LOGMEIN, INC., 10-Q filed on 7/29/2020
Quarterly Report
v3.20.2
Document and Entity Information - shares
6 Months Ended
Jun. 30, 2020
Jul. 27, 2020
Cover [Abstract]    
Document Type 10-Q  
Amendment Flag false  
Document Period End Date Jun. 30, 2020  
Document Fiscal Year Focus 2020  
Document Fiscal Period Focus Q2  
Trading Symbol LOGM  
Entity File Number 001-34391  
Entity Tax Identification Number 20-1515952  
Entity Address, Address Line One 320 Summer Street  
Entity Address, City or Town Boston  
Entity Address, Postal Zip Code 02210  
City Area Code 781  
Local Phone Number 638-9050  
Entity Address, State or Province MA  
Entity Registrant Name LOGMEIN, INC.  
Entity Central Index Key 0001420302  
Current Fiscal Year End Date --12-31  
Entity Filer Category Large Accelerated Filer  
Entity Shell Company false  
Entity Small Business false  
Entity Emerging Growth Company false  
Entity Current Reporting Status Yes  
Entity Common Stock, Shares Outstanding   49,028,170
Document Quarterly Report true  
Document Transition Report false  
Entity Incorporation, State or Country Code DE  
Entity Interactive Data Current Yes  
Security Exchange Name NASDAQ  
Title of 12(b) Security Common Stock, $0.01 par value per share  
v3.20.2
Condensed Consolidated Balance Sheets - USD ($)
$ in Thousands
Jun. 30, 2020
Dec. 31, 2019
Current assets:    
Cash and cash equivalents $ 249,464 $ 128,005
Accounts receivable (net of allowances of $3,744 and $4,078 as of December 31, 2019 and June 30, 2020, respectively) 108,959 107,595
Prepaid expenses and other current assets 103,585 89,351
Total current assets 462,008 324,951
Property and equipment, net 97,911 99,157
Operating lease assets 94,539 99,026
Restricted cash 1,796 1,883
Intangibles, net 736,107 840,427
Goodwill 2,414,229 2,414,287
Other assets 85,203 68,272
Deferred tax assets 9,090 7,994
Total assets 3,900,883 3,855,997
Current liabilities:    
Accounts payable 43,965 52,104
Current operating lease liabilities 19,346 18,470
Accrued liabilities 151,198 161,996
Deferred revenue, current portion 448,755 390,087
Total current liabilities 663,264 622,657
Long-term debt 200,000 200,000
Deferred revenue, net of current portion 9,616 18,076
Deferred tax liabilities 151,684 170,482
Non-current operating lease liabilities 84,768 88,674
Other long-term liabilities 20,394 15,400
Total liabilities 1,129,726 1,115,289
Commitments and contingencies (Note 11)
Preferred stock, $0.01 par value — 5,000 shares authorized, 0 shares outstanding as of December 31, 2019 and June 30, 2020
Equity:    
Common stock, $0.01 par value—145,000 shares authorized; 57,294 and 57,749 shares issued; and 48,573 and 49,028 outstanding as of December 31, 2019 and June 30, 2020, respectively 577 573
Additional paid-in capital 3,393,750 3,369,893
Retained earnings (accumulated deficit) 12,687 4,931
Accumulated other comprehensive income (loss) (484) 684
Treasury stock, at cost - 8,721 shares (635,373) (635,373)
Total equity 2,771,157 2,740,708
Total liabilities and equity $ 3,900,883 $ 3,855,997
v3.20.2
Condensed Consolidated Balance Sheets (Parenthetical) - USD ($)
$ in Thousands
Jun. 30, 2020
Dec. 31, 2019
Statement Of Financial Position [Abstract]    
Allowance for doubtful accounts $ 4,078 $ 3,744
Preferred stock, par value $ 0.01 $ 0.01
Preferred stock, shares authorized 5,000,000 5,000,000
Preferred stock, shares outstanding 0 0
Common stock, par value $ 0.01 $ 0.01
Common stock, shares authorized 145,000,000 145,000,000
Common stock, shares issued 57,749,000 57,294,000
Common stock, shares outstanding 49,028,000 48,573,000
Treasury stock, shares 8,721,000 8,721,000
v3.20.2
Condensed Consolidated Statements of Operations - USD ($)
shares in Thousands, $ in Thousands
3 Months Ended 6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Income Statement [Abstract]        
Revenue $ 350,727 $ 313,064 $ 673,110 $ 620,764
Cost of revenue 93,497 80,767 178,375 158,455
Gross profit 257,230 232,297 494,735 462,309
Operating expenses        
Research and development 37,170 40,379 77,049 81,096
Sales and marketing 121,521 120,825 247,731 235,459
General and administrative 30,291 34,539 63,990 68,425
Restructuring charge 3,032 956 21,573 9,430
Amortization of acquired intangibles 33,287 39,390 66,615 78,889
Total operating expenses 225,301 236,089 476,958 473,299
Income (loss) from operations 31,929 (3,792) 17,777 (10,990)
Interest income 225 415 492 1,076
Interest expense (1,132) (2,126) (2,812) (4,269)
Other income (expense), net (374) (107) 65 (367)
Income (loss) before income taxes 30,648 (5,610) 15,522 (14,550)
(Provision for) benefit from income taxes (11,607) (912) (7,766) (1,011)
Net income (loss) $ 19,041 $ (6,522) $ 7,756 $ (15,561)
Net income (loss) per share:        
Basic $ 0.39 $ (0.13) $ 0.16 $ (0.31)
Diluted $ 0.39 $ (0.13) $ 0.16 $ (0.31)
Weighted average shares outstanding:        
Basic 48,887 49,768 48,744 50,201
Diluted 49,186 49,768 49,189 50,201
Cash dividends declared and paid per share:   $ 0.325   $ 0.65
v3.20.2
Condensed Consolidated Statements of Comprehensive Income (Loss) - USD ($)
$ in Thousands
3 Months Ended 6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Statement Of Income And Comprehensive Income [Abstract]        
Net income (loss) $ 19,041 $ (6,522) $ 7,756 $ (15,561)
Other comprehensive gain (loss):        
Net translation gains (losses) 3,058 2,872 (1,168) 247
Comprehensive income (loss) $ 22,099 $ (3,650) $ 6,588 $ (15,314)
v3.20.2
Condensed Consolidated Statements of Equity - USD ($)
$ in Thousands
Total
Common Stock [Member]
Additional Paid-In Capital [Member]
Retained Earnings (Accumulated Deficit) [Member]
Accumulated Other Comprehensive Income (Loss) [Member]
Treasury Stock [Member]
Balance at Dec. 31, 2018 $ 2,974,688 $ 567 $ 3,316,603 $ 84,043 $ 2,133 $ (428,658)
Balance, shares at Dec. 31, 2018   50,692,000        
Issuance of common stock upon exercise of stock options 82   82      
Issuance of common stock upon exercise of stock options, shares   2,000        
Net issuance of common stock upon vesting of restricted stock units (17,676) $ 4 (17,680)      
Net issuance of common stock upon vesting of restricted stock units, shares   425,000        
Stock-based compensation 33,234   33,234      
Treasury stock $ (123,870)         (123,870)
Treasury stock, shares (1,552,896) (1,553,000)        
