10Q Q3 2014

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 September 30, 2014

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: 001-35925

TABLEAU SOFTWARE, INC.
(Exact name of registrant as specified in its charter)

    
Delaware
 
47-0945740
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
837 North 34th Street, Suite 200
Seattle, Washington 98103
(Address of principal executive offices and zip code)

(206) 633-3400
(Registrant's telephone number, including area code)
                    
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. x Yes o 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). x Yes o 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.
Large accelerated filer
o
 
 
Accelerated filer
o
Non-accelerated filer
x
(Do not check if smaller reporting company)
 
Smaller reporting company
o


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

As of November 4, 2014, there were approximately 44,649,460 shares of the registrant's Class A common stock and 24,686,254 shares of the registrant's Class B common stock outstanding.

 
 



TABLEAU SOFTWARE, INC.
QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended September 30, 2014
Table of Contents

 
PART I. FINANCIAL INFORMATION
Page
Item 1.
Financial Statements (unaudited)
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
PART II. OTHER INFORMATION
 
Item 1.
Item 1A.
Item 2.
Item 6.
 
 

    


 
 




PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Tableau Software, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
 
September 30, 2014
 
December 31, 2013
 
(in thousands, except share data)

Assets
 
Current assets
 
 
 
Cash and cash equivalents
$
644,516

 
$
252,674

Accounts receivable, net of allowance for doubtful accounts of $750 and $805
67,497

 
61,158

Prepaid expenses and other current assets
9,322

 
7,180

Income taxes receivable
2,094

 
2,033

Deferred income taxes
9,367

 
9,136

Total current assets
732,796

 
332,181

Property and equipment, net
38,799

 
21,338

Deferred income taxes
774

 
589

Deposits and other assets
1,526

 
819

Total assets
$
773,895

 
$
354,927

Liabilities and stockholders' equity
 
 
 
Current liabilities
 
 
 
Accounts payable
$
5,426

 
$
2,178

Accrued compensation and employee related benefits
27,113

 
27,187

Accrued liabilities
13,959

 
8,456

Income taxes payable
234

 
178

Deferred revenue
93,306

 
66,290

Total current liabilities
140,038

 
104,289

Deferred revenue
6,884

 
3,264

Other long-term liabilities
4,812

 
2,714

Total liabilities
151,734

 
110,267

Commitments and contingencies (Note 6)

 

Stockholders’ equity
 
 
 
Preferred stock, $0.0001 par value, 10,000,000 shares authorized; none issued

 

Class B common stock, $0.0001 par value, 75,000,000 shares authorized; 24,691,681 and 33,421,033 shares issued and outstanding as of September 30, 2014 and December 31, 2013, respectively
3

 
4

Class A common stock, $0.0001 par value, 750,000,000 shares authorized; 44,631,686 and 28,777,653 shares issued and outstanding as of September 30, 2014 and December 31, 2013, respectively
4

 
3

Additional paid-in capital
631,521

 
239,406

Accumulated other comprehensive income (loss)
149

 
(71
)
Retained earnings (accumulated deficit)
(9,516
)
 
5,318

Total stockholders’ equity
622,161

 
244,660

Total liabilities and stockholders’ equity
$
773,895

 
$
354,927

 
 
 
 


The accompanying notes are an integral part of these condensed consolidated financial statements.

3



Tableau Software, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands, except per share amounts)
Revenues
 
 
 
 
 
 
 
License
$
69,763

 
$
41,951

 
$
178,562

 
$
101,895

Maintenance and services
34,706

 
19,128

 
91,131

 
49,086

Total revenues
104,469

 
61,079

 
269,693

 
150,981

Cost of revenues
 
 
 
 
 
 
 
License
273

 
237

 
568

 
523

Maintenance and services
9,268

 
4,341

 
24,806

 
11,951

Total cost of revenues (1)
9,541

 
4,578

 
25,374

 
12,474

Gross profit
94,928

 
56,501

 
244,319

 
138,507

Operating expenses
 
 
 
 
 
 
 
Sales and marketing (1)
58,565

 
32,189

 
147,936

 
83,426

Research and development (1)
29,022

 
15,438

 
77,186

 
42,514

General and administrative (1)
11,111

 
6,345

 
28,953

 
18,064

Total operating expenses
98,698

 
53,972

 
254,075

 
144,004

Operating income (loss)
(3,770
)
 
2,529

 
(9,756
)
 
(5,497
)
Other income (expense), net
353

 
(177
)
 
(163
)
 
(350
)
Income (loss) before income tax expense (benefit)
(3,417
)
 
2,352

 
(9,919
)
 
(5,847
)
  Income tax expense (benefit)
1,214

 
(89
)
 
4,915

 
(1,678
)
Net income (loss)
$
(4,631
)
 
$
2,441

 
$
(14,834
)
 
$
(4,169
)
 
 
 
 
 
 
 
 
Net income (loss) per share attributable to common stockholders:
 
 
 
 
 
 
 
Basic
$
(0.07
)
 
$
0.04

 
$
(0.22
)
 
$
(0.09
)
Diluted
$
(0.07
)
 
$
0.03

 
$
(0.22
)
 
$
(0.09
)
 
 
 
 
 
 
 
 
Weighted average shares used to compute net income (loss) per share attributable to common stockholders:
 
 
 
 
 
 
 
Basic
68,966

 
59,143

 
66,923

 
47,093

Diluted
68,966

 
71,348

 
66,923

 
47,093


(1) Includes stock-based compensation expense as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands)
Cost of revenues
$
614

 
$
113

 
$
1,457

 
$
291

Sales and marketing
4,810

 
1,442

 
12,271

 
3,506

Research and development
5,550

 
1,473

 
13,771

 
3,785

General and administrative
1,539

 
702

 
4,025

 
1,951


The accompanying notes are an integral part of these condensed consolidated financial statements.

4



Tableau Software, Inc.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands)
Net income (loss)
$
(4,631
)
 
$
2,441

 
$
(14,834
)
 
$
(4,169
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustment
117

 
(5
)
 
220

 
(41
)
Comprehensive income (loss)
$
(4,514
)
 
$
2,436

 
$
(14,614
)
 
$
(4,210
)

The accompanying notes are an integral part of these condensed consolidated financial statements.


5



Tableau Software, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Nine Months Ended September 30,
 
2014
 
2013
 
 (in thousands)
Operating activities
 
 
 
Net loss
$
(14,834
)
 
$
(4,169
)
Adjustments to reconcile net loss to net cash provided by operating activities

 

Depreciation and amortization expense
9,473

 
4,580

Provision for doubtful accounts
(26
)
 
230

Stock-based compensation expense
31,524

 
9,533

Excess tax benefit from stock-based compensation
(3,758
)
 
(823
)
Deferred income taxes
3,532

 
701

Changes in operating assets and liabilities

 

Accounts receivable
(7,398
)
 
(13,479
)
Prepaid expenses, deposits and other assets
(2,910
)
 
(2,812
)
Income taxes receivable
(61
)
 
(3,453
)
Deferred revenue
32,232

 
19,527

Accounts payable and accrued liabilities
9,102

 
9,028

Income taxes payable
66

 
216

Net cash provided by operating activities
56,942

 
19,079

Investing activities
 
 
 
Purchase of property and equipment
(26,588
)
 
(11,515
)
Sale of property and equipment
1,694

 

Net cash used in investing activities
(24,894
)
 
(11,515
)
Financing activities
 
 
 
Proceeds from public offering, net of underwriters' discount and offering costs
344,077

 
176,974

Proceeds from exercise of stock options
12,714

 
1,672

Excess tax benefit from stock-based compensation
3,758

 
823

Net cash provided by financing activities
360,549

 
179,469

Effect of exchange rate changes on cash and cash equivalents
(755
)
 
2

Net increase in cash and cash equivalents
391,842

 
187,035

Cash and cash equivalents
 
 
 
Beginning of period
252,674

 
39,302

End of period
$
644,516

 
$
226,337

 
 
 
 
Supplemental information
 
 
 
Accrued purchases of property and equipment
$
3,649

 
$
3,155

Estimated asset retirement obligations recognized
667

 

Property and equipment acquired under build-to-suit lease
11,600

 

Property and equipment sold in sale-leaseback transaction
11,600

 


The accompanying notes are an integral part of these condensed consolidated financial statements.

6



Tableau Software, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1. Description of Business

Tableau Software, Inc., a Delaware corporation, and its wholly-owned subsidiaries (the “Company,” "we," "us" or "our") are headquartered in Seattle, Washington. Our software products put the power of data into the hands of everyday people, allowing a broad population of business users to engage with their data, ask questions, solve problems and create value. Based on innovative core technologies originally developed at Stanford University, our products dramatically reduce the complexity, inflexibility and expense associated with traditional business intelligence applications. We currently make four key products: Tableau Desktop, a self-service, powerful analytics product for anyone with data; Tableau Server, a business intelligence platform for organizations; Tableau Online, a cloud-based hosted version of Tableau Server; and Tableau Public, a free cloud-based platform for analyzing and sharing public data.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation

The accompanying unaudited condensed consolidated financial information has been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The condensed consolidated balance sheet data as of December 31, 2013 was derived from audited financial statements, but does not include all disclosures required by GAAP. The condensed consolidated financial information should be read in conjunction with the consolidated financial statements and notes included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2013 filed with the SEC on February 27, 2014.

In the opinion of management, the accompanying unaudited condensed consolidated financial information includes all normal recurring adjustments necessary for a fair presentation of the Company's financial position, results of operations, comprehensive loss and cash flows for the interim periods, but is not necessarily indicative of the results that may be expected for the year ending December 31, 2014. All intercompany accounts and transactions have been eliminated in consolidation.

Public Offerings
 
In May 2013, we completed our initial public offering ("IPO") whereby 9,430,000 shares of Class A common stock were sold to the public at a price of $31.00 per share. We sold 6,230,000 shares of Class A common stock and the selling stockholders sold 3,200,000 shares of Class A common stock. We received aggregate proceeds of $177.0 million from the IPO, net of underwriters' discounts and commissions and offering expenses. Upon the closing of the IPO, all shares of our outstanding convertible preferred stock automatically converted into shares of Class B common stock.

In March 2014, we closed a follow-on offering, in which we sold 4,000,000 shares of our Class A common stock at a price to the public of $89.25 per share. The aggregate offering price for shares sold in the offering was approximately $344.1 million, net of underwriting discounts, commissions and offering costs.

Use of Estimates
    
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates include depreciable lives for property and equipment, stock-based compensation, income taxes, accrued liabilities, and collectability of accounts receivable. Actual results could differ from those estimates.


7



Risks and Uncertainties

Inherent in our business are various risks and uncertainties, including our limited operating history and development of advanced technologies in a rapidly changing industry. These risks include our ability to manage our rapid growth and our ability to attract new customers and expand sales to existing customers, as well as other risks and uncertainties. In the event that we do not successfully implement our business plan, certain assets may not be recoverable, certain liabilities may not be paid and investments in our capital stock may not be recoverable. Our success depends upon the acceptance of our technology, the development of sales and distribution channels, and our ability to generate significant revenues from the use of our technology.

Segments

We follow the authoritative literature that established annual and interim reporting standards for an enterprise’s operating segments and related disclosures about its products and services, geographic regions and major customers.

We operate our business as one operating segment. Our chief operating decision makers are our Chief Executive Officer and Chief Financial Officer, who review financial information presented on a consolidated basis for purposes of making operating decisions, assessing financial performance and allocating resources.

Concentrations of Risk

Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. We extend credit to customers based upon an evaluation of the customer’s financial condition and generally collateral is not required. As of September 30, 2014 and December 31, 2013, no individual customer accounted for 10% or more of total accounts receivable. For the three and nine months ended September 30, 2014 and 2013, no individual customer represented 10% or more of our total revenues.
 
Leases and Asset Retirement Obligations

Leases are categorized at their inception as either operating or capital leases. Within some lease agreements, rent holidays and other incentives are included. Lease costs are recognized on a straight-line basis, over the term of the agreement generally beginning once control of the space is achieved, without regard to deferred payment terms, such as rent holidays that defer the commencement date of required payments. Additionally, incentives received are treated as a reduction of costs over the term of the agreement.     
    
Leased buildings under build-to-suit lease arrangements are capitalized and included in property and equipment when we are involved in the construction of the structural improvements or take construction risk prior to the commencement of the lease. Upon completion of the construction under the build-to-suit leases, we assess whether those arrangements qualify for sales recognition under the sale-leaseback accounting guidance. If we continue to be the deemed owner, the facilities would be accounted for as financing leases.

Liabilities are established for the present value of estimated future costs to retire long-lived assets at the termination or expiration of a lease. Assets are recorded to increase the carrying amount of the related long-lived assets in the period in which the obligation is incurred. Such assets are depreciated over the estimated useful life of the asset, and the recorded liabilities are accreted to the future value of the estimated retirement costs.

Recent Accounting Pronouncements

In May 2014, as part of its ongoing efforts to assist in the convergence of GAAP and International Financial Reporting Standards (“IFRS”), the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09 related to revenue recognition. The new guidance sets forth a new five-step revenue recognition model that replaces the prior revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed in GAAP. The underlying principle of the new standard is that a business or other organization will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects what it expects in exchange for the

8



goods or services. The standard also requires more detailed disclosures and provides additional guidance for transactions that were not addressed completely in the prior accounting guidance. ASU 2014-09 provides retrospective or modified prospective methods of initial adoption and is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. Early adoption is not permitted. We are currently evaluating the method of adoption and the impact that this standard will have on our consolidated financial statements.

In August 2014, the FASB issued ASU 2014-15 related to going concern. The new guidance explicitly requires that management assess an entity's ability to continue as a going concern and may require additional detailed disclosures. ASU 2014-15 is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. Though permitted, we do not plan to early adopt. We do not believe that this standard will have a significant impact on our consolidated financial statements.

