TABLEAU SOFTWARE INC, 10-K filed on 2/26/2018
Annual Report
Document and Entity Information Statement (USD $)
In Billions, except Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Jun. 30, 2017
Feb. 21, 2018
Common Class A
Feb. 21, 2018
Common Class B
Document Information [Line Items]
 
 
 
 
Document Type
10-K 
 
 
 
Amendment Flag
false 
 
 
 
Document Period End Date
Dec. 31, 2017 
 
 
 
Document Fiscal Year Focus
2017 
 
 
 
Document Fiscal Period Focus
FY 
 
 
 
Entity Registrant Name
TABLEAU SOFTWARE INC 
 
 
 
Entity Central Index Key
0001303652 
 
 
 
Current Fiscal Year End Date
--12-31 
 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
 
Entity Common Stock, Shares Outstanding
 
 
67,902,696 
13,633,546 
Entity Current Reporting Status
Yes 
 
 
 
Entity Well-Known Seasoned Issuer
Yes 
 
 
 
Entity Voluntary Filers
No 
 
 
 
Entity Public Float
 
$ 3.8 
 
 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2017
Dec. 31, 2016
Current assets
 
 
Cash and cash equivalents
$ 627,878 
$ 908,717 
Short-term Investments
226,787 
Accounts receivable, net
203,366 
206,765 
Prepaid expenses and other current assets
30,514 
36,011 
Income taxes receivable
673 
131 
Total current assets
1,089,218 
1,151,624 
Long-term Investments
148,364 
Property and equipment, net
106,753 
106,637 
Goodwill
35,083 
15,531 
Deferred income taxes
5,287 
1,449 
Deposits and other assets
14,090 
11,958 
Total assets
1,398,795 
1,287,199 
Current liabilities
 
 
Accounts payable
4,448 
17,637 
Accrued compensation and employee-related benefits
96,390 
70,230 
Other accrued liabilities
37,722 
53,418 
Income taxes payable
4,743 
1,893 
Deferred revenue
419,426 
285,543 
Total current liabilities
562,729 
428,721 
Deferred revenue
28,058 
26,930 
Other long-term liabilities
54,385 
39,700 
Total liabilities
645,172 
495,351 
Commitments and contingencies (Note 10)
   
   
Stockholders' equity
 
 
Preferred stock
Additional paid-in capital
1,168,563 
1,007,205 
Accumulated other comprehensive income (loss)
(11,991)
1,593 
Accumulated deficit
(402,957)
(216,958)
Total stockholders' equity
753,623 
791,848 
Total liabilities and stockholders' equity
1,398,795 
1,287,199 
Common Class B
 
 
Stockholders' equity
 
 
Common Stock
Common Class A
 
 
Stockholders' equity
 
 
Common Stock
$ 7 
$ 6 
Consolidated Balance Sheets - Parenthetical (USD $)
Dec. 31, 2017
Dec. 31, 2016
Convertible Preferred Stock
 
 
Preferred stock par value (in USD per share)
$ 0.0001 
$ 0.0001 
Preferred Stock, Shares Authorized
10,000,000 
10,000,000 
Preferred Stock, Shares Issued
Preferred Stock, Shares Outstanding
Common Class B
 
 
Common stock par value (in USD per share)
$ 0.0001 
$ 0.0001 
Shares authorized for issuance
75,000,000 
75,000,000 
Common Stock, Shares, Issued
14,492,846 
18,336,609 
Common Stock, Shares, Outstanding
14,492,846 
18,336,609 
Common Class A
 
 
Common stock par value (in USD per share)
$ 0.0001 
$ 0.0001 
Shares authorized for issuance
750,000,000 
750,000,000 
Common Stock, Shares, Issued
65,969,499 
58,381,813 
Common Stock, Shares, Outstanding
65,969,499 
58,381,813 
Consolidated Statement of Operations (USD $)
In Thousands, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Revenues
 
 
 
License
$ 429,204 
$ 481,659 
$ 423,766 
Maintenance and services
447,855 
345,284 
229,821 
Total revenues
877,059 
826,943 
653,587 
Cost of revenues
 
 
 
License
13,534 
7,003 
3,852 
Maintenance and services
100,025 
92,087 
69,833 
Total cost of revenues
113,559 1
99,090 1
73,685 1
Gross profit
763,500 
727,853 
579,902 
Operating expenses
 
 
 
Sales and marketing
517,446 1
476,506 1
356,723 1
Research and development
334,148 1
302,759 1
204,131 1
General and administrative
102,871 1
88,149 1
71,078 1
Total operating expenses
954,465 
867,414 
631,932 
Operating loss
(190,965)
(139,561)
(52,030)
Other income, net
12,266 
2,134 
1,223 
Loss before income tax expense
(178,699)
(137,427)
(50,807)
Income tax expense
6,861 
7,022 
32,893 
Net loss
$ (185,560)
$ (144,449)
$ (83,700)
Net loss per share:
 
 
 
Basic (in USD per share)
$ (2.35)
$ (1.92)
$ (1.17)
Diluted (in USD per share)
$ (2.35)
$ (1.92)
$ (1.17)
Weighted average shares used to compute net loss per share:
 
 
 
Basic (in shares)
78,869 
75,162 
71,701 
Diluted (in shares)
78,869 
75,162 
71,701 
Consolidated Statement of Operations - Parenthetical (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Cost of revenues
 
 
 
Allocated Share-based Compensation Expense
$ 11,029 
$ 10,595 
$ 7,031 
Sales and marketing
 
 
 
Allocated Share-based Compensation Expense
74,065 
68,411 
45,205 
Research and development
 
 
 
Allocated Share-based Compensation Expense
104,280 
91,044 
55,269 
General and administrative
 
 
 
Allocated Share-based Compensation Expense
$ 20,909 
$ 15,662 
$ 11,963 
Consolidated Statements of Comprehensive Loss Statement (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Statement of Comprehensive Income [Abstract]
 
 
 
Net loss
$ (185,560)
$ (144,449)
$ (83,700)
Other comprehensive income (loss), net of tax:
 
 
 
Foreign currency translation
(12,920)
950 
503 
Net unrealized loss on available-for-sale securities
(664)
Comprehensive loss
$ (199,144)
$ (143,499)
$ (83,197)
Consolidated Statements of Shareholders Equity Statement (USD $)
In Thousands, except Share data, unless otherwise specified
Total
Common Stock (Class A and B)
Additional Paid-in Capital
Accumulated Other Comprehensive Income (Loss)
Retained Earnings (Accumulated Deficit)
Balances, period start at Dec. 31, 2014
$ 672,006 
$ 7 
$ 660,668 
$ 140 
$ 11,191 
Balances (in shares), period start at Dec. 31, 2014
 
69,868,219 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
Proceeds from issuance of common stock (in shares)
 
3,336,245 
 
 
 
Issuance of common stock
20,117 
20,117 
 
 
Stock-based compensation expense
119,468 
 
119,468 
 
 
Excess tax benefit from stock-based compensation
5,551 
 
5,551 
 
 
Other comprehensive income, net
503 
 
 
503 
 
Net loss
(83,700)
 
 
 
(83,700)
Balances, period end at Dec. 31, 2015
733,945 
805,804 
643 
(72,509)
Balances (in shares), period end at Dec. 31, 2015
 
73,204,464 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
Proceeds from issuance of common stock (in shares)
 
3,960,475 
 
 
 
Issuance of common stock
34,357 
34,356 
 
 
Repurchase of common stock (in shares)
(446,517)
 
 
 
 
Repurchase of common stock
(20,009)
 
(20,009)
 
 
Stock-based compensation expense
185,712 
 
185,712 
 
 
Excess tax benefit from stock-based compensation
1,342 
 
1,342 
 
 
Other comprehensive income, net
950 
 
 
950 
 
Net loss
(144,449)
 
 
 
(144,449)
Balances, period end at Dec. 31, 2016
791,848 
1,007,205 
1,593 
(216,958)
Balances (in shares), period end at Dec. 31, 2016
 
76,718,422 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
Cumulative effect of a change in accounting principle related to stock-based compensation (Accounting Standards Update 2016-09 [Member])
 
 
439 
 
(439)
Proceeds from issuance of common stock (in shares)
 
5,008,351 
 
 
 
Issuance of common stock
38,856 
38,856 
 
 
Repurchase of common stock (in shares)
(1,264,428)
 
 
 
 
Repurchase of common stock
(80,000)
 
(79,991)
 
 
Stock-based compensation expense
202,054 
 
202,054 
 
 
Other comprehensive income, net
(13,584)
 
 
(13,584)
 
Net loss
(185,560)
 
 
 
(185,560)
Balances, period end at Dec. 31, 2017
$ 753,623 
$ 8 
$ 1,168,563 
$ (11,991)
$ (402,957)
Balances (in shares), period end at Dec. 31, 2017
 
80,462,345 
 
 
 
Consolidated Statement of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Operating activities
 
 
 
Net loss
$ (185,560)
$ (144,449)
$ (83,700)
Adjustments to reconcile net loss to net cash provided by operating activities
 
 
 
Depreciation and amortization expense
44,746 
43,006 
23,667 
Accretion (Amortization) of Discounts and Premiums, Investments
359 
Stock-based compensation expense
210,283 
185,712 
119,468 
Deferred income taxes
(2,988)
1,219 
28,558 
Changes in operating assets and liabilities
 
 
 
Accounts receivable, net
12,493 
(78,197)
(34,225)
Prepaid expenses, deposits and other assets
8,054 
(18,987)
(13,783)
Income taxes receivable
(515)
(56)
147 
Deferred revenue
123,938 
116,860 
71,383 
Accounts payable and accrued liabilities
13,529 
71,157 
30,224 
Income taxes payable
2,528 
997 
664 
Net cash provided by operating activities (1)
226,867 
177,262 
142,403 
Investing activities
 
 
 
Purchases of property and equipment
(61,823)
(60,732)
(45,130)
Business combinations, net of cash acquired
(23,966)
(16,399)
(1,000)
Purchases of investments
(421,719)
Maturities of investments
30,630 
Sales of investments
14,916 
Net cash used in investing activities
(461,962)
(77,131)
(46,130)
Financing activities
 
 
 
Proceeds from issuance of common stock
38,856 
34,356 
20,117 
Repurchases of common stock
(79,991)
(20,009)
Net cash provided by (used in) financing activities(1)
(41,135)
14,347 
20,117 
Effect of exchange rate changes on cash and cash equivalents
(4,609)
(1,661)
(1,103)
Net increase (decrease) in cash and cash equivalents
(280,839)
112,817 
115,287 
Cash and cash equivalents
 
 
 
Beginning of year
908,717 
795,900 
680,613 
End of year
627,878 
908,717 
795,900 
Supplemental disclosures
 
 
 
Cash paid for income taxes
4,347 
1,513 
959 
Non-cash activities
 
 
 
