance services for a term of one or three years.
We believe our renewal rate is an important metric to measure the long-term value of customer agreements and our ability to retain our customers. We calculate our renewal rate by dividing the number of renewing customers that were due for renewal in any rolling 12 month period by the number of customers that were due for renewal in that same rolling 12 month period. Our renewal rate for subscription and service agreements expiring in the 12 months ended June 30, 2015 and 2014 was in excess of 90% . These high renewal rates are primarily attributable to the incremental value added to our appliances by our DTI cloud subscriptions and support and maintenance services. As DTI cloud subscriptions and support and maintenance services represented 48% and 42% of our total revenue during the three months ended June 30, 2015 and 2014 , respectively, and 49% and 43% of our total revenue during the six months ended June 30, 2015 and 2014 , respectively, we expect our ability to maintain high renewal rates for these subscriptions and services to have a material impact on our future financial performance.

22


Follow-On Sales. After the initial sale to a new customer, we focus on expanding our relationship with such customer to sell additional products, subscriptions and services. To grow our revenue, it is important that our customers make additional purchases of our products, subscriptions and services. Sales to our existing customer base can take the form of incremental sales of appliances, subscriptions and services, either to deploy our platform into additional parts of their network or to protect additional threat vectors. Our opportunity to expand our customer relationships through follow-on sales will increase as we add new customers, broaden our product portfolio to support more threat vectors, add new services, increase network performance and enhance functionality. Follow-on sales lead to increased revenue over the lifecycle of a customer relationship and can significantly increase the return on our sales and marketing investments. With some of our most significant customers, we have realized follow-on sales that were multiples of the value of their initial purchases.
Components of Operating Results
Revenue
We generate revenue from the sales of our products, subscriptions and services. As discussed further in “Critical Accounting Policies and Estimates−Revenue Recognition” under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2014 filed with the SEC on March 2, 2015 , revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is reasonably assured.
Product revenue . Our product revenue is generated from sales of our appliances which we recognize at the time of shipment, provided that all other revenue recognition criteria have been met.
Subscription and services revenue . Subscription and services revenue is generated primarily from our DTI cloud, FireEye-as-a-Service, support and maintenance services and other professional services. Our DTI cloud subscription is determined as a percentage of the price of the related appliance. We recognize revenue from subscriptions and support and maintenance services over the one or three year contract term, as applicable. Professional services revenue, which includes incident response, is generally offered on a time-and-material basis and is recognized as the services are delivered.
Cost of Revenue
Our total cost of revenue consists of cost of product revenue and cost of subscription and services revenue. Personnel costs associated with our operations and global customer support organizations consist of salaries, benefits, bonuses and stock-based compensation. Overhead costs consist of certain facilities, depreciation and information technology costs.
Cost of product revenue. Cost of product revenue primarily consists of costs paid to our third-party contract manufacturers for our appliances and personnel and other costs in our manufacturing operations department. Our cost of product revenue also includes product testing costs, allocated costs and shipping costs. We expect our cost of product revenue to increase as our product revenue increases.
Cost of subscription and services revenue. Cost of subscription and services revenue consists of personnel costs for our global customer support and services organization and allocated costs. We expect our cost of subscription and services revenue to increase as our customer base grows and as we hire additional professional services personnel.
Gross Margin
Gross margin, or gross profit as a percentage of revenue, has been and will continue to be affected by a variety of factors, including the average sales price of our products, subscriptions and services, manufacturing costs, the mix of products sold, and the mix of revenue among products, subscriptions and services. We expect our gross margin to fluctuate over time depending on these factors.
Operating Expenses
Our operating expenses consist of research and development, sales and marketing and general and administrative expense. Personnel costs are the most significant component of operating expenses and consist of salaries, benefits, bonuses, stock-based compensation and, with regard to sales and marketing expense, sales commissions. Operating expenses also include overhead costs consisting of certain facilities, depreciation and information technology costs.
Research and development. Research and development expense consists primarily of personnel costs and allocated overhead. Research and development expense also includes prototype related expenses. We expect research and development expense to continue to increase in absolute dollars as we continue to invest in our research and product development efforts to enhance our product capabilities, address new threat vectors and access new customer markets, although such expense may fluctuate as a percentage of total revenue.
Sales and marketing. Sales and marketing expense consists primarily of personnel costs, incentive commission costs and allocated overhead. We expense commission costs as incurred. Sales and marketing expense also includes costs for market development programs, promotional and other marketing activities, travel, office equipment, depreciation of proof-of-concept evaluation units and outside consulting costs. We expect sales and marketing expense to continue to increase in absolute dollars as we