Dividends on common stock $ (32,699)     (32,699)    
Net income (loss) (15,561)     (15,561)    
Cumulative translation adjustments 247       247  
Balance at Jun. 30, 2019 2,818,445 $ 571 3,332,239 35,783 2,380 (552,528)
Balance, shares at Jun. 30, 2019   49,566,000        
Balance at Mar. 31, 2019 2,894,936 $ 569 3,322,862 58,487 (492) (486,490)
Balance, shares at Mar. 31, 2019   50,166,000        
Issuance of common stock upon exercise of stock options 41   41      
Issuance of common stock upon exercise of stock options, shares   1,000        
Net issuance of common stock upon vesting of restricted stock units (8,865) $ 2 (8,867)      
Net issuance of common stock upon vesting of restricted stock units, shares   238,000        
Stock-based compensation 18,203   18,203      
Treasury stock $ (66,038)         (66,038)
Treasury stock, shares (838,911) (839,000)        
Dividends on common stock $ (16,182)     (16,182)    
Net income (loss) (6,522)     (6,522)    
Cumulative translation adjustments 2,872       2,872  
Balance at Jun. 30, 2019 2,818,445 $ 571 3,332,239 35,783 2,380 (552,528)
Balance, shares at Jun. 30, 2019   49,566,000        
Balance at Dec. 31, 2019 2,740,708 $ 573 3,369,893 4,931 684 (635,373)
Balance, shares at Dec. 31, 2019   48,573,000        
Issuance of common stock upon exercise of stock options 351   351      
Issuance of common stock upon exercise of stock options, shares   10,000        
Net issuance of common stock upon vesting of restricted stock units (13,288) $ 3 (13,291)      
Net issuance of common stock upon vesting of restricted stock units, shares   346,000        
Issuance of common stock for employee stock purchase plan 6,505 $ 1 6,504      
Issuance of common stock for employee stock purchase plan, shares   99,000        
Stock-based compensation 30,293   30,293      
Net income (loss) 7,756     7,756    
Cumulative translation adjustments (1,168)       (1,168)  
Balance at Jun. 30, 2020 2,771,157 $ 577 3,393,750 12,687 (484) (635,373)
Balance, shares at Jun. 30, 2020   49,028,000        
Balance at Mar. 31, 2020 2,740,206 $ 573 3,384,902 (6,354) (3,542) (635,373)
Balance, shares at Mar. 31, 2020   48,619,000        
Issuance of common stock upon exercise of stock options 266   266      
Issuance of common stock upon exercise of stock options, shares   6,000        
Net issuance of common stock upon vesting of restricted stock units (11,351) $ 3 (11,354)      
Net issuance of common stock upon vesting of restricted stock units, shares   304,000        
Issuance of common stock for employee stock purchase plan 6,505 $ 1 6,504      
Issuance of common stock for employee stock purchase plan, shares   99,000        
Stock-based compensation 13,432   13,432      
Net income (loss) 19,041     19,041    
Cumulative translation adjustments 3,058       3,058  
Balance at Jun. 30, 2020 $ 2,771,157 $ 577 $ 3,393,750 $ 12,687 $ (484) $ (635,373)
Balance, shares at Jun. 30, 2020   49,028,000        
v3.20.2
Condensed Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
3 Months Ended 6 Months Ended 12 Months Ended
Jun. 30, 2020
Dec. 31, 2019
Sep. 30, 2019
Jun. 30, 2019
Mar. 31, 2019
Jun. 30, 2020
Jun. 30, 2019
Dec. 31, 2019
Cash flows from operating activities                
Net income (loss)           $ 7,756 $ (15,561)  
Adjustments to reconcile net income (loss) to net cash provided by operating activities:                
Stock-based compensation $ 13,432     $ 18,203   30,293 33,234  
Depreciation and amortization           138,873 152,333  
Benefit from deferred income taxes           (19,942) (22,786)  
Other, net           1,359 1,131  
Changes in assets and liabilities, excluding effect of acquisitions:                
Accounts receivable           (3,121) 4,110  
Prepaid expenses and other current assets           (15,226) 4,777  
Other assets           (17,039) (13,546)  
Accounts payable           (9,318) 15,507  
Accrued liabilities           (2,508) 16,226  
Deferred revenue           52,655 30,250  
Other long-term liabilities           4,873 (2,308)  
Net cash provided by (used in) operating activities           168,655 203,367  
Cash flows from investing activities                
Purchases of property and equipment           (18,104) (22,081)  
Intangible asset additions           (19,078) (18,745)  
Cash paid for acquisitions, net of cash acquired             (22,463)  
Net cash provided by (used in) investing activities           (37,182) (63,289)  
Cash flows from financing activities                
Proceeds from issuance of common stock upon option exercises and employee stock purchase plan           6,856 82  
Payments of withholding taxes in connection with restricted stock unit vesting           (13,288) (17,676)  
Payment of contingent consideration           (1,294) (1,857)  
Dividends paid on common stock   $ (15,900) $ (16,000) (16,200) $ (16,500)   (32,699) $ (64,600)
Purchase of treasury stock             (124,232)  
Net cash provided by (used in) financing activities           (7,726) (176,382)  
Effect of exchange rate changes on cash, cash equivalents and restricted cash           (2,375) (792)  
Net increase (decrease) in cash, cash equivalents and restricted cash           121,372 (37,096)  
Cash, cash equivalents and restricted cash, beginning of period     $ 113,396   $ 150,492 129,888 150,492 150,492
Cash, cash equivalents and restricted cash, end of period $ 251,260 $ 129,888   $ 113,396   251,260 113,396 $ 129,888
Supplemental disclosure of cash flow information                
Cash paid for interest           3,645 3,218  
Cash paid (refunds received) from income taxes           24,174 4,258  
Noncash investing and financing activities                
Purchases of property and equipment included in accounts payable and accrued liabilities           4,713 5,659  
Purchases of treasury stock included in accrued liabilities             1,427  
Fair value of contingent consideration in connection with acquisition, included in accrued liabilities             1,347  
Lease assets obtained (relieved) and related operating lease liabilities           $ 4,903 $ (3,096)  
v3.20.2
Nature of the Business
6 Months Ended
Jun. 30, 2020
Organization Consolidation And Presentation Of Financial Statements [Abstract]  
Nature of the Business

