LOGMEIN, INC., 10-K filed on 2/20/2018
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2017
Feb. 15, 2018
Jun. 30, 2017
Document And Entity Information [Abstract]
 
 
 
Document Type
10-K 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Dec. 31, 2017 
 
 
Document Fiscal Year Focus
2017 
 
 
Document Fiscal Period Focus
FY 
 
 
Trading Symbol
LOGM 
 
 
Entity Registrant Name
LogMeIn, Inc. 
 
 
Entity Central Index Key
0001420302 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Entity Common Stock, Shares Outstanding
 
52,431,012 
 
Entity Public Float
 
 
$ 4,854,813,766 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2017
Dec. 31, 2016
Current assets:
 
 
Cash and cash equivalents
$ 252,402 
$ 140,756 
Marketable securities
55,710 
Accounts receivable (net of allowance of $245 and $2,031 as of December 31, 2016 and 2017, respectively)
93,949 
25,901 
Prepaid expenses and other current assets
52,473 
5,723 
Total current assets
398,824 
228,090 
Property and equipment, net
92,154 
23,867 
Restricted cash
1,795 
2,481 
Intangibles, net
1,149,597 
62,510 
Goodwill
2,208,725 
121,760 
Other assets
6,483 
4,282 
Deferred tax assets
530 
303 
Total assets
3,858,108 
443,293 
Current liabilities:
 
 
Accounts payable
22,232 
14,640 
Accrued liabilities
82,426 
35,253 
Deferred revenue, current portion
340,570 
156,966 
Total current liabilities
445,228 
206,859 
Long-term debt
 
30,000 
Deferred revenue, net of current portion
6,735 
5,287 
Deferred tax liabilities
221,407 
2,332 
Other long-term liabilities
20,997 
2,699 
Total liabilities
694,367 
247,177 
Commitments and contingencies (Note 11)
   
   
Preferred stock, $0.01 par value - 5,000 shares authorized, 0 shares outstanding as of December 31, 2016 and December 31, 2017
   
   
Equity:
 
 
Common stock, $0.01 par value-75,000 and 150,000 shares authorized as of December 31, 2016 and December 31, 2017 respectively; 28,405 and 56,043 shares issued as of December 31, 2016 and December 31, 2017, respectively; 25,552 and 52,564 outstanding as of December 31, 2016 and December 31, 2017, respectively
560 
284 
Additional paid-in capital
3,276,891 
314,700 
Retained earnings (accumulated deficit)
50,445 
(1,754)
Accumulated other comprehensive income (loss)
15,570 
(6,618)
Treasury stock, at cost - 2,853 and 3,479 shares as of December 31, 2016 and December 31, 2017, respectively
(179,725)
(110,496)
Total equity
3,163,741 
196,116 
Total liabilities and equity
$ 3,858,108 
$ 443,293 
Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Share data, unless otherwise specified
Dec. 31, 2017
Dec. 31, 2016
Statement of Financial Position [Abstract]
 
 
Allowance for doubtful accounts
$ 2,031 
$ 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
56,043,000 
28,405,000 
Common stock, shares outstanding
52,564,000 
25,552,000 
Treasury stock, shares
3,479,000 
2,853,000 
Consolidated Statements of Operations (USD $)
In Thousands, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Income Statement [Abstract]
 
 
 
Revenue
$ 989,786 
$ 336,068 
$ 271,600 
Cost of revenue
203,203 
45,501 
35,458 
Gross profit
786,583 
290,567 
236,142 
Operating expenses
 
 
 
Research and development
156,731 
57,193 
42,597 
Sales and marketing
346,961 
162,811 
138,946 
General and administrative
160,366 
60,693 
33,034 
Legal settlements
3,600 
Amortization of acquired intangibles
134,342 
5,457 
1,916 
Total operating expenses
798,400 
286,154 
220,093 
Income (loss) from operations
(11,817)
4,413 
16,049 
Interest income
1,389 
698 
654 
Interest expense
(1,408)
(1,403)
(574)
Other income (expense), net
(141)
(500)
1,389 
Income (loss) before income taxes
(11,977)
3,208 
17,518 
(Provision for) benefit from income taxes
111,500 
(570)
(2,960)
Net income
$ 99,523 
$ 2,638 
$ 14,558 
Net income per share:
 
 
 
Basic
$ 1.97 
$ 0.10 
$ 0.59 
Diluted
$ 1.93 
$ 0.10 
$ 0.56 
Weighted average shares outstanding:
 
 
 
Basic
50,433 
25,305 
24,826 
Diluted
51,463 
26,164 
25,780 
Cash dividends declared and paid per share
$ 1.25 
$ 1.00 
 
Consolidated Statements of Comprehensive Income (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Statement of Comprehensive Income [Abstract]
 
 
 
Net income
$ 99,523 
$ 2,638 
$ 14,558 
Other comprehensive gain (loss):
 
 
 
Net unrealized gains on marketable securities, (net of tax provision of $31, $6 and $9 for the years ended December 31, 2015, 2016 and 2017, respectively)
16 
11 
55 
Net translation gains (losses)
22,172 
(1,413)
(2,154)
Total other comprehensive gain (loss)
22,188 
(1,402)
(2,099)
Comprehensive income
$ 121,711 
$ 1,236 
$ 12,459 
Consolidated Statements of Comprehensive Income (Parenthetical) (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Statement of Comprehensive Income [Abstract]
 
 
 
Net unrealized gains on marketable securities, tax provision
$ 9 
$ 6 
$ 31 
Consolidated Statements of Equity (USD $)
In Thousands, except Share data
Total
Common Stock [Member]
Additional Paid-In Capital [Member]
Retained Earnings (Accumulated Deficit) [Member]
Accumulated Other Comprehensive Income Loss [Member]
Treasury Stock [Member]
Balance at Dec. 31, 2014
$ 173,844 
$ 267 
$ 237,203 
$ 6,516 
$ (3,117)
$ (67,025)
Balance, shares at Dec. 31, 2014
 
24,419,000 
 
 
 
 
Issuance of common stock upon exercise of stock options
17,794 
17,788 
 
 
 
Issuance of common stock upon exercise of stock options, shares
 
611,000 
 
 
 
 
Issuance of common stock upon vesting of restricted stock units
(11,641)
(11,643)
 
 
 
Issuance of common stock upon vesting of restricted stock units, shares
 
397,000 
 
 
 
 
Excess tax benefits realized from stock-based awards
6,946 
 
6,946 
 
 
 
Stock-based compensation
26,499 
 
26,499 
 
 
 
Treasury stock
(18,090)
 
 
 
 
(18,090)
Treasury stock, shares
(297,461)
(297,000)
 
 
 
 
Net income
14,558 
 
 
14,558 
 
 
Unrealized gain (loss) on available-for-sale securities
55 
 
 
 
55 
 
Cumulative translation adjustments
(2,154)
 
 
 
(2,154)
 
Balance at Dec. 31, 2015
207,811 
275 
276,793 
21,074 
(5,216)
(85,115)
Balance, shares at Dec. 31, 2015
 
25,130,000 
 
 
 
 
Issuance of common stock upon exercise of stock options
11,753 
11,749 
 
 
 
Issuance of common stock upon exercise of stock options, shares
 
409,000 
 
 
 
 
Issuance of common stock upon vesting of restricted stock units
(14,445)
(14,450)
 
 
 
Issuance of common stock upon vesting of restricted stock units, shares
 
456,000 
 
 
 
 
Excess tax benefits realized from stock-based awards
2,258 
 
2,258 
 
 
 
Stock-based compensation
38,350 
 
38,350 
 
 
 
Treasury stock
(25,381)
 
 
 
 
(25,381)
Treasury stock, shares
(443,159)
(443,000)
 
 
 
 
Dividends on common stock
(25,466)
 
 
(25,466)
 
 
Net income
2,638 
 
 
2,638 
 
 
Unrealized gain (loss) on available-for-sale securities
11 
 
 
 
11 
 
Cumulative translation adjustments
(1,413)
 
 
 
(1,413)
 
Balance at Dec. 31, 2016
196,116 
284 
314,700 
(1,754)
(6,618)
(110,496)
Balance, shares at Dec. 31, 2016
 
25,552,000 
 
 
 
 
Issuance of common stock upon exercise of stock options
6,511 
6,509 
 
 
 
Issuance of common stock upon exercise of stock options, shares
181,000 
181,000 
 
 
 
 
Issuance of common stock upon vesting of restricted stock units
(35,245)
(35,250)
 
 
 
Issuance of common stock upon vesting of restricted stock units, shares
 
589,000 
 
 
 
 
Shares issued as Merger purchase consideration
2,904,487 
269 
2,904,218 
 
 
 
Shares issued as Merger purchase consideration, shares
 
26,868,000 
 
 
 
 
Restricted stock units issued as Merger purchase consideration
16,692 
 
16,692 
 
 
 
Stock-based compensation
67,292 
 
67,292 
 
 
 
Treasury stock
(69,229)
 
 
 
 
(69,229)
Treasury stock, shares
(626,154)
(626,000)
 
 
 
 
Dividends on common stock
(52,269)
 
 
(52,269)
 
 
Adoption of ASU (Adoption of ASU 2016-16 [Member])
82 
 
 
82 
 
 
Adoption of ASU (Adoption of ASU 2016-09 [Member])
7,593 
 
2,730 
4,863 
 
 
Net income
99,523 
 
 
99,523 
 
 
Unrealized gain (loss) on available-for-sale securities
16 
 
 
 