Accrued purchases of property and equipment
6,470 
26,548 
10,012 
Asset retirement obligations recognized, net
$ 1,003 
$ 745 
$ 271 
Consolidated Statement of Cash Flows - Parenthetical (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Net Cash Provided by Operating Activities
$ 177,262 
$ 142,403 
Net Cash Provided by (Used in) Financing Activities
14,347 
20,117 
Adjustments for New Accounting Pronouncement [Member]
 
 
Net Cash Provided by Operating Activities
2,200 
5,600 
Net Cash Provided by (Used in) Financing Activities
$ (2,200)
$ (5,600)
Description of Business
Description of Business
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 offer 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 hosted software-as-a-service ("SaaS") version of Tableau Server; and Tableau Public, a free cloud-based platform for analyzing and sharing public data.
Summary of Significant Accounting Policies
Summary of Significant Accounting Policies
Summary of Significant Accounting Policies
Accounting Principles
The consolidated financial statements and accompanying notes were prepared in accordance with accounting principles generally accepted in the United States ("GAAP").
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
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. Our estimates include the useful lives of our property and equipment and other lease-related assets, liabilities and costs and the collectability of our accounts receivable. We also use estimates in stock-based compensation, income taxes, business combinations, investments and accrued liabilities. Actual results could differ from those estimates.
Foreign Currency
The financial statements of our foreign subsidiaries with a functional currency other than U.S. dollars have been translated into U.S. dollars. Assets and liabilities of these subsidiaries are translated at the exchange rate in effect at each period-end. Income statement amounts are translated at the average rate of exchange prevailing during the period. Translation adjustments arising from the use of differing exchange rates from period to period are included in other comprehensive income (loss). As of December 31, 2017 and 2016, we had a cumulative translation gain (loss) of $(11.3) million and $1.6 million, respectively.
Gains and losses on foreign currency transactions are included in other income, net. Foreign currency transaction gains (losses) were $4.1 million, $(0.6) million and $0.6 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Risks and Uncertainties
Inherent in our business are various risks and uncertainties, including our limited history of operating our business at its current scale and development of advanced technologies in a rapidly changing industry. These risks include our ability to manage our 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, development of sales and distribution channels and our ability to generate significant revenues from the sale 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 ("CODM") 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.
Revenue Recognition
We generate revenues primarily in the form of software license fees and related maintenance and services fees. Software license fees include fees from the sales of perpetual, term and subscription licenses. Maintenance and services fees primarily consist of fees for maintenance services (including support and unspecified upgrades and enhancements when and if they are available), training and professional services that are not essential to the functionality of the software.
We recognize revenues when all of the following conditions are met:
there is persuasive evidence of an arrangement;
the software or services have been delivered to the customer;
the amount of fees to be paid by the customer is fixed or determinable; and
the collection of the related fees is probable.
We use click-through license agreements, signed agreements and purchase orders as evidence of an arrangement. We deliver all of our software electronically. Electronic delivery occurs when we provide the customer with access to the software and license key via a secure portal. We assess whether the fee is fixed or determinable at the outset of the arrangement. Our typical terms of payment are due 30 days from delivery. We assess collectability based on a number of factors such as collection history and creditworthiness of the customer. If we determine that collectability is not probable, revenue is deferred until collectability becomes probable, generally upon receipt of cash.
Substantially all of our software licenses are sold in multiple-element arrangements that include maintenance services and may include professional services and training.
Vendor specific objective evidence ("VSOE") of the fair value for software licenses is not available as our software licenses are never sold without maintenance; however, VSOE generally exists for all undelivered elements and any services that are not essential to the functionality of the delivered software. Therefore, we account for delivered software licenses under the residual method.
Maintenance agreements consist of fees for providing software updates on a when and if available basis and technical support for software products ("post-contract support" or "PCS") for an initial term, generally one year. We have established VSOE of the fair value for maintenance on perpetual licenses based on stated substantive renewal rates or the price when sold on a standalone basis. Stated renewal rates are considered to be substantive if they are at least 15% of the actual price charged for the software license. VSOE of the fair value for standalone maintenance contracts is considered to have been established when a substantial majority of individual sales transactions within the previous 12 months falls within a reasonably narrow range, which we have defined to be plus or minus 15% of the median sales price of actual standalone sales transactions.
License arrangements may include professional services and training. In determining whether professional services and training revenues should be accounted for separately from license revenues, we evaluate:
whether such services are considered essential to the functionality of the software using factors such as the nature of the software products;
whether they are ready for use by the customer upon receipt;
the nature of the services, which typically do not involve significant customization to or development of the underlying software code;
the availability of services from other vendors;
whether the timing of payments for license revenues coincides with performance of services; and
whether milestones or acceptance criteria exist that affect the realizability of the software license fee.
To date, professional services have not been considered essential to the functionality of the software. The VSOE of the fair value of our professional services and training is based on the price for these same services when they are sold separately. Revenues related to professional services are billed on a time and materials basis and are recognized as the services are performed.
Revenues related to training services are billed on a fixed fee basis and are recognized as the services are delivered. Payments received in advance of services performed are deferred and recognized when the related services are performed.
When software is licensed for a specified term or on a subscription basis, fees for maintenance and support are generally bundled with the license fee over the entire term of the contract. In these cases, we do not have VSOE of the fair value for maintenance and support. Revenues related to term and subscription license fees are recognized ratably over the contract term beginning on the date the customer has access to the software license key and continuing through the end of the contract term.
We do not offer refunds and therefore have not recorded any sales return allowance for any of the periods presented. Upon a periodic review of outstanding accounts receivable, amounts that are deemed to be uncollectable are written off against the allowance for doubtful accounts.
We account for taxes collected from customers and remitted to governmental authorities on a net basis and exclude them from revenues.
Cash and Cash Equivalents
We consider all highly liquid investments purchased with an original or remaining maturity of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents are recorded at cost, which approximates fair value. We maintain cash and cash equivalent balances which exceed the insured limits by the Federal Deposit Insurance Corporation.
Investments
We classify our investment securities as available-for-sale. Our investment securities are stated at fair value and reported in short-term investments and long-term investments. Investments in securities with maturities of less than one year, or where management's intent is to use the investments to fund current operations, are classified as short-term investments. Investments with maturities greater than one year are classified as long-term investments. Unrealized gains and losses on available-for-sale securities are excluded from net income and reported, net of tax, in other comprehensive income (loss). Realized gains and losses and declines in the value of securities judged to be other-than-temporary are determined based on the specific identification method and are included in other income, net. In order to determine whether a decline in value is other-than-temporary, we evaluate, among other factors, our intent and ability to recover the amortized cost basis of the security. Interest on securities classified as available-for-sale is included in other income, net.
Accounts Receivable, Net
Accounts receivable consist of amounts billed and currently due from customers. Our accounts receivable are subject to collection risk. Our gross accounts receivable is reduced for this risk by a provision for doubtful accounts. This provision is for estimated losses resulting from the inability of our customers to make required payments. It is an estimate and is regularly evaluated for adequacy by taking into consideration a combination of factors. We look at factors such as past collection experience, credit quality of the customer, age of the receivable balance and current economic conditions. These factors are reviewed to determine whether a provision for doubtful accounts should be recorded to reduce the receivable balance to the amount believed to be collectible.
Activity related to our provision for doubtful accounts was as follows:
 
Year Ended December 31,
 
2017
 
2016
 
2015
 
(in thousands)
Balance at the beginning of the year
$
1,065

 
$
888

 
$
1,111

Bad debt expense
650

 
750

 
250

Accounts written off
(712
)
 
(573
)
 