1. Nature of the Business

LogMeIn, Inc., which is referred to herein as LogMeIn or the Company, provides a portfolio of cloud-based unified communications and collaboration, identity and access management, and customer engagement and support solutions designed to simplify how people connect with each other and the world around them to drive meaningful interactions, deepen relationships, and create better outcomes for individuals and businesses. The Company is headquartered in Boston, Massachusetts with additional locations in North America, South America, Europe, Asia and Australia.

In December 2019, the Company entered into an Agreement and Plan of Merger, or the Merger Agreement, with Logan Parent, LLC, or Parent, and Logan Merger Sub, Inc., a wholly-owned subsidiary of Parent, or Merger Sub. Pursuant to the terms of the Merger Agreement, Merger Sub would merge with and into LogMeIn, in a transaction which the Company refers to herein as the Merger. Parent and Merger Sub are controlled by Francisco Partners, a technology-focused global private equity firm, and Evergreen Coast Capital Corp., the technology-focused global private equity affiliate of Elliott Management Corporation, an investment management firm. The Company’s stockholders voted to adopt the Merger Agreement at a special meeting of stockholders on March 12, 2020. In July 2020, the parties received the final regulatory approvals required to complete the transaction and now anticipate the Merger to close later in the third quarter of 2020, following the completion of Francisco Partners and Evergreen Coast Capital Corp.’s debt marketing periods and subject to the satisfaction or waiver of the remaining customary closing conditions. The Company recorded $2.6 million in general and administrative expense for Merger-related costs during the six months ended June 30, 2020.

The Company continues to closely monitor the impact of the 2019 novel coronavirus, or COVID-19, on all aspects of its business. COVID-19 was declared a global pandemic by the World Health Organization on March 11, 2020 and the President of the United States declared the COVID-19 outbreak a national emergency. While the COVID-19 pandemic has not had a material adverse impact on the Company’s operations to date, the future impacts of the pandemic and any resulting economic impact remains largely unknown and is rapidly evolving. It is possible that the COVID-19 pandemic, the measures taken by the governments of countries affected and the resulting economic impact may materially and adversely affect the Company’s results of operations, cash flows and financial position as well as its customers. The impact of the COVID-19 pandemic may also exacerbate other risks discussed in this Quarterly Report on Form 10-Q. Refer to Item 1A. “Risk Factors” in this Quarterly Report on Form 10-Q for a complete description of the material risks that the Company currently faces.

v3.20.2
Summary of Significant Accounting Policies
6 Months Ended
Jun. 30, 2020
Accounting Policies [Abstract]  
Summary of Significant Accounting Policies

2. Summary of Significant Accounting Policies

Principles of Consolidation — The accompanying condensed consolidated financial statements include the results of operations of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. The Company has prepared the accompanying condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, or GAAP.