As an “emerging growth company”, the Jumpstart Our Business Startups Act allows us to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies.
Note 3. Stockholders' Equity
Common Stock
Our certificate of incorporation, as amended and restated, authorizes us to issue 75,000,000 shares of Class B common stock, $0.0001 par value per share, and 750,000,000 shares of Class A common stock, $0.0001 par value per share. Each holder of Class B common stock is entitled to ten votes per share and each holder of Class A common stock is entitled to one vote per share. At its discretion, the board of directors may declare dividends on shares of common stock, subject to the rights of our preferred stockholders, if any. Upon liquidation or dissolution, holders of common stock will receive distributions only after preferred stock preferences have been satisfied.
Note 4. Stock-Based Compensation

A summary of the option activity under our equity incentive plan during the nine months ended September 30, 2014 is presented below:
    
 
 
Options Outstanding
 
 
Shares
 
Weighted Average Exercise Price Per Share
 
Weighted Average Remaining Contractual Term
 
Aggregate Intrinsic Value
 
 
 
 
 
 
(in years)
 
(in thousands)
Options outstanding at December 31, 2013
 
12,236,400

 
$
7.64

 

 
 
Options exercised
 
(3,089,585
)
 
4.12

 
 
 
 
Options canceled
 
(161
)
 
25.91

 
 
 
 
Options forfeited
 
(189,327
)
 
13.67

 
 
 
 
Options outstanding at September 30, 2014
 
8,957,327

 
$
8.73

 
7.22
 
$
572,544

Vested and expected to vest at September 30, 2014
 
8,773,499

 
$
8.64

 
7.20
 
$
561,558

Exercisable at September 30, 2014
 
4,778,878

 
$
6.60

 
6.54
 
$
315,625

    
We also grant Restricted Stock Unit ("RSU") awards to our employees and non-employee directors under the provisions of our equity incentive plan. The fair value of an RSU is determined by using the closing price of our Class A common stock on the New York Stock Exchange on the date of grant. An RSU award entitles the holder to receive shares of the Company’s Class A common stock as the award vests, which is generally based on the

9



requisite service period. The Company's unvested RSUs do not have nonforfeitable rights to dividends or dividend equivalents.

The following provides a summary of our RSU activity during the nine months ended September 30, 2014:
 
 
Number of Shares Underlying Outstanding RSUs
 
Weighted-Average Grant-Date Fair Value per RSU
 
 
 
 
 
RSUs outstanding at December 31, 2013
 
574,350

 
$
64.06

RSUs granted
 
1,817,802

 
78.26

RSUs vested
 
(35,096
)
 
59.80

RSUs forfeited
 
(61,008
)
 
80.10

RSUs outstanding at September 30, 2014
 
2,296,048

 
$
74.94

    
Stock-based compensation expense is amortized using the straight-line method over the requisite service period. As of September 30, 2014, total unrecognized compensation cost, adjusted for estimated forfeitures, related to stock options and unvested RSUs was approximately $161.1 million, which is expected to be recognized over a period of approximately 3.3 years.
    
The summary of shares available for issuance for equity based awards (including stock options and RSUs) for the nine months ended September 30, 2014 are as follows:
 
 
Shares Available for Grant
Balances at December 31, 2013
 
5,313,281

Authorized
 
3,109,934

Granted
 
(1,817,802
)
Canceled
 
161

Forfeited
 
250,335

Balances at September 30, 2014
 
6,855,909

Note 5. Income Taxes

Our income tax expense or benefit from income taxes for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter we update our estimate of the annual effective tax rate, and if our estimated tax rate changes, we make a cumulative adjustment.
    
Our effective tax rate was (35.5)% and (3.8)% for the three months ended September 30, 2014 and 2013, and (49.6)% and 28.7% for the nine months ended September 30, 2014 and 2013, respectively. The change in effective tax rates over both the three and nine month periods is a result of the expiration of the U.S. research and development tax credits as of December 31, 2013 and an increase in non-deductible stock-based compensation in 2014.

During the nine months ended September 30, 2014, we recognized income tax expense of $4.9 million, which includes $1.3 million of discrete tax benefits relating primarily to disqualifying dispositions on incentive stock options. During the nine months ended September 30, 2013, we recognized an income tax benefit of $1.7 million, which included $1.1 million of discrete tax benefits relating to the reinstatement of the U.S. research and development tax credits.

10



Note 6. Commitments and Contingencies
As of September 30, 2014, our principal obligations consisted of obligations outstanding under non-cancellable leases. We lease our facilities under operating leases that expire at various dates through 2025. The following table represents our non-cancellable minimum lease payments as of September 30, 2014 (in thousands):
Period Ending
 
Amount
Remainder of 2014
 
$
2,441

2015
 
9,334

2016
 
8,521

2017
 
7,883

2018
 
7,200

Thereafter
 
32,398

Total
 
$
67,777

On February 5, 2014, we entered into a ten year lease agreement, which began in August 2014, upon completion of leasehold improvements. The lease includes two optional renewal periods of five years each. During the second quarter of 2014, we capitalized $11.6 million into construction in progress and recorded a corresponding long-term liability for build-to-suit lease agreements under which we were considered the owner, for accounting purposes, during the construction period. During the third quarter of 2014, at the end of the construction period, we met the criteria for sale-leaseback and therefore decapitalized $11.6 million in construction in progress and removed the corresponding long term liability. We have no continuing involvement in the property, other than a normal leaseback.

We are subject to certain routine legal proceedings, as well as demands and claims that arise in the normal course of our business. We make a provision for a liability relating to legal matters when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed and adjusted to include the impacts of negotiations, estimated settlements, legal rulings, advice of legal counsel, and other information and events pertaining to a particular matter.
 
We are not aware of any pending legal proceedings that, individually or in the aggregate, would have a material adverse effect on our business, operating results, or financial condition. We may in the future be party to litigation arising in the ordinary course of business, including claims that we allegedly infringe upon third party intellectual property rights. Such claims, even if not meritorious, could result in the expenditure of significant financial and management resources.
Note 7. Segments and Information about Revenues by Geographic Area
The following table presents our revenues by geographic region of end users who purchased products or services for the periods presented below:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands)
United States and Canada
$
80,360

 
$
49,887

 
$
208,730

 
$
122,905

International
24,109

 
11,192

 
60,963

 
28,076

Total revenues
$
104,469

 
$
61,079

 
$
269,693

 
$
150,981


11



Note 8. Net Income (Loss) Per Share
Immediately prior to the closing of our IPO in May 2013, all outstanding shares of our Series A preferred stock and Series B preferred stock were converted into Class B common stock. We issued 6,230,000 shares of Class A common stock in the IPO. In addition, 3,200,000 shares of Class B common stock (including 2,000,000 shares of Class B common stock issued upon the conversion of our preferred stock) held by our existing stockholders were converted into Class A common stock and sold in the IPO. As a result, as of September 30, 2014, Class A and Class B common stock are the only outstanding classes of capital stock of the Company. The rights of the holders of Class A and Class B common stock are identical, except with respect to voting and conversion. Each holder of Class B common stock is entitled to ten votes per share and each share of Class A common stock is entitled to one vote per share. Shares of Class B common stock may be converted into Class A common stock at any time at the option of the stockholder, and are automatically converted upon sale or transfer to Class A common stock, subject to certain limited exceptions.
 
Net income per share attributable to common stockholders is presented in conformity with the two-class method required for participating securities for periods in which we have net income. As all shares of Series A and Series B preferred stock were converted into shares of Class B common stock in connection with our IPO, there have been no shares of preferred stock outstanding since the IPO, and therefore there was no allocation to preferred shares in the three and nine months ended September 30, 2014 and 2013.

The following table presents the computation of basic and diluted net income (loss) per share attributable to common stockholders:    
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands, except per share amounts)
Basic net income (loss) attributable to common stockholders:
 
 
 
 
 
 
 
Net income (loss)
$
(4,631
)
 
$
2,441

 
$
(14,834
)
 
$
(4,169
)
Weighted average shares used to compute basic net income (loss) per share
68,966

 
59,143

 
66,923

 
47,093

Net income (loss) per share attributable to common stockholders - basic
$
(0.07
)
 
$
0.04

 
$
(0.22
)
 
$
(0.09
)
Diluted net income (loss) attributable to common stockholders:
 
 
 
 
 
 
 
Net income (loss)
$
(4,631
)
 
$
2,441


$
(14,834
)

$
(4,169
)
Weighted average shares used to compute basic net income (loss) per share
68,966

 
59,143

 
66,923

 
47,093

Effect of potentially dilutive shares:
 
 
 
 
 
 
 
Stock awards

 
12,205

 

 

Weighted average shares used to compute diluted net income (loss) per share
68,966

 
71,348

 
66,923

 
47,093

Net income (loss) per share attributable to common stockholders - diluted
$
(0.07
)
 
$
0.03

 
$
(0.22
)
 
$
(0.09
)
    
For the three months ended September 30, 2014 and the nine months ended September 30, 2014 and 2013, outstanding stock awards were antidilutive because of our net loss, and as such, their effect has not been included in the calculation of basic or diluted net loss per share attributable to common stockholders.


12



The following shares subject to outstanding common stock awards were excluded from the computation of diluted net loss per share attributable to common stockholders for the periods presented as their effect would have been antidilutive:    
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands)
Shares subject to outstanding common stock awards
11,253

 
6

 
11,253

 
15,468


Note 9. Fair Value Measurements

We categorize assets and liabilities recorded at fair value based upon the level of judgment associated with inputs used to measure their fair value. The levels of the fair value hierarchy are as follows:

Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2—Inputs are quoted prices for similar assets and liabilities in active markets or quoted prices
for identical or similar instruments in markets that are not active and model-derived valuations in
which all significant inputs and significant value drivers are observable in active markets.

Level 3—Inputs are unobservable inputs based on our own assumptions and valuation
techniques used to measure assets and liabilities at fair value. The inputs require significant
management judgment or estimation.

Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.

The following table presents the fair value of our financial assets using the fair value hierarchy:
 
 
September 30, 2014
Description
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
(in thousands)
Money market funds
 
$
626,045

 
$

 
$

 
$
626,045

 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
Description
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
(in thousands)
Money market funds
 
$
238,810

 
$

 
$

 
$
238,810

    
We have no financial assets or liabilities measured using Level 2 or Level 3 inputs.


13



ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion of our financial condition and results of operations in conjunction with the condensed consolidated financial statements and notes thereto included elsewhere in this report and in our Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC, on February 27, 2014.
Special Note Regarding Forward-Looking Statements
This report contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed in the forward-looking statements. The statements contained in this report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “seek,” “should,” “strategy,” “target,” “will,” “would” and similar expressions or variations intended to identify forward-looking statements. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section titled “Risk Factors” included under Part II, Item 1A of this report. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.
Overview
Our mission is to help people see and understand data. Our software products put the power of data into the hands of everyday people, allowing a broad population of business users to engage with their data, ask questions, solve problems and create value. Based on innovative core technologies originally developed at Stanford University, our products dramatically reduce the complexity, inflexibility and expense associated with traditional business intelligence applications. We currently offer four products: Tableau Desktop, a self-service analytics product for anyone with data; Tableau Server, a business intelligence platform for organizations; Tableau Online, a cloud-based hosted version of Tableau Server; and Tableau Public, a free cloud-based platform for analyzing and sharing public data.
We have sought to rapidly improve the capabilities of our products over time and intend to continue to invest in product innovation and leadership. We were founded in January 2003 and we introduced Tableau Desktop in December 2003, our first version of Tableau Server in March 2007, our first version of Tableau Public in February 2010 and our first version of Tableau Online in July 2013. Building on our foundational technology innovations, we have released eight major versions of our software, each expanding and improving our products' capabilities. Our most recent major release, Tableau 8.0, includes several new features including Web and mobile authoring, free form dashboards, forecasting, integration with enterprise applications such as salesforce.com and Google Analytics, and application programming interfaces, or APIs. During the second quarter of 2014, we released Tableau 8.2, which introduced several new features, including Story Points, which allows users to create interactive data-driven stories. Tableau 8.2 also allows Tableau Desktop software to run natively on the Mac.
Our products are used by people of diverse skill levels across all kinds of organizations, including Fortune 500 corporations, small and medium-sized businesses, government agencies, universities, research institutions, and non-profits. As of September 30, 2014, we had over 23,000 customer accounts located in over 100 different countries. We define a customer account as a purchaser of our products. Customer accounts are typically organizations. In some cases, organizations will have multiple groups purchasing our software, which we count as discrete customer accounts.
Our distribution strategy is based on a “land and expand” business model and is designed to capitalize on the ease of use, low up-front cost and collaborative capabilities of our software. To facilitate rapid adoption of our products, we provide fully-functional free trial versions of our products on our website and have created a simple pricing model. After an initial trial or purchase, which is often made to target a specific business need at a

14



grassroots level within an organization, the use of our products often spreads across departments, divisions, and geographies, via word-of-mouth, discovery of new use cases, and our sales efforts.
We generate revenues in the form of license fees and related maintenance and services fees. License revenues reflect the revenues recognized from sales of licenses to new customer accounts and additional licenses to existing customer accounts. License fees include perpetual, term, and subscription license fees. Fees from perpetual licenses comprised more than 90% of our license revenues for the three and nine months ended September 30, 2014. Maintenance and services revenues reflect the revenues recognized from fees paid for maintenance services (including support and unspecified upgrades and enhancements when and if they are available) and, to a lesser extent, for training and professional services that help our customers maximize the benefits from using our products. A substantial majority of our maintenance and services revenues to date has been attributable to revenues from maintenance agreements. When purchasing a license, a customer also typically purchases one year of maintenance service and has the opportunity to purchase maintenance service annually thereafter. We expect maintenance and services revenues to become a larger percentage of our total revenues as our customer base grows.
Our direct sales approach includes inside sales teams and field sales teams. We also sell our products through indirect sales channels including technology vendors, resellers, original equipment manufacturers, or OEMs, and independent software vendors, or ISVs. We view these partners as an extension of our team, playing an integral role in our growth. We plan to continue to invest in our partner programs to help us enter and grow in new markets while complementing our direct sales efforts.
With approximately 23% of our total revenues from customers located outside the United States and Canada in both the three and nine months ended September 30, 2014, we believe there is significant opportunity to expand our international business. Our products currently support eight languages and we are aggressively expanding our direct sales force and indirect sales channels outside the United States.
Our quarterly results reflect seasonality in the sale of our products and services. Historically, we believe a pattern of increased license sales in the fourth fiscal quarter as a result of industry buying patterns has positively impacted total revenues in that period, which has resulted in low or negative sequential revenue growth in the first quarter compared to the prior quarter.
We have been growing rapidly in recent periods. Our total revenues for the three and nine months ended September 30, 2014 were $104.5 million and $269.7 million, respectively, compared to $61.1 million and $151.0 million for the three and nine months ended September 30, 2013, respectively. We increased the total number of customer accounts that had purchased our products to over 23,000 as of September 30, 2014 as compared to over 15,000 customer accounts as of September 30, 2013.
During the three and nine months ended September 30, 2014, we significantly increased the size of our workforce, particularly in our sales and marketing and research and development ("R&D") organizations, expanded internationally, and invested in our operational infrastructure to support our growth. As a result of our significant investments in growth, we incurred a net loss in both of the three and nine months ended September 30, 2014. Our net loss for the three and nine months ended September 30, 2014 was $4.6 million and $14.8 million, respectively, compared to net income of $2.4 million for the three months ended September 30, 2013 and net loss of $4.2 million for the nine months ended September 30, 2013.
During the three and nine months ended September 30, 2014, there were 200 and 477 sales transactions greater than $100,000, respectively, compared to 119 and 276 for the corresponding periods in 2013.