16 
 
Cumulative translation adjustments
22,172 
 
 
 
22,172 
 
Balance at Dec. 31, 2017
$ 3,163,741 
$ 560 
$ 3,276,891 
$ 50,445 
$ 15,570 
$ (179,725)
Balance, shares at Dec. 31, 2017
 
52,564,000 
 
 
 
 
Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Cash flows from operating activities
 
 
 
Net income
$ 99,523 
$ 2,638 
$ 14,558 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Stock-based compensation
67,292 
38,350 
26,499 
Depreciation and amortization
221,321 
21,505 
13,698 
Amortization of premium on investments
128 
431 
328 
Change in fair value of contingent consideration liability
 
502 
 
Amortization of debt issuance costs
613 
293 
187 
Provision for bad debts
614 
37 
61 
Benefit from deferred income taxes
(156,831)
(3,304)
(1,062)
Excess tax benefits realized from stock-based awards
 
(6,467)
(2,743)
Other, net
911 
12 
(12)
Changes in assets and liabilities, excluding effect of acquisitions:
 
 
 
Accounts receivable
(16,618)
(10,214)
2,224 
Prepaid expenses and other current assets
(22,819)
5,996 
(2,794)
Other assets
1,569 
1,490 
(454)
Accounts payable
(5,004)
6,149 
1,420 
Accrued liabilities
15,354 
8,353 
2,288 
Deferred revenue
93,036 
26,953 
28,874 
Other long-term liabilities
17,108 
(409)
2,698 
Net cash provided by operating activities
316,197 
92,315 
85,770 
Cash flows from investing activities
 
 
 
Purchases of marketable securities
 
(35,609)
(92,335)
Proceeds from sale or disposal or maturity of marketable securities
55,598 
64,756 
107,042 
Purchases of property and equipment
(36,635)
(14,015)
(14,219)
Intangible asset additions
(29,706)
(1,559)
(2,375)
Cash paid for acquisition, net of cash acquired
(22,348)
(6,083)
(107,575)
Decrease (increase) in restricted cash
1,953 
(30)
1,488 
Net cash provided by (used in) investing activities
(31,138)
7,460 
(107,974)
Cash flows from financing activities
 
 
 
Borrowings under credit facility
 
 
60,000 
Repayments under credit facility
(30,000)
(30,000)
 
Proceeds from issuance of common stock upon option exercises
6,511 
11,753 
17,794 
Excess tax benefits realized from stock-based awards
 
6,467 
2,743 
Payments of withholding taxes in connection with restricted stock unit vesting
(34,474)
(14,445)
(11,641)
Payment of debt issuance costs
(2,032)
(346)
(988)
Payment of contingent consideration
 
(2,030)
(226)
Dividends paid on common stock
(52,269)
(25,466)
 
Purchase of treasury stock
(69,229)
(25,381)
(18,090)
Net cash provided by (used in) financing activities
(181,493)
(79,448)
49,592 
Effect of exchange rate changes on cash and cash equivalents
8,080 
(2,714)
(5,205)
Net increase in cash and cash equivalents
111,646 
17,613 
22,183 
Cash and cash equivalents, beginning of period
140,756 
123,143 
100,960 
Cash and cash equivalents, end of period
252,402 
140,756 
123,143 
Supplemental disclosure of cash flow information
 
 
 
Cash paid for interest
201 
937 
574 
Cash paid (refunds received) for income taxes
55,730 
(5,439)
861 
Noncash investing and financing activities
 
 
 
Purchase consideration of the GoTo Business paid in equity
2,921,179 
 
 
Purchases of property and equipment included in accounts payable and accrued liabilities
3,522 
1,023 
3,145 
Fair value of contingent consideration in connection with acquisition, included in accrued liabilities
 
 
2,028 
Withholding taxes in connection with restricted stock unit vesting in accrued liabilities
$ 771 
 
 
Nature of the Business
Nature of the Business
1.    Nature of the Business

LogMeIn, Inc., which we refer to herein as LogMeIn or the Company, provides a portfolio of cloud-based communication and collaboration, 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 a wholly-owned subsidiary of Citrix Systems, Inc., or 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 which we refer to herein as 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 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 consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”).

Use of Estimates — The preparation of 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.

Cash Equivalents — Cash equivalents consist of highly liquid investments with an original or remaining maturity of less than three months at the date of purchase. Cash equivalents consist of investments in money market funds which primarily invest in U.S. Treasury obligations. Cash equivalents are stated at cost, which approximates fair value.

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, marketable securities consisted of U.S. government agency securities and corporate bonds with remaining maturities within two years and had an aggregate amortized cost of $55.7 million. The securities had an aggregate fair value of $55.7 million, including $17,000 of unrealized gains and $43,000 of unrealized losses, at December 31, 2016. The Company did not have any marketable securities as of December 31, 2017.

Restricted Cash — In April 2012, the Company entered into a lease for its corporate headquarters located in Boston, Massachusetts. The lease required a security deposit of $3.3 million in the form of an irrevocable standby letter of credit which was collateralized by a bank deposit in the amount of $3.5 million or 105 percent of the security deposit in accordance with the lease, which was classified as restricted cash. In 2015 and 2017, $1.5 million and $2.0 million, respectively, of the security deposit was returned to the Company due to a planned decrease in the security deposit obligation. In addition, the Company has made security deposits for various other leased facilities, which are also classified as restricted cash. As of December 31, 2016 and 2017, restricted cash totaled $2.5 million and $1.8 million, respectively.

Accounts Receivable — The Company reviews accounts receivable on a periodic basis to determine if any receivables will potentially be uncollectible. Estimates are used to determine the amount of the allowance for doubtful accounts necessary to reduce accounts receivable to its estimated net realizable value. The estimates are based on an analysis of past due receivables, historical bad debt trends, current economic conditions, and customer specific information. After the Company has exhausted all collection efforts, the outstanding receivable balance relating to services provided is written off against the allowance and the balance related to services not yet delivered is charged as an offset to deferred revenue. Additions to the provision for bad debt are charged to expense.

Activity in the provision for bad debt accounts was as follows for the years ended December 31, 2015, 2016 and 2017, respectively (in thousands):

 

     December 31,  
         2015              2016              2017      

Balance beginning of period

   $ 301      $ 274      $ 245  

Provision for bad debt

     61        37        614  

Uncollectible accounts written off

     (88      (66      (228
  

 

 

    

 

 

    

 

 

 

Balance end of period

   $ 274      $ 245      $ 631  
  

 

 

    

 

 

    

 

 

 

As of December 31, 2017, the Company also had a $1.4 million sales returns allowance. Additions to the provision for sales returns are charged against revenues. For the year ended December 31, 2017, the provision for sales returns was $4.1 million and write-offs were $2.7 million.

Property and Equipment — Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the related assets. Upon retirement or sale, the cost of the assets disposed of and the related accumulated depreciation are eliminated from the accounts, and any resulting gain or loss is reflected in the consolidated statements of operations. Expenditures for maintenance and repairs are charged to expense as incurred.

Estimated useful lives of assets are as follows:

 

Buildings

     30 years  

Site and building improvements

     5 — 10 years  

Computer equipment

     2 years  

Software

     2 — 5 years  

Office equipment

     3 years  

Furniture and fixtures

     5 years  

Leasehold improvements

    
Shorter of lease term
or estimated useful life

 

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, 2017, our measurement date, the fair value of the Company as a whole exceeded the carrying amount of the Company. Through December 31, 2017, no impairments have occurred.

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 December 31, 2017, the Company recorded no material impairments.

Revenue Recognition — The following revenue recognition accounting policy is based on the accounting principles that were used to prepare these 2017 consolidated financial statements. On January 1, 2018, the Company adopted Accounting Standard Update 2014-09, Revenue from Contracts with Customers, as amended (“ASC 606”). ASC 606 replaces existing revenue recognition rules with a comprehensive revenue measurement and recognition standard and expanded disclosure requirements. See Recently Issued Accounting Pronouncements below for additional information.

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.

Deferred Revenue — Deferred revenue primarily consists of billings and payments received in advance of revenue recognition. The Company primarily bills and collects payments from customers for its services in advance on a monthly and annual basis. Deferred revenue to be recognized in the next twelve months is included in current deferred revenue, and the remaining amounts are included in long-term deferred revenue in the consolidated balance sheets.

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.

As of December 31, 2016 and 2017, no customers accounted for more than 10% of accounts receivable and there were no customers that represented 10% or more of revenue for the years ended December 31, 2015, 2016 or 2017.

Legal Costs — Legal expenditures are expensed as incurred. The Company had legal settlement expense of $3.6 million for the year ended December 31, 2015 related to a trademark dispute.

Research and Development — Research and development expenditures are expensed as incurred.

 

Software Development Costs — The Company capitalizes certain direct costs to develop functionality as well as certain upgrades and enhancements of its on-demand products that are probable to result in additional functionality. The costs incurred in the preliminary stages of development are expensed as incurred. Once an application has reached the development stage, internal and external costs, if direct and incremental, are capitalized as part of intangible assets until the software is substantially complete and ready for its intended use. Internally developed software costs that are capitalized are classified as intangible assets and amortized over a period of two to three years.