Unaudited Interim Condensed Consolidated Financial Statements — The accompanying condensed consolidated financial statements and the related interim information contained within the notes to the condensed consolidated financial statements are unaudited and have been prepared in accordance with GAAP and applicable rules and regulations of the Securities and Exchange Commission for interim financial information. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. The accompanying unaudited condensed consolidated financial statements should be read along with the Company’s audited financial statements included in the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission on February 14, 2020. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited financial statements and in the opinion of management, reflect all adjustments, consisting of normal and recurring adjustments, necessary for the fair presentation of the Company’s financial position, results of operations and cash flows for the interim periods presented. The results for the interim periods presented are not necessarily indicative of future results. The Company considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure.

Use of Estimates — The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results could differ from those estimates.

 

Revenue Recognition — The Company derives its revenue primarily from subscription fees for its premium subscription software services, usage fees from audio services, and, to a lesser extent, the sale or lease of telecommunications equipment. Revenue is reported net of applicable sales and use tax, value-added tax and other transaction taxes imposed on the related transaction including mandatory government charges that are passed through to the Company’s customers. Revenue is recognized when control of these services or products are transferred to the Company’s customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for the contract’s performance obligations.

The Company determines revenue recognition through the following five steps:

 

Identification of the contract, or contracts, with a customer

 

Identification of the performance obligations in the contract

 

Determination of the transaction price

 

Allocation of the transaction price to the performance obligations in the contract

 

Recognition of revenue when, or as, performance obligations are satisfied

The Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.

Disaggregated Revenue — The Company disaggregates revenue from contracts with customers by geography and product grouping, as it believes it best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.

The Company’s revenue by geography (based on customer address) is as follows:

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2019

 

 

2020

 

 

2019

 

 

2020

 

 

 

(In thousands)

 

 

(In thousands)

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

247,570

 

 

$

270,302

 

 

$

488,864

 

 

$

523,249

 

International

 

 

65,494

 

 

 

80,425

 

 

 

131,900

 

 

 

149,861

 

Total revenue

 

$

313,064

 

 

$

350,727

 

 

$

620,764

 

 

$

673,110

 

 

The Company’s revenue by product grouping is as follows:

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2019

 

 

2020

 

 

2019

 

 

2020

 

 

 

(In thousands)

 

 

(In thousands)

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unified communications and collaboration

 

$

171,817

 

 

$

193,778

 

 

$

341,774

 

 

$

367,465

 

Identity and access management

 

 

98,266

 

 

 

111,726

 

 

 

192,445

 

 

 

217,307

 

Customer engagement and support

 

 

42,981

 

 

 

45,223

 

 

 

86,545

 

 

 

88,338

 

Total revenue

 

$

313,064

 

 

$

350,727

 

 

$

620,764

 

 

$

673,110

 

 

Performance Obligations

Premium Subscription Services — Revenue from the Company’s premium subscription services represents a single promise to provide continuous access (i.e., a stand-ready obligation) to its software solutions and their processing capabilities in the form of a service through one of the Company’s data centers. The Company’s software cannot be run on another entity’s hardware and customers do not have the right to take possession of the software and use it on their own or another entity’s hardware.

As each day of providing access to the software is substantially the same and the customer simultaneously receives and consumes the benefits as access is provided, the Company has determined that its premium subscription services arrangements include a single performance obligation comprised of a series of distinct services. Revenue from the Company’s premium subscription services is recognized over time on a ratable basis over the contract term beginning on the date that the Company’s service is made available to the customer. Subscription periods range from monthly to multi-year, are typically billed in advance and are non-cancelable.

Audio Services — Revenue from the Company’s audio services represent a single promise to stand-ready to provide access to the Company’s platform. As each day of providing audio services is substantially the same and the customer simultaneously receives and consumes the benefits as access is provided, the Company has determined that its audio services arrangements include a single performance obligation comprised of a series of distinct services. These audio services may include fixed consideration, variable consideration or a combination of the two. Variable consideration in these arrangements is typically a function of the corresponding rate per minute. The Company allocates the variable amount to each distinct service period within the series and recognizes revenue as each distinct service period is performed (i.e., recognized as incurred).

Accounts Receivable, Net — Accounts receivable, net, are amounts due from customers where there is an unconditional right to consideration. Unbilled receivables of $7.7 million and $9.0 million are included in this balance at December 31, 2019 and June 30, 2020, respectively. The payment of consideration related to these unbilled receivables is subject only to the passage of time. As of December 31, 2019 and June 30, 2020, lease receivables totaled $10.0 million (of which, $5.1 million was long term and in other assets), and $11.3 million (of which, $6.1 million was long term and in other assets), respectively.

Contract Assets and Contract Liabilities — Contract assets and contract liabilities (deferred revenue) are reported net at the contract level for each reporting period.

Contract Assets — Contract assets primarily relate to unbilled amounts typically resulting from sales contracts when revenue recognized exceeds the amount billed to the customer, and right to payment is not just subject to the passage of time. The contract assets are transferred to accounts receivable when the rights become unconditional. The Company had contract assets of $7.9 million as of December 31, 2019 ($4.4 million included in prepaid and other current assets and $3.5 million included in other assets) and $11.1 million as of June 30, 2020 ($6.0 million included in prepaid and other current assets and $5.1 million included in other assets).