(473
)
Balance at the end of the year
$
1,003

 
$
1,065

 
$
888


Property and Equipment, Net
Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization are calculated using the straight-line method over the estimated useful lives of the assets. The estimated useful lives range from approximately one to twelve years. Leasehold improvements are amortized over the shorter of the estimated useful life or the remaining lease term. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in results of operations. Maintenance and repairs that do not improve or extend the lives of the respective assets are charged to expense in the period incurred.
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. Rent expense is recognized on a straight-line method, 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 rent payments. Additionally, incentives received are treated as a reduction of expense over the term of the agreement.
Liabilities are established for the present value of estimated future costs to retire leasehold improvements at the termination or expiration of a lease. A corresponding asset is recorded in the period in which the obligation is incurred. Such assets are amortized over the estimated useful life of the asset, and the recorded liabilities are accreted to the future value of the estimated retirement costs.
Impairment of Long-Lived Assets
We evaluate the recoverability of long-lived assets in accordance with authoritative guidance on accounting for the impairment or disposal of long-lived assets. We evaluate long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. Such impairment is recognized in the event the carrying value of such assets exceeds their fair value. If the carrying value of the net assets assigned exceeds the fair value of the assets, then the second step of the impairment test is performed in order to determine the implied fair value. No impairment of long-lived assets occurred in the periods presented.
Software Development Costs
Software development costs associated with the development of new products, enhancements of existing products and quality assurance activities consists of employee, consulting and other external personnel costs. The costs incurred internally from the research and development ("R&D") of computer software products are charged to expense until technological feasibility has been established for the product. Once technological feasibility is established, all software costs are capitalized until the product is available for release to customers. Judgment is required in determining when technological feasibility of a product is established. To date, we have determined that technological feasibility of software products is reached shortly before the products are released. Costs incurred after establishment of technological feasibility have not been material, and therefore, we have expensed all R&D costs as they were incurred. R&D expenses primarily consist of personnel-related costs attributable to our R&D personnel and allocated overhead, which includes facilities-related costs.
We capitalize certain costs relating to software developed or modified solely to meet our internal requirements and for which there are no substantive plans to market the software. To date, we have not capitalized any such costs as these costs have not been material.
Intangible Asset Costs
Costs related to filing and pursuing patent and trademark applications are expensed as incurred, as recoverability of such expenditures is uncertain. These intangible asset-related legal costs are generally reported as a component of general and administrative expenses.
Advertising Expenses
We expense all advertising costs as incurred and classify such costs as sales and marketing expenses. Advertising expenses for the years ended December 31, 2017, 2016 and 2015 were $28.2 million, $21.7 million and $11.3 million, respectively.
Income Taxes
Income taxes are accounted for under the asset and liability method in accordance with authoritative guidance for income taxes. Deferred income tax assets are recognized for deductible temporary differences, net operating loss carryforwards, and tax credit carryforwards if it is more likely than not that the tax benefits will be realized. We consider future taxable income, historical operating results and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance. A valuation allowance is recorded to reduce our deferred income tax assets to the net amount that we believe is more likely than not to be realized. In the event we determine that we are able to realize our deferred income tax assets in excess of our net recorded amount, we would reduce the valuation allowance associated with the deferred income tax assets in the period the determination is made, which may result in a tax benefit in the statement of operations.
Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Our assumptions, judgments and estimates relative to the value of net deferred income taxes take into account predictions of the amount and category of future taxable income, such as income from operations or capital gains income. Actual operating results and the underlying amount and category of income in future years could render our current assumptions, judgments and estimates of recoverable net deferred income taxes inaccurate. Any of the assumptions, judgments and estimates mentioned above could cause our actual income tax obligations to differ from our estimates, thus materially impacting our financial position and results of operations.
Concentrations of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents, investments and accounts receivable.
Our investment portfolio consists of investment-grade securities diversified among security types, industries and issuers. Our cash and cash equivalents and investments are held and managed by recognized financial institutions that follow our investment policy. Our policy limits the amount of credit exposure to any one security issue or issuer.
We extend credit to customers based upon an evaluation of the customer's financial condition. As of December 31, 2017 and 2016, no individual customer accounted for 10% or more of total accounts receivable. For the years ended December 31, 2017, 2016 and 2015, no individual customer represented 10% or more of our total revenues.
Business Combinations
As of the date of an acquisition, we recognize the identifiable assets acquired and liabilities assumed at fair value. Any excess of the consideration over the fair value of identifiable net assets is recorded as goodwill. Amounts that are not part of the consideration transferred are recognized separately from a business combination and are expensed as incurred. Intangible assets acquired are measured at their acquisition date fair value using valuation techniques that are subject to judgment.
Goodwill and Intangible Assets
Intangible assets with a finite life are typically amortized over their useful lives which range from three to five years. Goodwill is tested for impairment on an annual basis in the third quarter and more frequently if circumstances indicate that the carrying value may not be recoverable. As part of our goodwill impairment test, we first perform a qualitative assessment to determine whether it is more likely than not that the fair value of our reporting unit is less than its carrying amount. For purposes of this assessment, we consider the enterprise to be the reporting unit. If we determine it is more likely than not that the fair value of our reporting unit is less than its carrying amount, we will perform a quantitative assessment to determine whether the fair value of our reporting unit is less than its carrying amount. We have not had any impairments of the goodwill balance.
Stock-Based Compensation
We record compensation expense for stock-based transactions including employee and non-employee stock option and restricted stock unit ("RSU") awards granted under our 2004 Equity Incentive Plan (the "2004 Plan") and our 2013 Equity Incentive Plan, as amended, (the "2013 Plan" and together with the 2004 Plan, the "Plans"). We also record compensation expense related to employee contributions made under our 2013 Employee Stock Purchase Plan ("2013 ESPP"). These contributions are used to purchase shares of our Class A common stock at a discount.
Stock-based compensation expense is measured and recognized in the financial statements based on fair value. The fair value of each RSU award is determined based on the closing price of our Class A common stock as reported on the New York Stock Exchange on the date of grant. The fair value of each stock option award is determined at the date of grant by applying the Black-Scholes option pricing model. We also use the Black-Scholes option pricing model to determine the fair value of each common share issued under the 2013 ESPP. The fair value for 2013 ESPP grants is determined on the first day of each offering period.
The Black-Scholes option pricing model utilizes the value of our underlying common stock at the measurement date, the expected or contractual term of the option or offering period, the expected volatility of our common stock, risk-free interest rates and expected dividend yield of our common stock. Prior to our IPO in May 2013, because our stock was not publicly traded we estimated the fair value of our common stock. Our board of directors considered numerous objective and subjective factors to determine the fair value of our common stock at each meeting at which awards were approved. The factors included, but were not limited to: (i) contemporaneous third-party valuations of our common stock; (ii) the prices, rights, preferences and privileges of our preferred stock that was then outstanding relative to those of our common stock; (iii) the lack of marketability of our common stock; (iv) our actual operating and financial results; (v) current business conditions and projections; and (vi) the likelihood of achieving a liquidity event, such as an IPO or merger or acquisition, given prevailing market conditions. After the completion of our IPO, our common stock has been valued by reference to the closing price of our Class A common stock as reported on the New York Stock Exchange.
We recognize stock-based compensation expense using the straight-line method over the requisite service period. We account for forfeitures as they occur. For awards subject to technology milestones, we recognize compensation cost over the required service period if it is probable that the technology milestone will be met. If our assessment of the probability of the technology milestone being met changes, we recognize the impact of the change in estimate in the period of the change. Excess tax benefits resulting from the settlement of stock awards are recorded to income tax expense.
Fair Value Measurements
We categorize assets and liabilities recorded at fair value on our consolidated balance sheets 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.     
We establish fair value of our assets and liabilities using the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and using a fair value hierarchy based on the inputs used to measure fair value. The carrying amounts reported in the consolidated financial statements approximate the fair value for cash equivalents, accounts receivable, accounts payable, and accrued and other current liabilities, due to their short-term nature. We value our investments using quoted prices for identical instruments in active markets when available. If we are unable to obtain quoted prices for identical instruments in active markets, we value our investments using quoted market prices for comparable instruments. To date, all of our investments can be valued using one of these two methodologies.
Recently Adopted Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-09 related to stock-based compensation. The guidance, which simplifies the accounting and presentation for share-based payments, provides for a number of amendments that impact the accounting for income taxes and the accounting for forfeitures. We adopted this standard in the first quarter of 2017. Upon adoption, we recognized all of the previously unrecognized excess tax benefits related to stock awards using the modified retrospective transition method. These excess tax benefits, recognized upon adoption, were recorded as a deferred tax asset, which was then fully offset by our U.S. federal and state deferred tax asset valuation allowance resulting in no impact to our accumulated deficit. Without the valuation allowance, our deferred tax asset would have increased by $180.9 million. Immediately prior to adoption, we had no unrecognized excess tax benefits related to stock awards in jurisdictions outside the United States. All future excess tax benefits resulting from the settlement of stock awards will be recorded to income tax expense.
Prior to the adoption of ASU 2016-09, excess tax benefits related to stock awards were required to be presented as an inflow from financing activities and an outflow from operating activities on the statement of cash flows. Under the new standard, all tax-related cash flows resulting from share-based payments are reported as operating activities. We adopted the new requirement retrospectively, and for the years ended December 31, 2016 and December 31, 2015, this resulted in an increase to net cash provided by operating activities of $2.2 million and $5.6 million, and a corresponding decrease to net cash provided by (used in) financing activities of $2.2 million and $5.6 million, respectively.
Also, as part of the adoption of the standard, we made the policy election to account for forfeitures as they occur. Using the modified retrospective adoption method, we recognized a $0.4 million cumulative-effect increase to our accumulated deficit for previously estimated forfeitures.
In January 2017, the FASB issued ASU 2017-04, simplifying the accounting for goodwill impairment. The new guidance removes step two of the two-step quantitative goodwill impairment test, which requires a hypothetical purchase price allocation. We adopted this standard in the third quarter of 2017 as part of our annual goodwill impairment testing. The adoption of this standard did not impact these consolidated financial statements.
Recent Accounting Pronouncements Not yet Adopted
In May 2014, the FASB issued ASU 2014-09 related to revenue recognition. Since the issuance of ASU 2014-09, the FASB has also issued ASU 2016-08, ASU 2016-10, ASU 2016-12, ASU 2016-20 and ASU 2017-14, all of which clarify certain aspects of ASU 2014-09. The new standard will change the way we recognize revenue, including the identification of contractual performance obligations and the allocation of transaction price, to depict the transfer of promised goods or services to customers at the amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. We will adopt this standard effective January 1, 2018 on a modified retrospective basis and apply the new standard only to contracts that are not completed contracts at January 1, 2018.
The new standard will materially impact the timing of revenue recognition related to our on-premises term license agreements. We have historically recognized revenue related to on-premises term license agreements ratably over the term of the licensing agreement. Under the new standard, revenue allocable to the license portion of the arrangement will be recognized upon delivery of the license. Maintenance revenue related to on-premises term license agreements will continue to be recognized ratably over the term of the licensing agreement. The new standard will also impact our determination of standalone selling prices, which will impact the allocation of transaction price to each performance obligation, thereby impacting the timing of revenue recognition depending on when each performance obligation is recognized. The impacts to the timing of revenue recognition will also affect our deferred revenue balance.
As of December 31, 2017, we had $142 million of on-premises deferred license revenue on our balance sheet. Upon adoption, a portion of this amount will be recorded to retained earnings for the impacts from the allocation of standalone selling prices under the new standard.
The new standard also requires the capitalization of certain incremental costs of obtaining a contract, which will impact the period in which we record our sales commissions expense. We have historically recognized sales commissions expense upfront. Under the new guidance, we are required to recognize these expenses consistently with the transfer of goods or services. This will result in a deferral of some sales compensation costs. We will amortize these deferred costs on a straight-line basis over four years.
The new standard will also impact our internal control environment, including our financial statement disclosure controls, our business process controls and enhancements necessary to update our business systems. We are currently finalizing the implementation controls necessary to adopt this new standard.
In February 2016, the FASB issued ASU 2016-02 related to lease accounting. The new guidance will require lessees to recognize right-of-use assets and lease liabilities on the balance sheet for operating leases that do not meet the definition of a short-term lease. ASU 2016-02 is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2018 and requires modified retrospective transition. Under the new standard we anticipate that our current real estate leases will continue to be classified as operating leases and a significant amount of our currently outstanding operating lease commitments will be recorded to the balance sheet as a right-of-use asset and a corresponding lease liability. Our evaluation of the new standard will extend into future periods and we will update our disclosures, including the expected impacts of the new standard, as we progress towards the required adoption date.
In June 2016, the FASB issued ASU 2016-13, related to credit losses. The new guidance replaces the existing incurred loss impairment model with an expected credit loss model and requires a financial asset measured at amortized cost to be presented at the net amount expected to be collected. ASU 2016-13 is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2019. Early adoption is permitted. We are currently evaluating the impact that this standard will have on our consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16 related to the accounting for income tax effects on intra-entity asset transfers of assets other than inventory. The new guidance will require reporting entities to recognize tax expense from the sale of assets when the transfer occurs, even though the pre-tax effects of the transaction are eliminated in consolidation. We will adopt the new standard, in the first quarter of 2018, on a modified retrospective basis. We are currently evaluating the impact that this standard will have on our consolidated financial statements.
Balance Sheet Detail
Balance Sheet Detail
Balance Sheet Detail
Property and Equipment, Net
Property and equipment, net consisted of the following:
 
Useful Life
 
December 31,
 
(in months)
 
2017
 
2016
 
 
 
(in thousands)
Computer equipment and software
36
 
$
98,737

 
$
92,536

Furniture and fixtures
36
 
25,232

 
18,953

Leasehold improvements
10-150
 
85,482

 
37,308

Construction in progress
 
 
313

 
35,099

 
 
 
209,764

 
183,896

Less: Accumulated depreciation and amortization
 
 
(103,011
)
 
(77,259
)
 
 
 