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

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

As of December 31, 2017, the Company had outstanding forward contracts with notional amounts equivalent to the following (in thousands):

 

Currency Hedged

   December 31,
2017
 

Euro / Canadian Dollar

   $ 556  

Euro / U.S. Dollar

     4,208  

Euro / British Pound

     5,926  

Israeli Shekel / Hungarian Forint

     8,008  
  

 

 

 

Total

   $ 18,698  
  

 

 

 

The Company had a net foreign currency gain of $1.4 million for the year ended December 31, 2015 and net foreign currency losses of $0.5 million and $0.1 million for the years ended December 31, 2016 and 2017, respectively, included in other expense in the 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.

Advertising Costs — The Company expenses advertising costs as incurred. Advertising expense for the years ended December 31, 2015, 2016 and 2017 was approximately $35.8 million, $29.2 million and $100.2 million, respectively, which consisted primarily of online paid searches, banner advertising and other online marketing and is included in sales and marketing expense in the accompanying consolidated statements of operations.

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):

 

     Years Ended December 31,  
     2015      2016      2017  

Revenues:

        

United States

   $ 191,300      $ 240,469      $ 755,220  

United Kingdom

     21,662        25,738        51,328  

International — all other

     58,638        69,861        183,238  
  

 

 

    

 

 

    

 

 

 

Total revenue

   $ 271,600      $ 336,068      $ 989,786  
  

 

 

    

 

 

    

 

 

 

Amounts for the years ended December 31, 2015 and 2016 presented in the Company’s revenue by product grouping table below include reclassifications between product groups to conform to the current year classification of the Company’s products (in thousands):

 

     Years Ended December 31,  
     2015      2016      2017  

Revenues:

        

Communications and Collaboration

   $ 28,751      $ 40,616      $ 527,412  

Identity and access

     152,194        196,952        289,181  

Customer engagement and support

     90,655        98,500        173,193  
  

 

 

    

 

 

    

 

 

 

Total revenue

   $ 271,600      $ 336,068      $ 989,786  
  

 

 

    

 

 

    

 

 

 

The Company’s long-lived assets by geography are as follows (in thousands):

 

         Years Ended December 31,      
     2016      2017  

Long-lived assets:

     

United States

   $ 16,872      $ 78,342  

Hungary

     3,015        3,484  

International — all other

     3,980        10,328  
  

 

 

    

 

 

 

Total long-lived assets

   $ 23,867      $ 92,154  
  

 

 

    

 

 

 

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

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

 

     Years Ended December 31,  
     2015      2016      2017  

Options to purchase common shares

                    

Restricted stock units

     204        114        65  
  

 

 

    

 

 

    

 

 

 

Total options and restricted stock units

     204        114        65  
  

 

 

    

 

 

    

 

 

 

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

 

     Years Ended December 31,  
     2015      2016      2017  

Basic:

        

Net income

   $ 14,558      $ 2,638      $ 99,523  
  

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding, basic

     24,826        25,305        50,433  
  

 

 

    

 

 

    

 

 

 

Net income per share, basic

   $ 0.59      $ 0.10      $ 1.97  
  

 

 

    

 

 

    

 

 

 

Diluted:

        

Net income

   $ 14,558      $ 2,638      $ 99,523  
  

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding

     24,826        25,305        50,433  

Add: Common stock equivalents

     954        859        1,030  
  

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding, diluted

     25,780        26,164        51,463  
  

 

 

    

 

 

    

 

 

 

Net income per share, diluted

   $ 0.56      $ 0.10      $ 1.93  
  

 

 

    

 

 

    

 

 

 

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 December 31, 2017, the Company has not experienced any losses related to these indemnification obligations

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 will 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. 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 estimates that the impact to the consolidated balance sheet upon adoption will be approximately $25 million to $30 million and that these capitalized costs will be amortized over a period of three to four years. The Company is continuing to evaluate the impact of the adoption of ASC 606 on these consolidated financial statements, including the tax effects related to the commission adjustments discussed above and the increased disclosure requirements. The Company’s preliminary assessments are subject to change.

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. For additional information regarding the Company’s lease obligations, see Note 11 to Consolidated Financial Statements.

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 will implement the ASU 2016-18 statement of cash flows presentation and disclosure requirements in the first quarter of 2018.

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 and liabilities 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 December 31, 2017  
     Level 1      Level 2      Level 3      Total  

Cash equivalents — money market funds

   $ 148,120      $ 10,000      $   —      $ 158,120  

Forward contracts

            18,669               18,669  

Bank deposits, corporate bonds, certain U.S. government agency securities and forward contracts 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

In 2017, the Company completed its Merger with Citrix Systems, Inc.’s wholly-owned subsidiary on January 31, 2017 and the acquisition of Nanorep Technologies Ltd, or Nanorep, on July 31, 2017; in 2016, the Company completed the acquisition of AuthAir, Inc., or AuthAir, on October 31, 2016; and in 2015, the Company completed the acquisition of Marvasol, Inc., d/b/a “LastPass,” or LastPass, on October 15, 2015. The results of operations of these acquired businesses have been included in the Company’s consolidated financial statements beginning on their respective acquisition dates.

These acquisitions have been accounted for as business combinations. Assets acquired and liabilities assumed have been recorded at their estimated fair values as of the respective acquisition date. The fair values of intangible assets were based on valuations using an income approach, with estimates and assumptions provided by management of the acquired companies and the Company. The excess of the purchase price over the tangible assets, identifiable intangible assets and assumed liabilities was recorded as goodwill.

In the years ended December 31, 2015, 2016 and 2017, acquisition-related costs were $6.4 million, $25.1 million and $59.8 million, respectively, including $5.6 million, $8.2 million and $16.6 million, respectively, of contingent retention-based bonus expense related to the Company’s acquisitions, which are typically earned over the first two years following the acquisition. Included in the years ended December 31, 2016 and 2017 is $16.2 million and $46.0 million, respectively, of acquisition-related costs associated with 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, an Israeli provider of artificial intelligence, chatbot and virtual assistant services, for $43.2 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 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. The Company finalized the allocation of purchase price in the fourth quarter of 2017 and recorded a $0.1 million purchase price adjustment received in the fourth quarter of 2017 for the final agreed net working capital adjustment.

 

The following table summarizes the Company’s 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

     26,933  
  

 

 

 

Total purchase consideration

     44,170  

Less: cash acquired

     923  
  

 

 

 

Total purchase consideration, net of cash acquired

   $ 43,247  
  

 

 

 

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.

GoTo Business

On January 31, 2017, the Company completed its Merger with 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 the GoTo Business 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 October 2017, pursuant to the terms of the merger agreement, the Company paid $3.3 million of additional purchase price for final adjustments related to defined targets for cash and cash equivalents and non-cash working capital.

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 year ended December 31, 2017, the Company recorded revenue of $617.3 million, amortization of acquired intangibles of $172.6 million and acquisition-related transaction, transition and integration costs of $46.0 million directly attributable to the Merger within its 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.

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. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company recorded 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 recorded 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, as well as the fact that the GoTo Business represented a carve out from Citrix into primarily newly formed legal entities in 2016, necessitated 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. The purchase accounting assessment, which was finalized in the fourth quarter of 2017, resulted in a change in the valuation of assets acquired and liabilities assumed and a corresponding decrease in goodwill of $43.2 million (2% of total goodwill initially recorded).

In the fourth quarter of 2017, the 2016 tax return filings for the GoTo Business were finalized by Citrix and the Company obtained access to the tax returns and supporting documentation. These tax returns and the supporting documentation allowed the Company to review tax elections made and to identify acquisition-date deferred income tax attributes. In most instances, these were the first tax returns prepared and filed for the respective GoTo Business entities. As a result, the Company decreased deferred tax liabilities, net, by $46.2 million due primarily to the GoTo Business’ pre-Merger acquisitions with tax attributes that are deductible for tax purposes post-Merger.

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 paid

     3,317 (3) 
  

 

 

 

Total 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

     21,824 (4) 

Other assets

     4,448  

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

  

Completed technology (9 years)

     385,600 (4) 

Customer relationships (8 years)

     756,700 (4) 

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

     (379,871
  

 

 

 

Goodwill

   $ 2,059,363  
  

 

 

 

 

  (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 the GoTo Business 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 GoTo Business 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 year ended December 31, 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 $0.1 million, an increase in intangible assets of $1.3 million, a decrease in deferred tax liabilities of $46.2 million and a decrease in goodwill of $43.2 million.
  (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 $379.9 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 December 31, 2017, the Company has incurred $5.2 million of costs related to the transition services agreement and the transition services are substantially complete.

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, third and fourth quarters 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

 

     Years Ended
December 31,
(unaudited)
 
(In millions, except per share data)    2016      2017  

Pro forma revenue

   $ 983.6      $ 1,060.7  

Pro forma net income (loss)

   $ (95.4    $ 129.3  

Pro forma income (loss) per share:

     

Basic

   $ (1.83    $ 2.46  

Diluted

   $ (1.83    $ 2.41  

Pro forma weighted average shares outstanding

     

Basic

     52.2        52.7  

Diluted

     52.2        53.7  

2016 Acquisition

AuthAir, Inc.