Contract Liabilities (Deferred Revenue) — Deferred revenue primarily consists of billings and payments received in advance of revenue recognition. The Company primarily bills and collects payments from customers for its services in advance on a monthly and annual basis. The Company initially records subscription fees as deferred revenue and then recognizes revenue as performance obligations are satisfied over the subscription period. Typically, subscriptions automatically renew at the end of the subscription period unless the customer specifically terminates it prior to the end of the period. Deferred revenue to be recognized within the next twelve months is included in current deferred revenue, and the remaining amount is included in long-term deferred revenue in the condensed consolidated balance sheets.

For the three and six months ended June 30, 2020, revenue recognized related to deferred revenue at January 1, 2020 was approximately $111 million and $283 million, respectively. As of June 30, 2020, approximately $748 million of revenue is expected to be recognized from remaining performance obligations, including backlog, primarily over the next two years.

Changes in contract liabilities for the six months ended June 30, 2020 are as follows:

 

 

 

Deferred Revenue

 

 

 

Current

 

 

Non-

Current

 

 

Total

 

 

 

(In thousands)

 

Balance as of January 1, 2020

 

$

390,087

 

 

$

18,076

 

 

$

408,163

 

Increase (decrease), net

 

 

58,668

 

 

 

(8,460

)

 

 

50,208

 

Balance as of June 30, 2020

 

$

448,755

 

 

$

9,616

 

 

$

458,371

 

 

Concentrations of Credit Risk and Significant Customers — The Company’s principal credit risk relates to its cash, cash equivalents, restricted cash and accounts receivable. Cash, cash equivalents and restricted cash are deposited primarily with financial institutions that management believes to be of high-credit quality. To manage accounts receivable credit risk, the Company regularly evaluates the creditworthiness of its customers and maintains allowances for expected credit losses. The Company also reserves against its lease receivables and contract assets for expected losses. To date, losses resulting from uncollected receivables have not exceeded management’s expectations.

For the three and six months ended June 30, 2019 and 2020, no customer accounted for more than 10% of revenue. As of December 31, 2019 and June 30, 2020, no customer accounted for more than 10% of accounts receivable.

Costs to Obtain and Fulfill a Contract — The Company’s incremental costs of obtaining a contract consist of sales commissions and their related fringe benefits. Sales commissions and fringe benefits paid on renewals are not commensurate with sales commissions paid on the initial contract, but they are commensurate with each other. Sales commissions and fringe benefits are deferred and amortized on a straight-line basis over the period of benefit, which the Company has estimated to be three to four years for initial contracts and amortized over the renewal period for renewal contracts, typically one year. The period of benefit was determined based on an average customer contract term, expected contract renewals, changes in technology and the Company’s ability to retain customers. Deferred commissions are classified as current or noncurrent assets based on the timing the expense will be recognized. The current and noncurrent portions of deferred commissions are included in prepaid expenses and other current assets and other assets, respectively, in the Company’s condensed consolidated balance sheets. As of December 31, 2019 and June 30, 2020, the Company had $49.7 million of current deferred commissions and $53.1 million of noncurrent deferred commissions, and $58.5 million of current deferred commissions and $67.4 million of noncurrent deferred commissions, respectively. Commissions expense is primarily included in sales and marketing expense on the condensed consolidated statements of operations. The Company had amortization expense of $9.4 million and $17.9 million related to employee-based deferred commissions during the three and six months ended June 30, 2019 and $16.2 million and $30.5 million during the three and six months ended June 30, 2020, respectively. Other costs incurred to fulfill contracts have been immaterial to date.

Segment Data — Operating segments are identified as components of an enterprise for which separate discrete financial information is available for evaluation by the chief operating decision-maker or decision-making group when making decisions regarding resource allocation and assessing performance. The Company’s chief operating decision maker is its Chief Executive Officer. The Company, whose management uses consolidated financial information in determining how to allocate resources and assess performance, has determined that it operates in one segment.

Goodwill — Goodwill is the excess of the acquisition price over the fair value of the tangible and identifiable intangible net assets acquired. The Company does not amortize goodwill but performs an impairment test of goodwill annually or whenever events and circumstances indicate that the carrying amount of goodwill may exceed its fair value. The Company operates as a single operating segment with one reporting unit and consequently evaluates goodwill for impairment based on an evaluation of the fair value of the Company as a whole. As of November 30, 2019, our measurement date, the fair value of the Company as a whole exceeded the carrying amount of the Company. As of June 30, 2020, the fair value of the Company as a whole continued to exceed the carrying amount of the Company.  

Long-Lived Assets and Intangible Assets — The Company records intangible assets at their respective estimated fair values at the date of acquisition. Intangible assets are being amortized based upon the pattern in which their economic benefit will be realized, or if this pattern cannot be reliably determined, using the straight-line method over their estimated useful lives, which range up to eleven years.

The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets, including intangible assets, may not be recoverable. When such events occur, the Company compares the carrying amounts of the assets to their undiscounted expected future cash flows. If this comparison indicates that there is impairment, the amount of the impairment is calculated as the difference between the carrying value and fair value. Through June 30, 2020, the Company recorded no material impairments.

Foreign Currency Translation — The functional currency of operations outside the United States of America is deemed to be the currency of the local country, unless otherwise determined that the United States dollar would serve as a more appropriate functional currency given the economic operations of the entity. Accordingly, the assets and liabilities of the Company’s foreign subsidiaries are translated into United States dollars using the period-end exchange rate, and income and expense items are translated using the average exchange rate during the period. Cumulative translation adjustments are reflected as a separate component of equity. Foreign currency transaction gains and losses are charged to operations.