$
106,753

 
$
106,637


Depreciation and amortization expense was $44.7 million, $43.0 million and $23.7 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Goodwill
The only changes in the carrying amounts of goodwill during the years ended December 31, 2017 and 2016 were increases of $19.6 million related to our acquisition of ClearGraph in 2017 and $14.6 million related to our acquisition of Hyper in 2016. See Note 7 for further discussion of these acquisitions.
Accrued Compensation and Employee-Related Benefits
Accrued compensation and employee-related benefits consisted of the following:
 
December 31,
 
2017
 
2016
 
(in thousands)
Accrued commissions
$
31,333

 
$
24,801

Accrued bonuses
25,435

 
19,080

Accrued vacation
14,512

 
13,003

Other
25,110

 
13,346

Total
$
96,390

 
$
70,230

Short-Term and Long-Term Investments (Notes)
Short-term and Long-term Investments Disclosure
Short-Term and Long-Term Investments
The following table represents our short-term and long-term investments in available-for-sale securities as of December 31, 2017, and is based on contractual years to maturity:
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
 
(in thousands)
Short-term investments
 
 
 
 
 
 
 
Commercial paper
$
9,970

 
$

 
$

 
$
9,970

U.S. treasury securities
160,206

 

 
(121
)
 
160,085

U.S. agency securities
9,917

 

 
(24
)
 
9,893

Corporate bonds
46,901

 
3

 
(65
)
 
46,839

Total short-term investments
226,994

 
3

 
(210
)
 
226,787

Long-term investments
 
 
 
 
 
 
 
U.S. treasury securities
79,371

 

 
(202
)
 
79,169

U.S. agency securities
18,570

 

 
(102
)
 
18,468

Corporate bonds
50,880

 

 
(153
)
 
50,727

Total long-term investments
148,821

 

 
(457
)
 
148,364

Total short-term and long-term investments
$
375,815

 
$
3

 
$
(667
)
 
$
375,151


We did not hold any short-term or long-term investments as of December 31, 2016.
We earn interest on our cash equivalents and investments. For the years ended December 31, 2017, 2016 and 2015, we earned interest income of $8.5 million, $2.7 million and $0.6 million, respectively.
As of December 31, 2017, there were no investments that had been in a net loss position for 12 months or greater. The unrealized losses on investments as of December 31, 2017 were primarily caused by increases in interest rates. None of the unrealized losses represent other-than-temporary impairments based on our evaluation of available evidence as of December 31, 2017.
Fair Value Measurements
Fair Value Measurements
Fair Value Measurements
The following table presents the fair value of our financial assets using the fair value hierarchy:
 
December 31, 2017

Level 1
 
Level 2
 
Level 3
 
Total
 
(in thousands)
Cash equivalents
 
 
 
 
 
 
 
Money market funds
$
582,835

 
$

 
$

 
$
582,835

Commercial paper

 
8,984

 

 
8,984

Short-term investments
 
 
 
 
 
 
 
Commercial paper

 
9,970

 

 
9,970

U.S. treasury securities

 
160,085

 

 
160,085

U.S. agency securities

 
9,893

 

 
9,893

Corporate bonds

 
46,839

 

 
46,839

Long-term investments
 
 
 
 
 
 
 
U.S. treasury securities

 
79,169

 

 
79,169

U.S. agency securities

 
18,468

 

 
18,468

Corporate bonds

 
50,727

 

 
50,727

Total
$
582,835

 
$
384,135

 
$

 
$
966,970

    
 
December 31, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(in thousands)
Cash equivalents
 
 
 
 
 
 
 
Money market funds
$
872,161

 
$

 
$

 
$
872,161

Total
$
872,161

 
$

 
$

 
$
872,161


We did not have any investments in prime money market funds as of December 31, 2017 and 2016. We have no material financial assets or liabilities measured using Level 3 inputs.
Income Taxes
Income Taxes
Income Taxes
The components of our loss before income tax expense consisted of the following:
 
Year Ended December 31,
 
2017
 
2016
 
2015
 
(in thousands)
United States
$
(134,723
)
 
$
(100,725
)
 
$
(27,779
)
International
(43,976
)
 
(36,702
)
 
(23,028
)
Total
$
(178,699
)
 
$
(137,427
)
 
$
(50,807
)
Income tax expense (benefit) consisted of the following:
 
Year Ended December 31,
 
2017
 
2016
 
2015
 
(in thousands)
United States
$
(592
)
 
$
2,147

 
$
28,630

International
7,453

 
4,875

 
4,263

Total
$
6,861

 
$
7,022

 
$
32,893

The provision (benefit) for income taxes consisted of the following:
 
Year Ended December 31,
 
2017
 
2016
 
2015
 
(in thousands)
Current:
 
 
 
 
 
Federal
$

 
$
1,447

 
$
4,009

State
233

 
402

 
771

Foreign
10,704

 
5,230

 
5,240

Total current income tax expense
10,937

 
7,079

 
10,020

Deferred:
 
 
 
 
 
Federal
(892
)
 
258

 
22,011

State
67

 
40

 
1,839

Foreign
(3,251
)
 
(355
)
 
(977
)
Total deferred income tax expense (benefit)
(4,076
)
 
(57
)
 
22,873

Total income tax expense
$
6,861

 
$
7,022

 
$
32,893


A reconciliation of the U.S. federal statutory income tax provision (benefit) to the effective income tax expense for each year follows:
 
Year Ended December 31,
 
2017
 
2016
 
2015
 
(in thousands)
Income tax benefit at statutory rate
$
(62,545
)
 
$
(48,098
)
 
$
(17,783
)
State taxes, net of federal tax benefit
(4,714
)
 
(3,466
)
 
(896
)
Impact of foreign income taxes
23,232

 
14,566

 
10,582

Impact of Tax Cuts and Jobs Act of 2017
87,584

 

 

Research and development and other tax credits
(12,563
)
 
(8,462
)
 
(10,187
)
Stock-based compensation
(13,466
)
 
5,098

 
3,174

Non-deductible meals and entertainment expenses
1,182

 
1,212

 
1,395

Impact of valuation allowance
(13,598
)
 
46,174

 
46,737

Other, net
1,749

 
(2
)
 
(129
)
Total income tax expense
$
6,861

 
$
7,022

 
$
32,893


Our effective tax rate differs from the U.S. federal statutory rate primarily due to the impact of the valuation allowance on our U.S. federal and state deferred income tax assets and losses in jurisdictions where a tax benefit is not available. In addition, due to the adoption of ASU 2016-09 in 2017, all excess tax benefits and deficiencies are recognized as an income tax benefit in the current year.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed with an effective date of January 1, 2018. The Act, which significantly revised U.S. tax law, included many important changes, including but not limited to a reduction of the U.S. corporate tax rate from 35%, down to 21%, a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings and fundamental changes to the taxation of multinational entities including a shift from a worldwide tax system to a territorial system. The Act had minimal impact to our income tax provision in 2017, mostly due to our domestic valuation allowance. Based on available guidance we recorded $87.6 million of additional income tax expense in the fourth quarter of 2017, mostly caused by the change in the U.S. corporate tax rate, applied to our U.S. federal and state deferred income tax assets, based on the rates applicable when these assets reverse in the future. This additional income tax expense was offset by a decrease in the domestic valuation allowance of $88.1 million.
On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued to assist in addressing uncertainty in applying GAAP to the accounting and reporting of tax reform changes related to the Act. We have considered these changes, including all available guidance, in determining our income tax provision for 2017. Additional work is necessary to do a more detailed analysis of historical foreign earnings as well as potential correlative adjustments. Any subsequent adjustment to these amounts may be recorded to current income tax expense when the analysis is complete.
The tax effects of temporary differences and carryforwards that gave rise to deferred income tax assets and liabilities consisted of the following:
 
 
December 31,
 
 
2017
 
2016
 
 
(in thousands)
Deferred income tax assets:
 
 
 
 
Net operating loss carryforwards
 
$
133,187

 
$

Tax credit carryforwards
 
59,343

 
17,904

Stock-based compensation
 
15,512

 
18,589

Accrued compensation
 
11,487

 
14,268

Deferred revenue
 
5,334

 
3,728

Deferred rent
 
12,483

 
9,037

Depreciation and amortization(1)
 
966

 
4,839

Other(1)
 
1,149

 
699

Total deferred income tax assets
 
239,461

 
69,064

Deferred income tax liabilities:
 
 
 
 
Prepaid assets
 
4,177

 
4,231

Total deferred income tax liabilities
 
4,177

 
4,231

Net deferred income tax assets before valuation allowance
 
235,284

 
64,833

Less: valuation allowance
 
(230,545
)
 
(63,384
)
Net deferred income tax assets
 
$
4,739

 
$
1,449

 
 
 
 
 
Reported as:
 
 
 
 
Deferred income taxes
 
5,287

 
1,449

Other long-term liabilities
 
(548
)
 

Net deferred income tax assets
 
$
4,739

 
$
1,449


(1) Certain amounts within the components of deferred taxes as of December 31, 2016 have been reclassified to conform to the presentation as of December 31, 2017.
We determine our deferred income tax assets and liabilities based on differences between the financial reporting and tax basis of assets and liabilities using the enacted tax rates and laws that will be in effect when we expect the differences to reverse.
We regularly assess the need for a valuation allowance against our deferred income tax assets by considering both positive and negative evidence related to whether it is more likely than not that our deferred income tax assets will be realized. A valuation allowance is recorded when it is more likely than not that all or some portion of the deferred income tax assets will not be realized. In evaluating our ability to recover our deferred income tax assets within the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred income tax liabilities, projected future taxable income, tax-planning strategies and results of recent operations.
In 2015, we established a valuation allowance of $46.7 million for our U.S. federal and state deferred income tax assets, in part due to our three-year cumulative GAAP net loss adjusted for permanent tax differences, which is a significant piece of negative evidence for recording the valuation allowance. In 2016, we increased the valuation allowance to $63.4 million as of December 31, 2016. In 2017, we determined our U.S. federal and state deferred income tax assets continue to be currently not more likely than not to be realized; therefore, we increased the valuation allowance to $230.5 million as of December 31, 2017. The increase in the valuation allowance during 2017 was primarily attributable to an adjustment of $180.9 million related to previously unrecognized deferred tax assets that were recorded upon the adoption of ASU 2016-09. The remaining difference is associated with the current year change in U.S. federal and state deferred income tax assets, less the effect of the Act.
We have gross net operating loss carryforwards totaling $895.9 million, R&D tax credit carryforwards of $64.4 million and Federal foreign tax credits of $12.4 million. If not utilized, a portion of these attributes will begin to expire in 2034. Utilization of our net operating loss and tax credit carryforwards may be subject to limitations upon certain ownership changes as provided by the Internal Revenue Code and similar state provisions. Such limitations could result in the expiration of the net operating loss and tax credit carryforwards before their utilization.
We are subject to income taxes in the U.S. and in numerous foreign jurisdictions. The statute of limitations for adjustments to our historic tax obligations will vary from jurisdiction to jurisdiction. Furthermore, net operating loss and tax credit carryforwards may be subject to adjustment after the expiration of the statute of limitations for the year such net operating losses and tax credits originated. In general, the tax years for U.S. federal and state income tax purposes open for examination are for 2013 and forward due to our net operating loss carryforwards.
Income tax expense includes both U.S. and international income taxes. Except as required under U.S. tax law, we do not provide for U.S. income taxes on our undistributed earnings of foreign subsidiaries that have not been previously taxed because we intend to invest such undistributed earnings indefinitely outside of the U.S. As of December 31, 2017, cash held by foreign subsidiaries was $35.6 million.
We have reserves for taxes to address potential exposures involving tax positions that we believe could be challenged by taxing authorities even though we believe the positions we have taken are appropriate. We believe our tax reserves are adequate to cover potential liabilities. We review the tax reserves as circumstances warrant and adjust the reserves as events occur that affect our potential liability for additional taxes. It is often difficult to predict the final outcome or timing of resolution of any particular tax matter. Various events, some of which cannot be predicted, such as clarification of tax law by administrative or judicial means, may occur and would require us to increase or decrease our reserves and effective income tax rate.
The total gross amount of unrecognized tax benefits was $19.9 million, $12.9 million and $10.8 million as of December 31, 2017, 2016 and 2015, respectively. Of the total gross amount of unrecognized tax benefits, the portion recorded to liabilities pertaining to uncertain tax positions was $1.4 million, $0.7 million and $0.7 million as of December 31, 2017, 2016 and 2015, respectively. Our increase in unrecognized tax benefits relates primarily to the R&D tax credits generated in the current year, which are recorded net of the corresponding deferred tax asset.
These amounts represent the gross amount of exposure in individual jurisdictions and do not reflect any additional benefits expected to be realized if such positions were not sustained. To the extent that any uncertain tax positions are resolved in our favor, it may have a positive impact on our effective income tax rate. We do not expect any material decrease on our unrecognized tax position within the next twelve months. The following table shows the gross changes in our unrecognized tax position.
 