On October 31, 2016, the Company acquired all of the outstanding equity interests in AuthAir, a Woodbridge, Connecticut-based provider of proximity-based security and wireless authentication solutions, for $6.0 million plus contingent retention-based bonuses totaling up to $0.5 million to be paid to former AuthAir employees over a two-year period following the date of the acquisition. The results of operations of AuthAir have been included in the Company’s consolidated financial results since the acquisition date and have not been material.

2015 Acquisition

Marvasol, Inc., d/b/a “LastPass”

On October 15, 2015, the Company acquired all of the outstanding equity interests in LastPass, a Fairfax, Virginia-based provider of an identity and password management service, for $107.6 million, net of cash acquired, plus contingent payments totaling $15.0 million which were paid over a two-year period following the date of acquisition. The stock purchase agreement also included non-retention based payments of $2.5 million to LastPass stockholders which were contingent on the achievement of certain bookings goals, which the Company concluded was contingent consideration and was accounted for as part of the purchase price. This contingent consideration liability was recorded at its fair value of $2.0 million at the acquisition date. The Company assessed the probability of the bookings goals being met and at what level each reporting period. The contingent consideration liability of $2.5 million was paid in October 2016.

Goodwill and Intangible Assets
Goodwill and Intangible Assets
5.     Goodwill and Intangible Assets

The changes in the carrying amounts of goodwill for the years ended December 31, 2016 and 2017 are due to the addition of goodwill resulting from the acquisition of AuthAir in 2016 and the Merger with the GoTo Business and the acquisition of Nanorep in 2017 (See Note 4 to the Consolidated Financial Statements).

Changes in goodwill for the years ended December 31, 2016 and 2017 are as follows (in thousands):

 

Balance, January 1, 2016

   $ 117,545  

Goodwill related to the acquisition of AuthAir

     4,215  
  

 

 

 

Balance, December 31, 2016

     121,760  

Goodwill related to the Merger

     2,059,363  

Goodwill related to the acquisition of Nanorep

     26,933  

Foreign currency translation adjustments

     669  
  

 

 

 

Balance, December 31, 2017

   $ 2,208,725  
  

 

 

 

 

Intangible assets consist of the following (in thousands):

 

    December 31, 2016     December 31, 2017        
    Gross
Carrying
Amount
    Accumulated
Amortization
    Net
Carrying
Amount
    Gross
Carrying
Amount
    Accumulated
Amortization
    Net
Carrying
Amount
    Weighted
Average
Life
Remaining
(in years)
 

Identifiable intangible assets:

             

Trade names and trademarks

  $ 3,806     $ 955     $ 2,851     $ 70,630     $ 10,073     $ 60,557       8.1  

Customer relationships

    29,249       9,315       19,934       810,779       135,715       675,064       7.1  

Domain names

    913       796       117       918       894       24       1.0  

Technology

    51,179       14,942       36,237       453,372       64,021       389,351       7.9  

Other

    442       359       83       442       429       13       0.3  

Internally developed software

    8,313       5,025       3,288       38,153       13,565       24,588       1.6  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   
  $ 93,902     $ 31,392     $ 62,510     $ 1,374,294     $ 224,697     $ 1,149,597    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

On January 31, 2017, the Company capitalized $65.1 million for trade names and trademarks, $756.7 million for customer relationships and $385.6 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 carrying amount of intangible assets also changed due to foreign currency translation adjustments, as applicable. The Company also capitalized $1.6 million and $29.8 million during the years ended December 31, 2016 and 2017, respectively, of costs related to internally developed software to be sold as a service incurred during the application development stage and is amortizing these costs over the expected lives of the related services.

The Company is amortizing its intangible assets based upon the pattern in which their economic benefit will be realized, or if this pattern cannot be reliably determined, using the straight-line method over their estimated useful lives. Amortization relating to technology, documented know-how (other) and internally developed software is recorded within cost of 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):

 

     Years Ended December 31,  
     2015      2016      2017  

Cost of revenue:

        

Amortization of internally developed software

   $ 1,196      $ 1,778      $ 8,540  

Amortization of acquired intangibles(1)

     2,955        4,604        48,676  
  

 

 

    

 

 

    

 

 

 

Sub-Total amortization of intangibles in cost of revenue

     4,151        6,382        57,216  

Amortization of acquired intangibles(1)

     1,916        5,457        134,342  
  

 

 

    

 

 

    

 

 

 

Total amortization of intangibles

   $ 6,067      $ 11,839      $ 191,558  
  

 

 

    

 

 

    

 

 

 

 

  (1) Total amortization of acquired intangibles was $4.9 million, $10.1 million and $183.0 million for the years ended December 31, 2015, 2016, and 2017, respectively.

 

Future estimated amortization expense for intangible assets at December 31, 2017 is as follows (in thousands):

 

Amortization Expense (Years Ending December 31)

   Amount  

2018

   $ 251,683  

2019

     232,515  

2020

     196,330  

2021

     160,884  

2022

     125,434  

Thereafter

     182,751  
  

 

 

 

Total

   $ 1,149,597  
  

 

 

 
Property and Equipment
Property and Equipment
6. Property and Equipment

Property and equipment consisted of the following (in thousands):

 

     December 31,  
     2016      2017  

Land, buildings and site improvements

   $      $ 34,050  

Computer equipment and software

     35,432        62,478  

Office equipment

     6,315        9,491  

Furniture & fixtures

     8,947        17,965  

Construction in progress

     1,443        34  

Leasehold improvements

     9,979        26,499  
  

 

 

    

 

 

 

Total property and equipment

     62,116        150,517  

Less accumulated depreciation

     (38,249      (58,363
  

 

 

    

 

 

 

Property and equipment, net

   $ 23,867      $ 92,154  
  

 

 

    

 

 

 

Depreciation expense for property and equipment was $7.6 million, $9.7 million and $29.8 million for the years ended December 31, 2015, 2016 and 2017, respectively.

Accrued Liabilities
Accrued Liabilities
7. Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):

 

     December 31,  
     2016      2017  

Marketing programs

   $ 4,274      $ 6,883  

Payroll and payroll-related

     11,886        30,204  

Professional fees

     1,429        5,353  

Acquisition-related(1)

     9,539        6,783  

Other accrued liabilities

     8,125        33,203  
  

 

 

    

 

 

 

Total accrued liabilities

   $ 35,253      $ 82,426  
  

 

 

    

 

 

 

 

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

The domestic and foreign components of income (loss) before provision for (benefit from) income taxes are as follows (in thousands):

 

     Years Ended December 31,  
     2015      2016     2017  

Domestic

   $ 1,059      $ (15,748   $ (25,027

Foreign

     16,459        18,956       13,050  
  

 

 

    

 

 

   

 

 

 

Total income (loss) before provision for (benefit from) income taxes

   $ 17,518      $ 3,208     $ (11,977
  

 

 

    

 

 

   

 

 

 

The provision for (benefit from) income taxes is as follows (in thousands):

 

     Years Ended December 31,  
     2015      2016      2017  

Current:

        

Federal

   $ 2,521      $ 1,264      $ 33,474  

State

     274        647        3,701  

Foreign

     1,227        1,963        6,568  
  

 

 

    

 

 

    

 

 

 

Total

     4,022        3,874        43,743  
  

 

 

    

 

 

    

 

 

 

Deferred:

        

Federal

     (1,281      (2,705      (150,038

State

     278        (428      4,558  

Foreign

     (59      (171      (9,763
  

 

 

    

 

 

    

 

 

 

Total

     (1,062      (3,304      (155,243
  

 

 

    

 

 

    

 

 

 

Total provision for (benefit from) income taxes

   $ 2,960      $ 570      $ (111,500
  

 

 

    

 

 

    

 

 

 

A reconciliation of the Company’s effective tax rate to the statutory federal income tax rate is as follows:

 

     Years Ended December 31,  
     2015     2016     2017  

Statutory tax rate

     35.0     35.0     (35.0 )% 

Change in valuation allowance

                 8.0  

Impact of permanent differences

     1.1       27.1       27.4  

Non-deductible stock-based compensation

     8.4       27.4       9.2  

Non-deductible transaction related costs

           82.1       19.5  

Foreign tax rate differential

     (26.7     (165.3     (71.3

Research and development credits

     (1.3     (10.6     (36.4

State taxes, net of federal benefit

     2.4       0.4       (21.1

Impact of uncertain tax positions

     1.4       18.6       29.3  

Effect of U.S. Tax Act

                 (714.9

Section 199 deduction

           (0.1     (20.0

Excess benefit on stock compensation

                 (133.6

Other

     (3.4     3.2       7.9  
  

 

 

   

 

 

   

 

 

 

Effective tax rate

     16.9     17.8     (931.0 )% 
  

 

 

   

 

 

   

 

 

 

The Company recorded a tax provision for income taxes of $3.0 million, $0.6 million and a benefit from income taxes of $111.5 million on profit before income taxes of $17.5 million, $3.2 million and a loss before income taxes of $12.0 million for the years ended December 31, 2015, 2016 and 2017, respectively. The Company’s effective tax rates for the years ended December 31, 2015 and December 31, 2016 were lower than the U.S. federal statutory rate of 35% due to profits earned in certain foreign jurisdictions, primarily by the Company’s Irish subsidiaries, which are subject to significantly lower tax rates than the U.S. federal statutory rate. The tax rate for 2017 was significantly higher than the U.S. federal statutory rate of 35% due to the impact of the Tax Cut and Jobs Act of 2017 (the “U.S. Tax Act”) on the Company’s net deferred tax liability position, recognition of stock-based awards’ excess tax benefits, and partially offset by the U.S. Tax Act’s one-time mandatory transition tax on accumulated foreign earnings and due to profits earned in certain foreign jurisdictions, primarily by our Irish subsidiaries, which are subject to significantly lower tax rates than the U.S. federal statutory rate.