Factors Affecting Our Performance
We believe that our performance and future success are dependent upon a number of factors, including our ability to continue to expand and further penetrate our customer base, innovate and enhance our products, and invest in our infrastructure. While each of these areas presents significant opportunities for us, they also pose significant risks and challenges that we must successfully address. See the section of this report titled “Risk Factors.”



15



Investment in Expansion and Further Penetration of Our Customer Base
Our performance depends on our ability to continue to attract new customers and to increase acceptance of our products within our existing customers, both domestically and internationally. Our ability to increase acceptance amongst existing customers is particularly important in light of our land and expand business model. We believe the existing market for business analytics software is underserved. We believe that we have an addressable market that is substantially larger than the market for traditional business analytics software. As a result, we believe we have the opportunity to substantially expand our customer base and to increase adoption of our products within and across our existing customers.
In order to expand and further penetrate our customer base, we have made and plan to continue to make significant investments in expanding our direct sales teams and indirect sales channels, and increasing our brand awareness. We plan to continue to significantly increase the size of our sales and marketing team domestically and internationally, particularly in the near term. We also intend to expand our online and offline marketing efforts to increase our brand awareness.
Investment in Innovation and Advancement of Our Products
Our performance is also significantly dependent on the investments we make in our R&D efforts, and in our ability to continue to innovate, improve functionality, adapt to new technologies or changes to existing technologies, and allow our customers to analyze data from a large and expanding range of data stores. We intend to continue to invest in product innovation and leadership, including hiring top technical talent, focusing on core technology innovation, and maintaining an agile organization that supports rapid release cycles.
Investment in Infrastructure
We have made and expect to continue to make substantial investments in our infrastructure in connection with enhancing and expanding our operations domestically and internationally. We expect to continue to open new offices internationally and domestically. Our international expansion efforts have resulted and will result in increased costs and are subject to a variety of risks, including those associated with communication and integration problems resulting from geographic dispersion and language and cultural differences, and compliance with laws of multiple countries. Moreover, the investments we have made and will make in our international organization may not result in our expected benefits. We currently expect to rely on our current cash on hand and cash generated from our operations to fund these investments. These costs could adversely affect our operating results.
Mix and Timing of Sales
Our land and expand business model results in a wide variety of sales transaction sizes, ranging from a single Tableau Desktop order of $1,000 to $2,000 to Tableau Desktop and Tableau Server orders of over $1.0 million. The time it takes to close a transaction, defined as the time between when a sales opportunity is entered in our customer relationship management system until when a related license agreement is signed with the customer, generally varies with the size of the transaction.
Components of Operating Results
Revenues
License revenues.   License revenues consist of the revenues recognized from sales of licenses to new customers and additional licenses to existing customers. More than 90% of our license revenues for the quarter ended September 30, 2014 resulted from perpetual licenses, under which we generally recognize the license fee portion of the arrangement upfront, assuming all revenue recognition criteria are satisfied. In addition, a small number of customers have purchased term or subscription licenses, under which we recognize the license fee ratably, on a straight-line basis, over the term of the license. In July 2013, we introduced Tableau Online, a subscription, cloud-based version of Tableau Server. To date, we have not derived a significant amount of revenues from term or subscription licenses.
Maintenance and services revenues.   Maintenance and services revenues consist of revenues from maintenance agreements and, to a lesser extent, professional services and training. A substantial majority of our maintenance and services revenues to date has been attributable to revenues from maintenance agreements. When purchasing a perpetual license, a customer also typically purchases one year of maintenance, and has the opportunity to purchase maintenance annually thereafter. We currently charge approximately 25% of the price of the perpetual license for each year of maintenance service, although this price may vary with regard to large enterprise sales. We measure the aggregate perpetual license maintenance renewal rate for our customers in a

16



12-month period of time, based on a dollar renewal rate for contracts expiring during that time period. Our maintenance renewal rate is measured three months after the 12-month period ends to account for late renewals. Our aggregate maintenance renewal rate for the 12-month period ended June 30, 2014 was over 90%.
Customers with maintenance agreements are entitled to receive support and unspecified upgrades and enhancements if and when they become available during the maintenance term. We recognize the revenues associated with maintenance agreements ratably, on a straight-line method over the associated maintenance term.
When a term or subscription license is purchased, maintenance service is typically bundled with the license for the term of the license period. In arrangements involving a term or subscription license, we recognize both the license and maintenance revenues ratably, on a straight-line method, over the contract term. Term and subscription license revenues are included in license revenues.
We also have a professional services organization focused on both training and assisting our customers to fully leverage the use of our products. We recognize the revenues associated with these professional services on a time and materials basis as we deliver the services or provide the training.
We expect maintenance and services revenues to become a larger percentage of our total revenues as our customer base grows.
Cost of Revenues
Cost of license revenues.   Cost of license revenues primarily consists of referral fees paid to third parties. For Tableau Online, cost of license revenues is calculated through an allocation of shared costs, which was immaterial for the three and nine months ended September 30, 2014.
Cost of maintenance and services revenues.   Cost of maintenance and services revenues includes salaries, benefits and stock-based compensation expense associated with our technical support and services organization, as well as allocated overhead. Allocated overhead includes overhead costs for depreciation of equipment, facilities (consisting of leasehold improvements and rent) and technical operations (including costs for compensation of our personnel and costs associated with our infrastructure). We recognize expenses related to our technical support and services organization as they are incurred. We expect the cost of maintenance and services revenues to increase as a percentage of maintenance and services revenues due to increased investment in our technical support and services organization to support our expanding customer base.
We expect that the cost of revenues will increase as a percentage of total revenues as we expand our technical support capabilities worldwide and seek to expand our product and service offerings.
Gross Profit and Gross Margin
Gross profit is total revenues less total cost of revenues. Gross margin is gross profit expressed as a percentage of total revenues. We expect that our gross margin may fluctuate from period to period as a result of changes in product and services mix, direct and indirect sales mix and the introduction of new products by us or our competitors.
Operating Expenses
Our operating expenses are classified into three categories: sales and marketing, research and development, and general and administrative. For each category, the largest component is personnel costs, which include salaries, payroll taxes, employee benefit costs, bonuses, commissions, as applicable, and stock-based compensation expense.
Sales and marketing.    Sales and marketing expenses primarily consist of personnel-related costs attributable to our sales and marketing personnel, commissions earned by our sales personnel, marketing, travel, and facility related costs and allocated overhead. We expect sales and marketing expenses to continue to significantly increase, in absolute dollars, for the remainder of 2014 compared to 2013 primarily due to our planned growth in our sales and marketing organization, both domestically and internationally. We expect sales and marketing expenses to be our largest category of operating expenses as we continue to expand our business.
Research and development.   R&D expenses primarily consist of personnel-related costs attributable to our R&D personnel and contractors, as well as allocated overhead. We have devoted our product development efforts primarily to develop new products, incorporate additional features, improve functionality, support additional languages and adapt to new technologies or changes to existing technologies. We expect that our R&D expenses

17



will continue to increase, in absolute dollars, in 2014 compared to 2013 as we increase our R&D headcount to further strengthen our software and invest in the development of our products.
General and administrative.  General and administrative expenses primarily consist of personnel-related costs attributable to our executive, finance, legal, human resources and administrative personnel, legal, accounting and other professional services fees, other corporate expenses and allocated overhead. We will continue to incur additional expenses associated with being a publicly traded company, including higher legal, corporate insurance and accounting expenses, and the additional costs of achieving and maintaining compliance with Section 404 of the Sarbanes-Oxley Act and other regulations. We also expect that general and administrative expenses will continue to increase, in absolute dollars, for the remainder of 2014 compared to 2013 as we further expand our operations, particularly internationally.
Other Income (Expense), Net
Other income (expense), net consists primarily of gains and losses on foreign currency transactions and interest income on our cash and cash equivalents balances.
Income Tax Expense (Benefit)
Our income taxes are based on the amount of our taxable income and enacted federal, state and foreign tax rates, as adjusted for allowable credits and deductions. Our provision for income taxes consists of federal, state and foreign taxes.
We generally conduct our international operations through wholly-owned subsidiaries, branches and representative offices and report our taxable income in various jurisdictions worldwide based upon our business operations in those jurisdictions. Our corporate structure and intercompany arrangements align with the international expansion of our business activities. The application of the tax laws of various jurisdictions, including the United States, to our international business activities is subject to interpretation. The taxing authorities of the jurisdictions in which we operate may challenge our methodologies for valuing developed technology or intercompany arrangements, including our transfer pricing, or determine the manner in which we operate our business is not consistent with the manner in which we report our income to the jurisdictions. If such a disagreement were to occur, and our positions were not sustained, we could be required to pay additional taxes, interest and penalties, resulting in higher effective tax rates, reduced cash flows and lower overall profitability of our operations. Additionally, our future worldwide tax rate and financial position may be affected by changes in tax laws or the interpretation of such tax laws, such as the Base Erosion Profit Shifting ("BEPS") project initiated by the Organization for Economic Co-operation and Development ("OECD") and recent announcements by Ireland's Minister for Finance related to its 2015 budget.
Our income tax provision may be significantly affected by changes to our estimates for taxes in jurisdictions in which we operate and other estimates utilized in determining our global effective tax rate. Actual results may also differ from our estimates based on changes in tax laws and economic conditions. Such changes could have a substantial impact on the income tax provision and effective income tax rate.
We are subject to the continuous examinations of our income tax returns in various tax jurisdictions and such jurisdictions may assess additional income tax liabilities against us. We are currently under audit by the Internal Revenue Service for taxable years 2012 and 2013. Although we believe our tax estimates are reasonable, the final outcome of tax audits and any related litigation could be materially different from our historical income tax provisions. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes.
Critical Accounting Policies and Estimates
We prepare our condensed consolidated financial statements in accordance with GAAP. The preparation of condensed consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from the estimates made by our management. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations, and cash flows will be affected.
Except as follows, there have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in our Annual Report on Form 10-K, filed with the SEC on February 27, 2014.

18



Leases and Asset Retirement Obligations
Leases are categorized at their inception as either operating or capital leases. Within some lease agreements, rent holidays and other incentives are included. Lease costs are recognized on a straight-line basis, over the term of the agreement generally beginning once control of the space is achieved, without regard to deferred payment terms, such as rent holidays that defer the commencement date of required payments. Additionally, incentives received are treated as a reduction of costs over the term of the agreement.     
Leased buildings under build-to-suit lease arrangements are capitalized and included in property and equipment when we are involved in the construction of the structural improvements or take construction risk prior to the commencement of the lease. Upon completion of the construction under the build-to-suit leases, we assess whether those arrangements qualify for sales recognition under the sale-leaseback accounting guidance. If we continue to be the deemed owner, the facilities would be accounted for as financing leases.
Liabilities are established for the present value of estimated future costs to retire long-lived assets at the termination or expiration of a lease. Assets are recorded to increase the carrying amount of the related long-lived assets in the period in which the obligation is incurred. Such assets are depreciated over the estimated useful life of the asset, and the recorded liabilities are accreted to the future value of the estimated retirement costs.
Recent Accounting Pronouncements
In May 2014, as part of its ongoing efforts to assist in the convergence of GAAP and International Financial Reporting Standards (“IFRS”), the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09 related to revenue recognition. The new guidance sets forth a new five-step revenue recognition model that replaces the prior revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed in GAAP. The underlying principle of the new standard is that a business or other organization will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. The standard also requires more detailed disclosures and provides additional guidance for transactions that were not addressed completely in the prior accounting guidance. ASU 2014-09 provides retrospective or modified prospective methods of initial adoption and is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. Early adoption is not permitted. We are currently evaluating the method of adoption and the impact that this standard will have on our consolidated financial statements.
In August 2014, the FASB issued ASU 2014-15 related to going concern. The new guidance explicitly requires that management assess an entity's ability to continue as a going concern and may require additional detailed disclosures. ASU 2014-15 is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. Though permitted, we do not plan to early adopt. We do not believe that this standard will have a significant impact on our consolidated financial statements.
As an “emerging growth company”, the Jumpstart Our Business Startups Act allows us to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies.    We will no longer be able to take advantage of this exemption beginning on December 31, 2014, when we will be deemed a large accelerated filer and, as a result, cease to be an "emerging growth company".