Year Ended December 31,
 
2017
 
2016
 
2015
 
(in thousands)
Balance, beginning of year
$
12,909

 
$
10,781

 
$
7,116

Gross increases to tax positions related to prior periods
1,289

 
28

 
545

Gross increases related to current tax positions
5,683

 
2,100

 
3,120

Balance, end of year
$
19,881

 
$
12,909

 
$
10,781

Interest or penalties, if incurred, would be recognized as a component of income tax expense. No penalties or interest were recognized or accrued for at December 31, 2017, 2016 and 2015.
On July 27, 2015, the U.S. Tax Court issued an opinion related to litigation in Altera Corp v. Commissioner. This litigation relates to the treatment of stock-based compensation expense in an intercompany cost sharing arrangement with one of Altera's foreign subsidiaries. In its opinion, the U.S. Tax Court invalidated the portion of the Treasury regulations requiring the inclusion of stock-based compensation expense in such intercompany cost-sharing arrangements. On February 19, 2016, the IRS appealed the U.S. Tax Court's decision. As the final resolution of this litigation remains uncertain, we have not recorded potentially favorable benefits related to the current or prior periods. We will continue to monitor developments related to this case and the potential impact of those developments on our current and future financial statements.
Business Combinations
Business Combinations
Business Combinations
ClearGraph
On August 1, 2017, we acquired all issued and outstanding stock of ClearGraph, a privately-held Delaware corporation, for $24.1 million in cash. ClearGraph is a startup that enables smart data discovery and data analysis through natural language query technology. As a result of this acquisition, we acquired all of the assets and assumed all of the liabilities of ClearGraph, and we accounted for this transaction as a business combination. Pro forma results of operations for this acquisition have not been presented as the effects were not material to our financial results. The following table summarizes the purchase price allocation based on the estimated fair value of the net assets acquired:
 
August 1, 2017
 
(in thousands)
Cash
$
161

Technology asset
5,000

Goodwill
19,552

Other liabilities, net
(586
)
Net assets acquired
$
24,127


The technology asset acquired in this business combination is being amortized on the straight-line method over a period of five years. Goodwill generated from this business combination is primarily attributable to expected synergies between the technology asset acquired and our key products. None of the goodwill recognized with this transaction is expected to be deductible for U.S. income tax purposes.
Additional information, such as that related to income tax and other contingencies, existing as of the acquisition date but unknown to us, may become known at a later time. In accordance with GAAP, if this occurs during the 12 month period subsequent to the acquisition date, we may update the amounts and allocations recorded as of the acquisition date, which are presented in the table above.
Hyper
On March 1, 2016, we acquired Hyper, a high-performance main-memory database system, for $16.4 million in cash. Through this acquisition we acquired new technology, capable of enhancing our key products, and additional engineering talent. We have accounted for this transaction as a business combination, and allocated $1.8 million to the acquired technology intangible asset. The remaining purchase price was recorded to goodwill, which is primarily attributable to the synergies between Hyper and our key products. No other assets or liabilities were identified as part of the acquisition. A portion of the goodwill balance associated with this transaction is deductible for U.S. income tax purposes.
Pro forma results of operations for this acquisition have not been presented as the effects were not material to our consolidated financial results.
Stockholders' Equity
Stockholders' Equity
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, at $0.0001 par value per share, and 750,000,000 shares of Class A common stock, at $0.0001 par value per share. 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 holder 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. 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.
Preferred Stock
Our certificate of incorporation, as amended and restated, authorizes us to issue 10,000,000 shares of preferred stock at $0.0001 par value per share. Our board of directors has the authority to provide for the issuance of all the shares in one or more series. At its discretion, our board of directors may designate the voting rights and preferences of the preferred stock. As of December 31, 2017 and 2016, no shares of preferred stock were outstanding.
Stock Repurchase Program
On November 1, 2016, we announced that our board of directors approved a stock repurchase program, under which we were authorized to repurchase up to $200 million of our outstanding Class A common stock. The repurchase program has no expiration date and may be modified, suspended or discontinued at any time. Repurchases under the program may be made from time to time on the open market at prevailing market prices, in privately negotiated transactions, in transactions structured through investment banking institutions or a combination of the foregoing, in compliance with Rule 10b-18 under the Securities Exchange Act of 1934. During the year ended December 31, 2017, we repurchased 1,264,428 shares of our outstanding Class A common stock at an average price of $63.26 per share for $80.0 million. During the year ended December 31, 2016, we repurchased 446,517 shares of our outstanding Class A common stock at an average price of $44.81 per share for $20.0 million. All repurchases were made in open market transactions using cash on hand and all of the shares repurchased were retired. As of December 31, 2017 we were authorized to repurchase a remaining $100.0 million of our Class A common stock under our repurchase program.
Stock-Based Compensation
Stock-Based Compensation
Stock-Based Compensation    
Our 2004 Plan authorized the granting of options to purchase shares of our Class B common stock, RSUs and other stock-based awards to our employees, consultants, officers and directors. In December 2012, we modified the 2004 Plan to increase the number of shares of Class B common stock authorized thereunder to 26,473,282. Our 2013 Plan, which was the successor to our 2004 Plan, authorizes the granting of options to purchase shares of our Class A common stock, RSUs and other stock-based awards to our employees, consultants, officers and directors. Options granted under the Plans may be incentive or nonstatutory stock options. Incentive stock options may only be granted to employees. The term of each option is stated in the award agreement, but shall be no more than ten years from the date of grant. The board of directors determines the period over which options and RSUs become vested. Currently, the vesting period for our options and RSUs is typically four years.
Our 2013 ESPP allows eligible employees to purchase shares of our Class A common stock at a discount through payroll deductions of up to 15% of their eligible compensation, subject to plan limitations. The 2013 ESPP currently includes purchase periods approximately six months in duration starting on the first trading date on or after June 1st and December 1st of each year. Participants are able to purchase shares of our common stock at 85% of the lower of its fair market value on (i) the first day of the purchase period or on (ii) the purchase date, which is the last day of the purchase period.
A summary of the option activity during the year ended December 31, 2017 follows:    
 
Options Outstanding
 
Shares
 
Weighted Average Exercise Price per Share
 
Weighted-Average Remaining Contractual Term
 
Aggregate Intrinsic Value
 
 
 
 
 
(in years)
 
(in thousands)
Balances at December 31, 2016
4,486,416

 
$
9.59

 
 
 
 
Options exercised
(1,467,464
)
 
8.46

 
 
 
 
Options canceled
(78
)
 
9.30

 
 
 
 
Options forfeited
(1,761
)
 
26.38

 
 
 
 
Balances at December 31, 2017
3,017,113

 
$
10.13

 
4.33
 
$
178,207

Vested and expected to vest at December 31, 2017
3,017,113

 
$
10.13

 
4.33
 
$
178,207

Exercisable at December 31, 2017
2,965,550

 
$
9.36

 
4.25
 
$
177,468


The stock options are exercisable at a price equal to the market value of the underlying shares of common stock on the date of the grant. For periods prior to the IPO this value was determined by our board of directors. After the IPO, this value was determined by reference to the closing price of our Class A common stock on the New York Stock Exchange on the date of the grant. The total intrinsic value of options exercised during 2017, 2016 and 2015 was $74.5 million, $63.3 million and $224.6 million, respectively. The intrinsic value is the difference between the current fair value of the stock and the exercise price of the stock option. The total grant date fair value of options vested during 2017, 2016 and 2015 was $1.2 million, $7.8 million and $11.7 million, respectively.
A summary of the RSU activity during the year ended December 31, 2017 follows:
 
Number of Shares Underlying Outstanding RSUs
 
Weighted-Average Grant-Date Fair Value per RSU
Non-Vested outstanding at December 31, 2016
7,141,294

 
$
65.62

RSUs granted
4,183,285

 
60.62

RSUs vested
(2,936,710
)
 
66.03

RSUs forfeited
(1,209,854
)
 
65.12

Non-Vested outstanding at December 31, 2017
7,178,015

 
$
62.79


An RSU award entitles the holder to receive shares of our Class A common stock as the award vests, which is generally based on length of service. Our non-vested RSUs do not have nonforfeitable rights to dividends or dividend equivalents. For awards subject to technology milestones, we recognize compensation cost over the required service period if it is probable that the technology milestone will be met. If our assessment of the probability of the technology milestone being met changes, we recognize the impact of the change in estimate in the period of the change.
The weighted-average grant date fair value of RSUs granted in 2017, 2016 and 2015 was $60.62, $44.61 and $101.52, respectively. The total intrinsic value of RSUs vested during 2017, 2016 and 2015 was $185.7 million, $92.5 million and $89.1 million, respectively.
Stock-based compensation expense is amortized using the straight-line method over the requisite service period. As of December 31, 2017, total unrecognized compensation expense related to stock options and non-vested RSUs was $399.0 million, which is expected to be recognized over a weighted-average period of 2.6 years. We account for forfeitures as they occur.
The summary of shares available for issuance for equity-based awards (including stock options and RSUs) during the year ended December 31, 2017 follows:
 