Derivative Financial Instruments — The Company’s earnings and cash flows are subject to fluctuations due to changes in foreign currency exchange rates. The Company uses foreign currency forward contracts to manage exposure to fluctuations in foreign currency exchange rates that arise from receivables and payables denominated in foreign currencies. The Company does not designate foreign currency forward contracts as hedges for accounting purposes, and changes in the fair value of these instruments are recognized immediately in earnings. Because the Company enters into forward contracts only as an economic hedge, any gain or loss on the underlying foreign-denominated balance would be offset by the loss or gain on the forward contract. Gains and losses on forward contracts and foreign denominated receivables and payables are included in foreign currency net gains and losses.

As of December 31, 2019 and June 30, 2020, the Company had outstanding forward contracts with notional amounts equivalent to the following:

 

 

 

December 31,

2019

 

 

June 30,

2020

 

Currency Hedged

 

(In thousands)

 

Euro / U.S. Dollar

 

$

3,503

 

 

$

4,592

 

British Pound / U.S. Dollar

 

 

858

 

 

 

826

 

Euro / Hungarian Forint

 

 

3,139

 

 

 

3,272

 

U.S. Dollar / Canadian Dollar

 

 

1,810

 

 

 

1,885

 

Total

 

$

9,310

 

 

$

10,575

 

 

Net realized and unrealized foreign currency gains and losses was a net loss of $0.1 million and $0.4 million for the three and six months ended June 30, 2019, respectively, and a net loss of $0.4 million and a net gain of $26,000 for the three and six months ended June 30, 2020, respectively, which are included in other income (expense), net in the condensed consolidated statements of operations. Excluding the underlying foreign currency exposure being hedged, net realized and unrealized gains and losses on forward contracts included in foreign currency gains and losses was a net gain of $0.1 million and a net loss of $0.4 million for the three and six months ended June 30, 2019, respectively, and a net gain of $48,000 and a net loss of $16,000 for the three and six months ended June 30, 2020, respectively.

Stock-Based Compensation — The Company values all stock-based compensation awards, primarily restricted stock units, at fair value on the date of grant and recognizes the expense over the requisite service period, which is generally the vesting period, on a straight-line basis.

Income Taxes — Deferred income taxes are provided for the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and operating loss carryforwards and credits using enacted tax rates expected to be in effect in the years in which the differences are expected to reverse. At each balance sheet date, the Company assesses the likelihood that deferred tax assets will be realized and recognizes a valuation allowance if it is more likely than not that some portion of the deferred tax assets will not be realized. This assessment requires judgment as to the likelihood and amounts of future taxable income by tax jurisdiction.

The Company evaluates its uncertain tax positions based on a determination of whether and how much of a tax benefit taken by the Company in its tax filings is more likely than not to be realized. Potential interest and penalties associated with any uncertain tax positions are recorded as a component of income tax expense.

Guarantees and Indemnification Obligations — As permitted under Delaware law, the Company has agreements whereby the Company indemnifies certain of its officers and directors for certain events or occurrences while the officer or director is, or was, serving at the Company’s request in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. As permitted under Delaware law, the Company also has similar indemnification obligations under its certificate of incorporation and bylaws. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has directors’ and officers’ insurance coverage that the Company believes limits its exposure and enables it to recover a portion of any future amounts paid.

In the ordinary course of business, the Company enters into agreements with certain customers that contractually obligate the Company to provide indemnifications of varying scope and terms with respect to certain matters including, but not limited to, losses arising out of the breach of such agreements, from the services provided by the Company or claims alleging that the Company’s products infringe third-party patents, copyrights, or trademarks. The term of these indemnification obligations is generally perpetual. The maximum potential amount of future payments the Company could be required to make under these indemnification obligations is, in many cases, unlimited. Through June 30, 2020, the Company has not experienced any losses related to these indemnification obligations.

Net Income (Loss) Per Share — Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per share is computed by dividing net income (loss) by the sum of the weighted average number of common shares outstanding during the period and, if dilutive, the weighted average number of potential common shares outstanding from the assumed exercise of stock options and the vesting of restricted stock units.

The Company excluded the following options to purchase common shares and restricted stock units from the computation of diluted net income (loss) per share because they had an anti-dilutive impact:

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2019

 

 

2020

 

 

2019

 

 

2020

 

 

 

(In thousands)

 

 

(In thousands)

 

Options to purchase common shares

 

 

43

 

 

 

 

 

 

43

 

 

 

 

Restricted stock units

 

 

1,816

 

 

 

186

 

 

 

1,816

 

 

 

186

 

Total options and restricted stock units

 

 

1,859

 

 

 

186

 

 

 

1,859

 

 

 

186

 

 

Basic and diluted net income (loss) per share was calculated as follows:

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2019

 

 

2020

 

 

2019

 

 

2020

 

 

 

(In thousands, except per share data)

 

 

(In thousands, except per share data)

 

Net income (loss)

 

$

(6,522

)

 

$

19,041

 

 

$

(15,561

)

 

$

7,756

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding, basic

 

 

49,768

 

 

 

48,887

 

 

 

50,201

 

 

 

48,744

 

Net income (loss) per share, basic

 

$

(0.13

)

 

$

0.39

 

 

$

(0.31

)

 

$

0.16

 

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

49,768

 

 

 

48,887

 

 

 

50,201

 

 

 

48,744

 