19



Results of Operations

The following tables set forth our results of operations for the periods presented and as a percentage of our total revenues for those periods. The period-to-period comparison of financial results is not necessarily indicative of financial results to be achieved in future periods.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands)
Condensed Consolidated Statements of Operations Data:
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
License
$
69,763

 
$
41,951

 
$
178,562

 
$
101,895

Maintenance and services
34,706

 
19,128

 
91,131

 
49,086

Total revenues
104,469

 
61,079

 
269,693

 
150,981

Cost of revenues
 
 
 
 
 
 
 
License
273

 
237

 
568

 
523

Maintenance and services
9,268

 
4,341

 
24,806

 
11,951

Total cost of revenues (1)
9,541

 
4,578

 
25,374

 
12,474

Gross profit
94,928

 
56,501

 
244,319

 
138,507

Operating expenses
 
 
 
 
 
 
 
Sales and marketing (1)
58,565

 
32,189

 
147,936

 
83,426

Research and development (1)
29,022

 
15,438

 
77,186

 
42,514

General and administrative (1)
11,111

 
6,345

 
28,953

 
18,064

Total operating expenses
98,698

 
53,972

 
254,075

 
144,004

Operating income (loss)
(3,770
)
 
2,529

 
(9,756
)
 
(5,497
)
Other income (expense), net
353

 
(177
)
 
(163
)
 
(350
)
Income (loss) before income tax expense (benefit)
(3,417
)
 
2,352

 
(9,919
)
 
(5,847
)
Income tax expense (benefit)
1,214

 
(89
)
 
4,915

 
(1,678
)
Net Income (loss)
$
(4,631
)
 
$
2,441

 
$
(14,834
)
 
$
(4,169
)
 
 
 
 
 
 
 
 

(1) Stock based compensation expense included in the condensed consolidated statements of operations above was as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands)
Cost of revenues
$
614

 
$
113

 
$
1,457

 
$
291

Sales and marketing
4,810

 
1,442

 
12,271

 
3,506

Research and development
5,550

 
1,473

 
13,771

 
3,785

General and administrative
1,539

 
702

 
4,025

 
1,951




20



 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Condensed Consolidated Statements of Operations Data:
(as a percentage of total revenues)
Revenues
 
 
 
 
 
 
 
License
66.8
 %
 
68.7
 %
 
66.2
 %
 
67.5
 %
Maintenance and services
33.2
 %
 
31.3
 %
 
33.8
 %
 
32.5
 %
Total revenues
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of revenues
 
 
 
 
 
 
 
License
0.3
 %
 
0.4
 %
 
0.2
 %
 
0.3
 %
Maintenance and services
8.9
 %
 
7.1
 %
 
9.2
 %
 
7.9
 %
Total cost of revenues
9.1
 %
 
7.5
 %
 
9.4
 %
 
8.3
 %
Gross profit
90.9
 %
 
92.5
 %
 
90.6
 %
 
91.7
 %
Operating expenses
 
 
 
 
 
 
 
Sales and marketing
56.1
 %
 
52.7
 %
 
54.9
 %
 
55.3
 %
Research and development
27.8
 %
 
25.3
 %
 
28.6
 %
 
28.2
 %
General and administrative
10.6
 %
 
10.4
 %
 
10.7
 %
 
12.0
 %
Total operating expenses
94.5
 %
 
88.4
 %
 
94.2
 %
 
95.4
 %
Operating income (loss)
(3.6
)%
 
4.1
 %
 
(3.6
)%
 
(3.6
)%
Other expense, net
0.3
 %
 
(0.3
)%
 
(0.1
)%
 
(0.2
)%
Income (loss) before income tax expense (benefit)
(3.3
)%
 
3.9
 %
 
(3.7
)%
 
(3.9
)%
Income tax expense (benefit)
1.2
 %
 
(0.1
)%
 
1.8
 %
 
(1.1
)%
Net income (loss)
(4.4
)%
 
4.0
 %
 
(5.5
)%
 
(2.8
)%



21



Comparison of Three and Nine Months Ended September 30, 2014 and 2013

Revenues
 
Three Months Ended September 30,
 

 
Nine Months Ended September 30,
 
 
 
2014
 
2013
 
% Change
 
2014
 
2013
 
% Change
Revenues
(dollars in thousands)
License
$
69,763

 
$
41,951

 
66.3
%
 
$
178,562

 
$
101,895

 
75.2
%
Maintenance and services
34,706

 
19,128

 
81.4
%
 
91,131

 
49,086

 
85.7
%
Total revenues
$
104,469

 
$
61,079

 
71.0
%
 
269,693

 
150,981

 
78.6
%

Total revenues were $104.5 million for the three months ended September 30, 2014 compared to $61.1 million for the three months ended September 30, 2013, an increase of $43.4 million, with 66% and 81% year-over-year growth in license and maintenance and services revenues, respectively. Total revenue growth was attributable to increased demand for our products and services from new and existing customers. For example, we added over 2,500 new customer accounts in the three months ended September 30, 2014. License revenues increased $27.8 million from the three months ended September 30, 2013 to the three months ended September 30, 2014 as we continued to increase sales both domestically and internationally. The increase in license revenues was a direct result of our investment in our products and in our sales and marketing efforts. The substantial majority of our license revenues was attributable to sales of perpetual licenses. The increase in maintenance and services revenues was primarily due to increases in sales of maintenance agreements resulting from the growth of our customer base. Total revenues derived from our customer accounts outside of the United States and Canada increased, as a percentage of total revenues, to 23% for the three months ended September 30, 2014 from 18% for the three months ended September 30, 2013.

Total revenues were $269.7 million for the nine months ended September 30, 2014 compared to $151.0 million for the nine months ended September 30, 2013, an increase of $118.7 million, with 75% and 86% year-over-year growth in license and maintenance and services revenues, respectively. Total revenue growth was attributable to increased demand for our products and services from new and existing customers. For example, we added over 6,500 new customer accounts in the nine months ended September 30, 2014. License revenues increased $76.7 million from the nine months ended September 30, 2013 to the nine months ended September 30, 2014 as we continued to increase sales both domestically and internationally. The increase in license revenues was a direct result of our investment in our products and in our sales and marketing efforts. The substantial majority of our license revenues was attributable to sales of perpetual licenses. The increase in maintenance and services revenues was primarily due to increases in sales of maintenance agreements resulting from the growth of our customer base. Total revenues derived from our customer accounts outside of the United States and Canada increased, as a percentage of total revenues, to 23% for the nine months ended September 30, 2014 from 19% for the nine months ended September 30, 2013.

Cost of Revenues and Gross Margin
 
Three Months Ended September 30,
 
 
 
Nine Months Ended September 30,
 
 
 
2014
 
2013
 
% Change
 
2014
 
2013
 
% Change
Cost of revenues
(dollars in thousands)
License
$
273

 
$
237

 
15.2
%
 
$
568

 
$
523

 
8.6
%
Maintenance and services
9,268

 
4,341

 
113.5
%
 
24,806

 
11,951

 
107.6
%
Total cost of revenues
$
9,541

 
$
4,578

 
108.4
%
 
$
25,374

 
$
12,474

 
103.4
%


22



 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Gross Margin
 
 
 
 
 
License
99.6
%
 
99.4
%
 
99.7
%
 
99.5
%
Maintenance and services
73.3
%
 
77.3
%
 
72.8
%
 
75.7
%
Total gross margin
90.9
%
 
92.5
%
 
90.6
%
 
91.7
%

Total cost of revenues was $9.5 million for the three months ended September 30, 2014 compared to $4.6 million for the three months ended September 30, 2013, an increase of $5.0 million. This increase was primarily due to the cost of providing maintenance and services to our expanding customer base, including an increase in compensation expense of $3.0 million related to increased headcount and $1.2 million in facilities and allocated overhead costs. Total gross margin decreased primarily due to an increased investment in our technical support and services organization for personnel and other costs to support our expanding customer base.

Total cost of revenues was $25.4 million for the nine months ended September 30, 2014 compared to $12.5 million for the nine months ended September 30, 2013, an increase of $12.9 million. This increase was primarily due to the cost of providing maintenance and services to our expanding customer base, including an increase in compensation expense of $7.4 million related to increased headcount, $3.1 million in facilities and allocated overhead costs and $1.0 million in additional travel costs. Total gross margin decreased primarily due to an increased investment in our technical support and services organization for personnel and other costs to support our expanding customer base.
    
Operating Expenses
 
Three Months Ended September 30,
 
 
 
Nine Months Ended September 30,
 
 
 
2014
 
2013
 
% Change
 
2014
 
2013
 
% Change
Operating expenses
(dollars in thousands)
Sales and marketing
$
58,565

 
$
32,189

 
81.9
%
 
$
147,936

 
$
83,426

 
77.3
%
Research and development
29,022

 
15,438

 
88.0
%
 
77,186

 
42,514

 
81.6
%
General and administrative
11,111

 
6,345

 
75.1
%
 
28,953

 
18,064

 
60.3
%
Total operating expenses
$
98,698

 
$
53,972

 
82.9
%
 
$
254,075

 
$
144,004

 
76.4
%

Sales and Marketing

Sales and marketing expenses were $58.6 million for the three months ended September 30, 2014 compared to $32.2 million for the three months ended September 30, 2013, an increase of $26.4 million. This increase was primarily due to an increase in compensation expense of $17.2 million resulting from increased sales headcount as we expanded our sales organization both domestically and internationally, as well as commissions on increased customer orders. The remainder of the increase was primarily attributable to an increase of $4.9 million in marketing costs related to conferences and trade shows, advertising and public relations, $2.8 million in facilities and allocated overhead costs and $1.5 million in additional travel costs.

Sales and marketing expenses were $147.9 million for the nine months ended September 30, 2014 compared to $83.4 million for the nine months ended September 30, 2013, an increase of $64.5 million. This increase was primarily due to an increase in compensation expense of $43.4 million resulting from increased sales headcount as we expanded our sales organization both domestically and internationally, as well as commissions on increased customer orders. The remainder of the increase was primarily attributable to an increase of $8.5 million in marketing costs related to conferences and trade shows, advertising and public relations, $7.1 million in facilities and allocated overhead costs and $4.5 million in additional travel costs.    





23



Research and Development
    
R&D expenses were $29.0 million for the three months ended September 30, 2014 compared to $15.4 million for the three months ended September 30, 2013, an increase of $13.6 million. This increase was primarily due to an increase in compensation expense of $11.6 million resulting from increased headcount as part of our focus on further developing and enhancing our products and an increase of $1.7 million in facilities and allocated overhead costs.

R&D expenses were $77.2 million for the nine months ended September 30, 2014 compared to $42.5 million for the nine months ended September 30, 2013, an increase of $34.7 million. This increase was primarily due to an increase in compensation expense of $29.2 million resulting from increased headcount as part of our focus on further developing and enhancing our products and an increase of $4.3 million in facilities and allocated overhead costs.

General and Administrative

General and administrative expenses were $11.1 million for the three months ended September 30, 2014 compared to $6.3 million for the three months ended September 30, 2013, an increase of $4.8 million. This increase was primarily due to an increase in compensation expense of $2.9 million resulting from increased headcount to support our overall growth. The remainder of the increase was primarily attributable to an increase of $1.0 million in professional service fees and $0.5 million in facilities and allocated overhead costs.

General and administrative expenses were $29.0 million for the nine months ended September 30, 2014 compared to $18.1 million for the nine months ended September 30, 2013, an increase of $10.9 million. This increase was primarily due to an increase in compensation expense of $6.5 million resulting from increased headcount to support our overall growth. The remainder of the increase was primarily attributable to an increase of $2.2 million in professional service fees and $1.0 million in facilities and allocated overhead costs.

Other Income (Expense), Net
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands)
Other income (expense), net
$
353

 
$
(177
)
 
$
(163
)
 
$
(350
)

Other income (expense), net increased primarily due to currency gains associated with foreign transactions and interest income on available cash balances.

Income Tax Expense (Benefit)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(dollars in thousands)
Income tax expense (benefit)
$
1,214

 
$
(89
)
 
$
4,915

 
$
(1,678
)
Effective tax rate
(35.5
)%
 
(3.8
)%
 
(49.6
)%
 
28.7
%
Period specific items
$
(309
)
 
$

 
$
(1,325
)
 
$
(1,148
)
Our effective tax rate was (35.5)% and (3.8)% for the three months ended September 30, 2014 and 2013, and (49.6)% and 28.7% for the nine months ended September 30, 2014 and 2013, respectively. The change in effective tax rates over both the three and nine month periods is a result of the expiration of the U.S. research and development tax credits as of December 31, 2013 and an increase in non-deductible stock-based compensation in 2014.
During the nine months ended September 30, 2014, we recognized income tax expense of $4.9 million, which includes $1.3 million of discrete tax benefits relating primarily to disqualifying dispositions on incentive stock

24



options. During the nine months ended September 30, 2013, we recognized an income tax benefit of $1.7 million, which included $1.1 million of discrete tax benefits relating to the reinstatement of the U.S. research and development tax credits.
Non-GAAP Financial Measures
We believe that the use of non-GAAP gross profit and gross margin, non-GAAP operating income (loss) and operating margin, non-GAAP net income (loss), non-GAAP net income (loss) per basic and diluted common share and free cash flow is helpful to our investors. These measures, which we refer to as our non-GAAP financial measures, are not prepared in accordance with generally accepted accounting principles in the United States, or GAAP. Non-GAAP gross profit is calculated by excluding stock-based compensation expense attributable to cost of revenues from gross profit. Non-GAAP gross margin is the ratio calculated by dividing non-GAAP gross profit by revenues. Non-GAAP operating income (loss) is calculated by excluding stock-based compensation expense from operating income (loss). Non-GAAP operating margin is the ratio calculated by dividing non-GAAP operating income (loss) by revenues. Non-GAAP net income (loss) is calculated by excluding stock-based compensation expense, net of tax, from net income (loss). Non-GAAP net income (loss) per basic and diluted common share is calculated by dividing non-GAAP net income (loss) by the basic and diluted weighted average shares outstanding as presented in the calculation of GAAP net income (loss) per share. Because of varying available valuation methodologies, subjective assumptions and the variety of equity instruments that can impact a company's non-cash expenses, we believe that providing non-GAAP financial measures that exclude stock-based compensation expense allows for more meaningful comparisons between our operating results from period to period. We calculate free cash flow as net cash provided by operating activities less net cash used in investing activities for purchases of property and equipment. 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 can be used for strategic opportunities, including investing in our business, making strategic acquisitions, and strengthening our balance sheet. All of our non-GAAP financial measures are important tools for financial and operational decision making and for evaluating our own operating results over different periods of time.
Our non-GAAP financial measures may not provide information that is directly comparable to that provided by other companies in our industry, as other companies in our industry may calculate non-GAAP financial results differently, particularly related to non-recurring, unusual items. In addition, there are limitations in using non-GAAP financial measures because the non-GAAP financial measures are not prepared in accordance with GAAP and may be different from non-GAAP financial measures used by other companies and exclude expenses that may have a material impact on our reported financial results. Further, stock-based compensation expense has been and will continue to be for the foreseeable future a significant recurring expense in our business and an important part of the compensation provided to our employees. The presentation of non-GAAP financial information is not meant to be considered in isolation or as a substitute for the directly comparable financial measures prepared in accordance with GAAP. We urge our investors to review the reconciliation of our non-GAAP financial measures to the comparable GAAP financial measures included below, and not to rely on any single financial measure to evaluate our business.

