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ForeScout Technologies Reports Third Quarter 2018 Financial Results

November 8, 2018

-- Revenue increases 23% year-over-year -- Achieves non-GAAP operating profit of $4.9 million -- Acquires SecurityMatters to accelerate momentum in Operational Technology market

SAN JOSE, Calif., Nov. 08, 2018 (GLOBE NEWSWIRE) -- ForeScout Technologies, Inc. (NASDAQ:FSCT), a leading Internet of Things (IoT) security company, today announced results for its third quarter, ended September 30, 2018.

The Company also announced it has acquired SecurityMatters, a global leader in operational technology (OT) network protection. The acquisition will bolster ForeScout’s global leadership position in device visibility for IT networks with expanded capabilities and advanced features to secure OT and industrial environments - enabling the industry’s first, and only, end-to-end agentless device visibility and control platform across the extended enterprise. The acquisition is expected to accelerate ForeScout’s traction in the emerging OT space and expand its current total addressable market by approximately 50% to 2.1 billion enterprise devices, from a previous 1.4 billion devices.

“Q3 marked another strong quarter for ForeScout, as we again delivered consistent outperformance across both top and bottom line metrics,” said Michael DeCesare, CEO and President of ForeScout Technologies. “We landed more than 100 new customers and expanded with many existing ones across a mix of industries and geographies as we continued to execute well to capitalize on the growing market opportunity for device visibility solutions. We are excited about strengthening and accelerating our opportunity in the OT market with our acquisition of SecurityMatters, which makes us the industry’s only vendor able to provide deep and continuous end-to-end agentless device visibility and control across the extended enterprise - from the campus to data center, cloud and OT environments.”

Third Quarter 2018 Financial Highlights

-- Revenue: Total revenue was $85.6 million, an increase of 23% over the third quarter of 2017

o Product revenue was $51.1 million, an increase of 18% over the third quarter of 2017

o Maintenance and Professional Services revenue was $34.5 million, an increase of 32% over the third quarter of 2017

-- Gross Profit: GAAP gross profit was $66.4 million, or 78% of total revenue, compared to $53.4 million in the third quarter of 2017, or 77% of total revenue. Non-GAAP gross profit was $67.2 million, or 78% of total revenue, compared to $53.7 million in the third quarter of 2017, or 77% of total revenue. -- Operating Loss/Income: GAAP operating loss was $8.6 million, or 10% of total revenue, compared to $0.7 million in the third quarter of 2017, or 1% of total revenue. Non-GAAP operating income was $4.9 million, or 6% of total revenue, compared to $3.2 million in the third quarter of 2017, or 5% of total revenue. -- Net Loss/Income: GAAP net loss was $8.3 million, or $0.20 per share, compared to $1.3 million in the third quarter of 2017, or $0.21 per share. Non-GAAP net income was $5.1 million, or $0.10 per share, based on 48.5 million weighted average diluted shares outstanding, compared to $2.6 million in the third quarter of 2017, or $0.08 per share, based on 34.7 million weighted average diluted shares outstanding. -- Cash Flow: Net cash used in operating activities was $11.6 million, or 14% of total revenue, compared to net cash provided by operating activities of $2.3 million in the third quarter of 2017, or 3% of total revenue. Free cash flow was negative $13.6 million, or 16% of total revenue, compared to positive $1.7 million in the third quarter of 2017, or 2% of total revenue.

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

“Revenue growth of 23% exceeded our guidance for the third quarter, driven by strong product revenue growth from CounterACT sales and continued momentum with our Extended Modules,” said Criss Harms, Chief Financial Officer of ForeScout. “We also achieved Non-GAAP profitability, resulting from our strong revenue outperformance, which further evidenced the sales leverage that we are able to unlock in our model, as well as the continuing mix shift within our revenue to more software-only sales.”

Third Quarter 2018 Business Highlights

During the third quarter and recently, ForeScout:

-- Received the Frost & Sullivan Growth Excellence Leadership Award in the network access control (NAC) market for the fastest growth in the industry, the largest gain in global market share and the highest standards for delivering customer value. The award recognizes the company for its innovative, agentless solutions that offer customers unmatched device visibility and control across multi-vendor environments in the extended enterprise. -- Announced it has teamed up with Belden, a global leader in industrial networking and cybersecurity, to help organizations mitigate detrimental impacts to safety, quality and productivity in their industrial automation and control networks caused by cyber events. Through this strategic partnership ForeScout delivers secure network access, comprehensive device visibility and dynamic network segmentation capabilities in industrial environments powered by Belden infrastructure. -- Was named a winner in multiple categories at the 2018 Cyber Defense Global Awards. The company’s visibility platform was recognized as a winner in two categories including “Leader of Internet of Things Security” and “Best Product: Network Access Control.” These wins confirm the company’s unique ability to provide network security that enables commercial and government organizations to see all devices on the network, control connected systems, and orchestrate incident response and device remediation. -- Was named the winner of the “Overall IoT Security Solution Provider of the Year” award from CyberSecurity Breakthrough, an independent organization that recognizes the top companies, technologies and products in the global information security market today.