Add: Common stock equivalents

 

 

 

 

 

299

 

 

 

 

 

 

445

 

Weighted average common shares outstanding, diluted

 

 

49,768

 

 

 

49,186

 

 

 

50,201

 

 

 

49,189

 

Net income (loss) per share, diluted

 

$

(0.13

)

 

$

0.39

 

 

$

(0.31

)

 

$

0.16

 

 

Recently Adopted Accounting Pronouncements — On January 1, 2020, the Company adopted ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), referred to herein as ASU 2016-13, which changes how entities will account for credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. ASU 2016-13 replaces the existing incurred loss model with an expected credit loss model that requires entities to estimate an expected lifetime credit loss on most financial assets and certain other instruments. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated balance sheets, statements of operations, financial positions or cash flows.

v3.20.2
Fair Value of Financial Instruments
6 Months Ended
Jun. 30, 2020
Fair Value Disclosures [Abstract]  
Fair Value of Financial Instruments

3. Fair Value of Financial Instruments

The carrying value of the Company’s financial instruments, including cash equivalents, restricted cash, accounts receivable and accounts payable, approximate their fair values due to their short maturities and the debt outstanding under the variable-rate credit facility approximates fair value. The Company’s financial assets and liabilities are measured using inputs from the three levels of the fair value hierarchy. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. The three levels are as follows:

 

Level 1: Unadjusted quoted prices for identical assets or liabilities in active markets accessible by the Company at the measurement date.

 

Level 2: Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

 

Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

Money market funds and time deposits are classified within Level 1 of the fair value hierarchy because they are valued based on quoted market prices in active markets.

Certificates of deposit, commercial paper and certain U.S. government agency securities are classified within Level 2 of the fair value hierarchy. These instruments are valued based on quoted prices in markets that are not active or based on other observable inputs consisting of market yields, reported trades and broker/dealer quotes.

The principal market in which the Company executes foreign currency contracts is the institutional market in an over-the-counter environment with a relatively high level of price transparency. The market participants are usually large financial institutions. The Company’s foreign currency contracts’ valuation inputs are based on quoted prices and quoted pricing intervals from public data sources and do not involve management judgment. These contracts are typically classified within Level 2 of the fair value hierarchy.

The Company’s Level 3 liability at December 31, 2019 related to a 2019 acquisition, described further in Note 4 below. The remaining contingent consideration liability of $2.0 million was based on the achievement of certain development milestones and was paid in January 2020.

The Company’s significant financial assets and liabilities are measured at fair value in the table below (in thousands), which excludes cash on hand and assets and liabilities that are measured at historical cost or any basis other than fair value.

 

 

 

Fair Value Measurements at December 31, 2019

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Financial assets (liabilities):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents — money market funds

 

$

1,183

 

 

$

 

 

$

 

 

$

1,183

 

Forward contracts ($9.3 million notional amount)

 

$

 

 

$

20

 

 

$

 

 

$

20

 

Contingent consideration liability

 

$

 

 

$

 

 

$

(2,000

)

 

$

(2,000

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at June 30, 2020

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Financial assets (liabilities):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forward contracts ($10.6 million notional amount)

 

$

 

 

$

13

 

 

$

 

 

$

13

 

 

v3.20.2
Acquisitions
6 Months Ended
Jun. 30, 2020
Business Combinations [Abstract]  
Acquisitions

4. Acquisitions

Acquisition-Related Costs

Acquisition-related costs were $6.9 million for the six months ended June 30, 2019, including $5.6 million of retention-based bonuses and $1.2 million of transaction, transition and integration-related costs. Acquisition-related costs were $2.6 million for the six months ended June 30, 2020, comprised primarily of retention-based bonuses.

2019 Acquisitions

On February 6, 2019, the Company acquired substantially all of the assets of an Israeli-based company specializing in artificial intelligence, or A.I., and speech-to-text recognition, pursuant to an asset purchase agreement. The Company completed the acquisition for $5.0 million in cash and potential acquisition-related contingent consideration totaling up to $4.0 million contingent upon the achievement of certain development milestones. This contingent consideration liability was recorded at an estimated fair value of $3.2 million at the acquisition date. The Company paid $2.0 million of the contingent consideration in 2019 and paid the remaining $2.0 million in January 2020. The Company accounted for the acquisition as a business combination. Assets acquired were primarily intellectual property. The Company’s purchase price allocation of the $8.2 million purchase consideration was $5.1 million of completed technology and $3.1 million of goodwill. Additionally, the Company expects to pay up to $2.0 million in retention-based bonus payments to certain employees upon the achievement of specified retention milestones over the two-year period following the closing of the transaction, of which $1.0 million has been paid as of June 30, 2020.

On February 21, 2019, the Company acquired a California-based provider of multi-factor and single-sign-on, or SSO, services pursuant to a stock purchase agreement dated February 13, 2019 for $17.5 million, net of cash acquired. The Company accounted for the acquisition as a business combination. The Company’s purchase price allocation of the $17.5 million purchase consideration was $11.8 million of completed technology, $8.7 million of goodwill and $0.1 million of other current assets partially offset by $0.3 million of current liabilities and $2.9 million of a long-term deferred tax liability primarily related to the amortization of intangible assets which cannot be deducted for tax purposes. Additionally, the Company expects to pay up to $4.4 million in retention-based bonus payments to certain employees upon the achievement of specified retention milestones over a three-year period following the closing of the transaction, of which $2.5 million has been paid as of June 30, 2020.