The following table summarizes our non-GAAP financial measures:    
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands)
Non-GAAP gross profit
$
95,542

 
$
56,614

 
$
245,776

 
$
138,798

Non-GAAP gross margin
91.5
%
 
92.7
%
 
91.1
%
 
91.9
%
Non-GAAP operating income
8,743

 
6,259

 
21,768

 
4,036

Non-GAAP operating margin
8.4
%
 
10.2
%
 
8.1
%
 
2.7
%
Non-GAAP net income
3,882

 
5,554

 
6,721

 
4,062

Free cash flow *
 
 
 
 
30,354

 
7,564

* Cash flow presented on a nine month basis only        

25



The following table presents the reconciliation of gross profit to non-GAAP gross profit:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands)
Gross profit
$
94,928

 
$
56,501

 
$
244,319

 
$
138,507

Excluding: Stock-based compensation expense attributable to cost of revenues
614

 
113

 
1,457

 
291

Non-GAAP gross profit
$
95,542

 
$
56,614

 
$
245,776

 
$
138,798

The following table presents the reconciliation of gross margin to non-GAAP gross margin:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands)
Gross margin
90.9
%
 
92.5
%
 
90.6
%
 
91.7
%
Excluding: Stock-based compensation expense attributable to cost of revenues
0.6
%
 
0.2
%
 
0.5
%
 
0.2
%
Non-GAAP gross margin
91.5
%
 
92.7
%
 
91.1
%
 
91.9
%
The following table presents the reconciliation of operating income (loss) to non-GAAP operating income:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands)
Operating income (loss)
$
(3,770
)
 
$
2,529

 
$
(9,756
)
 
$
(5,497
)
Excluding: Stock-based compensation expense
12,513

 
3,730

 
31,524

 
9,533

Non-GAAP operating income
$
8,743

 
$
6,259

 
$
21,768

 
$
4,036

The following table presents the reconciliation of operating margin to non-GAAP operating margin:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands)
Operating margin
(3.6
)%
 
4.1
%
 
(3.6
)%
 
(3.6
)%
Excluding: Stock-based compensation expense
12.0
 %
 
6.1
%
 
11.7
 %
 
6.3
 %
Non-GAAP operating margin
8.4
 %
 
10.2
%
 
8.1
 %
 
2.7
 %





26



The following table presents the reconciliation of net income (loss) to non-GAAP net income:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands)
Net income (loss)
$
(4,631
)
 
$
2,441

 
$
(14,834
)
 
$
(4,169
)
Excluding: Stock-based compensation expense, net of tax
8,513

 
3,113

 
21,555

 
8,231

Non-GAAP net income
$
3,882

 
$
5,554

 
$
6,721

 
$
4,062

 
 
 
 
 
 
 
 
Non-GAAP net income per share attributable to common stockholders:
 
 
 
 
 
 
 
Basic
$
0.06

 
$
0.09

 
$
0.10

 
$
0.09

Diluted
$
0.06

 
$
0.08

 
$
0.10

 
$
0.09

Weighted average shares used to compute non-GAAP net income per share attributable to common stockholders:
 
 
 
 
 
 
 
Basic
68,966

 
59,143

 
66,923

 
47,093

Diluted
68,966

 
71,348

 
66,923

 
47,093


The following table presents the reconciliation of net cash provided by operating activities to free cash flow:
 
Nine Months Ended September 30,
 
2014
 
2013
 
(in thousands)
Net cash provided by operating activities
$
56,942

 
$
19,079

Less: Purchases of property and equipment
26,588

 
11,515

Free cash flow
$
30,354

 
$
7,564

Net cash used in investing activities
$
(24,894
)
 
$
(11,515
)
Net cash provided by financing activities
$
360,549

 
$
179,469


Non-GAAP Operating Income
Non-GAAP operating income increased substantially from each of the three and nine months ended September 30, 2013 to the corresponding periods in 2014 as a result of increased domestic and international demand for our products and services from new and existing customers, offset in part by increased operating expenses attributable to increased headcount.

Non-GAAP Net Income

Non-GAAP net income for the three months ended September 30, 2014 decreased as compared to the corresponding period in 2013 as a result of the net loss during the three months ended September 30, 2014. Non-GAAP net income for the nine months ended September 30, 2014 increased as compared to the corresponding period in 2013 as a result of increases in non-GAAP operating income.


27



Free Cash Flow

Free cash flow is a non-GAAP financial measure that we calculate as net cash provided by operating activities less net cash used in investing activities for purchases of property and equipment. Free cash flow increased from the nine months ended September 30, 2013 to the nine months ended September 30, 2014 primarily due to the increase in net cash provided by operating activities.
 
Liquidity and Capital Resources
Prior to our initial public offering, or IPO, in May 2013, we financed our operations primarily through cash flows generated by operations, and to a lesser extent the sale of preferred stock.
Our IPO resulted in proceeds to us of $177.0 million, net of underwriters’ discounts and commissions and offering expenses. In March 2014, we closed a follow on public offering resulting in proceeds to us of $344.1 million, net of underwriters’ discounts and commissions and offering expenses.
As of September 30, 2014, we had cash and cash equivalents totaling $644.5 million, accounts receivable, net of $67.5 million and $592.8 million of working capital.
The following tables show our cash and cash equivalents and our cash flows from operating activities, investing activities and financing activities for the stated periods:
 
September 30,
 
December 31,
 
2014
 
2013
 
(in thousands)
Cash and cash equivalents
$
644,516

 
$
252,674


 
Nine Months Ended September 30,
 
2014
 
2013
 
(in thousands)
Net cash provided by operating activities
$
56,942

 
$
19,079

Net cash used in investing activities
(24,894
)
 
(11,515
)
Net cash provided by financing activities
360,549

 
179,469

Effect of exchange rate changes
(755
)
 
2

Net increase in cash and cash equivalents
$
391,842

 
$
187,035

Cash and Cash Equivalents
As of September 30, 2014, our cash and cash equivalents were held for working capital purposes, a majority of which was held in cash deposits and money market funds. We intend to increase our capital expenditures to support the growth in our business and operations. We believe that our existing cash and cash equivalents, together with cash generated from operations, will be sufficient to meet our anticipated cash needs for at least the next 12 months. Our future capital requirements will depend on many factors including our growth rate, the timing and extent of spending to support research and development efforts, the continued expansion of sales and marketing activities, the introduction of new and enhanced software and services offerings, and the continued market acceptance of our products.
Operating Activities
Net cash provided by operating activities was $56.9 million for the nine months ended September 30, 2014. The cash provided by operating activities was affected by a net loss of $14.8 million, stock-based compensation expense of $31.5 million, non-cash depreciation and amortization expense of $9.5 million related to capital expenditures, and a $32.2 million increase in deferred revenue. The increase in deferred revenue was primarily due to increased sales of maintenance agreements. The net cash provided by operating activities was partially offset by changes in operating assets and liabilities as a result of our growth.

28



Net cash provided by operating activities was $19.1 million for the nine months ended September 30, 2013. The cash provided by operating activities was affected by a net loss of $4.2 million, stock-based compensation expense of $9.5 million, non-cash depreciation and amortization expense of $4.6 million related to capital expenditures, and a $19.5 million increase in deferred revenue. The increase in deferred revenue was primarily due to increased sales of maintenance agreements. The net cash provided by operating activities was partially offset by changes in operating assets and liabilities as a result of our growth.
Investing Activities
Cash outflows for investing activities for the nine months ended September 30, 2014 and 2013 were $24.9 million and $11.5 million, respectively. The cash used for these periods was primarily attributable to capital expenditures to support the growth of our business, including hardware, software, office equipment and leasehold improvements.
Financing Activities
Cash inflows from our financing activities for the nine months ended September 30, 2014 and 2013 were $360.5 million and $179.5 million, respectively. In the nine months ended September 30, 2014, cash provided by financing activities was primarily due to proceeds of $344.1 million from our public offering which closed in March 2014 along with proceeds of $12.7 million from the exercise of stock options. For the nine months ended September 30, 2013, cash provided by financing activities was primarily due to proceeds of $177.0 million from our initial public offering which closed in May 2013.

Obligations and Commitments
    
In the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2013, filed with the SEC on February 27, 2014, as updated in the Company's Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 2014 and June 30, 2014, filed with the SEC on May 7, 2014 and August 8, 2014, respectively, we disclosed that we had approximately $40.4 million in outstanding obligations and commitments related to non-cancellable minimum lease payments. Other than the items discussed below, there have been no material changes to this disclosure as of September 30, 2014.

Subsequent to the June 30, 2014 disclosure, we entered into six additional office lease agreements, with aggregate non-cancellable minimum lease payments of approximately $29.9 million. These payments are due and payable over the full term of each respective lease. See Item 1, "Financial Statements (Unaudited) - Note 6 - Commitments and Contingencies" for additional discussion of our principal contractual commitments.

29



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Management believes there have been no material changes to our quantitative and qualitative disclosures about market risks during the nine months ended September 30, 2014, compared to those discussed in our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the SEC on February 27, 2014.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our principal executive officer and principal financial officer, our management conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this report.
In designing and evaluating our disclosure controls and procedures, management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Based on management’s evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are designed to, and are effective to, provide assurance at a reasonable level that the information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


30



PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the ordinary course of business, we may be involved in various legal proceedings and claims related to alleged infringement of third-party patents and other intellectual property rights, commercial, employment, wage and hour, and other claims. For example, we have been, and may in the future be, put on notice and/or sued by third parties for alleged infringement of their proprietary rights, including patent infringement. We evaluate these claims and lawsuits with respect to their potential merits, our potential defenses and counter claims, and the expected effect on us.
The outcome of any litigation, regardless of its merits, is inherently uncertain. Any intellectual property claims and other lawsuits, and the disposition of such claims and lawsuits, could be time-consuming and expensive to resolve, divert management attention from executing our business plan, lead to attempts on the part of other parties to seek similar claims and, in the case of intellectual property claims, require us to change our technology, change our business practices and/or pay monetary damages or enter into short- or long-term royalty or licensing agreements.
In general, the resolution of a legal matter could prevent us from offering our service to others, could be material to our financial condition or cash flows, or both, or could otherwise adversely affect our operating results.
We make a provision for a liability relating to legal matters when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. When we make such provisions they are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular matter. In management’s opinion, resolution of these matters is not expected to have a material adverse impact on our consolidated results of operations, cash flows or financial position. However, depending on the nature and timing of any such dispute, an unfavorable resolution of a matter could materially affect our future results of operations or cash flows, or both, of a particular quarter.

31



ITEM 1A. RISK FACTORS
Our operations and financial results are subject to various risk and uncertainties, including those described below. You should carefully consider the following risks and all of the other information contained in this report, including our condensed consolidated financial statements and related notes, before making an investment decision. While we believe that the risks and uncertainties described below are the material risks currently facing us, additional risks that we do not yet know of or that we currently think are immaterial may also arise and materially affect our business. If any of the following risks materialize, our business, financial condition and results of operations could be materially and adversely affected. In that case, the trading price of our Class A common stock could decline, and you may lose some or all of your investment.
Risks Related to Our Business and Industry
Due to our rapid growth, we have a limited operating history at our current scale, which makes it difficult to evaluate our future prospects and may increase the risk that we will not be successful.
We have been growing rapidly in recent periods, and as a result have a relatively short history operating our business at its current scale. For example, we have significantly increased the number of our employees and have expanded our operations worldwide. Furthermore, we operate in an industry that is characterized by rapid technological innovation, intense competition, changing customer needs and frequent introductions of new products, technologies and services. We have encountered, and will continue to encounter, risks and uncertainties frequently experienced by growing companies in evolving industries. If our assumptions regarding these risks and uncertainties, which we use to plan our business, are incorrect or change in reaction to changes in the market, or if we do not address these risks successfully, our operating and financial results could differ materially from our expectations and our business could suffer.
Our future success will depend in large part on our ability to, among other things:
hire, integrate, train and retain skilled talent, including members of our direct sales force and software engineers;
maintain and expand our business, including our operations and infrastructure to support our growth, both domestically and internationally;
compete with other companies, custom development efforts and open source initiatives that are currently in, or may in the future enter, the market for our software;
expand our customer base, both domestically and internationally;
renew maintenance agreements with, and sell additional products to, existing customers;
improve the performance and capabilities of our software;
maintain high customer satisfaction and ensure quality and timely releases of our products and product enhancements;
maintain, expand and support our indirect sales channels and strategic partner network;
maintain the quality of our website infrastructure to minimize latency when downloading or utilizing our software;
increase market awareness of our products and enhance our brand; and
maintain compliance with applicable governmental regulations and other legal obligations, including those related to intellectual property, international sales and taxation.
If we fail to address the risks and difficulties that we face, including those associated with the challenges listed above as well as those described elsewhere in this “Risk Factors” section, our business will be adversely affected and our results of operations will suffer.
We may not be able to sustain our revenue growth rate or profitability in the future.
While we have achieved profitability on an annual basis over the past three years, we have not consistently achieved profitability on a quarterly basis during that same period. For example, we had net losses in the fourth quarter of 2012, the first and second quarters of 2013 and the first, second and third quarters of 2014. We expect expenses to increase substantially in the near term, particularly as we make significant investments in our sales, marketing and engineering organizations, expand our operations and infrastructure both domestically and internationally and develop new products and new features for and enhancements of our existing products. In addition, in connection with operating as a public company, we are incurring additional significant legal, accounting and other expenses that we did not incur as a private company.
Moreover, as we grow our business, we expect our revenue growth rates to slow in future periods due to a number of reasons, which may include slowing demand for our products, increasing competition, a decrease in

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the growth of our overall market, our failure, for any reason, to continue to capitalize on growth opportunities, the maturation of our business or the decline in the number of organizations into which we have not already expanded. Accordingly, our historical revenue growth should not be considered indicative of our future performance.
We have been growing rapidly and expect to continue to invest in our growth for the foreseeable future. If we fail to manage this growth effectively, our business and results of operations will be adversely affected.
We have experienced rapid growth in a relatively short period of time. Our revenues grew from $151.0 million in the nine months ended September 30, 2013 to $269.7 million in the nine months ended September 30, 2014. Our number of full time employees increased from 1,039 as of September 30, 2013 to 1,717 as of September 30, 2014. During this period, we also expanded our operations in countries outside the United States.
We intend to continue to aggressively grow our business. For example, we plan to continue to hire new employees at a rapid pace, particularly in our sales and engineering groups. If we cannot adequately train these new employees, including our direct sales force, our sales may decrease or our customers may lose confidence in the knowledge and capability of our employees. In addition, we are expanding internationally, establishing operations in additional countries outside the United States, and we intend to make direct and substantial investments to continue our international expansion efforts. We must successfully manage our growth to achieve our objectives. Although our business has experienced significant growth in the past, we cannot provide any assurance that our business will continue to grow at the same rate, or at all.
Our ability to effectively manage any significant growth of our business will depend on a number of factors, including our ability to do the following:
effectively recruit, integrate, train and motivate a large number of new employees, including our direct sales force, while retaining existing employees, maintaining the beneficial aspects of our corporate culture and effectively executing our business plan;
satisfy existing customers and attract new customers;
successfully introduce new products and enhancements;
continue to improve our operational, financial and management controls;
protect and further develop our strategic assets, including our intellectual property rights; and
make sound business decisions in light of the scrutiny associated with operating as a public company.
These activities will require significant capital expenditures and allocation of valuable management and employee resources, and our growth will continue to place significant demands on our management and our operational and financial infrastructure.
Our future financial performance and our ability to execute on our business plan will depend, in part, on our ability to effectively manage any future growth. There are no guarantees we will be able to do so in an efficient or timely manner, or at all. In particular, any failure to successfully implement systems enhancements and improvements will likely negatively impact our ability to manage our expected growth, ensure uninterrupted operation of key business systems and comply with the rules and regulations that are applicable to public reporting companies. Moreover, if we do not effectively manage the growth of our business and operations, the quality of our software could suffer, which could negatively affect our brand, results of operations and overall business.
We face intense competition, and we may not be able to compete effectively, which could reduce demand for our products and adversely affect our business, growth, revenues and market share.
The market for our products is intensely and increasingly competitive and subject to rapidly changing technology and evolving standards. In addition, many companies in our target market are offering, or may soon offer, products and services that may compete with our products.
Our current primary competitors generally fall into three categories:
large software companies, including suppliers of traditional business intelligence products that provide one or more capabilities that are competitive with our products, such as International Business Machines Corporation, Microsoft Corporation, Oracle Corporation and SAP AG;
spreadsheet software providers, such as Microsoft Corporation; and