As a result of the U.S. Tax Act, the Company calculated its best estimation of the impact of the U.S. Tax Act and recognized a one-time mandatory transition tax of $14.8 million on cumulative foreign subsidiary earnings, remeasured the Company’s U.S. deferred tax assets and liabilities, which resulted in a benefit from income taxes of $105.1 million, and reassessed the net realizability of the Company’s deferred tax assets and liabilities, which resulted in a tax provision of $4.7 million. Further, 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”). Previously, excess tax benefits were recognized in additional paid-in capital on the consolidated balance sheet to the extent they reduced income taxes payable. Beginning in 2017, any excess tax benefits or shortfalls were recorded in the income tax provision upon vest or exercise. In 2017, the Company recorded a net benefit of $16.0 million related to excess tax benefits.

Our effective tax rate in the future will depend upon the proportion of our income before provision for income taxes earned in the United States and in jurisdictions with a tax rate lower than the U.S. statutory rate, as well as several other factors, including excess tax benefits from share-based compensation, changes to the Company’s provisional accounting for the effects of the U.S. Tax Act during the measurement period, and the impact of new legislation. On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address the application of generally accepted accounting principles in the United States, or GAAP, in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the U.S. Tax Act. The ultimate impact of the U.S. Tax Act may differ from this estimate, possibly materially, due to changes in interpretations and assumptions, and guidance that may be issued and actions the Company may take in response to the U.S. Tax Act. The U.S. Tax Act is highly complex and the Company will continue to assess the impact that various provisions will have on its business. Any subsequent adjustment to these amounts will be recorded to current tax expense in the quarter of 2018 when the analysis is complete.

 

The Company has deferred tax assets related to temporary differences and operating loss carryforwards as follows (in thousands):

 

     December 31,  
     2016      2017  

Deferred tax assets:

     

Net operating loss carryforwards

   $ 3,190      $ 8,117  

Deferred revenue

     1,161        709  

Amortization

     756        3,808  

Stock-based compensation

     10,903        9,165  

Accrued bonus

     4,409        717  

Other

     1,989        11,611  
  

 

 

    

 

 

 

Total deferred tax assets

     22,408        34,127  

Deferred tax asset valuation allowance

     (1,708      (3,112
  

 

 

    

 

 

 

Net deferred tax assets

     20,700        31,015  
  

 

 

    

 

 

 

Deferred tax liabilities:

     

Depreciation

     (1,314      (3,247

Goodwill amortization

     (1,542      (2,838

Intangible assets not deductible

     (19,814      (241,517

Other

     (59      (4,290
  

 

 

    

 

 

 

Total deferred tax liabilities

     (22,729      (251,892
  

 

 

    

 

 

 

Total

   $ (2,029    $ (220,877
  

 

 

    

 

 

 

As a result of the U.S. Tax Act, the U.S. statutory tax rate was lowered from 35% to 21%, effective January 1, 2018. The Company is required to remeasure its U.S. deferred tax assets and liabilities to the new tax rate. The Company recorded $105.1 million of income tax benefit for the remeasurement of the U.S. net deferred tax liabilities primarily associated with indefinite-lived intangible assets that will reverse at the new 21% rate.

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 December 31, 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. During the years ended December 31, 2015 and 2016, the valuation allowance decreased by $0.4 million and $0.2 million, respectively, as a result of a tax return provision adjustment, which decreased the Hungarian subsidiary’s net operating loss carryforwards. During 2017, as a result of the Merger, the valuation allowance increased by $1.4 million primarily due to the recording of a valuation allowance for California and Massachusetts state net operating losses.

For U.S. tax return purposes, net operating losses and tax credits are normally available to be carried forward to future years, subject to limitations as discussed below. As of December 31, 2017, the Company had federal and state net operating loss carryforwards of $5.7 million and $20.0 million, respectively, which expire on various dates from 2033 through 2036.

The Company has performed an analysis of its ownership changes as defined by Section 382 of the Internal Revenue Code and has determined that the net operating loss carryforwards acquired from its 2014 and 2015 acquisitions are subject to limitation. The Company also analyzed the historical LogMeIn net operating loss carryforwards due to the Merger. As of December 31, 2017, all net operating loss carryforwards (except for Massachusetts and California) generated by the Company, including those subject to limitation, are available for utilization. Subsequent ownership changes as defined by Section 382 could potentially limit the amount of net operating loss carryforwards that can be utilized annually to offset future taxable income.

As of December 31, 2017, the Company had foreign net operating loss carryforwards of $35.9 million, of which $18.7 million is related to the Company’s Hungarian subsidiary, which are not subject to expiration, and the Company has recognized a full valuation allowance against these carryforwards. The remaining $17.2 million of foreign net operating loss carryforwards are related to the Company’s Israel subsidiary. The Company expects to fully realize these net operating loss carryforwards prior to expiration.

As of December 31, 2017, it is management’s assertion that the earnings and profits of foreign entities may not be reinvested in the overseas businesses indefinitely however, the outside basis differences in the international subsidiaries will be permanently reinvested. As a result of the U.S. Tax Act, the Company recognized a one-time mandatory transition tax of $14.8 million on cumulative foreign subsidiary earnings of $56.6 million.

The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, the Company and its subsidiaries are examined by various tax authorities, including the Internal Revenue Service in the United States. As of December 31, 2017, the Company remained subject to examination in the following major tax jurisdictions for the years indicated:

 

Major Tax Jurisdictions

   Open Tax Years  

United States (Federal)

     2014-2017  

United States (State)

     2013-2017  

Hungary

     2011-2017  

Ireland

     2012-2017  

The Company incurred expenses related to stock-based compensation for the years ended December 31, 2015, 2016 and 2017 of $26.5 million, $38.4 million and $67.3 million, respectively. Accounting for the tax effects of stock-based awards requires the recording of a deferred tax asset as the compensation is recognized for financial reporting prior to recognizing the tax deductions. Upon the settlement of the stock-based awards (i.e., exercise, vesting, forfeiture or cancellation), the actual tax deduction is compared with the cumulative financial reporting compensation cost, and any excess tax deduction is considered an excess tax benefit. In 2015 and 2016, the excess tax benefit was tracked in a “windfall tax benefit pool” to offset any future tax deduction shortfalls and were recorded as increases to additional paid-in capital in the period when the tax deduction reduced income taxes payable. Historically, the Company has followed the with-and-without approach for the direct effects or excess tax deductions to determine the timing of the recognition of benefits for excess tax deductions. In 2015 and 2016, the Company recorded excess tax benefits to additional paid-in capital of $6.9 million and $2.3 million, respectively.

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. Upon the adoption of ASU 2016-09, the Company, on a prospective basis, records the recognition of excess tax benefits and deficits in its provision from income taxes in the consolidated income statement and treats those amounts as discrete items in the period in which they occur. For the year ended December 31, 2017, the Company recorded a net tax benefit of $16.0 million related to excess tax benefits.

 

The Company has provided liabilities for uncertain tax positions in other long-term liabilities on the consolidated balance sheets as follows (in thousands):

 

     Years Ended December 31,  
     2015      2016      2017  

Balance beginning of period

   $ 652      $ 884      $ 1,480  

Tax positions related to prior periods:

        

Increases

     2        34        68  

Decreases

     (3             (42

Tax positions related to current period:

        

Increases

     428        588        3,661  

Settlements

     (195      (26      (78

Statute expiration

                   (30
  

 

 

    

 

 

    

 

 

 

Balance end of period

   $ 884      $ 1,480      $ 5,059  
  

 

 

    

 

 

    

 

 

 

These uncertain tax positions would impact the Company’s effective tax rate if recognized. 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 $3,000, $42,000 and $50,000 of interest expense during the years ended December 31, 2015, 2016 and 2017, respectively.

Common Stock and Equity
Common Stock and Equity
9. Common Stock and Equity

Authorized Shares — Pursuant to the Company’s restated certificate of incorporation, the Company is authorized to issue 150 million shares of common stock and 5 million shares of undesignated preferred stock, each $0.01 par value per share.

Common Stock Reserved — As of December 31, 2016 and 2017, the Company has reserved shares of common stock for the exercise of stock options and restricted stock units of 5.3 million and 8.8 million, respectively.

On February 23, 2017, the Company’s Board of Directors approved a three-year capital return plan through a combination of repurchases and dividends. During the year ended December 31, 2017, the Company paid three cash dividends of $0.25 per share in the second, third and fourth quarters. These cash dividends paid in 2017 under the capital return plan totaled $39.5 million. 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. Additionally, the Company’s credit facility contains certain financial and operating covenants that may restrict its ability to pay dividends in the future.

During the years ended December 31, 2015, 2016 and 2017, the Company repurchased 297,461, 443,159 and 626,154 shares of its common stock at an average price of $60.81, $57.27 and $110.56 per share, respectively, for a total cost of $18.1 million, $25.4 million and $69.2 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 cash dividend was declared by the Company’s Board of Directors on July 26, 2016 and paid on August 26, 2016 to stockholders of record as of August 8, 2016, and totaled $12.7 million. The second cash dividend was declared by the Company’s Board of Directors on October 27, 2016 and paid on November 22, 2016 to stockholders of record as of November 7, 2016, and totaled $12.8 million. 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.