Shares Available for Grant
 
2013 Plan
 
2013 ESPP
Balances at December 31, 2016
6,342,962

 
3,503,385

Authorized
3,835,921

 
767,184

Granted
(4,183,285
)
 
(604,177
)
Canceled
78

 

Forfeited
1,211,615

 

Balances at December 31, 2017
7,207,291

 
3,666,392


Pursuant to the provisions of our 2013 Plan, the number of shares authorized for issuance increases annually on January 1st by the lesser of 5% of the total number of shares of our capital stock outstanding on December 31st of the preceding calendar year or an amount determined by our board of directors. Pursuant to the provisions of our 2013 ESPP, the number of shares authorized for issuance increases annually on January 1st by the lesser of 1% of the total number of shares of our capital stock outstanding on December 31st of the preceding calendar year, 4,000,000 shares of Class A common stock, or an amount determined by our board of directors. There are no shares available for grant under our 2004 plan.
Valuation Assumptions
Stock-based awards granted to our employees, consultants, officers and directors are measured based on the grant date fair value of the awards.
For the years ended December 31, 2017 and 2015, there were no options granted. The weighted average grant date fair value of stock options granted for the year ended December 31, 2016 was $23.73. For the year ended December 31, 2016, the fair value of options was estimated using the Black-Scholes option pricing model with the following assumptions:
 
Year Ended December 31,
 
2016
Risk-free interest rates
1.2%
Expected term
5.2 years
Expected dividends
None
Expected volatility
48.0%

There were 604,177 and 549,327 Class A common stock shares issued under the 2013 ESPP for the years ended December 31, 2017 and 2016, respectively. For the year ended December 31, 2015, there were no Class A common stock shares issued under the 2013 ESPP. The first offering period under the 2013 ESPP commenced on December 1, 2015.
For the years ended December 31, 2017, 2016 and 2015, the fair value of common share purchase rights under the 2013 ESPP was estimated using the Black-Scholes option pricing model with the following assumptions:
 
Year Ended December 31,
 
2017
2016
2015
Risk-free interest rates
1.1% - 1.5%
0.5% - 0.6%
0.4%
Expected term
0.5 years
0.5 years
0.5 years
Expected dividends
None
None
None
Expected volatility
28.6% - 30.5%
42.0% - 50.1%
48.0%

The risk-free interest rates are based on the rates for a U.S. Treasury zero-coupon issue with a term that approximates the expected life of the award at the date closest to the grant date for stock options and to the first date of the purchase period for shares expected to be issued under our 2013 ESPP. The expected term represents the period that our stock-based awards are expected to be outstanding. For awards of stock options, the expected term assumptions were determined based on actual experience adjusted for expected employee exercise behavior. The expected term for shares expected to be issued under our 2013 ESPP is based on the duration of each purchase period, which is approximately six months. We have not paid and do not expect to pay dividends. We estimate expected future volatility based on the annualized daily historical volatility of our stock price.
Commitments and Contingencies
Commitments and Contingencies
Commitments and Contingencies
Operating Lease Commitments and Expected Sublease Receipts    
We conduct our operations in leased facilities under leases expiring at various dates through 2029. We recognize rent expense on a straight-line basis over the defined lease periods. Total rent expense under operating leases, net of sublease income, was approximately $41.1 million, $44.1 million and $18.3 million for the years ended December 31, 2017, 2016 and 2015, respectively. Future minimum lease payments under non-cancellable operating leases, net of future expected sublease payments to be received under non-cancellable subleases, as of December 31, 2017 are as follows:
Year Ending December 31,
 
Operating Lease Commitments
 
Expected Sublease Receipts
 
Net
 
 
(in thousands)
2018
 
$
43,529

 
$
(8,563
)
 
$
34,966

2019
 
42,979

 
(10,606
)
 
32,373

2020
 
43,849

 
(7,113
)
 
36,736

2021
 
43,308

 
(1,180
)
 
42,128

2022
 
42,991

 
(597
)
 
42,394

Thereafter
 
175,175

 
(121
)
 
175,054

Total
 
$
391,831

 
$
(28,180
)
 
$
363,651


Liabilities for Loss on Lease Obligations and Related Exit Costs
During the fourth quarter of 2016 and the first quarter of 2017, we consolidated operations in some of our leased real estate properties and vacated certain leased office spaces.
In the first quarter of 2017, we recognized additional operating expenses of $10.3 million, of which $4.8 million related to losses on cease-use and $1.3 million resulted from additional expenses related to sublease of certain real estate properties. The remainder was recognized as additional depreciation expense attributable to adjustments to the useful lives of certain leasehold improvements. The expense recognized was included in our overhead allocation. A cease-use loss liability was recorded for the leased office spaces we vacated and was calculated as the present value of the total remaining lease payment obligation offset by estimated sublease rental income, adjusted for deferred items and estimated direct costs to obtain sublease rentals.
During 2016, we recognized additional operating expenses of $13.9 million, of which $5.5 million related to losses on cease-use. The remainder was recognized as additional depreciation expense attributable to adjustments to the useful lives of certain leasehold improvements. The expense recognized during the year was included in our overhead allocation. A cease-use loss liability was recorded for the leased office spaces we vacated and was calculated as the present value of the total remaining lease payment obligation offset by estimated sublease rental income, adjusted for deferred items and estimated direct costs to obtain sublease rentals.
Contractual Commitments
Our contractual commitments are associated with agreements that are enforceable and legally binding and that specify all significant terms, including fixed or minimum services to be used, fixed, minimum or variable price provisions and the approximate timing of the transaction. Obligations under contracts that we can cancel without a significant penalty are not included. The following table represents our contractual commitments as of December 31, 2017:
 
Payments Due by Year
 
Total
 
2018
 
2019
 
2020
 
Thereafter
 
(in thousands)
Contractual commitments
$
27,458

 
$
12,665

 
$
11,975

 
$
2,818

 
$


Legal Proceedings
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 reflect 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 we believe, individually or in the aggregate, would be expected to 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.
Retirement Plan
Retirement Plan
Retirement Plan
We offer a salary deferral 401(k) plan for our U.S. employees. The plan allows employees to contribute a percentage of their pretax earnings annually, subject to limitations imposed by the IRS. The plan also allows us to make matching contributions, subject to certain limitations. We contributed $3.7 million, $3.6 million and $2.8 million for the years ended December 31, 2017, 2016 and 2015, respectively, to the 401(k) plan.
Segments and Information about Revenues by Geographic Region
Segments and Information about Revenues by Geographic Area
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:
 
Year Ended December 31,
 
2017
 
2016
 
2015
 
(in thousands)
United States and Canada
$
605,773

 
$
586,494

 
$
489,329

International
271,286

 
240,449

 
164,258

Total revenues
$
877,059

 
$
826,943

 
$
653,587


Substantially all of our long-lived assets were located in the United States as of December 31, 2017 and 2016.
Net Income (Loss) Per Share
Net Income (Loss) Per Share
Net Loss Per Share
We calculate basic net income (loss) per share by dividing our net income (loss) for the period by the weighted average number of shares of common stock outstanding during the period. Diluted net income (loss) per share is computed giving effect to all potential common shares that were dilutive and outstanding during the period. For the years ended December 31, 2017, 2016 and 2015, basic net loss per share is the same as diluted net loss per share as the inclusion of all potentially dilutive common shares outstanding is anti-dilutive when we are in a net loss position.
The following table presents the computation of basic and diluted net loss per share:    
 
Year Ended December 31,
 
2017
 
2016
 
2015
 
(in thousands, except per share data)
Net loss per share - basic and diluted
 
 
 
 
 
Net loss
$
(185,560
)
 
$
(144,449
)
 
$
(83,700
)
Weighted average shares outstanding used to compute basic and diluted net loss per share
78,869

 
75,162

 
71,701

Net loss per share - basic and diluted
$
(2.35
)
 
$
(1.92
)
 
$
(1.17
)

The following shares subject to outstanding awards were excluded from the computation of diluted net loss per share for the periods presented as their effect would have been antidilutive:
 
Year Ended December 31,
 
2017
 
2016
 
2015
 
(in thousands)
Shares subject to outstanding common stock awards
10,488

 
12,017

 
11,510

Quarterly Financial Information (Unaudited)
Quarterly Financial Information (Unaudited)
Quarterly Financial Information (Unaudited)
The following table contains selected unaudited financial data for each quarter of 2017 and 2016. The unaudited information should be read in conjunction with our financial statements and these notes to the consolidated financial statements. We believe that the following unaudited information reflects all normal recurring adjustments necessary for a fair presentation of the information for the periods presented. The operating results for any quarter are not necessarily indicative of results for any future period.
 
Three Months Ended
 
Dec 31, 2017
 
Sept 30, 2017
 
June 30, 2017
 
March 31, 2017
 
Dec 31, 2016
 
Sept 30, 2016
 
June 30, 2016
 
March 31, 2016
 
(in thousands, except per share amounts)
Total revenues
$
249,356

 
$
214,917

 
$
212,880

 
$
199,906

 
$
250,653

 
$
206,057

 
$
198,535

 
$
171,698

Gross profit
219,046

 
184,988

 
186,215

 
173,251

 
222,950

 
182,027

 
173,671

 
149,205

Net loss
(41,838
)
 
(46,553
)
 
(42,522
)
 
(54,647
)
 
(21,088
)
 
(30,261
)
 
(47,522
)
 
(45,578
)
Net loss per share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic and diluted
$
(0.52
)
 
$
(0.59
)
 
$
(0.54
)
 
$
(0.71
)
 
$
(0.28
)
 
$
(0.40
)
 
$
(0.64
)
 