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new and emerging business analytics software companies, such as Qlik Technologies Inc., or Qlik, MicroStrategy, and TIBCO Spotfire (a subsidiary of TIBCO Software Inc.).
In addition, we may compete with open source initiatives and custom development efforts. We expect competition to increase as other established and emerging companies, enter the business analytics software market, as customer requirements evolve and as new products and technologies are introduced. We expect this to be particularly true with respect to our cloud-based initiatives as we and our competitors seek to provide business analytics products based on a software-as-a-service, or SaaS, platform (i.e Salesforce Wave, a cloud analytics platform). This is a relatively new and evolving area of business analytics solutions, and we anticipate competition to increase based on customer demand for these types of products.
Many of our competitors, particularly the large software companies named above, have longer operating histories, significantly greater financial, technical, marketing, distribution, professional services or other resources and greater name recognition than we do. In addition, many of our competitors have strong relationships with current and potential customers and extensive knowledge of the business analytics industry. As a result, they may be able to respond more quickly to new or emerging technologies and changes in customer requirements, for example by offering a SaaS based product that competes with our on-premise products or our SaaS product, Tableau Online, or devote greater resources to the development, promotion and sale of their products than we do. Moreover, many of these competitors are bundling their analytics products into larger deals or maintenance renewals, often at significant discounts. Increased competition may lead to price cuts, alternative pricing structures or the introduction of products available for free or a nominal price, fewer customer orders, reduced gross margins, longer sales cycles and loss of market share. We may not be able to compete successfully against current and future competitors, and our business, results of operations and financial condition will be harmed if we fail to meet these competitive pressures.
Our ability to compete successfully in our market depends on a number of factors, both within and outside of our control. Some of these factors include ease and speed of product deployment and use, discovery and visualization capabilities, analytical and statistical capabilities, performance and scalability, the quality and reliability of our customer service and support, total cost of ownership, return on investment and brand recognition. Any failure by us to compete successfully in any one of these or other areas may reduce the demand for our products, as well as adversely affect our business, results of operations and financial condition.
Moreover, current and future competitors may also make strategic acquisitions or establish cooperative relationships among themselves or with others. By doing so, these competitors may increase their ability to meet the needs of our customers or potential customers. In addition, our current or prospective indirect sales channel partners may establish cooperative relationships with our current or future competitors. These relationships may limit our ability to sell or certify our products through specific distributors, technology providers, database companies and distribution channels and allow our competitors to rapidly gain significant market share. These developments could limit our ability to obtain revenues from existing and new customers and to maintain maintenance and support revenues from our existing and new customers. If we are unable to compete successfully against current and future competitors, our business, results of operations and financial condition would be harmed.
Our success is highly dependent on our ability to penetrate the existing market for business analytics software as well as the growth and expansion of that market.
Although the overall market for business analytics software is well-established, the market for business analytics software like ours is relatively new, rapidly evolving and unproven. Our future success will depend in large part on our ability to penetrate the existing market for business analytics software, as well as the continued growth and expansion of what we believe to be an emerging market for analytics solutions that are faster, easier to adopt, easier to use and more focused on self-service capabilities. It is difficult to predict customer adoption and renewal rates, customer demand for our products, the size, growth rate and expansion of these markets, the entry of competitive products or the success of existing competitive products. Our ability to penetrate the existing market and any expansion of the emerging market depends on a number of factors, including the cost, performance and perceived value associated with our products, as well as customers' willingness to adopt a different approach to data analysis. Furthermore, many potential customers have made significant investments in legacy business analytics software systems and may be unwilling to invest in new software. If we are unable to penetrate the existing market for business analytics software, the emerging market for self-service analytics solutions fails to grow or expand, or either of these markets decreases in size, our business, results of operations and financial condition would be adversely affected.

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Our future quarterly results of operations may fluctuate significantly due to a wide range of factors, which makes our future results difficult to predict.
Our revenues and results of operations could vary significantly from quarter to quarter as a result of various factors, many of which are outside of our control, including:
the expansion of our customer base;
the renewal of maintenance agreements with, and sales of additional products to, existing customers;
the size, timing and terms of our perpetual license sales to both existing and new customers;
the mix of direct sales versus sales through our indirect sales channels;
the timing and growth of our business, in particular through our hiring of new employees and international expansion;
the introduction of products and product enhancements by existing competitors or new entrants into our market, and changes in pricing for products offered by us or our competitors;
customers delaying purchasing decisions in anticipation of new products or product enhancements by us or our competitors or otherwise;
changes in customers' budgets;
customer acceptance of and willingness to pay for new versions of our products;
seasonal variations in our sales, which have generally historically been highest in the fourth quarter of a calendar year and lowest in the first quarter;
seasonal variations related to sales and marketing and other activities, such as expenses related to our annual customer conferences;
our ability to control costs, including our operating expenses;
our ability to hire, train and maintain our direct sales force;
the timing of satisfying revenue recognition criteria, particularly with regard to large transactions;
fluctuations in our effective tax rate; and
general economic and political conditions, both domestically and internationally, as well as economic conditions specifically affecting industries in which our customers operate.
Any one of these or other factors discussed elsewhere in this report may result in fluctuations in our revenues and operating results, meaning that quarter-to-quarter comparisons of our revenues, results of operations and cash flows may not necessarily be indicative of our future performance.
We may not be able to accurately predict our future revenues or results of operations. For example, a large percentage of the revenues we recognize each quarter has been attributable to sales made in the last month of that same quarter. Our license revenues, which are primarily attributable to perpetual licenses, in particular can be impacted by short-term shifts in customer demand. As a result, our ability to forecast revenues on a quarterly or longer-term basis is limited. In addition, we base our current and future expense levels on our operating plans and sales forecasts, and our operating expenses are expected to be relatively fixed in the short term. Accordingly, we may not be able to reduce our costs sufficiently to compensate for an unexpected shortfall in revenues, and even a small shortfall in revenues could disproportionately and adversely affect our financial results for that quarter. The variability and unpredictability of these and other factors could result in our failing to meet or exceed financial expectations for a given period.
If we are unable to attract new customers and expand sales to existing customers, both domestically and internationally, our growth could be slower than we expect and our business may be harmed.
Our future growth depends in part upon increasing our customer base. Our ability to achieve significant growth in revenues in the future will depend, in large part, upon the effectiveness of our marketing efforts, both domestically and internationally, and our ability to attract new customers. This may be particularly challenging where an organization has already invested substantial personnel and financial resources to integrate traditional business intelligence products into its business, as such organization may be reluctant or unwilling to invest in a new product. If we fail to attract new customers and maintain and expand those customer relationships, our revenues will grow more slowly than expected and our business will be harmed.
Our future growth also depends upon expanding sales of our products to and renewing license and maintenance agreements with existing customers and their organizations. In order for us to improve our operating results, it is important that our existing customers make additional significant purchases of our products. If our customers do not purchase additional licenses or capabilities, our revenues may grow more slowly than expected,

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may not grow at all or may decline. Additionally, increasing incremental sales to our current customer base requires increasingly sophisticated and costly sales efforts that are targeted at senior management. There can be no assurance that our efforts would result in increased sales to existing customers, or upsells, and additional revenues. If our efforts to upsell to our customers are not successful, our business would suffer. Moreover, while most of our software is licensed and sold under perpetual license agreements, we also enter into term license agreements with some of our customers and offer a SaaS-based product, Tableau Online, which is sold on a subscription basis. In addition, all of our maintenance and support agreements are sold on a term basis. In order for us to grow our revenues and increase profitability, it is important that our existing customers renew their maintenance and support agreements and their term licenses, if applicable, when the initial contract term expires. Our customers have no obligation to renew their term licenses or maintenance and support contracts with us after the initial terms have expired. Our customers' renewal rates may decline or fluctuate as a result of a number of factors, including their satisfaction or dissatisfaction with our software or professional services, our pricing or pricing structure, the pricing or capabilities of products or services offered by our competitors, the effects of economic conditions, or reductions in our customers' spending levels. If our customers do not renew their agreements with us, or renew on terms less favorable to us, our revenues may decline.
We derive substantially all of our revenues from a limited number of software products.
We currently derive and expect to continue to derive substantially all of our revenues from our Tableau Desktop, Tableau Server and Tableau Online software products. As such, the continued growth in market demand of these software products is critical to our continued success. Demand for our software is affected by a number of factors, including continued market acceptance of our products, the timing of development and release of new products by our competitors, price changes by us or by our competitors, technological change, growth or contraction in the traditional and expanding business analytics market, and general economic conditions and trends. If we are unable to continue to meet customer demands or to achieve more widespread market acceptance of our software, our business, results of operations, financial condition and growth prospects will be materially and adversely affected.
Our success depends on increasing the number and value of enterprise sales transactions, which typically involve a longer sales cycle, greater deployment challenges and additional support and services than sales to individual purchasers of our products.
Growth in our revenues and profitability depends in part on our ability to complete more and larger enterprise sales transactions. These larger transactions may involve significant customer negotiation. Enterprise customers may undertake a significant evaluation process, which can last from several months to a year or longer. For example, in recent periods, excluding renewals, our transactions over $100,000, which have been increasing, have generally taken over three months to close. Any individual transaction may take substantially longer than three months to close. If our sales cycle were to lengthen in this manner, events may occur during this period that affect the size or timing of a purchase or even cause cancellations, which may lead to greater unpredictability in our business and results of operations. We will spend substantial time, effort and money on enterprise sales efforts without any assurance that our efforts will produce any sales.
We may also face unexpected deployment challenges with enterprise customers or more complicated installations of our software platform. It may be difficult to deploy our software platform if the customer has unexpected database, hardware or software technology issues. Additional deployment complexities may occur if a customer hires a third party to deploy or implement our products or if one of our indirect sales channel partners leads the implementation of our products. In addition, enterprise customers may demand more configuration and integration services, which increase our upfront investment in sales and deployment efforts, with no guarantee that these customers will increase the scope of their use. As a result of these factors, we must devote a significant amount of sales support and professional services resources to individual customers, increasing the cost and time required to complete sales. Any difficulties or delays in the initial implementation, configuration or integration of our products could cause customers to reject our software or lead to the delay or non-receipt of future orders which would harm our business, results of operations and financial condition.
If our new products and product enhancements do not achieve sufficient market acceptance, our results of operations and competitive position will suffer.
We spend substantial amounts of time and money to research and develop new software and enhanced versions of our existing software to incorporate additional features, improve functionality, function in concert with new technologies or changes to existing technologies and allow our customers to analyze a wide range of data sources. When we develop a new product or an enhanced version of an existing product, we typically incur

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expenses and expend resources upfront to market, promote and sell the new offering. Therefore, when we develop and introduce new or enhanced products, they must achieve high levels of market acceptance in order to justify the amount of our investment in developing and bringing them to market.
Further, we may make changes to our software that our customers do not find useful. We may also discontinue certain features, begin to charge for certain features that are currently free or increase fees for any of our features or usage of our software. We may also face unexpected problems or challenges in connection with new product or feature introductions.
Our new products or product enhancements, such as Tableau Online and our most recent release, Tableau 8.2, and changes to our existing software could fail to attain sufficient market acceptance for many reasons, including:
failure to predict market demand accurately in terms of software functionality and capability or to supply software that meets this demand in a timely fashion;
inability to operate effectively with the technologies, systems or applications of our existing or potential customers;
defects, errors or failures;
negative publicity about their performance or effectiveness;
delays in releasing our new software or enhancements to our existing software to the market;
the introduction or anticipated introduction of competing products by our competitors;
an ineffective sales force;
poor business conditions for our end-customers, causing them to delay purchases; and
the reluctance of customers to purchase software incorporating open source software.
In addition, because our products are designed to operate on and with a variety of systems, we will need to continuously modify and enhance our products to keep pace with changes in technology. We may not be successful in either developing these modifications and enhancements or in bringing them to market in a timely fashion.
If our new software or enhancements and changes do not achieve adequate acceptance in the market, our competitive position will be impaired, and our revenues could decline. The adverse effect on our results of operations may be particularly acute because of the significant research, development, marketing, sales and other expenses we will have incurred in connection with the new software or enhancements.
We are dependent on the continued services and performance of our senior management and other key personnel, the loss of any of whom could adversely affect our business.
Our future success depends in large part on the continued contributions of our senior management and other key personnel. In particular, the leadership of key management personnel is critical to the successful management of our company, the development of our products, and our strategic direction. We do not maintain “key person” insurance for any member of our senior management team or any of our other key employees. Our senior management and key personnel are all employed on an at-will basis, which means that they could terminate their employment with us at any time, for any reason and without notice. The loss of any of our key management personnel could significantly delay or prevent the achievement of our development and strategic objectives and adversely affect our business.
If we are unable to attract, integrate and retain additional qualified personnel, including top technical talent, our business could be adversely affected.
Our future success depends in part on our ability to identify, attract, integrate and retain highly skilled technical, managerial, sales and other personnel, including top technical talent from the industry and top research institutions. We face intense competition for qualified individuals from numerous other companies, including other software and technology companies, many of whom have greater financial and other resources than we do. These companies also may provide more diverse opportunities and better chances for career advancement. Some of these characteristics may be more appealing to high-quality candidates than those we have to offer. In addition, new hires often require significant training and, in many cases, take significant time before they achieve full productivity. We may incur significant costs to attract and retain qualified personnel, including significant expenditures related to salaries and benefits and compensation expenses related to equity awards, and we may lose new employees to our competitors or other companies before we realize the benefit of our investment in recruiting and training them. Moreover, new employees may not be or become as productive as we expect, as we may face challenges in adequately or appropriately integrating them into our workforce and culture. In addition, as