Fourth Quarter and Full Year 2018 Outlook

ForeScout provides guidance based on current market conditions and expectations.

For the fourth quarter of 2018, ForeScout expects:

-- Revenue of $75.8 million - $78.8 million, representing year-over-year growth of 23% at the midpoint -- Non-GAAP operating loss of $10.5 - $9.5 million -- Non-GAAP net loss per share of $0.26 - $0.24 using approximately 42.8 million weighted shares outstanding

For the full year 2018, ForeScout expects:

-- Revenue of $288.7 million - $291.7 million, representing year-over-year growth of 29% at the midpoint -- Non-GAAP operating loss of $26.7 - $25.7 million -- Non-GAAP net loss per share of $0.69 - $0.67 using approximately 40.9 million weighted shares outstanding

Guidance for non-GAAP operating loss and non-GAAP net loss per share excludes stock-based compensation expense and acquisition-related expenses. We have not reconciled non-GAAP operating loss guidance to GAAP operating loss, nor have we reconciled non-GAAP net loss per share to GAAP net loss per share, as a result of the uncertainty regarding, and the potential variability of, this item. Accordingly, a reconciliation of the non-GAAP financial measure guidance to the corresponding GAAP measure is not available without unreasonable effort.

Conference Call Information

ForeScout will host a conference call for analysts and investors to discuss its third quarter 2018 financial results today at 1:30 p.m. Pacific time. Open to the public, interested parties may access the conference call by dialing either (855) 659-9329 or (615) 247-5915 using the passcode 5249667.

A live webcast will be accessible on ForeScout’s investor relations website at www.investors.forescout.com. A telephonic replay of the conference call will be available through Thursday, November 15, 2018. To access the replay, interested parties should dial either (855) 859-2056 or (404) 537-3406 using the passcode 5249667.

About ForeScout

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

© 2018. ForeScout Technologies, Inc. All rights reserved. ForeScout Technologies, Inc. is a Delaware corporation. A list of our trademarks and patents can be found at https://www.forescout.com/company/legal/intellectual-property-patents-trademarks. Other brands, products, or service names may be trademarks or service marks of their respective owners.

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Forward Looking Statements

This press release contains forward-looking statements that involve risks and uncertainties, including statements regarding our financial outlook for the fourth quarter of 2018 and fiscal year 2018, our markets and demand for our products as well as our growth prospects, our market opportunity as well as the goals and expectations for our partnerships and product enhancements in the operational technology market resulting from the acquisition of SecurityMatters. These forward-looking statements involve risks and uncertainties. If any of these risks or uncertainties materialize, or if any of our assumptions prove incorrect, our actual results could differ materially from the results expressed or implied by these forward-looking statements. These risks and uncertainties include risks associated with: the evolution of the cyberthreat landscape facing enterprises in the United States and other countries; developments and trends in the domestic and international markets for network security products; our growth in international markets; our expectations concerning the productivity of our expanding sales force as our sales representatives become more seasoned; our plans to attract new customers, retain existing customers and increase our annual revenue; fluctuations in our quarterly results of operations and other operating measures; increasing competition; new integrations to the ForeScout platform; the receipt of product certifications and the importance of such certifications for government buyers and contractors; the ability of ForeScout to successfully integrate SecurityMatters and to achieve anticipated benefits to our product, business and growth in the operational technology market following our acquisition of SecurityMatters; general economic, market and business conditions and the risks described in the other filings we make with the Securities and Exchange Commission from time to time, including the risks described under the headings “Risk Factors” and “Management Discussion and Analysis of Financial Condition and Results of Operations” in our Quarterly Report on Form 10-Q, which was filed with the Securities and Exchange Commission on August 9, 2018, and which should be read in conjunction with our financial results and forward-looking statements, and is available on the SEC filings section of the Investor Relations page of our website at https://investors.forescout.com. Additional information will also be set forth in ForeScout’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2018. All forward-looking statements in this press release are based on information available to us as of the date hereof, and we do not assume any obligation to update the forward-looking statements provided to reflect events that occur or circumstances that exist after the date on which they were made, except as required by law.

Non-GAAP Financial Measures

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

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

Non-GAAP Gross Profit. ForeScout defines non-GAAP gross profit as gross profit plus stock-based compensation expense.

Non-GAAP Operating Income (Loss). ForeScout defines non-GAAP operating income (loss) as operating income (loss) excluding stock-based compensation expense and acquisition-related expenses.