23


increase the size of our sales and marketing organizations and expand our international operations, although such expense may fluctuate as a percentage of total revenue.
General and administrative . General and administrative expense consists of personnel costs, professional services and allocated overhead. General and administrative personnel include our executive, finance, human resources, facilities and legal organizations. Professional services consist primarily of legal, auditing, accounting and other consulting costs. We expect general and administrative expense to continue to increase in absolute dollars as we have recently incurred, and expect to continue to incur, additional general and administrative expenses as we grow our operations and comply with public company regulations, including higher legal, corporate insurance, and accounting expenses.
Interest Income
Interest income consists of interest earned on our cash and cash equivalent and investment balances. We have historically invested our cash in money-market funds and other short-term, high-quality securities. We expect interest income to vary each reporting period depending on our average investment balances during the period, types and mix of investments, and market interest rates.
Interest Expense
Interest expense is primarily a result of our convertible senior notes, consisting of interest at the stated rate (coupon) and amortization of discounts and issuance costs.
Other Expense, Net
Other expense, net includes gains or losses on the disposal of fixed assets, foreign currency re-measurement gains and losses and foreign currency transaction gains and losses. We expect other expense, net to fluctuate depending on foreign exchange rate movements.
Provision for (Benefit from) Income Taxes
Provision for (benefit from) income taxes consists primarily of federal and state income taxes in the United States and income taxes in certain foreign jurisdictions in which we conduct business. Income in certain countries may be taxed at statutory tax rates that are lower than the U.S. statutory tax rate. As a result, our overall effective tax rate over the long term may be lower than the U.S. federal statutory tax rate due to a larger proportion of net income which was subject to foreign income tax rates that are lower than the U.S. federal statutory rate.

24


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.
 
Three Months Ended June 30,
 
2015
 
2014
 
Amount
 
% of total Revenue
 
Amount
 
% of total Revenue
 
(Dollars In thousands)
Revenue:
 
 
 
 
 
 
 
Product
$
49,696

 
34
 %
 
$
37,683

 
40
 %
Subscription and services
97,511

 
66

 
56,806

 
60

Total revenue
147,207

 
100

 
94,489

 
100

Cost of revenue:
 
 
 
 
 
 
 
Product
17,101

 
12

 
13,749

 
15

Subscription and services
39,006

 
26

 
27,831

 
29

Total cost of revenue
56,107

 
38

 
41,580

 
44

Total gross profit
91,100

 
62

 
52,909

 
56

Operating expenses:
 
 
 
 
 
 
 
Research and development
68,798

 
47

 
53,408

 
56

Sales and marketing
116,008

 
79

 
94,591

 
100

General and administrative
34,687

 
23

 
31,931

 
34

Total operating expenses
219,493

 
149

 
179,930

 
190

Operating loss
(128,393
)
 
(87
)
 
(127,021
)
 
(134
)
Interest income
391

 

 
183

 

Interest expense
(3,838
)
 
(3
)
 
(4
)
 

Other expense, net
(806
)
 

 
(329
)
 
(1
)
Loss before income taxes
(132,646
)
 
(90
)
 
(127,171
)
 
(135
)
Provision for (benefit from) income taxes
927

 
1

 
(10,348
)
 
(11
)
Net loss attributable to common stockholders
$
(133,573
)
 
(91
)%
 
$
(116,823