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we move into new geographies, we will need to attract and recruit skilled personnel in those areas. We have little experience with recruiting in geographies outside of the United States, and may face additional challenges in attracting, integrating and retaining international employees. If we are unable to attract, integrate and retain suitably qualified individuals who are capable of meeting our growing technical, operational and managerial requirements, on a timely basis or at all, our business will be adversely affected.
Volatility or lack of positive performance in our stock price may also affect our ability to attract and retain our key employees. Many of our senior management personnel and other key employees have become, or will soon become, vested in a substantial amount of stock or stock options. Employees may be more likely to leave us if the shares they own or the shares underlying their vested options have significantly appreciated in value relative to the original purchase prices of the shares or the exercise prices of the options, or, conversely, if the exercise prices of the options that they hold are significantly above the market price of our common stock. If we are unable to appropriately incentivize and retain our employees through equity compensation, or if we need to increase our compensation expenses in order to appropriately incentivize and retain our employees, our business, results of operations, financial condition and cash flows would be adversely affected.
Our growth depends on being able to expand our direct sales force successfully.
To date, most of our revenues have been attributable to the efforts of our direct sales force in the United States. In order to increase our revenues and profitability, we must increase the size of our direct sales force, both in the United States and internationally, to generate additional revenues from new and existing customers. We intend to substantially further increase our number of direct sales professionals.
We believe that there is significant competition for sales personnel with the skills and technical knowledge that we require. Our ability to achieve significant revenue growth will depend, in large part, on our success in recruiting, training and retaining sufficient numbers of direct sales personnel to support our growth. New hires require significant training and may take significant time before they achieve full productivity. Our recent hires and planned hires may not become productive as quickly as we expect, and we may be unable to hire or retain sufficient numbers of qualified individuals in the markets where we do business or plan to do business. In addition, as we continue to grow rapidly, a large percentage of our sales force will be new to our company and our products, which may adversely affect our sales if we cannot train our sales force quickly or effectively. Attrition rates may increase and we may face integration challenges as we continue to seek to aggressively expand our sales force. If we are unable to hire and train sufficient numbers of effective sales personnel, or the sales personnel are not successful in obtaining new customers or increasing sales to our existing customer base, our business will be adversely affected.
If we cannot maintain our corporate culture as we grow, we could lose the innovation, teamwork, passion and focus on execution that we believe contribute to our success, and our business may be harmed.
We believe that our corporate culture has been a critical component to our success. We have invested substantial time and resources in building our team. As we grow and mature as a public company, we may find it difficult to maintain our corporate culture. Any failure to preserve our culture could negatively affect our future success, including our ability to recruit and retain personnel and effectively focus on and pursue our corporate objectives.
Real or perceived errors, failures or bugs in our software could adversely affect our results of operations and growth prospects.
Because our software is complex, undetected errors, failures or bugs may occur, especially when new versions or updates are released. Our software is often installed and used in large-scale computing environments with different operating systems, system management software, and equipment and networking configurations, which may cause errors or failures of our software or other aspects of the computing environment into which it is deployed. In addition, deployment of our software into computing environments may expose undetected errors, compatibility issues, failures or bugs in our software. Despite testing by us, errors, failures or bugs may not be found in our software until it is released to our customers. Moreover, our customers could incorrectly implement or inadvertently misuse our software, which could result in customer dissatisfaction and adversely impact the perceived utility of our products as well as our brand. Any of these real or perceived errors, compatibility issues, failures or bugs in our software could result in negative publicity, reputational harm, loss of or delay in market

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acceptance of our software, loss of competitive position or claims by customers for losses sustained by them. In such an event, we may be required, or may choose, for customer relations or other reasons, to expend additional resources in order to help correct the problem. Alleviating any of these problems could require significant expenditures of our capital and other resources and could cause interruptions, delays or cessation of our licensing, which could cause us to lose existing or potential customers and could adversely affect our results of operations and growth prospects.
Interruptions or performance problems associated with our technology and infrastructure may adversely affect our business and results of operations.
We have in the past experienced, and may in the future experience, performance issues due to a variety of factors, including infrastructure changes, human or software errors, website or third-party hosting disruptions or capacity constraints due to a number of potential causes including technical failures, cyber-attacks, security vulnerabilities, natural disasters or fraud. If our security is compromised, our website is unavailable or our users are unable to download our software within a reasonable amount of time or at all, our business could be negatively affected. Moreover, if our security measures, products or services are subject to cyber-attacks that degrade or deny the ability of users to access our website, products or services, our products or services may be perceived as unsecure and we may incur significant legal and financial exposure. In particular, our cloud-based products, Tableau Online and Tableau Public, may be especially vulnerable to interruptions or performance problems. In some instances, we may not be able to identify the cause or causes of these performance problems within an acceptable period of time. These cloud-based products are hosted at third-party data centers that are not under our direct control. If these data centers were to be damaged or suffer disruption, our ability to provide these products to our customers could be impaired and our reputation could be harmed.
In addition, it may become increasingly difficult to maintain and improve our website performance, especially during peak usage times and as our software becomes more complex and our user traffic increases. Adverse consequences could include unanticipated system disruptions, slower response times, degradation in level of customer support, and impaired quality of users' experiences, and could result in customer dissatisfaction and the loss of existing customers. We expect to continue to make significant investments to maintain and improve website performance and security and to enable rapid and secure releases of new features and applications for our software. To the extent that we do not effectively address capacity constraints, upgrade our systems as needed and continually develop our technology and network architecture to accommodate actual and anticipated changes in technology, our business and results of operations may be adversely affected.
We also rely on SaaS technologies from third parties in order to operate critical functions of our business, including financial management services from NetSuite Inc. and customer relationship management services from salesforce.com, inc. If these services become unavailable due to extended outages or interruptions, security vulnerabilities or cyber-attacks, or because they are no longer available on commercially reasonably terms or prices, our expenses could increase, our ability to manage these critical functions could be interrupted and our processes for managing sales of our software and supporting our customers could be impaired until equivalent services, if available, are identified, obtained and implemented, all of which could adversely affect our business.
We face security risks, including but not limited to, unauthorized use or disclosure of customer data, theft of proprietary information, denial of service attacks, loss or corruption of customer data, and computer hacking attacks. If any of these risks occur, our services may be perceived as not secure, we may lose prospective customers, existing customers may curtail or stop using our services, our ability to operate our business may be impaired, and we may incur significant liabilities.
Our operations involve transmission and processing of our customers' confidential, proprietary and sensitive information including in some cases personally identifiable information and credit card information. We have legal and contractual obligations to protect the confidentiality and appropriate use of customer data. Security risks, including but not limited to, unauthorized use or disclosure of customer data, theft of proprietary information, denial of service attacks, loss or corruption of customer data, and computer hacking attacks could expose use to substantial litigation expenses and damages, indemnity and other contractual obligations, government fines and penalties, mitigation expenses and other liability. The security measures protecting our customers' information could be breached as a result of third party action, employee error or misconduct. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until

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successfully launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. If an actual or perceived breach of our security occurs, the market perception of the effectiveness of our security measures could be harmed, we could lose potential sales and existing customers, our ability to operate our business could be impaired, and we may incur significant liabilities.
Our products use third-party software and services that may be difficult to replace or cause errors or failures of our products that could lead to a loss of customers or harm to our reputation and our operating results.
We license third-party software and depend on services from various third parties for use in our products. In the future, this software or these services may not be available to us on commercially reasonable terms, or at all. Any loss of the right to use any of the software or services could result in decreased functionality of our products until equivalent technology is either developed by us or, if available from another provider, is identified, obtained and integrated, which could harm our business. In addition, any errors or defects in or failures of the third-party software or services could result in errors or defects in our products or cause our products to fail, which could harm our business and be costly to correct. Many of these providers attempt to impose limitations on their liability for such errors, defects or failures, and if enforceable, we may have additional liability to our customers or third-party providers that could harm our reputation and increase our operating costs.
We will need to maintain our relationships with third-party software and service providers, and to obtain software and services from such providers that do not contain any errors or defects. Any failure to do so could adversely impact our ability to deliver effective products to our customers and could harm our operating results.
If customers demand products that provide business analytics via a SaaS business model, our business could be adversely affected.
In recent years, we believe that companies have begun to expect that key software be provided through a SaaS model, and customers may eventually require that we provide our product via a SaaS deployment. In July 2013 we launched Tableau Online, our cloud-based service that provides our software's core capabilities as a commercial SaaS offering. We anticipate using our current cash or future cash flows to fund further development of this product, and we may encounter difficulties that cause our costs to exceed our current expectations. Moreover, as demand increases, we will need to make additional investments in related infrastructure such as server farms, data centers, network bandwidth and technical operations personnel. All of these investments will negatively affect our operating results. Even if we make these investments, we may be unsuccessful in achieving significant market acceptance of this new product. Moreover, sales of a potential future SaaS offering by our competitors could adversely affect sales of all of our existing products. In addition, increasing sales of our SaaS offering could cannibalize license sales of our on-premise desktop and server products to our existing and prospective customers, which could negatively impact our overall sales growth. The migration of our customers to a SaaS model would also change the manner in which we recognize revenue, which could adversely affect our operating results and business operations.
Our success depends on our ability to maintain and expand our indirect sales channels.
Historically, we have used indirect sales channel partners, such as original equipment manufacturers, technology partners, systems integrators and resellers, to a limited degree. Indirect sales channel partners are becoming an increasingly important aspect of our business, particularly with regard to enterprise and international sales. Our future growth in revenues and profitability depends in part on our ability to identify, establish and retain successful channel partner relationships in the United States and internationally, which will take significant time and resources and involve significant risk.
We cannot be certain that we will be able to identify suitable indirect sales channel partners. To the extent we do identify such partners, we will need to negotiate the terms of a commercial agreement with them under which the partner would distribute our products. We cannot be certain that we will be able to negotiate commercially-attractive terms with any channel partner, if at all. In addition, all channel partners must be trained to distribute our products. In order to develop and expand our distribution channel, we must develop and improve our processes for channel partner introduction and training.

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We also cannot be certain that we will be able to maintain successful relationships with any channel partners. These channel partners may not have an exclusive relationship with us, and may offer customers the products of several different companies, including products that compete with ours. With or without an exclusive relationship, we cannot be certain that they will prioritize or provide adequate resources for selling our products. A lack of support by any of our channel partners may harm our ability to develop, market, sell or support our products, as well as harm our brand. There can be no assurance that our channel partners will comply with the terms of our commercial agreements with them or will continue to work with us when our commercial agreements with them expire or are up for renewal. If we are unable to maintain our relationships with these channel partners, or these channel partners fail to live up to their contractual obligations, our business, results of operations and financial condition could be harmed.
Our long-term growth depends in part on being able to expand internationally on a profitable basis.
Historically, we have generated a substantial majority of our revenues from customers inside the United States and Canada. For example, approximately 77% of our total revenues in the nine months ended September 30, 2014 was derived from sales within the United States and Canada. We have begun to expand internationally and plan to continue to expand our international operations as part of our growth strategy. Expanding our international operations will subject us to a variety of risks and challenges, including:
increased management, travel, infrastructure and legal compliance costs associated with having multiple international operations;
management communication and integration problems resulting from geographic dispersion and language and cultural differences;
sales and customer service challenges associated with operating in different countries;
increased reliance on indirect sales channel partners outside the United States;
longer payment cycles and difficulties in collecting accounts receivable or satisfying revenue recognition criteria, especially in emerging markets;
increased financial accounting and reporting burdens and complexities;
general economic or political conditions in each country or region;
economic uncertainty around the world and adverse effects arising from economic interdependencies across countries and regions;
compliance with foreign laws and regulations and the risks and costs of non-compliance with such laws and regulations;
compliance with laws and regulations for foreign operations, including the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act, import and export control laws, tariffs, trade barriers, economic sanctions and other regulatory or contractual limitations on our ability to sell our software in certain foreign markets, and the risks and costs of non-compliance;
heightened risks of unfair or corrupt business practices in certain geographies and of improper or fraudulent sales arrangements that may impact financial results and result in restatements of financial statements and irregularities in financial statements;
fluctuations in currency exchange rates and related effects on our results of operations;
difficulties in transferring or, if we determine to do so, repatriating funds from or converting currencies in certain countries;
the need for localized software and licensing programs;
reduced protection for intellectual property rights in certain countries and practical difficulties and costs of enforcing rights abroad; and
compliance with the laws of numerous foreign taxing jurisdictions and overlapping of different tax regimes.

Any of these risks could adversely affect our international operations, reduce our international revenues or increase our operating costs, adversely affecting our business, results of operations and financial condition and growth prospects.
For example, compliance with laws and regulations applicable to our international operations increases our cost of doing business in foreign jurisdictions. We may be unable to keep current with changes in government requirements as they change from time to time. Failure to comply with these regulations could have adverse effects on our business. In addition, in many foreign countries it is common for others to engage in business

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practices that are prohibited by our internal policies and procedures or U.S. laws and regulations applicable to us. We have not historically had formal policies with respect to these laws and regulations, and have only recently begun to implement compliance procedures designed to prevent violations of these laws and regulations. There can be no assurance that all of our employees, contractors, indirect sales channel partners and agents will comply with the formal policies we will implement, or applicable laws and regulations. Violations of laws or key control policies by our employees, contractors, channel partners or agents could result in delays in revenue recognition, financial reporting misstatements, fines, penalties, or the prohibition of the importation or exportation of our software and services and could have a material adverse effect on our business and results of operations.
Our business is highly dependent upon our brand recognition and reputation, and the failure to maintain or enhance our brand recognition or reputation would likely adversely affect our business and results of operations.
We believe that maintaining and enhancing the Tableau brand identity and our reputation are critical to our relationships with our customers and channel partners and to our ability to attract new customers and channel partners. We also believe that the importance of our brand recognition and reputation will continue to increase as competition in our market continues to develop. Our success in this area will depend on a wide range of factors, some of which are beyond our control, including the following:
the efficacy of our marketing efforts;
our ability to continue to offer high-quality, innovative and error- and bug-free products;
our ability to retain existing customers and obtain new customers;
our ability to maintain high customer satisfaction;
the quality and perceived value of our products;
our ability to successfully differentiate our products from those of our competitors;
actions of our competitors and other third parties;
our ability to provide customer support and professional services;
any misuse or perceived misuse of our products;
positive or negative publicity;
interruptions, delays or attacks on our website; and
litigation- or regulatory-related developments.