Non-GAAP Net Income (Loss) Per Share. ForeScout defines non-GAAP net income (loss) as net income (loss) excluding stock-based compensation expense, expense associated with changes in warrants issued in connection with preferred shares, acquisition-related expenses, and tax effect of non-GAAP adjustments. ForeScout defines non-GAAP net loss per share as non-GAAP net loss divided by the weighted average diluted shares outstanding.

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

FORESCOUT TECHNOLOGIES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited, in thousands) September December 30, 31, 2018 2017 ----------- ----------- Assets Current assets: Cash and cash equivalents $ 129,035 $ 63,009 Marketable securities 81,289 123,384 Accounts receivable 67,967 64,686 Inventory 322 3,660 Deferred commissions - current 10,667 10,957 Prepaid expenses and other current assets 11,786 9,213 --------- - Total current assets 301,066 274,909 Deferred commissions - non-current 20,942 21,795 Property and equipment, net 24,376 23,260 Severance pay deposits 2,162 2,118 Restricted cash - non-current 1,189 4,146 Other assets 2,196 2,490 --------- - --------- - Total assets $ 351,931 $ 328,718 - ------- - - ------- - Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 902 $ 7,348 Accrued compensation 23,819 25,358 Accrued expenses 11,410 10,023 Customer deposits 331 1,008 Deferred revenue - current 95,448 79,631 Notes payable - current 7,309 7,245 Total current liabilities 139,219 130,613 Deferred revenue - non-current 66,633 55,228 Notes payable - non-current 10,089 15,579 Accrued severance pay liability 2,783 2,617 Other liabilities 7,964 9,190 --------- - --------- - Total liabilities 226,688 213,227 --------- - --------- - Stockholders’ equity: Common stock 43 38 Additional paid-in capital 618,656 551,986 Accumulated other comprehensive loss (147 ) (112 ) Accumulated deficit (493,309 ) (436,421 ) --------- - --------- - Total stockholders’ equity 125,243 115,491 --------- - --------- - Total liabilities and stockholders’ equity $ 351,931 $ 328,718 - ------- - - ------- -

FORESCOUT TECHNOLOGIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited, in thousands, except share and per share amounts) Three Months Ended Nine Months Ended September 30, September 30, 2018 2017 2018 2017 ---------- ---------- ----------- ----------- Revenue: Product $ 51,082 $ 43,204 $ 115,185 $ 90,354 Maintenance and professional services 34,546 26,136 97,734 71,143 -------- - -------- - --------- - --------- - Total revenue 85,628 69,340 212,919 161,497 -------- - -------- - --------- - --------- - Cost of revenue: Product 8,947 7,240 21,002 16,877 Maintenance and professional services 10,250 8,688 29,394 25,662 -------- - -------- - --------- - --------- - Total cost of revenue 19,197 15,928 50,396 42,539 -------- - -------- - --------- - --------- - Total gross profit 66,431 53,412 162,523 118,958 -------- - -------- - --------- - --------- - Operating expenses: Research and development 15,062 10,985 44,552 32,634 Sales and marketing 46,098 34,028 133,416 102,629 General and administrative 13,880 9,148 40,872 27,265 -------- - -------- - --------- - --------- - Total operating expenses 75,040 54,161 218,840 162,528 -------- - -------- - --------- - --------- - Loss from operations (8,609 ) (749 ) (56,317 ) (43,570 ) Interest expense (208 ) (290 ) (676 ) (953 ) Other income (expense), net 865 160 2,040 (66 ) Revaluation of warrant liabilities — — — (342 ) -------- - -------- - --------- - --------- - Loss before income taxes (7,952 ) (879 ) (54,953 ) (44,931 ) Income tax provision 334 412 1,935 1,221 Net loss $ (8,286 ) $ (1,291 ) $ (56,888 ) $ (46,152 ) - ------ - - ------ - - ------- - - ------- - Net loss per share attributable to common stockholders, basic $ (0.20 ) $ (0.21 ) $ (1.41 ) $ (7.65 ) and diluted - ------ - - ------ - - ------- - - ------- - Weighted-average shares used to compute net loss per share 42,064,35 6,139,876 40,294,019 6,032,427 attributable to common stockholders, basic and diluted 6 -------- - -------- - --------- - --------- -