Stock Incentive Plan
Stock Incentive Plan
10. 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 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 December 31, 2017, 7.2 million shares remained available for grant under the 2009 Plan.

The Company generally issues previously unissued shares of common stock for the exercise of stock options and restricted stock units. The Company received $17.8 million, $11.8 million and $6.5 million in cash from stock option exercises during the years ended December 31, 2015, 2016 and 2017, respectively.

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

     (181     35.89         $ 12,040  
          

 

 

 

Forfeited

     (2     26.57        
  

 

 

   

 

 

       

Outstanding, December 31, 2017

     172     $ 30.33        3.7      $ 14,520  
  

 

 

   

 

 

    

 

 

    

 

 

 

The aggregate intrinsic value was calculated based on the positive differences between the fair value of the Company’s common stock of $67.10, $96.55 and $114.50 per share on December 31, 2015, 2016 and 2017, respectively, or at time of exercise, and the exercise price of the options.

During the year ended December 31, 2017, the Company granted the following restricted stock unit awards (in thousands):

 

Type of Award

   Number of shares
Underlying Awards
 

Time-based (1)

                       766  

Performance-based (2)

     82  

TSR-based (3)

     36  
  

 

 

 

Total awards granted during the year ending December 31, 2017

     884  
  

 

 

 

 

  (1) Time-based restricted stock units generally vest one-third every year for three years and are valued on the grant date using the grant date closing price of the underlying shares.
  (2) Performance-based restricted stock units vest two years from the grant date based on the Company’s attainment of a specified financial target for 2017 and 2018.
  (3) TSR-based restricted stock units vest equally upon the achievement of a total shareholder return, or TSR, target as measured over the two to three year performance period versus the TSR realized for that same period by a specified stock index. The amount earned can range from 0% to 200% of the target shares awarded depending on the Company’s level of achievement.

In the first quarter of 2017, the Company also issued 0.4 million restricted stock units in substitution for certain outstanding Citrix restricted stock units held by GoTo Business employees pursuant to the terms of the Merger.

 

The Company recognizes stock compensation expense on a straight-line basis over the requisite service period of the restricted stock unit, which is generally three years. Compensation cost for TSR-based restricted stock 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 market condition.

The fair value of the TSR-based restricted stock units granted in 2016 and 2017 was determined using a Monte Carlo simulation model including assumptions used (but not limited to) a risk-free interest rate, an expected volatility and an expected dividend yield as follows:

 

     February 2016 Grant     May 2016 Grant     June 2017 Grant  

Risk-free interest rate

     0.89     1.02     1.43

Volatility

     40     37     36

Dividend yield

                 0.88

The following table summarizes restricted stock unit activity, including performance-based and market-based 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

     884                  108.71  

Restricted stock units issued for Merger

     446        108.10  

Restricted stock units earned(1)

     66     

Restricted stock units vested

     (917      72.23  

Restricted stock units forfeited

     (235      82.84  
  

 

 

    

 

 

 

Unvested as of December 31, 2017

     1,689      $ 90.91  
  

 

 

    

 

 

 

 

  (1) In May 2017, a total of 65,500 target TSR-based restricted stock units, which were awarded in 2014 and 2015, vested at 200% of the target TSR-based restricted stock units granted (an additional 65,500 were earned and vested). These TSR-based restricted stock units were measured against the Russell 2000 Index for that same period.

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

 

     Years Ended December 31,  
     2015      2016      2017  

Cost of revenue

   $ 1,560      $ 2,289      $ 5,222  

Research and development

     5,188        6,201        22,103  

Sales and marketing

     11,090        16,181        16,155  

General and administrative

     8,661        13,679        23,812  
  

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 26,499      $ 38,350      $ 67,292  
     

 

 

    

 

 

    

 

 

 

As of December 31, 2017, there was approximately $103.4 million of total unrecognized stock-based compensation cost related to unvested stock awards which are expected to be recognized over a weighted average period of 1.9 years.

Commitments and Contingencies
Commitments and Contingencies
11. 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 $8.2 million, $11.8 million and $21.5 million for the years ended December 31, 2015, 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. Hosting fees incurred under these arrangements aggregated $6.9 million, $10.0 million and $34.4 million for the years ended December 31, 2015, 2016 and 2017, respectively.

Future minimum lease payments under non-cancelable operating leases including commitments associated with the Company’s hosting services arrangements are approximately as follows at December 31, 2017 (in thousands):

 

Years Ending December 31

      

2018

   $ 50,381  

2019

     29,104  

2020

     23,303  

2021

     19,556  

2022

     15,593  

Thereafter

     30,309  
  

 

 

 

Total minimum committed payments

   $ 168,246  
  

 

 

 

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.

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 was held on February 8, 2018 at the United State Court of Appeals for the Federal Circuit. The Company is awaiting a judgment from the Federal Circuit. The Company believes it has meritorious defenses to this claim and intends to defend it vigorously. Given the inherent unpredictability of litigation, 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.

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 consolidated financial statements.

401(k) Plan
401(k) Plan
12. 401(k) Plan

On January 1, 2007, the Company established a defined contribution savings plan under Section 401(k) of the Internal Revenue Code. The plan is available to all employees upon employment and allows participants to defer a portion of their annual compensation on a pre-tax basis. On July 1, 2016, the Company implemented a 401k Employer Match program in which all employees who are making eligible 401k contributions will receive an employer match in which the Company contributes 50% of the amount contributed by the employee, up to a maximum of 6% of the employee’s earnings. The match vests over 3 years beginning from an employee’s hire date anniversary at 33.3% per year. Employees who joined the Company on or before July 1, 2013 were immediately 100% vested in their match as of the program launch date. The Company made matching contributions of $0.8 million and $4.7 million for the years ended December 31, 2016 and 2017, respectively.

Accumulated Other Comprehensive Income (Loss)
Accumulated Other Comprehensive Income (Loss)
13. 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. The Company continues to maintain that for all foreign subsidiaries, except for 100% of the current and prior year earnings and foreign currency translation adjustments related to those earnings, it is indefinitely reinvested outside the United States for any additional outside basis differences inherent in these entities. Accumulated other comprehensive income (loss) is reported as a component of stockholders’ equity and, as of December 31, 2016 and 2017, was comprised of cumulative translation adjustment losses of $6.6 million and cumulative translation adjustment gains of $15.6 million, respectively, and unrealized losses (net of tax) on marketable securities of $16,000 and $0, respectively. There were no material reclassifications to earnings in the years ended December 31, 2016 or 2017.

Credit Facility
Credit Facility
14. Credit Facility

On February 18, 2015, the Company entered into a multi-currency credit agreement with a syndicate of banks, financial institutions and other lending entities (the “Credit Agreement”), pursuant to which a secured revolving credit facility of up to $100 million in the aggregate was made available to the Company. On January 22, 2016, the Company entered into the First Amendment to the Credit Agreement, pursuant to which the Company exercised its option to increase the credit facility to up to $150 million in the aggregate with the existing lenders and an additional lender.

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. In October 2015, the Company borrowed $60.0 million under the credit facility to partially fund the acquisition of LastPass. The Company repaid $30.0 million in 2016 and $30.0 million in 2017. There were no outstanding borrowings as of December 31, 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 December 31, 2016 and 2017 was 2.013% and 2.188%, respectively. 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, including covenants that limit or restrict the Company and its subsidiaries’ ability to, among other things, incur indebtedness, grant liens, merge or consolidate, dispose of assets, change the nature of its business, make investments and acquisitions, pay dividends or make distributions, or enter into certain transactions with affiliates, in each case 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 December 31, 2017, the Amended Credit Agreement also required the Company to maintain a maximum total leverage ratio (not greater than 4.00:1.00), a minimum interest coverage ratio (not less than 3.00:1.00), and a maximum senior secured leverage ratio (not greater than 3.00:1.00), each as further defined in the Amended Credit Agreement. As of December 31, 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 December 31, 2017, the Company had $2.3 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
15. Subsequent Events

Cash Dividend

On February 1, 2018, the Company announced that its Board of Directors declared a cash dividend of $0.30 per share of common stock. The dividend is payable on February 28, 2018 to stockholders of record as of February 12, 2018.

Agreement to Acquire Jive Communications, Inc.

On February 7, 2018, the Company entered into a definitive Agreement and Plan of Merger (the “Jive Merger Agreement”) to acquire all of the outstanding equity of Jive Communications, Inc. (“Jive”), a provider of cloud-based phone systems and Unified Communications services. The transaction is expected to close during the second quarter of 2018, subject to certain regulatory approvals and customary closing conditions, including expiration of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and consent of the Federal Communications Commission. The Company expects to pay $342 million in cash upon close for all outstanding equity interests in Jive, subject to potential working capital and other adjustments as further described in the Jive Merger Agreement. An additional $15 million in cash is payable in contingent payments which are expected to be paid to certain employees of Jive upon their achievement of specified retention milestones over the two-year period following the closing of the transaction. The Company expects to fund the acquisition through a combination of cash and debt. At the time of signing the Jive Merger Agreement, Jive had approximately 600 employees and fiscal year 2017 revenue of approximately $80 million.