Our brand promotion activities may not be successful or yield increased revenues.
Independent industry analysts often provide reviews of our products, as well as those of our competitors, and perception of our products in the marketplace may be significantly influenced by these reviews. If these reviews are negative, or less positive as compared to those of our competitors' products and services, our brand may be adversely affected.
Furthermore, negative publicity, whether or not justified, relating to events or activities attributed to us, our employees, our partners or others associated with any of these parties, may tarnish our reputation and reduce the value of our brand. Damage to our reputation and loss of brand equity may reduce demand for our products and have an adverse effect on our business, operating results and financial condition. Moreover, any attempts to rebuild our reputation and restore the value of our brand may be costly and time consuming, and such efforts may not ultimately be successful.
Economic uncertainties or downturns could materially adversely affect our business.
Current or future economic uncertainties or downturns could adversely affect our business and results of operations. Negative conditions in the general economy both in the United States and abroad, including conditions resulting from changes in gross domestic product growth, the continued sovereign debt crisis, potential future government shutdowns, the federal government's failure to raise the debt ceiling, financial and credit market fluctuations, political deadlock, natural catastrophes, warfare and terrorist attacks on the United States, Europe, the Asia Pacific region or elsewhere, could cause a decrease in business investments, including corporate spending on business analytics software in general and negatively affect the rate of growth of our business.

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Although legislation was recently passed to fund the federal government and lift the debt ceiling, the law only does so through March 2015, and legislators will have to negotiate a longer-term solution, which could lead to additional shutdowns or other disruptions. In addition, general worldwide economic conditions have experienced a significant downturn and continue to remain unstable. These conditions make it extremely difficult for our customers and us to forecast and plan future business activities accurately, and they could cause our customers to reevaluate their decisions to purchase our products, which could delay and lengthen our sales cycles or result in cancellations of planned purchases. Furthermore, during challenging economic times our customers may tighten their budgets and face issues in gaining timely access to sufficient credit, which could result in an impairment of their ability to make timely payments to us. In turn, we may be required to increase our allowance for doubtful accounts, which would adversely affect our financial results.

To the extent purchases of our software are perceived by customers and potential customers to be discretionary, our revenues may be disproportionately affected by delays or reductions in general information technology spending. Also, customers may choose to develop in-house software as an alternative to using our products. Moreover, competitors may respond to market conditions by lowering prices and attempting to lure away our customers. In addition, the increased pace of consolidation in certain industries may result in reduced overall spending on our software.
We cannot predict the timing, strength or duration of any economic slowdown, instability or recovery, generally or within any particular industry. If the economic conditions of the general economy or industries in which we operate do not improve, or worsen from present levels, our business, results of operations, financial condition and cash flows could be adversely affected.
If currency exchange rates fluctuate substantially in the future, the results of our operations, which are reported in U.S. dollars, could be adversely affected.
As we continue to expand our international operations, we become more exposed to the effects of fluctuations in currency exchange rates. Although we expect an increasing number of sales contracts to be denominated in currencies other than the U.S. dollar in the future, our sales contracts have historically been denominated in U.S. dollars, and therefore most of our revenues have not been subject to foreign currency risk. However, a strengthening of the U.S. dollar could increase the real cost of our software to our customers outside of the United States, which could adversely affect our business, results of operations, financial condition and cash flows. In addition, we incur expenses for employee compensation and other operating expenses at our non-U.S. locations in the local currency. Fluctuations in the exchange rates between the U.S. dollar and other currencies could result in the dollar equivalent of such expenses being higher. This could have a negative impact on our reported results of operations. Although we may in the future decide to undertake foreign exchange hedging transactions to cover a portion of our foreign currency exchange exposure, we currently do not hedge our exposure to foreign currency exchange risks.
Failure to protect our intellectual property rights could adversely affect our business.
Our success depends, in part, on our ability to protect proprietary methods and technologies that we develop or license under patent and other intellectual property laws of the United States, so that we can prevent others from using our inventions and proprietary information. If we fail to protect our intellectual property rights adequately, our competitors might gain access to our technology, and our business might be adversely affected. However, defending our intellectual property rights might entail significant expenses. Any of our patent rights, copyrights, trademarks or other intellectual property rights may be challenged by others, weakened or invalidated through administrative process or litigation.
As of September 30, 2014, we had 11 issued U.S. patents covering our technology and 24 patent applications pending for examination in the United States. The patents that we own or license from others (including those that have issued or may issue in the future) may not provide us with any competitive advantages or may be challenged by third parties, and our patent applications may never be granted.
Additionally, the process of obtaining patent protection is expensive and time-consuming, and we may not be able to prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. Even if issued, there can be no assurance that these patents will adequately protect our intellectual property, as

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the legal standards relating to the validity, enforceability and scope of protection of patent and other intellectual property rights are uncertain.
Any patents that are issued may subsequently be invalidated or otherwise limited, allowing other companies to develop offerings that compete with ours, which could adversely affect our competitive business position, business prospects and financial condition. In addition, issuance of a patent does not guarantee that we have a right to practice the patented invention. Patent applications in the United States are typically not published until 18 months after filing or, in some cases, not at all, and publications of discoveries in industry-related literature lag behind actual discoveries. We cannot be certain that third parties do not have blocking patents that could be used to prevent us from marketing or practicing our patented software or technology.
Effective patent, trademark, copyright and trade secret protection may not be available to us in every country in which our software is available. The laws of some foreign countries may not be as protective of intellectual property rights as those in the United States (in particular, some foreign jurisdictions do not permit patent protection for software), and mechanisms for enforcement of intellectual property rights may be inadequate. Additional uncertainty may result from changes to intellectual property legislation enacted in the United States, including the recent America Invents Act, and other national governments and from interpretations of the intellectual property laws of the United States and other countries by applicable courts and agencies. Accordingly, despite our efforts, we may be unable to prevent third parties from infringing upon or misappropriating our intellectual property.
We rely in part on trade secrets, proprietary know-how and other confidential information to maintain our competitive position. Although we endeavor to enter into non-disclosure agreements with our employees, licensees and others who may have access to this information, we cannot assure you that these agreements or other steps we have taken will prevent unauthorized use, disclosure or reverse engineering of our technology. Moreover, third parties may independently develop technologies or products that compete with ours, and we may be unable to prevent this competition.
We might be required to spend significant resources to monitor and protect our intellectual property rights. We may initiate claims or litigation against third parties for infringement of our proprietary rights or to establish the validity of our proprietary rights. Litigation also puts our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing. Additionally, we may provoke third parties to assert counterclaims against us. We may not prevail in any lawsuits that we initiate, and the damages or other remedies awarded, if any, may not be commercially viable. Any litigation, whether or not resolved in our favor, could result in significant expense to us and divert the efforts of our technical and management personnel, which may adversely affect our business, results of operations, financial condition and cash flows.
We may be subject to intellectual property rights claims by third parties, which are extremely costly to defend, could require us to pay significant damages and could limit our ability to use certain technologies.
Companies in the software and technology industries, including some of our current and potential competitors, own large numbers of patents, copyrights, trademarks and trade secrets and frequently enter into litigation based on allegations of infringement or other violations of intellectual property rights. In addition, many of these companies have the capability to dedicate substantially greater resources to enforce their intellectual property rights and to defend claims that may be brought against them. The litigation may involve patent holding companies or other adverse patent owners that have no relevant product revenues and against which our patents may therefore provide little or no deterrence. We have received, and may in the future receive, notices that claim we have misappropriated, misused, or infringed other parties' intellectual property rights, and, to the extent we gain greater market visibility, we face a higher risk of being the subject of intellectual property infringement claims, which is not uncommon with respect to the business analytics software market.
There may be third-party intellectual property rights, including issued or pending patents that cover significant aspects of our technologies or business methods. Any intellectual property claims, with or without merit, could be very time-consuming, could be expensive to settle or litigate and could divert our management's attention and other resources. These claims could also subject us to significant liability for damages, potentially including treble damages if we are found to have willfully infringed patents or copyrights. These claims could also

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result in our having to stop using technology found to be in violation of a third party's rights. We might be required to seek a license for the intellectual property, which may not be available on reasonable terms or at all. Even if a license were available, we could be required to pay significant royalties, which would increase our operating expenses. As a result, we may be required to develop alternative non-infringing technology, which could require significant effort and expense. If we cannot license or develop technology for any infringing aspect of our business, we would be forced to limit or stop sales of our software and may be unable to compete effectively. Any of these results would adversely affect our business, results of operations, financial condition and cash flows.
Our use of open source software could negatively affect our ability to sell our software and subject us to possible litigation.
We use open source software in our software and expect to continue to use open source software in the future. We may face claims from others claiming ownership of, or seeking to enforce the license terms applicable to such open source software, including by demanding release of the open source software, derivative works or our proprietary source code that was developed using such software. These claims could also result in litigation, require us to purchase a costly license or require us to devote additional research and development resources to change our software, any of which would have a negative effect on our business and results of operations. In addition, if the license terms for the open source code change, we may be forced to re-engineer our software or incur additional costs. Finally, we cannot assure you that we have not incorporated open source software into our software in a manner that may subject our proprietary software to an open source license that requires disclosure, to customers or the public, of the source code to such proprietary software. Any such disclosure would have a negative effect on our business and the value of our software.
We may be subject to litigation for a variety of claims, which could adversely affect our results of operations, harm our reputation or otherwise negatively impact our business.
In addition to intellectual property litigation, we may be subject to other claims arising from our normal business activities. These may include claims, suits, and proceedings involving labor and employment, wage and hour, commercial and other matters. The outcome of any litigation, regardless of its merits, is inherently uncertain. Any claims and lawsuits, and the disposition of such claims and lawsuits, could be time-consuming and expensive to resolve, divert management attention and resources, and lead to attempts on the part of other parties to pursue similar claims. Any adverse determination related to litigation could adversely affect our results of operations, harm our reputation or otherwise negatively impact our business. In addition, depending on the nature and timing of any such dispute, a resolution of a legal matter could materially affect our future results of operations, our cash flows or both.
Our success depends in part on maintaining and increasing our sales to customers in the public sector.
We derive a portion of our revenues from contracts with federal, state, local and foreign governments and agencies, and we believe that the success and growth of our business will continue to depend on our successful procurement of government contracts. Selling to government entities can be highly competitive, expensive and time consuming, often requiring significant upfront time and expense without any assurance that our efforts will produce any sales. Factors that could impede our ability to maintain or increase the amount of revenues derived from government contracts include:
changes in fiscal or contracting policies;
decreases in available government funding;
changes in government programs or applicable requirements;
the adoption of new laws or regulations or changes to existing laws or regulations;
potential delays or changes in the government appropriations or other funding authorization processes;
governments and governmental agencies requiring contractual terms that are unfavorable to us, such as most-favored-nation pricing provisions; and
delays in the payment of our invoices by government payment offices.


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The occurrence of any of the foregoing could cause governments and governmental agencies to delay or refrain from purchasing our software in the future or otherwise have an adverse effect on our business, results of operations, financial condition and cash flows.
Further, to increase our sales to customers in the public sector, we must comply with laws and regulations relating to the formation, administration, performance and pricing of contracts with the public sector, including U.S. federal, state and local governmental bodies, which affect how we and our channel partners do business in connection with governmental agencies. These laws and regulations may impose added costs on our business, and failure to comply with these laws and regulations or other applicable requirements, including non-compliance in the past, could lead to claims for damages from our channel partners or government customers, penalties, termination of contracts, loss of intellectual property rights and temporary suspension or permanent debarment from government contracting. Any such damages, penalties, disruptions or limitations in our ability to do business with the public sector could have a material adverse effect on our business, results of operations, financial condition and cash flows.
Future acquisitions could disrupt our business and adversely affect our results of operations, financial condition and cash flows.
We may choose to expand by making acquisitions that could be material to our business, results of operations, financial condition and cash flows. Our ability as an organization to successfully acquire and integrate technologies or businesses is unproven. Acquisitions involve many risks, including the following:
an acquisition may negatively affect our results of operations, financial condition or cash flows because it may require us to incur charges or assume substantial debt or other liabilities, may cause adverse tax consequences or unfavorable accounting treatment, including potential write- downs of deferred revenues, may expose us to claims and disputes by third parties, including intellectual property claims and disputes, or may not generate sufficient financial return to offset additional costs and expenses related to the acquisition;
we may encounter difficulties or unforeseen expenditures in integrating the business, technologies, products, personnel or operations of any company that we acquire, particularly if key personnel of the acquired company decide not to work for us;
an acquisition may disrupt our ongoing business, divert resources, increase our expenses and distract our management;
an acquisition may result in a delay or reduction of customer purchases for both us and the company we acquired due to customer uncertainty about continuity and effectiveness of service from either company;
we may encounter difficulties in, or may be unable to, successfully sell any acquired products;
an acquisition may involve the entry into geographic or business markets in which we have little or no prior experience or where competitors have stronger market positions;
challenges inherent in effectively managing an increased number of employees in diverse locations;
the potential strain on our financial and managerial controls and reporting systems and procedures;
potential known and unknown liabilities associated with an acquired company;
our use of cash to pay for acquisitions would limit other potential uses for our cash;
if we incur debt to fund such acquisitions, such debt may subject us to material restrictions on our ability to conduct our business as well as financial maintenance covenants;
the risk of impairment charges related to potential write-downs of acquired assets or goodwill in future acquisitions;
to the extent that we issue a significant amount of equity or convertible debt securities in connection with future acquisitions, existing stockholders may be diluted and earnings per share may decrease; and
managing the varying intellectual property protection strategies and other activities of an acquired company.

We may not succeed in addressing these or other risks or any other problems encountered in connection with the integration of any acquired business. The inability to integrate successfully the business, technologies,

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products, personnel or operations of any acquired business, or any significant delay in achieving integration, could have a material adverse effect on our business, results of operations, financial condition and cash flows.
We may require additional capital to fund our business and support our growth, and our inability to generate and obtain such capital on acceptable terms, or at all, could harm our business, operating results, financial condition and prospects.
We intend to continue to make substantial investments to fund our business and support our growth. In addition, we may require additional funds to respond to business challenges, including the need to develop new features or enhance our software, improve our operating infrastructure or acquire or develop complementary businesses and technologies. As a result, we may need to engage in equity or debt financings to provide the funds required for these and other business endeavors. If we raise additional funds through future issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing that we may secure in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult