LOGMEIN, INC., 10-Q filed on 10/27/2017
Quarterly Report
Document and Entity Information
9 Months Ended
Sep. 30, 2017
Oct. 23, 2017
Document And Entity Information [Abstract]
 
 
Document Type
10-Q 
 
Amendment Flag
false 
 
Document Period End Date
Sep. 30, 2017 
 
Document Fiscal Year Focus
2017 
 
Document Fiscal Period Focus
Q3 
 
Trading Symbol
LOGM 
 
Entity Registrant Name
LogMeIn, Inc. 
 
Entity Central Index Key
0001420302 
 
Current Fiscal Year End Date
--12-31 
 
Entity Filer Category
Large Accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
52,637,672 
Condensed Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Sep. 30, 2017
Dec. 31, 2016
Current assets:
 
 
Cash and cash equivalents
$ 262,051 
$ 140,756 
Marketable securities
13,996 
55,710 
Accounts receivable (net of allowance of $245 and $1,729 as of December 31, 2016 and September 30, 2017, respectively)
83,862 
25,901 
Prepaid expenses and other current assets
34,412 
5,723 
Total current assets
394,321 
228,090 
Property and equipment, net
91,401 
23,867 
Restricted cash
1,661 
2,481 
Intangibles, net
1,191,609 
62,510 
Goodwill
2,254,773 
121,760 
Other assets
7,295 
4,282 
Deferred tax assets
276 
303 
Total assets
3,941,336 
443,293 
Current liabilities:
 
 
Accounts payable
37,117 
14,640 
Accrued liabilities
110,675 
35,253 
Deferred revenue, current portion
323,044 
156,966 
Total current liabilities
470,836 
206,859 
Long-term debt
 
30,000 
Deferred revenue, net of current portion
5,468 
5,287 
Deferred tax liabilities
376,006 
2,332 
Other long-term liabilities
7,174 
2,699 
Total liabilities
859,484 
247,177 
Commitments and contingencies (Note 10)
   
   
Preferred stock, $0.01 par value - 5,000 shares authorized, 0 shares outstanding as of December 31, 2016 and September 30, 2017
   
   
Equity:
 
 
Common stock, $0.01 par value - 75,000 and 150,000 shares authorized as of December 31, 2016 and September 30, 2017 respectively; 28,405 and 55,993 shares issued as of December 31, 2016 and September 30, 2017, respectively; 25,552 and 52,669 outstanding as of December 31, 2016 and June 30, 2017, respectively
560 
284 
Additional paid-in capital
3,261,762 
314,700 
Accumulated deficit
(29,719)
(1,754)
Accumulated other comprehensive income (loss)
10,820 
(6,618)
Treasury stock, at cost - 2,853 and 3,324 shares as of December 31, 2016 and September 30, 2017, respectively
(161,571)
(110,496)
Total equity
3,081,852 
196,116 
Total liabilities and equity
$ 3,941,336 
$ 443,293 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Share data, unless otherwise specified
Sep. 30, 2017
Dec. 31, 2016
Statement of Financial Position [Abstract]
 
 
Allowance for doubtful accounts
$ 1,729 
$ 245 
Preferred stock, par value
$ 0.01 
$ 0.01 
Preferred stock, shares authorized
5,000,000 
5,000,000 
Preferred stock, shares outstanding
Common stock, par value
$ 0.01 
$ 0.01 
Common stock, shares authorized
150,000,000 
75,000,000 
Common stock, shares issued
55,993,000 
28,405,000 
Common stock, shares outstanding
52,669,000 
25,552,000 
Treasury stock, shares
3,324,000 
2,853,000 
Condensed Consolidated Statements of Operations (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2017
Sep. 30, 2016
Sep. 30, 2017
Sep. 30, 2016
Income Statement [Abstract]
 
 
 
 
Revenue
$ 269,267 
$ 85,103 
$ 713,750 
$ 248,103 
Cost of revenue
55,605 
11,485 
147,780 
34,121 
Gross profit
213,662 
73,618 
565,970 
213,982 
Operating expenses
 
 
 
 
Research and development
42,603 
14,161 
116,435 
43,571 
Sales and marketing
89,379 
39,628 
258,616 
123,533 
General and administrative
37,906 
18,694 
120,460 
40,350 
Amortization of acquired intangibles
36,613 
1,363 
97,187 
4,103 
Total operating expenses
206,501 
73,846 
592,698 
211,557 
Income (loss) from operations
7,161 
(228)
(26,728)
2,425 
Interest income
405 
177 
924 
546 
Interest expense
(294)
(335)
(1,088)
(1,094)
Other income (expense), net
51 
(180)
(27)
(676)
Income (loss) before income taxes
7,323 
(566)
(26,919)
1,201 
(Provision for) benefit from income taxes
2,597 
(91)
33,121 
(425)
Net income (loss)
$ 9,920 
$ (657)
$ 6,202 
$ 776 
Net income (loss) per share:
 
 
 
 
Basic
$ 0.19 
$ (0.03)
$ 0.12 
$ 0.03 
Diluted
$ 0.19 
$ (0.03)
$ 0.12 
$ 0.03 
Weighted average shares outstanding:
 
 
 
 
Basic
52,706 
25,401 
49,697 
25,230 
Diluted
53,606 
25,401 
50,735 
26,009 
Condensed Consolidated Statements of Comprehensive Income (Loss) (USD $)
In Thousands, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2017
Sep. 30, 2016
Sep. 30, 2017
Sep. 30, 2016
Statement of Comprehensive Income [Abstract]
 
 
 
 
Net income (loss)
$ 9,920 
$ (657)
$ 6,202 
$ 776 
Other comprehensive gain (loss):
 
 
 
 
Net unrealized gains (losses) on marketable securities, (net of tax benefit of $33 and tax provision of $7 for the three months ended September 30, 2016 and 2017 and a tax provision of $27 and $5 for the nine months ended September 30, 2016 and 2017, respectively)
11 
(58)
47 
Net translation gains (losses)
5,996 
172 
17,429 
(30)
Total other comprehensive gain
6,007 
114 
17,438 
17 
Comprehensive income (loss)
$ 15,927 
$ (543)
$ 23,640 
$ 793 
Condensed Consolidated Statements of Comprehensive Income (Loss) (Parenthetical) (USD $)
In Thousands, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2017
Sep. 30, 2016
Sep. 30, 2017
Sep. 30, 2016
Statement of Comprehensive Income [Abstract]
 
 
 
 
Net unrealized (gains) losses on marketable securities, tax (benefit) provision
$ 7 
$ (33)
$ 5 
$ 27 
Condensed Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
9 Months Ended
Sep. 30, 2017
Sep. 30, 2016
Cash flows from operating activities
 
 
Net income
$ 6,202 
$ 776 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Stock-based compensation
49,255 
27,327 
Depreciation and amortization
158,761 
16,076 
Amortization of premium on investments
125 
357 
Change in fair value of contingent consideration liability
 
502 
Amortization of debt issuance costs
466 
218 
Provision for bad debts
193 
31 
Benefit from deferred income taxes
(47,659)
 
Other, net
822 
Changes in assets and liabilities, excluding effect of acquisitions:
 
 
Accounts receivable
(6,480)
(79)
Prepaid expenses and other current assets
(4,607)
(1,552)
Other assets
991 
1,188 
Accounts payable
10,154 
4,705 
Accrued liabilities
36,586 
4,176 
Deferred revenue
75,135 
25,420 
Other long-term liabilities
3,316 
4,943 
Net cash provided by operating activities
283,260 
84,090 
Cash flows from investing activities
 
 
Purchases of marketable securities
 
(35,609)
Proceeds from sale or disposal or maturity of marketable securities
41,603 
50,000 
Purchases of property and equipment
(23,322)
(12,629)
Intangible asset additions
(21,893)
(1,037)
Cash paid for acquisition, net of cash acquired
(19,160)
(61)
(Increase) decrease in restricted cash
1,751 
(30)
Net cash provided by (used in) investing activities
(21,021)
634 
Cash flows from financing activities
 
 
Repayments under credit facility
(30,000)
(22,500)
Proceeds from issuance of common stock upon option exercises
6,363 
9,443 
Payments of withholding taxes in connection with restricted stock unit vesting
(32,189)
(13,432)
Payment of debt issuance costs
(1,993)
(349)
Payment of contingent consideration
 
(29)
Dividends paid on common stock
(39,117)
(12,700)
Purchase of treasury stock
(51,075)
(22,799)
Net cash used in financing activities
(148,011)
(62,366)
Effect of exchange rate changes on cash and cash equivalents
7,067 
1,099 
Net increase in cash and cash equivalents
121,295 
23,457 
Cash and cash equivalents, beginning of period
140,756 
123,143 
Cash and cash equivalents, end of period
262,051 
146,600 
Supplemental disclosure of cash flow information
 
 
Cash paid for interest
201 
763 
(Refunds received) cash paid for income taxes
22,272 
(177)
Noncash investing and financing activities
 
 
Purchases of property and equipment included in accounts payable and accrued liabilities
7,006 
890 
Fair value of contingent consideration in connection with acquisition, included in accrued liabilities
 
2,500 
GetGo, Inc. [Member]
 
 
Noncash investing and financing activities
 
 
Purchase consideration of GetGo paid in equity
2,921,179 
 
Liability accrued for GetGo purchase consideration
$ 3,317 
 
Nature of the Business
Nature of the Business

1. Nature of the Business

LogMeIn, Inc. (the “Company”) provides a portfolio of cloud-based communication and conferencing, identity and access, 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 wholly-owned subsidiaries in North America, South America, Europe, Asia and Australia.

On January 31, 2017, the Company completed a merger with GetGo, Inc. (“GetGo”) a wholly-owned subsidiary of Citrix Systems, Inc. (“Citrix), pursuant to which the Company combined with Citrix’s GoTo family of service offerings known as the “GoTo Business” in a Reverse Morris Trust transaction (the “Merger”). For additional information regarding the Merger, see Note 4 below.

Summary of Significant Accounting Policies
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 (“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 March 1, 2017. 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.

Marketable Securities — The Company’s marketable securities are classified as available-for-sale and are carried at fair value with the unrealized gains and losses, net of tax, reported as a component of accumulated other comprehensive loss in equity. Realized gains and losses and declines in value judged to be other than temporary are included as a component of earnings based on the specific identification method. Fair value is determined based on quoted market prices. At December 31, 2016 and September 30, 2017, marketable securities consisted of U.S. government agency securities and corporate bonds that have remaining maturities within two years and have an aggregate amortized cost of $55.7 million and $14.0 million, respectively. The securities have an aggregate fair value of $55.7 million and $14.0 million, including $17,000 of unrealized gains at December 31, 2016 and $43,000 and $11,000 of unrealized losses, at December 31, 2016 and September 30, 2017, respectively.

Revenue Recognition — The Company derives revenue primarily from subscription fees related to its premium subscription software services, usage fees from its audio services and to a lesser extent, the delivery of professional services, primarily related to its customer engagement and support business. Revenues are reported net of applicable sales and use tax, value-added tax and other transaction taxes imposed on the related transaction.

Revenue from the Company’s premium services is recognized on a daily basis over the subscription term as the services are delivered, provided that there is persuasive evidence of an arrangement, the fee is fixed or determinable and collectability is deemed reasonably assured. Subscription periods range from monthly to ten years. 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. Revenue from the Company’s audio services is recognized upon actual usage of audio minutes or the expiration of audio minutes purchased in prepaid plans. Any unbilled audio revenue is accrued for in the period the usage occurs.

The Company’s multi-element arrangements typically include subscription and professional services, which may include development services. The Company evaluates each element within the arrangement to determine if they can be accounted for as separate units of accounting. If the delivered item or items have value to the customer on a standalone basis, either because they are sold separately by any vendor or the customer could resell the delivered item or items on a standalone basis, the Company has determined that the deliverables within these arrangements qualify for treatment as separate units of accounting. Accordingly, the Company recognizes revenue for each delivered item or items as a separate earnings process commencing when all of the significant performance obligations have been performed and when all of the revenue recognition criteria have been met. Professional services revenue recognized as a separate earnings process under multi-element arrangements has been immaterial to date.

In cases where the Company has determined that the delivered items within its multi-element arrangements do not have value to the customer on a stand-alone basis, the arrangement is accounted for as a single unit of accounting and the related consideration is recognized ratably over the estimated customer life, commencing when all of the significant performance obligations have been delivered and when all of the revenue recognition criteria have been met. Revenue from these multi-element arrangements has been immaterial to date.

Concentrations of Credit Risk and Significant Customers — The Company’s principal credit risk relates to its cash, cash equivalents, marketable securities, 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 and custody of its marketable securities is with an accredited financial institution. To manage accounts receivable credit risk, the Company regularly evaluates the creditworthiness of its customers and maintains allowances for potential credit losses. To date, losses resulting from uncollected receivables have not exceeded management’s expectations.

For the three and nine months ended September 30, 2016 and 2017, no customers accounted for more than 10% of revenue. As of December 31, 2016 and September 30, 2017, no customers accounted for more than 10% of accounts receivable.

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, 2016, our measurement date, the fair value of the Company as a whole exceeded the carrying amount of the Company. Through September 30, 2017, no events have been identified indicating an impairment.

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 September 30, 2017, 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 contract to manage exposure to fluctuations in foreign 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 September 30, 2017, the Company had outstanding forward contracts with notional amounts equivalent to the following (in thousands):

 

Currency Hedged    September 30,
2017
 

U.S. Dollar / Canadian Dollar

   $ 401  

Euro / U.S. Dollar

     3,600  

Euro / British Pound

     2,011  

Israeli Shekel / Hungarian Forint(1)

     7,850  
  

 

 

 

Total

   $ 13,862  
  

 

 

 

 

(1) The Israeli Shekel and Hungarian Forint forward contract covers an intercompany loan between Nanorep Technologies Ltd. (“Nanorep”) and the Company’s Hungarian subsidiary. Nanorep was acquired in the third quarter of 2017. For additional information regarding the acquisition, see Note 4.

The Company had net foreign currency losses of $0.2 million and $0.7 million for the three and nine months ended September 30, 2016, respectively, a net foreign currency gain of $47,000 for the three months ended September 30, 2017 and a net foreign currency loss of $28,000 for the nine months ended September 30, 2017, which are included in other income (expense), net in the condensed consolidated statements of operations.

Stock-Based Compensation — The Company values all stock-based compensation, including grants of stock options and 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 of the award, for those awards expected to vest, 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 carry-forwards 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.

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.

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

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2016      2017      2016      2017  

Revenues:

           

United States

   $ 60,713      $ 204,831      $ 177,440      $ 545,117  

United Kingdom

     6,530        13,371        19,239        37,318  

International—all other

     17,860        51,065        51,424        131,315  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

   $ 85,103      $ 269,267      $ 248,103      $ 713,750  
  

 

 

    

 

 

    

 

 

    

 

 

 

Amounts for the three and nine months ended September 30, 2016 presented in the Company’s revenue by service cloud (product grouping) table below include reclassifications between product groups to conform to the current year classification of the Company’s products (in thousands):

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2016      2017      2016      2017  

Revenues:

           

Communications and Collaboration cloud

   $ 10,413      $ 146,808      $ 29,622      $ 377,780  

Identity and Access Management cloud

     50,352        76,380        144,483        208,487  

Customer Engagement and Support cloud

     24,338        46,079        73,998        127,483  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

   $ 85,103      $ 269,267      $ 248,103      $ 713,750  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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 by-laws. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has director’s and officer’s 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 September 30, 2017, 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. For the three months ended September 30, 2016, the Company incurred a net loss and therefore, the effect of the Company’s outstanding common stock equivalents was not included in the calculation of diluted loss per share as they were anti-dilutive. Accordingly, basic and dilutive net loss per share for the period were identical.

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

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2016      2017      2016      2017  

Options to purchase common shares

     418        —          —          —    

Restricted stock units

     1,473        36        106        59  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total options and restricted stock units

     1,891        36        106        59  
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic and diluted net income (loss) per share was calculated as follows (in thousands, except per share data):

 

     Three months ended September 30,      Nine months ended September 30,  
     2016      2017      2016      2017  

Basic:

           

Net income (loss)

   $ (657    $ 9,920      $ 776      $ 6,202  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding, basic

     25,401        52,706        25,230        49,697  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss) per share, basic

   $ (0.03    $ 0.19      $ 0.03      $ 0.12  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted:

           

Net income (loss)

   $ (657    $ 9,920      $ 776      $ 6,202  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding

     25,401        52,706        25,230        49,697  

Add: Common stock equivalents

     —          900        779        1,038  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding, diluted

     25,401        53,606        26,009        50,735  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss) per share, diluted

   $ (0.03    $ 0.19      $ 0.03      $ 0.12  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Recently Adopted Accounting Pronouncements

On May 10, 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-09 Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting (“ASU 2017-09”), which provides clarity on what changes to share-based payment awards are considered substantive and require modification accounting to be applied. The guidance is effective for annual reporting periods beginning after December 15, 2017 and interim periods within those fiscal years. The Company has elected to adopt ASU 2017-09 early beginning in second quarter of 2017 and will apply it prospectively to award modifications after the adoption date. The Company does not regularly modify the terms and conditions of share-based awards and does not believe this ASU 2017-09 will have a material effect on its consolidated financial statements.

On January 1, 2017, the Company adopted ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”) and recorded, using the modified retrospective approach, a cumulative-effect adjustment to accumulated deficit of a credit of $4.9 million to record $6.8 million of previously unrecognized windfall tax benefits, partially offset by $1.9 million for the accounting policy election to account for forfeitures in compensation cost when they occurred. The Company recorded $2.7 million to additional paid-in capital for the differential between the amount of compensation cost previously recorded and the amount that would have been recorded without assuming forfeitures, partially offset by its tax effect of $0.8 million recorded to deferred tax assets. Previously, excess tax benefits were recognized in additional paid-in capital on the condensed consolidated balance sheet to the extent they reduced income taxes payable.

Further, upon the adoption of ASU 2016-09, the Company, on a prospective basis, records the recognition of excess tax benefits and deficits in benefit from income taxes in the condensed consolidated income statement and treats those amounts as discrete items in the period in which they occur. In the first quarter of 2017, the Company recognized a $2.3 million income tax benefit and a corresponding decrease in net loss during the period ($0.05 per weighted average shares outstanding).

On January 1, 2017, the Company early adopted ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”) which records the effect of intra-entity transfers of assets other than inventory when the transfer occurs, resulting in $0.1 million charged to accumulated deficit upon adoption in the first quarter of 2017.

Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, Revenue from Contracts with Customers and has since issued several additional amendments thereto (collectively referred to herein as “ASC 606”) which will become effective for the Company on January 1, 2018. ASC 606 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The new standards require entities to apportion consideration from contracts to performance obligations on a relative standalone selling price basis, based on a five-step model. Under ASC 606, revenue is recognized when a customer obtains control of a promised good or service and is recognized in an amount that reflects the consideration that the entity expects to receive in exchange for the good or service. In addition, ASC 606 provides guidance on accounting for certain revenue related costs including costs associated with obtaining and fulfilling a contract.

The Company plans to adopt ASC 606 using the modified retrospective transition method which will result in an adjustment to retained earnings for the cumulative effect of applying the standard to all contracts not completed as of the adoption date. As this adoption method does not result in a recast of the prior year financial statements, ASC 606 requires the Company to provide additional disclosures during the year of adoption of the amount by which each financial statement line item is affected by adoption of the new standard and explanation of the reasons for significant changes.

The Company is currently evaluating the impact of the adoption of ASC 606 to its consolidated financial statements, accounting policies, IT systems and processes. The Company has allocated internal and external resources to assist in its implementation and evaluation of the impact of ASC 606 and has made enhancements to its financial information systems to assist in financial reporting under ASC 606. While the Company cannot reliably estimate the expected financial statement impact at this time, the Company expects the revenue recognition of its primary revenue streams to remain substantially unchanged and therefore, does not expect a material impact on its revenues upon adoption of ASC 606. The adoption of ASC 606 will have an impact on the Company's consolidated financial statements with respect to its accounting for sales commissions related to customer arrangements. In making this determination the Company has also considered the impact of the guidance in ASC 340-40, Other Assets and Deferred Costs; Contracts with Customers, under ASU 2014-09 (“ASC 340-40”). Under the Company’s current accounting policy, it recognizes the expense of incremental costs of obtaining a contract, such as sales commission costs, when they are incurred rather than capitalizing the costs. Under ASC 340-40, the Company is required to capitalize and amortize incremental costs of obtaining a contract and certain sales commissions may require amortization over a period longer than the term of the associated customer contract. The Company is in process of determining the appropriate amortization period for these capitalized commissions.

On February 25, 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”), which will require lessees to recognize most leases on their balance sheet as a right-of-use asset and a lease liability. Leases will be classified as either operating or finance, and classification will be based on criteria similar to current lease accounting, but without explicit bright lines. The guidance is effective for annual reporting periods beginning after December 15, 2018 and interim periods within those fiscal years, and early adoption is permitted. Although the Company is currently assessing the impact of adoption of ASU 2016-02 on its consolidated financial statements, the Company currently believes the most significant changes will be related to the recognition of new right-of-use assets and lease liabilities on the Company’s balance sheet for operating leases.

 

On January 26, 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which simplifies the accounting for goodwill impairments by eliminating step two from the goodwill impairment test. Instead, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. ASU 2017-04 also clarifies the requirements for excluding and allocating foreign currency translation adjustments to reporting units related to an entity’s testing of reporting units for goodwill impairment, clarifies that an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The guidance is effective for annual reporting periods beginning after January 1, 2020 and interim periods within those fiscal years. The Company is currently assessing the potential impact of the adoption of ASU 2017-04 on its consolidated financial statements.

On November 17, 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB’s EITF) (“ASU 2016-18”). ASU 2016-18 requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Entities will also be required to reconcile such total to amounts on the balance sheet and disclose the nature of the restrictions. The guidance is effective for annual reporting periods beginning after December 15, 2017 and interim periods within those fiscal years. The Company is currently assessing the potential impact of the adoption of ASU 2016-18 on its consolidated financial statements.

Fair Value of Financial Instruments
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. 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.

The following table summarizes the basis used to measure certain of the Company’s financial assets that are carried at fair value (in thousands):

 

     Fair Value Measurements at December 31, 2016  
     Level 1      Level 2      Level 3      Total  

Cash equivalents — money market funds

   $ 11,599      $ —        $ —        $ 11,599  

Short-term marketable securities:

           

U.S. government agency securities

     34,961        8,001        —          42,962  

Corporate bond securities

     —          12,748        —          12,748  
     Fair Value Measurements at September 30, 2017  
     Level 1      Level 2      Level 3      Total  

Cash equivalents — money market funds

   $ 166,918      $ —        $ —        $ 166,918  

Short-term marketable securities:

        

U.S. government agency securities

     7,997        —          —          7,997  

Corporate bond securities

     —          5,999        —          5,999  

Forward contracts

     —          13        —          13  

Bank deposits, corporate bonds and certain U.S. government agency securities are classified within the second level of the fair value hierarchy as the fair value of those assets are determined based upon quoted prices for similar assets.

Acquisitions
Acquisitions

4. Acquisitions

Acquisition-Related Costs

Acquisition-related costs were $16.9 million and $51.4 million for the nine months ended September 30, 2016 and 2017, respectively. Acquisition-related costs are associated with the acquisitions of businesses and intellectual property and include transaction, transition and integration-related charges (including legal, accounting and other professional fees, severance, and retention bonuses) and subsequent adjustments to our initial estimated amount of contingent consideration associated with acquisitions. Acquisition-related costs for the nine months ended September 30, 2016 were primarily comprised of $9.8 million of acquisition-related costs associated with the Merger and $6.7 million of retention bonuses related to the Company’s 2014 and 2015 acquisitions. Acquisition-related costs for the nine months ended September 30, 2017 were primarily related to the Merger and consisted of $26.2 million in transaction, transition and integration-related expenses, $10.1 million in integration-related severance costs and $15.1 million of retention-based bonuses, of which $9.7 million was related to the Merger.

 

2017 Acquisitions

Nanorep Technologies Ltd.

On July 31, 2017, the Company, through its wholly-owned Hungarian subsidiary, acquired all of the outstanding equity interests in Nanorep Technologies Ltd. (“Nanorep”), an Israeli provider of artificial intelligence, chatbot and virtual assistant services, for $43.4 million, net of cash acquired. Additionally, the Company expects to pay up to $5 million in cash in the future to certain employees of Nanorep contingent upon their continued service over the two-year period following the closing of the acquisition and, in some cases, the achievement of specified performance conditions. At the time of the acquisition, Nanorep had approximately 55 employees and annualized revenue of approximately $5 million. The operating results of Nanorep, which have been included in the Company’s results since the date of the acquisition are not material. Accordingly, pro forma financial information for the business combination has not been presented.

The acquisition is being accounted for under the acquisition method of accounting. The acquisition method of accounting requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The preliminary determination of the fair value of assets acquired and liabilities assumed has been recognized based on management’s estimates and assumptions using the information about facts and circumstances that existed at the acquisition date. While the Company uses its best estimates and assumptions as part of the purchase price allocation process to value the assets acquired and liabilities assumed on the acquisition date, its estimates and assumptions are subject to refinement. Fair value estimates are based on a complex series of judgments about future events and uncertainties and rely heavily on estimates and assumptions. The judgments used to determine the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact the Company’s results of operations. The Company expects to finalize the allocation of purchase price in the fourth quarter of 2017.

The following table summarizes the Company’s preliminary purchase price allocation (in thousands):

 

Cash

   $ 923  

Accounts receivable

     1,108  

Property and equipment

     78  

Restricted cash

     129  

Prepaid expenses and other current assets

     334  

Intangible assets:

  

Completed technology

     9,200  

Customer relationships

     10,500  

Trade name

     500  

Deferred revenue

     (854

Accounts payable and accrued liabilities

     (2,704

Deferred tax liabilities, net

     (1,977

Goodwill

     27,062  
  

 

 

 

Total purchase consideration

     44,299  

Less: cash acquired

     923  
  

 

 

 

Total purchase consideration, net of cash acquired

   $ 43,376  
  

 

 

 

The useful lives of the identifiable intangible assets acquired range from 8 to 10 years with a weighted average useful life of 9.1 years. The goodwill recorded in connection with this transaction is primarily related to the expected synergies to be achieved as a result of the Company’s ability to leverage its customer base, sales force and business plan with Nanorep’s product, technical expertise and customer base. All goodwill and intangible assets acquired are not deductible for income tax purposes.

The Company recorded a long-term deferred tax asset of $2.9 million primarily related to net operating losses that were acquired as a part of the acquisition and a long-term deferred tax liability of $4.8 million primarily related to the amortization of intangible assets which cannot be deducted for tax purposes, resulting in a net long-term deferred tax liability of $2.0 million.

 

GetGo Merger

On January 31, 2017, the Company completed its Merger with GetGo, a wholly-owned subsidiary of Citrix, pursuant to which the Company acquired Citrix’s GoTo Business. In connection with the Merger, the Company issued 26.9 million shares of its common stock to Citrix stockholders and an additional 0.4 million of the Company’s restricted stock units in substitution for certain outstanding Citrix restricted stock units held by GetGo employees. Based on the Company’s closing stock price of $108.10 on January 31, 2017 as reported by the NASDAQ Global Select Market, the total value of the shares of LogMeIn common stock issued to Citrix stockholders in connection with the Merger was $2.9 billion. In the third quarter of 2017, pursuant to the terms of the merger agreement, the Company accrued $3.3 million of additional purchase price for final adjustments related to defined targets for cash and cash equivalents and non-cash working capital, which was paid to Citrix in October 2017.

The Merger is being accounted for under the acquisition method of accounting with the operations of the GoTo Business included in the Company’s operating results since the date of acquisition. During the nine months ended September 30, 2017, the Company recorded revenue of $439.9 million, amortization of acquired intangibles of $119.8 million and acquisition-related transaction, transition and integration costs of $41.5 million directly attributable to the Merger within its condensed consolidated financial statements. Since the Merger, the operating costs of the GoTo Business have been integrated with the operating costs of the Company and therefore, the Company has not provided operating income for the GoTo Business.

The acquisition method of accounting requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The preliminary determination of the fair value of assets acquired and liabilities assumed has been recognized based on management’s estimates and assumptions using the information about facts and circumstances that existed at the acquisition date.

While the Company uses its best estimates and assumptions as part of the purchase price allocation process to value the assets acquired and liabilities assumed on the acquisition date, its estimates and assumptions are subject to refinement. Fair value estimates are based on a complex series of judgments about future events and uncertainties and rely heavily on estimates and assumptions. The judgments used to determine the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact the Company’s results of operations. The finalization of the purchase accounting assessment will result in a change in the valuation of assets acquired and liabilities assumed and may have a material impact on the Company’s results of operations and financial position. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed with a corresponding offset to goodwill to reflect additional information received about facts and circumstances that existed at the date of acquisition. The Company records these adjustments to the assets acquired and liabilities assumed subsequent to the purchase price allocation period in the Company’s operating results in the period in which the adjustments were determined. The size and breadth of the Merger necessitates the use of this measurement period to adequately analyze and assess a number of the factors used in establishing the fair value of certain tangible and intangible assets acquired and liabilities assumed as of the acquisition date and the related tax impacts of any changes made. Any potential adjustments made could be material in relation to the preliminary values presented below. The Company expects to record additional adjustments related to tax balances and tax attributes in the fourth quarter of 2017 as the GetGo entities finalize their tax returns for fiscal year 2016.

The following table summarizes the fair value (in thousands) of the assets acquired and liabilities assumed at the date of acquisition:

 

Purchase consideration:

  

Company common shares issued

   $ 2,904,487 (1) 

Restricted stock units issued

     16,692 (2)  

Cash consideration payable

     3,317 (3)  
  

 

 

 

Total estimated purchase consideration

   $ 2,924,496  

Estimated fair value of assets acquired and liabilities assumed:

  

Cash

     24,215  

Accounts receivable

     48,957 (4)  

Property and equipment

     59,715  

Prepaid expense and other current assets

     22,986 (4)  

Other assets

     4,448  

Intangible assets (weighted average useful life): (5)

  

Completed technology (9 years)

     385,000  

Customer relationships (8 years)

     756,000  

Tradenames and trademark (9 years)

     65,100  

Accounts payable

     (11,030

Accrued liabilities

     (26,886

Deferred revenue, current and noncurrent

     (82,643

Other long-term liabilities

     (996

Deferred tax liability, net

     (426,081
  

 

 

 

Goodwill

   $ 2,105,711  
  

 

 

 

 

(1) Represents the fair value of the 26.9 million new shares of the Company’s common stock (plus cash in lieu of fractional shares) issued to Citrix stockholders, based on the fair value per share of the Company’s common stock of $108.10 per share, which was the closing price of the Company’s common stock on the NASDAQ Global Select Market on January 31, 2017.
(2) Represents the fair value of the 0.4 million restricted stock units issued by the Company in substitution for certain outstanding Citrix restricted stock units held by GetGo employees, pursuant to the terms of the Merger. These Company restricted stock units were issued on the same terms and conditions as were applicable to the outstanding Citrix restricted stock units held by the GetGo employees immediately prior to the Merger date (including the same vesting and forfeiture provisions). The aggregate fair value of those awards ($48.2 million) is based on the fair value per share of the Company’s common stock of $108.10 per share, which was the closing price of the Company’s common stock on the NASDAQ Global Select Market on January 31, 2017. Of that amount, $18.0 million was related to pre-combination employee services and, after adjusting for known and estimated forfeitures, $16.7 million was allocated to purchase consideration and $30.2 million was allocated to future employee services and will be expensed as stock-based compensation on a straight-line basis over the remaining service periods of those awards.
(3) Represents $3.3 million of additional purchase price paid by the Company to Citrix, pursuant to the terms of the merger agreement for final adjustments related to defined targets for cash and cash equivalents and non-cash working capital, resulting in an increase of $3.3 million to goodwill.
(4) During the nine months ended September 30, 2017, the Company identified measurement period adjustments that impacted the estimated fair value of the assets and liabilities assumed as of the date of the acquisition. The table above, which summarizes the allocation of the purchase price for the entities acquired, has been updated to reflect these measurement period adjustments. The total measurement period adjustments resulted in a decrease in accounts receivable of $1.1 million, an increase in prepaid expense and other current assets of $1.2 million and a decrease in goodwill of $0.1 million. This change to the provisional fair value amounts of the assets and liabilities assumed had no impact on the Company’s results of operations for the nine months ended September 30, 2017.
(5) The weighted average useful life of identifiable intangible assets acquired in the Merger is 8.4 years.

The completion of the Merger and the acquisition of the GoTo Business has resulted in a combined company with the scale, employees, products and customer base needed to lead large markets, support a more global customer base and compete against a variety of different solution providers of all sizes. Goodwill of $2.1 billion was recognized for the excess purchase consideration over the estimated fair value of the assets acquired. Goodwill and intangible assets recorded as part of the acquisition are not deductible for tax purposes.

The Company recorded a deferred tax liability, net of deferred tax assets, of $426.1 million, which was primarily related to the amortization of intangible assets which cannot be deducted for tax purposes and which was partially offset by deferred tax assets primarily related to the pre-combination services of the Company’s restricted stock units issued in substitution for the outstanding Citrix restricted stock units pursuant to the Merger agreement.

The Company and Citrix entered into a transition services agreement, pursuant to which each party will provide to the other party certain services on a transitional basis following the completion of the Merger to facilitate the transition of the GoTo Business to the Company. Among other services, the transition services generally relate to information technology and security operations, facilities, human resources support and accounting and finance support. As of September 30, 2017, the Company has incurred $4.9 million of costs related to the transition services agreement.

The unaudited financial information in the table below summarizes the combined results of operations for the Company and the GoTo Business, on a pro forma basis, as though the Merger had been consummated as of the beginning of 2016, including amortization charges from acquired intangible assets, the effect of acquisition accounting on the fair value of acquired deferred revenue, the inclusion of expense related to retention-based bonuses assuming full achievement of the retention requirements, the reclassification of all acquisition-related costs incurred by the Company and the GoTo Business as of the beginning of 2016 through the first quarter of 2017 (the quarter the Merger was completed), and the related tax effects. The second and third quarter of 2017 reported results of the Company have not been adjusted. The pro forma financial information is presented for comparative purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of 2016.

Unaudited Pro Forma Financial Information

 

     Three Months
Ended
September 30,
(unaudited)
     Nine Months
Ended
September 30,
(unaudited)
 
     2016              2016                      2017          
     (in millions except per share amounts)  

Pro forma revenue

   $ 251.8      $ 724.6      $ 784.7  

Pro forma net income (loss)

   $ (1.3    $ (94.2    $ 36.0  

Pro forma income (loss) per share:

        

Basic

   $ (0.02    $ (1.81    $ 0.68  

Diluted

   $ (0.02    $ (1.81    $ 0.67  

Pro forma weighted average shares outstanding

        

Basic

     52.3        52.1        52.7  

Diluted

     52.3        52.1        53.7  

 

Goodwill and Intangible Assets
Goodwill and Intangible Assets

5. Goodwill and Intangible Assets

The changes in the carrying amounts of goodwill during the nine months ended September 30, 2017 are due to the addition of goodwill resulting from the Merger and the acquisition of Nanorep (see Note 4 for additional information).

Changes in goodwill for the nine months ended September 30, 2017 are as follows (in thousands):

 

Balance, January 1, 2017

   $ 121,760  

Goodwill resulting from the Merger

     2,105,711  

Goodwill resulting from the acquisition of Nanorep

     27,062  

Foreign currency translation adjustments

     240  
  

 

 

 

Balance, September 30, 2017

   $ 2,254,773  
  

 

 

 

Intangible assets consist of the following (in thousands):

 

            December 31, 2016      September 30, 2017  
     Estimated
Useful
Life
     Gross
Carrying
Amount
     Accumulated
Amortization
     Net
Carrying
Amount
     Gross
Carrying
Amount
     Accumulated
Amortization
     Net
Carrying
Amount
 

Identifiable intangible assets:

                    

Trade names and trademarks

     1-11 years      $ 3,806      $ 955      $ 2,851      $ 70,462      $ 7,745      $ 62,717  

Customer relationships

     5-8 years        29,249        9,315        19,934        808,061        100,586        707,475  

Domain names

     5 years        913        796        117        918        873        45  

Technology

     3-9 years        51,179        14,942        36,237        451,683        50,656        401,027  

Other

     4-5 years        442        359        83        442        411        31  

Internally developed software

     2-3 years        8,313        5,025        3,288        30,276        9,962        20,314  
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
      $ 93,902      $ 31,392      $ 62,510      $ 1,361,842      $ 170,233      $ 1,191,609  
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

On January 31, 2017, the Company capitalized $65.1 million for trade names and trademarks, $756.0 million for customer relationships and $385.0 million for technology as intangible assets in connection with the Merger. On July 31, 2017, the Company capitalized $0.5 million for a trade name, $10.5 million for customer relationships, and $9.2 million for technology as intangible assets in connection with the acquisition of Nanorep. The gross carrying amount of intangible assets also changed due to foreign currency translation adjustments, as applicable. The Company capitalized $0.3 million and $7.9 million during the three months ended September 30, 2016 and 2017, respectively, and $1.0 million and $22.0 million during the nine months ended September 30, 2016 and 2017, respectively, of costs related to internally developed computer 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 over the estimated useful lives noted above 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 revenues and the amortization of trade name and trademark, customer relationships, domain names and non-compete agreements (other) is recorded within operating expenses. Amortization expense for intangible assets consisted of the following (in thousands):

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2016      2017      2016      2017  

Cost of revenue:

           

Amortization of internally developed computer software

   $ 396      $ 2,594      $ 1,358      $ 4,937  

Amortization of acquired intangibles (1)

     1,150        13,229        3,454        35,416  
  

 

 

    

 

 

    

 

 

    

 

 

 

Sub-Total amortization of intangibles in cost of revenue

     1,546        15,823        4,812        40,353  

Amortization of acquired intangibles (1)

     1,363        36,613        4,103        97,187  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total amortization of intangibles

   $ 2,909      $ 52,436      $ 8,915      $ 137,540  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Total amortization of acquired intangibles was $2.5 million and $49.8 million for the three months ended September 30, 2016 and 2017, respectively, and $7.6 million and $132.6 million for the nine months ended September 30, 2016 and 2017, respectively.

 

Future estimated amortization expense for intangible assets at September 30, 2017 is as follows (in thousands):

 

Amortization Expense (Years Ending December 31)

   Amount  

2017 (three months ending December 31)

   $ 53,102  

2018

     247,259  

2019

     228,825  

2020

     196,109  

2021

     160,427  

Thereafter

     305,887  
  

 

 

 

Total

   $ 1,191,609  
  

 

 

 
Accrued Liabilities
Accrued Liabilities

6. Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):

 

     December 31,
2016
     September 30,
2017
 

Marketing programs

   $ 4,274      $ 14,027  

Payroll and payroll-related

     11,886        35,099  

Professional fees

     1,429        5,230  

Acquisition-related (1)

     9,539        17,702  

Other accrued liabilities

     8,125        38,617  
  

 

 

    

 

 

 

Total accrued liabilities

   $ 35,253      $ 110,675  
  

 

 

    

 

 

 

 

(1) Acquisition-related costs include transaction, transition and integration-related fees and expenses and contingent retention-based bonus costs.
Income Taxes
Income Taxes

7. Income Taxes

The Company recorded a provision for federal, state, and foreign taxes of $0.1 million and a benefit of $2.6 million on a loss before income taxes of $0.6 million and a profit before income taxes of $7.3 million for the three months ended September 30, 2016 and 2017, respectively. For the nine months ended September 30, 2016 and 2017, the Company recorded a provision for federal, state, and foreign taxes of $0.4 million and a benefit of $33.1 million on a profit before income taxes of $1.2 million and a loss before income taxes of $26.9 million, respectively. The effective income tax rates for the nine months ended September 30, 2016 and 2017 were impacted by profits earned in certain foreign jurisdictions, primarily our Irish subsidiaries, which are subject to significantly lower tax rates than the U.S. federal statutory rate. The effective income tax rate for the nine months ended September 30, 2017 was also impacted by the expected non-deductibility of certain transaction costs related to the Merger and $15.7 million of discrete income tax benefits related to excess tax deductions on stock compensation now recorded as a tax benefit due to the Company’s adoption of ASU 2016-09 as well as a $3.8 million tax benefit related to discrete integration-related activity.

Deferred tax assets, related valuation allowances, current tax liabilities and deferred tax liabilities are determined separately by tax jurisdiction. In making these determinations, the Company estimates deferred tax assets, current tax liabilities and deferred tax liabilities, and the Company assesses temporary differences resulting from differing treatment of items for tax and accounting purposes. As of September 30, 2017, the Company maintained a full valuation allowance against the deferred tax assets of its Hungarian subsidiary. This entity has historical tax losses and the Company concluded it was not more likely than not that these deferred tax assets are realizable.

The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The Company’s income tax returns are open to examination by federal, state, and/or foreign tax authorities. The United States federal income tax returns are open to examination from 2014. In the normal course of business, the Company and its subsidiaries are examined by various taxing authorities. The Company regularly assesses the likelihood of additional assessments by tax authorities and provides for these matters as appropriate. Audits by tax authorities typically involve examination of the deductibility of certain permanent items, limitations on net operating losses and tax credits.

 

Although the Company believes its tax estimates are appropriate, the final determination of tax audits could result in material changes in its estimates. The Company has recorded a liability related to uncertain tax positions of $1.5 million and $4.1 million as of December 31, 2016 and September 30, 2017, respectively. The Company’s policy is to record estimated interest and penalties related to the underpayment of income taxes or unrecognized tax benefits as a component of its income tax provision. The Company recognized $21,000 and $31,000 of interest expense for the nine months ended September 30, 2016 and 2017, respectively.

Common Stock and Equity
Common Stock and Equity

8. Common Stock and Equity

On February 23, 2017, the Company’s Board of Directors approved a three-year capital return plan. During the third quarter, the Company paid a cash dividend of $0.25 per share on August 25, 2017 to stockholders of record as of August 9, 2017. The Company’s Board of Directors will continue to review this capital return plan for potential modifications based on the Company’s financial performance, business outlook and other considerations. The timing and number of shares to be repurchased pursuant to the capital return plan will depend upon prevailing market conditions and other factors related to the Merger. Additionally, the Company’s credit facility contains certain financial and operating covenants that may restrict its ability to pay dividends in the future.

For the three months ended September 30, 2016 and 2017, the Company repurchased 45,562 and 191,618 shares of its common stock at an average price of $75.98 and $111.99 per share, for a total cost of $3.5 million and $21.5 million, respectively. For the nine months ended September 30, 2016 and 2017, the Company repurchased 416,474 and 471,206 shares of its common stock at an average price of $54.74 and $108.39 per share, for a total cost of $22.8 million and $51.1 million, respectively.

In connection with the Merger, the Company declared and paid three special cash dividends of $0.50 per share of common stock. The first two dividends totaling $25.5 million were declared and paid in the third and fourth quarters of fiscal 2016. The third cash dividend was declared by the Company’s Board of Directors on January 6, 2017 and paid on January 31, 2017 to stockholders of record as of January 16, 2017, and totaled $12.8 million.

The following table summarizes the changes in equity for the nine months ended September 30, 2017 (amounts in thousands):

 


     Common Stock      Additional
Paid-In
Capital
    Accumulated
Deficit
    Accumulated
Other
Comprehensive
Loss
    Treasury
Stock
    Total
Equity
 
     Number of
Shares
    Amount             

Balance at December 31, 2016

     25,552     $ 284      $ 314,700     $ (1,754   $ (6,618   $ (110,496   $ 196,116  

Issuance of common stock upon exercise of stock options

     175       2        6,361       —         —         —         6,363  

Net issuance of common stock upon vesting of restricted stock units

     545       5        (32,194     —         —         —         (32,189

Shares issued as Merger purchase consideration

     26,868       269        2,904,218       —         —         —         2,904,487  

Restricted stock units issued as Merger purchase consideration

     —         —          16,692       —         —         —         16,692  

Stock-based compensation

     —         —          49,255       —         —         —         49,255  

Treasury stock

     (471     —          —         —         —         (51,075     (51,075

Dividends on common stock

     —         —          —         (39,117     —         —         (39,117

Adoption of ASU2016-16

     —         —          —         84       —         —         84  

Adoption of ASU2016-09

     —         —          2,730       4,866       —         —         7,596  

Net Income

     —         —          —         6,202       —         —         6,202  

Unrealized loss on available-for-sale securities

     —         —          —         —         9       —         9  

Cumulative translation adjustments

     —         —          —         —         17,429       —         17,429  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2017

     52,669     $ 560      $ 3,261,762     $ (29,719   $ 10,820     $ (161,571   $ 3,081,852  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

Stock Incentive Plan
Stock Incentive Plan

9. Stock Incentive Plan

The Company’s 2009 Stock Incentive Plan (“2009 Plan”) is administered by the Board of Directors and Compensation Committee, which have the authority to designate participants and determine the number and type of awards to be granted and any other terms or conditions of the awards. The Company awards restricted stock units as the principal equity incentive award. Restricted stock units with time-based vesting conditions generally vest over a three-year period while restricted stock units with market-based or performance-based vesting conditions generally vest over two or three-year periods. Until 2012, the Company generally granted stock options as the principal equity incentive award. Options generally vest over a four-year period and expire ten years from the date of grant. Certain stock-based awards provide for accelerated vesting if the Company experiences a change in control.

Effective on January 31, 2017, the Company’s stockholders approved an amendment and restatement of the Company’s 2009 Stock Incentive Plan, which increased the number of shares of the Company’s common stock that may be issued under the plan by an additional 4.5 million shares and extended the term of the plan to December 5, 2026. As of September 30, 2017, 7.1 million shares remained available for grant under the 2009 Plan.

 

The following table summarizes stock option activity (shares and intrinsic value in thousands):

 

     Number of Options      Weighted Average
Exercise Price
     Weighted Average
Remaining
Contractual Term
(Years)
     Aggregate
Intrinsic Value
 

Outstanding, January 1, 2017

     355      $ 33.15        5.0      $ 22,529  
           

 

 

 

Granted

     —          —          

Exercised

     (175      36.41         $ 11,373  
           

 

 

 

Forfeited

     (1      26.57        
  

 

 

    

 

 

       

Outstanding, September 30, 2017

     179      $ 30.02        3.9      $ 14,336  
  

 

 

    

 

 

    

 

 

    

 

 

 

The aggregate intrinsic value was calculated based on the positive differences between the fair value of the Company’s common stock of $96.55 per share on December 31, 2016 and $110.05 per share on September 30, 2017, or at time of exercise, and the exercise price of the options. As of September 30, 2017, the Company had 170,388 shares exercisable.

During the nine months ended September 30, 2017, the Company granted 1,283,531 restricted stock units, of which 1,165,378 have time-based vesting conditions, 81,915 have performance-based vesting conditions and 36,238 have market-based vesting conditions. Restricted stock units with time-based vesting conditions are valued on the grant date using the grant date closing price of the underlying shares. The Company recognizes the expense on a straight-line basis over the requisite service period of the restricted stock unit, which is generally three years. The performance-based awards vest on February 14, 2019 based on the achievement of performance criteria for fiscal years 2017 and 2018 established by the Board of Directors at the time of grant. Shares not earned will be forfeited.

Since 2013, the Company has granted to certain key executives restricted stock unit awards with market-based vesting conditions, which are tied to the individual executive’s continued employment with the Company throughout the applicable performance period and the level of the Company’s achievement of a pre-established relative total shareholder return, or TSR, goal, as measured over an applicable performance period ranging from two to three years as compared to the TSR realized for that same period by a well-known stock index (the “TSR Units”). The number of shares that may vest under these TSR Units may range from 0% to 200% of the target number of shares granted depending on the Company’s level of achievement of its TSR goal. Compensation cost for TSR Units is recognized on a straight-line basis over the requisite service period and is recognized regardless of the actual number of awards that are earned based on the level of achievement of the market-based vesting condition. In May 2017, a total of 65,500 target TSR Units which were awarded in 2014 and 2015 vested at 200% of the target TSR Units (an additional 65,500 were earned and vested). In June 2017, the Company granted a total of 36,238 TSR Units, 50% of which may be earned over a two-year performance period with the remaining 50% earned over a three-year performance period. The fair value of the 2017 TSR Units granted was determined using a Monte Carlo simulation model including (but not limited to) a risk-free interest rate of 1.43%, an expected volatility of 36% and an expected dividend yield of 0.88%.

The following table summarizes restricted stock unit activity, including market-based TSR Units (shares in thousands):

 

     Number of shares
Underlying Restricted
Stock Units
     Weighted Average
Grant Date Fair
Value
 

Unvested as of January 1, 2017

     1,445      $ 62.23  

Restricted stock units granted

     837        108.29  

Restricted stock units issued for Merger

     446        108.10  

Restricted stock units earned

     66     

Restricted stock units vested

     (848      70.17  

Restricted stock units forfeited

     (175      81.24  
  

 

 

    

 

 

 

Unvested as of September 30, 2017

     1,771      $ 90.42  
  

 

 

    

 

 

 

 

The Company recognized stock based compensation expense within the accompanying condensed consolidated statements of operations as summarized in the following table (in thousands):

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2016      2017      2016      2017  

Cost of revenue

   $ 536      $ 1,612      $ 1,774      $ 3,911  

Research and development

     1,476        6,405        4,702        16,042  

Sales and marketing

     4,398        4,312        12,876        12,108  

General and administrative

     2,589        6,436        7,975        17,194  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 8,999      $ 18,765      $ 27,327      $ 49,255  
  

 

 

    

 

 

    

 

 

    

 

 

 

On January 1, 2017, the Company adopted ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”) and elected to account for forfeitures in compensation cost when they occur. As of September 30, 2017, there was $120.1 million of total unrecognized share-based compensation cost related to unvested stock awards which are expected to be recognized over a weighted average period of 2.0 years.

Commitments and Contingencies
Commitments and Contingencies

10. Commitments and Contingencies

Operating Leases — The Company has operating lease agreements for offices in the United States, Hungary, Germany, Australia, the United Kingdom, Ireland, Israel and India that expire at various dates through 2028.

Rent expense under all leases was $3.0 million and $5.5 million for the three months ended September 30, 2016 and 2017, respectively, and $8.9 million and $16.0 million for the nine months ended September 30, 2016 and 2017, respectively. The Company records rent expense on a straight-line basis for leases with scheduled escalation clauses or free rent periods.

The Company also enters into hosting services agreements with third-party data centers and internet service providers that are subject to annual renewal. Hosting fees incurred under these arrangements totaled $2.6 million and $7.0 million for the three months ended September 30, 2016 and 2017, respectively and $7.2 million and $25.2 million for the nine months ended September 30, 2016 and 2017, respectively.

Future minimum lease payments under non-cancelable operating leases including one year commitments associated with the Company’s hosting services arrangements are approximately as follows as of September 30, 2017 (in thousands):

 

Years Ending December 31

      

2017 (three months ending December 31)

   $ 8,513  

2018

     30,911  

2019

     24,104  

2020

     20,088  

2021

     17,920  

Thereafter

     45,737  
  

 

 

 

Total minimum lease payments

   $ 147,273  
  

 

 

 

Litigation — The Company routinely assesses its current litigation and/or threatened litigation as to the probability of ultimately incurring a liability, and records its best estimate of the ultimate loss in situations where the Company assesses the likelihood of loss as probable.

On September 2, 2016, Meetrix IP, LLC, (“Meetrix”), filed a complaint against the Company in the U.S. District Court for the Western District of Texas (Case No. 1:16-cv-1034). The complaint, which was served upon the Company on September 22, 2016, alleges that the Company’s join.me service infringes upon U.S. Patent Nos. 9,253,332, 9,094,525 and 8,339,997, each of which are allegedly owned by Meetrix and which Meetrix asserts relate to audio-video conferencing collaboration. On the same date, Meetrix also filed a complaint against Citrix in the same jurisdiction (Case No. 1:16-cv-1033-LY) alleging that the GoToMeeting service, which has since been acquired by the Company as part of the Merger, also infringes upon U.S. Patent Nos. 9,253,332, 9,094,525 and 8,339,997. On April 17, 2017, Meetrix also alleged that the GoToTraining and GoToWebinar services, which also have been acquired by the Company, infringe upon the three patents. The complaints seek monetary damages in an unspecified amount, attorneys’ fees and costs, and additional relief as is deemed appropriate by the Court. The Company believes it has meritorious defenses to these claims and intends to defend against them vigorously. Given the inherent unpredictability of litigation and the fact that this litigation is still in its early stages, the Company is unable to predict the outcome of this litigation or reasonably estimate a possible loss or range of loss associated with this litigation at this time.

In February 2006, ‘01 Communiqué, or ‘01, filed a patent infringement lawsuit against Citrix and Citrix Online, LLC in the United States District Court for the Northern District of Ohio (Case No. 1:06-cv-253), claiming that certain GoTo remote access service offerings, which have since been acquired by the Company as part of the Merger, infringed U.S. Patent No. 6,928,479, or the ‘479 Patent, which is allegedly owned by ‘01. In January 2016, an Ohio jury rendered a verdict that the GoTo services had not infringed the ‘479 Patent. The District Court affirmed the jury’s findings and denied ‘01’s request for a new trial. On March 30, 2017, ’01 initiated an appeal of this ruling and a hearing has not yet been scheduled.

The Company is from time to time subject to various other legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. While the outcome of these other claims cannot be predicted with certainty, management does not believe that the outcome of any of these other legal matters will have a material adverse effect on the Company’s condensed consolidated financial statements.

Accumulated Other Comprehensive Income (Loss)
Accumulated Other Comprehensive Income (Loss)

11. Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) consists of foreign currency translation adjustments and changes in unrealized losses and gains (net of tax) on marketable securities. For the purposes of comprehensive income disclosures, the Company does not record tax provisions or benefits for the net changes in the foreign currency translation adjustment, as the Company intends to reinvest permanently undistributed earnings of its foreign subsidiaries. Accumulated other comprehensive income (loss) is reported as a component of stockholders’ equity and, as of December 31, 2016 and September 30, 2017, was comprised of cumulative translation adjustment losses of $6.6 million and gains of $10.8 million and unrealized losses (net of tax) on marketable securities of $16,000 and $7,000, respectively. There were no material reclassifications to earnings in the nine months ending September 30, 2017.

Credit Facility
Credit Facility

12. Credit Facility

On February 1, 2017, the Company entered into an Amended and Restated Credit Agreement (the “Amended Credit Agreement”), which increased the Company’s secured revolving credit facility from $150 million to $400 million in the aggregate, and permits the Company to increase the revolving credit facility and/or enter into one or more tranches of term loans up to an additional $200 million. The Amended Credit Agreement also extended the maturity date of the revolving credit facility to February 1, 2022. The Company may prepay the loans or terminate or reduce the commitments in whole or in part at any time, without premium or penalty. The Company and its subsidiaries expect to use the credit facility for general corporate purposes, including, but not limited to, the potential acquisition of complementary products or businesses, share repurchases, as well as for working capital. The Company repaid $30.0 million of borrowings in the second quarter of 2017. There was no outstanding debt balance as of September 30, 2017.

Loans under the Amended Credit Agreement bear interest at variable rates which reset every 30 to 180 days depending on the rate and period selected by the Company as described below. The average interest rate on borrowings outstanding during the nine month period ending September 30, 2017 was 2.188%. The quarterly commitment fee on the undrawn portion of the credit facility ranges from 0.15% to 0.30% per annum, based upon the Company’s total leverage ratio.

The Amended Credit Agreement contains customary affirmative and negative covenants, subject to customary and other exceptions for a credit facility of this size and type, each as further described in the Amended Credit Agreement. As of September 30, 2017, the Company was in compliance with all financial and operating covenants of the Amended Credit Agreement.

Any failure to comply with the financial or operating covenants of the Amended Credit Agreement would prevent the Company from being able to borrow additional funds, and would constitute a default, permitting the lenders to, among other things, accelerate the amounts outstanding, including all accrued interest and unpaid fees, under the credit facility and to terminate the credit facility.

As of September 30, 2017, the Company had $2.4 million of origination costs recorded in other assets. The Company incurred approximately $2.0 million of origination costs in connection with the Amended Credit Agreement executed in February 2017. As permitted by FASB issued ASU 2015-15, the Company presents debt issuance costs as an asset and subsequently amortizes the deferred debt issuance costs ratably over the term of the credit facility.

Subsequent Events
Subsequent Events

13. Subsequent Events

In accordance with the Company’s previously announced three-year capital return plan, on October 26, 2017, the Company’s Board of Directors declared a $0.25 per share cash dividend to be paid on November 24, 2017 to stockholders of record as of November 8, 2017.

Summary of Significant Accounting Policies (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 (“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 March 1, 2017. 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.

Marketable Securities — The Company’s marketable securities are classified as available-for-sale and are carried at fair value with the unrealized gains and losses, net of tax, reported as a component of accumulated other comprehensive loss in equity. Realized gains and losses and declines in value judged to be other than temporary are included as a component of earnings based on the specific identification method. Fair value is determined based on quoted market prices. At December 31, 2016 and September 30, 2017, marketable securities consisted of U.S. government agency securities and corporate bonds that have remaining maturities within two years and have an aggregate amortized cost of $55.7 million and $14.0 million, respectively. The securities have an aggregate fair value of $55.7 million and $14.0 million, including $17,000 of unrealized gains at December 31, 2016 and $43,000 and $11,000 of unrealized losses, at December 31, 2016 and September 30, 2017, respectively.

Revenue Recognition — The Company derives revenue primarily from subscription fees related to its premium subscription software services, usage fees from its audio services and to a lesser extent, the delivery of professional services, primarily related to its customer engagement and support business. Revenues are reported net of applicable sales and use tax, value-added tax and other transaction taxes imposed on the related transaction.

Revenue from the Company’s premium services is recognized on a daily basis over the subscription term as the services are delivered, provided that there is persuasive evidence of an arrangement, the fee is fixed or determinable and collectability is deemed reasonably assured. Subscription periods range from monthly to ten years. 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. Revenue from the Company’s audio services is recognized upon actual usage of audio minutes or the expiration of audio minutes purchased in prepaid plans. Any unbilled audio revenue is accrued for in the period the usage occurs.

The Company’s multi-element arrangements typically include subscription and professional services, which may include development services. The Company evaluates each element within the arrangement to determine if they can be accounted for as separate units of accounting. If the delivered item or items have value to the customer on a standalone basis, either because they are sold separately by any vendor or the customer could resell the delivered item or items on a standalone basis, the Company has determined that the deliverables within these arrangements qualify for treatment as separate units of accounting. Accordingly, the Company recognizes revenue for each delivered item or items as a separate earnings process commencing when all of the significant performance obligations have been performed and when all of the revenue recognition criteria have been met. Professional services revenue recognized as a separate earnings process under multi-element arrangements has been immaterial to date.

In cases where the Company has determined that the delivered items within its multi-element arrangements do not have value to the customer on a stand-alone basis, the arrangement is accounted for as a single unit of accounting and the related consideration is recognized ratably over the estimated customer life, commencing when all of the significant performance obligations have been delivered and when all of the revenue recognition criteria have been met. Revenue from these multi-element arrangements has been immaterial to date.

Concentrations of Credit Risk and Significant Customers — The Company’s principal credit risk relates to its cash, cash equivalents, marketable securities, 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 and custody of its marketable securities is with an accredited financial institution. To manage accounts receivable credit risk, the Company regularly evaluates the creditworthiness of its customers and maintains allowances for potential credit losses. To date, losses resulting from uncollected receivables have not exceeded management’s expectations.

For the three and nine months ended September 30, 2016 and 2017, no customers accounted for more than 10% of revenue. As of December 31, 2016 and September 30, 2017, no customers accounted for more than 10% of accounts receivable.

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, 2016, our measurement date, the fair value of the Company as a whole exceeded the carrying amount of the Company. Through September 30, 2017, no events have been identified indicating an impairment.

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 September 30, 2017, 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 contract to manage exposure to fluctuations in foreign 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 September 30, 2017, the Company had outstanding forward contracts with notional amounts equivalent to the following (in thousands):

 

Currency Hedged    September 30,
2017
 

U.S. Dollar / Canadian Dollar

   $ 401  

Euro / U.S. Dollar

     3,600  

Euro / British Pound

     2,011  

Israeli Shekel / Hungarian Forint(1)

     7,850  
  

 

 

 

Total

   $ 13,862  
  

 

 

 

 

(1) The Israeli Shekel and Hungarian Forint forward contract covers an intercompany loan between Nanorep Technologies Ltd. (“Nanorep”) and the Company’s Hungarian subsidiary. Nanorep was acquired in the third quarter of 2017. For additional information regarding the acquisition, see Note 4.

The Company had net foreign currency losses of $0.2 million and $0.7 million for the three and nine months ended September 30, 2016, respectively, a net foreign currency gain of $47,000 for the three months ended September 30, 2017 and a net foreign currency loss of $28,000 for the nine months ended September 30, 2017, which are included in other income (expense), net in the condensed consolidated statements of operations.

Stock-Based Compensation — The Company values all stock-based compensation, including grants of stock options and 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 of the award, for those awards expected to vest, 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 carry-forwards 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.

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.

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

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2016      2017      2016      2017  

Revenues:

           

United States

   $ 60,713      $ 204,831      $ 177,440      $ 545,117  

United Kingdom

     6,530        13,371        19,239        37,318  

International—all other

     17,860        51,065        51,424        131,315  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

   $ 85,103      $ 269,267      $ 248,103      $ 713,750  
  

 

 

    

 

 

    

 

 

    

 

 

 

Amounts for the three and nine months ended September 30, 2016 presented in the Company’s revenue by service cloud (product grouping) table below include reclassifications between product groups to conform to the current year classification of the Company’s products (in thousands):

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2016      2017      2016      2017  

Revenues:

           

Communications and Collaboration cloud

   $ 10,413      $ 146,808      $ 29,622      $ 377,780  

Identity and Access Management cloud

     50,352        76,380        144,483        208,487  

Customer Engagement and Support cloud

     24,338        46,079        73,998        127,483  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

   $ 85,103      $ 269,267      $ 248,103      $ 713,750  
  

 

 

    

 

 

    

 

 

    

 

 

 

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 by-laws. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has director’s and officer’s 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 September 30, 2017, 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. For the three months ended September 30, 2016, the Company incurred a net loss and therefore, the effect of the Company’s outstanding common stock equivalents was not included in the calculation of diluted loss per share as they were anti-dilutive. Accordingly, basic and dilutive net loss per share for the period were identical.

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

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2016      2017      2016      2017  

Options to purchase common shares

     418        —          —          —    

Restricted stock units

     1,473        36        106        59  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total options and restricted stock units

     1,891        36        106        59  
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic and diluted net income (loss) per share was calculated as follows (in thousands, except per share data):

 

     Three months ended September 30,      Nine months ended September 30,  
     2016      2017      2016      2017  

Basic:

           

Net income (loss)

   $ (657    $ 9,920      $ 776      $ 6,202  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding, basic

     25,401        52,706        25,230        49,697  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss) per share, basic

   $ (0.03    $ 0.19      $ 0.03      $ 0.12  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted:

           

Net income (loss)

   $ (657    $ 9,920      $ 776      $ 6,202  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding

     25,401        52,706        25,230        49,697  

Add: Common stock equivalents

     —          900        779        1,038  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding, diluted

     25,401        53,606        26,009        50,735  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss) per share, diluted

   $ (0.03    $ 0.19      $ 0.03      $ 0.12  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

 

Recently Adopted Accounting Pronouncements

On May 10, 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-09 Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting (“ASU 2017-09”), which provides clarity on what changes to share-based payment awards are considered substantive and require modification accounting to be applied. The guidance is effective for annual reporting periods beginning after December 15, 2017 and interim periods within those fiscal years. The Company has elected to adopt ASU 2017-09 early beginning in second quarter of 2017 and will apply it prospectively to award modifications after the adoption date. The Company does not regularly modify the terms and conditions of share-based awards and does not believe this ASU 2017-09 will have a material effect on its consolidated financial statements.

On January 1, 2017, the Company adopted ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”) and recorded, using the modified retrospective approach, a cumulative-effect adjustment to accumulated deficit of a credit of $4.9 million to record $6.8 million of previously unrecognized windfall tax benefits, partially offset by $1.9 million for the accounting policy election to account for forfeitures in compensation cost when they occurred. The Company recorded $2.7 million to additional paid-in capital for the differential between the amount of compensation cost previously recorded and the amount that would have been recorded without assuming forfeitures, partially offset by its tax effect of $0.8 million recorded to deferred tax assets. Previously, excess tax benefits were recognized in additional paid-in capital on the condensed consolidated balance sheet to the extent they reduced income taxes payable.

Further, upon the adoption of ASU 2016-09, the Company, on a prospective basis, records the recognition of excess tax benefits and deficits in benefit from income taxes in the condensed consolidated income statement and treats those amounts as discrete items in the period in which they occur. In the first quarter of 2017, the Company recognized a $2.3 million income tax benefit and a corresponding decrease in net loss during the period ($0.05 per weighted average shares outstanding).

On January 1, 2017, the Company early adopted ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”) which records the effect of intra-entity transfers of assets other than inventory when the transfer occurs, resulting in $0.1 million charged to accumulated deficit upon adoption in the first quarter of 2017.

Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, Revenue from Contracts with Customers and has since issued several additional amendments thereto (collectively referred to herein as “ASC 606”) which will become effective for the Company on January 1, 2018. ASC 606 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The new standards require entities to apportion consideration from contracts to performance obligations on a relative standalone selling price basis, based on a five-step model. Under ASC 606, revenue is recognized when a customer obtains control of a promised good or service and is recognized in an amount that reflects the consideration that the entity expects to receive in exchange for the good or service. In addition, ASC 606 provides guidance on accounting for certain revenue related costs including costs associated with obtaining and fulfilling a contract.

The Company plans to adopt ASC 606 using the modified retrospective transition method which will result in an adjustment to retained earnings for the cumulative effect of applying the standard to all contracts not completed as of the adoption date. As this adoption method does not result in a recast of the prior year financial statements, ASC 606 requires the Company to provide additional disclosures during the year of adoption of the amount by which each financial statement line item is affected by adoption of the new standard and explanation of the reasons for significant changes.

The Company is currently evaluating the impact of the adoption of ASC 606 to its consolidated financial statements, accounting policies, IT systems and processes. The Company has allocated internal and external resources to assist in its implementation and evaluation of the impact of ASC 606 and has made enhancements to its financial information systems to assist in financial reporting under ASC 606. While the Company cannot reliably estimate the expected financial statement impact at this time, the Company expects the revenue recognition of its primary revenue streams to remain substantially unchanged and therefore, does not expect a material impact on its revenues upon adoption of ASC 606. The adoption of ASC 606 will have an impact on the Company's consolidated financial statements with respect to its accounting for sales commissions related to customer arrangements. In making this determination the Company has also considered the impact of the guidance in ASC 340-40, Other Assets and Deferred Costs; Contracts with Customers, under ASU 2014-09 (“ASC 340-40”). Under the Company’s current accounting policy, it recognizes the expense of incremental costs of obtaining a contract, such as sales commission costs, when they are incurred rather than capitalizing the costs. Under ASC 340-40, the Company is required to capitalize and amortize incremental costs of obtaining a contract and certain sales commissions may require amortization over a period longer than the term of the associated customer contract. The Company is in process of determining the appropriate amortization period for these capitalized commissions.

On February 25, 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”), which will require lessees to recognize most leases on their balance sheet as a right-of-use asset and a lease liability. Leases will be classified as either operating or finance, and classification will be based on criteria similar to current lease accounting, but without explicit bright lines. The guidance is effective for annual reporting periods beginning after December 15, 2018 and interim periods within those fiscal years, and early adoption is permitted. Although the Company is currently assessing the impact of adoption of ASU 2016-02 on its consolidated financial statements, the Company currently believes the most significant changes will be related to the recognition of new right-of-use assets and lease liabilities on the Company’s balance sheet for operating leases.

 

On January 26, 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which simplifies the accounting for goodwill impairments by eliminating step two from the goodwill impairment test. Instead, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. ASU 2017-04 also clarifies the requirements for excluding and allocating foreign currency translation adjustments to reporting units related to an entity’s testing of reporting units for goodwill impairment, clarifies that an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The guidance is effective for annual reporting periods beginning after January 1, 2020 and interim periods within those fiscal years. The Company is currently assessing the potential impact of the adoption of ASU 2017-04 on its consolidated financial statements.

On November 17, 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB’s EITF) (“ASU 2016-18”). ASU 2016-18 requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Entities will also be required to reconcile such total to amounts on the balance sheet and disclose the nature of the restrictions. The guidance is effective for annual reporting periods beginning after December 15, 2017 and interim periods within those fiscal years. The Company is currently assessing the potential impact of the adoption of ASU 2016-18 on its consolidated financial statements.

Summary of Significant Accounting Policies (Tables)

As of September 30, 2017, the Company had outstanding forward contracts with notional amounts equivalent to the following (in thousands):

 

Currency Hedged    September 30,
2017
 

U.S. Dollar / Canadian Dollar

   $ 401  

Euro / U.S. Dollar

     3,600  

Euro / British Pound

     2,011  

Israeli Shekel / Hungarian Forint(1)

     7,850  
  

 

 

 

Total

   $ 13,862  
  

 

 

 

 

(1) The Israeli Shekel and Hungarian Forint forward contract covers an intercompany loan between Nanorep Technologies Ltd. (“Nanorep”) and the Company’s Hungarian subsidiary. Nanorep was acquired in the third quarter of 2017. For additional information regarding the acquisition, see Note 4.

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

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2016      2017      2016      2017  

Revenues:

           

United States

   $ 60,713      $ 204,831      $ 177,440      $ 545,117  

United Kingdom

     6,530        13,371        19,239        37,318  

International—all other

     17,860        51,065        51,424        131,315  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

   $ 85,103      $ 269,267      $ 248,103      $ 713,750  
  

 

 

    

 

 

    

 

 

    

 

 

 

Amounts for the three and nine months ended September 30, 2016 presented in the Company’s revenue by service cloud (product grouping) table below include reclassifications between product groups to conform to the current year classification of the Company’s products (in thousands):

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2016      2017      2016      2017  

Revenues:

           

Communications and Collaboration cloud

   $ 10,413      $ 146,808      $ 29,622      $ 377,780  

Identity and Access Management cloud

     50,352        76,380        144,483        208,487  

Customer Engagement and Support cloud

     24,338        46,079        73,998        127,483  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

   $ 85,103      $ 269,267      $ 248,103      $ 713,750  
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2016      2017      2016      2017  

Options to purchase common shares

     418        —          —          —    

Restricted stock units

     1,473        36        106        59  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total options and restricted stock units

     1,891        36        106        59  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Basic and diluted net income (loss) per share was calculated as follows (in thousands, except per share data):

 

     Three months ended September 30,      Nine months ended September 30,  
     2016      2017      2016      2017  

Basic:

           

Net income (loss)

   $ (657    $ 9,920      $ 776      $ 6,202  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding, basic

     25,401        52,706        25,230        49,697  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss) per share, basic

   $ (0.03    $ 0.19      $ 0.03      $ 0.12  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted:

           

Net income (loss)

   $ (657    $ 9,920      $ 776      $ 6,202  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding

     25,401        52,706        25,230        49,697  

Add: Common stock equivalents

     —          900        779        1,038  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding, diluted

     25,401        53,606        26,009        50,735  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss) per share, diluted

   $ (0.03    $ 0.19      $ 0.03      $ 0.12  
  

 

 

    

 

 

    

 

 

    

 

 

 
Fair Value of Financial Instruments (Tables)
Summary of Company's Financial Assets Carried at Fair Value

The following table summarizes the basis used to measure certain of the Company’s financial assets that are carried at fair value (in thousands):

 


     Fair Value Measurements at December 31, 2016  
     Level 1      Level 2      Level 3      Total  

Cash equivalents — money market funds

   $ 11,599      $ —        $ —        $ 11,599  

Short-term marketable securities:

           

U.S. government agency securities

     34,961        8,001        —          42,962  

Corporate bond securities

     —          12,748        —          12,748  
     Fair Value Measurements at September 30, 2017  
     Level 1      Level 2      Level 3      Total  

Cash equivalents — money market funds

   $ 166,918      $ —        $ —        $ 166,918  

Short-term marketable securities:

        

U.S. government agency securities

     7,997        —          —          7,997  

Corporate bond securities

     —          5,999        —          5,999  

Forward contracts

     —          13        —          13
Acquisitions (Tables)

The following table summarizes the fair value (in thousands) of the assets acquired and liabilities assumed at the date of acquisition:

 

Purchase consideration:

  

Company common shares issued

   $ 2,904,487 (1) 

Restricted stock units issued

     16,692 (2)  

Cash consideration payable

     3,317 (3)  
  

 

 

 

Total estimated purchase consideration

   $ 2,924,496  

Estimated fair value of assets acquired and liabilities assumed:

  

Cash

     24,215  

Accounts receivable

     48,957 (4)  

Property and equipment

     59,715  

Prepaid expense and other current assets

     22,986 (4)  

Other assets

     4,448  

Intangible assets (weighted average useful life): (5)

  

Completed technology (9 years)

     385,000  

Customer relationships (8 years)

     756,000  

Tradenames and trademark (9 years)

     65,100  

Accounts payable

     (11,030

Accrued liabilities

     (26,886

Deferred revenue, current and noncurrent

     (82,643

Other long-term liabilities

     (996

Deferred tax liability, net

     (426,081
  

 

 

 

Goodwill

   $ 2,105,711  
  

 

 

 

 

(1) Represents the fair value of the 26.9 million new shares of the Company’s common stock (plus cash in lieu of fractional shares) issued to Citrix stockholders, based on the fair value per share of the Company’s common stock of $108.10 per share, which was the closing price of the Company’s common stock on the NASDAQ Global Select Market on January 31, 2017.
(2) Represents the fair value of the 0.4 million restricted stock units issued by the Company in substitution for certain outstanding Citrix restricted stock units held by GetGo employees, pursuant to the terms of the Merger. These Company restricted stock units were issued on the same terms and conditions as were applicable to the outstanding Citrix restricted stock units held by the GetGo employees immediately prior to the Merger date (including the same vesting and forfeiture provisions). The aggregate fair value of those awards ($48.2 million) is based on the fair value per share of the Company’s common stock of $108.10 per share, which was the closing price of the Company’s common stock on the NASDAQ Global Select Market on January 31, 2017. Of that amount, $18.0 million was related to pre-combination employee services and, after adjusting for known and estimated forfeitures, $16.7 million was allocated to purchase consideration and $30.2 million was allocated to future employee services and will be expensed as stock-based compensation on a straight-line basis over the remaining service periods of those awards.
(3) Represents $3.3 million of additional purchase price paid by the Company to Citrix, pursuant to the terms of the merger agreement for final adjustments related to defined targets for cash and cash equivalents and non-cash working capital, resulting in an increase of $3.3 million to goodwill.
(4) During the nine months ended September 30, 2017, the Company identified measurement period adjustments that impacted the estimated fair value of the assets and liabilities assumed as of the date of the acquisition. The table above, which summarizes the allocation of the purchase price for the entities acquired, has been updated to reflect these measurement period adjustments. The total measurement period adjustments resulted in a decrease in accounts receivable of $1.1 million, an increase in prepaid expense and other current assets of $1.2 million and a decrease in goodwill of $0.1 million. This change to the provisional fair value amounts of the assets and liabilities assumed had no impact on the Company’s results of operations for the nine months ended September 30, 2017.
(5) The weighted average useful life of identifiable intangible assets acquired in the Merger is 8.4 years.

Unaudited Pro Forma Financial Information

 

     Three Months
Ended
September 30,
(unaudited)
     Nine Months
Ended
September 30,
(unaudited)
 
     2016              2016                      2017          
     (in millions except per share amounts)  

Pro forma revenue

   $ 251.8      $ 724.6      $ 784.7  

Pro forma net income (loss)

   $ (1.3    $ (94.2    $ 36.0  

Pro forma income (loss) per share:

        

Basic

   $ (0.02    $ (1.81    $ 0.68  

Diluted

   $ (0.02    $ (1.81    $ 0.67  

Pro forma weighted average shares outstanding

        

Basic

     52.3        52.1        52.7  

Diluted

     52.3        52.1        53.7  

The following table summarizes the Company’s preliminary purchase price allocation (in thousands):

 

Cash

   $ 923  

Accounts receivable

     1,108  

Property and equipment

     78  

Restricted cash

     129  

Prepaid expenses and other current assets

     334  

Intangible assets:

  

Completed technology

     9,200  

Customer relationships

     10,500  

Trade name

     500  

Deferred revenue

     (854

Accounts payable and accrued liabilities

     (2,704

Deferred tax liabilities, net

     (1,977

Goodwill

     27,062  
  

 

 

 

Total purchase consideration

     44,299  

Less: cash acquired

     923  
  

 

 

 

Total purchase consideration, net of cash acquired

   $ 43,376  
  

 

 

 
Goodwill and Intangible Assets (Tables)

Changes in goodwill for the nine months ended September 30, 2017 are as follows (in thousands):

 

Balance, January 1, 2017

   $ 121,760  

Goodwill resulting from the Merger

     2,105,711  

Goodwill resulting from the acquisition of Nanorep

     27,062  

Foreign currency translation adjustments

     240  
  

 

 

 

Balance, September 30, 2017

   $ 2,254,773  
  

 

 

 

 

Intangible assets consist of the following (in thousands):

 

            December 31, 2016      September 30, 2017  
     Estimated
Useful
Life
     Gross
Carrying
Amount
     Accumulated
Amortization
     Net
Carrying
Amount
     Gross
Carrying
Amount
     Accumulated
Amortization
     Net
Carrying
Amount
 

Identifiable intangible assets:

                    

Trade names and trademarks

     1-11 years      $ 3,806      $ 955      $ 2,851      $ 70,462      $ 7,745      $ 62,717  

Customer relationships

     5-8 years        29,249        9,315        19,934        808,061        100,586        707,475  

Domain names

     5 years        913        796        117        918        873        45  

Technology

     3-9 years        51,179        14,942        36,237        451,683        50,656        401,027  

Other

     4-5 years        442        359        83        442        411        31  

Internally developed software

     2-3 years        8,313        5,025        3,288        30,276        9,962        20,314  
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
      $ 93,902      $ 31,392      $ 62,510      $ 1,361,842      $ 170,233      $ 1,191,609  
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Amortization expense for intangible assets consisted of the following (in thousands):

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2016      2017      2016      2017  

Cost of revenue:

           

Amortization of internally developed computer software

   $ 396      $ 2,594      $ 1,358      $ 4,937  

Amortization of acquired intangibles (1)

     1,150        13,229        3,454        35,416  
  

 

 

    

 

 

    

 

 

    

 

 

 

Sub-Total amortization of intangibles in cost of revenue

     1,546        15,823        4,812        40,353  

Amortization of acquired intangibles (1)

     1,363        36,613        4,103        97,187  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total amortization of intangibles

   $ 2,909      $ 52,436      $ 8,915      $ 137,540  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Total amortization of acquired intangibles was $2.5 million and $49.8 million for the three months ended September 30, 2016 and 2017, respectively, and $7.6 million and $132.6 million for the nine months ended September 30, 2016 and 2017, respectively.

Future estimated amortization expense for intangible assets at September 30, 2017 is as follows (in thousands):

 

Amortization Expense (Years Ending December 31)

   Amount  

2017 (three months ending December 31)

   $ 53,102  

2018

     247,259  

2019

     228,825  

2020

     196,109  

2021

     160,427  

Thereafter

     305,887  
  

 

 

 

Total

   $ 1,191,609  
  

 

 

 
Accrued Liabilities (Tables)
Summary of Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):

 

     December 31,
2016
     September 30,
2017
 

Marketing programs

   $ 4,274      $ 14,027  

Payroll and payroll-related

     11,886        35,099  

Professional fees

     1,429        5,230  

Acquisition-related (1)

     9,539        17,702  

Other accrued liabilities

     8,125        38,617  
  

 

 

    

 

 

 

Total accrued liabilities

   $ 35,253      $ 110,675  
  

 

 

    

 

 

 

 

(1) Acquisition-related costs include transaction, transition and integration-related fees and expenses and contingent retention-based bonus costs.
Common Stock and Equity (Tables)
Summary of Changes in Equity

The following table summarizes the changes in equity for the nine months ended September 30, 2017 (amounts in thousands):

 

     Common Stock      Additional
Paid-In
Capital
    Accumulated
Deficit
    Accumulated
Other
Comprehensive
Loss
    Treasury
Stock
    Total
Equity
 
     Number of
Shares
    Amount             

Balance at December 31, 2016

     25,552     $ 284      $ 314,700     $ (1,754   $ (6,618   $ (110,496   $ 196,116  

Issuance of common stock upon exercise of stock options

     175       2        6,361       —         —         —         6,363  

Net issuance of common stock upon vesting of restricted stock units

     545       5        (32,194     —         —         —         (32,189

Shares issued as Merger purchase consideration

     26,868       269        2,904,218       —         —         —         2,904,487  

Restricted stock units issued as Merger purchase consideration

     —         —          16,692       —         —         —         16,692  

Stock-based compensation

     —         —          49,255       —         —         —         49,255  

Treasury stock

     (471     —          —         —         —         (51,075     (51,075

Dividends on common stock

     —         —          —         (39,117     —         —         (39,117

Adoption of ASU2016-16

     —         —          —         84       —         —         84  

Adoption of ASU2016-09

     —         —          2,730       4,866       —         —         7,596  

Net Income

     —         —          —         6,202       —         —         6,202  

Unrealized loss on available-for-sale securities

     —         —          —         —         9       —         9  

Cumulative translation adjustments

     —         —          —         —         17,429       —         17,429  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2017

     52,669     $ 560      $ 3,261,762     $ (29,719   $ 10,820     $ (161,571   $ 3,081,852  
Stock Incentive Plan (Tables)

The following table summarizes stock option activity (shares and intrinsic value in thousands):

 

     Number of Options      Weighted Average
Exercise Price
     Weighted Average
Remaining
Contractual Term
(Years)
     Aggregate
Intrinsic Value
 

Outstanding, January 1, 2017

     355      $ 33.15        5.0      $ 22,529  
           

 

 

 

Granted

     —          —          

Exercised

     (175      36.41         $ 11,373  
           

 

 

 

Forfeited

     (1      26.57        
  

 

 

    

 

 

       

Outstanding, September 30, 2017

     179      $ 30.02        3.9      $ 14,336  
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table summarizes restricted stock unit activity, including market-based TSR Units (shares in thousands):

 

     Number of shares
Underlying Restricted
Stock Units
     Weighted Average
Grant Date Fair
Value
 

Unvested as of January 1, 2017

     1,445      $ 62.23  

Restricted stock units granted

     837        108.29  

Restricted stock units issued for Merger

     446        108.10  

Restricted stock units earned

     66     

Restricted stock units vested

     (848      70.17  

Restricted stock units forfeited

     (175      81.24  
  

 

 

    

 

 

 

Unvested as of September 30, 2017

     1,771      $ 90.42  
  

 

 

    

 

 

 

The Company recognized stock based compensation expense within the accompanying condensed consolidated statements of operations as summarized in the following table (in thousands):

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2016      2017      2016      2017  

Cost of revenue

   $ 536      $ 1,612      $ 1,774      $ 3,911  

Research and development

     1,476        6,405        4,702        16,042  

Sales and marketing

     4,398        4,312        12,876        12,108  

General and administrative

     2,589        6,436        7,975        17,194  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 8,999      $ 18,765      $ 27,327      $ 49,255  
  

 

 

    

 

 

    

 

 

    

 

 

 
Commitments and Contingencies (Tables)
Schedule of Minimum Future Lease Payments Receivable

Future minimum lease payments under non-cancelable operating leases including one year commitments associated with the Company’s hosting services arrangements are approximately as follows as of September 30, 2017 (in thousands):

 

Years Ending December 31

      

2017 (three months ending December 31)

   $ 8,513  

2018

     30,911  

2019

     24,104  

2020

     20,088  

2021

     17,920  

Thereafter

     45,737  
  

 

 

 

Total minimum lease payments

   $ 147,273  
  

 

 

 
Summary of Significant Accounting Policies - Additional Information (Detail) (USD $)
3 Months Ended 9 Months Ended 3 Months Ended 9 Months Ended 0 Months Ended 3 Months Ended 9 Months Ended 9 Months Ended 3 Months Ended 9 Months Ended 12 Months Ended
Sep. 30, 2017
Sep. 30, 2016
Sep. 30, 2017
Segment
Sep. 30, 2016
Dec. 31, 2016
Mar. 31, 2017
ASU 2016-09 [Member]
Sep. 30, 2017
ASU 2016-09 [Member]
Jan. 1, 2017
ASU 2016-09 [Member]
Sep. 30, 2017
ASU 2016-09 [Member]
Accumulated Deficit [Member]
Jan. 1, 2017
ASU 2016-09 [Member]
Accumulated Deficit [Member]
Jan. 1, 2017
ASU 2016-09 [Member]
Additional Paid-In Capital [Member]
Sep. 30, 2017
ASU 2016-09 [Member]
Additional Paid-In Capital [Member]
Sep. 30, 2017
Sales Revenue, Net [Member]
Customer
Sep. 30, 2016
Sales Revenue, Net [Member]
Customer
Sep. 30, 2017
Sales Revenue, Net [Member]
Customer
Sep. 30, 2016
Sales Revenue, Net [Member]
Customer
Sep. 30, 2017
Accounts Receivable [Member]
Customer
Dec. 31, 2016
Accounts Receivable [Member]
Customer
Sep. 30, 2017
Indemnification Agreement [Member]
Sep. 30, 2017
Maximum [Member]
Sep. 30, 2017
Minimum [Member]
Sep. 30, 2017
Minimum [Member]
Customer Concentration Risk [Member]
Sales Revenue, Net [Member]
Sep. 30, 2016
Minimum [Member]
Customer Concentration Risk [Member]
Sales Revenue, Net [Member]
Sep. 30, 2017
Minimum [Member]
Customer Concentration Risk [Member]
Sales Revenue, Net [Member]
Sep. 30, 2016
Minimum [Member]
Customer Concentration Risk [Member]
Sales Revenue, Net [Member]
Sep. 30, 2017
Minimum [Member]
Credit Concentration Risk [Member]
Accounts Receivable [Member]
Dec. 31, 2016
Minimum [Member]
Credit Concentration Risk [Member]
Accounts Receivable [Member]
Organization And Summary Of Significant Accounting Policies [Line Items]
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Marketable securities, maturities remaining
 
 
2 years 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Marketable securities, amortized cost
$ 14,000,000 
 
$ 14,000,000 
 
$ 55,700,000 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Marketable securities
13,996,000 
 
13,996,000 
 
55,710,000 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Marketable securities, unrealized gains
 
 
 
 
17,000 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Marketable securities, unrealized losses
11,000 
 
11,000 
 
43,000 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue subscription period
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10 years 
1 month 
 
 
 
 
 
 
Revenue, number of customers accounted
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Percentage outstanding for major customer
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.00% 
10.00% 
10.00% 
10.00% 
10.00% 
10.00% 
Accounts receivable, number of major customers
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of reporting unit
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of operating segments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Goodwill impairments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Intangible assets, estimated useful life
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
11 years 
 
 
 
 
 
 
 
Long-lived asset impairment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net foreign currency contract gain (loss)
47,000,000 
(200,000)
(28,000,000)
(700,000)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses related to indemnification obligations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cumulative effect of change in accounting principle
 
 
 
 
 
 
7,596,000 
 
4,866,000 
4,900,000 
 
2,730,000 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrecognized windfall tax benefits
 
 
 
 
 
 
 
6,800,000 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Windfall tax benefits offset amount account for forfeitures in compensation cost
 
 
 
 
 
 
 
1,900,000 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Windfall tax benefit to additional paid-in capital
 
 
 
 
 
 
 
 
 
 
2,700,000 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deferred tax assets
 
 
 
 
 
 
 
800,000 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income tax benefit
2,597,000 
(91,000)
33,121,000 
(425,000)
 
2,300,000 
3,800,000 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average shares outstanding
 
 
 
 
 
$ 0.05