Divestiture of Xively

On February 9, 2018, the Company and certain of its subsidiaries entered into an agreement to sell its Xively business for approximately $50 million. This transaction is expected to close in the first quarter of 2018, subject to certain customary closing conditions, and is expected to result in a pre-tax gain of approximately $34 million. The net assets being sold are primarily comprised of $14 million of goodwill allocated to the Xively business. In fiscal year 2017, the Company recorded $3 million of revenue and $13 million of GAAP expense directly related to its Xively business. The sale of the Xively business does not constitute a significant strategic shift that will have a material impact on the Company’s ongoing operations and financial results.

Quarterly Information (Unaudited)
Quarterly Information (Unaudited)
16. Quarterly Information (Unaudited)

 

    For the Three Months Ended  
    March 31,
2016
    June 30,
2016
    September 30,
2016
    December 31,
2016
    March 31,
2017
    June 30,
2017
    September 30,
2017
    December 31,
2017
 
    (in thousands, except for per share data)  

Statement of Operations Data:

               

Revenue

  $ 79,734     $ 83,266     $ 85,103     $ 87,965     $ 187,458     $ 257,025     $ 269,267     $ 276,036  

Gross profit

    68,534       71,830       73,618       76,585       148,519       203,789       213,662       220,613  

Income (loss) from operations

    (707     3,360       (228     1,988       (34,182     293       7,161       14,911  

Net income (loss)

    (1,073     2,506       (657     1,862       (18,564     14,846       9,920       93,321  

Net income (loss) per share-basic

  $ (0.04   $ 0.10     $ (0.03   $ 0.07     $ (0.43   $ 0.28     $ 0.19     $ 1.77  

Net income (loss) per share-diluted

  $ (0.04   $ 0.10     $ (0.03   $ 0.07     $ (0.43   $ 0.28     $ 0.19     $ 1.74  
Summary of Significant Accounting Policies (Policies)

Principles of Consolidation — The accompanying 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 consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”).

Use of Estimates — The preparation of 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.

Cash Equivalents — Cash equivalents consist of highly liquid investments with an original or remaining maturity of less than three months at the date of purchase. Cash equivalents consist of investments in money market funds which primarily invest in U.S. Treasury obligations. Cash equivalents are stated at cost, which approximates fair value.

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, marketable securities consisted of U.S. government agency securities and corporate bonds with remaining maturities within two years and had an aggregate amortized cost of $55.7 million. The securities had an aggregate fair value of $55.7 million, including $17,000 of unrealized gains and $43,000 of unrealized losses, at December 31, 2016. The Company did not have any marketable securities as of December 31, 2017.

Restricted Cash — In April 2012, the Company entered into a lease for its corporate headquarters located in Boston, Massachusetts. The lease required a security deposit of $3.3 million in the form of an irrevocable standby letter of credit which was collateralized by a bank deposit in the amount of $3.5 million or 105 percent of the security deposit in accordance with the lease, which was classified as restricted cash. In 2015 and 2017, $1.5 million and $2.0 million, respectively, of the security deposit was returned to the Company due to a planned decrease in the security deposit obligation. In addition, the Company has made security deposits for various other leased facilities, which are also classified as restricted cash.As of December 31, 2016 and 2017, restricted cash totaled $2.5 million and $1.8 million, respectively.

Accounts Receivable — The Company reviews accounts receivable on a periodic basis to determine if any receivables will potentially be uncollectible. Estimates are used to determine the amount of the allowance for doubtful accounts necessary to reduce accounts receivable to its estimated net realizable value. The estimates are based on an analysis of past due receivables, historical bad debt trends, current economic conditions, and customer specific information. After the Company has exhausted all collection efforts, the outstanding receivable balance relating to services provided is written off against the allowance and the balance related to services not yet delivered is charged as an offset to deferred revenue. Additions to the provision for bad debt are charged to expense.

Activity in the provision for bad debt accounts was as follows for the years ended December 31, 2015, 2016 and 2017, respectively (in thousands):

 

     December 31,  
         2015              2016              2017      

Balance beginning of period

   $ 301      $ 274      $ 245  

Provision for bad debt

     61        37        614  

Uncollectible accounts written off

     (88      (66      (228
  

 

 

    

 

 

    

 

 

 

Balance end of period

   $ 274      $ 245      $ 631  
  

 

 

    

 

 

    

 

 

Property and Equipment — Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the related assets. Upon retirement or sale, the cost of the assets disposed of and the related accumulated depreciation are eliminated from the accounts, and any resulting gain or loss is reflected in the consolidated statements of operations. Expenditures for maintenance and repairs are charged to expense as incurred.

Estimated useful lives of assets are as follows:

 

Buildings

     30 years  

Site and building improvements

     5 — 10 years  

Computer equipment

     2 years  

Software

     2 — 5 years  

Office equipment

     3 years  

Furniture and fixtures

     5 years  

Leasehold improvements

    
Shorter of lease term
or estimated useful life

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, 2017, our measurement date, the fair value of the Company as a whole exceeded the carrying amount of the Company. Through December 31, 2017, no impairments have occurred.

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 December 31, 2017, the Company recorded no material impairments.

Revenue Recognition — The following revenue recognition accounting policy is based on the accounting principles that were used to prepare these 2017 consolidated financial statements. On January 1, 2018, the Company adopted Accounting Standard Update 2014-09, Revenue from Contracts with Customers, as amended (“ASC 606”). ASC 606 replaces existing revenue recognition rules with a comprehensive revenue measurement and recognition standard and expanded disclosure requirements. See Recently Issued Accounting Pronouncements below for additional information.

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.

Deferred Revenue — Deferred revenue primarily consists of billings and payments received in advance of revenue recognition. The Company primarily bills and collects payments from customers for its services in advance on a monthly and annual basis. Deferred revenue to be recognized in the next twelve months is included in current deferred revenue, and the remaining amounts are included in long-term deferred revenue in the consolidated balance sheets.

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.

As of December 31, 2016 and 2017, no customers accounted for more than 10% of accounts receivable and there were no customers that represented 10% or more of revenue for the years ended December 31, 2015, 2016 or 2017.

Legal Costs — Legal expenditures are expensed as incurred. The Company had legal settlement expense of $3.6 million for the year ended December 31, 2015 related to a trademark dispute.


 

Research and Development — Research and development expenditures are expensed as incurred.

Software Development Costs — The Company capitalizes certain direct costs to develop functionality as well as certain upgrades and enhancements of its on-demand products that are probable to result in additional functionality. The costs incurred in the preliminary stages of development are expensed as incurred. Once an application has reached the development stage, internal and external costs, if direct and incremental, are capitalized as part of intangible assets until the software is substantially complete and ready for its intended use. Internally developed software costs that are capitalized are classified as intangible assets and amortized over a period of two to three years.

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

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

As of December 31, 2017, the Company had outstanding forward contracts with notional amounts equivalent to the following (in thousands):

 

Currency Hedged

   December 31,
2017
 

Euro / Canadian Dollar

   $ 556  

Euro / U.S. Dollar

     4,208  

Euro / British Pound

     5,926  

Israeli Shekel / Hungarian Forint

     8,008  
  

 

 

 

Total

   $ 18,698  
  

 

 

 

The Company had a net foreign currency gain of $1.4 million for the year ended December 31, 2015 and net foreign currency losses of $0.5 million and $0.1 million for the years ended December 31, 2016 and 2017, respectively, included in other expense in the 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.

Advertising Costs — The Company expenses advertising costs as incurred. Advertising expense for the years ended December 31, 2015, 2016 and 2017 was approximately $35.8 million, $29.2 million and $100.2 million, respectively, which consisted primarily of online paid searches, banner advertising and other online marketing and is included in sales and marketing expense in the accompanying consolidated statements of operations.

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):

 

     Years Ended December 31,  
     2015      2016      2017  

Revenues:

        

United States

   $ 191,300      $ 240,469      $ 755,220  

United Kingdom

     21,662        25,738        51,328  

International — all other

     58,638        69,861        183,238  
  

 

 

    

 

 

    

 

 

 

Total revenue

   $ 271,600      $ 336,068      $ 989,786  
  

 

 

    

 

 

    

 

 

 

Amounts for the years ended December 31, 2015 and 2016 presented in the Company’s revenue by product grouping table below include reclassifications between product groups to conform to the current year classification of the Company’s products (in thousands):

 

     Years Ended December 31,  
     2015      2016      2017  

Revenues:

        

Communications and Collaboration

   $ 28,751      $ 40,616      $ 527,412  

Identity and access

     152,194        196,952        289,181  

Customer engagement and support

     90,655        98,500        173,193  
  

 

 

    

 

 

    

 

 

 

Total revenue

   $ 271,600      $ 336,068      $ 989,786  
  

 

 

    

 

 

    

 

 

 

 

The Company’s long-lived assets by geography are as follows (in thousands):

 

         Years Ended December 31,      
     2016      2017  

Long-lived assets:

     

United States

   $ 16,872      $ 78,342  

Hungary

     3,015        3,484  

International — all other

     3,980        10,328  
  

 

 

    

 

 

 

Total long-lived assets

   $ 23,867      $ 92,154  
  

 

 

    

 

 

 

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

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

 

     Years Ended December 31,  
     2015      2016      2017  

Options to purchase common shares

                    