$
(0.62
)
Summary of Significant Accounting Policies (Policies)
Accounting Principles
The consolidated financial statements and accompanying notes were prepared in accordance with accounting principles generally accepted in the United States ("GAAP").
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
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. Our estimates include the useful lives of our property and equipment and other lease-related assets, liabilities and costs and the collectability of our accounts receivable. We also use estimates in stock-based compensation, income taxes, business combinations, investments and accrued liabilities. Actual results could differ from those estimates.
Foreign Currency
The financial statements of our foreign subsidiaries with a functional currency other than U.S. dollars have been translated into U.S. dollars. Assets and liabilities of these subsidiaries are translated at the exchange rate in effect at each period-end. Income statement amounts are translated at the average rate of exchange prevailing during the period. Translation adjustments arising from the use of differing exchange rates from period to period are included in other comprehensive income (loss). As of December 31, 2017 and 2016, we had a cumulative translation gain (loss) of $(11.3) million and $1.6 million, respectively.
Gains and losses on foreign currency transactions are included in other income, net. Foreign currency transaction gains (losses) were $4.1 million, $(0.6) million and $0.6 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Risks and Uncertainties
Inherent in our business are various risks and uncertainties, including our limited history of operating our business at its current scale and development of advanced technologies in a rapidly changing industry. These risks include our ability to manage our 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, development of sales and distribution channels and our ability to generate significant revenues from the sale 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 ("CODM") 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.
Revenue Recognition
We generate revenues primarily in the form of software license fees and related maintenance and services fees. Software license fees include fees from the sales of perpetual, term and subscription licenses. Maintenance and services fees primarily consist of fees for maintenance services (including support and unspecified upgrades and enhancements when and if they are available), training and professional services that are not essential to the functionality of the software.
We recognize revenues when all of the following conditions are met:
there is persuasive evidence of an arrangement;
the software or services have been delivered to the customer;
the amount of fees to be paid by the customer is fixed or determinable; and
the collection of the related fees is probable.
We use click-through license agreements, signed agreements and purchase orders as evidence of an arrangement. We deliver all of our software electronically. Electronic delivery occurs when we provide the customer with access to the software and license key via a secure portal. We assess whether the fee is fixed or determinable at the outset of the arrangement. Our typical terms of payment are due 30 days from delivery. We assess collectability based on a number of factors such as collection history and creditworthiness of the customer. If we determine that collectability is not probable, revenue is deferred until collectability becomes probable, generally upon receipt of cash.
Substantially all of our software licenses are sold in multiple-element arrangements that include maintenance services and may include professional services and training.
Vendor specific objective evidence ("VSOE") of the fair value for software licenses is not available as our software licenses are never sold without maintenance; however, VSOE generally exists for all undelivered elements and any services that are not essential to the functionality of the delivered software. Therefore, we account for delivered software licenses under the residual method.
Maintenance agreements consist of fees for providing software updates on a when and if available basis and technical support for software products ("post-contract support" or "PCS") for an initial term, generally one year. We have established VSOE of the fair value for maintenance on perpetual licenses based on stated substantive renewal rates or the price when sold on a standalone basis. Stated renewal rates are considered to be substantive if they are at least 15% of the actual price charged for the software license. VSOE of the fair value for standalone maintenance contracts is considered to have been established when a substantial majority of individual sales transactions within the previous 12 months falls within a reasonably narrow range, which we have defined to be plus or minus 15% of the median sales price of actual standalone sales transactions.
License arrangements may include professional services and training. In determining whether professional services and training revenues should be accounted for separately from license revenues, we evaluate:
whether such services are considered essential to the functionality of the software using factors such as the nature of the software products;
whether they are ready for use by the customer upon receipt;
the nature of the services, which typically do not involve significant customization to or development of the underlying software code;
the availability of services from other vendors;
whether the timing of payments for license revenues coincides with performance of services; and
whether milestones or acceptance criteria exist that affect the realizability of the software license fee.
To date, professional services have not been considered essential to the functionality of the software. The VSOE of the fair value of our professional services and training is based on the price for these same services when they are sold separately. Revenues related to professional services are billed on a time and materials basis and are recognized as the services are performed.
Revenues related to training services are billed on a fixed fee basis and are recognized as the services are delivered. Payments received in advance of services performed are deferred and recognized when the related services are performed.
When software is licensed for a specified term or on a subscription basis, fees for maintenance and support are generally bundled with the license fee over the entire term of the contract. In these cases, we do not have VSOE of the fair value for maintenance and support. Revenues related to term and subscription license fees are recognized ratably over the contract term beginning on the date the customer has access to the software license key and continuing through the end of the contract term.
We do not offer refunds and therefore have not recorded any sales return allowance for any of the periods presented. Upon a periodic review of outstanding accounts receivable, amounts that are deemed to be uncollectable are written off against the allowance for doubtful accounts.
We account for taxes collected from customers and remitted to governmental authorities on a net basis and exclude them from revenues.
Cash and Cash Equivalents
We consider all highly liquid investments purchased with an original or remaining maturity of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents are recorded at cost, which approximates fair value. We maintain cash and cash equivalent balances which exceed the insured limits by the Federal Deposit Insurance Corporation.
Investments
We classify our investment securities as available-for-sale. Our investment securities are stated at fair value and reported in short-term investments and long-term investments. Investments in securities with maturities of less than one year, or where management's intent is to use the investments to fund current operations, are classified as short-term investments. Investments with maturities greater than one year are classified as long-term investments. Unrealized gains and losses on available-for-sale securities are excluded from net income and reported, net of tax, in other comprehensive income (loss). Realized gains and losses and declines in the value of securities judged to be other-than-temporary are determined based on the specific identification method and are included in other income, net. In order to determine whether a decline in value is other-than-temporary, we evaluate, among other factors, our intent and ability to recover the amortized cost basis of the security. Interest on securities classified as available-for-sale is included in other income, net.
Accounts Receivable, Net
Accounts receivable consist of amounts billed and currently due from customers. Our accounts receivable are subject to collection risk. Our gross accounts receivable is reduced for this risk by a provision for doubtful accounts. This provision is for estimated losses resulting from the inability of our customers to make required payments. It is an estimate and is regularly evaluated for adequacy by taking into consideration a combination of factors. We look at factors such as past collection experience, credit quality of the customer, age of the receivable balance and current economic conditions. These factors are reviewed to determine whether a provision for doubtful accounts should be recorded to reduce the receivable balance to the amount believed to be collectible.
Property and Equipment, Net
Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization are calculated using the straight-line method over the estimated useful lives of the assets. The estimated useful lives range from approximately one to twelve years. Leasehold improvements are amortized over the shorter of the estimated useful life or the remaining lease term. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in results of operations. Maintenance and repairs that do not improve or extend the lives of the respective assets are charged to expense in the period incurred.
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. Rent expense is recognized on a straight-line method, 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 rent payments. Additionally, incentives received are treated as a reduction of expense over the term of the agreement.
Liabilities are established for the present value of estimated future costs to retire leasehold improvements at the termination or expiration of a lease. A corresponding asset is recorded in the period in which the obligation is incurred. Such assets are amortized over the estimated useful life of the asset, and the recorded liabilities are accreted to the future value of the estimated retirement costs.
Impairment of Long-Lived Assets
We evaluate the recoverability of long-lived assets in accordance with authoritative guidance on accounting for the impairment or disposal of long-lived assets. We evaluate long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. Such impairment is recognized in the event the carrying value of such assets exceeds their fair value. If the carrying value of the net assets assigned exceeds the fair value of the assets, then the second step of the impairment test is performed in order to determine the implied fair value. No impairment of long-lived assets occurred in the periods presented.
Software Development Costs
Software development costs associated with the development of new products, enhancements of existing products and quality assurance activities consists of employee, consulting and other external personnel costs. The costs incurred internally from the research and development ("R&D") of computer software products are charged to expense until technological feasibility has been established for the product. Once technological feasibility is established, all software costs are capitalized until the product is available for release to customers. Judgment is required in determining when technological feasibility of a product is established. To date, we have determined that technological feasibility of software products is reached shortly before the products are released. Costs incurred after establishment of technological feasibility have not been material, and therefore, we have expensed all R&D costs as they were incurred. R&D expenses primarily consist of personnel-related costs attributable to our R&D personnel and allocated overhead, which includes facilities-related costs.
We capitalize certain costs relating to software developed or modified solely to meet our internal requirements and for which there are no substantive plans to market the software. To date, we have not capitalized any such costs as these costs have not been material.
Intangible Asset Costs
Costs related to filing and pursuing patent and trademark applications are expensed as incurred, as recoverability of such expenditures is uncertain. These intangible asset-related legal costs are generally reported as a component of general and administrative expenses.
Advertising Expenses
We expense all advertising costs as incurred and classify such costs as sales and marketing expenses.
Income Taxes
Income taxes are accounted for under the asset and liability method in accordance with authoritative guidance for income taxes. Deferred income tax assets are recognized for deductible temporary differences, net operating loss carryforwards, and tax credit carryforwards if it is more likely than not that the tax benefits will be realized. We consider future taxable income, historical operating results and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance. A valuation allowance is recorded to reduce our deferred income tax assets to the net amount that we believe is more likely than not to be realized. In the event we determine that we are able to realize our deferred income tax assets in excess of our net recorded amount, we would reduce the valuation allowance associated with the deferred income tax assets in the period the determination is made, which may result in a tax benefit in the statement of operations.
Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Our assumptions, judgments and estimates relative to the value of net deferred income taxes take into account predictions of the amount and category of future taxable income, such as income from operations or capital gains income. Actual operating results and the underlying amount and category of income in future years could render our current assumptions, judgments and estimates of recoverable net deferred income taxes inaccurate. Any of the assumptions, judgments and estimates mentioned above could cause our actual income tax obligations to differ from our estimates, thus materially impacting our financial position and results of operations.
Concentrations of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents, investments and accounts receivable.
Our investment portfolio consists of investment-grade securities diversified among security types, industries and issuers. Our cash and cash equivalents and investments are held and managed by recognized financial institutions that follow our investment policy. Our policy limits the amount of credit exposure to any one security issue or issuer.
We extend credit to customers based upon an evaluation of the customer's financial condition.
Business Combinations
As of the date of an acquisition, we recognize the identifiable assets acquired and liabilities assumed at fair value. Any excess of the consideration over the fair value of identifiable net assets is recorded as goodwill. Amounts that are not part of the consideration transferred are recognized separately from a business combination and are expensed as incurred. Intangible assets acquired are measured at their acquisition date fair value using valuation techniques that are subject to judgment.
Goodwill and Intangible Assets
Intangible assets with a finite life are typically amortized over their useful lives which range from three to five years. Goodwill is tested for impairment on an annual basis in the third quarter and more frequently if circumstances indicate that the carrying value may not be recoverable. As part of our goodwill impairment test, we first perform a qualitative assessment to determine whether it is more likely than not that the fair value of our reporting unit is less than its carrying amount. For purposes of this assessment, we consider the enterprise to be the reporting unit. If we determine it is more likely than not that the fair value of our reporting unit is less than its carrying amount, we will perform a quantitative assessment to determine whether the fair value of our reporting unit is less than its carrying amount. We have not had any impairments of the goodwill balance.
Stock-Based Compensation
We record compensation expense for stock-based transactions including employee and non-employee stock option and restricted stock unit ("RSU") awards granted under our 2004 Equity Incentive Plan (the "2004 Plan") and our 2013 Equity Incentive Plan, as amended, (the "2013 Plan" and together with the 2004 Plan, the "Plans"). We also record compensation expense related to employee contributions made under our 2013 Employee Stock Purchase Plan ("2013 ESPP"). These contributions are used to purchase shares of our Class A common stock at a discount.
Stock-based compensation expense is measured and recognized in the financial statements based on fair value. The fair value of each RSU award is determined based on the closing price of our Class A common stock as reported on the New York Stock Exchange on the date of grant. The fair value of each stock option award is determined at the date of grant by applying the Black-Scholes option pricing model. We also use the Black-Scholes option pricing model to determine the fair value of each common share issued under the 2013 ESPP. The fair value for 2013 ESPP grants is determined on the first day of each offering period.
The Black-Scholes option pricing model utilizes the value of our underlying common stock at the measurement date, the expected or contractual term of the option or offering period, the expected volatility of our common stock, risk-free interest rates and expected dividend yield of our common stock. Prior to our IPO in May 2013, because our stock was not publicly traded we estimated the fair value of our common stock. Our board of directors considered numerous objective and subjective factors to determine the fair value of our common stock at each meeting at which awards were approved. The factors included, but were not limited to: (i) contemporaneous third-party valuations of our common stock; (ii) the prices, rights, preferences and privileges of our preferred stock that was then outstanding relative to those of our common stock; (iii) the lack of marketability of our common stock; (iv) our actual operating and financial results; (v) current business conditions and projections; and (vi) the likelihood of achieving a liquidity event, such as an IPO or merger or acquisition, given prevailing market conditions. After the completion of our IPO, our common stock has been valued by reference to the closing price of our Class A common stock as reported on the New York Stock Exchange.
We recognize stock-based compensation expense using the straight-line method over the requisite service period. We account for forfeitures as they occur. For awards subject to technology milestones, we recognize compensation cost over the required service period if it is probable that the technology milestone will be met. If our assessment of the probability of the technology milestone being met changes, we recognize the impact of the change in estimate in the period of the change. Excess tax benefits resulting from the settlement of stock awards are recorded to income tax expense.
Fair Value Measurements
We categorize assets and liabilities recorded at fair value on our consolidated balance sheets 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.     
We establish fair value of our assets and liabilities using the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and using a fair value hierarchy based on the inputs used to measure fair value. The carrying amounts reported in the consolidated financial statements approximate the fair value for cash equivalents, accounts receivable, accounts payable, and accrued and other current liabilities, due to their short-term nature. We value our investments using quoted prices for identical instruments in active markets when available. If we are unable to obtain quoted prices for identical instruments in active markets, we value our investments using quoted market prices for comparable instruments. To date, all of our investments can be valued using one of these two methodologies.
Recently Adopted Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-09 related to stock-based compensation. The guidance, which simplifies the accounting and presentation for share-based payments, provides for a number of amendments that impact the accounting for income taxes and the accounting for forfeitures. We adopted this standard in the first quarter of 2017. Upon adoption, we recognized all of the previously unrecognized excess tax benefits related to stock awards using the modified retrospective transition method. These excess tax benefits, recognized upon adoption, were recorded as a deferred tax asset, which was then fully offset by our U.S. federal and state deferred tax asset valuation allowance resulting in no impact to our accumulated deficit. Without the valuation allowance, our deferred tax asset would have increased by $180.9 million. Immediately prior to adoption, we had no unrecognized excess tax benefits related to stock awards in jurisdictions outside the United States. All future excess tax benefits resulting from the settlement of stock awards will be recorded to income tax expense.
Prior to the adoption of ASU 2016-09, excess tax benefits related to stock awards were required to be presented as an inflow from financing activities and an outflow from operating activities on the statement of cash flows. Under the new standard, all tax-related cash flows resulting from share-based payments are reported as operating activities. We adopted the new requirement retrospectively, and for the years ended December 31, 2016 and December 31, 2015, this resulted in an increase to net cash provided by operating activities of $2.2 million and $5.6 million, and a corresponding decrease to net cash provided by (used in) financing activities of $2.2 million and $5.6 million, respectively.
Also, as part of the adoption of the standard, we made the policy election to account for forfeitures as they occur. Using the modified retrospective adoption method, we recognized a $0.4 million cumulative-effect increase to our accumulated deficit for previously estimated forfeitures.
In January 2017, the FASB issued ASU 2017-04, simplifying the accounting for goodwill impairment. The new guidance removes step two of the two-step quantitative goodwill impairment test, which requires a hypothetical purchase price allocation. We adopted this standard in the third quarter of 2017 as part of our annual goodwill impairment testing. The adoption of this standard did not impact these consolidated financial statements.
Recent Accounting Pronouncements Not yet Adopted
In May 2014, the FASB issued ASU 2014-09 related to revenue recognition. Since the issuance of ASU 2014-09, the FASB has also issued ASU 2016-08, ASU 2016-10, ASU 2016-12, ASU 2016-20 and ASU 2017-14, all of which clarify certain aspects of ASU 2014-09. The new standard will change the way we recognize revenue, including the identification of contractual performance obligations and the allocation of transaction price, to depict the transfer of promised goods or services to customers at the amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. We will adopt this standard effective January 1, 2018 on a modified retrospective basis and apply the new standard only to contracts that are not completed contracts at January 1, 2018.
The new standard will materially impact the timing of revenue recognition related to our on-premises term license agreements. We have historically recognized revenue related to on-premises term license agreements ratably over the term of the licensing agreement. Under the new standard, revenue allocable to the license portion of the arrangement will be recognized upon delivery of the license. Maintenance revenue related to on-premises term license agreements will continue to be recognized ratably over the term of the licensing agreement. The new standard will also impact our determination of standalone selling prices, which will impact the allocation of transaction price to each performance obligation, thereby impacting the timing of revenue recognition depending on when each performance obligation is recognized. The impacts to the timing of revenue recognition will also affect our deferred revenue balance.
As of December 31, 2017, we had $142 million of on-premises deferred license revenue on our balance sheet. Upon adoption, a portion of this amount will be recorded to retained earnings for the impacts from the allocation of standalone selling prices under the new standard.
The new standard also requires the capitalization of certain incremental costs of obtaining a contract, which will impact the period in which we record our sales commissions expense. We have historically recognized sales commissions expense upfront. Under the new guidance, we are required to recognize these expenses consistently with the transfer of goods or services. This will result in a deferral of some sales compensation costs. We will amortize these deferred costs on a straight-line basis over four years.
The new standard will also impact our internal control environment, including our financial statement disclosure controls, our business process controls and enhancements necessary to update our business systems. We are currently finalizing the implementation controls necessary to adopt this new standard.
In February 2016, the FASB issued ASU 2016-02 related to lease accounting. The new guidance will require lessees to recognize right-of-use assets and lease liabilities on the balance sheet for operating leases that do not meet the definition of a short-term lease. ASU 2016-02 is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2018 and requires modified retrospective transition. Under the new standard we anticipate that our current real estate leases will continue to be classified as operating leases and a significant amount of our currently outstanding operating lease commitments will be recorded to the balance sheet as a right-of-use asset and a corresponding lease liability. Our evaluation of the new standard will extend into future periods and we will update our disclosures, including the expected impacts of the new standard, as we progress towards the required adoption date.
In June 2016, the FASB issued ASU 2016-13, related to credit losses. The new guidance replaces the existing incurred loss impairment model with an expected credit loss model and requires a financial asset measured at amortized cost to be presented at the net amount expected to be collected. ASU 2016-13 is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2019. Early adoption is permitted. We are currently evaluating the impact that this standard will have on our consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16 related to the accounting for income tax effects on intra-entity asset transfers of assets other than inventory. The new guidance will require reporting entities to recognize tax expense from the sale of assets when the transfer occurs, even though the pre-tax effects of the transaction are eliminated in consolidation. We will adopt the new standard, in the first quarter of 2018, on a modified retrospective basis. We are currently evaluating the impact that this standard will have on our consolidated financial statements.
Summary of Significant Accounting Policies (Tables)
Activity Related to Provision for Doubtful Accounts
Activity related to our provision for doubtful accounts was as follows:
 