FORESCOUT TECHNOLOGIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited, in thousands) Nine Months Ended September 30, 2018 2017 ----------- ----------- Cash flows from operating activities: Net loss $ (56,888 ) $ (46,152 ) Adjustments to reconcile net loss to net cash provided by operating activities: Stock-based compensation 39,544 12,060 Depreciation 5,490 4,451 Revaluation of warrant liabilities — 342 Other 113 259 Changes in operating assets and liabilities: Accounts receivable (3,414 ) (4,286 ) Inventory 3,348 835 Deferred commissions 1,143 (2,483 ) Prepaid expenses and other current assets (1,924 ) 66 Other assets (154 ) 336 Accounts payable (6,110 ) (3,319 ) Accrued compensation (1,539 ) 3,820 Accrued expenses 1,704 (567 ) Customer deposits (677 ) 5,788 Deferred revenue 27,222 32,333 Severance pay, net 122 208 Other liabilities (588 ) (128 ) Net cash provided by operating activities 7,392 3,563 --------- - --------- - Cash flows from investing activities: Purchases of property and equipment (6,766 ) (3,386 ) Purchases of marketable securities (54,530 ) — Proceeds from maturities of marketable securities 97,050 — Net cash provided by (used in) investing activities 35,754 (3,386 ) --------- - --------- - Cash flows from financing activities: Repayments of notes payable (5,625 ) (5,624 ) Proceeds from sales of shares through employee equity incentive plans 24,648 960 Payment related to shares withheld for taxes on vesting of restricted stock units (10,727 ) — Proceeds from public offerings, net 13,818 — Payments of deferred offering costs (1,542 ) (2,708 ) Net cash provided by (used in) financing activities 20,572 (7,372 ) --------- - --------- - Net change in cash, cash equivalents, and restricted cash for period 63,718 (7,195 ) Cash, cash equivalents, and restricted cash at beginning of period 67,357 83,877 --------- - --------- - Cash, cash equivalents, and restricted cash at end of period $ 131,075 $ 76,682 - ------- - - ------- -

FORESCOUT TECHNOLOGIES, INC. RECONCILIATION OF GAAP TO NON-GAAP MEASURES (Unaudited, in thousands, except per share amounts) Three Months Ended Nine Months Ended September 30, September 30, 2018 2017 2018 2017 ------------ ---------- ----------- ----------- GAAP gross profit $ 66,431 $ 53,412 $ 162,523 $ 118,958 Add: Stock-based compensation expense 782 305 2,385 990 --------- -- -------- - --------- - --------- - Non-GAAP gross profit $ 67,213 $ 53,717 $ 164,908 $ 119,948 - ------- -- - ------ - - ------- - - ------- - GAAP operating expense: $ 75,040 $ 54,161 $ 218,840 $ 162,528 Less: Stock-based compensation expense 12,236 3,604 37,159 11,070 Acquisition-related expenses 481 — 481 — --------- -- -------- - --------- - --------- - Non-GAAP operating expense $ 62,323 $ 50,557 $ 181,200 $ 151,458 - ------- -- - ------ - - ------- - - ------- - GAAP operating loss $ (8,609 ) $ (749 ) $ (56,317 ) $ (43,570 ) Add: Stock-based compensation expense 13,018 3,909 39,544 12,060 Acquisition-related expenses 481 — 481 — --------- -- -------- - --------- - --------- - Non-GAAP operating income (loss) $ 4,890 $ 3,160 $ (16,292 ) $ (31,510 ) - ------- -- - ------ - - ------- - - ------- - GAAP net loss $ (8,286 ) $ (1,291 ) $ (56,888 ) $ (46,152 ) Add: Stock-based compensation expense $ 13,018 $ 3,909 $ 39,544 $ 12,060 Acquisition-related expenses 481 — 481 — Revaluation of warrant liabilities — — — 342 Tax effect of non-GAAP adjustments (131 ) — (131 ) — --------- -- -------- - --------- - --------- - Non-GAAP net income (loss) $ 5,082 $ 2,618 $ (16,994 ) $ (33,750 ) - ------- -- - ------ - - ------- - - ------- - Non-GAAP net income (loss) per share, diluted $ 0.10 $ 0.08 $ (0.42 ) $ (5.59 ) - ------- -- - ------ - - ------- - - ------- - GAAP weighted-average shares used to compute net loss per 42,064,356 6,139,876 40,294,019 6,032,427 share, diluted Add: 6,442,336 28,594,96 — — Weighted-average effect of potentially dilutive securities 8 Non-GAAP weighted-average shares used to compute net income 48,506,692 34,734,84 40,294,019 6,032,427 per share, diluted 4 --------- -- -------- - --------- - --------- - Net cash (used in) provided by operating activities $ (11,644 ) $ 2,313 $ 7,392 $ 3,563 Less: Net purchases of property and equipment 1,934 592 6,766 3,386 --------- -- -------- - --------- - --------- - Free cash flow (non-GAAP) $ (13,578 ) $ 1,721 $ 626 $ 177 - ------- -- - ------ - - ------- - - ------- - Free cash flow margin (non-GAAP) (16 )% 2 % — % — %

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

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