The operating results of these February 2019 acquisitions, which have been included in the Company’s results since the date of the acquisitions, are not material. Accordingly, pro forma financial information for these business combinations has not been presented.

v3.20.2
Goodwill and Intangible Assets
6 Months Ended
Jun. 30, 2020
Goodwill And Intangible Assets Disclosure [Abstract]  
Goodwill and Intangible Assets

5. Goodwill and Intangible Assets

The changes in the carrying amounts of goodwill during the six months ended June 30, 2020 are primarily due to foreign currency translation adjustments.

Changes in goodwill for the six months ended June 30, 2020 are as follows (in thousands):

 

Balance, January 1, 2020

 

$

2,414,287

 

Foreign currency translation adjustments

 

 

(58

)

Balance, June 30, 2020

 

$

2,414,229

 

 

Intangible assets consist of the following (in thousands):

 

 

 

December 31, 2019

 

 

June 30, 2020

 

 

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

Carrying

Amount

 

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

Carrying

Amount

 

 

Weighted

Average

Life

Remaining

(in years)

 

Identifiable intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

$

918,234

 

 

$

440,496

 

 

$

477,738

 

 

$

918,444

 

 

$

502,502

 

 

$

415,942

 

 

 

5.2

 

Technology

 

 

497,892

 

 

 

216,318

 

 

 

281,574

 

 

 

497,993

 

 

 

255,152

 

 

 

242,841

 

 

 

5.6

 

Trade names and trademarks

 

 

70,778

 

 

 

30,780

 

 

 

39,998

 

 

 

70,797

 

 

 

35,499

 

 

 

35,298

 

 

 

5.6

 

Other

 

 

3,575

 

 

 

1,639

 

 

 

1,936

 

 

 

3,573

 

 

 

1,798

 

 

 

1,775

 

 

 

5.5

 

Internally developed software

 

 

104,410

 

 

 

65,229

 

 

 

39,181

 

 

 

123,449

 

 

 

83,198

 

 

 

40,251

 

 

 

1.4

 

 

 

$

1,594,889

 

 

$

754,462

 

 

$

840,427

 

 

$

1,614,256

 

 

$

878,149

 

 

$

736,107

 

 

 

 

 

 

During the six months ended June 30, 2019, the Company capitalized $16.9 million for technology as intangible assets in connection with its 2019 acquisitions. The Company capitalized $9.9 million and $8.8 million during the three months ended June 30, 2019 and 2020, respectively, and $18.8 million and $19.1 million during the six months ended June 30, 2019 and 2020, respectively, of costs related to internally developed software to be sold as a service incurred during the application development stage and is amortizing these costs over the expected lives of the related services.

The Company is amortizing its intangible assets based upon the pattern in which their economic benefit will be realized, or if this pattern cannot be reliably determined, using the straight-line method over their estimated useful lives. Amortization relating to technology, documented know-how (other) and internally developed software is recorded within cost of revenue and the amortization of trade names and trademarks, customer relationships, and domain names (other) is recorded within operating expenses. Amortization expense for intangible assets consisted of the following:

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2019

 

 

2020

 

 

2019

 

 

2020

 

 

 

(In thousands)

 

 

(In thousands)

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of internally developed software

 

$

8,264

 

 

$

9,138

 

 

$

16,298

 

 

$

18,002

 

Amortization of acquired intangibles (1)

 

 

21,038

 

 

 

19,332

 

 

 

42,008

 

 

 

38,690

 

Sub-Total amortization of intangibles in cost of revenue

 

 

29,302

 

 

 

28,470

 

 

 

58,306

 

 

 

56,692

 

Amortization of acquired intangibles (1)

 

 

39,390

 

 

 

33,287

 

 

 

78,889

 

 

 

66,615

 

Total amortization of intangibles

 

$

68,692

 

 

$

61,757

 

 

$

137,195

 

 

$

123,307

 

 

(1)

Total amortization of acquired intangibles was $60.4 million and $52.6 million for the three months ended June 30, 2019 and 2020, respectively, and $120.9 million and $105.3 million for the six months ended June 30, 2019 and 2020, respectively.

 

Future estimated amortization expense for intangible assets at June 30, 2020 is as follows (in thousands):

 

Amortization Expense (Years Ending December 31)

 

Amount

 

2020 (six months ending December 31)

 

$

122,221

 

2021

 

 

200,516

 

2022

 

 

148,416

 

2023

 

 

115,487

 

2024

 

 

90,241

 

Thereafter

 

 

59,226

 

Total

 

$

736,107

 

 

v3.20.2
Accrued Liabilities
6 Months Ended
Jun. 30, 2020
Payables And Accruals [Abstract]  
Accrued Liabilities

6. Accrued Liabilities

Accrued liabilities consisted of the following:

 

 

 

December 31,

2019

 

 

June 30,

2020

 

 

 

(In thousands)

 

Marketing programs

 

$

11,748

 

 

$

16,733

 

Compensation and benefits-related

 

 

44,631

 

 

 

46,875

 

Merger and acquisition-related (1)

 

 

23,065

 

 

 

2,066

 

Restructuring-related

 

 

693

 

 

 

3,856

 

Other accrued liabilities

 

 

81,859

 

 

 

81,668

 

Total accrued liabilities

 

$

161,996

 

 

$

151,198

 

 

(1)

Merger and acquisition-related costs include transaction, transition and integration-related fees and expenses and acquisition retention-based bonus costs.

v3.20.2