Restricted stock units

     204        114        65  
  

 

 

    

 

 

    

 

 

 

Total options and restricted stock units

     204        114        65  
  

 

 

    

 

 

    

 

 

 

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

 

     Years Ended December 31,  
     2015      2016      2017  

Basic:

        

Net income

   $ 14,558      $ 2,638      $ 99,523  
  

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding, basic

     24,826        25,305        50,433  
  

 

 

    

 

 

    

 

 

 

Net income per share, basic

   $ 0.59      $ 0.10      $ 1.97  
  

 

 

    

 

 

    

 

 

 

Diluted:

        

Net income

   $ 14,558      $ 2,638      $ 99,523  
  

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding

     24,826        25,305        50,433  

Add: Common stock equivalents

     954        859        1,030  
  

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding, diluted

     25,780        26,164        51,463  
  

 

 

    

 

 

    

 

 

 

Net income per share, diluted

   $ 0.56      $ 0.10      $ 1.93  
  

 

 

    

 

 

    

 

 

 

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 December 31, 2017, the Company has not experienced any losses related to these indemnification obligations

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 will 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. 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 estimates that the impact to the consolidated balance sheet upon adoption will be approximately $25 million to $30 million and that these capitalized costs will be amortized over a period of three to four years. The Company is continuing to evaluate the impact of the adoption of ASC 606 on these consolidated financial statements, including the tax effects related to the commission adjustments discussed above and the increased disclosure requirements. The Company’s preliminary assessments are subject to change.

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. For additional information regarding the Company’s lease obligations, see Note 11 to Consolidated Financial Statements.

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 will implement the ASU 2016-18 statement of cash flows presentation and disclosure requirements in the first quarter of 2018.

Summary of Significant Accounting Policies (Tables)

Activity in the provision for bad debt accounts was as follows for the years ended December 31, 2015, 2016 and 2017, respectively (in thousands):

 

     December 31,  
         2015              2016              2017      

Balance beginning of period

   $ 301      $ 274      $ 245  

Provision for bad debt

     61        37        614  

Uncollectible accounts written off

     (88      (66      (228
  

 

 

    

 

 

    

 

 

 

Balance end of period

   $ 274      $ 245      $ 631  
  

 

 

    

 

 

    

 

 

Estimated useful lives of assets are as follows:

 

Buildings

     30 years  

Site and building improvements

     5 — 10 years  

Computer equipment

     2 years  

Software

     2 — 5 years  

Office equipment

     3 years  

Furniture and fixtures

     5 years  

Leasehold improvements

    
Shorter of lease term
or estimated useful life

As of December 31, 2017, the Company had outstanding forward contracts with notional amounts equivalent to the following (in thousands):

 

Currency Hedged

   December 31,
2017
 

Euro / Canadian Dollar

   $ 556  

Euro / U.S. Dollar

     4,208  

Euro / British Pound

     5,926  

Israeli Shekel / Hungarian Forint

     8,008  
  

 

 

 

Total

   $ 18,698  
  

 

 

 

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

 

     Years Ended December 31,  
     2015      2016      2017  

Revenues:

        

United States

   $ 191,300      $ 240,469      $ 755,220  

United Kingdom

     21,662        25,738        51,328  

International — all other

     58,638        69,861        183,238  
  

 

 

    

 

 

    

 

 

 

Total revenue

   $ 271,600      $ 336,068      $ 989,786  
  

 

 

    

 

 

    

 

 

 

Amounts for the years ended December 31, 2015 and 2016 presented in the Company’s revenue by product grouping table below include reclassifications between product groups to conform to the current year classification of the Company’s products (in thousands):

 

     Years Ended December 31,  
     2015      2016      2017  

Revenues:

        

Communications and Collaboration

   $ 28,751      $ 40,616      $ 527,412  

Identity and access

     152,194        196,952        289,181  

Customer engagement and support

     90,655        98,500        173,193  
  

 

 

    

 

 

    

 

 

 

Total revenue

   $ 271,600      $ 336,068      $ 989,786  
  

 

 

    

 

 

    

 

 

 

The Company’s long-lived assets by geography are as follows (in thousands):

 

         Years Ended December 31,      
     2016      2017  

Long-lived assets:

     

United States

   $ 16,872      $ 78,342  

Hungary

     3,015        3,484  

International — all other

     3,980        10,328  
  

 

 

    

 

 

 

Total long-lived assets

   $ 23,867      $ 92,154  
  

 

 

    

 

 

 

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

 

     Years Ended December 31,  
     2015      2016      2017  

Options to purchase common shares

                    

Restricted stock units

     204        114        65  
  

 

 

    

 

 

    

 

 

 

Total options and restricted stock units

     204        114        65  
  

 

 

    

 

 

    

 

 

 

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

 

     Years Ended December 31,  
     2015      2016      2017  

Basic:

        

Net income

   $ 14,558      $ 2,638      $ 99,523  
  

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding, basic

     24,826        25,305        50,433  
  

 

 

    

 

 

    

 

 

 

Net income per share, basic

   $ 0.59      $ 0.10      $ 1.97  
  

 

 

    

 

 

    

 

 

 

Diluted:

        

Net income

   $ 14,558      $ 2,638      $ 99,523  
  

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding

     24,826        25,305        50,433  

Add: Common stock equivalents

     954        859        1,030  
  

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding, diluted

     25,780        26,164        51,463  
  

 

 

    

 

 

    

 

 

 

Net income per share, diluted

   $ 0.56      $ 0.10      $ 1.93  
  

 

 

    

 

 

    

 

 

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

The following table summarizes the basis used to measure certain of the Company’s financial assets and liabilities 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 December 31, 2017  
     Level 1      Level 2      Level 3      Total  

Cash equivalents — money market funds

   $ 148,120      $ 10,000      $   —      $ 158,120  

Forward contracts

            18,669               18,669  
Acquisitions (Tables)

Unaudited Pro Forma Financial Information

 

     Years Ended
December 31,
(unaudited)
 
(In millions, except per share data)    2016      2017  

Pro forma revenue

   $ 983.6      $ 1,060.7  

Pro forma net income (loss)

   $ (95.4    $ 129.3  

Pro forma income (loss) per share:

     

Basic

   $ (1.83    $ 2.46  

Diluted

   $ (1.83    $ 2.41  

Pro forma weighted average shares outstanding

     

Basic

     52.2        52.7  

Diluted

     52.2        53.7  

The following table summarizes the Company’s 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

     26,933  
  

 

 

 

Total purchase consideration

     44,170  

Less: cash acquired

     923  
  

 

 

 

Total purchase consideration, net of cash acquired

   $ 43,247  
  

 

 

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 paid

     3,317 (3) 
  

 

 

 

Total 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

     21,824 (4) 

Other assets

     4,448  

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

  

Completed technology (9 years)

     385,600 (4) 

Customer relationships (8 years)

     756,700 (4) 

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

     (379,871
  

 

 

 

Goodwill

   $ 2,059,363  
  

 

 

 

 

  (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 the GoTo Business 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 GoTo Business 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 year ended December 31, 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 $0.1 million, an increase in intangible assets of $1.3 million, a decrease in deferred tax liabilities of $46.2 million and a decrease in goodwill of $43.2 million.
  (5) The weighted average useful life of identifiable intangible assets acquired in the Merger is 8.4 years.
Goodwill and Intangible Assets (Tables)

Changes in goodwill for the years ended December 31, 2016 and 2017 are as follows (in thousands):

 

Balance, January 1, 2016

   $ 117,545  

Goodwill related to the acquisition of AuthAir

     4,215  
  

 

 

 

Balance, December 31, 2016

     121,760  

Goodwill related to the Merger

     2,059,363  

Goodwill related to the acquisition of Nanorep

     26,933  

Foreign currency translation adjustments

     669  
  

 

 

 

Balance, December 31, 2017

   $ 2,208,725  
  

 

 

Intangible assets consist of the following (in thousands):

 

    December 31, 2016     December 31, 2017        
    Gross
Carrying
Amount
    Accumulated
Amortization
    Net
Carrying
Amount
    Gross
Carrying
Amount
    Accumulated
Amortization
    Net
Carrying
Amount
    Weighted
Average
Life
Remaining
(in years)
 

Identifiable intangible assets:

             

Trade names and trademarks

  $ 3,806     $ 955     $ 2,851     $ 70,630     $ 10,073     $ 60,557       8.1  

Customer relationships

    29,249       9,315       19,934       810,779       135,715       675,064       7.1  

Domain names

    913       796       117       918       894       24       1.0  

Technology

    51,179       14,942       36,237       453,372       64,021       389,351       7.9  

Other

    442       359       83       442       429       13       0.3  

Internally developed software

    8,313       5,025       3,288       38,153       13,565       24,588       1.6  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   
  $ 93,902     $ 31,392     $ 62,510     $ 1,374,294     $ 224,697     $ 1,149,597    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

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

 

     Years Ended December 31,  
     2015      2016      2017  

Cost of revenue:

        

Amortization of internally developed software

   $ 1,196      $ 1,778      $ 8,540  

Amortization of acquired intangibles(1)

     2,955        4,604        48,676  
  

 

 

    

 

 

    

 

 

 

Sub-Total amortization of intangibles in cost of revenue

     4,151        6,382        57,216  

Amortization of acquired intangibles(1)

     1,916        5,457        134,342