Year Ended December 31,
 
2017
 
2016
 
2015
 
(in thousands)
Balance at the beginning of the year
$
1,065

 
$
888

 
$
1,111

Bad debt expense
650

 
750

 
250

Accounts written off
(712
)
 
(573
)
 
(473
)
Balance at the end of the year
$
1,003

 
$
1,065

 
$
888

Balance Sheet Detail (Tables)
Property and equipment, net consisted of the following:
 
Useful Life
 
December 31,
 
(in months)
 
2017
 
2016
 
 
 
(in thousands)
Computer equipment and software
36
 
$
98,737

 
$
92,536

Furniture and fixtures
36
 
25,232

 
18,953

Leasehold improvements
10-150
 
85,482

 
37,308

Construction in progress
 
 
313

 
35,099

 
 
 
209,764

 
183,896

Less: Accumulated depreciation and amortization
 
 
(103,011
)
 
(77,259
)
 
 
 
$
106,753

 
$
106,637

Accrued compensation and employee-related benefits consisted of the following:
 
December 31,
 
2017
 
2016
 
(in thousands)
Accrued commissions
$
31,333

 
$
24,801

Accrued bonuses
25,435

 
19,080

Accrued vacation
14,512

 
13,003

Other
25,110

 
13,346

Total
$
96,390

 
$
70,230

Short-Term and Long-Term Investments (Tables)
Short-term and Long-term Investments
The following table represents our short-term and long-term investments in available-for-sale securities as of December 31, 2017, and is based on contractual years to maturity:
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
 
(in thousands)
Short-term investments
 
 
 
 
 
 
 
Commercial paper
$
9,970

 
$

 
$

 
$
9,970

U.S. treasury securities
160,206

 

 
(121
)
 
160,085

U.S. agency securities
9,917

 

 
(24
)
 
9,893

Corporate bonds
46,901

 
3

 
(65
)
 
46,839

Total short-term investments
226,994

 
3

 
(210
)
 
226,787

Long-term investments
 
 
 
 
 
 
 
U.S. treasury securities
79,371

 

 
(202
)
 
79,169

U.S. agency securities
18,570

 

 
(102
)
 
18,468

Corporate bonds
50,880

 

 
(153
)
 
50,727

Total long-term investments
148,821

 

 
(457
)
 
148,364

Total short-term and long-term investments
$
375,815

 
$
3

 
$
(667
)
 
$
375,151

Fair Value Measurements (Tables)
Fair Value of Financial Assets
The following table presents the fair value of our financial assets using the fair value hierarchy:
 
December 31, 2017

Level 1
 
Level 2
 
Level 3
 
Total
 
(in thousands)
Cash equivalents
 
 
 
 
 
 
 
Money market funds
$
582,835

 
$

 
$

 
$
582,835

Commercial paper

 
8,984

 

 
8,984

Short-term investments
 
 
 
 
 
 
 
Commercial paper

 
9,970

 

 
9,970

U.S. treasury securities

 
160,085

 

 
160,085

U.S. agency securities

 
9,893

 

 
9,893

Corporate bonds

 
46,839

 

 
46,839

Long-term investments
 
 
 
 
 
 
 
U.S. treasury securities

 
79,169

 

 
79,169

U.S. agency securities

 
18,468

 

 
18,468

Corporate bonds

 
50,727

 

 
50,727

Total
$
582,835

 
$
384,135

 
$

 
$
966,970

    
 
December 31, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(in thousands)
Cash equivalents
 
 
 
 
 
 
 
Money market funds
$
872,161